Professional Documents
Culture Documents
CPA Reviewer in Auditing Theory by Roque 2018 2019 Edition
CPA Reviewer in Auditing Theory by Roque 2018 2019 Edition
CPA Reviewer in Auditing Theory by Roque 2018 2019 Edition
ASSURANCE SERVICES
1. Which of the following statements best describes assurance services?
A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial statements
based on the results of an audit
C. The preparation of the financial statements or the collection, classification and
summarization of other financial information.
D. Services designed for the improvement of operations resulting in better outcomes.
Assurance engagements performed by professional accountants are intended to enhance the
credibility of information about subject matter by evaluating whether the subject matter
conforms in all material respects with suitable criteria, thereby improving the likelihood that the
information will meet the needs of the intended user.
Services performed by professional accountants that are not assurance engagements include the
following:
1. Agreed-upon procedures
4. Management consulting
A. 2 C. 4
B. 3 D. 5
elements?
A. Yes No
B. No Yes
C. Yes Yes
D. No No
A. a professional accountant
B. a responsible party
C. intended users
2. A subject matter
3. Suitable criteria
5. An assurance report
The Framework defines and describes the elements and objective of an assurance engagement
and identifies engagements to which Philippine Standards of Auditing (PSAs), Philippines
Standards on Review Engagements (PSREs) and Philippine Standards on Assurance
Engagements (PSAEs) apply.
The Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagement. PSAs, PSREs and PSAEs contain basic principles,
essential procedures, and related guidance, consistent with the concepts in the Framework, for
the p [performance of assurance engagements.
9. CPAs in public practice who perform assurance engagements are governed by the following,
except:
A. Philippine Framework for Assurance Engagements
B. Code of Ethics for Professional Accountants in the
Philippines
C. Philippine Standards in Related Services
D. Philippine Standards in Quality Control
10. in an assurance engagements, the responsible party and the internal users:
A. Should be from different entities
B. Should be from the same entity
C. May be from the same entity or different entities
D. Are both responsible for determining the nature, timing and extent of the procedures to be
performed?
According to the Philippine Framework for Assurance Engagements, the responsible party and
the intended users may be from different entities or the same entity.
Answer D is incorrect because the practitioner is responsible for determining the nature, timing
and extent of procedures to be performed.
B. No No No
C. Yes No Yes
D. No Yes No
Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an
assurance engagement. These are important because they establish and inform the intended users
of the basis against which the subject matter has been evaluated or measured in forming the
conclusion.
14. The criteria against which the subject matter of the assurance engagements is to be
evaluated or measured should process which of the following characteristics?
B. No Yes No
C. Yes No No
D. No Yes Yes
According to the Philippine Framework for Assurance Engagements, suitable criteria should
have the following characteristics:
1. Relevance
2. Completeness
• Criteria are sufficiently complete when relevant factors that could affect the conclusions
in the context of the engagement are not omitted.
• Complete criteria include, where relevant, bench-marks for presentation and disclosure
3. Reliability
• Understandable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
16. Criteria that are embodied in laws or regulations or issued by authorized or recognized body
of experts that follow a transparent due process are called
A. Suitable Criteria
B. Established Criteria
C. Specifically developed criteria
D. General criteria
The Framework states that criteria can either be established or specifically developed.
Established criteria are those that are embodied in laws or regulations, or issued by authorized or
recognized bodies. Specifically developed criteria are those designed for the purpose of the
engagement.
17. in an assurance engagements, the person or persons, either as individuals or representative
of an entity, responsible for the subject matter is the A. Intended user
B. Responsible party
C. Professional Accountant
D. Client
The responsible party is the one responsible for the subject matter of an assurance engagement.
For example, an entity’s management is responsible for the preparation and presentation of
financial statements or the establishment and implementation of internal control.
The responsible party may or may not be the party who engages the professional accountant.
18. In an assurance engagement, the person or class of persons for whom the professional
account prepares the report for a specific user or purpose is the
A. Intended user
B. Responsible party
C. Management
D. Client
The intended user is the person or a class of persons for whom the professional accountant
prepares the report for a specific use or purpose.
19. In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
The term “subject matter information” is used in the Framework for Assurance Engagements to
mean the outcome of the evaluation or measurement of a subject matter.
According to the Framework, it is the subject matter information about which the practitioner
gathers sufficient appropriate evidences to provide a reasonable basis for expressing a conclusion
in an assurance report.
20. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to the untended users. It is called:
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements
21. The following are characteristics of “direct reporting” assurance engagements, except
A. The subject matter information is in the form of an assertion by the responsible party that
is made available to the intended users.
B. The subject matter information is provided to the intended users in the assurance report
C. The practitioner either directly performs the evaluation or measurement of the subject
matter our obtains a representation from the responsible party that has performed the evaluation
or measurement
D. The representation of the responsible party that has performed the evaluation or
measurement of the subject matter is not available to the intended users.
22. What type of assurance engagement is involved when the practitioner expresses a positive
form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagements
C. Reasonable assurance engagements
D. Absolute assurance engagements
According to the Framework, the objective of the reasonable assurance engagement is the
reduction in the assurance engagement risk to an acceptable low level in the circumstances
of the engagements the basis for a positive form of expression of the practitioner’s
conclusion.
23. What type of assurance engagements is involved when the practitioner expresses a negative
form of conclusion?
A. Reasonable Assurance engagements
B. Negative assurance engagements
C. Assertion-based assurance engagements
D. Limited assurance engagements
According to the Framework, the objective of the limited assurance engagement is the reduction
in the assurance engagement risk to the level that is acceptable in the circumstances of the
engagement, but where the risk is greater than for reasonable assurance engagement, as the basis
for a negative form of expression of the practitioner’s conclusion.
25. In assertion-based engagements, the evaluation or measurement of the subject matter against
criteria is performed by the
A. Intended users C. Practitioner
B. Responsible party D. AASC
In assertion-based assurance engagements, the evaluation or measurement of the subject matter
against criteria is performed by the responsible party and the subject matter in formation
(outcome) is in the form of an assertion by the responsible party that is made available to the
intended users.
26. The following statements relate to the three parties involved in an assurance engagement. Which
is correct?
A. The responsible party and the intended users should be from different entities.
B. A practitioner should decline a proposed assurance engagement when the subject matter requires
specialized skills and knowledge beyond those ordinarily possessed by the
practitioner.
C. A responsible party is the person who is responsible for the subject matter or the subject matter
information
D. The responsible party, not intended users, determines the nature of the procedures to be
performed
According to the Framework, the responsible party is the person (or persons) who:
• In a direct reporting engagement, is the repos bile for the subject matter
• In an assertion-based engagement, is responsible for the subject matter information (the
assertion) and may be responsible for the subject matter.
27. A proposed assurance engagements can be accepted when the practitioner’s preliminary
knowledge about the engagement circumstances indicates that relevant ethical requirements will
be satisfied and:
I. The subject matter of the engagement is appropriate
II. The criteria to be used are suitable and are available to the intended users
III. The practitioner has access to sufficient appropriate evidence to support the conclusion.
IV. The conclusion is to be contained in a written report
V. There is a rational purpose for the engagement
A. I, II, III
B. I, II, IV, V
C. I, II, III, IV
D. I, II, III, IV, V
29. Which of the following statements is true concerning evidence in assurance engagement?
A. Sufficiency is the measure of the quantity of evidence
B. Appropriateness is the measure of the quantity of evidence, that is, its reliability and
persuasiveness
C. The reliability of evidence is influenced not by its nature but by its source
D. Obtaining more evidence may compensate for its poor quality
Sufficiency is the measure of the quantity if evidence. The quantity of evidence needed is
affected by the quality of such evidence (the higher the quality, the less may be required.)
However, merely obtain more evidence may not compensate for its poor quality.
Appropriateness is the measure of the quality of evidence, that is, its relevance and the reliability.
The reliability of evidences influent by its source and by its nature.
B. Control Risk- the risk that a misstatement will occur will not be prevented, or detected
and corrected, on a timely basis by related internal controls.
2. Detection Risk- the risk that the practitioner will not detect a material misstatement that exists.
32. An unqualified conclusion is not appropriate for either reasonable or limited assurance
engagement when
A. Circumstances prevent the practitioner from obtaining evidence required to reduce
assurance engagement risk to the appropriate level
B. The responsible party or the engaging party imposes the restriction that prevents the
practitioner from obtaining evidence required to reduce assurance engagement risk to the
appropriate level C. Both A and B
D. Neither A nor B
According to the Framework, an unqualified conclusion is not appropriate for either type of
assurance engagement in the case of a material limitation on the scope of the practitioner’s work,
whether imposed by the engagement circumstances or the engaging party or the responsible
party.
33. The following statements relate to the performance of an assurance engagement other than an
audit or review of historical financial information covered by PSAs and PSREs. Which is
incorrect?
A. Those persons who are to perform the engagement should collectively possess the necessary
professional competence
B. The practitioner is precluded from using the work of persons from other professional disciplines
C. The practitioner should consider materiality and assurance engagement risk when planning and
performing an assurance
engagement
D. The assurance report should be in writing and should contain a clear expressions of the
practitioner’s conclusion about the subject matter information
The subject matter and related criteria of some assurance engagements may include aspects
inquiring specialized knowledge and skills in the accumulation and evaluation of evidence. The
standards allow a practitioner to engage persons from other professional disciplines, referred to
as experts.
34. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a
result of the following factors except
A. The use of selective testing
B. The fact that much of the evidence available to the practitioner is persuasive rather that
conclusive
C. The practitioner may not have required assurance knowledge and skills to gather and
evaluate evidence
D. The use of judgment in gathering and evaluating evidence and forming conclusions based on
that evidence
35. After an accepting an assurance engagement, a practitioner is not allowed to change the
engagement to a non-assurance engagement, or from a reasonable assurance engagement to a
limited assurance engagement except when there is reasonable justification for the change.
Which of the following ordinarily will justify a request for the change in the engagement?
I. A change in circumstances that affects the intended users’ requirements
II. A misunderstanding concerning the nature of the engagement
The Philippine Standards of Auditing (PSAs) are to be applied, as appropriate, in the audit of
historical financial information.
37. Which of the following standards are to be applied to compilation engagement, engagements to
apply agreed-upon procedures of information, and other related services engagements as
specified by the AASC?
A. PSRSs C. PSAEs
B. PSAs D. PSREs
39. PSRE 2400 (Engagement to Review Financial Statements), as amended by the AASC in
February 2008, applies to
A. Reviews of any historical financial information of an audit client
B. Reviews of any historical financial information by a
practitioner other than the entity’s auditor.
C. Reviews of historical financial or other information by a
practitioner other than the entity’s auditor
D. Reviews of historical financial or other information of an audit client
PSRE 2400 (Engagement to Review Financial Statements), and PSRE 2410 (Review on Interim
Financial Information Performed by the Independent Auditor of the Entity) were amended by the
AASC in February 2008. The objective of the amendment made is to clarify to which
engagements each of the standards is to be applied.
The effect of the amendments is summarized as follows:
PSAs, PSREs, PSAEs, and PSRSs are collectively referred to as the AASC’s Engagement
Standards. PSQSs are to be applied for all services under these Engagement Standards.
42. These statements are issued by the AASC to provide interpretive guidance and practical
assistance to auditors in the implementations of PSAs and to promote good practice
A. PREPSs C.
PAEPs
D.PRPS
B. PAPSs Ps
The AASC issues Practical Statements to provide interpretative guidance and practical assistance
to practitioners in implementing the Engagement Standards and to promote good practice. The
following are the AASC engagement standards and the related Practice Statements.
Statements (PAPSs)
43. The auditor’s satisfaction as to reliability of an assertion being made by one party for use by
another party is called
A. Opinion C. Examination
B. Assurance D. Verification
The term “assurance means” means the practitioner’s satisfaction as to the reliability of an
assertion being made by one party for use by another party. The procedures performed and the
evidence collected by the practitioner.
In a review engagement, the practitioner provides a moderate level of assurance that the
information subject to review is free of material misstatements. This is expressed in the form of a
negative (also limited) assurance.
46. For the purpose of expressing negative assurance in the review report, the practitioner should
obtain sufficient appropriate evidence primarily through
A. Inquiry and confirmation
B. Analytical procedures and substantive tests of details of transactions and account balances
C. Confirmation and test of controls
D. Inquiry and analytical procedures
A. Yes Yes No
B. Yes No Yes
C. No Yes Yes
D. No No No
49. A practitioner’s review of an entity’s financial statements does not provide assurance that
he/she will become aware of all significant matters that would be disclosed in an audit. However,
if the practitioner has become aware that information coming to his/her attention may be
materially misstated, the practitioner should
A. Carry out additional or more extensive procedures as are necessary to achieve limited
assurance
B. Withdraw immediately from the engagement
C. Perform a complete audit and issue a modified auditor’s
report
D. Downgrade the engagement to a compilation and issue the appropriate report
According to PSRE 2400, if the practitioner has reason to believe that the information subject to
review may be materially misstated, he/she should carry out additional or more extensive
procedures as are necessary to be able to express negative assurance or to confirm that a
modified report is required.
50. The following statements relate to a review of financial statements. Which is incorrect?
A. The objective of a review of financial statements is to enable a practitioner to state whether
anything has come to the practitioner’s attention that causes the practitioner to believe that the
financial statements are not prepared in accordance with an identified financial reporting
framework
B. A review comprises inquiry and analytical procedures which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party
C. A review ordinarily involves an assessment of accounting and internal control systems
D. The level of assurance provided in review report is less than that given in an audit report
While a review involves the application of audit skills and techniques and the gathering of
evidence, it does not ordinarily involve an assessment of accounting and internal control
systems, test of recorded and of responses to inquiries by obtaining corroborating evidence
through inspection, observation, confirmation and computations which are procedures ordinarily
performed during an audit.
51. The following statement relate to a review of an interim financial information performed by
the entity’s independent auditor. Which is incorrect?
A. Similar to a financial statement audit, a review of interim financial information is
designed to obtain reasonable assurance that the interim financial information is free from
material misstatement
B. A review of interim financial information does not provide a basis for expressing an
opinion whether the financial information is presented fairly, in all material respects, in
accordance with an applicable financial reporting framework.
C. In a review of interim financial information. The auditor should have an understanding of
the entity and its environment, including its internal control
D. A review of interim financial information may bring significant matters affecting the
interim financial information to the auditor’s attention, but it does not provide all of the evidence
that would be required in an audit
The procedures employed in a compilation engagement are not designed and do not enable the
accountant to express any assurance in the financial information.
a) Make inquiries to the management to assess the reliability and completeness of the
information provided;
b) Assess internal controls;
c) Verify any matters; or
d) Verify any explanations.
55. Each page of the financial information complied by the accountant should include the
following reference, except
A. “Unaudited”
B. “Compiled without Audit or Review”
C. “Refer to Compilation Report”
D. “Compiled, Negative Assurance Expressed”
• Unaudited
• Compiled without Audit or Review
• Refer to Compilation Report on each page of the financial information or on the front of
the complete set of financial statements.
57. What assurance is provided by the author in the agreedupon procedures engagement?
A. Reasonable C. Moderate
B. Absolute D. No assurance
In an agreed-upon procedures engagement, the auditor simply provides a report of the factual
findings and expressed no assurance in his/her report. Users of the report make an assessment of
the procedures and findings reported by the auditor and draw their own conclusions from the
auditor’s work.
58. In an engagement to perform agreed- upon procedures, an auditor is engage to
A. Carry out those procedures of an audit nature to which the auditor, the entity and any appropriate
third party have agreed and to report factual findings.
B. Use accounting expertise as opposed to auditing expertise to collect, summarize and classify
financial information
C. Provide a moderate level of assurance that the information is free from any material
misstatement
D. Provide a high, but not absolute, level of assurance that the information is free of material
misstatement
In an engagement to perform agreed- upon procedures, an auditor is engage to carry out those
procedures, an auditor is engaged to carry out those procedures of an audit nature which the
auditor and the entity and any appropriate parties have agreed and to report factual findings.
The report contains no assurance and is restricted to those parties that have agreed to the
procedures to be performed, since others, unaware of the reasons for other procedures, may
misinterpret the results. Users of the report must form their own conclusions from the auditor’s
work.
59. A report may be based upon applying agreed-upon procedures to specified elements,
accounts or items of a financial statement. The users of the report should participate in
establishing the procedure to be performed. If the auditor cannot discuss the procedures with all
the parties who will receive the report, he/she may
I. Discuss the procedures to be applied with appropriate representatives of the parties
involved.
II. Review relevant correspondence from the parties involved.
III. Distribute a draft of the type of report that will be issued to the parties involved.
PSRS 4400 (Engagements on Agreed- upon Procedures) states, “in certain circumstances for
example, when the procedures have been agreed to between the regulator, industry
representatives and representatives of the accounting profession, the auditor may not be able to
discuss the procedures with all the parties who will receive the report . In such cases, the auditor
may consider, for example, discussing the procedures to be applied with appropriate
representatives of the parties involved, reviewing relevant correspondence from such parties or
sending them a draft of the type of report that will be issued.”
60. An auditor may accept an engagement to perform specifies procedures on the specific subject
matter of specified elements, accounts or items of a financial statement if
A. The report does not list the procedures performed
B. The financial statements are prepared in accordance with a special purpose framework
C. Use of the report is restricted
D. The auditor is also the entity’s continuing auditor
PSRS 4400 states that the report is restricted to those parties that have agreed to the procedures
to be performed, since others, unaware of the reasons for other procedures, may misinterpret the
results.
Answer A is incorrect because the report should include a listing of the specific procedures
performed.
Answer B is incorrect because the financial statements need not be prepared in accordance with a
special purpose
framework.
Answer D is incorrect because the auditor need not be the entity’s continuing auditor.
62. An engagement to perform an agreed-upon procedures may involve the auditor in performing
certain procedures
concerning
I. Individual items of the financial data
II. A single financial statement
III. A complete set of financial statement
According to PSRS 4400, the report on an agreed- upon procedures engagement needs to be
described the purpose and the agreed-upon procedures of the engagement in sufficient detail to
enable the users of the report to understand the nature and extent of the work performed.
Answer B is incorrect because the report should include a statement that the procedures
performed do not constitute either an audit or a review and, as such, no assurance is
expressed.
Answer C is incorrect because the report should contain the statement that the auditor is not
independent of the entity if such is the case.
Answer D is incorrect because the report should include a listing of the specific procedures
performed.
64. Which of the following engagement does not require compliance with independence
requirements?
A. Compilation of financial information
B. Review of financial statements
C. Examination of prospective financial information
D. Audit of financial statement
A. I only C. Either I or II
B. II only D. Neither I or II
CHAPTER 2
THE ACCOUNTANCY PROFESSION
2. Which of the following is not an objective of the Philippine Accountancy Act of 2004?
A. The standardization and regulation of accounting education.
B. The examination for registration of certified public
accountants.
C. The supervision, control, and regulation of the practice of accountancy in the Philippines.
D. The development and improvement of accounting standards that will be generally
accepted in the Philippines
3. The practice of Accountancy includes
Section 4 of RA 9298 provides that the practice of accountancy shall include, but not limited
to, the following:
a) Practice of Public Accountancy
b) Practice in Commerce and Industry
c) Practice in Education/Academe
d) Practice in the Government
5. Section 4 of the Rules and Regulations Implementing RA 9298 (IRR) provides that any
position in any business or company in the private sector which requires supervising the
recording of financial transactions, preparation of financial statements, coordinating with
the external auditors of the audit of such financial statements, and other related functions
should be occupied by a duly registered CPA. It provides further that the business or
company where such position exists has a
A. Paid-up capital of at least P5,000,000 and/or an annual revenue of at least P10,000,000.
B. Paid-up capital of at least P10,000,000 and/or an annual revenue of at least P5,000,000.
C. Paid-up capital and/or an annual revenue of at least P10,000,000.
D. Paid-up capital and/or an annual revenue of at least P5,000,000.
A B C D
1. Is involved in decision making requiring
professional knowledge
in the science of accounting Yes No No Ye
2. Represents his/her employer before s
government agencies on tax and other
matters related to
accounting Yes No Yes N
3. Renders professional services as a CPA to o
more than one client on
a fee basis. No Yes No Ye
s
8. Section 5 of the Accountancy Act of 2004 states that the Board of Accountancy shall be
composed of a chairman and
A. 2 members B. 4 members C. 6
members
D. 8 members
10. If the PICPA fails to submit to the PRC its own nominees within 60 days prior to the
expiry of the term of an incumbent chairman or member of the Board of Accountancy
(BOA), the PRC in consultation with the BOA shall submit to the president a list of how
may nominees for each vacant position?
A. 2
B. 3
C. 4
D. 5
11. A member of the BOA shall, at the time of his/her appointment, possess which of the
following qualifications? A. Must be a natural-born citizen of the Philippines.
B. Must be a Filipino citizen.
C. Must be a Filipino citizen and a resident of the
Philippines.
D. Must be a natural-born citizen and a resident of the Philippines.
According to Section 6 of the Accountancy Act of 2004, am member of the Board shall, at
the time of his/her appointment, possess the following qualifications:
a) Must be a natural-born citizen and a resident of the
Philippines;
b) Must be a duly registered Certified Public Accountant with at least ten (10) years of
work experience in any scope of practice of accountancy.
c) Must be of good moral character and must not have been convicted of crimes
involving moral turpitude; and
d) Must not have any pecuniary interest, directly or indirectly, in any school, college,
university, or institution conferring an academic degree necessary for admission to the
practice of accountancy or where review classes in preparation for the licensure
examination are being offered or conducted, nor shall he/she be a member of the
faculty or administration thereof at the time of his/her appointment to the Board.
12. The Chairman and members of the Board of Accountancy shall hold office for a term of
A. 2 years B. 3 years C. 4 years
D. 5 years
13. According to Section 7 of the IRR, no person who has served two successive complete
terms as chairman or member of the Board of Accountancy shall be eligible for
reappointment as
chairman or member until the lapse of
A. 1 year
B. 2 years C. 3 years
D. 4 years
14. According to Section 7 of the IRR, no person shall serve in the Board of Accountancy for
more than
A. 3 years
B. 5 years
C. 10 years
D. 12 years
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
Section 9 of the Accountancy Act of 2004 states that the Board of Accountancy shall exercise
the following specific powers, functions and responsibilities:
a) To prescribe and adopt rules and regulations necessary for carrying out the provisions
of the Act;
b) To supervise the registration, licensure and practice of accountancy in the Philippines;
c) To administer oaths in connection with the administration of the Act;
d) To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice
of the accountancy profession;
e) To adopt an official seal of the Board;
f) To prescribe and/or adopt a Code of Ethics for the practice of accountancy;
g) To monitor the conditions affecting the practice of accountancy and adopt such
measures, rules and regulations and best practices as may be deemed proper for the
enhancement and maintenance of high professional, ethical, accounting and auditing
standards.
h) To conduct an oversight into the quality of audits of financial statements through a
review of the quality control measures instituted by auditors in order to ensure
compliance with the accounting and auditing standards and practices;
i) To investigate violations of the Act and the IRR;
j) To make such investigations as it deems necessary to determine whether any person
has violated any provision of the Act, any accounting or auditing standards or rules
duly promulgated by the Board as part of the rules governing the practice of
accountancy;
k) To issue a cease or desist order to any person, association, partnership or corporation
engaged in violation of any provision of the Act, any accounting or auditing standards
or rules duly promulgated by the Board as part of the rules governing the practice of
accountancy in the Philippines;
l) To punish for contempt of the Board, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of the Court;
m) To prepare, adopt, issue or amend the syllabi of the subjects for examinations in
consultation with the academe, determine and prepare questions for the licensure
examination which shall directly be within the scope of the syllabi of the subjects for
examinations as well as administer, correct and release the results of the licensure
examinations;
n) To ensure, in coordination with the Commission on Higher Education (CHED) or
other authorized government offices that all higher educational instruction and
offering of accountancy comply with the policies, standards and requirements of the
course prescribed by CHED or other authorized government offices in the areas of
curriculum, faculty, library, and facilities; and
o) To exercise such other powers as may be provided by law as well as those which may
be implied from, which are necessary or incidental tot the carrying out of, the express
powers granted to the Board to achieve the objectives and purpose of the Act.
16. The Board of Accountancy shall elect a vice-chairman from among its members for a
term of
A. Two (2) years
B. One (1) year
C. Three (3) years
D. Five (5) years
17. According to Section 9(A) of the IRR, the Commission, upon the recommendation of the
Board, shall create an accounting
standard setting body to be known as the A. Accounting Standards
Council
B. Financial Reporting Standards Council
C. Accounting Standards Board
D. Financial Reporting Standards Board
18. According to Section 9(A) of the IRR, the Commission, upon the recommendation of the
Board, shall create an auditing standard setting body to be known as the A. Auditing and
Assurance Standards Council (AASC)
B. Auditing Standards and Practices Council (ASPC)
C. Auditing Standards Board D. Auditing Standards Council
19. This standard setting body shall have a chairman who had been or presently a senior
accounting practitioner in any of the scope of accounting practice.
A. FRSC
B. AASC
C. PICPA
D. ACPAPP
20. This standard setting body shall have a chairman who had been or presently a senior
accounting practitioner in public accountancy. A. AASC
B. FRSC
C. ACPAE
D. BOA
21. The Chairman and the members of the FRSC and AASC shall have a term of A. 3 years
B. 5 years C. 6 years
D. 7 years
23. Who has the power to suspend or remove any member of the Board of Accountancy?
A. The Chairman of the FRSC B. The Chairman of
the PRC
C. The Chairman of the AASC
D. The President of the Philippines
I. A Filipino citizen
II. Of good moral character
III. A holder of the degree of Bachelor of Science in
Accountancy
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III Section 14 of the IRR states that any person applying for examination shall
be establish the following requisites to the satisfaction of the Board that he/she:
a) Is a Filipino citizen;
b) Is of good moral character;
c) Is a holder of the degree of Bachelor of Science in Accountancy conferred by a
school, college, academy or institute duly recognized and/or accredited by the
CHED or other authorized government offices;
d) Has not been convicted of any criminal offense involving moral turpitude.
25. The following documents shall be submitted by applicants for the CPA licensure
examination, except
A. Certificate of Live Birth in National Statistics Office (NSO) security paper.
B. Marriage contract in NSO security paper for married male applicants.
C. NBI clearance.
D. Transcript of records with indication therein of date of graduation and Special Order
number unless it is not required.
26. Section 16 of the IRR states that to be qualified as having passed the licensure
examination for accountants, a candidate must obtain a
A. General average of seventy-five percent (75%), with no grades lower than sixty percent
(60%) in any given subject.
B. General average of seventy-five percent (75%), with no grades lower than sixty-five
percent (65%) in any given subject.
C. General average of seventy-five percent (70%), with no grades lower than sixty percent
(60%) in any given subject.
D. General average of seventy-five percent (75%), with no grades lower than sixty percent
(60%) in any given subject.
27. A candidate who obtains the rating of seventy-five percent (75%) and above in at least a
majority of the subjects shall receive a conditional credit for the subjects passed. He/she
shall take an examination in the remaining subjects within how many years from the
preceding examination?
A. 1 B. 2 C. 3
D. 5
28. Any candidate who fails in two (2) complete CPA board examinations shall be
disqualified from taking another set of examinations unless he/she has completed at least
how many units of subjects given in the licensure examination?
A. 4
B. 8
C. 16
D. 24
29. The Board of Accountancy shall submit to the PRC the ratings obtained by each
candidate within how many calendar days after the examination?
A. 1 B. 2
C. 5
D. 10
Section 20 of the IRR provides that a Professional Identification Card bearing the registration
number, date of issuance, expiry date, duly signed by the Chairperson of the PRC, shall be
issued to every registrant. It provides further that the reissuance or renewal of the said card
shall be subject to payment of the annual registration fees for another and every after three
(3) years thereafter.
32. The Board of Accountancy may reinstate the validity of a revoked Certificate of
Registration after the expiration of how many years from the date of revocation?
A. 1 B. 2 C. 3
D. 5
Section 25 of the IRR provides that the Board of Accountancy may, after the expiration of
two (2) years from the date of revocation of a Certificate of Registration and upon
application and for reasons deemed proper and sufficient, and after being convinced of
applicant’s remorse and rehabilitation, reinstate the validity of a revoked Certificate of
Registration and in so doing, may, in its discretion, exempt the applicant from taking another
examination.
33. The following statements relate to the practice of public accountancy. Which is incorrect?
A. Single practitioners and partners of partnerships organized for the practice of public
accountancy shall be registered CPAs in the Philippines.
B. A partnership engaged in the practice of public accountancy may be carried on in the
form of a general partnership (GP) but not a limited liability partnership (LLP).
C. A CPA is in public accounting practice when he/she represents his/her clients before
government agencies on tax and other matters related to accounting.
D. The Securities and Exchange Commission shall not register any corporation organized for
the practice of public accountancy.
Section 28 of the IRR provides that partnership engaged in in the practice of public
accountancy may be carried on in the form of a general partnership (GP) or a limited liability
partnership (LLP).
34. Which of the following statements concerning ownership of working papers is incorrect?
A. All working papers made by a CPA and his/her staff in the course of an examination
remain the property of such CPA in the absence of any agreement (written or oral)
between the CPA and the client to the contrary.
B. Working papers include schedules and memoranda prepared and submitted by the client
of the CPA.
C. All working papers, except reports submitted by a CPA to his/her client shall be treated
confidential and privileged.
D. Working papers shall be treated confidential and privileged and remain the property of
the CPA unless such documents are required to be produced through subpoena issued by
any court, tribunal, or government regulatory or administrative body.
35. All registered CPAs shall obtain and use a seal which shall be circular in form with a
smaller circle within bearing the registrant’s name, registration number and title. Which
of the following is correct?
A. Engraved in the lower portion of the space between the circles is the CPA’s name.
B. Engraved in the upper portion of the space between the circles is the CPA registration
number.
C. Engraved in the middle of the smaller circle are the letters “CPA”.
D. Engraved in the middle of the smaller circle are the CPA’s name and registration number.
E. Engraved in the middle of the smaller circle is the CPA’s name
Section 33 of the IRR states that the seal of a CPA shall be circular in form with a smaller
circle within. In the upper portion of the space between the circles shall be engraved the
name of the individual CPA, firm or partnership as the case maybe, the lower portion thereof
shall be engraved the CPA registration number of the individual CPA, proprietor of the firm
and the signing partner of the partnership, and in the middle of the smaller circle shall be
engraved the letters “CPA”.
The auditor’s reports shall be stamped with said seal, indicating therein his/her current
Professional Tax Receipt (PTR) number, date/place of payment when filed with government
authorities or when used professionally.
36. Section 36 (Penal Provision) of RA 9298 states that any person who shall violate any of
the provisions of the Act or any of its implementing rules and regulations shall, upon
conviction, be punished by
A. A fine of not less than P50,000
B. Imprisonment for a period not exceeding two (2) years.
C. A fine of not less than P50,000 or by imprisonment for a period not exceeding two (2)
years.
D. A fine of not less than P50,000 or by imprisonment for a period not exceeding two (2)
years, or both.
37. Which of the following is the accredited national professional organization of CPAs
(APO)?
A. PICPA
B. ASC
C. AASB
D. FRSC
38. Tanya, Sam, and Jervi, CPAs, a newly formed partnership, applied for registration with
the Commission and the Board which was approved on June 30, 2012. The partnership
should apply for renewal of its registration on or before
A. September 30,2014
B. September 30,2015
C. December 30,2016
D. June 30,2015
39. Which of the following statements concerning the use of firm or partnership name is
incorrect?
A. In the case of an individual CPA, he/she shall do business under his/her registered name
with the BOA and the PRC and as printed in his/her CPA certificate (for example, Juan
Puruntong, CPA).
B. In the case of a firm, it shall do business under its duly registered and authorized firm
name appearing in the registration documents issued by the Department of Trade and
Industry (DTI) and other government offices and such firm name shall include the real
name of the sole proprietor as printed in his/her CPA certificate (for example, Amulfo
Gumamela and Associates).
C. In the case of registered partnership, it shall do business under its name as indicated in its
current Articles of Partnership and Certificate of Registration issued by the Securities and
Exchange Commission (SEC) (for example, Tanya, Sam, and Jervi, CPAs).
D. A CPA shall practice only under an individual, firm, or partnership name in accordance
with Philippine law and shall not include any fictitious name but may indicate
specialization.
40. A partner surviving the death or withdrawal of all the other partners in a partnership may
continue to practice under the partnership name for a period of not more than ___ years
after becoming a sole proprietor.
A. 1 B. 2 C. 3
D. 4
41. The death or disability of an individual CPA and/or the dissolution and liquidation of a
firm or partnership of CPAs shall be reported to the BOA not late than ____ days from
the date of such death, dissolution or liquidation.
A. 15 B. 30 C. 60
D. 90
42. As defined in Annex “C” of the IRR, this refers to the inculcation, assimilation and
acquisition of knowledge, skills, proficiency and ethical and moral values, after the initial
registration of a professional that raise and enhance the professional’s technical skills and
competence.
A. Professional Development
B. Continuing Professional Education
C. Continuing Professional Development
D. Professional Growth and Development
43. The PRC CPE Council shall assist the BOA in implementing its CPE program. Which of
the following statements is incorrect concerning the Council’s compostion?
A. The PRC CPE Council shall be composed of a chairperson and two (2) members.
B. The Chairperson shall be chosen from among the members of the BOA by the PRC.
C. The first member shall be the President or, in his/her absence or incapacity, any officer
chosen by the Board of Directors of PICPA.
D. The second member shall be the President or, in his/her absence or incapacity, any officer
of the organization of Deans or Department Heads of schools, colleges, or universities
offering the degree requiring licensure examination.
44. The following statements relate to CPE credit units. Which is incorrect?
A. The total CPE credit units for registered accounting professionals shall be sixty (60)
credit units for three (3) years, provided that a minimum of fifteen (15) credit units shall
be earned in each year.
B. Any excess credit units in one year may be carried over to the succeeding years within
the three-year period.
C. Excess credit units earned may be carried over to the next three-year period except credit
units earned for doctoral and master’s degrees.
D. One credit hour of CPE program, activity or source shall be equivalent to one (1) credit
unit.
45. The following statements relate to the exemption from CPE requirements. Which is false?
A. A registered professional shall be permanently exempted from CPE requirements upon
reaching the age of 60 years old.
B. A registered professional applying for permanent CPE exemption is required to submit an
authentic or authenticated copy of his/her birth certificate or, if not available, his/her
voter’s ID or driver’s license.
C. A registered professional who is working or practicing his/her profession abroad shall be
temporarily exempted from compliance with CPE requirements during the period of
his/her stay abroad provided that he/she has been out of the country for at least two years
immediately prior to the date of renewal.
D. A registered professional who is furthering his/her studies abroad shall be temporarily
exempted from compliance with CPE requirements during the period of his/her stay
abroad provided that he/she has been out of the country for at least two years
immediately prior to the date of renewal.
A registered professional shall be permanently exempted from CPE requirements upon the
reaching the age of 65 years old.
46. Which of the following statements concerning a CPA’s disclosure of confidential client
information is ordinarily
correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect the CPA’s professional
interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional duty to make disclosure.
D. Disclosure may be made to any government agency without subpoena.
47. Listed below are names of four CPA firms and pertinent facts relative to each firm.
Unless otherwise indicated, the individuals named are CPAs and partners, and there are
no other partners. Which is a violation of the Implementing Rules and Regulations of RA
9298?
A. Tin, Ton and Tan, CPAs (Tin died about five years ago; Ton and Tan are continuing the
firm.)
B. Poe and Que, CPAs (The name of Cua, a third partner, is omitted from the partnership
name.)
C. Joni and Jona, CPAs (Joni died about three years ago; Jona is continuing the firm as a
sole proprietor.)
D. Elias and Co., CPAs (The firm has ten other partners who are all CPAs).
48. Which of the following has the power to conduct an oversight into the quality of audits of
financial statements through the review of the quality control measures instituted by
auditors?
A. Bureau of Internal Revenue
B. Securities and Exchange Commission
C. Board of Accountancy
D. Insurance Commission
Under RA 9298, the Board of Accountancy (BOA) has the power to conduct an oversight
into the quality of audits of financial statements through a review of the quality control
measures instituted by auditors in order to ensure compliance with the accounting and
auditing standards and practices.
49. In the exercise of its power to conduct an oversight into the quality of audits, the BOA
organized the _______ Department of the Philippine Institute of Certified Public
Accountants (PICPA) to conduct an independent study, appraisal, or review of the quality
of audit of financial
statements.
A. Quality Assurance Review
B. Quality Control Review
C. Independent Quality Assurance Review
D. Independent Quality Control Review
Section 2 of the Revised Rules and Regulations for the Conduct by the Professional
Regulatory Board of Accountancy of Oversight into the Quality of Audits of Financial
Statements defines Quality Assurance Review as “a study, appraisal, or review by an
independent Quality Assurance Review Department organized by the Board, of the quality of
audit of financial statements through a review of the quality control measures instituted by
member-CPA Practitioners engaged in the practice of public accountancy to ascertain
compliance with prescribed professional, ethical and technical standards of public practice.”
Section 5 provides, “The Executive Committee shall have the full power and authority to set
policies and to supervise the operation of QARD.”
Listed under Section 5 are the following duties and responsibilities of the Executive
Committee:
a) To set policies that will ensure effective implementation of the quality assurance
review program;
b) To maintain independence of the QARD;
c) Through its QARD, to monitor the quality of audits;
d) To hire the Chief Inspector and Chief of Administration of QARD including other
personnel thereof;
e) To recommend to the Board a rolling Quality Assurance Review (QAR) plan for three
(3) years, which may be approved by the Board without referral to the Commission.
f) To implement the approved QAR plan through the QARD;
g) To obtain independent technical advice on the subject of quality assurance when
needed and appropriate;
h) To receive and evaluate the reports and recommendations of the Chief Inspector;
i) Submit regularly to the Board a list of erring memberCPA practitioners including the
findings and actions taken by the QARD. The Committee shall likewise regularly
submit to the Board policies that it adopted and implementing issues that it settled for
the oversight review of the Board. It shall also report to the Board any form of
interference by the APO on its policy making or on QARD’s operation;
j) To issue through the Board, annual reports for the benefit of the general public.
Section 6 provides that the Chairman and members of the Executive Committee should not
be in active practice of public accountancy during his term in the Executive Committee.
53. The Head of the QARD who will be appointed by the Executive
Committee is the
A. Chief Inspector
B. Chief of Administration
C. Chief Auditor
D. Chief Quality Assurance Reviewer
54. Which of the following is an incorrect qualification of the Chief Inspector of the QARD?
A. Must have at least 5 years of experience in the practice of public accountancy.
B. Must be of good character.
C. Must not have been found guilty of violating any professional, ethical and regulatory
auditing standards.
D. Must have reached the level of senior manager or partner of an accounting firm that has
among its clients, publicly listed entities.
Section 9 provides that the Chief Inspector of the QARD should have at least 10 years of
experience in the practice of public accountancy.
55. Who is responsible for the non-technical aspect of the QAR program? A. Chief Inspector
B. Chief of Administration
C. Assistant to the Chief Inspector
D. Chairman of the Executive Committee
Section 15 provides that the QAR program covers all CPAs in public accounting, whether as
an individual practitioner, a firm or a partnership.
57. Which of the following statements concerning enrollment in QAR program is/are
correct?
I. Enrollment in the QAR program under the prescribed category is a pre-requisite for
accreditation or renewal of accreditation as a CPA in public practice by the Board of
Accountancy.
II. The CPA practitioner’s registration category should be stated in the BOA certificate of
accreditation.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
58. CPAs in public practice are required to register with the QAR program under the
prescribed category. Those whose clients are public-interest entities (listed and not-listed
but with public accountability) should register under
A. Category A B. Category B C.
Category C
D. Category D
Section 19 provides that CPA practitioners should be registered in accordance with the
following categories
• Category A – registration for CPA practitioners handling clients that use the full IFRS
or their Philippine equivalents. These would cover CPA practitioners auditing public-
interest entities (listed and notlisted but with public accountability).
• Category B – registration for CPA practitioners handling clients that use the IFRS or
their Philippine equivalents for Small and Medium-sized enterprises.
59. Public-interest entities include publicly-listed entities and not listed entities but with
public accountability. The following are examples of not-listed public-interest entities,
except
A. Entities which have sold a class of their securities pursuant to a registration under
Section12 of the Securities Regulation Code.
B. Entities with assets of at least P50 million and having 200 or more holders each holding
at least 100 shares of a class of its equity securities as of the first day of the issuer’s fiscal
year.
C. Entities which are in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market.
D. Entities not in the process of filing their financial statements for the purpose of issuing
any class of instruments in a public market.
I. Public-interest Entities (Entities with Public Accountability) Using Full IFRS or their
Philippine
Equivalents
1. Publicly-listed entities
a. Entities which have issued a class of securities listed for trading on an Exchange
f. Entities which are economically significant. These are entities whose total assets
exceed P350 million or whose total liabilities exceed P250 million. Total assets
and total liabilities are based on the entity’s annual financial statements and on
consolidated totals, if the entity presents consolidated financial statements. An
entity that is a subsidiary of a parent that is considered to have public
accountability is similarly considered to have public accountability.
60. There are rules to observe in connection with the registration of CPA practitioners with
the QAR program. Which is incorrect?
A. A CPA practitioner will register in only one category division.
B. Change in registration category is not allowed.
C. Change in registration sub-category due to the change in the number of clients should be
done upon renewal of registration within the first two months of each calendar year.
D. All applications for registration must include information as to the number of clients
classified as to publicinterest entities using full IFRS and small and mediumsized entities
using IFRS for SMEs.
According to the registration riles in Section 19, the change in registration from Category A
to Category B or vice versa should be done within the year of change.
RULES AND REGULATIONS FOR THE ACCREDITATION OF ACCOUNTING TEACHERS
61. What is the effectivity date of the BOA Resolution No.88 (Series of 2008) prescribing the
rules and regulations for the accreditation of accounting teachers?
A. June 4, 2008
B. June 20, 2008
C. December 31, 2008
D. June 30,2008
62. Which of the following requirements for the accreditation of accounting teachers shall
not apply to those CPAs already engaged in teaching as of the effectivity date of the
Rules and Regulations?
A. I and II only
B. II and III only
C. I and IV only
D. II only
63. The following statements relate to the requirement to complete 12 units of relevant
education subjects for the accreditation of accounting teachers. Which is incorrect?
A. For purposes of compliance, the 12 units may be earned from the undergraduate
education program or from a graduate degree program of any Higher Education
Institution (HEI) duly recognized by CHED.
B. The 12 units may be earned from in-service or in-house training on relevant education
subjects offered by schools or training centers.
C. The 12 units may be a combination of in-service trainings and units earned in an
undergraduate or graduate education
programs.
D. CPAs who have passed the Teachers Board Exams and are licensed Professional Teachers
should earn the 12 units through in-service or in-house trainings.
64. Which of the following shall be considered proof of compliance with the CPE
requirement for accreditation of accounting teachers?
I. Certification of CPE units from accredited CPE providers issued by the PICPA.
II. Certificate of Attendance or other proofs of meaningful participation in other CPE
programs as approved by the PRC/CPE Council upon recommendation of the PICPA
of the individual CPA of a minimum of sixty (60) credits units earned for the past
immediate 3 years.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
65. What is the required minimum number of CPE credit units that an accounting teacher
shall earn in each year prior to renewal of accreditation?
A. 15 units B. 20 units
C. 10 units
D. No minimum number of credit units required
66. The Certificate of Accreditation issued by the PRC to an accounting teacher shall
A. Be valid for 2 years and renewable every 2 years.
B. Be valid initially for 3 years renewable annually.
C. Remain in full force and effect unless revoked, cancelled or withdrawn.
D. Be valid for 3 years and renewable every 3 years.
67. According to the Transitory Provisions of the BOA Resolution No.88, any tenured/full
time/full load faculty member who does not meet the accreditation requirements as of the
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
earlier withdrawn, revoked, or cancelled for cause by the BOA.
II. The Provisional Accreditation may be issued only once and is not renewable.
III. The transitory provision shall also apply to returning teachers who have not been
teaching for the last 5 years.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
B. DIFFERENT GOVERNMENT AGENCIES THAT INFLUENCE THE PRACTICE OF
ACCOUNTANCY
68. Which of the following is responsible for the registration of corporations and partnerships, as
well as monitoring of compliance with the Corporation Code, Civil Code provisions on
partnerships, Foreign Investments Act, and other related
laws?
A. Bangko Sentral ng Pilipinas (BSP)
B. Securities and Exchange Commission (SEC)
C. Bureau of Internal Revenue (BIR)
D. Philippine Stock Exchange (PSE)
69. Which of the following laws/regulations govern the registration of corporations and
partnerships with the SEC?
A. Civil Code
B. Corporation Code of the Philippines
C. Securities Regulation Code
D. A,B, and C
70. Which of the following entities need not be registered with the SEC? A. Sole proprietorships
B. General and limited partnerships
C. Stock corporations
D. Non-stock corporations
71. The SEC is composed of a chairperson and four (4) commissioners appointed by the
President of the Philippines for a term of A. 3 years B. 6 years C. 7 years
D. 8 years
72. The following statements relate to the qualifications of the SEC commissioners. Which is
incorrect?
A. The commissioners must be natural-born citizen of the Philippines.
B. The commissioners must be of good moral character, of unquestionable integrity, of
known probity and patriotism, and with recognized competence in social and economic
disciplines.
C. The majority of the commissioners, including the Chairperson, shall be the members of
the Philippine Bar.
D. The Chairperson and the commissioners must be at least thirty-five (35) years of age.
The Chairperson must be at least forty (40) years of age and the commissioners must be at
least thirty-five (35) years of age. (Subsection 4.2, Securities Regulation Code)
73. Subsection 8.1 of the Securities Regulation Code (SRC) provides that securities shall not be
sold or offered for sale or distribution within Philippines without a
A. Registration Statement
B. Register of Securities
C. Certificate of Accreditation
D. Certificate of Registration
Securities shall not be sold or offered for sale or distribution within the Philippines without a
Registration Statement duly filed with and approved by the Securities and Exchange
Commission.
74. The following securities are exempted from the registration requirement under Subsection
8.1 of the Securities Regulation Code (SRC), except A. A bank’s own shares of stock.
B. Any security issued or guaranteed by the Government of the Philippines.
C. Any security issued by the Government of any country with which the Philippines
maintains diplomatic relations on the basis of reciprocity.
D. Any security or its derivatives, the sale or transfer of which by law, is under supervision
and regulation of the Office of the Insurance Commission, Housing and Land Use
Regulatory Board, or the Bureau of Internal Revenue.
Under Subsection 9.1 of the SRC, exempted from the registration requirement is any security
issued by a bank except its own shares of stock.
75. The following transactions are exempted from the registration requirement under Subsection
8.1 of the Securities Regulation Code (SRC), except
A. The distribution by a corporation, actively engaged in the business authorized by its
articles of incorporation, of securities to its stockholders as a stock dividend.
B. The sale of securities by an issuer to more than twenty (20) persons in the Philippines
during any 12-month period.
C. The issuance of bonds and notes secured by mortgage upon real estate or tangible
personal property, where the entire mortgage together with the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
D. Broker’s transactions, executed upon customer’s orders, on any registered Exchange or
other trading market.
Under Subsection 10.1 of the SRC, exempted from the registration requirement I the sale of
securities by an issuer to fewer than twenty (20) persons in the Philippines during any 12-month
period.
76. Rule 68 of the Securities Regulation Code (SRC) prescribes the requirements applicable to
the form and content of financial statements to be filed by stock corporations except
those whose paid-up capital is less than
A. P500,000 B. P 50,000 C. P250,000
D. P400,000
SRC Rule 68, as amended, prescribes the form and content of financial statements required to
be filed with the Securities and Exchange Commission (SEC) by corporations which meet
the following thresholds:
a) Stock corporations with paid-up capital stock of P50,000 or more;
b) Non-stock corporations with total assets of P500,000 or more, or with gross annual
receipts of P100,000 or more; c) Branch offices of stock foreign corporations with
assigned capital in the equivalent amount of P1,000,000 or more;
d) Branch offices of non-stock corporations with total assets in the equivalent amount of
P1,000,000 or more;
e) Regional operating headquarters of foreign corporations with total revenues in the
equivalent amount of P1,000,000 or more.
77. The audited financial statements to be filed with the SEC shall be accompanied by a A.
Management Report
B. Registration Statement
C. Statement of Management’s Responsibility for Financial Statements
D. Statement of the Board of Director’s Responsibility for Financial Statements
The SEC requires management of all operations covered by SRC Rule 68, as amended, to
acknowledge their responsibility for their financial statements. Hence, the financial
statements to be filed with the SEC shall be accompanied by a Statement of Management’s
Responsibility (SMR) for Financial Statements.
SRC Rule 68, as amended, prescribe the wording of the wording of the SMR that shall be
attached to the financial statements.
Part I, Section B (ii) of the Rule states that the SMR for Financial Statements that shall be
attached to the financial statements shall read as follows:
The management of (name of reporting company) is responsible for the preparation and fair
presentation of the financial statements for the year(s) ended (date), in accordance with the
prescribed financial reporting framework indicated therein. This responsibility includes
designing and implementing internal controls relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to
fraud or error, selecting and applying appropriate accounting policies, and making
accounting estimates that are reasonable in the circumstances.
The Board of Directors or Trustees reviews and approves the financial statements and
submits the same to the stockholders or members.
(name of auditing firm), the independent auditors, appointed by the stockholders has
examined the financial statements of the company in accordance with Philippine Standards
on Auditing, and in its report to the stockholders or members, has expressed its opinion on
the fairness of presentation upon completion of such examination.
Signature_______________
Printed Name of the Chairman of the
Board________________
Signature_______________
Printed Name of the Chief Executive
Officer______________
Signature_______________
Printed Name of the Chief Financial
Officer______________
The SMR of the entities covered under Part II of the SRC Rule 68, as amended, shall be
signed under oath.
79. In addition to the requirements prescribed under Part I of the Rule 68, as amended, Part II
of the Rule prescribes special requirements on the financial statements required to be
filed with the SEC by
I. An issuer which has sold a class of its securities pursuant to a registration under
Section 12 of the SRC.
II. An issuer with a class of securities listed for trading on an Exchange.
III. An issuer with assets of at least P50,000,000 and has 200 or more holders, each
holding at least 100 shares of a class of its equity securities as of the first day of the
issuer’s fiscal year.
A. I only
B. II only
C. II and III only
D. I,II and III
80. The financial statements to be filed with the SEC shall be presented in comparative form.
The audited balance sheets or statements of financial position shall be as of the end of
each of the ___ most recently completed fiscal years.
A. 2 B. 3 C. 4
D. 5
81. SRC Rule 68, as amended, requires a regulated entity to report to the SEC its action on a
report of its independent auditor pertaining to any material findings involving fraud or
error within _____ business days from the date the report is submitted by the independent
auditor.
A. 2 B. 3 C. 4
D. 5
A regulated entity shall report to the SEC its action on a report of its independent auditor
pertaining to the following:
1) Any material findings involving fraud or error;
2) Losses or potential losses the aggregate of which amounts to at least 10% of the
consolidated total assets of the company;
3) Any finding to the effect that the consolidated total assets of the company, on a going
concern basis, are no longer adequate to cover the total claims of creditors;
4) Material internal control weaknesses which may lead to financial reporting problems.
Rule 68, as amended, prescribed the form of report on the audit findings to be submitted by
the regulated entity to the SEC within 5 business days from the date the report is submitted
by the independent auditor.
82. If a regulated entity fails to submit the required report if its action concerning any of the
audit findings specified in Rule 68, as amended, the independent auditor shall, within
____ business days from the submission of his findings to the entity, file a report to the
SEC.
A. 10 B. 15 C. 20
D. 30
83. According to Part II of Rule 68, as amended, the Rule is considered violated if the
auditor’s opinion on the financial statements of listed entities or other issuers of securities
to the public is other than unqualified because of
I. Deviation(s) from the required financial reporting framework.
II. A scope limitation imposed by the company.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
84. The primary objective of this government agency is to maintain price stability conductive
to a balanced and sustainable economic growth. It also aims to promote and preserve
monetary stability and the convertibility of the
peso.
A. Bureau of Internal Revenue (BIR)
B. Securities and Exchange Commission (SEC)
C. Philippine Deposit and Insurance Corporation (PDIC)
D. Bangko Sentral ng Pilipinas (BSP)
85. Which of the following is not a function of the Bangko Sentral ng Pilipinas (BSP)
A. Recommend measures to improve the efficiency and effectiveness of government
operations.
B. Supervise banks and exercise regulatory powers over nonbank institutions performing
quasi-bank functions.
C. Determine the exchange rate policy of the Philippines.
D. Extend discounts, loans, and receivables to banking institutions for liquidity purposes.
87. The BSP Monetary Board is composed of seven (7) members appointed by the President
of the Philippines for a term of
A. 6 years B. 5 years C. 7 years
D. 3 years
Section 6 of the New Central Bank Act (RA 7653) states that the powers and functions of the
BSP shall be exercised by the BSP Monetary Board composed of seven (7) members
appointed by the President of the Philippines for a term of six (6) years.
I. Should be a CPA.
II. Must have at least five (5) years of experience in the regular audit (internal or
external) of a universal or commercial bank as auditor-in-charge, senior auditor, or
audit manager.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
The internal auditor of a universal or commercial bank must be a CPA and must have at least
five (5) years of experience in the regular audit (internal or external) of a universal or
commercial bank as auditor-in-charge, senior, auditor, or audit manager. He/she must be
competent to examine all areas in which the institution operates. (BSP Circular No. 499,
Series of 2005)
90. In its Circular No. 425, Series of 2000, the BSP requires that only external auditors
accredited by the BSP shall be engaged by banks for regular audit or special
engagements. Which of the following is not an accreditation requirement for external
auditors?
A. No external auditor may be engaged by a bank if he/she has or was committed to acquire
any direct or material indirect financial interest in the bank, or if his/her independence is
considered impaired under the circumstances specified in the Code of Professional Ethics
for CPAs.
B. The external auditor and the members of the audit team do not have/shall not have
outstanding loans or any credit accommodations (including credit card obligations) with
any bank to be audited / being audited at the time of signing the engagement and during
the engagement.
C. The external auditor should have at least five (5) years track record in conducting
external audit.
D. The external auditor and members of the audit team adhere to the highest standards of
professional conduct, including integrity and objectivity.
The requirement that the external auditor and the members of the audit team do not have /
shall not have outstanding loans or may credit accommodations with any bank to be audited /
being audited does not include credit card obligations.
a. The external auditor must have at least twenty (20) existing corporate clients with
resources of P50 million each; and
b. The external auditor must have at least one (1) existing client commercial bank in the
regular audit or in lieu thereof, the external auditor and the auditor who will head the
team must have at least five (5) years of experience in the bank audit.
91. One of the documents that should be submitted by an auditor who is applying for BSP
accreditation is a Certification from the Professional Regulation Commission (PRC) that
the external auditor and the members of the audit team have no derogatory information,
previous conviction or any pending investigation. However, in the event that the
certification cannot be obtained because of the pendency of a case, the BSP
may dispense with this requirement if the case
A. Involves purely legal question
B. Does not, in any way, negate the auditor’s adherence to the highest standards of
professional conduct and degrade his/her integrity and objectivity.
C. Either A or B
D. Neither A nor B
Section 3(i) of BSP Circular No. 245 dated May 25, 2000, was amended by Circular No.318
(Series of 2002) which states that in the event the PRC Certification cannot be obtained
because of the pendency of a case, the BSP may dispense with this requirement upon
determination by the Monetary Board that the case involves purely legal question, or does
not, in any way, negate the auditor’s adherence to the highest standards of professional
conduct and degrade his/her integrity and objectivity.
92. Which of the following cases that may be discovered by a Bangko Sentral ng Pilipinas
(BSP) accredited external auditor during his/her audit fieldwork must be reported to the
BSP?
I. Any material finding discovered during the period of audit involving fraud or
dishonesty (except cases that were resolved during the audit period).
II. Adjustments or potential losses, the aggregate of which amounts to at least 1% of the
capital funds of the bank.
III. Any finding to the effect that the total bank assets, on a going concern basis, are no
longer adequate to cover the total claims of creditors.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
A BSP accredited external auditor must report to the BSP any material finding which will
reduce the capital funds of the bank by at least 1%, including those cases that were resolved
during the period of audit.
(Section 4 of BSP Circular No.425, Series of 2000)
93. All banks are required to prepare the Financial Reporting Package (FRP). The FRP,
composed of the balance sheet, income statement, and supporting schedules, shall be
prepared on a solo and consolidated basis. Solo basis shall refer to the
combined financial statements of the A. Head office and
subsidiaries.
B. Head office and branches/other offices.
C. Parent bank, head office, and subsidiaries.
D. Parent bank and subsidiaries.
Solo basis refers to the combined financial statements of the head office and branches/other
offices.
Consolidated basis refers to the combined financial statements of parent bank and
subsidiaries.
94. Within how many banking days after the end of the reference quarter should banks
submit their consolidated FRP to the BSP?
A. 10 B. 20
C. 15
D. 30
The solo and consolidated FRP shall be prepared on a quarterly basis, except for the solo
balance sheet which shall be prepared on a monthly basis.
The consolidated FRP shall be submitted within 30 banking days after the end of the
reference quarter.
The solo FRP shall be submitted within 15 banking days after the end of the reference
quarter. The solo balance sheet shall be submitted within 15 banking days after the end of the
reference month.
95. Within how many banking days after the end of the reference month or quarter should
banks submit their solo balance sheet and solo income statement to the Bangko Sentral ng
Pilipinas?
A. 10 B. 20
C. 15
D. 30
96. This Constitutional Commission has the power, authority, and duty to examine, audit, and
settle all accounts pertaining
to the revenue and receipts of, and expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned or controlled corporations and recommend
measures to improve the efficiency and effectiveness of government operations.
A. Securities and Exchange Commission
B. Insurance Commission
C. Commission on Audit
D. Bureau of Internal Revenue
98. The COA Chairman and the two (2) commissioners shall be appointed by the President of
the Philippines with consent of
the Commission on Appointments for a term of
A. 5 years B. 6 years C. 7 years
D. 9 years
99. Which of the following is not one of the principal duties of the COA?
A. Keep the general accounts of the government and preserve the vouchers and supporting
papers pertaining thereto.
B. Maintain price stability conducive to a balanced and sustainable economic growth.
C. Promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant or
unconscionable expenditures, or uses of government funds and properties.
D. Submit to the President of the Philippines and Congress, within the time fixed by law, an
annual report covering the financial condition and operation of the government.
To maintain price stability conducive to a balanced and sustainable economic growth is the
primary objective of the Bangko Sentral ng Pilipinas.
1. C 36. D 71. C
2. D 37. A 72. D
3. D 38. A 73. A
4. B 39. D 74. A
5. A 40. B 75. B
6. A 41. B 76. B
7. A 42. B 77. C
8. C 43. B 78. D
9. C 44. C 79. D
10. B 45. A 80. A
11. D 46. A 81. D
12. B 47. C 82. D
13. A 48. C 83. C
14. D 49. A 84. D
15. D 50. A 85. A
16. B 51. D 86. B
17. B 52. C 87. A
18. A 53. A 88. A
19. A 54. A 89. D
20. A 55. B 90. B
21. A 56. A 91. C
22. C 57. C 92. C
23. D 58. A 93. B
24. D 59. D 94. D
25. B 60. B 95. C
26. B 61. B 96. C
27. B 62. B 97. A
28. D 63. D 98. C
29. D 64. C 99. B
30. C 65. A 100. D
31. A 66. D
32. B 67. D
33. B 68. B
34. A 69. D
35. B 70. A
Chapter 3
The CPA’s Professional Responsibilities
2. Which part of the Code of Ethics applies to professional accountants in public practice?
A. Part A Part C
C .
B. Part B Part D
D .
A. Objectivity
B. Professional behavior
C. Professional competence and due care
D. Integrity
Part A of the Code establishes the following fundamental ethical principles:
1. Professional Behavior
- A professional accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.
2. Integrity
- A professional accountant should be straightforward and honest in all
professional and business relationships.
3. Confidentiality
- A professional accountant should respect the confidentiality of
information acquired as a result of professional and business relationships.
Such information should not be disclosed to third parties without proper and
specific authority unless there is a legal or professional right or duty to
disclose. Also, it should not be used for the personal advantage of the
professional accountant or third parties.
4. Objectivity
- A professional accountant should not allow bias, conflict of interest or
undue influence of others to override professional or business judgments.
A B C
D
Integrity implies fair dealing
And truthfulness. True False True
False
Services. False
False True True
A. Integrity
B. Objectivity
C. Professional competence and due care
D. COnfidentiality
Under the principle of integrity, professional accountants are required to be
straightforward and honest in professional and business relationships.
A professional accountant shall not knowingly be associated with reports,
returns, communications or other information where the professional accountant
believes that the information:
7. The principle of professional competence and due care imposes which of the
following obligations on professional
accountants?
A. To maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service.
B. To refrain from disclosing confidential information obtained as a result of
professional and business relationships without proper and specific authority unless there
is a legal or professional right or duty to disclose.
C. To comply with relevant laws and regulations and avoid any situation that may
bring discredit to the profession.
D. Not to compromise professional or business judgment because of bias, conflict of
interest or undue influence of others.
10. Which of the following threats to compliance with the fundamental principles
may occur as a result of the financial or other interests of a professional
accountant or of an immediate or close family member?
A. Self-interest
B. Self-review
C. Advocacy
D. Familiarity
The Code of Ethics identifies the following threats to compliance with the fundamental
principles:
1. Self-interest threat
- The threat that a financial or other interest will inappropriately
influence the professional accountant’s judgment or behavior.
2. Self-review threat
- the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service performed by the
professional accountant, or by another individual within the professional
accountant’s firm or employing organization, on which the accountant will
rely when forming a judgment as part of providing current service.
3. Advocacy threat
- The threat that a professional accountant will promote client’s or
employer’s position to the point that the professional accountant’s objectivity
is compromised.
4. Familiarity threat
- The threat that due to a long or close relationship with a client or
employer, a professional accountant will be too sympathetic to their interests
or too accepting of their work.
5. Intimidation threat
- The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to
exercise undue influence over the professional accountant.
A. I and II only
B. III and IV only
C. I and IV only
D. II and III only
The Code states that when a professional accountant identifies threats to
compliance with the fundamental principles and, based on an evaluation of those
threats, determines that they are not an acceptable level, the professional
accountant shall determine whether appropriate safeguards are available and can
be applied to eliminate the threats or reduce them to an acceptable level.
12. The Code of Ethics allows an auditor to perform which of the following
services for an audit client that is not a public interest entity?
The Code states that a CPA may render services related to the preparation of
accounting records and financial statements to an audit client that is not a public
interest entity where the services are of a routine or mechanical nature, provided
that any self-review threat created is reduced to an acceptable level.
1. Educational, training and experience requirements for entry into the profession.
2. Continuing professional development requirements.
3. Corporate governance regulations.
4. Professional standards.
5. Professional or regulatory monitoring and disciplinary procedures.
6. External review by a legally empowered third party of the reports, returns,
communications or information produced by a professional accountant.
15. Which of the following circumstances may create self-interest threat for a
professional accountant in public practice?
A. A member of the assurance team having a direct financial interest in the assurance
client.
B. Performing a service for an assurance client that directly affects the
subject matter information of the assurance engagement.
C. Being threatened with litigation by the client.
D. Acting as an advocate on behalf of an audit client in litigation or disputes
with third parties.
The Code of Ethics gives the following examples of circumstances that may
create self-interest threats for a professional accountant in public practice:
5. A member of the audit team entering into employment negotiations with the audit
client.
6. A firm entering into a contingent fee arrangement relating to an assurance
engagement.
Performing a service for an assurance client that directly affects the subject
matter information of the assurance engagement (Answer B) may create self-
review threat.
Being the threatened with litigation by the client (Answer C) may create
intimidation threat.
16. The following are examples of circumstances that may create familiarity
threat, except
The following are examples of circumstances that may create self-review threat:
The Code gives the following examples of safeguards within the client’s systems
and procedures:
20. If the fee quoted for a professional service is so low, it may be difficult for
the CPA to perform the engagement in accordance with applicable technical
and professional standards for that price. This situation may create a self-
interest threat to
21. According to Section 240 of the Code of Ethics, fees charged for assurance
engagements should be fair reflection of the value of the work involved. In
determining professional fees, the following should be taken into account,
except
A. A fee that is dependent upon the approval of the assurance client’s loan
application.
B. An audit fee that is based on 5% of the client’s adjusted net income
for the current year.
C. A fee that is fixed by the court or other public authority.
D. An arrangement whereby no fee will be charged unless a specified finding or
result is attained.
23. The Code of Ethics, requires that members of assurance teams, firms and,
when applicable, network firms be independent of assurance clients.
Independence requires
24. Which of the following most completely describes how independence has
been defined by the accountancy
profession?
A. Possessing the ability to act with integrity, and exercise objectivity and
professional skepticism.
B. Accepting responsibility to act professionally and in accordance with
laws and regulations.
C. Avoiding the appearance of significant interests in the affairs of an
assurance client.
D. Performing an assurance service from the viewpoint of the public.
Answer D is incorrect because professional standards require objectivity, not the adoption of
any viewpoint.
25. Which of the following is a misunderstanding created by the use of the word
“independence?”
A. A larger structure where the entities within the structure share costs that are limited
only to those costs related to development of audit methodologies, manuals, or training
courses.
B. A larger structure that is aimed at cooperation and the entities within the structure share
common ownership, control or management.
C. A larger structure that is aimed at cooperation and the entities within the structure share
common quality control policies and procedures.
D. A larger structure that is aimed at cooperation and it is clearly aimed at profit or cost sharing
among the entities within the structure.
27. The Code of Ethics provides that where the larger structure is aimed at
cooperation and the entities within the structure share a significant part of
professional resources, it is considered to be a network. Professional
resources include the following, except
A. I only
B. II only
C. Neither I nor II
D. Either I or II
29. When identified threats to independence are significant and the firm decides
to accept or continue the assurance engagement, the decision should be
documented. The firm’s documentation should include
I. A description of the threats identified.
II. The safeguards applied to eliminate or reduce threats to an acceptable level.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
30. Which of the following threats to independence would most likely be created
by a financial interest in an assurance client?
A. Self-interest threat
B. Self-review threat
C. Familiarity threat
D. Intimidation threat
31. A self-interest threat may be created when a member of the assurance team
knows that his close family member has a direct financial interest or a
material indirect financial interest in the assurance client. Which of the
following should be considered in evaluating the significance of the
identified threat to independence?
I. The nature of the relationship between the member of the assurance team
and the close family member.
II. The materiality of the financial interest.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
A. The CPA resigned on January 17, 20X5 from the board of directors of the client, prior to
accepting the new audit engagement.
B. The CPA continues to hold an immaterial indirect financial interest in the client.
C. The CPA continues to serve as a trustee for the client’s pension plan and has the authority to
make investment decisions.
D. The CPA’s spouse owns an immaterial amount of ordinary shares in the client.
33. A loan, or guarantee of a loan, to the firm from an assurance client that is a
bank or similar institution, would not create a threat to independence
provided.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
The Code of Ethics states that if a firm or a member of the assurance team,
or a member of that individual’s immediate family, has deposits or a brokerage
account with an assurance client that is a bank, broker, or similar institution, a
threat to independence is not created if the deposit or account is held under
normal commercial terms.
36. A self-interest threat would be created if the firm, or a member of the
assurance team, makes a loan to an assurance client that is not a bank or
similar institution, or guarantees such an assurance client’s borrowing. The
selfinterest threat created would be so significant that no safeguard could
reduce the threat to an acceptable level unless the loan or guarantee is
A. Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the immediate
family member.
B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit committee.
According to the Code of Ethics, the only safeguard that can reduce the
threats to independence is by removing the individual from the assurance team. If
this safeguard is not used, the only course of action is to withdraw from the
assurance engagement.
41. When a close family member of a member of the assurance team is a
director, an officer, or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter information of
the assurance engagement, threats to independence may be created. If the
threats are other than clearly insignificant, which of the following safeguards
can be applied to reduce the threats to an acceptable level?
A. I only
B. II only
C. Either I or II
D. Neither I nor II
A. Intimidation threat
B. Self-interest threat
C. Self-review threat
D. Familiarity threat
According to the Code of Ethics, firm policies and procedures shall require
members of an assurance team to notify the firm when entering employment
negotiations with the client. The significance of the threat shall be evaluated and
safeguards applied when necessary to eliminate the threat or reduce it to an
acceptable level. Examples of such safeguards include:
43. Using the same engagement partner or the same individual for the
engagement quality control review on a financial statement audit over a
prolonged period may create a
A. Self-review threat
B. Intimidation threat
C. Familiarity threat
D. Self-interest threat
45. Several months after an unmodified audit report was issued, the auditor
discovers the financial statements were materially misstated. The client’s
CEO agrees that there are misstatements, but refuses to correct them. She
claims that “confidentiality” prohibits the CPA from informing anyone.
Is the CEO correct?
A. Yes. The auditor must maintain confidentiality.
B. No. But because the audit report has been issued it is too late.
C. Yes. But to be ethically correct, the auditor should violate the confidentiality rule and disclose
the error.
D. No. The auditor has an obligation to issue a revised audit report, even if the CEO will
not correct the financial statements.
46. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or from a financial
statement audit client by a network firm) or a member of the assurance team provided that the
transaction is in the normal course of business and on an arm’s length basis.
B. A partner or employee of the firm or a network firm serves as Company Secretary for a financial
statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.
Serving as the Company Secretary for a financial statement audit client may
create self-review and advocacy threats (Answer B).
Determining which recommendations of the firm should be implemented (Answer C)
and reporting in a management role, to those charged with governance (Answer D) would
generally create self-interest and advocacy threats.
47. The following activities may create self-interest or selfreview threats, except
48. The following forms of assistance to a financial statement audit client do not
generally threaten the firm’s independence, except
A. Advocacy threat
B. Familiarity threat
C. Self-review threat
D. Intimidation threat
50. A firm provides valuation services to an audit client. The service involves
valuation of matters material to the financial statements and involves a
significant degree of subjectivity. Which of the following safeguards should
be applied to eliminate the self-review threat created, or reduce it to an
acceptable level?
A. Confirming with the audit client their understanding of the underlying assumptions of the
valuation and the methodology to be used and obtaining approval for their use.
B. Obtaining the audit client’s acknowledgement of responsibility for the results of the work
performed by the firm.
C. Making arrangements so that personnel providing such services do not participate in the
audit engagement.
D. The self-review threat created could not be reduced to an acceptable level by the application of
any safeguard.
The Code states, “If the valuation services involves the valuation of matters
material to the financial statements and the valuation involves a significant
degree of subjectivity, the self-review threat could not be reduced to an
acceptable level by the application of any safeguard. Accordingly, such valuation
services should not be provided or, alternatively, the only course of action could
be to withdraw from the audit engagement.”
51. The following statements relate to the provision of taxation, internal audit or
IT Systems services to audit clients.
Which is false?
53. What threat to independence is created when the litigation support services
provided to an audit client include the estimation of the possible outcome
and thereby affects the amounts or disclosure to be reflected in the financial
statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
54. According to the Code, legal services encompasses a wide and diversified
range of areas including both corporate and commercial services to clients -
such as contract support; litigation, mergers, and acquisition advice and
support, and the provision of assistance to a client’s internal legal
department. The provision of legal services by a firm, or
network firm, to an audit client ay create
A. Self-interest threat
B. Self-review and advocacy threat
C. Advocacy and intimidation threat
D. Familiarity and intimidation threat
55. The following statements refer to the provision of legal services to an audit
client. Which is incorrect?
A. The provision of legal services to an audit client involving matters that would not be expected to
have a material effect on the financial statements may create a self-review threat.
B. Legal services to support an audit client in the execution of a transaction (e.g., contract support)
may create an s elf-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such circumstances when
the amounts involved are material in relation to the financial statements of the audit client would create
advocacy and self-review threats that are so significant no safeguards could reduce the threats to an
acceptable level.
D. The appointment of a partner or an employee of the firm or network firm as General Counsel for
legal affairs to an audit client would create self-review and advocacy threats that are so significant no
safeguards could reduce the threats to an acceptable level.
56. The recruitment of senior management for an audit client may create the
following current or future threats to independence, except
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat
A. Self-interest threat
B. Self-interest and intimidation threats
C. Advocacy and self-review threats
D. Advocacy and intimidation threats
58. When the total fees generated by an assurance client represent a large portion
of a firm’s total fees, the dependence on that client or client group and
concern about the possibility of losing the client may create a/an
A. Self-interest threat
B. Self-review threat
C. Intimidation threat
D. Advocacy threat
59. What threat to independence may be created when the fees generated by the
assurance client represent a large portion of the revenue of an individual of
the firm?
A. Self-review threat
B. Familiarity threat
C. Self-interest threat
D. Advocacy threat
60. What threat to independence may create when fees due from an assurance
client for professional services remain unpaid for a long time, especially if a
significant part is not paid before the issue of the assurance report for the
following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat
61. These are fees calculated on a predetermined basis relating to the outcome or
result of a transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions
62. What threats to independence are created when a contingent fee is charged
by a firm in respect of an assurance engagement?
A. Disclosing to the audit committee, or others charged with governance, the extent and nature of
the litigation.
B. If the litigation involves a member of the assurance team, removing that individual from the
assurance team.
C. Involving an additional professional accountant in the firm who was not a member of the
assurance team to review the work or otherwise advice as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.
A. The skill and knowledge required for the type of professional services involved.
B. The result of the assurance work.
C. The level of training and experience of the persons necessarily engaged in
performing the professional services.
D. The time necessarily occupied by each person engaged in performing the professional services.
67. Janus De Belen, CPA, was offered the engagement to audit the financial
statements of ABC Company for the year ended December 31, 2015. Janus
had served as a director of ABC Company until December 31, 2013, and his
spouse currently owns 1,000 of 200,000 outstanding shares of ABC
Company. Janus disassociated form ABC Company prior to being offered the
engagement. Moreover, the engagement does not cover any period that
includes Janus’ association or employment with ABC
Company. Under the Code of Ethics, Janus should
69. A client company has not paid its 20X5 audit fees. According to the Code of
Professional Ethics, in order for the auditor to be considered independent
with respect to the 20X6 audit, the 20X5 audit fees must be paid before the:
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
71. As defined in the Code of Ethics, ______________ is the communication to
the public of facts about a professional accountant which are not designed
for the deliberate promotion of that professional accountant.
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
72. The following statements relate to the provisions of the Code of Ethics that
deal with the professional accountant’s marketing of professional services.
Which is false?
A. When a professional accountant in public practice solicits new work through advertising or
other forms of marketing, a self-interest threat to compliance with the principle of professional
behavior may be created.
B. The professional accountant should be honest and truthful when marketing professional
services.
C. Advertising and publicity are generally unacceptable.
D. When marketing professional services, the professional accountant should not make
exaggerated claims for services offered, qualifications possessed or experience gained.
73. The Board of Accountancy Resolution No. 126, Series of 2008 (Adoption of
the Rules and Regulations on Advertising for the Philippine Accountancy
Profession) states that, generally, advertising and publicity in any medium
are acceptable, provided:
a) It has as its objective the notification to the public or such sectors of the public
as are concerned, of matters of fact (e.g., name, address, contact numbers,
services offered) in a manner that is not false, misleading or deceptive;
b) It is in good taste;
c) It is professionally dignified; and
d) It avoids frequent repetition of, and any undue prominence being given to, the
name of the firm or professional accountant in public practice.
B. Other Professional Responsibilities
76. Which of the following are elements of a CPA firm's quality control that
should be considered in establishing its quality control policies and
procedures?
Ethical Human Engagement
Requirements Resources Performance
No Yes No
Yes No No
c. Yes Yes Yes
No No Yes
77. Which of the following is an element of a CPA firm's quality control
system that should be considered in establishing its quality control
policies and procedures?
A. Considering audit risk and materiality.
B. Managing human resources.
C. Using statistical sampling techniques.
D. Complying with laws and regulations.
a. Has considered the integrity of the client and does not have
information that would lead it to conclude that the client lacks
integrity;
b. Is competent to perform the engagement and has the
capabilities, time and resources to do so; and
c. Can comply with ethical requirements.
83. As defined in PSQC 1, is a process comprising an ongoing
consideration and evaluation of the firm's system of quality control,
including a periodic inspection of a selection of completed engagements,
designed to provide the firm with reasonable assurance that its system of
quality control is operating effectively.
A. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision
84. The firm shall obtain written confirmation of compliance with its
policies and procedures on independence from all firm personnel
required to be independent by relevant ethical requirements
A. At least annually
B. At least monthly
C. At least semi-annually
D. At the completion of each engagement
a. Integrity;
b. Objectivity;
c. Professional competence and due care:
d. Confidentiality; and
e. Professional behavior.
87. The audit work performed by each assistant should be reviewed by
personnel of at least equal competence to determine whether it was
adequately performed and to evaluate whether the
A. Firm's system of quality control has been maintained at a high level.
B. Work performed and the results obtained have been adequately documented.
C. Audit procedures performed are approved in the professional standards.
D. Audit procedures performed are in accordance with Philippine Standards on
Auditing (PSAs).
The work performed by each assistant should be reviewed to consider whether:
a) The work has been performed in accordance with the audit program;
b) The work performed and the results obtained have been adequately documented;
c) All significant audit matters have been resolved or are reflected in audit conclusions;
d) The objectives of the audit procedures have been achieved; and
e) The conclusions expressed are consistent with the results of the work performed and
support the audit opinion.
88. The nature, timing, and extent of an audit firm's quality control policies
and procedures depend on
The Nature Appropriate
The CPA of the CPA Cost-Benefit
Firm's Size Firm's Practice Considerations
A. Yes Yes No
B. Yes Yes Yes
C. No No No
D. Yes No Yes
The nature, timing, and extent of an audit firm's quality control policies
and procedures depend on a number of factors such as the size and nature of
its practice, its geographic dispersion, its organization, and appropriate
cost/benefit considerations.
89. An audit firm should implement quality control policies and procedures
designed to ensure that all audits are conducted in accordance with PSAs
or relevant national standards or practices. These policies and procedures
should be
implemented
A. At the audit firm level only.
B. On individual audits only.
C. Either at the audit firm level or on individual audits.
D. Both at the audit firm level and on individual audits.
90. For audits of financial statements of listed entities, the engagement
partner should not issue the auditor's report
until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
Engagement quality control review, as defined in the Standard, is "a
process designed to provide an objective evaluation, on or before the date of
the report, of the significant judgments the engagement team made and the
conclusions it reached in formulating the report." The Standard provides
further that and engagement quality control review is for audits of financial
statements of listed entities, and those other engagements, if any, for which
the firm has determined an engagement quality control review is required.
94. Who should take responsibility for the overall quality on each audit
engagement?
A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm
PSA 220 provides that the engagement partner should take responsibility
for the overall quality on each audit engagement to which that partner is
assigned. As defined in this Standard, the engagement partner is "the partner
or the person in the firm who is responsible for the audit engagement and its
performance, and for the auditor's report that is issued on behalf of the firm,
and who, where required, has the appropriate authority from a professional,
legal or regulatory body,"
A. CPA firm
B. Engagement quality control reviewer
C. Engagement team
D. Expert contracted by the firm in connection with the audit engagement
PSA 220 states that the engagement team should implement quality
control procedures that are applicable to the individual audit
engagement. The engagement team is composed of all personnel
(partners and staff) performing an audit engagement, including any
experts contracted by the firm in connection with that audit
engagement.
106. Why is computer fraud often much more difficult to detect than other
types of fraud?
A. Perpetrators can commit a fraud and leave little or no evidence.
B. Perpetrators usually only steal very small amounts of money at a time,
thus requiring a long period of time to have elapsed before they are
discovered.
C. Most computer criminals are older and are considered to be more
cunning when committing such a fraud.
D. Most perpetrators invest their illegal income rather than spend it, thus
concealing key evidence.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
109. Stealing a master list of customers and selling it to a competitor is an
example of what classification of fraud?
A. Output theft
B. Data theft
C. Disbursement fraud
D. Cash receipt fraud
110. The primary responsibility for the prevention and detection of fraud rests
with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management. D. The auditor.
Answers A, B, and D are incorrect because they create opportunities to commit fraud.
As required by PSA 200, the auditor plans and performs the audit with
an attitude of professional skepticism recognizing that circumstances
may exist that cause the financial statements to be materially misstated.
Professional skepticism includes a questioning -mind and critical
assessment of audit evidence.
128. As used in PSA 250, this term refers to acts of omission or commission
by the entity being audited, either intentional or unintentional, which are
contrary to prevailing laws or regulations.
A. Noncompliance
B. Illegal acts
C. Deplorable acts D. Unforgivable acts
129. According to PSA 250, the term "noncompliance" as used in the standard
refers to acts of omission or commission by the entity being audited,
either intentional or unintentional, which are contrary to the prevailing
laws or regulations. Such acts do not include
A. Transactions entered into by the entity.
B. Transactions entered into in the name of the entity.
C. Transactions entered into on the entity's behalf by its
management or employees.
D. Personal misconduct (unrelated to the entity's business activities)
by the entity's management or employees.
130. The responsibility for the prevention and detection of noncompliance
rests with
A. The auditor
B. Management
C. The auditor's lawyer
D. The client's lawyer
PSA 250 states that it is management's responsibility to ensure that the
entity's operations are conducted in accordance with laws and
regulations.
131. Which of the following statements best describes why the auditor's
examination cannot reasonably be expected to bring all acts of
noncompliance with existing laws and regulations by the client to the
auditor's attention?
A. Acts of noncompliance by clients often relates to accounting,
aspects rather than operating aspects.
B. Noncompliance may involve conduct designed to conceal it, such
as collusion, forgery, deliberate failure to record transactions,
senior management override of controls, or intentional
misrepresentations being made to the auditor.
C. Noncompliance may be perpetrated by the only person in the
client's organization with access to both assets and the accounting
records.
D. The client's internal control may be so strong that the auditor
performs only minimal substantive testing.
132. PSA 250 states that in order to plan the audit, the auditor should obtain a
general understanding of the legal and regulatory framework applicable
to the entity and the industry and how the entity is complying with that
framework. To obtain this understanding, the following procedures
would ordinarily be considered by the auditor, except
143. The auditor shall communicate with those charged with governance
his/her responsibilities in relation to the audit of the entity's financial
statements, including that
A. I only
B. II only
C. Neither I nor II
D. Both I and II
144. Which of the following matters will an auditor most likely communicate
to those charged with governance?
A. The level of responsibility assumed by management for the
preparation of the financial statements.
B. The effects of significant accounting policies adopted by management
in emerging areas for which there is no authoritative guidance.
C. A list of negative trends that may lead to working capital deficiencies
and adverse financial ratios.
D. Difficulties encountered in achieving a satisfactory response rate from
the entity's customers in confirming accounts receivables.
TRUE OR FALSE
2. Safeguards fall into two broad categories: safeguards in the work environment
and firm-wide safeguards.
7. The auditor must be independent of the audit client unless the lack of
independence does not influence his or her professional judgment.
9. Due professional care requires auditors to plan and perform their duties with the
skill and care that is commonly expected of accounting professionals.
13. A direct financial interest violates independence when close relatives such as a
brother, sister, or in-laws are employed by the client.
14. If an entity asks a CPA to perform a review engagement, and the CPA has an
immaterial direct financial interest in the entity, the CPA is not independent and,
therefore, may not issue a review report.
KEY ANSWERS 41. C 83. A 125. A
42. B 84. C 126. D
1. B 43. C 85. C 127. A 2. B 44. B 86. B 128. A 3. D
45. D 87. B 129. D 4. B 46. A 88. D 130. B 5. C 47. D
89. A 131. B 6. A 48. C 90. B 132. D 7. A 49. C 91. D
133. B 8. D 50. D 92. C 134. C 9. D 51. A 93. B 135. A
10. A 52. B 94. C 136. B 11. A 53. A 95. B 137. D 12. A 54.
B 96. C 138. B 13. A 55. A 97. A 139. A 14. C 56. D 98. C
140. B 15. A 57. C 99. D 141. D
16. A 58. A 100. D 142. C 17. D 59. C 101. C 143. D 18. D 60.
B 102. C 144. B
19. B 61. A 103. D 145. C
20. A 62. B 104. C
21. B 63. A 105. A
22. C 64. C 106. A TRUE OR FALSE
23. C 65. D 107. B
24. A 66. B 108. D
25. C 67. A 109. B 1. False
26. A 68. C 110. C 2. False
27. C 69. C 111. D 3. True
28. D 70. A 112. A 4. False
29. D 71. B 113. B 5. True
30. A 72. C 114. A 6. True
31. D 73. C 115. D 7. False
32. B 74. B 116. C 8. False
33. D 75. C 117. D 9. True
34. D 76. B 118. A 10. False
35. C 77. B 119. C 11. True
36. C 78. C 120. B 12. False
37. C 79. B 121. A 13. False
38. A 80. A 122. C 14. True
39. A 81. D 123. A
40. C 82. A 124. C
CHAPTER 4
The Financial Statement Audit: Client Acceptance and Planning
1. In assessing whether to accept a client for an audit engagement, an auditor
should consider the
I. Client’s business risk
II. Auditor’s business risk
A. I only
B. II only
C. Both I and II
D. Neither I nor II
2. Which of the following factors most likely would cause an auditor to decline a
new audit engagement?
PSA 300 (Planning an Audit of Financial Statements) states that the auditor shall
undertake the following activities prior to an initial audit:
1.) Performing procedures required by PSA 220 (Quality Control for an Audit of
Financial Statements) regarding the acceptance of the client relationship and the
specific audit engagement; and
2.) Communicating with he predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.
Answer A is incorrect because the entity’s annual financial statements will be
prepared after the end of its reporting period and the auditor’s acceptance of the
engagement will likely be prior to that time.
Answers B and D are incorrect because the procedures described will be
performed only after the acceptance of engagement.
4. Which of the following conditions most likely would pose the greatest risk in
accepting a new audit engagement?
A. There will be a client-imposed scope limitation.
B. The client’s financial reporting system has been in place for 10 years.
C. The firm will have to hire an expert in one audit area.
D. Staff will need to be rescheduled to cover this new client.
According to PSA 210 (Agreeing the Terms of Audit Engagements), the auditor
shall not accept the engagement if management or those charged with governance
impose the limitation on the scope of the auditor’s work in the terms of a proposed
audit engagement such that the auditor believes the limitation will result in the
auditor disclaiming an opinion on the financial statements.
5. Which of the following circumstances would permit an independent auditor to
accept an engagement after the end of the reporting period?
A. Expectation of the operating effectiveness of controls.
B. Issuance of a disclaimer opinion as a result of inability to conduct certain tests
required by PSAs due to the timing of acceptance of the engagement.
C. Remedy the limitations resulting from accepting the engagement after the end
of the reporting period, such as those relating to the existence of physical
inventory.
D. Receipt of an assertion from the predecessor auditor that the entity will be
able to continue as a going concern.
Prior to accepting apropos audit engagement subsequent to the end of the entity’s
reporting period, the auditor should determine whether the circumstances permit
an audit with accordance with PSAs and expression of an unmodified opinion.
Otherwise, the auditor should discuss with the prospective client the possibility of
rendering a qualified opinion or a disclaimer of opinion. However in some cases,
the auditor may remedy the audit limitations uch as by observing another physical
count of inventories.
Answer A is incorrect because sufficient appropriate evidence regarding the
operating effectiveness of the entity internal control during the year should be
available after the year-end.
Answer B is incorrect because a disclaimer of opinion is appropriate only if the
auditor cannot resolve an issue by performing alternative procedures.
Answer D is incorrect because there is no need to obtain representations regarding
the prospective client’s ability to continue as going concern from the predecessor
auditor.
7. A predecessor withdrew from the engagement after discovering that the client’s
financial statements are materially misstated that it would not revise. If asked by
the successor auditor about the termination of the engagement, the predecessor
should
A. Suggest that the successor auditor should obtain the client’s consent to discuss
the reasons.
B. Indicate that there was a misunderstanding.
C. State that the audit revealed material misstatement that the client would not
revise.
D. Suggest that the successor auditor ask the client.
The standard states that it is in the interest of both the entity and the auditor that
the auditor sends an audit engagement letter before the commencement of the
audit to help avoid misunderstandings with respect to the audit. The engagement
letter shall include:
a.) The objective and scope of the audit of the financial statement;
b.) The responsibilities of the auditor;
c.) The responsibilities of the management;
d.) Identification of applicable financial reporting framework for the
preparation of financial statements; and
e.) Reference to the expected form and content of any reports to be
issued by the auditor and a statement that there may be
circumstances in which a report may differ from its expected form
and content.
12. The following matters are generally included in the auditor engagement letter,
except
A. The factors to be considered in determining the overall materiality.
B. The fact that because of the test nature and other inherent limitations of an
audit, together with the inherent limitations of internal control, there is an
unavoidable risk that even some material misstatements may remain
undiscovered.
C. The scope of the audit
D. Management’s responsibility for the financial statements.
13. The following are usually included in an auditor’s engagement letter, except
A. List of audit procedures to be used in inventory observation.
B. The financial statements are the responsibility of the company’s management.
C. A reference to PFRS.
D. A reference to PSAs.
14. Which of the following statements would least likely appear an auditor’s
engagement letter?
A. Our audit will be made with the objective of our expressing an opinion on the
financial statements.
B. We remind you that the responsibility for the preparation of financial
statements including adequate disclosure is that of the management of the
entity.
C. After performing our preliminary analytical procedures, we will discuss with
you the other procedures we consider necessary to complete the engagement.
D. Our fees, which will be billed as work progresses, are based on the time
required by individuals assigned to the engagement plus out-of-the-pocket
expenses.
An auditor’s engagement letter shall include, among the other things, the auditor’s
responsibility to communicate to those charged with governance of the client
significant internal control deficiencies that may be discovered during the audit.
Answer A is incorrect because determining materiality to planning and performing
an audit is a responsibility that the auditor is not required to share with the client.
Answer B is incorrect because the auditor assesses the risk of material
misstatement.
Answer D is incorrect because management is not responsible for the errors and
illegal activities of employees.
16. An auditor’s engagement letter most likely will include
A. A request for permission to contact the client’s lawyer for assistance in identifying
litigation, claims and assessments.
B.A reminder that management is responsible for illegal acts committed by
employees.
C.The auditor preliminary assessment of the risk factors relating to misstatements
arising from fraudulent financial reporting.
D. Management’s acknowledgement of its responsibility for such internal control as
it determines is necessary to enable the preparation of financial statements that are
free from material misstatements.
Among the matters addressed in an engagement letter is management’s
responsibility for:
a.) The preparation and fair presentation of the financial statements in
accordance with Philippine Financial Reporting Standards.
b.) Such internal control as it determines is necessary to enable the
preparation of financial statements that are free from material
misstatements, whether due to fraud or error.
Answer A is incorrect because management is responsible for adopting policies
and procedures to identify, evaluate and account for litigation, claims and
assessment.
Answer B is incorrect because management is responsible for ensuring that the
entity’s operation are conducted accordance with laws and regulations. However,
it is not responsible for the illegal acts of employees that are unrelated to the
entity’s business activity.
Answer C in incorrect because an auditor submit an engagement before the
commencement of an audit. Prior to performing procedures, the auditor does not
assess the risk factors relating to misstatements that may arise from fraudulent
financial reporting.
17. The auditor of a parent entity is also the auditor of its component. Which of
the following factors may influence the auditor’s decision whether to send a
separate engagement letter to entity’s component?
A. Whether a separate auditor’s report is to be issued on the component.
B. The component’s management does not accept its responsibilities that are
fundamental to the conduct of an audit.
C. The financial reporting framework use by the component is unacceptable.
D. The preconditions for an audit of the component financial statement are not
present.
The following factors may influence the auditor’s decision whether to send a
separate audit engagement letter to the component:
According to the standard, the following factors may make it appropriate to revise
the terms of the audit engagement or to remind the entity of existing terms:
• Any indication that the entity misunderstands the objective and scope of
the audit. Any revised or special terms of the audit A recent change in
senior management.
• A significant change of ownership.
• A significant change in nature or size of the entity business.
• A change on legal and regulatory requirements.
• A change in the financial reporting framework adopted in the preparation
of the financial statements.
19. The auditor shall not agree to a request from the entity to change the terms of the
audit engagement or to change the audit engagement to an engagement that
conveys a lower level of assurance when there is no reasonable justification for
doing so. Which of the following may be considered reasonable justifications for
the change in audit engagement?
I. A change in circumstance affecting the need for the service.
II. A misunderstanding as to the nature of an audit as originally requested.
III. A restriction on the scope of the engagement, whether imposed by
management or caused by other circumstances.
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
PSA 210 states that a change in circumstances that affects the entity’s
requirements or a misunderstanding concerning the nature of the service originally
requested may be considered reasonable basis for requesting a change in the audit
engagement.
A restriction on the scope of the audit would not be considered a reasonable
justification for change. For example, a change would not be considered
reasonable if the auditor is unable to obtain sufficient appropriate audit evidence
regarding receivable and the client requests that the audit engagement be changed
into a review engagement to avoid a qualified opinion or a disclaimer of opinion.
PSA 210 states that if the auditor concludes that there is a reasonable justification
to change the engagement and if the audit work performed complies with the
PSAs applicable to the change engagement, the report issued would be that
appropriate for the revised terms of engagement. In order avoid confusing the
reader, the report would not include the reference to:
a.) The original engagement; or
b.) Any procedures that may have been performed in the original
engagement, except where the engagement is changed to an
engagement to undertake agreed-upon procedures. And thus,
reference to the procedures performed is normal part of the report.
21. If the auditor is unable to agree to a change of the engagement and is not
permitted to continue the original engagement, the auditor should
A. Insist on continuing the original engagement.
B. Express a qualified opinion.
C. Express an adverse opinion.
D. Withdraw from the engagement.
Under PSA 210, if the auditor is unable to agree to a change of the engagement
and is not permitted to continue the original engagement, the auditor should
withdraw and considered whether there is any obligation, either contractual or
otherwise, to report to other parties, such as the board of directors or shareholders,
the circumstances necessitating the withdrawal.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
23. Which of the following activities should be performed by the auditor at the
beginning f the current audit engagement?
I. Perform procedures regarding th continuance of the client relationship and
the specific audit engagement.
II. Evaluate compliance with relevant ethical requirements, including
independence.
III. Establish an understanding of the terms of the engagement.
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
The standard states, “Planning is not a discrete phase of an audit but rather a
continual and iterative process that begins shortly after (or in connection with) the
completion of the previous audit and continuous until the completion of the
current audit engagement. Planning, however, includes consideration of a timing
of certain activities and audit procedures that need to be completed prior to
performance of further audit procedures.”
27. In performing an audit of financial statements, the auditor should obtain a
sufficient knowledge of a client’s business and industry to
A. Develop an attitude of professional skepticism concerning managements’ financial
statements assertions.
B.Make constructive suggestions concerning improvements to the client’s internal
control.
C.Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s
financial statements.
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
PSA 300 (Planning an Audit of Financial Statements) requires the auditor to
establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor is required to
a.) Identify the characteristics of the engagement that define its scope.
b.) Ascertain the reporting objectives of the engagement to plan the timing of
the audit and the nature of the communication required.
c.) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s effort.
d.) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gain
on other engagement performed by the engagement partner for the entity
is relevant, and
e.) Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The audit plan shall include a description of
a.) The nature, timing and extent of planned risk assessment procedures as
determined under PSA 315 (Identifying and Assessing the Risks of Material
Misstatement through Understanding the entity and its Environment).
b.) The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under PSA 330 (The Auditor’s Responses to
Assessed Risks).
31. Which of the following matters would an auditor least likely consider when
setting the direction of the audit?
A. The selection of the engagement team and the assignment of the audit work to
the team members.
B The engagement budget which includes consideration of the appropriate amount
of time to allot for areas where there may be higher risk for material misstatement.
C. The availability of client personnel and data.
D. The manner in which the auditor emphasizes to engagement team members the
need to maintain a questioning mind and to exercise professional skepticism in the
gathering and evaluation of audit evidence.
34. In planning the audit engagement, the auditor should consider each of the
following, except
A. The type of opinion that is likely to be expressed.
B. The entity’s accounting principles and procedures.
C. Matters relating to the entity’s business and industry in which it operates.
D. Materiality level and audit risk.
Only after obtaining knowledge of the entity and its environment, including its
internal control and assessed the risk of material misstatement can be the auditor
determine the nature, timing, and extent of substantive tests of financial statement
assertion.
36. In designing written audit programs, an auditor should establish specific audit
objectives that can relate primarily to the
A. Selected audit techniques.
B. Cost-benefit of gathering audit evidence.
C. Timing of audit procedures.
D. Financial statement assertions.
The audit procedures included in the audit program should enable the auditor to
gather sufficient appropriate audit evidence about management presentations
embodied in the entity’s financial statements. Such management representations
are called management assertions. Hence, in designing written audit programs, the
auditor develops specific audit objectives in light of those management assertions.
37. An audit program should be designed for each individual and should
incorporate steps and procedure to
A. Detect and eliminate fraud of any type.
B. Gather sufficient amount of management information available.
C. Provide assurances that the objectives of the audit are satisfied.
D. Insure that only material items are audited.
A written audit program sets forth, in reasonable detail, the specific audit
procedures that in the auditor’s judgment are necessary to satisfy the specific audit
engagement.
38. Which of the following is an aspect of scheduling and controlling of the audit
engagement?
A. Including in the engagement letter an estimate of the minimum and maximum
audit fee.
B.Writing a conclusion in individual working papers indicating how the results of the
audit will affect the auditor’s report.
C.Performing audit work only after the entity’s books have been closed for the period
under audit.
D. Including in the audit program a column for budgeted and actual time.
39. In connection with the planning phase of an audit engagement, which of the
following statements is always correct?
A. Final staffing decisions must be made prior to completion of planning stage.
B.Observation of inventory count should be performed at yearend.
C.A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client’s financial year-end.
40. The auditor shall undertake which of the following activities prior to starting
an initial audit?
I. Performing procedures required by PSA 220 (Quality Control for an audit of
Financial Statements) regarding the acceptance of the client relationship and the
specific audit engagement.
II.Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
41. Before accepting an audit engagement, a proposed (successor/incoming)
auditor should make inquiries of the previous (predecessor) auditor regarding the
previous auditor’s
A. Evaluation of all matters of continuing accounting significance.
B. Understanding as to the reasons for the change of auditors.
C. Awareness of the consistency in the application of PAS/PFRS between
periods.
D. Opinion on any subsequent events occurring since the previous auditor’s
report was issued.
The standard requires the proposed auditor to communicate directly with the
previous auditor before accepting the engagement. The proposed auditor should
initiate the communication, although both must obtain client permission to
communicate. The proposed auditor should inquire about reasons for the change
in auditors, disagreement with management concerning accounting principles and
auditing procedures, and facts bearing on the integrity of the entity’s management.
42. The auditor is required to determine three different levels of materiality: (1)
materiality for the financial statements as a whole, (2) performance materiality,
and (3)
A. Overall materiality
B. Planning materiality C. General materiality
D. Specific materiality
The auditor is required to determine three different levels of materiality. These are
1. Materiality for the financial statements as a whole ( also called overall
materiality, general materiality, or tolerable misstatement)
2. Performance materiality (also called planning materiality or scoping
materiality)
3. Materiality applied to specific classes of transaction, account balances or
disclosures (also called specific materiality or individual materiality)
AASC Bulletin, Series 001 of 2010 states, “Materiality for the financial
statements as a whole (herein referred to as the “overall materiality”) is the
materiality determined at the overall financial statement level. This materiality
level helps the auditor determine whether the proposed audit adjustments are
significant or not,. I the audit adjustments exceed this level, the auditor may need
to adjust the financial statements.”
44. What materiality level is used by the auditor in determining which line items
in the financial statements are to be tested?
A. Overall materiality
B. Performance materiality
C. Specific materiality
D. Individual materiality
A. Overall materiality
B. Planning materiality C. Scoping materiality
D. Specific materiality
47. Which of the following factors are normally considered by the auditor in
determining the appropriate benchmark for the purpose of calculating overall
materiality?
I. Components of the entity’s financial statements
II. Laws and regulations
II. Nature of the entity
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
The following factors are normally considered in choosing the appropriate
benchmark:
PSA 320 (Materiality in Planning and Performing an Audit) states that materiality
for the financial statements as a whole (and if applicable, the materiality level or
levels for particular classes of transactions, account balances or disclosures) may
need to be revised as a result of:
• A change in circumstances that occurred during the audit (e.g. a decision
to dispose of a major part of the entity’s business);
• New information; or
• A change in the auditor understands of the entity and its operations as a
result of performing further audit procedures.
49. Which of the following would an auditor most likely use in determining a
preliminary judgment about materiality?
A. The content of the management representation letter.
B. The anticipated sample size of the planned substantive tests.
C. The entity’s annualized interim financial statements.
D. The results of the internal control questionnaire. The measurement of a
preliminary materiality level usually
relates to an annual figure (e.g. net income)
50. An auditor shall consider materiality when
I. Determining the nature, timing and extent of audit procedures.
II. Evaluating the effect of misstatements.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The auditor considers materiality when determining the nature, timing and extent
of audit procedures and evaluating the effect of misstatements.
51. It is an appraisal activity established within the entity. Its functions include,
among other things, examining, evaluating and monitoring the adequacy and
effectiveness of the accounting and internal control systems.
A. External auditing
B. Internal auditing
C. Governmental auditing
D. Internal auditing
A. The external auditor is not required to give consideration to the internal audit
function beyond obtaining a sufficient understanding to identify and assess the
risks of material misstatement of the financial statements and to design and
perform further audit procedures.
B.The internal auditors may determine the extent to which audit procedures should be
employed by the external auditor.
C.Under certain circumstances, the internal auditors may assist the external auditor in
performing substantive tests and tests controls.
D. The nature, timing and extent of the external auditor’s substantive tests may be
affected by the work of the internal auditors.
The standard categorically states that the external auditor has sole responsibility
for the audit opinion expressed, and the responsibility is not reduced by any use
made of internal auditing. All judgments relating to the audit of an entity’s
financial statements are those of the external auditor.
56. In determining whether the work of the internal auditors is likely to be
adequate for purposes of the audit, the external auditor shall evaluate the internal
auditor’s
A. Efficiency and experience
B. Independence and review skills
C. Training and supervisory skills
D. Competence and objectivity
The external auditor shall evaluate
58. Which of the following is s false statement about the use of the internal
auditor’s work by the external auditor?
A. The PSAs do not allow the external auditor to use to work of the internal auditor.
B.PSAs do not allow the external auditor to substitute the work of the internal auditor
for the work of the external auditor in critical judgments.
C.The PSAs state that, when specific work of the internal auditor is to be used, it
should be evaluated and tested.
D. PSAs states that, when considering whether to use the work of the internal auditor,
the external auditor should consider the internal auditor’s competence and
objectivity.
59. The coordination between internal and external auditors
60. Which of the following are included in the activities of the internal audit
function?
I. Monitoring of internal control.
II. Examination of financial and operating information.
III. Review of operating activities.
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
The activities of the internal audit function may include one or more of the
following:
63. When planning to use the work of an expert, the auditor should evaluate the
experts
I. Professional competence
II. Objectivity
A. I only
B. II only
C. Both I and II
D. Neither I nor II
64. Which of the following statements is correct concerning the auditor’s use of
the work of an expert?
A. The auditor is required to perform substantive test procedures to verify the
expert’s assumptions and findings.
B.The auditor should obtain understanding of the methods and assumptions used by
the expert.
C.The entity should not have an understanding of the nature of the work to be
performed by the expert.
D. The expert should not have an understanding of the nature of the auditor’s
corroborative use of the expert’s findings.
65. Which of the following is not an expert upon whose work an auditor may
rely?
A. An actuary.
B. An individual with expertise in complex modeling for the purpose of valuing
financial instruments. C. An expert in taxation law.
D. An individual with expertise in applying methods of accounting for deferred
income tax.
66. If the results of the expert’s work do not provide sufficient appropriate audit
evidence or are not consistent with other audit evidence, the auditor should
If the results of the expert’s work do not provide sufficient appropriate audit
evidence or are not consistent with other audit evidence, the auditor should
resolve the matter. The auditor may need to discuss the matter with the entity and
the expert, apply additional audit procedures, possibly engage another expert, or
modify the auditor’s report.
The standard prohibits the auditor to refer to the expert’s work when issuing an
unmodified auditor’s report because such a reference might be misunderstood to
be a qualification of the auditor’s opinion or a division of responsibility, neither of
which is intended.
68. In using the work of an expert, an auditor referred to the expert’s finding in the
auditor’s report. This is an appropriate practice if the
A. Auditor, as a result of the expert’s work, decides to indicate a division of
responsibility with the expert.
B.Expert is aware that his/her work will be used to evaluate the assertions in the
financial statements.
C.Auditor, as a result of the expert’s work, issues a report that an unmodified opinion.
D. Auditor, as a result of the expert’s work, adds an emphasisof-matter paragraph I
his/her unmodified auditor’s report.
An auditor shall not refer to the expert’s work in an auditor’s report containing an
unmodified opinion. However, if as a result of the expert’s work, the auditor
decides to express a modified opinion, it may be appropriate—in explaining the
nature of the modification—to refer to or describe the expert’s work
70. As used in PSA 600, financial statements that include the financial information
of more than one component are called
71. The __________________ is the partner or other person in the firm who is
responsible for the group audit management and its performance, and for the
auditor’s report on the group financial statements that is issued on behalf of the
firm.
A. Engagement partner
B. Component engagement partner
C. Principal auditor
D. Group engagement partner
72. The group engagement team shall obtain an understanding that is sufficient to
I. Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is
independent.
II. The component auditor’s professional competence.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
74. Which of the following statements concerning the group audits is incorrect?
A. The group engagement team has the responsibility to establish an overall group
audit strategy and audit plan.
B.The group engagement team shall determine the materiality for the group financial
statements as a whole when establishing the overall group audit strategy.
C.The component engagement partner shall review the overall group audit strategy
and audit plan.
D. The group engagement team shall agree on the terms of the group audit
engagement in accordance with PSA 210.
75. An auditor who, at the request of the group engagement team, performs work
on financial information related to a component for the group audit is a
A. Group auditor
B. Component auditor
C. Component engagement team D. Group engagement team
KEY ANSWERS
1. C 26. A 51. B
2. A 27. D 52. D
3. C 28. A 53. D
4. A 29. D 54. A
5. C 30. C 55. B
6. B 32. C 56. D
7. A 32. A 57. A
8. A 33. A 58. A
9. C 34. A 59. B
10. A 35. C 60. D
11. A 36. D 61. A
12. A 37. C 62. B
13. A 38. D 63. C
14. C 39. C 64. B
15. C 40. D 65. D
16. D 41. B 66. B
17. A 42. D 67. D
18. A 43. A 68. C
19. A 44. B 69. A
20. A 45. C 70. B
21. D 46. A 71. D
22. C 47. D 72. C
23. D 48. D 73. C
24. D 49. C 74. C
25. B 50. C 75. B
CHAPTER 5
RISK ASSESSMENTS AND INTERNAL COTROL
2. Analytical procedures.
The auditor does not have a responsibility to identify or assess all business risks
facing the entity because not all business risks give rise to risks of material
misstatement.
5. The risk that the auditor may give an inappropriate opinion when the financial
statements are materially misstated is called
A. Detection risk
B. Business risk
C. Audit risk
D. Inherent risk
6. Audit risk has three components: inherent risk, control risk, and detection
risk. Which is correct?
A. Detection risk is a function of the efficiency of an auditing procedure.
B. Cash is more susceptible to theft than an inventory of coal because it has a
greater inherent risk.
C. The risk that material misstatements will not be prevented or detected on a
timely basis by internal control can be reduced to zero by effective controls.
D. The existing levels of inherent risk, control risk, and detection risk can be
changed at the discretion of the auditor.
The three components of audit risk are:
2. “Control risk” is the risk that a misstatement that could occur in an account
balance or class of transactions that could be material, individually or when
aggregated with other misstatements in other balances or classes, will not be
prevented, or detected and corrected, on a timely basis, by the accounting and
internal control systems.
3. “Detection risk” is the risk that an auditor’s substantive procedures will not
detect a misstatement that exists in an account balance or class of transactions
that could be material, individually or when aggregated with misstatements in
other balances or classes.
Answer C is incorrect because even the most effective internal control has
inherent limitations. Thus, control risk cannot be reduced to zero.
7. The risk that an auditor’s substantive procedures will lead to the conclusion
that a material misstatement does not exist in an account balance or
transaction class when, in fact, such misstatement does exist is
A. Control risk
B. Inherent risk
C. Audit risk
D. Detection risk
10. Some account balances, such as those for retirement benefits and finance
leases, are the results of complex calculations. The susceptibility to material
misstatements in these types is referred to as
A. Audit risk
B. Detection risk
C. Inherent risk
D. Control risk
12. Which of the following statements concerning audit risk and its components
is incorrect?
A. Regardless of the assessed levels of inherent and control risks, the auditor
should always perform some substantive procedures for material account
balances and classes of transactions.
B. The higher the assessment of inherent and control risks, the more evidence
the auditor should obtain from the performance of substantive procedures.
C. The assessed level of inherent risk need not be considered in determining
the nature, timing, and extent of substantive procedures required to reduce
audit risk to an acceptably low level.
D. After obtaining an understanding of the accounting and internal control
systems, the auditor should make a preliminary assessment of control risk,
at the assertion level, for each material account balance or class of
transactions.
According to the standard, the auditor should consider the assessed levels of
inherent and control risks in determining the nature, timing, and extent of
substantive procedures required to reduce audit risk to an acceptable level.
13. Because the concepts of audit risk and materiality are interrelated, they must
be considered together by the auditor. Which of the following statements is
correct?
A. The phrase in the auditor’s report “present fairly, in all material respects, in
accordance with Philippine Financial Reporting Standards” indicates the
auditor’s belief that the financial statements taken as a whole are not
materially misstated.
B. If misstatements are not individually material, but are material when
aggregated with other misstatements, the concept of materiality does not
apply.
C. Audit risk is the risk that an auditor may unknowingly modify his/her
opinion when, in fact, the financial statements are fairly presented.
D. Only material errors cause financial statements to be materially misstated.
The opinion paragraph of the auditor’s report explicitly refers to materiality.
By stating that the financial statements are presented fairly, in all material
respects, in accordance with an applicable financial reporting framework, the
auditor is of the opinion that the financial statements are not materially
misstated.
Answer C is incorrect because audit risk is the probability that an auditor may
give an inappropriate opinion when the financial statements are materially
misstated.
The standard states that regardless of the assessed levels of inherent and
control risks, the auditor should perform some substantive procedures for
material account balances and classes of transactions.
15. Based on audit evidence gathered and evaluated, an auditor decides to
increase the assessed level of control risk 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
materiality levels.
B. Decrease detection risk.
C. Decrease substantive testing.
D. Increase inherent risk.
Answer A is incorrect because for many assertions, tests of details are still
more effective or efficient in providing the level of assurance desired by the
auditor.
PSA 315 states that internal control is designed and implemented to achieve the
entity’s objectives with regard to:
• Reliability of financial reporting;
• Effectiveness and efficiency of operations; and
• Compliance with applicable laws and regulations.
29. An entity’s internal control system contains manual elements and often
contains automated elements. Manual elements in internal control may be
less reliable than automated elements because
A. Manual control elements can be more easily bypassed, ignored, or
overridden and they are also more prone to simple errors and mistakes.
B. Manual control elements facilitate the additional analysis of information.
C. Consistency of application of manual control elements can always be
assumed.
D. Manual control elements include reliance on systems or programs that
are inaccurately processing data, processing inaccurate data, or both.
31. When obtaining an understanding of controls that are relevant to the audit,
the auditor is required to
A. Evaluate the design of those controls.
B. Determine whether those controls have been implemented.
C. Evaluate the design of those controls and determine whether they have
been implemented.
D. Evaluate the design of those controls and determine whether they have
been implemented by performing tests of controls.
PSA 315 states that when obtaining an understanding of controls that are
relevant to the audit, the auditor shall evaluate the design of those controls
and determine whether they have been implemented.
PSA 315 states that the control environment includes the governance and
management functions and the attitudes, awareness, and actions of those
charged with governance and management concerning the entity’s internal
control and its importance in the entity. The control environment sets the tone
of the organization, influencing the control consciousness of its people.
36. Which of the following statements concerning the relevance of various types
of controls to a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary importance,
while controls over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly
relevant to a financial statement audit, but other controls may also be a
relevant.
D. An auditor may ordinarily ignore a consideration of controls when a
substantive audit approach is taken.
Controls that are relevant to a financial statement audit pertain to the entity’s
objective of preparing financial statements for external purpose and the
management of risk that may give rise to a material misstatement in those
financial statements.
37. Which of the following internal control components relates to an entity’s
process for identifying and responding to business risks?
A. Control activities
B. Information and communication
C. Risk assessment
D. Monitoring of controls
PSA 315 states that the entity’s risk assessment process forms the basis for how
management determines the risks to be managed.
For financial reporting purposes, an entity’s risk assessment process includes how
management identifies risks relevant to the preparation of financial
statements, estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to manage them.
38. The following are subcomponents of the control environment, except
A. Management’s philosophy and operating style.
B. Adequate separation of duties.
C. Organizational structure.
D. Commitment to competence.
41. Inherent risk is ______ related to detection risk and ______ related to the
amount of audit evidence.
A. directly, inversely
B. directly, directly
C. inversely, inversely
D. inversely, directly
44. Which of the following are the two key issues that an auditor considers when
obtaining an understanding of a client’s internal controls?
A. The effectiveness and efficiency of the controls.
B. The implementation and efficiency of the controls.
C. The design and utilization of the controls.
D. The frequency and effectiveness of the controls.
45. The auditor documents his or her understanding of the internal control
system to substantiate
A. The fairness of presentation of the financial statements.
B. Adherence to the requirements of management.
C. Compliance with PSAs.
D. Conformity of the accounting records with the applicable financial reporting
framework.
48. An auditor must assess control risk as high when he has A. Decided not to
test the internal control system.
B. Decided on a high level of detection risk.
C. Assessed inherent risk to be high.
D. Found no significant deficiencies in the internal control system.
53. Which of the following best explains why many modern accounting software
packages offer separate transaction cycle modules?
A. A properly designed Accounting Information System does not use the concept
of separate business transaction cycles to process transactions.
B. The nature of a given transaction cycle is the same irrespective of the type of
organization.
C. Most businesses do not need the revenue cycle module as part of their
Accounting Information System.
D. Every organization does not need to implement all of the available transaction
cycle modules.
60. Which symbol would be used to represent a connection to another part of the
flowchart on the same page?
A. #4 C. #10
B. #9 D. #11
61. Which symbol would be used to represent a connection to another part of the
flowchart on a different page?
A. #4 C. #10
B. #9 D. #11
68. Under PSA 315, monitoring of controls is an internal control component that
involves a process of assessing the quality of internal control performance
over time. It involves assessing the design and operation of controls on a
timely basis and taking necessary corrective actions. Monitoring of controls
is accomplished through ongoing monitoring activities, separate evaluations,
or a combination of the two. An entity’s ongoing monitoring activities often
include
A. Periodic reporting by the entity’s internal auditors about the functioning of
internal control. B. Reviewing the purchasing function.
C. Periodic audits by the audit committee.
D. The audit of the annual financial statements.
According to the standard, ongoing monitoring activities are built into the
normal recurring activities of an entity and include regular management
supervisory activities, such as reviewing the purchasing function.
Control activities are the policies and procedures that help ensure that
management directives are carried out. They are intended to ensure that
necessary actions are taken to address risks that threaten the achievements of
the entity’s objectives. Control activities have various objectives and are
applied at various organizational and functional levels. Specific control
activities include those that relate to:
• Authorization
• Performance reviews
• Information processing
• Physical controls
• Segregation of duties
Reconciling batch control totals being a processing control is not part of the
internal control’s monitoring component.
Answers B, C, and D are incorrect because they are subsumed under the
overall purpose of providing reasonable assurance that the entity’s objectives
are achieved.
72. An internal control system that is working effectively A. Eliminates risk and
potential loss to the entity.
B. Cannot be circumvented by management.
C. Reduces the need for management to review exception reports on a day-
to-day basis.
D. Is unaffected by changing circumstances and conditions encountered by
the entity.
Answer A is incorrect because some risks are unavoidable and others are too
costly to eliminate.
74. When considering an entity’s system of internal control, one of the auditor’s
major concerns is to ascertain whether internal control is designed to provide
reasonable assurance
that
A. Financial statements are fairly presented.
B. The accounting manager reviews all accounting transactions.
C. Profit margins are maximized, and operational efficiency is optimized.
D. Corporate morale problems are addressed immediately and effectively.
79. Control activities are the policies and procedures that help ensure that
management directives are carried out. These include activities relating to
authorization, performance reviews, information processing, physical
controls, and segregation of duties. There is proper segregation of duties
when an individual who
A. Records a transaction does not compare the accounting record of the
asset with the asset itself. B. Authorizes a transaction records it.
C. Authorizes a transaction maintains custody of the asset that resulted from
the transaction.
D. Maintains custody of an asset has access to the accounting records for the
asset.
81. Control activities include those that relate to physical controls over access to
and use of assets and records. A departure from the purpose of physical
controls is that
A. The mail room clerk compiles a list of the checks received in the
incoming mail.
B. Access to safe-deposit box requires two officers.
C. Only warehouse personnel and production supervisors have access to
raw materials storeroom.
D. Only sales personnel use sales department vehicles.
82. Which of the following most likely would not be considered an inherent
limitation of internal control?
A. Management override
B. Incompatible functions
C. Mistakes in judgment
D. Collusion among employees
Answers A, C, and D are incorrect because they describe activities outside the
accounting system relevant to financial reporting.
PSA 315 states that the auditor’s understanding of internal control may raise
doubts about the auditability of an entity’s financial statements.
Also, concerns about the condition and reliability of an entity’s records may cause
the auditor to conclude that it is unlikely that sufficient appropriate audit
evidence will be available to support an unmodified opinion on the financial
statements. In such circumstances, the auditor considers a qualification or
disclaimer of opinion, but in some cases, the auditor’s only recourse may be
to withdraw from the engagement.
Implementation of a control means that the control exists and that the entity
is using it.
Answers A and B are incorrect because in some cases, the auditor may
determine that performing only substantive procedure is appropriate for
specific assertions and, therefore, may choose not to obtain information
about the operating effectiveness of controls and their consistency of
application.
According to PSA 315, risk assessment procedures to obtain audit evidence about
the design and implementation of relevant controls may include:
A. I only
B. II only
C. Either I or II
D. Neither I nor II
Under PSA 330 (The Auditor' Responses to Assessed Risks), the auditor
should perform tests of controls when his/her assessment of risks of material
misstatements at the assertion level includes an expectation that controls are
operating effectively or when substantive procedures alone do not provide
sufficient appropriate evidence to reduce the risk of material misstatement at
the assertion level.
93. Which of the following determines the extent of the auditor's tests of
control? A. Auditor's knowledge
B. Auditor's initial/planned assessment control of risk
C. Resources available to the auditor
D. Management's desire to help the auditor
94. After obtaining an understanding of internal control relevant to the audit, the
auditor may attempt to assess control risk at below the maximum level. In
turn, the auditor will (1) identify specific controls that are likely to prevent
or detect material misstatements in the relevant financial statement
assertions and (2) perform tests of controls. The purpose of the tests of
controls is to A. Evaluate inherent risk.
B. Assure that the auditor has a sufficient understanding of internal control.
C. Evaluate the effectiveness of such controls.
D. Provide recommendations to management to improve internal control.
The auditor performs tests of controls to obtain assurance about the
operating effectiveness of controls.
95. Tests of controls are concerned primarily with each of the following
questions, except
A. By whom were the controls applied?
B. Were the necessary controls consistently performed?
C. How were the controls applied?
D. Why were the controls applied?
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
99. The ultimate purpose of assessing control risk is to contribute the auditor's
evaluation of the risk that
A. Material misstatements may exist in the financial statements.
B. Specified controls requiring segregation of duties may be circumvented
by collusion.
C. Entity's control may be overridden by management.
D. Tests of controls may fail to identify procedures relevant to assertions.
The ultimate purpose of assessing control risk at the assertion level for each
material account balance or class of transactions is to contribute to the
auditor's evaluation of the risk that material misstatements exist in the
financial statements.
100. An auditor may decide to assess control risk at a high level for some or all
assertions because the auditor believes
A. The entity's internal control system is not effective.
B. More emphasis on tests of controls than substantive tests is warranted.
C. Sufficient appropriate audit evidence to support the assertions is likely to
believe.
D. The entity's internal control components are interrelated.
The auditor ordinarily assesses control risk at a high level for some or all
assertions when:
a) the entity's internal control system is not effective; or
b) evaluating the operating effectiveness of the entity's
control would not be efficient.
102. The preliminary assessment of control risk for a financial statement assertion
should be high unless the auditor
I. Is able to identify controls relevant to the assertion which are likely to
prevent, or detect and correct, material misstatements.
II. Plans to perform tests of controls to support the assessment.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
Answer B, C, and D are incorrect because they include procedures which are
more closely associated with substantive testing — namely, analytical
procedures, comparison, confirmation, and verification.
104. An auditor intends to perform tests of control on a client's cash
disbursements procedures. If the control procedures leave no audit trail of
documentary evidence, the auditor
most likely will test the procedures by A. Inquiry and
analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
107. The following statements relate to the use of audit evidence when testing the
operating effectiveness of relevant controls. Which is false?
A. An auditor who obtains sufficient appropriate audit evidence about the
operating effectiveness of controls during the interim period should no
longer obtain additional evidence of operating effectiveness for the
remaining period.
B. An auditor may plan to use audit evidence about the operating
effectiveness of controls obtained in the prior audits.
C. If an auditor plans to rely on controls that have changed since they were
last tested, the auditor should test the operating effectiveness of such
controls in the current audit.
D. Audit evidence pertaining only to a point in time may be sufficient for the
auditor's purpose, for example, when testing controls over an entity's
physical count of inventories at year-end.
PSA 330 states that when the auditor obtains audit evidence about the
operating effectiveness of controls during an interim period, the auditor
should determine what additional audit evidence should be obtained for the
remaining period. In addition, the auditor is required to obtain audit
evidence about the nature and extent of any significant changes in internal
control, including changes in the information system, processes, and
personnel that occur subsequent to the interim period.
Answers B and C are correct statements. PSA 330 states that if the auditor
plans to use audit evidence about the operating effectiveness of controls
obtained in prior audits, the auditor should obtain audit evidence about
whether changes in those specific controls have occurred subsequent to the
prior audit. In this regard, the auditor may perform inquiry in combination
with observation or inspection. If the auditor plans to rely on controls that
have changed since they were last tested, the auditor is required to test the
operating effectiveness of such controls in the current audit.
108. According to PSA 330, an auditor who plans to rely on controls that have
not changed since they were last tested should test the operating
effectiveness of such controls at least once in every A. Second audit B.
Third audit
C. Fourth audit
D. Fifth audit
An auditor may plan to rely on controls that have not changed since they
were last tested. The length of time period between retesting such controls is
a matter of professional judgment but cannot exceed two years. Therefore,
the operating effectiveness of such controls should be tested at least once in
every third audit.
109. Which of the following procedures are performed by an auditor who wants
to detect material misstatements at the assertion level? A. Compliance tests
B. Tests of controls
C. Substantive tests
D. Dual-purpose tests
110. After gaining an understanding of internal control and assessing the risks of
material misstatement, an auditor decided to perform tests of controls. The
auditor most likely decided that
A. Additional evidence to support a further reduction in control risk is not
available.
B. It is not possible or practicable to reduce the risks of material
misstatements at the assertion level to an acceptably low level with audit
evidence obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
D. An increase in the assessed level of control risk is justified for certain
financial statement assertions.
REVENUE/RECEIPT CYCLE
114. Which of the following is not a source document for the revenue cycle? A.
Sales order
B. Receiving report C.
Credit memo
D. Delivery receipt
115. Which of the following activities is not part of the revenue cycle?
A. Sales order entry
B. Receiving
C. Billing
D. Shipping
116. In the revenue cycle, a customer places an order for a certain product. What
step should be taken before the order is checked for inventory availability?
A. A packing list should be generated for the warehouse.
B. The customer's credit should be checked or a sale on account.
C. The sales order should created and written to a file.
D. The shipping department should be notified of an order in process.
118. An essential part of the revenue cycle is filling customer orders and
shipping goods to customer. Automating warehouse systems cut costs,
improves efficiency, and enables more customer-responsive shipments.
Which of the following elements is required for an automated perpetual
inventory system? A. Forklifts
B. Conveyor belts
C. Bar-code scanners
D. VAN
The receiving department clerk counts and inspects the goods received from
suppliers and prepares receiving reports which serve as partial authorization
for invoice payment. The activity relates more directly to
expenditure/disbursement cycle.
123. Which of the following controls most likely would provide reasonable
assurance that all credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly
statements to customers and investigates any differences reported by
customers.
B. The accounting department supervisor independently reconciles, on a
monthly basis, the account receivable subsidiary ledger to the accounts
receivable control account.
C. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders
to the credit department for comparison to authorized credit limits and
current customer account balances.
Customer orders are received by the sales-order department. A clerk computes the
peso amount of the order and sends it to the credit department for approval. Credit
approval is stamped on the order and returned to sales order department. A sales
invoice is prepared, and the sales order is filled in the customer order file.
The customer copy of the sales invoice is sent to the billing department and held
in the pending file awaiting notification that the order has been shipped.
The shipping copy of the sales invoice is routed to warehouse and the shipping
department as authority for the respective departments to release and ship the
goods.
Shipping department personnel pack the order and prepare a threecopy bill of
lading:
Original copy - mailed to the customer
Second copy - sent with the shipment
Third copy - filed in sequence in the bill of lading file
The shipping copy of the sales invoice is sent to the billing department.
The billing clerk matches the received shipping copy of the sales invoice with the
customer copy from the pending file. Both copies of the invoice are priced,
extended, and footed. The customer copy is then mailed to the customer, and the
shipping copy is sent to the accounts receivable clerk.
The accounts receivable clerk enters the sales invoice data in the sales journal,
posts the customer's account in the accounts receivable subsidiary ledger, and files
the shipping copy in the sales invoice file. The sales invoices are numbered and
filed in sequence.
127. To obtain evidence, concerning the proper credit approval of sales, the
auditor would select a sample of transaction document from the population
represented by the
A. Bill of lading file
B. Accounting receivable subsidiary ledger
C. Sales invoice file
D. Customer order file
To determine if goods that have been shipped were not invoiced, an effective
audit procedure is to match a sample from the bill of lading file to sales
invoices.
130. To obtain evidence that uncollected items in customer's accounts
represented valid trade receivables, the auditor should select a sample of
items from the population represented by the A. Bill of lading
B. Customer order file
C. Accounts receivable subsidiary ledger
D. Sales invoice file
131. Which of the following most likely would be the result of ineffective
controls in the revenue/receipt cycle?
A. Omission of shipping documents could go undetected, causing an
understatement of inventories.
B. Irregularities in recording transactions in the subsidiary accounts could
result in a delay in goods shipped.
C. Final authorization of credit memos by sales department personnel
could permit an employee defalcation scheme.
D. Fictitious transactions could be recorded causing an understatement of
revenues and an overstatement of receivables.
Final approval of credit memos in the sales department may allow sales
department personnel to commit irregularities.
Answer A is incorrect because if shipping documents are omitted, shipped
goods may not be credited to inventory, causing the account to be
overstated, not understated.
133. EFG Company uses its sales invoice for posting perpetual inventory
records. Inadequate internal control over the invoicing function allows good
to be shipped but not invoiced. The inadequate controls could cause what
type of misstatement in each of the following accounts?
If goods are shipped but are not invoiced, there will be no documentation for
sales, thus understanding revenues and receivables. Moreover, inventory
will not be credited thereby overstating the account.
134. Which of the following controls is often lacking in a retail cash sales
environment? A. Segregation of functions
B. Competent personnel
C. Monitoring
D. Access to assets limited to authorized personnel.
In a retail cash sales environment, the sales clerk ordinarily authorizes and
records the transactions and has custody of assets. But the apparent lack of
proper segregation o functions is compensated by controls such as close
supervision of the cash registers that limits access to assets, and an effective
internal recording function that maintains control over cash receipts.
The clerk has custody of cash, authorizes credit memos, and performs the
record-keeping function for accounts receivable. Hence, the clerk can easily
misappropriate cash received from customers and conceal such defalcation
by recording fictitious sales returns.
138. Which of the following tests of controls would most likely be performed by
an auditor to obtain evidence about management's assertion concerning the
completeness of sakes transactions?
A. Inquiries about the entity's credit granting policies and whether credit
checks are consistently applied.
B. Inspect the entity's reports of prenumbered shipping documents that
have not been recorded in the sales journal.
C. Compare prices on prenumbered sales invoices to the entity's
authorized price list.
D. Verify that extensions and footings on sales invoices and monthly
statements of customers' accounts have been checked.
Inspecting shipping that has not been recorded in the sales journal will
possibly disclose items that have been sold as evidence by the shipping documents
but were not recorded as sales.
139. An online sales order processing system most likely would have an
advantage over a batch sales order processing system by
A. Enabling shipment of customer orders to be initiated as the orders are
received.
B. Maintaining more accurate records of accounts receivables and
inventory.
C. Maintaining backup copies of the database.
D. Detecting errors in the data entry process by the use of edit checks.
The inability to keep track of and ship out-of-stock items as soon as they
become available may be addressed by matching the back order file to
goods received daily. Once identified, appropriate action on unfilled orders
could then be made.
EXPEDITURES/DISBURSEMENT CYCLE
141. Which of the following is a source document that would be found in the
expenditure cycle?
A. Journal voucher
B. Purchase order
C. Time card
D. Delivery report
142. ____________ is a standing order to purchase specified items at a
designated price, from a particular supplier for a set period of time.
A. Set order
B. Blanket purchase order
C. Purchasing order
D. Commodity order
143. Which of the following is probably the most effective control or the
prevention of kickbacks to purchasing agents? A. Review a vendor
performance.
B. A corporate policy to prohibit purchasing agents from accepting
kickbacks.
C. Purchasing from approved vendors.
D. Good supervision in the purchasing area.
Controls are the relevant of to the audit are those that relate to the reliability
of financial reporting.
Third-party written quality and quantity reports are not ordinarily sought
before making the payment. The entity receiving department personnel
usually have sufficient knowledge about the purchased goods. Only in
exceptional cases when an outside may be considered.
Answer A is incorrect because determining the need for the raw materials
before preparing the purchase order will ensure that only needed materials
will be ordered.
150. Which of the following procedures would best discourage the resubmission
of vendor invoices after they have been paid?
A. The mailing of payments directly to payees by accounts payable
department personnel.
B. A requirement for double endorsement of checks.
C. The cancellation of vouchers by accounting personnel.
D. The cancellation of vouchers by treasurer personnel.
151. A university does not have a centralized receiving function for departmental
purchases of books, supplies, and equipment. Which of the following
controls would most effectively prevent payment for goods not received, if
performed prior to invoice payment?
A. Vendor invoices should be approved by a departmental supervisor other than
the employee ordering the goods.
B. Invoices for a specified amount should be approved by the vice president of
finance.
C. Names and addresses on vendor invoices should be compared to a list of
department-authorized vendors.
D. Vendor invoices should be matched with department purchase orders.
Answer B is incorrect because the vice president of finance does not receive
incoming goods.
152. To minimize the risk that purchasing agents will use their positions for
personal gain, an entity should
A. Direct the purchasing department to maintain records on purchase prices
paid, to be reviewed every 6 months.
B. Request internal auditors to send confirmation requests to selected
vendors.
C. Require competitive building.
D. Specify that all items purchased must pass quality control tests.
The purchase of goods through competitive bidding will reduce costs and
the possibility that purchasing agents will have side agreements with vendors.
The controls described in answers A,B and D are detective, not preventive
controls.
153. The following are appropriate questions on an internal control
questionnaire concerning purchase transactions, except
A. All are goods received in a centralized receiving department counted,
inspected, and compared with purchase orders on receipt?
B. Are intact cash receipts deposited daily in the bank?
C. Are pre-numbered purchase orders and receiving reports used and
accounted for?
D. Are an approved purchase requisition and a signed purchase order
required for each purchase?
The question about the daily deposit of intact cash receipts relates to the
revenue/receipt cycle, not the expenditure/ disbursement cycle.
154. The following questions ordinarily appear in an internal control
questionnaire on cash disbursements, except
A. Are pre-listings made of all cash receipts?
B. Is each check supported by an approved voucher?
C. Are imprinted and pre-numbered checks used and is a check provision
device used in printing the check amount? D. Are all disbursements except
for petty cash made by check?
Pre-listing of cash receipts is part of the revenue/receipt cycle.
155. In a well-designed internal control, the same employee may be permitted
to
A. Prepare receiving reports and also approve purchase orders.
B. Approve vouchers for payment and also have access to unused
purchased orders.
C. Mail signed checks and also cancel supporting documents D. Mail signed
checks and also prepare bank reconciliations.
In a typical cash disbursement system, approved check vouchers and
supporting documents are forwarded to the cash disbursements department.
This department, having a custodial function, is responsible for signing checks,
cancelling supporting documents, and mailing signed checks.
Answer A is incorrect because approving purchase orders is a function of
the purchasing department. The receiving department, responsible for the
preparation of receiving reports, should not know the quantity ordered.
Answer B is incorrect because vouchers are approved in the accounts
payable department, and only the purchasing department should be allowed
access to unused purchase orders.
Answer D is incorrect because the bank reconciliation should be performed
by an employee who does not have a custodial responsibility.
156. Which of the following is of least concern to an auditor in assessing the
risks of material misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.
Answer A is incorrect because the controller, who performs a record-
keeping function, should not have access to signed checks.
Answer C is incorrect because daily deposit of intact cash receipts should
be required to minimize defalcation.
Answer D is incorrect because the treasurer should sign checks only after
verification of supporting documentation has been performed.
157. Under which of the following circumstances would an auditor be most
likely to intensify an audit of a P100,000 petty cash fund?
A. Petty cash vouchers are not pre-numbered.
B. The custodian endorses reimbursement checks.
C. Reimbursement occurs twice each week.
D. The custodian occasionally uses the petty cash fund to cash employee
checks.
Frequent reimbursement of petty cash fund (for example, twice each week)
suggests that the fund is not functioning as intended. In this case, the auditor
may need to intensify the audit of the petty cash fund.
Answer A and D are incorrect because although failure to pre- number
vouchers and occasional use of the fund to cash employee checks are not
preferable practices, they do not necessarily lead to commission of errors or
fraud.
Answer B is incorrect because the custodian’s endorsement is required to
cash a replenishment check.
158. In ABC Company’s accounting system, the quantities counted by the
receiving department and entered at a terminal are transmitted to the
computer, which immediately transmits the amounts back to the terminal for
display to enable the operator to
A. Verify that the amount was entered accurately.
B. Establish the validity of the account number.
C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.
The display of the amounts entered is called closed-loop verification-an
effective control to verify the accuracy of data input.
159. What document is prepared to authorize the removal of the necessary
quantity of raw materials from storeroom to factory?
A. Production order
B. Materials requisition
C. Movie ticket
D. Purchase invoice
160. Which of the following is an essential control procedure to ensure the
accuracy of the recorded inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items
in accordance with inventory policy. B. Testing inventory extensions.
C. Performing a gross profit test.
D. Establishing a cutoff for goods received and shipped.
Establishing a cutoff for goods received and shipped would ensure that
only goods owned by the entity are included in inventory.
Answers A, B, and C are incorrect because the procedures described relate
more directly to inventory valuation rather than inventory quantities.
161. The following questions are appropriate for an internal control
questionnaire concerning inventory except
A. Are goods stored in locked storage areas?
B. Is access to the storage area limited to authorized personnel?
C. Are disbursement vouchers approved before payment?
D. Are there independent, periodic comparisons of inventory records with
goods on hand?
Vouchers for all disbursements (not only for inventory purchases) must be
approved before payment. Therefore, a question on voucher approval would
be more appropriately included in the expenditure/disbursement cycle
questionnaire.
162. Effective internal controls over inventories are designed and
implemented for the following reasons, except
A. Inventories typically represent a large component of an entity’s current
assets.
B. Inventories are the most liquid asset.
C. Inventories directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity’s total assets.
Cash, not inventories, is the most liquid asset and has the greatest inherent
risk.
Answers A and D are incorrect because inventories typically represent a
material component of an entity’s current assets and total assets.
Answer C is incorrect because once sold, inventories become cost of goods
sold and is a determinant of an entity’s financial performance for a given
period.
163. ABC Manufacturing Corporation mass produces ten different products.
The company’s controller is interested in strengthening internal control over
the accounting for materials used in production. He/she would most likely
design and implement
A. An economic order quantity (EOQ) system.
B. A perpetual inventory system.
C. A separation of duties among production personnel.
D. A job-order cost accounting system.
The entity can easily keep track of materials usage by maintaining
perpetual inventory records.
Answer A is incorrect because EOQ system will ensure cost- effective
recording of materials but will not strengthen the control over accounting for
material usage.
Answer C is incorrect because segregation of duties among production
personnel does not strengthen control over accounting for materials used in
production unless the authorization, custodial, and record-keeping functions
are likewise separated.
Answer D is incorrect because a process-cost system, not a job-order cost
system, is appropriate for goods that are mass produced.
164. Your client, a merchandising concern, has annual sales of
P150,000,000 and a 40& gross profit rate. Tests revealed that 2% of the
peso amount of purchases do not get into inventory because of breakage and
inventory pilferage by employees. The company estimates that these losses
could be reduced to 0.5 of purchases by designing and implementing certain
controls costing approximately P1,750,000. Should the contols be
designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation
involves employee theft.
B. Yes, because the ideal system of internal control is the most expensive
one.
C. No, because the cost of designing and implementing the
added controls exceeds the projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of the
added controls.
A basic concept of internal control is the concept of reasonable assurance,
which recognizes that the cost of internal control should not exceed the
benefits expected to be derived.
The additional controls should not be considered because the cost is
P1,750,000, but the estimated saving is only P1,350,000 {(2%-0.5%)x(P150
million sales x 60% cost of sales ratio)}
165. The objectives of internal control for a production cycle are to provide
assurance that transactions are properly executed and recorded, and that
A. Production orders are pre-numbered and signed by a supervisor.
B. Custody of work-in-process and of finished goods is properly maintained.
C. Independent internal verification of activity reports is established.
D. Transfers to finished goods are documented by a completed production
report and a quality control report.
A primary objective of internal control in the production cycle is to
safeguard inventories from misuse and theft. The inventories should be in the
custody of a storekeeper, and inventory movements should be properly
documented and recorded to establish accountability.
Answers A, C and D are incorrect because the use of pre- numbered
production orders signed by a supervisor, independent internal verification of
activity reports, and documenting inventory transfers are control activities-an
internal control component, not control objectives.
166. Which of the following controls most likely would be implemented to
achieve the production cycle control objective of maintaining accurate
inventory records.
A. Periodic inventory counts are used to adjust the perpetual inventory
records.
B. A just-in-time inventory ordering system keeps inventory levels to a
desired minimum.
C. Perpetual inventory records are periodically compared with the net
realizable value of individual inventory items.
D. Purchase requisitions, receiving reports, purchase orders, and vendor
invoices are independently matched before payment is approved.
A well-designed internal control system should require comparison of the
recorded accountability for assets with existing assets at reasonable intervals.
In the production cycle, periodic inventory counts should be reconciled to
the perpetual inventory records. This control will provide reasonable
assurance about the accuracy of inventory records.
Answer B is incorrect because just-in-time ordering a system provides
assurance that desired inventory levels are maintained but does not ensure that
accurate inventory records are maintained.
Answer C is incorrect because periodic comparison of perpetual inventory
records with net realizable value relates more to inventory valuation rather
than the accuracy of inventory records.
Answer D is incorrect because matching of purchase documents provides
assurance that payments are made only for goods authorized and received but
does not ensure that the accuracy of perpetual inventory records.
167. Which of the following questions would an auditor most likely include
in the production cycle internal control questionnaire?
A. Are details of individual disbursements for raw materials compared to
the total for posting to the general ledger?
B. Are vendor invoices for raw materials approved before payment?
C. Are all issuances of raw materials to production based on approved
requisition forms?
D. Are signed checks for the purchase of raw materials sent directly to
intended payees after signing, without being returned to the person who
authorized the invoice processing?
Answers A, B, and D are incorrect because comparing individual
disbursements for raw materials to totals, approving vendor invoices before
payment, and sending checks directly to payees after signing pertain more
directly to the expenditure/disbursement cycle.
168. Which of the following is the most likely procedure an auditor would
perform in obtaining an understanding of a manufacturing entity’s internal
control for inventory balances?
A. Perform test counts of inventory when observing the entity’s physical
count.
B. Perform analytical procedures designed to identify significant cost
variances.
C. Analyze the liquidity and turnover ratio of the inventory.
D. Review the entity’s description of inventory policies and procedures.
The auditor will review the entity’s description of inventory policies and
procedures to evaluate the design of controls and determine whether they have
been implemented.
169. A properly designed internal control should require that defective
merchandise returned by customers be presented initially to the
A. Receiving clerk
B. Purchasing clerk
C. Billing clerk
D. Inventory control clerk
All incoming goods, including defective merchandise returned by
customers, should be received by the receiving clerk.
INVESTING CYCLE
170. The following controls are appropriate for property, plant, and
equipment (PPE) except
A. Written policies for capitalization and expenditure and review of
application of depreciation methods. B. Disposal of fully depreciated PPE
items.
C. Proper authority for acquisition and retirement of
PPE items.
D. Detailed PPE records and physical controls over PPE items.
Fully depreciated PPE items need not be disposed of because they may still
be useful in the business. These assets should remain on the books until
disposal.
Answers A, C, and D are incorrect because written policies for
capitalization and expenditure and review of depreciation methods, proper
authority for acquisition and retirement, and detailed PPE records and physical
controls are proper controls over PPE.
171. The question that an auditor would least likely include on an internal
control questionnaire concerning the initiation and execution of equipment
transactions is
A. Are requests for purchases of equipment reviewed for consideration of
soliciting competitive bids?
B. Are requests for major repairs approved at a higher level than the
department initiating the request? C. Are procedures in place to monitor
and properly restrict access to equipment?
D. Are pre-numbered purchase orders used for equipment and periodically
accounted for?
The issue is the initiation and execution of equipment transactions.
Restricting access to equipment to authorized personnel only does not address
the issue because it deals more with proper custody of assets.
Answers A, B and D are incorrect because competitive bidding, approval of
major repairs, and use of pre-numbered purchase orders are related to the issue
concerning initiation and execution of equipment transactions.
172. Which of the following controls would most likely detect equipment
acquisitions that are misclassified as maintenance expense?
A. Segregation of duties of employees in the accounts payable department.
B. Authorization by the board of directors of significant equipment
acquisitions.
C. Independent verification of invoices for disbursements recorded as
equipment acquisitions.
D. Investigation of variances within a formal budgeting system.
If equipment acquisitions are misclassified as maintenance expense, an
entity’s formal budgeting system that includes estimates of maintenance
expense will report a significant variance. The misclassification may be
detected by investigating the variance.
Answer A is incorrect because the accounts payable department that
processes payment transactions is unlikely to question the classification of
expenditures that are based on proper documentation.
Answer B is incorrect because verification of invoices from the population
of recorded equipment acquisitions will not disclose items misclassified as
maintenance expense.
Answer C is incorrect because verification of invoices from the population
of recorded equipment acquisitions will not disclose items misclassified as
maintenance expense.
173. Which of the following control activities is most likely to prevent the
improper disposition of equipment?
A. A periodic analysis of the scrap sales and the repairs and maintenance
accounts.
B. Periodic comparison of removal work orders with authorizing
documentation.
C. The use of serial numbers to identify equipment that could be sold.
D. A separation of duties between those authorized to dispose of
equipment and those authorized to approve removal work orders.
There should be proper segregation of duties to reduce the opportunity for
an individual to both perpetrate and conceal errors of fraud.
The functions of authorization, recording, and asset custody should be
separated. Accordingly, the authorization to dispose of equipment by
approving removal work orders (authorization) and the disposal of equipment
(asset custody) should not be assigned to the same person.
Answers A, B and C are incorrect because the control activities described
are detective, not preventive, in nature.
174. Which of the following control activities most likely would justify a
reduced level of control risk concerning property, plant, and equipment
(PPE) acquisitions?
A. Periodic physical inspection of PPE by the internal audit staff.
B. Approval of periodic depreciation entries by a supervisor independent
of the accounting department. C. The review of pre-numbered purchase orders
to detect unrecorded trade-ins.
D. Comparison of current-year PPE account balances with prior-year
figures.
A periodic physical inspection by an objective and competent internal audit
staff is the best way to verify the existence of PPE. This will reduce the
possibility of recording fictitious PPE acquisitions and other fraudulent
acts. The implementation of this control activity would justify a lower
assessed level of control risk.
Answer B is incorrect because depreciation is computed based on recorded
amounts of PPE. Depreciation will be misstated if the basis used in calculating
it is also misstated.
Answer C is incorrect because reviewing purchase orders to detect
unrecorded trade-ins is not as effective as directly inspecting the assets.
Answer D is incorrect because comparing recorded PPE account
balances may not be effective for detecting non- existent PPE.
175. An internal control objective concerning property, plant, and equipment
(PPE) acquisitions is that they be recorded at the correct amounts and in
the proper period, and properly classified. In which of the following
conditions would an auditor most likely assess a high level of risk of
material misstatement?
A. All material acquisitions of PPE are required to be approved by the
board of directors.
B. Most additions are self-constructed by the entity. C. Recently acquired
loans include covenants that preclude further plant acquisitions for 5 years.
D. Gross PPE increased 30% during the current period.
If an entity has on-going in-house construction projects, labor and overhead
costs should be allocated between its inventories and in-house construction
projects. Moreover, capitalization of borrowing costs would involve complex
calculations. Therefore, the inherent risk of misstatement for self-constructed
assets is high.
Answer A is incorrect because the required approval of the entity’s board of
directors for all material PPE additions relates to authorization, not recording.
Answer C is incorrect because the loan covenant that precludes further
plant additions for 5 years is most likely to decrease risk.
Answer D is incorrect because the significant increase in PPE does not
necessarily increase the risk of misstatement. For example, the significant
increase may be due to material acquisitions of PPE from outside vendors. In
this case, the cost of PPE can easily be determined by just referring to
amounts on vendor invoices.
176. Why is property, plant, and equipment (PPE) typically considered to be
one of the accounts least susceptible to fraud?
A. Internal control on this account is inherently effective.
B. The depreciated values are always smaller than cost.
C. The inherent risk of PPE is usually low.
D. For most companies, the recorded amounts of PPE are immaterial.
PPE is one of the accounts that is least susceptible to misstatement in the
absence of related controls-that is,
its inherent risk is low. This is because of the infrequency of
transactions in the account and the relative ease in verifying its existence.
Answer A is incorrect because inherent risk, not control risk, pertains to the
susceptibility of an account to misstatement.
Answer B is incorrect because not all PPE items are depreciable, for
example, land.
Answer D is incorrect because although transactions affecting PPE are
infrequent, the amounts involved are usually large.
177. Which of the following misstatements or questionable practices may be
uncovered if an auditor tours an entity’s production facility?
A. Insurance coverage on the facility has lapsed.
B. Overhead has been over applied.
C. Depreciation expense on fully depreciated machinery has been
recognized.
D. Necessary facility maintenance has not been performed.
The auditor’s tour of an entity’s production facility would involve direct
observation of the asset condition. Hence, it is likely that the auditor will
discover that necessary facility maintenance has not been performed during the
year.
Answer A is incorrect because inspection of insurance contracts, not a tour
of the plant facility, will detect lapsed insurance coverage.
Answer B is incorrect because comparison of the actual overhead incurred
with applied overhead will determine if overhead has been over applied.
Answer C is incorrect because the auditor should examine depreciation
records to determine if depreciation has been provided on fully depreciated
machinery.
178. Which of the following controls would an entity most likely use in
safeguarding against the loss of trading securities?
A. The independent auditor traces all purchases and sales of trading
securities through the subsidiary ledgers to general ledger.
B. An independent trust company that has no direct contact with the
employees who have record-keeping responsibilities has possession of the
securities.
C. The internal auditor inspects the trading securities
in the entity’s safe each year on the balance sheet date.
D. A designated member of each board of directors controls the securities
in a bank safe-deposit box.
Engaging an independent trust company for the custody of an entity’s
trading securities may be considered the best way to safeguard such securities
against loss. Such an institution normally has very strict controls over assets
under it’s custody, including access to its vaults.
Answer A is incorrect because an independent auditor’s tracing of trading
securities transactions is an audit test, not a control.
Answer C is incorrect because the internal auditor’s inspection of trading
securities in the entity’s safe each year on the balance sheet date does not
assure that no securities have been removed between inspections dates.
Answer D is incorrect because a better control is to require the presence of
two authorized persons to access a safe deposit box.
179. Which of the following controls would a company most likely use to
safeguard marketable securities when such securities are not in the custody of
an independent trust agent?
A. The chairman of the board of directors verifies the marketable
securities, which are kept in a bank safe- deposit box, each year on the balance
sheet date.
B. The internal auditor and the controller independently trace all
purchases and sales of marketable securities from the subsidiary ledgers to the
general ledger.
C. Two company officials have joint control of marketable securities,
which are kept in a bank safe-deposit box. D. The investment committee of the
board of directors periodically reviews the instrument decisions
delegated to the treasurer.
A physical control to safeguard an entity’s assets such as marketable
securities is to keep them in a bank safe- deposit box requiring two
signatures to gain access.
Answer A is incorrect because verification of marketable securities once
a year is unlikely to provide adequate control.
Answer B is incorrect because tracing of marketable securities
transactions to the accounting records assures proper recording but does not
physically safeguard the asset.
Answer D is incorrect because periodic review of the investment
decisions delegated to the treasurer does not physically safeguard the asset.
180. Which of the following internal control activities would an entity most
likely implement to assist in satisfying the completeness assertion related to
noncurrent investments?
A. The internal auditor compares the securities in the bank safe-deposit
box with recorded investments.
B. Senior management verifies that securities in the bank safe-deposit
box are registered in the entity’s name.
C. The controller compares the current market prices of recorded
investments with the brokers’ advices on file.
D. The treasurer vouches the acquisition of securities by comparing
brokers’ advices with canceled checks.
Comparison of securities in bank safe-deposit box with the accounting
records assures that the investment balance is complete, that is, all investment
securities have been reflected in the account.
Answer B is incorrect because senior management’s verification that
securities are registered in the entity’s name relates to the right assertion.
Answer C is incorrect because comparing market prices with brokers’
advices pertains to the valuation assertion.
Answer D is incorrect because vouching securities purchased by comparing
brokers’ advices with canceled checks relates to the rights assertion.
181. Which of the following is not a proper control over investment
securities?
A. Separation of custodial and treasury functions.
B. Employing an independent trust agent.
C. Proper authorization of transactions.
D. Storage in a safe-deposit box.
An entity’s treasury function should include custody of cash and
securities.
Answers B, C, and D are incorrect because employing an independent
trust agent, proper authorization of transactions, and storage of investment
securities in a safe-deposit box are proper controls over investment
securities.
182. The following controls are designed to protect investment securities, except
A. Investment securities should be properly controlled physically in order
to prevent unauthorized usage.
B. Custody over investment securities should be limited to personnel having
record-keeping responsibility over the securities.
C. Securities should be registered in the entity’s name. D. Access to securities
should be vested in two individuals.
As with other assets, the custody of investment securities should be
delegated to individuals who do not have recording responsibility over
securities.
FINANCING CYCLE
183. Which of the following questions is most likely to be included by an
auditor on an internal control questionnaire for notes payable?
A. Are direct borrowings on notes payable authorized by the board of
directors?
B. Are assets that collateralize notes payable critically needed for the
entity’s continued existence?
C. Are two or more authorized signatures required on checks that repay
notes payable?
D. Are the proceeds from notes payable used for the purchase of noncurrent
assets?
Most companies are ordinarily require that direct borrowings on notes
payable be authorized by the board of directors. Accordingly, an auditor should
verify if such control has been properly implemented.
184. The audit program for long-term debt should include steps that require
the
A. Verification of the existence of the bondholders.
B. Examination of any bond trust indenture.
C. Inspection of the accounts payable master file.
D. Investigation of credits to the bond interest income account.
185. During the year under audit, a company has completed a private
placement of a substantial amount of bonds. Which of the following is
the most important step in the auditor’s program for the audit of bonds
payable?
A. Confirming the amount issued with the bond trustee. B. Tracing the cash
received from the issue to the accounting records.
C.Examining the bond records maintained by the transfer agent.
D. Recomputing the annual interest cost and the effective yield.
186. Several years ago, ABC, Inc., secured a conventional real estate
mortgage loan. Which of the following audit procedures would be least
likely to be performed by an auditor auditing the mortgage balance?
A. Examine the current year’s cancelled checks.
B. Review the mortgage amortization schedule.
C. Inspect public records of lien balances.
D. Recompute mortgage interest expense.
187. During an audit of publicly held company, the auditor should obtain
written confirmation regarding debenture transactions from the
A. Debenture holders
B. Client’s authority
C. Internal auditors
D. Trustee
188. An audit program for the audit of retained earnings account should
include a step that requires verification of
A. Market value used to charge retained earnings to account for a 2-for-1
stock split.
B. Approval of the adjustment to the beginning balance as a result of a
write-down of an account receivable. C. Authorization for both cash and
stock dividends.
D. Gain or loss resulting from disposition of treasury shares.
189. Where no independent stock transfer agents are employed and the
corporation issues its own stocks and maintains stock records, cancelled
stock certificates should
A. Be defaced to prevent reissuance and attached to their corresponding
stubs.
B. Not be defaced, but segregated from other stock certificates and retained
in a cancelled certificates file.
C. Be destroyed to prevent fraudulent reissuance.
D. Be defaced and sent to the Secretary of the Department of Finance.
KEY ANSWERS
TRUE OR
FALSE
1. True 9. False 17. False 25. False 33. False
8. True 16. True 24. False 32. True 40. True CHAPTER 6
AUDITING IN A COMPUTER INFORMATION SYSTEMS (CIS) OR
INFORMATION
TECHNOLOGY (IT) ENVIRONMENT
A CIS environment does not affect the overall objective and scope of an audit.
A. The Internet is a shared public network that enables communication with other
entities and individuals around the world.
B.The Internet is a private network that only allows access to authorized persons or
entities.
C.The Internet is interoperable, which means that any computer connected to the
Internet can communication.
D. The Internet is a worldwide network that allows entities to engage in e-
commerce/e-business activities.
5. In planning the portions of the audit which may be affected by the client’s CIS
environment, the auditor should obtain an understanding of the significance and
complexity of the CIS activities and the availability of data for use in the audit.
The following relate to the complexity of CIS activities except when
The materiality of the financial statement assertions affected by the CIS relates to
the significance, not the complexity of computer processing.
6. The auditor shall consider the entity’s CIS environment in designing audit
procedures to reduce risk to an acceptably low level. Which of the following
statements is incorrect?
Answers A and B are incorrect because an auditor need not have expertise in
programming and computer systems analysis. If specialized CIS skills are needed
in the audit, the auditor may seek the assistance of an auditor’s expert.
Answer C is incorrect because the auditor should have sufficient knowledge of the
entire CIS not only of the computer’s operating systems.
A B C D
Erroneous data conversion Yes Yes Yes Yes
Erroneous source document
preparation Yes Yes Yes No
Repetition of errors No No Yes Yes
Concentration of data Yes No Yes Yes
Answers A, B, and D are incorrect because optical scanners, CDROM drive, and
modems are elements of computer hardware.
11. Which of the following computer hardware elements is not associated with
data input?
A. Touch screen
B. Printer
C. Mouse
D. Optical scanner
Answers A, C, and D are incorrect because a touch screen, a mouse, and an optical
scanner can be used for data input.
12. A hardware element that takes the computer’s digital information and
transforms it into signals that can be sent, over ordinary telephone lines is a/an
A. Intelligent terminal
B. Point-of-sale terminal
C. Terminal emulator
D. Modem
A modem converts data in digital form into analog or wave form (the process is
called modulation) so that data can be sent to remote locations through the
telephone system.
The modem at the receiving end of the transmission path converts the analog or
wave form back to the digital form (the process is called demodulation) used by
the terminal or CPU.
13. Uninterruptible power supplies are used in computer
facilities to minimize the risk of
14. In a computer system, the parts of the operating system program and language
translator program are stored in the
ROM consists of semiconductor chips that can be read from (but not written to)
and are used as permanent storage of the operating system and language
translator.
Answers B, C, and D are incorrect because RAM and magnetic tape and disk
drives are temporary storage devices.
A. The potential for systematic error is ordinarily greater in manual processing than
in computerized processing.
B.Errors or fraud in computer processing will be detected soon after their
occurrences.
C.Most computer systems are designed so that transaction trails useful for audit
purposes do not exist.
D. Computer processing virtually eliminates the occurrence of computational errors
normally associated with manual processing.
Computational or clerical errors are virtually eliminated in computer processing
because of the computer’s capability to uniformly process like transactions with
the same processing instructions.
Answer A is incorrect because the risk of systematic or programming error is
greater in computer processing than is manual processing.
The computer’s ability to subject like transactions to uniform processing will
result in all transactions being processed incorrectly if there are errors embedded
in the program logic.
A. Personal computer
B. Mainframe
C. On-line computer
D. Terminal
17. A CIS where two or more personal computers are linked together through the
use of special software and communication lines and allows the sharing of
application software, data files, and computer peripherals, such as printers and
optical scanners is a/an
Each personal computer linked to a LAN is called a workstation that can access
data, software, and other resources through a file server – a linked PC that
manages the network.
Two or more LANs can be linked together to form a wide area network (WAN).
18. A file server in a local area network (LAN) is
A. A workstation that is dedicated to a single user on the LAN. B. A computer that
stores programs and data files for users of the LAN.
C. The cabling that physically interconnects the nodes of the LAN.
D. A device that connects the LAN to other networks.
Common resources such as programs and data shared by LAN nodes are stored
and managed by special-purposed computers called file servers.
Answer C is incorrect because the cabling that physically interconnects the nodes
of the LAN is communications link.
Answer D is incorrect because bridges and gateways are used to link networks
together. Bridges connect LANs of the same type while gateways connect LANs
of different types.
19. Audit team members can use the same database and programs when their PCs
share a hard disk and printer in a LAN. Which of the following communication
devices enables a PC to connect to a LAN?
20. A computer information system that allows individual users to develop and
execute application programs, enter and process data, and generate reports in a
decentralized manner is called
a/an
A. Online system
B. Batch processing system
C. End-user computing
D. Networking
21. Which the following statements most likely represents a disadvantage for an
entity that maintains data files on personal computers (PCs) rather than manually
prepared files?
23. Most personal computers have both a CD-ROM drive and a hard disk drive.
The major difference between the two types of storage is that a hard disk.
24. What type of online computer system is characterized by data that are
assembled from more than one location and records that are updated immediately?
A. Online, batch processing system
B. Online, real-time processing system
C. Online, inquiry system
D. Online, downloading/uploading system
In an online processing system, individual transactions are entered through
workstations or terminals that are connected to the mainframe.
The transaction file is to be subjected to further validation checks and then used in
updating the relevant master file in the subsequent processing cycle.
26. Which of the following features is least likely to be found in an online, real-
time processing system?
A. Turnaround documents B.
User manuals
C. Preformatted screens
D. Automatic error correction
Answer C is incorrect because users usually interact with the mainframe through
preformatted screens of remotes terminals.
27. Which of the following is usually not a factor to consider in designing and
implementing an online, real-time system?
A. Priority allocation
B. Queues
C. Interrupts
D. Hardware diagnostics
Answers A and B are incorrect because priority allocation and queues are
important factors in real-time systems. Both of them relate to deciding which jobs
should be given priority in processing.
Answer C is incorrect because interrupts allow high priority jobs to get immediate
action. In a multiprogramming environment, work on one program is interrupted
so the CPU may attend to another.
29. Online computer systems use workstations or terminals that are located either
locally or at remote sites. There are two types of workstations: general purpose
terminals and special purpose terminals. General purpose terminals include the
following, except
• Basic keyboard and monitor – used for entering data without any
validation checks; the monitor displays data from the computer system.
• Intelligent terminal – performs the functions of the basic keyboard and
monitor with the additional functions of validating data within the
terminal, maintaining transaction logs, and performing other local
processing.
• Personal computers – perform all the functions of an intelligent terminal
with the additional local processing and storage capabilities.
• Point of sale devices – used to record sales transactions as they occur and
to transmit them to the main computer such as electronic cash registers
and optical scanners.
• Automated teller machines (ATMs) – used to initiate, validate, record,
transmit, and complete various banking transactions.
A. Involves reprocessing actual entity data using the entity’s computer software.
B. Involves reprocessing actual entity data using the auditor’s computer software.
C. Is where dummy transactions are prepared by the auditor and processed under
the auditor’s control using the entity’s computer software.
D. Is where actual transactions are prepared by the auditor.
A. A subsidiary ledger
B. A utility bill
C. Point-of-sale (POS) scanners in malls
D. A bill of lading
32. Express Padala, Inc. stated in one of its mission statements that “positive
control of each package will be maintained by utilizing . . . electronic tracking and
tracing systems.” Express Padala uses what type of IT system?
A. Data warehouse
B. Data administrator
C. Database system
D. Database manager
A. Data coordinator
B. Database master
C. Database administrator
D. Database manager
36. Which feature of many database systems simplifies the creation of reports by
allowing users to specify the data elements desired and the format of the output?
A. Report generator
B. Report writer
C. Report printer
D. Report creator
37. Which of the following is probably the most significant effect of database
technology on accounting?
38. An entity should have a disaster recovery plan to ensure that data processing
capacity can be restored as smoothly and quickly as possible. The following
would typically be part of an adequate disaster recovery plan, except
A. After the amended program has received final approval, the change is
implemented by replacing the production version with the developmental version.
B.During the modification process, the developmental version of the program must be
kept separate from the production version. C. When a program change is
submitted for approval, a list of all required updates should be compiled and then
approved by management and program users.
D. Only material program changes should be thoroughly tested and documented.
40. Old and new systems operating simultaneously in all locations is a test
approach known as parallel testing.
Pilot testing involves implementing a new system in one part of the organization,
while other locations continue to use the current system.
The standard defines “database” as a collection of data that is shared and used by
a number of users for different purposes.
42. Which of the following computer software is used to create, maintain, and
operate a database?
A. Application software
B. Systems software
C. Database management system (DBMS)
D. Database administrator
The DBMS is used to create, maintain, and operate a data-base. It facilitates the
physical storage of the data, maintains the interrelationships among the data, and
makes the data available to application programs.
The two important characteristics of a database system are data sharing and data
independence.
Data sharing can be achieved if the database contains data which are setup with
defined relationships and are organized in a manner that permits several users to
access and use the data in different application programs.
The need for data sharing creates the need for data independence from application
programs. Through the DBMS, data are recorded only once, for use by different
application programs. There will be true data independence if the structure of data
can be changed without affecting the application programs, and vice versa.
44. To protect the integrity of the database, data sharing by different users requires
organization, coordination, rules, and guidelines. The individual responsible for
managing the database resource is the
A. Programmer
B. Database administrator
C. User
D. CIS manager
45. An auditor who wishes to trace data through several application programs
should know what programs use the data, which files contain the data, and which
printed reports display the data. In a database system, the information could be
found in a
A. Decision table
B. Data dictionary
C. Database schema
D. Data encryptor
A software within the DBMS that keeps track of the location of the data in the
database is called the data dictionary.
Answer A is incorrect because the DBMS is no safer than any other computer
information systems.
Because EDI transactions are transmitted and processed in real time, delays are
eliminated in receiving and processing an order, shipping goods, and receiving
payment. Thus, EDI compresses an entity’s business cycle and results in lower
year-end receivables balances.
Answer C is incorrect because an EDI system typically uses a VAN value added
network) as a third-party service provider, and reliance on VAN controls may be
critical.
Answer D is incorrect because all transactions (not just a sample) may be tested
with the aid of computer technology.
50. The internal controls over computer processing include both manual
procedures and procedures designed into computer programs (programmed
control procedures). These manual and programmed control procedures comprise
the general CIS controls and CIS application controls. The purpose of general CIS
controls is to
A. Establish specific control procedures over the accounting applications in order to
provide reasonable assurance that all transactions are authorized and recorded and
are processed completely, accurately, and on a timely basis.
B.Establish a framework of overall controls over the CIS activities and to provide a
reasonable level of assurance that the overall objectives of internal control are
achieved.
C.Provide reasonable assurance that systems are developed and maintained in an
authorized and efficient manner.
D. Provide reasonable assurance that access to data and computer programs is
restricted to authorized personnel.
2. Controls over processing and computer data files – designed to provide reasonable
assurance that:
52. The auditor is required to consider how an entity’s general CIS controls affect
the CIS applications significant to the
audit. Accordingly, the auditor should
53. The two broad categories of IT controls are general controls and application
controls. General controls include controls
General controls relate to all or many IT activities and often include organization
and management controls, application systems development and maintenance
controls, and data entry and program controls.
To detect and control errors arising from the use of computer equipment, hardware
controls are built into the equipment by the manufacturer, such as parity checks,
read-after-write checks, and echo checks.
Answer B is incorrect because input controls such as the use of limit checks, self-
checking digits, and input screens can reduce the incidence of user input errors in
online systems.
A. In EDI systems, preventive controls are generally more important than detective
controls.
B.Control objectives for EDI systems generally are different from the objectives for
other computer information systems.
C.Internal controls that relate to the segregation of duties generally are the most
important controls in EDI systems.
D. Internal controls in EDI systems rarely permit control risk at below the maximum.
Answer B is incorrect because the basic objectives of internal control are the same
regardless of the nature of data processing.
Answer C is incorrect because adequate segregation of incompatible functions in a
CIS environment may not be feasible.
Answer D is incorrect because control risk in an EDI system may be assessed at
below the maximum level if relevant controls exist and tests of controls provide
evidence that those controls are functioning effectively.
57. An entity has recently converted its revenue/receipt cycle from a manual
processing to an online, real-time processing system. Which is the most probable
result associated with conversion to the new computerized processing system?
The functions of systems analysts and programmers should not be combined with
the functions of computer operators. Programmers and systems analysts may be
able to effect changes in programs, files, and controls and should therefore have
no access to computer equipment.
59. A systems analyst should have access to each of the following, except
A. Edit criteria
B. Source code
C. Password identification tables
D. User procedures
Unauthorized changes to application programs and data files can be made by the
analyst if he/she has access to password identification tables.
Answer A, B, and D are incorrect because the systems analyst needs access to edit
criteria, source code, and user procedures.
60. Which of the following would represent an internal control weakness in an IT
environment?
Answers B and D are incorrect because the data control group keeps unauthorized
and improper transactions from entering the computer facility and specifies the
distribution of computer results.
Answer C is incorrect because file retention and disaster recovery policies are
specified in the entity’s backup and recovery plan.
62. One of the major problems in a CIS environment is that incompatible duties
may be performed by the same individual. One compensating control is the use of
Answer A is incorrect because hash totals are control totals calculated using
nonfinancial data (for example, the sum of sales order numbers) to keep track of
the records in a batch.
64. An entity has recently converted its purchasing cycle from a manual process to
an online computer system. Which of the following is a probable result associated
with conversion to the new IT system?
65. An entity should plan the physical location of its computer facility. Which of
the following is the primary consideration for selecting a computer site?
The computer and other peripheral pieces of hardware should be protected from
disasters such as fire, flood, sabotage, and theft. Thus, the primary consideration
for selecting a computer site should be the security of the computer facility.
Answer A is incorrect because the basement or the ground floor is not always a
secured place. For example, installing a computer facility on the ground floor or
in the basement of an old office building in Malabon City could be disastrous
because of frequent flooding.
General controls apply to all CIS activities. Given the nature of notebook
computers, general controls to prevent theft of equipment and data and restrict
access to the use of equipment and data must be the primary concerns.
Answe4r B, C, and D are incorrect because designing the content and organization
of the database; protecting the database and its software; and monitoring and
improving the efficiency of the database are appropriate responsibilities of a
database administrator.
68. Which of the following groups should have the operational responsibility for
the accuracy and completeness of computerbased information?
A. External auditors
B. Internal auditors
C. Users
D. Top management
Users are in the best position to review the accuracy and completeness of
computer output in relation to the input provided. Thus, the operational
responsibility for the accuracy and completeness of computer-based information
should be placed on users.
Answer A is incorrect because the primary purpose of external auditing is the
expression of an opinion on an entity’s financial statements.
Answer D is incorrect because access controls (for example the use of personal
identification codes such as passwords and PINs) ensure that unauthorized access
to programs and files is prevented.
70. Which of the following is the best method to prevent unauthorized alteration
of online records?
73. Which of the following controls would most likely provide protection against
74. Which of the following would most likely indicate that a computer virus is
present?
75. Which of the following operating procedures would most likely increase an
entity’s exposure to computer viruses?
76. An entity installed antivirus software on all its personal computers. The
software was designed to prevent initial infections, stop replication attempts,
detect infections after their occurrence, mark affected system components, and
remove viruses from infected components. The major risk in relying on antivirus
software is that it may A. Consume too many system resources.
Antiviral programs (also called vaccines) are used to examine application and
operating system programs for the presence of viruses and remove them from the
affected programs. However, a vaccine works only on known viruses and there is
no guarantee that it will work if virus has been mutated.
Answers A and B are incorrect because antiviral software can be set to execute at
startup so as not to consume too many system resources.
77. The accountant who prepared a spreadsheet model for workload forecasting
left the company, and his successor was unable to understand how to use the
spreadsheet. The best control to permit new employees to understand internally
developed programs is A. Adequate backups are made for spreadsheet models.
Answer A is incorrect because the accountant’s successor could not use the
spreadsheet model due to inadequate documentation, not inadequate backups.
78. What is the appropriate term for the process of monitoring, evaluating, and
modifying a system?
A. Feasibility study
B. Maintenance
C. Implementation
D. Analysis
Systems maintenance means keeping a new system that has been designed and
implemented current wit user needs. This basically involves revising the systems
and application programs to meet new user needs and to correct designed errors.
The responsibility for systems maintenance is assumed by systems analysts and
programmers.
Answer A is incorrect because a feasibility study is made to determine the
technical, legal, operational, and schedule (i.e., the company’s ability to
implement the project within an acceptable time) feasibility of a proposed system.
The systems designer is responsible for determining the number of backup files
needed for each application. The designer should consider the degree of file
activity and the financial relevance of the system in making such decision.
Answer A and D are incorrect because validation routines and internal labels may
prevent data from being destroyed but do not allow recovery of lost or destroyed
data.
Answer C is incorrect because verification of run-to-run totals ensures
completeness of processing, not data recovery.
A “cold site” is a backup facility that has all the needed computer equipment. This
backup arrangement is too vendordependent because it relies on the vendor’s
timely delivery of the needed computer equipment.
Answer B is incorrect because a “hot site” backup facility has all the needed
resources in place, including the computer equipment, and is therefore not vendor-
dependent.
Answer C is incorrect because a “cold and hot site” backup facility has a “hot
site” component that is fully configured and available for immediate use while the
“cold site” is being configured, making it not too vendor-dependent.
Answer A is incorrect because antiviral software, not security software, detects the
presence of computer viruses.
Answer C is incorrect because security software can be used to control the use of
utility software not to prevent installation of unauthorized utility software.
84. An internal control has just concluded a physical security audit of data center
which is primarily engaged in top-secret defense contract work. The auditor has
recommended biometric authentication for workers entering the building. The
recommendation might include devices that verify all of the following, except A.
Fingerprints
B. Password patterns
C. Speech patterns
D. Retina patterns
85. Which of the following best describes the process called authentication?
A. The system verifies the identity of the user
C. The user indicates to the system that the transaction was processed correctly
D. The system verifies the user is entitled to enter the transactions request.
A. Review and approval procedures for new systems are set by policy and
adhered to
D. Processing results are received by the intended users Answers B, C and D are
incorrect because these are the objectives of application controls.
87. Data processing activities may be classified in terms of three stages or
processes: input, processing, and output. Which of the following activities is not
C. Reporting
D. Verifying
Reporting is normally associated with the output stage. Output is the result of
computer processing, for example, a hard copy printout of a report, magnetic files,
or invoices.
Answers A, B and D are incorrect because recording, batching, and verifying are
normally associated with the input stage.
Input controls are designed to provide reasonable assurance that the data received
for computer processing are complete, accurate and valid.
A. Employee numbers
90. An entity uses the account code 699 for depreciation expense. However, one
of the company data input clerks often codes depreciation expense as 996. The
highest account code in the company’s system is 700. What programmed control
procedure would detect this error?
B. Sequence check
C. Valid-code test
D. Valid-character test
91. Which of the following provides the most valuable information for detecting
unauthorized input from a terminal?
C. Error file
Answer A is incorrect because a user error report only lists input that fails the
validation tests.
Answer C is incorrect because an error file is used to store and correct records
detected during validation.
92. Many customers, managers, employees, and suppliers have blamed the
computer for making errors. In reality, computers make very few mechanical
errors. Which of the following is the most likely source of errors in fully
operational computer-based system?
B. Operator error
C. Processing
D. Input
Answer B is incorrect because operator (run) manuals which describe how to run
the system, decrease the chance of operator error.
Answer C is incorrect because, once a program has been thoroughly tested (for
example, by creating hypothetical master files and transaction files to be
processed by the program being tested), the processing of appropriate data does
not result in errors.
93. Data conversion is the transcription of transaction data from source documents
to magnetic tape or disk suitable for computer processing. Which of the following
data conversion methods is most difficult to audit?
Answer B is incorrect because keying data to disk for batch processing creates
records that can be readily tested.
Answer C is incorrect because hard copy source documents are retained in optical
character recognition. Moreover, this method reduces the risks of conversion
error.
94. Which of the following best describes the online data processing control called
preformatting?
A. The display of a document with blanks for data items to be entered by the terminal
operator.
B.a program initiated prior to regular input to discover errors in data before entry so
that the errors can be corrected.
C.A series of request for required input data that requires an acceptable response to
each request before a subsequent request is made.
D. A check to determine if all data items for a transaction have been entered by the
terminal operator.
A preformatted screen approach may be used in online systems to avoid data entry
error. Under this approach, blanks for specified data items will be displayed on the
monitor. This is most appropriate when data entry is from a source document.
Moreover, the screen format may even be in the form of a transaction document.
95. When erroneous data are detected by the computer program controls, such
data may be excluded from processing and printed on an error report. Who should
review and follow up this error report?
A. System analyst
B. Data control group
C. Computer operator
D. Computer programmer
Many entities have a data control group (independent of the computer processing
operation) that acts as liaison between the end user and data processing.
The data control group is responsible for receiving from users, transaction
documents for processing; and controlling the distribution of computer output
such as documents and reports. It is responsible for the following up error reports
to ensure that the erroneous records are corrected by the users and reprocessed by
the computer center.
96. If a payroll system continues to pay employees who have been terminated,
control weakness most likely exist because
A. Input file label checking routines built into the program were ignored by the
operator.
B.Programmed controls such limit checks should have been built into the system.
C.Procedures were not implemented to verify and control the receipt by the computer
processing department of all transactions prior to processing.
D. There were inadequate manual controls maintained outside the computer system.
In a payroll system, the authorization to pay employees should come from the
personnel department, which is external to the computer processing department.
Hence, inadequate controls maintained outside the computer system are likely to
allow the payments to terminated employees to continue without being detected.
Answers A, B, and C are incorrect because the use of input file labels, limit
checks, and batch total will not detect unauthorized transactions.
Displaying the amounts entered on the terminal screen allows the terminal
operator to visually verify the accuracy of the amounts entered.
98. Which of the following input validation checks is least likely to be appropriate
in an online, real-time system?
A. Sign check
B. Sequence check
C. Reasonableness check
A sign check tests data to determine if they have appropriate arithmetic sign.
A. Completeness check
B. Compatibility check
C. Sequence check
D. Reasonableness test
A completeness test identifies missing data within a single transaction record (for
example, missing purchase order number on the shipping document) or records
within a batch of transaction data.
B.A completeness check that does not allow a sales invoice to be processed if key
fields are blank.
D. Matching line control counts produced by the computer with predetermined line
control counts.
A line control count could have prevented or promptly detected the clerical error.
This control technique involves a count of individual line items on a document.
Missing lines can be detected by simply comparing these counts with
predetermined line control counts for each document.
Answer A is incorrect because the three-item sales invoice would be the basis for
updating both the accounts receivable master file and control account. Hence, no
discrepancy would be disclosed by the comparison.
Answer B is incorrect because a completeness check would not detect the billing
error because other sales invoices may properly contain three or fewer lines.
Answer C is incorrect because although the sales invoice has missing lines, it
exist and can be matched with the shipping document.
101. Which of the following computerized control procedures would most likely
provide reasonable assurance that data uploaded from personal computers to a
mainframe are complete and that no additional data are added?
A. Field-level edit controls that test each field for alphanumerical integrity.
B.Self-checking digits to ensure that only authorized part numbers are added to the
database.
D. Passwords that effectively limit access to only those authorized to upload the data
to the mainframe.
Batch totals which consist of record counts, financial or control totals, and hash
totals can be used to ensure the accuracy and completeness of data uploaded from
personal computers to mainframe. After the uploading process, these totals are
reconciled with predetermined totals to test if the data have been completely
transferred.
A record count (also called item count) is the total number of records in a batch.
A financial or control total is the peso value of a financial field, for example, the
total sales invoice amounts.
A hash total is the total of a unique nonfinancial field, for example, the total of
purchased order numbers in a batch.
Answers A, B, and D are incorrect because they do not provide assurance about
the completeness of data upload.
A. Validity check
B. Limit check
D. Control total
Validity checks compare actual values in a field (for example, a transaction code)
against acceptable (valid) values in the master file. If the value in the field does
not match one of the acceptable values. The record is considered to be in error. If
the computer checks first for validity of the jobs, labor hours would not be
erroneously assigned to inactive jobs.
Answer B is incorrect because a limit check determines if the value in the field
exceeds a predetermined limit.
Answer C is incorrect because missing data checks are used to determine if a field
contains blank spaces. The computer considers a record in error if blanks are
detected where data values are expected.
Answer D is incorrect because control totals are used to reconcile computer input
with processing result.
103. If, in reviewing an application system, it is noted that the batch controls are
not used, which of the following statements by the user of the system is
acceptable as a compensating control?
A 100% physical review of the input document to the output document will
provide evidence that all records are completely and accurately processed. Thus,
this procedure will compensate for the lack of batch control totals.
Answer A is incorrect because the use of batch control totals is most appropriate
in managing high volumes of transaction data.
Answer C is incorrect because a 100% key verification does not assure that all
records submitted for processing were keypunched.
Answer D is incorrect because the supervisor’s approval of all inputs does not
In many cases, the wrong merchandise was sent because adjacent characters in the
order code had been transposed. The most effective control to prevent this
erroneous input is to
A. Use a master file reference for all codes to verify the existence of items.
B.Separate the parts of the order code with hyphens to make the characters easier to
read.
C.Add check digits to the order codes and verify them for each order.
Transposition errors can corrupt data codes and cause serious data processing
problems if they go undetected.
An effective control to detect data coding errors is by adding a check digit (or
digits) to a data code.
The check digits is the result of the mathematical calculation done based on the
original data code (the simplest form is to add all the digits in the code). During
the input process, the system recalculates the check digits for each input and
compares the result with the check digit attached to the data code entered.
Answer B is incorrect because the use of hyphens would make the order code
easier to read, but would not detect order codes with transposed characters.
Answer D is incorrect because requiring customers to specify the name for each
item they order would generally not allow detection of erroneous codes.
105. Which of the following is the major purpose of the auditor’s study and
evaluation of the company’s computer processing operations?
A. Ensure the exercise of due professional care
Answer A is incorrect because auditors are required to exercise due care in all
audits.
106. When the auditor chooses to use only the non-IT segment of a client’s control
to asses control risk, it is referred to as auditing around the computer. Which one
of the following conditions need not be present to apply this audit approach?
A. The output must be listed in sufficient detail to enable the auditor to trace
individual transactions.
107. The following statements relate to the auditor’s assessment of control risk in
an entity’s computer environment. Which is correct?
A. The auditor usually can ignore the computer system if he/she can obtain an
understanding of the controls outside the computer information system.
B.If the general controls are ineffective, the auditor ordinarily can assess control risk
at a low level if the application controls are effective.
C.The auditor’s objectives with respect to the assessment of control risk are the same
as in a manual system.
D. The auditor must obtain an understanding of the internal control and test controls
in computer environments.
The overall objective and scope of an audit does not change in a CIS environment.
Regardless of the information system used by the entity--- manual or
computerized, the auditor is required to obtain an understanding of internal
control and assess control risk to plan the audit.
108. Computer programs and data that the auditor may us as part of the audit
procedures to process data of audit significance contained in an entity’s
information system are called
A. CAATs
B. DOOGs
C. BIIKs
D. BIIRDs
Computer-assisted audit techniques (CAATs) are computer programs and data that
the auditor may use in performing various audit procedures, including the
following:
Answer B, C, and D are incorrect because DOOGs, BIIKs, and BIIRDs are not
used in information technology (IT).
109. One common type of CAAT is the use of audit software to process data audit
significance from the entity’s information system. An audit software that has
widespread popularity because it is easy to use and requires little computer
background on the part of the auditor; it can be used on both mainframe and PC
systems; it allows the auditor to perform hi/her tests independent of the entity’s
computer processing personnel; and it can be used to audit the data in most file
formats and structures is called a A. Customized program
B. Purpose-written program
C. Utility program
The easy-to-use and flexibility features of generalized audit software (GAS) make
it very popular to auditors in the audit information technology (IT) environments.
This audit software is designed to perform common audit tasks or standardized
data processing functions, such as the following:
A B C D
The auditor no yes yes no
An outside programmer
hired by the auditor yes yes no no
111. These computer programs are enhanced productivity tools that are typically
part of a sophisticated operating systems environment, for example, data retrieval
software or code comparison software
A. Purpose-written programs
B. System management programs C. Utility programs
112. Embedded audit routines are sometimes built into an entity’s computer
information system to provide data for later use by the auditor. One technique
involves embedding audit software modules within an application system to
provide continuous monitoring of entity’s transactions. These audit modules are
used to create logs that collect transaction information for subsequent review by
the auditor. These logs are called
B. Console logs
C. Computer logs
D. IT logs
C.Manually comparing detail transaction files used by an edit program with the
program’s generated error listings to determine that errors were properly identified
by the edit program.
Because programmed controls are built into the computer program, the auditor
should instead apply the white box approach. This means that the auditor should
have an in depth understanding of how the programmed control function and
should consider using CAATs in testing their effectiveness.
Answer A is incorrect because the use of the test data approach is an effective
method of evaluating the reliability of programmed control procedures.
D. Processing primarily consists of sorting the input data and updating the master
files sequentially.
115. When an auditor tests a computer information system, which of the following
is true of the test data approach?
A. 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 entity.
Under the test data approach, the auditor processes a specially prepared set of
input data containing possible valid and invalid conditions using the client’s
application program.
The result of each test are compared with predetermined results, based on the
auditor’s understanding of the programmed controls. This approach will allow the
auditor to make an objective evaluation of the program logic and the effectiveness
of programmed controls.
Answer B is incorrect because only one of each transaction type needs to be tested
and evaluated.
Answer C is incorrect because the auditor tests only those controls that are
relevant to the financial statement audit.
Answer D is incorrect because, if the program to be used for testing is different
from the program used throughout the year by the client, no assurance can be
obtained about the effectiveness of programmed controls.
116. An auditor who is testing IT controls in a payroll system would most likely
use test data that contain conditions such as
117. Auditors have learned that increased computerization has created more
opportunities for computer fraud but has also led to the development of computer
audits techniques to detect frauds. A type of fraud that has occurred in the banking
industry is programming fraud in which the programmer designs a program to
calculate daily interest on savings accounts to four decimal points. The
programmer then truncates the last two digits adds it to his account balance.
Which of the following CAATs would be most effective in detecting this type of
fraud?
A. Generalized audit software that select account balances for confirmation with
the depositor
B. Snapshot
C. Parallel simulation
In parallel simulation, the auditor uses a specially prepared computer program that
simulates key features or processes of the application program to be tested.
Program logic and controls are evaluated by comparing the results of processing
actual data using the simulation program with the results of processing the same
actual data using the client’s application program.
Parallel simulation is the most effective CAAT application because the amounts
credited to the depositors’ accounts can be compared with the amounts calculated
by the auditor’s simulation program.
Answer B and D are incorrect because SCARFs and snapshots will not detect the
computer fraud prescribed.
118. To obtain evidence that online access controls are properly functioning, an
auditor is most likely to
B.Create checkpoints at periodic intervals after live data processing to test for
unauthorized use of the system.
C.Enter invalid identification numbers or passwords to ascertain whether the system
rejects them.
D. Examine the transaction log to discover whether any transactions were lost or
entered twice because of a system malfunction.
The auditor can directly test whether online access controls are properly
functioning by attempting to gain access to the system by using invalid
identification numbers or passwords.
Answer A is incorrect because unauthorized transactions may be entered by any
intruder who know valid identification numbers or passwords.
119. Which of the following CAATs allows fictitious and real transactions to be
processed together without the knowledge of client operating personnel?
C. Parallel simulation
The integrated test facility (ITF) approach enables the auditor to test a computer
program’s logic and controls during its normal operation. Under this approach,
fictitious records for dummy units (for example, a division, a department, or a
dummy entity) are integrated with legitimate records in the database.
During the normal computer processing, test transactions are merged with actual
transactions and processed against the dummy records in the master database.
Answers A and D are incorrect because data entry monitor and input control
matrix are not used by the auditor in testing an entity’s computer information
system.
Answers C is incorrect because, in parallel simulation, real (not fictitious)
transactions are reprocessed.
A. Snapshot
B. Simulation
D. Code comparison
TRUE OR FALSE
11. When applying the test data approach, auditors use auditor- controlled
software to do the same operations that the client’s software does, using the
same data files.
12. A problem for a CPA associated with advanced IT systems is that the audit
trail is sometimes generated only in machine readable form.
13. Controls which are designed to assure that the information processed by the
computer is authorized, complete, and accurate are called input controls.
14. A system in which the end use is responsible for the development and
execution of the computer application that he or she uses is called
decentralized computing.
17. Output controls are designed to assure that the data generated by the
computer are used appropriately by management.
21. Random errors are more likely in a batch system than in an online system.
22. Auditing by testing the input and output of a computer system instead of the
computer program itself will detect all program errors, regardless of the
nature of the output.
25. Controls that relate to a specific use of the IT system, such as the processing
of sales or cash receipts, are called general controls.
KEY ANSWERS
TRUE OR FALSE
1. All the information used by the auditor in arriving at the conclusions on which
the audit opinion is based is called a. Audit information
b. Audit evidence
c. Accounting records
d. Corroborating information
According to PSA 500 (Audit Evidence), audit evidence refers to information
used by the auditor in arriving at the conclusions on which the auditor's opinion is
based. It includes both information contained in the accounting records underlying
the financial statements and other information.
A. Minutes of meetings
B. Confirmations received from third parties
C. Analyst's reports
D. Comparable data about competitors (benchmarking)
E. Controls manuals
F. Information obtained by the auditor from such audit procedures as inquiry,
observation, and inspection.
G. Other information developed by, or available to, the auditor to reach
conclusions through valid reasoning.
3. Audit evidence comprises
A. Information that supports and corroborates management assertions.
Objectivity relates to the possible effect that bias, conflict of interest or the
influence of others may have on the professional or business judgement of the
management’s expert.
A. I only
B. II only
C. Either I or II
D. Both I and II
A given set of audit procedures may provide audit evidence that is relevant to
certain assertions, but not others. For example, inspection of records and
documents related to the collection of receivables after the period end may
provide audit evidence regarding both existence and valuation, although not
necessarily the appropriateness of period-end cutoffs.
10. Which of the following generalizations does not relate to the reliability of
audit evidence?
A. Audit evidence is more reliable when it is obtained from independent
sources outside the entity.
B. Audit evidence obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by in
C. Audit evidence that is generate internally is more reliable when the related
controls imposed by the entity are effective.
D. An auditor’s opinion, to be economically useful, is formed within a
reasonable time and based on audit evidence obtained at a reasonable cost.
PSA 500 gives the following generalizations about the reliability of audit
evidence:
The standard states that the auditor considers the relationship between the cost of
obtaining audit evidence and the usefulness of the information obtained. However,
the matter of difficulty or expense involved is not itself a valid basis for omitting
an audit procedure for which there is no alternative.
12. In representing that the financial statements are presented fairly, in all
material respects, in accordance with the applicable financial reporting
framework, management implicitly or explicitly makes regarding the
recognition, measurement, presentation, and disclosure of the various
elements of financial statements and related disclosures.
A. Assertions
B. Allegations
C. Conclusions
D. Assurances
Assertions about classes of transactions and events for the period under audit
include:
1. Occurrence – transactions and events that have been recorded have
occurred and pertain to the entity.
2. Completeness – all transactions and events that should have been
recorded.
3. Accuracy – amounts and other data relating to recorded transactions and
event have been recorded appropriately.
4. Cutoff – transactions and events have been recorded in the correct
accounting period.
5. Classification – transactions and events have been recorded in the proper
accounts.
Answer A, B, and C are incorrect because valuation and allocating rights and
obligations and existence are assertions about account balances at the period end.
14. The following are assertions about account balances at the period end,
except
The cutoff assertion deals with whether transactions and events have been
recorded in the correct accounting period. Thus, it is an assertion about classes of
transactions and events for the period under audit
Assertions about account balance at the period end include the following:
1. Existence – assets, liabilities, and equity interests exist.
2. Rights and obligations – the entity holds or controls the rights to assets,
and liabilities are the obligations of the entity.
3. Completeness – all assets, liability, and equity interests that should have
been recorded.
4. Valuation and allocation – assets, liabilities, and equity interest are
included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are properly recorded.
15. The following are assertions about presentation and
disclosure.
The auditor may use the assertions as described in PSA 500 or may express them
differently provided all aspects described in the standard have been covered.
Answer B is incorrect because the auditor mmay choose to combine the assertions
about transactions and events with the assertions about account balances.
Answer C is incorrect because there may not be a separate assertion related to
cutoff of transactions and events when the occurrence and completeness
assertions include appropriate consideration of recording transactions in
the correct accounting period.
Answer D is incorrect because the completeness assertions may relate to classes
of transactions and events for the period under audit, account balances at
the period end, and presentation and disclosure.
Audit objectives and procedures need not have a one-to-one relationship. Some
audit procedures may satisfy more than one specific audit objective. In some
cases, a combination of audit procedures may be needed to achieve a single audit
objective.
Answer A is incorrect because the auditor should resolve all substantial doubts
about any of management’s material financial statement assertions before an
opinion is rendered
18. The primary difference between an audit of the balance sheet and an audit of
the income statement is that the audit of the income statement addresses the
verification of
A. Cutoffs
B. Authorizations
C. Transactions
D. Costs
Answer D is incorrect because the auditor is concerned with the cost reflected in
both statements.
19. Which of the following would least likely affect the appropriateness of
evidence available to an auditor?
A. The sampling method employed by the auditor to obtain a sample of such
evidence
B. The relevance of such evidence to the financial statement assertion being
verified.
C. The relationship of the preparer of such evidence to the entity being
audited.
D. The timeliness of such evidence.
Appropriateness is the measure of the quality of audit evidence, that is, its
relevance and reliability. Generally, audit evidence obtained from independent
sources outside the entity, generated under effective controls, or obtained directly
by the auditor is presumed to be the most reliable. The relevance and reliability of
audit evidence will not be affected by the sample selection method as long as the
sample is representative of the population.
Answer A and C are incorrect because internally generated and easily duplicated
documents are readily available to employees who commit fraud.
Answer A and B are incorrect because test of controls are performed to test the
reliability of the accounting system and to determine whether management’s
policies and procedures operated effectively.
Answer D is incorrect because the auditor may apply a variety of audit procedures
and is not required to perform tests of details of transactions to comply with
PSAs.
22. In testing the existence assertion for an asset, an auditor ordinarily works from
the
A. Potentially unrecorded items to the financial statements.
B. Financial statements to the potentially unrecorded items.
C. Supporting evidence to the accounting records. D. Accounting records to
the supporting evidence.
23. In determining whether transactions have been recorded, the direction of the
audit testing should be from the
A. General journal entries
B. Original source documents
C. General ledger balances
D. Adjusted trial balance
The completeness assertion deals with whether all transactions and events that
should have been recorded. Thus, determining whether transactions have been
recorded is testing the completeness assertion. In applying this test, the auditor
ordinarily begins with the original source documents and traces them to the
appropriate accounting records to determine whether the underlying transactions
were properly recorded.
Answers A, C, and D are incorrect because beginning with the accounting records
is unlikely to provide evidence about unrecorded transactions.
24. Which of the following audit procedures consists of looking at the process or
procedure being performed by others?
A. Observation
B. Inspection of records and documents
C. Inspection of tangible assets
D. Inquiry
25. 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?
A. Materiality
B. Audit risks
C. Auditor judgement
D. Reasonable assurance
Answer A and B are incorrect because material and audit risk are considered in
exercising professional judgement.
Answer D is incorrect because the auditor exercises professional judgement in
determining whether reasonable assurance that the financial statements are free of
material misstatement has been obtained.
ANALYTIC PROCEDURES
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
A. I and II only
B. II and III
C. I and III
D. I, II, and II
28. Which of the following should be considered by the auditor when designing
and performing analytical procedures as substantive procedures?
A. I only
B. II only
C. Both I and II
D. Neither I nor II The standard states that the auditor considers the
understanding of the entity and its internal control, the materiality and likelihood of
misstatement of the items involved, and the nature of the assertion in determining
the suitability of substantive analytical procedures. It states further that substantive
analytical procedures may also be considered appropriate when tests of details are
performed on the same assertion.
31. Reliability of data is influenced by its source and by its nature and is
dependent on the circumstances under which it is obtained. Which of the
following should the auditor consider in determining whether data is reliable for
purposes of designing substantive analytical procedures? I. Source of the
information available.
II. Comparability of the information available.
III. Nature and relevance of the information available.
IV. Controls over the preparation of the information.
REVENUE/RECEIPT CYCLE
33. The following are the auditor’s principal objectives in the audit of revenues,
except
A. To determine whether all cash owned by the entity at the balance sheet
date is included on the balance sheet.
B. To determine whether earned revenue has been recorded and recorded
revenue has been earned.
C. To determine whether revenues are reported in the income statement at the
appropriate amounts.
D. To determine whether revenues are properly classified, described, and
disclosed in the financial statements, including notes, in conformity with
an applicable financial reporting framework.
Determining whether all cash owned by the entity at the end of the reporting
period is included on the statement of financial position is not part of the audit of
sales and other revenues. A separate audit program is ordinarily prepared for the
audit of cash, including bank balances.
34. Auditors are often concerned with the possibility of overstatement of sales and
receivables. However, management may also have reasons for understating
these balances. Which of the following would explain understatement of sales
and
receivables?
I. To avoid paying taxes.
II. To window-dress the financial statements.
III. To meet budgets and forecasts.
A. I only
B. II only
C. I and III only D. I, II, and III
One way of avoiding tax liability is by not recording and reporting all sales and
receivables.
Because of the large volume of sales transactions, test of controls are particularly
appropriate to restrict substantive testing, provided that the evidence obtained
supports an assessment of control risk at less than the maximum.
Answer B is incorrect because the small volume of equipment transactions and the
ease of verifying its physical existence and computing depreciation may make
evaluation of the effectiveness of controls inefficient.
An auditor’s view of the client’s sales cutoff involves examining recorded sales
for several days (for example, one week) before and after the balance sheet date
and comparing them with sales invoices and shipping documents. By performing
this substantive procedure, the auditor may detect the recording of sale in a period
other that in which title passed. The completeness and cutoff assertions are
directly related to the auditor’s cutoff test.
Answer D is incorrect because an auditor’s review of the client’s sales cutoff does
not include examination of sales returns.
37. An auditor most likely would review a client’s periodic accounting for the
numerical sequence of shipping documents and sales invoices to support
management’s financial statement assertion of A. Existence
B. Rights and obligations
C. Completeness
D. Valuation and allocation
The existence of source documents such as sales invoices and shipping documents
indicates that the sales are valid.
Thus, the proper direction of testing should be from the recorded sales
transactions to the source documents. This procedure may reveal overstatements
of sales that are likely to result from entries in the sales account with no
supporting documentation.
Answer A and D are incorrect because the cash receipts journal and the sales
journal are not source documents.
39. Cutoff test designed to detect credit sales made before the end of the year that
have been recorded in the subsequent year provide assurance about
management’s assertion of
A. Accuracy
B. Classification
C. Rights and obligations
D. Cutoff
The cutoff assertion addresses whether transactions and events have been recorded
in the correct accounting period. This assertion is tested by examining recorded
sales for several days before and after the balance sheet date.
Answer c is incorrect because right and obligations assertion concerns whether the
entity controls or holds the right to assets, and liabilities are the obligations of the
entity.
40. An auditor most likely would limit substantive audit tests of the sales
transactions when control risk is assessed as low for the occurrence assertion
concerning sales transactions and the auditor has already gathered evidence
supporting
The occurrence assertion concerns whether transactions and events that have been
recorded have occurred and pertain to the entity.
Because cash receipt and accounts receivable are directly related to sales (a cash
sale is debited to cash and credited to sales; a sale on account is debited to
accounts receivable and credited to sales), evidence related to these accounts
provides assurance about the occurrence of sales transactions.
Answer A is incorrect because the beginning and ending inventory balances do not
have a direct relationship with sales transactions.
42. The auditor finds a situation in which one person has the ability to collect
receivables, make deposits, issue credit memos, and record receipt of
payments. Which of the following audit procedures would be most effective in
discovering fraud in this scenario?
A. A perform a detailed review of debits to sales discounts, sales returns and
allowances, or other debit accounts, excluding cash posted to the cash
receipt journal.
B. Take a sample of bank deposits and trace the detail in cash bank deposit
back deposit back to the entry in the cash receipts journal.
C. Send negative confirmations to all outstanding accounts receivable
customers.
D. Send positive confirmations to a random selection of customers.
Answer A is incorrect because bank deposits will agree with the entries in the cash
receipts journal. The theft of cash is concealed by debiting a non-cash account
when recording cash collections
43. Which of the following most likely would give the most assurance concerning
the valuation and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping
documents.
B. Inquiring about receivables pledged under load agreements.
C. Assessing the allowance for bad debts for reasonableness.
D. Comparing receivable turnover ratios with industry statistics for
reasonableness.
Valuation and allocation is an assertion that assets, liabilities, and equity interests
are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
Management asserts that accounts receivable are stated at net realizable value
(gross accounts receivable minus allowance for bad debts, allowance for sales
returns, allowance for sales discounts, etc.). Hence, assessing the reasonable-
valuation of the accounts receivable.
An auditor who seeks assurance that all tuition revenue has been recorded should
perform substantive procedures such as test of details and substantive analytical
procedures. For example, the auditor may obtain analytical evidence by
comparing business office revenue records with the registrar’s office records of
students enrolled.
Answers A and B are incorrect because confirming tuition payment with the
students and preparing year-end bank reconciliation will not detect unrecorded
stolen cash receipts.
46. The process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information
about a particular item affecting Assertions made by management in the
financial statements is called
A. Re-performance
B. External confirmation
C. Inquiry
D. Recalculation
PSA 505 states that external confirmation does not normally provide all the
necessary audit evidence relating to the valuation assertion since it is not
practicable to ask the debtor to confirm detailed information relating to its ability
to pay the account.
Answer B is incorrect because the positive form is used when the combined
assessed level of inherent and control risk is high.
Answer C is incorrect because the negative form is used when a large number of
small balances is involved.
Answer D is incorrect because the type of confirmation request does not depend
on nature of the balances.
49. The following statements relate to the use of negative confirmation request.
Which is true?
Answers A and D are incorrect because positive confirmation request are more
effective when detection risk is low and when understatements of account
balances are suspected.
51. Which of the following statements would an auditor most likely add to the
negative form of confirmations of accounts receivable to encourage timely
consideration by the
recipient?
A. “This is not a request for payment; remittances should not be sent to our
auditors in the enclosed envelope”
B. “If you do not report any differences within 15 days, it will be assumed
that this statement is correct.”
C. “The following invoices have been selected for confirmation and represent
amounts that are overdue
D. “Report any differences on the enclosed statement directly to our auditors;
no reply is necessary if this amount
agrees with your records.”
Answer A and D are incorrect because the statements do not encourage a timely
response.
Answer C is incorrect because stating that the amount is overdue could discourage
a customer from responding promptly.
Answer B is incorrect because written off accounts are no longer open accounts.
When a response indicates that the balance was already paid, the auditor should
trace the customer’s remittance to verify that the payment was actually received
by the client.
54. A company was computerized sales and cash receipts journal. The computer
programs for these journals have been properly debugged. The auditor’s
examination of the accounting records revealed that the total of the accounts
receivable subsidiary accounts differs materially from the accounts receivable
control account. This discrepancy could indicate
Based on approved credit memoranda, sales returns and allowance are recorded
by crediting accounts receivable. The discrepancy between the subsidiary ledger
and the control account could be due to the recording of unauthorized credit
memoranda, assuming sales and cash receipts have been properly recorded.
55. To reduce the risk associated with accepting fax responses to request for
confirmations of accounts receivable, an
auditor most likely would
PSA 505 (External Confirmations) states that the auditor should consider
validating the source of replies received in electronic format (for example, fax or
electronic mail). The auditor may verify the source and contents of a response in a
telephone call to the purported sender. Moreover, the auditor should consider
requesting the purported sender to mail the original confirmation directly to the
auditor.
Answer A is incorrect because faces may not be signed. IN addition, PSA 500
(Audit evidence) states that an audit rarely involves the authentication of
documentation, nor is the auditor trained as or expected to be an expert in such
authentication.
57. For accounts receivable, negative confirmation is less effective than positive
confirmation because
58. Which of the following procedures would an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests?
A. Inspect the shipping records documenting the merchandise sold to the
debtors.
B. Review the cash receipts journal for the month prior to year-end.
C. Intensify the study of internal control concerning the revenue cycle.
D. Increase the assessed level of detection risk for the existence assertion.
Answer D is incorrect because the auditor assesses inherent and control risks, not
detection risk. The level of detection risk acceptable to the auditor depends on the
combined assessed level of inherent and control risks.
59. Which of the following is the most effective procedure for determining
collectability of an account receivable?
A. Confirmation of the account
B. Review of the subsequent cash collections
C. Review of authorization of credit sales to the customer and the previous
history of collections.
D. Examination of the related sales invoice(s).
60. An auditor reconciles the total of the account receivable subsidiary ledger to
the general ledger control account as of December 31. By this procedure, the
auditor is most likely to learn which of the following?
61. Once a CPA has determined that accounts receivable have increased because
of slow collections in a tight money environment, the CPA is likely to
62. All of the following are examples of substantive procedures to verify the
valuation of net accounts receivables, except the
A. Comparison of the allowance for bad debts with past records.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Inspection of accounts for current versus noncurrent status in the statement
of financial position.
The inspection of accounts for current versus noncurrent status tests
management's assertion about presentation and disclosure, not valuation.
Answers A, B, and C are incorrect because comparison for allowance for bad
debts with past records, re-computation of the allowance for bad debts, and
inspection of the aging schedule and credit records of past due accounts are tests
of management's valuation assertion about the account's balance.
63. The most likely reason for the auditor to be concerned about the valuation of
cash is that A. The proof of cash cannot be reconciled.
64. When counting cash on hand, the auditor must exercise control over all cash
and other negotiable assets to prevent
A. Theft
B. Deposits in transit
C. Substitution
D. Irregular endorsement
There should be simultaneous verification of cash and other negotiable assets to
prevent the likelihood of converting negotiable assets to cash to conceal a cash
shortage.
Answers A and D are incorrect because simultaneous verification does not directly
prevent theft or irregular endorsement except during the time the auditor performs
the verification procedures.
Answer B is incorrect because deposits in transit (collections recorded in the
client's book but are not yet credited by the bank) normally arise from cash
transactions.
65. The best evidence regarding year-end bank balances is documented in the A.
Bank reconciliations
B. Interbank transfer schedule
C. Cash in bank lead schedule
D. Cut-off bank statement
A bank reconciliation statement is a schedule that explains any differences
between the bank statement balance and the cash balance per the company's
records. The adjusted cash balance is the amount of cash reported in the financial
statements. Thus, a bank reconciliation statement provides direct evidence of the
year-end bank balances.
Answer B is incorrect because an interbank transfer schedule shows only the
transfer of funds between banks.
Answer C is incorrect because a cash in bank lead schedule shows the components
of the amount of cash included in the working trial balance.
Answer D is incorrect because a cutoff bank statements reports cash transactions
for a short period after the balance sheet date and is used by the auditor to verify
year-end reconciling items such as deposits in transit and outstanding checks.
66. Which of the following sets of information does an auditor usually confirm on
one form?
A. Accounts receivable and accrued interest receivable
B. Cash in bank and collateral for loans
C. Accounts payable and purchase commitments
D. Inventory on consignment and contingent liabilities.
The standard bank confirmation form is used by the auditors to confirm the cash
in bank balance and request loan information such as balance, maturity date,
interest rate, and description of collateral.
Answers A, C, and D are incorrect because accounts receivable and accrued
interest receivable, accounts payable and purchase commitments, and inventory
on consignments and contingent liabilities are pairs of information that are not
usually confirmed on one form.
67. An auditor ordinarily sends a standard confirmation request to all banks with
which the client has done business during the year under audit, regardless of
the year-end balance. The purpose of this procedure is to
A. Detect kiting activities that may otherwise not be discovered.
B. Provide the data necessary to prepare a proof of cash.
C. Request that a cutoff bank statement and related checks be sent to the
auditor.
D. Seek information about other deposit and loan amounts that come to the
attention of the institution in the process of completing the confirmation.
The bank confirmation form requests information about cash in bank and direct
liabilities of the entity to the bank.
Answer A is incorrect because kiting can be detected by preparing an interbank
transfer schedule for a few days before and after the balance sheet date to
determine whether fund transfer between banks have been recorded in the proper
periods.
Answer B is incorrect because the cash records and the monthend bank statement
provide data for the preparation of the proof of cash.
Answer C is incorrect because a separate letter should be prepared by the client to
request for a cutoff bank statement.
68. Which of the following items is not requested on a standard bank account
balance confirmation form? A. The principal paid on a direct liability
B. Maturity date of a direct liability
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.
The bank confirmation form requests information about account number and
description, balance, maturity date, interest rate, date through which interest is
paid, and description of collateral. The auditor is not concerned with the amount
paid on a direct liability.
69. Which of the following is not considered an objective of the audit of cash?
A. Cash is stated at its realizable value.
B. Compensating cash balances are reported as other current assets.
C. Cash is properly classified, described, and disclosed in the financial
statements, including notes, in accordance with the applicable financial
reporting framework.
D. The client has ownership rights in the reported cash.
Compensating balance are classified according to the appropriate classification of
the related borrowing, either current or noncurrent.
72. Purchase cutoff procedures test the completeness assertion. An entity should
include goods in inventory if it
A. Has paid for it
B. Holds legal title to the goods
C. Has physical possession of the goods
D. Has sold the goods
A purchase cutoff test is a substantive procedure to obtain audit evidence about
whether purchases are recorded in the appropriate period. An entity should include
goods in the inventory and recognize a liability in the period in which acquired
title to the goods.
Answer A is incorrect because goods purchased on account need not be paid for
by the cutoff date.
Answer C is incorrect because title to the goods can pass before actual delivery to
the buyer, for example, in transit goods purchased under FOB shipping point term.
Answer D is incorrect because goods already sold should be excluded from
inventory.
73. In auditing accounts payable, an auditor's procedures will most likely focus
primarily on management's assertion on
A. Existence
B. Valuation and allocation
C. Completeness
D. Presentation and disclosure
The primary audit risk for liabilities, including accounts payable, is the possible
understatement of the account. Thus, in auditing accounts payable, the auditor will
most likely focus on the completeness assertion.
Answer A is incorrect because the risk that reported liabilities do not exist is
generally lower than the risk that the balance is understated.
Answer B is incorrect because the risk that accounts payable are not reported at
appropriate amounts is less than the risk that the balance is understated.
Answer D is incorrect because the risk that the accounts payable are not properly
presented and disclosed in the financial statement is not as high as the risk that
they are materially understated.
74. Which of the following primary audit test to determine if accounts payable are
valued properly?
A. Vouching accounts payable in supporting documentation.
B. An analytical procedure.
C. Verification that the accounts payable are recorded as current liability in
the balance sheet.
D. Examination of cash disbursements subsequent to year-end.
To determine if accounts payable are properly valued, the auditor will vouch a
sample of recorded accounts payable to the supporting documentation of purchase
- namely, purchase order, receiving order, and vendor invoice.
Answer B is incorrect because analytical procedures are performed to provide an
overall review of the accounts, not to test the valuation of specific accounts.
Answer C is incorrect because determining whether accounts payable are
classified as current liability addresses the presentation and disclosure assertion
rather than valuation.
Answer D is incorrect because examining subsequent cash disbursements may
reveal unrecorded liabilities but does not addresses the valuation of those
liabilities that are recorded on the company's books.
75. Which of the following procedures is least likely to be performed before the
balance sheet date? A. Search for unrecorded liabilities
B. Confirmation of accounts receivable
C. Attendance at the physical inventory count
D. Testing internal control over cash
The auditor searches for unrecorded liabilities by reviewing cash disbursements
made after year-end to determine if they pertain to unrecorded liabilities as of the
client's balance sheet date.
Answer B is incorrect because, depending on the combined assessed level of
inherent and control risks for receivables, confirmation may be made before, on,
or after the balance sheet date.
Answer C is incorrect because if the internal control over the inventory is
effective, attendance at the physical inventory count usually can be made during
or at the end of the period under audit.
Answer D is incorrect because the understanding of internal control is usually
obtained prior to the balance sheet date as part of the auditor's risk assessment
procedures.
76. An auditor performs a test to determine whether all merchandise for which the
client was billed was received. The
population for this test consists of all
A. Receiving reports
B. Vendor's invoices
C. Cancelled checks
D. Merchandise received
A supplier bills the buyer through an invoice that describes the item(s), amount
due, and payment terms. To determine whether all merchandise for which the
client was billed was received, the auditor's should trace vendor's invoices to the
related receiving reports.
Answer A is incorrect because tracing receiving reports to vendor's invoices
provides audit evidence about whether all goods received were billed by suppliers.
Answer C is incorrect because trading canceled checks to receiving reports
assures that goods paid for - not goods billed - were received.
Answer D is incorrect because if the direction of testing is from goods received,
merchandise received but not billed will not be detected.
77. Which of the following is a substantive procedure than an auditor would most
likely perform to verify the existence and valuation of recorded accounts
payable?
C. Receiving the client's mail, unopened, for a reasonable period of time after
year-end to search for unrecorded vendor's invoices.
D. Payees' checks drawn in the month subsequent to the balance sheet date.
The completeness assertion for the account payable addresses whether all amounts
due to vendors that should have been recorded have been recorded. If
confirmation has to be used to verify this assertion, the population must be all
vendors with whom the entity has previously done business. This means that
confirmation requests will be sent not only to vendors with large year-end
balances, but also to those with small or zero balances as long as the entity has
made purchases of their goods during the year under audit.
Answers A and C are incorrect because, in testing the completeness assertion, the
auditor is concerned with accounts payable that have not recognized or invoices
that have not been filed.
Answer D is incorrect because the population for the confirmation process should
consist of vendor's accounts regardless of the balance -large, small, or zero- at the
confirmation date.
79. Unrecorded liabilities are most likely to be found during the review of which
of the following documents?
A. Bills of lading
B. Unpaid bills
D. Shipping records
The auditor's review of unpaid bills may reveal payables that should have been
recorded or accrued but have not been recognized as liabilities as of the balance
sheet date.
Answers A, C, and D are incorrect because these records and documents relate to
the entities sales, not liabilities.
80. Which of the following audit procedures least likely to detect an unrecorded
liability?
81. When title to merchandise in transit has passed to the audit client, the auditor
engaged in the performance of a purchase cutoff will encounter the greatest
difficulty in gaining assurance with respect to the
A. Quality
B. Quantity
C. Price
D. Terms
The quality of the merchandise can be determined through physical inspection of
the goods already received. Thus, the auditor will encounter the greatest difficulty
in gaining assurance about quality with respect to goods included in inventory but
have not yet arrived.
Answers B, C, and D are incorrect because supporting purchase documentation
will provide information to the auditor about the quantity, price, and terms of the
purchase.
82. Which of the following audit procedures is best for identifying unrecorded
trade accounts payable?
83. In a payables application, checks are authorized and paid based on matching
purchase orders, receiving reports, and vendor invoices. Partial payments are
common. An appropriate audit procedure for verifying that a purchase order
has not been paid twice is to sort the
A. Check register file by purchase order, compute total amounts paid by
purchase order, compare total amounts paid with purchase order amounts,
and investigate any discrepancies between total amounts paid and
purchase order amounts.
B. Receiving reports file by vendor invoice amounts and investigate any
discrepancies between the total amounts received and vendor invoice
amounts.
C. Vendor invoice file by purchase order, compute total amounts paid by
purchase order, compare total amounts invoiced with purchase order
amounts, and investigate any discrepancies between the total amounts
invoiced with purchase order amounts.
D. Receiving report filed by purchase order, compute total amounts received
by purchase order, compare total amounts received with purchase order
amounts, and investigate any discrepancies between the total amounts
received and purchase order amounts.
Sorting the check register file by purchase order, computing the total amounts
paid by purchase order comparing the total amounts paid with purchase order
amounts, and investigating discrepancies between the total amounts paid and
purchase order amounts will provide reasonable assurance to the auditor that a
purchase order has not been paid twice.
Answers B, C, and D are incorrect because the audit procedures described do not
include examination of the check register file. Thus, they do not provide assurance
that no overpayments have been made by the entity.
87. Which of the following procedures would an auditor least likely to perform
before the balance sheet date?
A. Confirmation of accounts payable
B. Identification of related parties
C. Assessment of control risk
D. Attendance at the physical inventory count
PRODUCTION CYCLE
88. Which of the following statements concerning the auditor’s attendance at the
physical inventory count is incorrect?
A. A financial statement audit should always include attendance at the
physical inventory count.
B. If the auditor is unable to attend the physical inventory count on the date
planned due to unforeseen circumstances, he/she should take or observe
some physical counts on an alternative date, and when necessary, perform
audit procedures on intervening transactions.
C. Where attendance is impracticable, due to factors such as the nature and
location of inventory, the auditor should consider whether alternative
procedures provide sufficient appropriate audit evidence of existence and
condition to conclude that reference to a scope limitation need not be
made.
D. Inventories that are under the custody and control of third parties (for
example, inventories located in public warehouses)may be verified by
obtaining direct confirmation from the custodians, provided that,
depending on the materiality of the amount involved, additional
procedures should be applied as deemed necessary.
PSA 501 (Audit Evidence – Specific Considerations for Selected Items) states,
“When inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by
attendance at physical inventory counting unless impracticable.”
89. PSA 501 states that in planning attendance at the physical inventory count, the
auditor considers the risks of material misstatement related to inventory as
well as the nature of the internal control related to inventory. Which of the
following would the auditor also consider?
I. Whether adequate procedures are expected to be established and
proper instructions issued for the physical inventory count.
II. The timing of the count.
III. The locations at which inventories are held.
IV. Whether an expert’s assistance is to be sought.
A. I and IV only
B. II and III only
C. II, III, and IV only
D. I, II, III, and IV
90. According to PSA 501, when inventories are under the custody and control of
a third party, the auditor would ordinarily obtain direct confirmation from the
third party as to the quantities and condition of inventories held on behalf of
the entity. Which of the following would the auditor also
consider?
I. The integrity and independence of the third party.
II. Observing, or arranging for another auditor to observe, the physical
inventory count.
III. Obtaining another auditor’s report on the adequacy of the third party’s
internal control for ensuring that inventories are correctly counted and
adequately safeguarded.
IV. Inspecting documentation regarding inventories held by third parties
(for example, warehouse receipts) or obtaining confirmation from other
parties when such inventories have been pledges as collateral.
Inventory owned by the client need not be on hand at the time of the count. For
example, some items purchased under FOB shipping point term may still be in
transit on the date of the count. Also, some goods may have been shipped to
customer on consignment basis.
Answers A and B are incorrect because the auditor should verify management’s
valuation and allocation assertion.
92. An auditor selected items for test counts while observing a client’s physical
inventory. The auditor then traced the test counts to the client’s inventory
listing. This procedure most likely obtained evidence concerning
management’s assertion
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation and allocation
Answer A is incorrect because the direction of testing must be from the client’s
inventory listing to the inventory tags to obtain evidence that items included in
the listing have been counted, that is, they exist.
Answer B is incorrect because tracing the test counts to the inventory listing does
not provide evidence that the inventory is owned by the client.
A. I and II only
B. III only
C. I and III only
D. I, II, and III
A. I only
B. II only
C. Both I and II
D. Neither I nor II
3. It will be appropriate to audit all the items that make up a class of transactions
or account balance (100% examination), except
• High value or key items – items that are of high value or exhibit some
other characteristics like those that are unusual, suspicious, risk-prone,
etc.
• All items over a certain amount – items whose values exceed a certain
amount so as to verify a large proportion of the total amount of a class
of transactions or an account balance.
• Items to obtain information – items that provide specific information
like the nature of the entity, the nature of transactions, and internal
control.
5. Audit sampling involves the
A. Selection of all items mover a certain amount.
B. Application of audit procedures to less than 100% of items within a class
of transactions or an account balance such that all items have a chance of
selection.
C. Application of audit procedures to all items over a certain amount and
those that are unusual or have a history of error.
As defined in PSA 530 (Audit Sampling), audit sampling involves the
application of audit procedures to less than 100% or items within a population
of audit relevance such that all sampling units have a chance of selection in
order to provide the auditor with a reasonable basis on which to draw
conclusions about the entire population.
Answers A and D are incorrect because they involve selection of specific items
for testing to gather audit evidence.
Answer C is incorrect because it involves 100% examination.
6. Population, as defined in PSA 530 (Audit Sampling), means the entire set of
data from which a sample is selected and about which the auditor wishes to
draw conclusions. It is important for the auditor to ensure that the population
is
I. Appropriate to objective of the audit procedure.
II. Complete.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The auditor should ensure that the population is appropriate to the objective of
the audit procedure, which includes consideration of the direction of the test to
be applied. For example, the appropriate population to test for overstatement
of accounts payable will be accounts payable listing. However, of the auditor’s
objective is to test for understatement of accounts payable, the appropriate
population is not the accounts payable listing but the subsequent
disbursements, unpaid invoices, vendors’ statements, or other audit evidence
that will satisfy the objective of the test.
It is also important for the auditor to ensure that the population is complete.
For example, if the sample is to be drawn from the vouchers file, the auditor
should be satisfied that all vouchers have, in fact, been filed.
7. The two general approaches to audit sampling are: A. Stratification and value
weighted.
B. Random and nonrandom.
C. Statistical and nonstatistical.
D. Precision and reliability.
The two general approaches to audit sampling are statistical and
nonstatistical.
A. statistical sampling plan should have the following characteristics:
8. The principal methods of selecting samples are the use of I. Random number
tables or CAATs. II. Systematic selection.
III. Haphazard selection.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
According to PSA 530, the principal methods of selecting samples are as
follows:
10. The likelihood of assessing control risk too high is the risk that the sample
selected to test controls
A. Does not support the tolerable error for some or all of management’s
assertions.
B. Contains proportionately fewer deviations form prescribed internal
controls than exist in the balance or class as a whole.
C. Does not support the auditor’s planned assessed level of control risk when
the true operating effectiveness of internal control justifies such an
assessment.
D. Contains misstatements that could be material to the financial statements
when aggregated with misstatements in other account balances or
transactions classes.
As defined in the standard, sampling risk arises from the possibility that the
auditor’s conclusion based on a sample may be different from the conclusion
reached if the entire population were subjected to same audit procedure. It
arises from the fact that a sample may not be representative of the population
from which it was drawn.
1) The risk of incorrect rejection is the risk that a sample supports the
conclusion that the account balance is materially misstated when,
unknown to the auditor, the account balance is not materially misstated
(i.e., it is fairly stated).
2) The risk of incorrect acceptance is the risk that a sample supports the
conclusion that the account balance is not materially misstated (i.e., it
is fairly stated) when, unknown to the auditor, the account balance is
materially misstated.
Answers A and B are incorrect because assessing control too high or too low
related to test of controls.
Answer C is incorrect because the risk of incorrect acceptance is the risk that
the auditor will conclude based on a sample that the account balance is not
materially misstated when, in fact, it is materially misstated.
12. The risk of incorrect acceptance and the likelihood of assessing control risk
too low relate to the A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Tolerable misstatement.
D. Preliminary estimates of materiality levels.
If an auditor erroneously accepts an account balance a fairly stated, it is
unlikely that additional audit procedures will be performed. Thus, the
probability that the erroneous conclusion will be discovered is minimal,
thereby decreasing the effectiveness of the audit.
An auditor’s rejection of a fairly stated account balance is most likely to result
in performing extended substantive testing that will ultimately lead to the
acceptance of the balance. Hence, the risk of incorrect rejection affects the
efficiency of the audit.
Assessing control risk too low leads to an unjustified reduction in substantive
testing which, in turn, results in obtaining insufficient audit evidence, thereby
decreasing the effectiveness of the audit. Conversely, assessing control risk
too high results in an unjustified increase in substantive testing and thus
affecting the efficiency of the audit.
Answer B is incorrect because the risk of incorrect acceptance and the
likelihood of assessing control risk too low both relate to audit effectiveness,
not audit efficiency. As indicated above, audit efficiency is affected by the risk
of incorrect rejection and the likelihood of assessing control risk too high.
Answers C and D are incorrect because the tolerable error and preliminary
estimates of materiality levels are considered when the auditor plans a sample
for substantive testing. Moreover, the likelihood of assessing control risk too
low is an aspect of sampling risk in performing tests of controls.
16. Which of the following methods is most appropriate when performing tests of
controls?
A. Stratified random sampling
B. Unrestricted random sampling with replacement
C. Variable sampling
D. Attribute sampling
17. In the audit of inventory, attribute sampling may be applied to estimate the
A. Average price of inventory items
B.
Physical quantity of inventory items
C. Percentage of slow-moving inventory items
D. Peso value of inventory
18. The risk that the assessed level of control risk based on the sample is less
than the true operating effectiveness of
the control policy or procedure is the risk of A. Assessing
control risk too low.
B. Assessing control risk too high.
C. Incorrect acceptance.
D. Incorrect rejection.
22. Which of the following is true if certain forms are not consecutively
numbered?
A. Systematic sampling may be appropriate.
B. Selection of a random sample probably is not possible.
C. Random number tables cannot be used.
D. Stratified sampling should be used.
C.
23. In examining cash disbursements, an auditor plans to choose a sample using
systematic selection with a random start. The primary advantage of this
selection technique is that population items
A. May occur more than once in the sample.
B. May occur in a systematic pattern, thus making the sample more
representative.
That are indicative of fraud will be included in the sample.
D. Do not have to be prenumbered in order for the auditor to use the
technique.
25. Given random selection, the same sample size, and the same tolerable
deviation rate for the testing of two unequal populations, the risk of assessing
control risk too low for the larger population is
A. Higher than the risk of assessing control risk too low for the smaller
population.
B. Lower than the risk of assessing control risk too low for the smaller
population.
C. The same as the risk of assessing control risk too low for the smaller
population.
D. Indeterminable relative to the risk of assessing control risk too low for the
smaller population.
26. If the size of the sample to be used in a particular test of attributes has not
been determined by utilizing statistical concepts, but the sample has been
randomly chosen
A. The auditor will have to evaluate the results by reference to the principles
of discovery sampling. B. May not use statistical evaluation.
C. The auditor has committed a nonsampling error.
D. No inferences can be drawn from the sample.
28. Which of the following statements best describes the concept of sampling
risk?
A. A randomly chosen sample may not be representative of the population as
a whole on the characteristic of interest.
B. The documents related to the chosen sample may not be available for
inspection.
C. An auditor may fail to recognize errors in the documents examined for the
chosen sample/
An auditor may select audit procedures that are not appropriate to achieve
the specific objective.
According to the standard, sampling risk arises from the possibility that the
auditor’s conclusion based on a sample may be different from the conclusion
reached if the entire population were subjected to the same audit procedures.
It is the risk that, unknown to the auditor, the sample selected is not
representative of the population.
Answers B, C, and D are incorrect because they all relate to nonsampling risk,
that is, the risk that the auditor will reach an incorrect conclusion even if
100% of the population were examined.
29. In assessing sampling risk, the risk of incorrect rejection and the risk of
assessing control risk too high relate to the A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Audit quality controls.
D. Selection of the sample.
Both the risk of incorrect rejection and the risk of assessing control risk too
high will typically lead to the performance of unnecessary audit procedures.
Thus, these risks relate to the efficiency of the audit.
Answer A is incorrect because the risk of incorrect acceptance and the risk of
assessing control risk too low both relate to the effectiveness of the audit.
Answer C is incorrect because the standards on quality control do not
specifically mention any of these risks.
E.
Answer D is incorrect because these risks do not directly relate to actual
selection of the sample.
32. When performing a test of a control with respect to control over cash receipts,
an auditor may use a systematic sampling technique, with a start at any
randomly selected item. The biggest disadvantage of this type of sampling is
that the items in the population
A. Must be systematically replaced in the population after sampling.
B. Must be recorded in a systematic pattern before the sample can be drawn.
C. May occur in a systematic pattern, thus destroying the sample randomness.
D. May systematically occur more than once in the sample.
PSA 530 states that when using systematic selection, the auditor would need
to determine that sampling units within the population are not structured in
such a way that the sampling interval corresponds with a particular pattern in
the population.
Answer A is incorrect because items need not be replaced in the population.
Answer B is incorrect because systematic sampling is a selection method and
does not relate to the manner in which items in the population are recorded.
Moreover, the occurrence of a systematic pattern in the population destroys
the sample randomness.
Answer D is incorrect because there is no chance that the items will
systematically occur more than once in the sample since systematic selection
involves selecting every nth item from the population.
33. For which of the following audit tests would an auditor most likely use attribute
sampling?
A. Selecting accounts receivable for confirmation of account balances.
B. Examining invoices in support of the valuation of property, plant, and equipment
additions.
C. Making an independent estimate of the amount of FIFO inventory.
D. Inspecting employee time cards for proper approval by supervisors.
Attribute sampling is designed to test the rate of deviation from a prescribed control
procedure.
Answers A, B, and C are incorrect because they relate more directly to
variables sampling which is designed to test whether an account balance is
materially misstated.
34. Which of the following sampling methods would be used to estimate a numerical
measurement of a population, such as a peso value? A. Variable sampling
B. Attribute sampling
C. Random-number sampling
D. Stop-or-go sampling
A. variable sampling plan is designed to test whether an account balance is materially
misstated and therefore addresses numerical measurements such as a peso value.
Answer B is incorrect because attribute sampling deals with deviation rates, not numerical
measurements.
Answer C is incorrect because random-number sampling is a selection method
and may be used with either an attribute or a variable sampling plan.
Answer D is incorrect because stop-or-go sampling (also called sequential sampling) is
a form of attribute sampling.
In stop-or-go sampling, the sample is selected in several steps (i.e., not only a
single sample is tested). For each step, the auditor decided whether to stop the
test or to proceed to the next step.
35. Which of the following combinations results in a decrease in sample size in an attribute
sample?
Allowable Risk
Of Assessing
Control Risk Tolerable Expected Population
Too Low Deviation Rate Deviation Rate A. Increase
Increase Increase
B. Decrease Increase Decrease
C. Increase Increase Decrease
D. Increase Decrease Increase
To determine the sample size for tests of controls, the auditors considers the following
factors:
Factors Conditions Leading to
Smaller Larger
Sample Size Sample Size
36. In determining the number of documents to select for a test to obtain assurance that all sales
returns have been properly authorized, an auditor should consider the tolerable rate of
deviation from the control activity. The auditor should also consider the
37. Which of the following factors is usually not considered in determining the sample size for a
test of controls?
A. Expected population deviation rate
B. Risk of assessing control risk too low
C. Tolerable deviation rate
D. Population size, when the population is large
A change in the number of sampling units in the population has a negligible
effect on the required sample size when the population is large. Therefore,
population size is often not considered in determining the sample size unless it
is small.
Answers A, B, and C are incorrect because the risk of assessing control risk
too low, the tolerable deviation rate, and the expected deviation rate are
considered in determining the sample size for a test of controls.
39. In planning a statistical sample for a test of controls, an auditor increased the
expected population deviation rate (EDR) from the prior year’s rate because of
the results of the prior year’s tests of controls and the overall control
environment. The auditor most likely would then increase the planned
A. Risk of assessing control risk too low.
B. Sample size.
C. Allowance for sampling risk.
D. Tolerable deviation rate.
The EDR directly affects the sample size – that is, as the EDR increases, the
sample size increases. An increase in the EDR increases the degree of
assurance to be provided by the sample and therefore increases the sample
size.
Answer A is incorrect because the risk of assessing control risk too low is
determined based on the auditor’s judgment and does not necessarily increase
with the EDR.
Answer C is incorrect because the allowance for sampling risk is the
difference between the maximum deviation rate (also called upper precision
limit) and the sample deviation rate.
Answer D is incorrect because the tolerable deviation rate is determined based
on the auditor’s judgment. It is a function of the planned assessed level of
control risk and the level of assurance the evidence is expected to provide. It
does not necessarily increase with the EDR.
40. Which of the following factors does an auditor usually need to consider in
planning a particular audit sample for a test of controls?
A. Acceptable level of risk of assessing control risk too low.
B. Tolerable misstatement.
C. Number of sampling units in the population.
D. Total peso amount of the items to be sampled.
To determine the sample size for a test controls, the auditor considers the risk
of assessing control risk too low, the tolerable deviation rate, and the expected
population deviation rate.
Answer B is incorrect because the auditor considers the tolerable misstatement
in determining the sample size for substantive tests of details.
Answer C is incorrect because the number of units in the population has a
negligible effect on the sample size unless it is small.
Answer D is incorrect because the total peso amount of the items to be
sampled is irrelevant to the objective of a test of controls, that is, to determine
the operating effectiveness of prescribed controls.
41. Which of the following statements is true concerning statistical sampling in tests of controls?
A. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases.
B. As the population size doubles, the sample size also should double.
C. The expected population deviation rate has little or no effect on determining sample
size except for very small populations.
D. The population size has little or no effect on determining sample size except for very
small populations.
A change in the size of the population has a negligible effect on the required
sample size when the population is large.
Answer A is incorrect because the expected population deviation rate directly
affects the sample size. A smaller sample size should be selected as the
expected population deviation rate decreases.
Answer B is incorrect because, as previously stated, a change in the population
size has a negligible effect on the required sample size when the population is
large.
Answer C is incorrect because, as indicated in answer A, the expected
population deviation rate directly affects the sample size.
42. Which of the following statements is correct concerning statistical sampling in tests of
controls?
A. In determining the tolerable rate, an auditor considers detection risk and the sample
size.
B. Deviations from specific control activities at a given rate ordinarily result in
misstatements at a lower rate.
C. As the population size increases, the sample size should increase proportionately.
D. There is an inverse relationship between the expected population deviation rate and
the sample size.
Deviations from a specific control activity increase the risk of, but do not
always result in, misstatement. Hence, deviations from a specific control
activity at a given rate ordinarily result in misstatement at a lower rate.
Answer A is incorrect because the tolerable rate is a function of the planned
assessed level of control risk and the assurance sought from the audit
evidence.
Answer C is incorrect because as the population size increases, the sample size
increases at a decreasing rate. Thus, a large population size will have little or
no effect on the sample size.
Answer D is incorrect because the expected deviation rate is directly related to the
required sample size.
43. An auditor plans to examine a sample of 100 purchase orders for proper
approvals as prescribed by the client’s internal control. One of the purchase
orders in the chosen sample of 100 cannot be found, and the auditor is unable
to use alternative procedures to test whether the purchase order was properly
approved. The auditor should
A. Choose another purchase order to replace the missing purchase order in the sample.
B. Select a completely new set of 100 purchase orders.
C. Consider this test of controls invalid and proceed with substantive tests because internal
control is ineffective.
D. Treat the missing purchase order as a deviation for the purpose of evaluating the sample.
The auditor’s failure to apply the planned audit procedures or to perform
alternative procedures to selected items requires consideration of the reasons
for the limitation. Moreover, the auditor considers such items as deviations
from the prescribed control procedures for the purpose of evaluating the
sample.
Answer A is incorrect because choosing another purchase order is appropriate
only if the selected item has been found to be properly voided or canceled.
Answer B is incorrect because selecting a completely new set of 100 purchase
orders is unnecessary.
Answer C is incorrect because by treating the missing purchase order as a
deviation, the sampling plan could still be completed.
44. An attribute sampling plan may be used to test the effectiveness of controls.
The auditor’s evaluation of the sampling results ordinarily leads to a
conclusion concerning
A. The relation of the population deviation rate to the tolerable rate.
B. Monetary precision exceeding a certain predetermined amount.
C. The population value not being misstated by more than a predetermined amount.
D. Population characteristics occurring at least once in the population.
In an attribute sampling plan, the auditor’s concern is the occurrence rate of
deviations in the population. This statistical sampling plan enables the auditor
to make an estimate of the occurrence rate and to arrive at a conclusion
concerning the relation of the population deviation to the tolerable deviation
rate.
Answers B and C are incorrect because variables sampling is concerned with peso values.
Answer D is incorrect because determining if a population characteristic
occurs at least once in the population will involve examining items until one is
detected.
46. The diagram below depicts the auditor’s estimated maximum deviation rate
compared with the tolerable rate, and also depicts the true population
deviation rate compared with the tolerable rate.
Rate I III
Maximum Deviation
Rate Exceeds
Tolerable Rate II IV
Maximum Deviation
Rate is Less Than
Tolerable Rate
As a result of testing internal controls, the auditor assesses control risk too
high and thereby increases substantive testing. This is illustrated by situation
A. I
B. II
C. III
D. IV
The auditor would assess control risk too high if, based on sample results, the
maximum deviation rate exceeds the tolerable rate, but the true population
deviation rate is less than the tolerable deviation rate. Moreover, assessing
control risk too high concerns the efficiency, not the effectiveness, of the audit
because it typically leads to the performance of additional audit procedures to
ultimately arrive at the correct conclusion.
Answers A and D are incorrect because the auditor will properly assess control
risk at a high level in situation I and at a low level in situation IV.
Answer B is incorrect because the auditor will assess control risk too low in situation
II.
47. In evaluating an attribute sample, the estimated range that is expected to contain
the population characteristic is the
A. Confidence level
B. Expected deviation rate
C. Precision
D. Upper deviation limit
Precision (also called confidence level) is the range within which the estimate
of the population characteristic is expected to fail. It is an interval around the
sample statistic that is expected to contain the true population value.
Answer A is incorrect because confidence level refers to the auditor’s measure
of how reliable the sample results should be.
Answer B is incorrect because the expected deviation rate is the rate of
deviation the auditor expects to find in the population.
Answer D is incorrect because the upper deviation limit, as it suggests, is the
upper limit of the precision or confidence interval.
48. Which of the following sample planning factors would influence the sample
size for a substantive test of details for a specific account?
Expected Amount Measure of
of misstatements Tolerable Misstatements
A. Yes Yes
B. No No
C. Yes No
D. No Yes
The auditor considers the following factors in determining the sample size for
substantive tests of details:
Conditions Leading to
Smaller Sample Size Larger Sample Size a. Reliance on Higher
reliance on Lower reliance on internal control internal control internal
control
49. An error that arises from an isolated event that has not recurred other than on
specifically identifiable occasions and is therefore not representative of
similar errors in the population is a/an A. Anomalous error
B. Isolated error
C. Scandalous error
D. Non-recurring error
51. In estimation sampling for variables, which of the following must be known
to estimate the appropriate sample size required to meet the auditor’s needs
in a given situation?
A. The estimated deviation rate in the population.
B. The qualitative aspects of misstatements.
C. The estimated population value.
D. The acceptable level of risk.
When determining the sample size for a substantive test of details, the auditor
should consider the acceptable level of sampling risk.
Answer A is incorrect because the estimated population deviation rate is considered in
attribute sampling.
Answer B is incorrect because the qualitative aspects of misstatements are
considered in the evaluation of the sample results.
Answer C is incorrect because estimation of the population value is the objective of
variables sampling.
53. When planning a sample for s substantive test of details, an auditor should
consider tolerable misstatement for the sample. This consideration should
A. Not be changed during the audit process.
B. Be related to the auditor’s business risk.
C. Be related to preliminary judgments about materiality levels.
D. Not be adjusted for qualitative factors.
The tolerable misstatement is the maximum amount of misstatement that may
exist in an account balance without causing the financial statements to be
materially misstated.
The combined tolerable misstatement for an entire audit should not exceed the
auditor’s preliminary estimate of materiality for the financial statements taken
as a whole.
Answer A is incorrect because, as the audit progresses, the auditor may decide
to change the tolerable misstatement like when he/she discovers the incorrect
planning assumptions were used.
Answer B is incorrect because the auditor’s business risk is irrelevant to the determination of
tolerable misstatement.
Answer D is incorrect because qualitative factors should be considered when
determining the tolerable misstatement for the sample. For example, the
auditor should consider the nature and cause of misstatements and their
impact on other phases of the audit.
54. An auditor may decide to increase the risk of incorrect rejection when
A. The cost and effort of selecting additional sample items are low.
B. Increased reliability from the sample is desired.
C. Many differences (audit value minus recorded value) are expected.
D. Initial sample results do not support the planned level of control risk.
The risk of incorrect rejection is the risk that the sample supports the
conclusion that the recorded account balance is materially misstated, when, in
fact, it is fairly stated. This risk ordinarily result in the performance of
additional audit procedures that will lead the auditor to the proper conclusion.
Thus, the risk of incorrect rejection affects the efficiency, not the effectiveness
of the audit. If the cost and effort of selecting additional items are low, the
auditor may accept a higher risk of incorrect rejection.
56. How would decreases in tolerable misstatement and assessed level of control
risk affect the sample size in a substantive test of details?
Decrease in Decrease in
Tolerable Misstatement Assessed Level
Of Control Risk
A. Increase sample size Increase sample size
B. Increase sample size Decrease sample size
C. Decrease sample size Increase sample size
D. Decrease sample size Decrease sample size
The tolerable misstatement is inversely related to the sample size – that is, as
the tolerable misstatement decreases, the sample size increases. Also, a
decrease in the assessed level of control risk will allow the auditor to accept a
higher level of detection risk and therefore a small sample size for substantive
testing.
57. Which of the following courses of action would an auditor most likely follow
in planning a sample of cash disbursements if the auditor is aware of several
unusually large cash disbursements?
A. Continue to draw new samples until all the unusually large disbursements appear in the
sample.
B. Increase the sample size to reduce the effect of the unusually large disbursements.
C. Stratify the cash disbursements population so that the unusually large disbursements are
selected.
D. Set the tolerable rate of deviation at a lower level than originally planned.
The auditor should stratify the population to ensure that the “unusually large
disbursements” will be tested. Sampling procedures will then be applied to
those smaller disbursements.
Answer A is incorrect because it will be inefficient to continue to draw new
samples to assure inclusion of all unusually large disbursements.
Answer B is incorrect because the auditor will tend to include in his/her test
those disbursements described as “unusually large.”
Answer D is incorrect because the existence of unusually large disbursements
in the population does not affect the tolerable deviation rate in an attribute
sampling application.
58. A number of factors influence the sample size for a substantive test of details
of an account balance. All other factors being equal, which of the following
would lead to a larger sample size?
A. Smaller measure of tolerable misstatement.
B. Smaller expected frequency of errors.
C. Greater reliance on analytical procedures.
D. Greater reliance on internal control.
The tolerable misstatement is inversely related to the sample size – that is, as
the tolerable misstatement decreases, the sample size increases.
Answer B is incorrect because the expected frequency of errors directly affects
the sample size – that is, as the expected frequency of errors decreases, the
sample size also decreases.
Answer C is incorrect because the auditor will select a smaller sample size for
a substantive test of details if greater reliance is to be placed on analytical
procedures directed at the same assertion.
Answer D is incorrect because as the degree of reliance on internal control
increases, the acceptable level of detection also increases. This means that the
auditor may restrict his/her substantive testing by selecting a smaller sample
size.
60. Which of the following sample selection methods is not appropriate when using
statistical sampling?
A. Random selection
B. Systematic selection
C. Monetary unit sampling
D. Haphazard selection
Haphazard selection method involves selection of the sample without
following a structured approach. This technique is not appropriate when using
statistical sampling.
61. Which of the following sample selection methods cannot ordinarily be used in audit
sampling?
A. Value-weighted selection
B. Random selection
C. Block selection
D. Systematic selection
Block selection involves selection of a block(s) of contiguous items from
within the population. In most populations, items in a sequence are expected
to have similar characteristics to each other, but different characteristics from
items elsewhere in the population.
Because audit sampling involves drawing valid conclusions about the whole
population based on the sample, block selection ordinarily cannot be applied
in audit sampling.
62. In systematic selection, the number of sampling units in the population is divided by
the sample size to determine the
A. Sampling interval
B. Pattern that may exist in the population
C. Sampling risk
D. Nonsampling risk
In systematic selection, the number of sampling units in the population is
divided by the sample size to determine the sampling interval. For example,
20 will be the sampling interval in a population of 5,000 sampling units within
which a sample of 250 items will be selected (5,000 / 250). After selecting a
starting point within the sampling interval of 20, the auditor will then select
every 20th item.
63. In audit sampling, ____________ involves dividing the population into discrete
sub-populations which have an identifying characteristic.
A. Value-weighted selection
B. Stratification
C. Random selection
D. Block selection
The auditor may stratify a population by dividing it into discrete sub-
populations which have an identifying characteristic.
Stratification of the population may improve audit efficiency because each
stratum will contain homogeneous items that will allow selection of smaller
sample size without increasing sampling risk.
65. Audit efficiency may be improved when the sampling unit is defined as the
individual monetary units that comprise the
population. This technique is called
A. Stratification
B. Random selection
C. Systematic selection
D. Value-weighted selection
Value-weighted selection identifies the sampling nit as the individual
monetary units that make up the population. Under this method, audit effort
may be directed to the larger value items because they will have a greater
chance of being selected. This can result in smaller sample sizes and may thus
improve audit efficiency.
TRUE OR FALSE
1. Nonsampling risk is the risk that audit tests will not uncover existing
exceptions in a sample.
2. For a given tolerable deviation rate, a larger sample size should be selected as
the expected population deviation rate decreases.
3. The tolerable deviation rate for a test of controls is generally lower than the
expected rate of deviations in the related accounting records.
5. If sample results indicate that the control is operating effectively, but in fact it
is not, control risk will be assessed too high.
8. One of the ways to eliminate nonsampling risk is through the use of attributes
sampling rather than variables sampling.
9. As the amount of misstatements expected in the population approaches
tolerable misstatement, the planned sample size will increase.
10. The auditor’s principal objective when using a sample of test of details of
balances is whether the transactions being
audited are free of misstatements
11. The computed upper deviation rate is the sum of the sample deviation rate and
an appropriate allowance for sampling risk.
12. When selecting a stratified sample, the sample size is determined for each
stratum and selected randomly from the entire unstratified population.
21. The process which requires the calculation of an interval and then selects the
items based on the size of the interval is random sample selection.
22. Correspondence is established between the random number table and the
population by deciding the number of digits to use in the random number table
and their association with the population numbering system.
25. When selecting a three-digit number from a table that is separated into
columns of five digits, it is permissible to use the first three digits, the middle
three digits, or the last three digits.
KEY ANSWERS
1. D 10. C
6. C
2. C 11. D
6. C
3. A 12. A
6. D
4. C 13. B
6. B
5. B 14. B
32. C
15. B 50. B
33. D
16. D 51. D
33. A
17. C 52. A
33. C
18. A 53. C
36. A
19. A 54. A
37. D
20. D 55. B
37. D
21. D 56. B
37. B
22. A 57. C
37. A
23. D 58. A
24. C 41. D
59. C
25. A 42. B
60. D
26. B 43. D
61. C
27. C 44. A
62. A
28. A 45. B
63. B
29. B 46. C
47. C 64. B
30. B
48. A 65. D
31. B
49. A
TRUE OR FALSE
1. True
2. False
3. False
4. True
5. False
6. False
7. True
8. False
9. True
10. False
11. True
12. False
13. True
14. False
15. False
16. True
17. False
18. False
19. True
20. False
21. False
22. True
23. False
24. True
25. True
CHAPTER 9
COMPLETING THE AUDIT AND POST-AUDIT
RESPONSIBILITIES
Analytical Procedures
1. Analytical procedures used in the overall review stage of the audit generally
include:
A. Retesting controls that appeared to be ineffective during the assessment of
control risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from the
prior year.
D. Performing tests of transactions to corroborate management’s financial
statement assertions.
PSA 520 (Analytical Procedures) states, “The auditor shall design and
perform analytical procedures near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial statements
are consistent with the auditor’s understanding of the entity.”
Analytical procedures used in the final review stage of the audit are intended
to corroborate the conclusions formed during the audit of individual
components or elements of financial statements. They assist in arriving at
the overall conclusion as to the reasonableness of the financial statements.
Moreover, analytical procedures may also identify a previously
unrecognized risk of material misstatement.
3. The responsibility for the identification and disclosure of related parties and
transactions with such parties rests with the:
A. Auditor
B. Entity’s management
C. Financial Reporting Standards Council (FRSC)
D. Securities and Exchange Commission (SEC)
5. Which of the following events most likely indicated the existence of related
parties?
A. Making a loan without scheduled terms for payment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.
The following suggest related party transactions:
I. Review prior year’s working papers for names of known related parties.
II. Inquire as to the affiliation of those charged with governance and officers
with other entities.
III. Review minutes of the meetings of shareholders and those charged with
governance.
A. I and II only
B. II and III only
C. I and II only
D. I, II, and III
PSA 550(Related Parties0 requires the auditor to review information provided by
those charged with governance and management identifying the names of known
related parties. Moreover, the auditor is required to perform the following
procedures to determine the completeness of such information:
10. After determining that a related party transaction has, in fact, occurred an
auditor should
A. Obtain an understanding of the business purposes of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to
an arm’s-length transaction.
C. Add a separate paragraph to the auditor’s report to explain transaction.
D. Perform analytical procedures to verify whether similar transactions
occurred, but were not recorded.
After identifying related party transactions, the auditor should obtain sufficient
appropriate audit evidence to determine whether such transactions have been
properly recorded and disclosed. The auditor should become satisfied about their
purpose, nature, extent, and effect. Therefore, the auditor should obtain an
understanding of the business purpose of an identified related party transaction.
Answer B is incorrect because the auditor’s primary concern is to determine
whether a related party transaction has been properly recoded and disclosed, not
whether such transaction was consummated on terms equivalent to an arm’s-
length transaction.
Answer C is incorrect because no modification of the report is necessary if the
related party transaction has been properly recorded and disclosed. However, the
auditor may add an emphasis of matter paragraph to the audit report to emphasize
that the entity has had significant related party transactions.
Answer D is incorrect because management is responsible to ensure that the
related party transactions are appropriately identified in the entity’s information
system and disclosed in financial statements. Thus, the auditor is not responsible
for undisclosed, unrecorded related party transactions.
11. Which of the following audit procedure is most likely to assist an auditor in identifying related party
transactions?
The following are examples of audit procedures which may identify the existence of
related party transactions:
Performing detailed tests of transaction balances.
Reviewing minutes of meetings of shareholders and those charged with
governance.
Reviewing accounting records for large or unusual transactions or balances,
paying particular attention to transactions recognized at or near the end of
reporting period.
Reviewing confirmations of loans receivable and payable and confirmations from
banks. Such a review may indicate a guarantor relationship and other related party
transactions.
Reviewing investment transactions, for example, purchase or sale of an equity
interest in a joint venture or other entity.
Answer A is incorrect because the purpose of inspecting communications with
law firms for evidences of unreported contingent liabilities is to identify potential
litigation, claims, and assessment that may require disclosure in the financial
statements.
Answer C is incorrect because the auditor should not retest ineffective controls
previously reported to the audit committee.
Answer D is incorrect because confirmation of accounts receivable do not
normally provide audit evidence about the existence of related party transactions.
12. For a reporting entity that has participated in related party transactions that
are material, disclosure in the financial statements should include:
A. A reference to deficiencies in the entity’s internal control.
B. A statement to the effect that a transaction was consummated on terms
equivalent to those that prevail in arm’s-length transactions.
C. The nature of the relationship and the terms and manner of settlement.
D. Details of the transactions within major classifications.
PAS 24 (Related Party Disclosures) provides that if an entity has participated in
material related party transactions, it should disclose the nature of the
relationship, information about the transaction, and outstanding balances
necessary for an understanding of the potential effect of the relationship on
financial statements.
As minimum, the disclosures should include:
14. Which of the following statements best describe the “date of the financial
statements?”
A. The date on which those with the recognized authority assert that they have
prepared the entity’s complete set of financial statements, including the
related notes, and that they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made
available to third parties.
C. The date of the end of the latest period covered by the financial statements.
D. The date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the opinion on financial statements.
According to the standard, the date of the financial statements is the date of the
end of the latest period covered by the financial statements.
Answer A is incorrect because it is the date of the approval of the financial
statements.
Answer B is incorrect because it is the date of issuance of the financial statements.
Answer D is incorrect because it is usually the date of the auditor’s report.
16. Which of the following procedures would an auditor most likely perform to
obtain evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date
of financial statements.
B. Confirming a sample of material accounts receivable after the date of
financial statements.
C. Comparing the financial statements being reported on with those prior
period.
D. Investigating personnel charges in the accounting department occurring
after the date of the financial statements.
The audit procedures to identify subsequent events ordinarily include the following:
18. An auditor is concerned with completing various phases of the audit after
the balance sheet date. This subsequent period extends to the date of the
A. Delivery of the auditor’s report to the client
B. Auditor’s report
C. Final review of the audit working papers
D. Public issuance of financial statements
The auditor is required to perform procedures designed to identify all subsequent
events up to the date of the auditor’s report. Hence, the subsequent events period
extends from the date of the financial statements (i.e., the balance sheet date) to
the date of the auditor’s report.
Answers A and D are incorrect because the delivery of the auditor’s report to the
client and the public issuance of the financial statements both occur later than the
date of the auditor’s report.
Answer C is incorrect because the auditor is required to perform subsequent
events worked up to the date of the auditor’s report.
21. Which of the following events occurring after the issuance of an auditor’s
report most likely would cause the auditor to make further inquiries about
the previously issued financial statements?
A. A technological development that could affect the entity’s future ability
to continue as a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity’s
consolidated sales
C. The discovery of information regarding a contingency that existed
before the financial statements were issued
D. The final resolution of a lawsuit disclosed in the notes to the financial
statements.
If, after the report has been issued, the auditor becomes aware of the fact which
existed at the report date and which, if known at that date, may have caused the
auditor to modify the report, the auditor should consider whether the financial
statements need revision, discuss the matter with management, and take actions
appropriate in the circumstances.
Answers A and B are incorrect because the auditor has no reporting responsibility
for events occurring after the issuance of the auditor’s report if such events would
not affect the report.
Answer D is incorrect because the auditor has no responsibility to monitor
disclosed contingencies after the report is issued.
23. PSA 570 (Going Concern) states that a fundamental principle in the
preparation of financial statements is the going concern assumption.
Under this assumption, an entity is ordinarily viewed as continuing
business for the foreseeable future with neither the intention nor the
necessity of liquidation, ceasing trading or seeking protection from
creditors pursuant to laws and regulations. The responsibility to make an
assessment of an entity’s ability to continue as a going concern rests with
the
A. Auditor
B. Entity’s management
C. Securities and Exchange Commission (SEC)
D. Entity’s creditors
Under PAS 1(Presentation of Financial Statements), management is required to
make an assessment of an entity’s ability to continue as a going concern.
25. Which of the following conditions or events most likely would cause an
auditor to have substantial doubt about an entity’s ability to continue as a
going concern?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects re postpones.
PSA 570 gives the following examples of conditions or events which may give
rise to business risks, that individually or collectively, may cast significant doubt
about the entity’s ability to continue as a going concern.
Financial
Other
26. Which of the following audit procedures most likely would assist an
auditor in identifying conditions and events that may indicate substantial
doubt about an entity’s ability to continue as a going concern?
A. Confirming with third parties the details of arrangements to maintain
financial support
B. Comparing the entity’s depreciation and asset capitalization policies to other
entities in the industry
C. Reconciling the cash balance per books with the cutoff bank statement and
the bank confirmation
D. Inspecting the title documents to verify whether any assets are pledged as
collateral
The auditor typically performs the following procedures to identify conditions
and events that may cast significant doubt about an entity’s ability to continue as a
going concern:
27. Which of the following conditions or events most likely would cause an
auditor to have substantial doubt about an entity’s ability to continue as a
going concern?
A. Restrictions on the disposal of principal assets present
B. Usual trade credit from suppliers denied
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
Denial of usual trade credit from suppliers is an indication that the entity is facing
financial difficulties.
Answer A is incorrect because long-term debt arrangements ordinarily include
restrictions on the disposal of principal assets.
Answer C is incorrect because the existence of related party transactions concerns disclosure,
not going concern, issues.
Answer D is incorrect because the payment of stock dividends in arrears does not
indicate that the entity is financially distressed.
28. Which of the following audit procedures would most likely assist an
auditor in identifying conditions and events that may indicate there could
be substantial doubt about an entity’s ability to continue as a going
concern?
A. Confirmation of bank balances
B. Confirmation of accounts receivable from major customers
C. Reconciliation of interest expense with debt outstanding
D. Review of compliance with terms of debt agreements
The auditor’s review of compliance with terms of debt agreements may reveal
conditions of non-compliance because the entity is in weak financial condition.
Answers A, B, and C are incorrect because these procedures are less effective if
the auditor’s objective is to identify conditions or events that may cast significant
doubt about the entity’s ability to continue as a going concern.
29. Harold, CPA, believes there is substantial doubt about the ability of ABC
Co. to continue as a going concern for a reasonable period of time. In
evaluating ABC’s plans for dealing with adverse effects of future
conditions and events, Harold most likely would consider, as a mitigating
factor, ABC’s plans to
A. Postpone expenditures for research and development projects.
B. Purchase production facilities currently being leased from a related party.
C. Strengthen internal controls over cash disbursements
D. Discuss with lenders the terms of all debt and loan agreements.
If the auditor believes that there are conditions or events indicating that
substantial doubts exists about an entity’s ability to continue as a going concern,
he/she should inquire to the management concerning its plans to mitigate their
adverse effects. For example, management’s plans to dispose of assets, borrow
money, or restructure debt, reduce or delay expenditures, or increase capital. The
auditor should obtain sufficient appropriate audit evidence that management’s
plans are feasible and that the outcome of these plans will improve the situation.
Answer B is incorrect because the purchase of production facilities will worsen the
company’s weak financial condition.
Answer C is incorrect because improvements in internal control will not solve the
company’s going concern problems.
Answer D is incorrect because discussion with lenders is not a sufficient action to improve the
situation.
30. Harry, CPA, believes that there is substantial doubt about the ability of
ABC Corp. to continue as a going concern for a reasonable period of time.
In evaluating ABC’s plans for dealing with the adverse effects of
future conditions and events, Harry most likely would consider, as a mitigating
factor, ABC’s plans to
A. Purchase equipment and production facilities currently being leased.
B. Accumulate treasury shares at prices favorable to ABC’s historic price
range.
C. Negotiate reductions in required dividends being paid on preference
shares.
D. Accelerate research and development projects related to future
products.
The auditor should inquire of management concerning its plans to mitigate
adverse effects of identified conditions or events indicating that a substantial
doubt exists about an entity’s ability to continue as a going concern.
The auditor should consider management’s plans to dispose of assets, borrow
money or restructure debt, reduce or delay expenditures, and increase capital.
Management’s plans to negotiate reductions in required dividends being paid on
preference shares are intended to increase capital.
Answers A, B, and D are incorrect because leasing equipment and production
facilities, increasing capital, and postponement of R&D projects would be
mitigating factors.
32. Under PSA 580 (Written Representations), the auditor is required to obtain audit
evidence that management
I. Has fulfilled its responsibility for the fair presentation of the
financial statements in accordance with applicable financial
reporting framework.
II. Has provided the auditor with all relevant information and access
as agreed in the terms of audit engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
According to PSA 580, the auditor shall request management to provide a written
representation that it has fulfilled its responsibility for the preparation of financial
statements in accordance with the applicable financial reporting framework,
including where relevant, their fair presentation as set out in the terms of the audit
engagement.
The standard further provides that the auditor shall request management to provide a written
representation that:
• It has provided the auditor with all relevant information and access as
agreed in the terms of audit engagement; and
• All transactions have been recorded and are recorded and are reflected
in the financial statements.
35. When an audit is made in accordance with PSAs, the auditor should always
A. Observe the taking of physical inventory on the balance sheet date
B. Obtain certain written representations from the management
C. Employ analytical procedures as substantive tests to obtain evidence about
specific assertions related to account balances
D. Document the understanding of the client’s internal control and the basis for
all conclusions about the assessed level of control risk for financial
statement assertions
PSA 580 requires the auditor to obtain certain written representations from
management. They confirm oral representations – either unsolicited or in response
to specific inquiries – received from management.
Answer A is incorrect because attendance at the physical inventory taking can be
performed either during or after the end of the period covered by the audit like
when well-kept perpetual inventory records are periodically compared with
physical counts.
Answer C is incorrect because the auditor is required to apply analytical
procedures as risk assessment procedures to obtain an understanding of the entity
and its environment and in the overall review at the end of the audit. Analytical
procedures may also be applied as substantive procedures.
Answer D is incorrect because the auditor is not required to document the basis if
control risk is assessed at the maximum level for some assertions.
41. What type of opinion is the most appropriate when management does not provide
written representations about its responsibility for the presentation of financial
statements? A. Qualified opinion
B. Disclaimer of an opinion
C. Adverse opinion
D. Unmodified opinion
42. To which of the following matter would materiality limits not apply in obtaining
written management representations?
A. Reductions of obsolete inventory to net realizable value
B. The disclosure of compensating balance arrangements involving related
parties
C. Losses from purchase commitments at prices in excess of market value
D. The availability of minutes of shareholders’ and directors’ meetings
Written representations from management may be limited to matters that are
considered either individually or collectively material to the financial statements.
With respect to certain items, it may be necessary for the auditor to inform
management of his/her understanding of materiality.
Materiality limits do not apply to management’s representations concerning the
availability of minutes of shareholders’ and directors’ meetings since it is
independent of amounts in the financial statements.
46. The primary source of information to be reported about litigation, claims, and
assessments is the
A. Independent auditor
B. Client’s management
C. Court records
D. Client’s lawyer
Management should adopt policies and procedures to identify, evaluate, and
account for litigation, claims, and assessments as basis for the preparation of
financial statements in accordance with the applicable framework.
Answer A is incorrect because the auditor’s responsibility is to perform audit
procedures in order to be aware of any litigation and claims involving the entity
that may result in a material misstatement of financial statements (PSA 501, Audit
Evidence – Additional Considerations for Specific Items).
Answer C is incorrect because there is no requirement to examine court orders.
Answer D is incorrect because the client’s lawyer corroborates the information
furnished by the client’s management.
48. The primary reason an auditor requests that letters of inquiry be sent to a
client’s attorney is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed in the balance
sheet date
B. The attorney’s opinions of the client’s historical experiences in recent similar litigation
C. Corroboration of information furnished by the management about litigation, claims, and
assessments
PSA 501 (Audit Evidence – Specific Cosideration for Selected Items) states that
when the auditor assesses a risk of material misstatement regarding litigation or
claims that have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entity’s legal counsel. Such
communication will assist in obtaining sufficient appropriate audit evidence as to
whether potentially material litigation and claims are known and management’s
estimate of financial implications, including costs, are reliable.
Answers A and D are incorrect because, as stated in the standard, the letter would
ordinarily specify the following when it is considered unlikely that the entity’s
legal counsel will respond to a general inquiry:
50. An auditor should obtain evidence relevant to all of the following factors
concerning third-party litigation against a client except the
A. Jurisdiction in which the matter will be resolved.
B. Existence of a situation indicating an uncertainty as to possible loss
C. Profitability of an unfavorable outcome
D. Period in which the underlying cause for legal action occurred
When performing procedures after year-end concerning litigation and claims, the
auditor is primarily concerned with the impact of the matter on the fair
presentation of the client’s financial statements.
Accordingly, the auditor should obtain sufficient appropriate audit evidence about
the existence, amount, profitability of an unfavorable outcome, and timing of the
cause of the litigation or claims.
The auditor is least interested in determining the jurisdiction in which the
litigation will be resolved.
Answers B, C, and D are incorrect because the uncertainty as to the possible loss,
the probability of an outcome, and the period in which the underlying cause for
legal action occurred are matters that should be considered by the auditor to
determine the impact of litigation on the financial statements.
53. In which of the following circumstances would an auditor most likely meet
with the client’s legal counsel to discuss the likely outcome of the litigation
and claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between management and the entity’s legal counsel.
III. The subject matter of the litigation is complex.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
PSA 501 states that, in certain circumstances, for example, where the auditor
determines that the matter is a significant risk, the matter is complex or there is
disagreement between management and the entity’s legal counsel, it may be
necessary for the auditor to meet with the entity’s legal counsel to discuss the
likely outcome of litigation and claims. Such meetings would take place with
management’s permission and, preferably, with a representative of management in
attendance.
54. Which of the following statements extracted from a client’s lawyer’s letter
concerning litigation, claims, and assessment most likely would cause the
auditor to request clarification?
A. “I believe that the action can be settled for less than the damages
claimed.”
B. “I believe that the company will be able to defend this action
successfully.”
C. “I believe that the plaintiff’s case against the company is without merit.”
D. “I believe that the possible liability to the company is nominal in
amount.”
The letter of audit inquiry requests the entity’s lawyer to evaluate the likelihood
of an unfavorable outcome, and if possible, to make an estimate of the amount or
range of potential loss. A statement that the action can be settled for less than the
damages claimed is unclear as to the amount or range of potential loss.
Answers B and C are incorrect because the responses clearly state that the entity
should not expect any liability to arise from the lawsuit. Answer D is incorrect
because the response is clear as to the amount or range of possible loss.
55. The auditor should consider the status of legal matters up to the
A. Balance sheet date
B. Date of the auditor’s report
C. Date of approval of the financial statements
D. Date of issuance of financial statements
TRUE OR FALSE
KEY ANSWERS
TRUE OR FALSE
Chapter 10
THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
PSA 200 (Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with Philippine Standards on Auditing) states
that the purpose of an audit is to enhance the degree of confidence of
intended users in the financial statements. This is achieved by the
expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
Answer A is incorrect because an auditor’s opinion is not an assurance of
complete accuracy of the financial statements.
Answer C is incorrect because while the auditor’s report may contain
some information that users of financial statements may use to make
informed decisions, it is not a substitute for their judgment. Answer D is
incorrect because the Auditor’s
Responsibility section of the auditor’s provides only a general
description of how an audit is conducted.
2. If a company’s external auditor expresses an unmodified opinion as a result
of the audit of the company’s financial statements, readers of the audit
report can assume that
a. The external auditor found no fraud
b. The company is financially sound and the financial statements are accurate
c. Internal control is effective
d. The auditor concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.
An UNMODIFIED OPINION is expressed when the auditor concludes
that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
If the auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement or
is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement,
the auditor should express a modified opinion (qualified opinion, adverse
opinion or disclaimer of opinion) on the financial statements.
Answer A is incorrect because readers may only assume that fraud found
did not, in the auditor’s opinion, materially affect the fair presentation of
the statements.
Answer B is incorrect because the report contains an opinion on whether
the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework and not an
appraisal of the company. Also, an unmodified opinion provides
reasonable assurance that the statements are free of material misstatement,
not that they are accurate.
Answer D is incorrect because an unmodified opinion may be expressed
even though the auditee’s internal control system is ineffective.
17. During the year ended December 31, ABC Co. Reported its
property, plant and equipment at the lower of cost or market (LCM)
because their fair value had declined. The loss has been included in the
income statement and the adjustment has been fully disclosed in the notes.
If a CPA believes that the values reported in the financial statements are
reasonable, what opinion should be expressed?
a. An unmodified opinion
b. A “subject to” qualified opinion
c. An adverse opinion
d. A disclaimer of opinion
Under PAS 16 (Property,Plant and Equipment), a company may report its
property,plant and equipment using the cost model or the revaluation
model. Recording them at LCM is therefore not consistent with the
requirement of the PAS. Assuming that the effects are material, the auditor
should express either a qualified or adverse opinion.
Answer A is incorrect because a material misstatement in the financial
statement precludes an unmodified opinion.
Answer B is incorrect because the use of “subject to” in a qualified opinion
is prohibited.
Answer D is incorrect because a disclaimer is appropriate when the scope
limitation does not permit expression of an opinion.
a. I only
b. I and III only
c. I and II only
d. I, II and III
21. When reporting on financial statements prepared in accordance with
a compliance framework, the auditor shall evaluate
A B C D
A. The overall presentation,
Structure and content of
The financial statements No Yes No Yes
B. Whether the financial
Statements, including the
Related notes, represent
The underlying transactions
And events in a manner that
Achieves fair presentation No Yes Yes No
The auditor’s evaluation should include consideration of (a) and (b) above
when reporting on financial statements prepared in accordance with a fair
presentation framework (PSA700,par 14).
(Auditor’s signature)
(Date of the auditor’s report)
(Auditor’s address)
30. The following statements relate to the date of the auditor’s report. Which
is false?
a. The auditor should date the report as of the completion date of the
audit.
b. The date of the auditor’s report should not be earlier that the date on
which the financial statements are signed or approved by
management.
c. The date of the auditor’s report should not be later than the date on
which the financial statements are signed or approved by
management.
d. The date of the auditor’s report should always be later than the date
of the financial statements (i.e., the balance sheet ate).
PSA 700 states that since the auditor’s opinion is provided on the financial
statements and the financial statements are responsibility of management,
the auditor is not in a position to conclude that sufficient appropriate audit
evidence has been obtained until the auditor obtains evidence that a
complete set of financial statements has been prepared and management
has accepted responsibility for them.
31. Which of the following statements best expresses the objective of the
traditional audit of financial statements?
a. To express an opinion on the fairness with which the statements
present financial position, financial performance, and cash flows in
accordance with Philippine Financial Reporting Standards.
b. To express an opinion on the accuracy with which the statements
present financial position, financial performance, and cash flows in
accordance with Philippine Financial Reporting Standards.
c. To make suggestions as to the form or content of the financial
statements or to draft them in whole or in part.
d. To assure adoption of sound accounting policies and the
establishment and maintenance of internal control.
The objective of the traditional financial statement audit is for the auditor
to express an opinion (or a disclaimer of opinion) on the fairness, in all
material respects, of the financial statements prepared and presented by the
client’s management.
The auditor’s report should clearly state whether the audit was conducted
in accordance with PSAs, and whether, in the opinion of the independent
auditor, the financial statements are presented in accordance with
Philippine Financial Reporting Standards.
Answer B is incorrect because the auditor expresses an opinion on the
fairness (not the accuracy) of financial statements.
Answer C is incorrect because the client’s management is responsible for
adopting sound accounting policies and establishing and maintaining
internal control.
34. In which of the following circumstance would an auditor most likely add
an Emphasis of Matter paragraph to the auditor’s report while expressing
an unmodified opinion?
a. There is a substantial doubt about the entity’s ability to continue as a going
concern.
b. Management’s estimates of the effects of future vents are unreasonable.
c. No depreciation has been provided in the financial statements.
d. Certain transactions cannot be tested because of management’s records
retention policy.
a. Unmodified
b. “except for” qualified
c. “subject to” qualified
d. Disclaimer of opinion
37. The existence of audit risk is recognized by the statement in the auditor’s
report that the auditor
a. Is responsible for expressing an opinion on the financial statements, which are the
responsibility of management.
b. Realizes some matters, either individually or in the aggregate, are important while other
matters are not important.
c. Obtains reasonable assurance about whether the financial statements are free from
material misstatement.
d. Assess the accounting principles used and also evaluates the overall financial statement
presentation.
Audit risk is the risk that the auditor may give an inappropriate
opinion on financial statements that are materially misstated. The
existence of audit risk is recognized by the statement in the auditor’s
report that the auditor obtained reasonable (not absolute) assurance
about whether the financial statements are free of material
misstatement.
Answer A, B and D are incorrect because they don’t pertain to audit risk.
e. Unmodified opinion
f. Disclaimer of opinion
g. Adverse opinion
h. Scope qualification
As long as the misappropriation is accounted for properly, an
unmodified opinion will be appropriate because the financial
statements will be fairly presented in accordance with Philippine
Financial Reporting Standards. Moreover, the amount of
misappropriation is immaterial relative to the company’s assets and
income.
41. A client makes test counts on the basis of a statistical an. The
auditor observes such counts as are deemed necessary and is able to
become satisfied as to the reliability of the client’s procedures. In reporting
on the results of the audit, the auditor
a. Must qualify the opinion if the inventories were material
b. Can express an unmodified opinion
c. Must comment in an Emphasis of Matter paragraph as to the inability to
observe year-end inventories.
d. Is required to disclaim an opinion if the inventories were material.
42. A note to the financial statements of the ABC Bank indicates that all of the
records relating to the bank’s business operations are stored on magnetic
disks, and that no emergency backup systems or duplicate disks are stored
because the bank and its auditors consider the occurrence of a catastrophe to
be remote. Based upon this note, the auditor’s report should express
a. A qualified opinion
b. An unmodified opinion
c. An adverse opinion
d. A “subject to” opinion
The bank’s failure to have backup records does not affect the fairness of
the financial statements. Hence, an unmodified opinion is appropriate.
43. An auditor who uses the work of an expert may refer to the auditor’s expert
in the auditor’s report if the
a. Expert is employed by the entity
b. Expert’s work provides the auditor greater assurance of reliability
c. Auditor expresses a qualified opinion or an adverse opinion related to the work of the
expert
d. Auditor indicates a division of responsibility related to the work of the expert
Par.A42 of PSA 620 (Using the Work of an Auditor’s Expert) states, “It
may be appropriate in some circumstances to refer to the auditor’s expert
in an auditor’s report containing a modified opinion to explain the nature
of the modification.in such circumstances, the auditor may need the
permission o the auditor’s expert before making such a reference.”
Answer A is incorrect because an expert employed by the entity is a
management’s expert, not an auditor’s expert.
Answer B is incorrect because, although the work of an expert is expected
to provide greater assurance of reliability, reference to the auditor’s
expert’s work is justified only when the opinion as a result of the expert’s
work.
Answer D is incorrect because PSA 620 provides that if the auditor makes
reference to the work of an auditor’s expert in the auditor’s report when
such reference is relevant to an understanding of a modification to the
auditor’s opinion, the auditor shall indicate in the auditor’s report that such
reference does not reduce his/her responsibility for the opinion.
44. When would the auditor refer to the work of an appraiser in the auditor’s
report?
a. An adverse opinion is expressed based on a difference of opinion between
the client and the outside appraiser as to the value of certain assets.
b. A disclaimer of opinion is expressed because of a scope limitation imposed
on the auditor by the appraiser
c. a qualified opinion is expressed because of a matter unrelated to the work
of the appraiser
d. An unmodified opinion expressed and an Emphasis of Matter paragraph is
added to disclose the use of the appraiser’s work.
According to PSA 620, the auditor may refer to the auditor’s expert if a
modified report is to be issued as a result of the expert’s work.
Answer B is incorrect because the appraiser is not in a position to limit the
scope of the auditor’s work since the auditor can engage another appraiser
Answer C is incorrect because the auditor’s qualification must be related to the
expert’s work.
Answer D is incorrect because the auditor should not refer to the work of
an expert if an unmodified report is to be issued.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
TRUE OR FALSE
KEY ANSWERS
1. B
2. D
3. A
4. D
5. D
6. D
7. B
8. B
9. B
10. C
11. B
12. A
13. B
14. B
15. B
16. B
17. C
18. A
19. C
20. D
21. A
22. C
23. A
24. B
25. B
26. D
27. A
28. D
29. C
30. C
31. A
32. B
33. D
34. A
35. A
36. B
37. C
38. C
39. D
40. A
41. B
42. B
43. C
44. A
45. C
46. B
47. C
48. D
49. A
50. D
51. B
52. C
53. C
54. D
55. C
56. B
57. A
58. D
59. A
60. B
61. D
62. A
63. B
64. C
65. A
66. C
67. C
68. A
69. D
70. A
71. D
72. B
73. D
74. A
75. D
76. B
77. C
78. B
79. D
80. A
81. B
82. D
83. C
84. A
85. D
86. C
87. D
88. D
89. A
90. C
TRUE or FALSE
1. True
2. False
3. False
4. False
5. True
6. True
7. False 8. True
9. False
10. False
11. False
12. True
13. False 14. False 15. False
16. False
17. False
18. False
19. False
20. False
21. False
22. True
23. True
24. True
25. True
46. Which of the following terms is used in the standard to describe the effects on
the financial statements of misstatements or the possible effects on the financial
statements, if any, that are undetected due to an inability to obtain sufficient
appropriate audit evidence?
A. Persuasive
B. Pervasive C. Material
D. Extensive
According to the standard, pervasive effects on the financial statements are those that, in the
auditor’s judgment:
1) Are not confined to specific elements, accounts or items of the financial statements;
2) If so confined, represent or could represent a substantial proportion of the financial
statements; or
3) In relation of disclosures, are fundamental to users’ understanding of the financial
statements.
49. The auditor’s inability to obtain sufficient appropriate audit evidence (limitation
on scope of the audit) arising from circumstances beyond the control of the
entity include when
50. A paragraph included in the auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements that, in the auditor/s judgment,
is of such importance that it is fundamental to user’s understand of the financial
statements is called
A. Explanatory paragraph
B. Other Matter paragraph
C. Basis for Modified Opinion paragraph
D. Emphasis of Matter paragraph
The following are example of circumstances where the auditor may consider it
necessary to include an Emphasis of Matter paragraph;
• An uncertainty relating to the future outcome of exceptional litigation or
regulatory action.
• Early application (where permitted) of a new accounting standard that
has a pervasive effect on the financial statements in advance of its
effective date.
• A major catastrophe that has, had, or continues to have, a significant
effect on the entity’s financial position.
51. When the auditor includes an Emphasis of Matter paragraph in the auditor’s
unmodified report, the auditor shall
52. Which of the following should be included in the opinion paragraph when an
author expresses a qualified opinion?
Par. A22 of PSA 705 states, “When the auditor expresses a qualified opinion, it
would not be appropriate to use phrases such as “with the foregoing explanation”
or “subject to” in the opinion paragraph as these are not sufficiently clear or
forceful.”
53. In which of the following circumstance would an auditor usually choose between
expressing a qualified opinion or disclaiming an opinion?
When there is a limitation on the scope of the auditor’s work that requires
expression of a qualified opinion or a disclaimer of opinion, the auditor’s report
should describe the limitation and indicate the possible adjustments to the
financial statements that might have been determined to be necessary had the
limitation not existed.
Answer A is incorrect because the opinion paragraph should state that the
qualification pertains to possible effect on the financial statements and not to the
scope limitation itself.
Answer B is incorrect because the audit was conducted in accordance with PSAs.
Answer C is incorrect because the issue is the auditor’s failure to apply
necessary procedures and not inadequate disclosure.
55. Sam, CPA, was engaged to audit the financial statements of Mantha Corp. after its
fiscal year had ended. The timing of Sam’s appointment as auditor and the start of
field work made confirmation of accounts receivable by direct communication
with the debtors ineffective. However, Sam applied other procedures and was
satisfied as to the reasonableness of the account balances. Sam’s auditor’s report
most likely contained a/an
57. Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
A. The financial statements fail to contain adequate disclosure concerning related party
transactions.
B. The auditor is engaged after fiscal year-end and is unable to observe the physical
inventories or apply alternative procedures to verify their balances.
C. The auditor is unable to determine the amounts associated with fraud committed by the
client’s management.
D. The client refuses to permit its attorney to furnish information requested in a letter of audit
inquiry.
59. When a client will not permit inquiry of outside legal counsel, the audit report will
ordinarily contain a/an
A. Disclaimer of opinion.
B. Adverse opinion.
C. “Subject to” qualified opinion.
D. Unmodified opinion with an Emphasis of Matter paragraph.
A. The financial statements are not in conformity with the Philippine Accounting
Standards (PAS) on capitalization of leases.
B. Tests of controls show that the entity’s internal control is so poor that it cannot be
relied upon.
C. The Chief Executive Officer refuses the auditor access to minutes of board of
directors’ meetings.
D. Information comes to the auditor’s attention that raises substantial doubt about
the entity’s ability to continue as a going concern.
The auditor should express an adverse opinion when the financial statements
are not presented fairly in accordance with Philippine Financial Reporting
Standards.
Answer B is incorrect because an ineffective internal control system is not a
basis for an adverse opinion.
Answer C is incorrect because a limitation on the scope of the auditor’s work
could lead to a qualified opinion or a disclaimer of opinion.
Answer D is incorrect because significant doubt about the entity’s continued
existence, if adequately disclosed in the financial statements, does not result in the
modification of the opinion but requires an Emphasis of Matter paragraph
following the opinion paragraph.
A. The principal effects of the departure from the requirements of the PFRS.
B. The substantive reasons for the financial statements being misleading.
C. A direct reference to a separate paragraph disclosing the basis for the opinion.
D. A description of the uncertainty or scope limitation that prevents an unmodified
opinion.
When the auditor expresses an adverse opinion, the opinion paragraph of the
auditor’s report should include a direct reference to the Basis for Adverse
Opinion paragraph(s) preceding the opinion paragraph that clearly states all
the substantive reasons for the adverse opinion.
Answers A and B are incorrect because the principal effects of the departure
from the requirements of the PFRS and all the substantive reasons for the
adverse opinion are disclosed in the Basis for Modified Opinion paragraph(s).
Answer D is incorrect because an uncertainty or a scope limitation does not lead to an
adverse opinion.
65. There are two broad financial reporting frameworks for comparatives: the
corresponding figures and the comparative financial statements. Which of the
following statements is correct concerning these reporting frameworks?
A. Under the corresponding figures framework, the corresponding figures for the
prior period(s) are integral part of the current period financial statements.
B. Under the corresponding figures framework, the corresponding figures for the
prior period(s) are considered separate financial statements.
C. Under the comparative financial statements framework, the comparative
financial statements for the prior period(s) are intended to be read in conjunction
with the amounts and other disclosures relating to the current period.
D. Under the comparative financial statements framework, the amounts and other
disclosures for the prior period(s) form part of the current period financial
statements.
Under PSA 710 (Comparative Information – Corresponding Figures and
Comparative Financial Statements), the two financial reporting frameworks
are:
Corresponding figures where amounts and other disclosures for the preceding
period are included as part of the current period financial statements, and are
intended to be read in relation to the amounts and other disclosures relating to
the current period.
These corresponding figures are not presented as complete financial
statements capable of standing alone, but are an integral part of the current
period financial statements intended to be read only in relationship to the
current period figures.
Comparative financial statements where amounts and other disclosures for the
preceding period are included for comparison with the financial statements of
the current period, but do not form part of the current period financial
statements, the comparative financial statements are considered separate
financial statements.
I. For corresponding figures, the auditor’s report only refers to the financial
statements of the current period.
II. For comparative financial statements, the auditor’s report refers to each
period that financial statements are presented.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
Because the corresponding figures are included as part of the current period
financial statements and are intended to be read in conjunction with the
amounts and other disclosures relating to the current period, the auditor’s
report only refers to the financial statements of the current period.
But because the comparative financial statements are considered separate
financial statements, the auditor’s report refers to each period that financial
statements are presented.
67. PSA 710 states that the extent of audit procedures performed on the
corresponding figures is significantly less that for the audit of the current period
figures. The auditor’s procedures are ordinarily limited to ensuring that the
corresponding figures have been correctly reported and are appropriately
classified, the auditor should assess whether
69. According to PSA 710, the incoming auditor may refer to the predecessor
auditor’s report on the corresponding figures in the incoming auditor’s report for
the current period. The incoming auditor’s report should indicate
I. That the financial statements of the prior period were audited by the
predecessor auditor.
II. The type of opinion issued by the predecessor auditor.
III. The date of the predecessor auditor’s report.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II and III.
70. When the prior period financial statements are not audited, the incoming
auditor should state in the auditor’s report that
A. I, II and IV only.
B. II, III and IV only.
C. I, II and III only.
D. I, II, III and IV.
PSA 710 states that when the financial statements of the prior period were
audited by another auditor,
a) the predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
b) the incoming auditor’s report shall indicate:
i. that the financial statements of the prior period were audited by the
predecessor auditor;
ii. the type of opinion issued by the predecessor auditor and, if the
opinion was modified, the reasons therefor;
iii. the date of that report.
It should be emphasized that the requirement in (b) above is to state the prior
year’s financial statements were audited by the predecessor auditor, not to
name the predecessor auditor.
A. Express an opinion only on the current year’s statements and make no reference
to the prior year’s statements.
B. Issue an updated comparative audit report indicating the division of
responsibility.
C. Request the client to reissue the predecessor’s report on the prior year’s
statements.
D. Indicate the substantive reasons for the qualification in the predecessor
auditor’s opinion.
When the predecessor auditor’s report is not presented, the incoming auditor’s report
shall indicate:
i. that the financial statements of the prior period were audited by the predecessor
auditor;
ii. the type of opinion issued by the predecessor auditor and, if the opinion was
modified, the substantive reasons therefor; and
iii. the date of the report.
Answer A is incorrect because, when comparative financial statements are
presented, the auditor’s opinion (or disclaimer of opinion) should be expressed
individually on the financial statements of each period presented.
Answer B is incorrect because the standard does not require indication of divided
responsibility.
Answer C is incorrect because, although the predecessor auditor may reissue
the audit report on the prior period with the incoming auditor reporting only
on the current period, the situation in the question is that the predecessor
auditor’s report is not presented.
74. Comparative financial statements include the prior year’s statements that
were audited by a predecessor auditor whose report is not presented. If the
predecessor’s report was unmodified, the incoming auditor should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the
opinion paragraph.
D. Not refer to the report of the work of the incoming auditor.
PSA 710 states that when the financial statements of the prior period were
audited by another auditor, the predecessor auditor may reissue that audit
report on the prior period with the incoming auditor only reporting on the
current period. The reissued report should not refer to the report or work of the
incoming auditor.
Answers A, B, and C are incorrect because the reissued report should not refer
to the report or the work of the incoming auditor.
A. Make no reference to the type of opinion expressed on the prior year’s financial
statements.
B. Express an unmodified opinion on the restated financial statements of the prior
year.
C. Be accompanied by the auditor’s original report on the prior year’s financial
statements.
D. Continue to express a qualified opinion on the prior year’s financial statements.
During the course of the audit of the current period, the auditor may become
aware of circumstances or events that materially affect the financial statements
of a prior period. For example, if the auditor expressed a qualified opinion on
the prior year financial statements because of the departure form PFRS and
such statements are restated in the current period to conform with the
requirements of the PFRS, the continuing auditor’s updated report should refer
to the restatement and express an unmodified opinion. Moreover, the report
should contain an Other Matter paragraph to disclose the substantive reasons
for the different opinion.
Answer A is incorrect because the auditor’s report should contain an Other
Matter paragraph to disclose the substantive reasons for the change and the
type of opinion previously expressed by the auditor.
Answer C is incorrect because the original auditor’s report should not be reissued.
Answer D is incorrect because the auditor should express a different opinion.
77. In performing the audit on the current period financial statements, the
incoming auditor, in certain unusual circumstances, may become aware of
material misstatement that affects the prior period financial statements on which
the predecessor auditor had previously reported without modification. In these
circumstances, the incoming auditor should.
78. The following statements relate to unaudited prior year financial statements that
are presented in comparative form with audited current year financial statements.
Which is
incorrect?
A. The incoming auditor should state in the auditor’s report that the comparative
financial statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening
balances of the current period.
C. Clear disclosure in the financial statements that the comparative financial
statements are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited
figures are materially misstated, the auditor should request management to revise
the prior year’s figures or if management refuses to do so, appropriately modify the
report.
According to PSA 710, a statement in the auditor’s report that the prior period
financial statements are unaudited does not relieve the auditor of the
requirement to carry out appropriate procedures regarding opening balances of
the current period.
79. A client is presenting comparative (two-year) financial statements. Which of the
following is correct concerning reporting responsibilities of a continuing auditor?
A. The auditor may issue either one audit report on both presented year, or two audit
reports, one on each year.
B. The auditor should issue on audit report, but only on the most recent year.
C. The auditor should issue two audit reports, one on each year.
D. The auditor should issue on audit report that is on both presented years.
When comparative financial statements are presented, the auditor should issue
a report in which the comparatives are specifically identified because the
auditor’s opinion is expressed individually on the financial statements of each
period presented.
80. When audited financial statements are presented in a document (e.g., annual
report) containing other information, the auditor
A. Should read the other information to consider whether it is inconsistent with the
audited financial statements.
B. Has no responsibility for the other information because it is not part of the basic
financial statements.
C. Has an obligation to perform auditing procedures to corroborate the other
information.
D. Is required to express a qualified opinion if the other information has a material
misstatement of fact.
A. Disclaimer of opinion.
B. Qualified opinion or disclaimer of opinion.
C. Unmodified opinion with an Other Matter paragraph describing the material
inconsistency. D. Qualified or adverse opinion.
83. Which of the following phrases would an auditor most likely include in the
auditor’s report when expressing a qualified opinion because of inadequate
disclosure?
The Qualified Opinion paragraph states. “In our opinion, except for the omission
of information discussed in the Basis for Qualified Opinion paragraph, the
financial statement present fairly.
Answers A and B are incorrect. When the auditor expresses a qualified opinion. It
would not be appropriate to use phrases such as “with the foregoing explanation”
or “subject to” in the opinion paragraph as these are not sufficiently clear or
forceful. (PSA 705 (Revised and Redrafted), par. A22)
Answer D is incorrect because the phrase “do not present fairly” is used when
expressing an adverse opinion.
84. ABC CO.’s financial statements adequately disclose uncertainties that concern
future events, the outcome of which are not susceptible to reasonable estimation.
The auditor’s report should include
A. An unmodified opinion
B. A “subject to” qualified opinion
C. An “except for” qualified opinion
D. An adverse opinion
86. Under the PSAs, the tax information required by RR 15-2010 that is presented as
part of the notes to financial statements is considered
A. Significant information
B. Other information
C. Supplementary information
D. Material information
87. The tax information disclosures under RR 15-2010 are required to be presented
A. Only in the consolidated financial statements.
B. Both in the consolidated financial statements and the separate financial statements
of the parent company and its subsidiaries.
C. Only in the consolidated financial statements and the separate financial statements
of the parent company.
D. Only in the separate financial statements of the parent company and the separate
financial statements of the subsidiaries.
The consolidated financial statements are not the financial statements to be
submitted to the BIR accompanying the income tax returns. Hence, the required
disclosures under RR 15-2010 are to be presented in the separate financial
statements only.
88. Where the supplementary information required by RR 15-2010 is not clearly
differentiated from the financial statements, such supplementary information shall
be
A. Addressed in a separate section in the auditor’s report under the sub-title “Report
on Other Legal and Regulatory Requirements.”
B. Addressed in a separate section in the auditor’s report under the sub-title “Report
on the Supplementary Information Required under RR 15-2010.”
C. Addressed in an emphasis-of-matter paragraph in the auditor’s report.
D. Covered by the auditor’s opinion on the financial statements.
89. When the supplementary information required under RR 15-2010 is not presented
A. The auditor’s “Report on the Financial Statements.” Would not be affected because
such supplementary information is not part of the basic financial statements.
B. The auditor is precluded from expressing an opinion on the financial statements.
C. The auditor’s report should contain a qualified opinion.
D. The auditor’s report should contain an adverse opinion.
KEY ANSWERS
TRUE OR FALSE
Chapter 11
Other reporting responsibilities PSA 800
Special Considerations – Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks
1. Financial statement prepared in accordance with financial reporting framework
designed to meet the financial information needs of specific users are referred to
as
A. Special purpose financial statements B. Special
purpose framework
C. General purpose financial statements
D. Specific purpose financial statements
Special purpose financial statements are financial statements prepared in accordance with a
special purpose framework.
Special purpose framework is a financial reporting framework designed to meet
the financial information needs of specific users.
2. The following are examples of special purpose frameworks, except
A. An opinion as to whether the financial statements are presented fairly, in all material aspects,
in accordance with the financial reporting provisions of the contract.
B. A statement that indicated the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of presentation.
Answer D is incorrect because the auditor’s report only refers to the note to the
financial statements that explains the basis of accounting used.
5. An auditor is reporting in a statement of cash receipt and disbursements. This
statement is best referred to in the opinion paragraph by which of the following
descriptions?
A. “Results of operations arising from cash transactions.”
B. “Cash receipts and disbursements”
C. “Income statement resulting from cash transactions.”
D. “Statement of cash flows.”
The opinion paragraph of a report on a statement of cash receipts and
disbursements states, “In our opinion, the financial statement presents fairly, in all
material respects, the cash receipt and disbursements of ABC Company for the
year ended December 31, 20x1 in accordance with the cash receipts and
disbursements basis of accounting described in Note X.”
6. In an audit of special purpose financial statements, the auditor shall obtain an
understanding of
I. The purpose for which the financial statements are prepared.
II. The intended users.
III. The steps taken by management to determine that the applicable financial
reporting framework is acceptable in the circumstances.
A. I only
B. II and III only
C. I and II only
D. I, II, and III
A. A statement that the audit was conducted in accordance with Philippine Standards on
Auditing.
B. A reference to the note to the financial statements that describes the cash receipts and
disbursements basis of accounting.
C. A statement that the cash receipts and disbursements basis of accounting is not a
comprehensive basis of accounting.
D. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the cash receipts and disbursements basis of accounting.
Answer A, B and D are incorrect because the statement that the audit was
conducted in accordance with PSAs, a reference to the note to the financial
statements that describes the basis of presentation and an opinion as to whether
the statements are fairly presented should be included in the auditor’s report.
PSA 805
Special Considerations – Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement
8. A CPA is permitted to accept a separate engagement (not in conjunction with an
audit of financial statements) to audit an entity’s
A. Yes No
B. No Yes C. Yes
Yes
D. No No
An audit engagement to express an opinion on one or more components of a
financial statement (for example, accounts receivable, inventory, or a schedule of
profit participation) may be undertaken as a separate engagement or in
conjunction with an audit of the entity’s financial statements.
9. Which of the following statements is correct with respect to an auditor’s report
expressing an opinion on a specific element on a financial statement?
A. The auditor who was expressed an adverse opinion on the financial statements
as a whole can never express an unmodified opinion on a specific element in
theses financial statements.
B. The materiality determined for a specific element of a financial statement may
be lower than the maturity determined for the entity’s complete set of financial
statements.
C. Such a report can only be issued if the auditor is also engaged to audit the
entire set of financial statements.
D. The attention devoted to the specific element is usually less than it would be if
the financial statements as a whole were audited.
Answer B is incorrect because the standard does not require restrictions on the distribution and use
of the auditor’s report.
Answer C is incorrect because this engagement may be undertaken as separate
engagement or in conjunction with an audit of the entity’s financial statements.
Answer D is incorrect because the auditor is allowed to express an opinion on one
or more financial statement elements if he/she has not expressed an adverse
opinion or disclaimer of opinion on the financial statements taken as a whole or if
the elements to be reported on are not so extensive as to constitute a major portion
of the financial statements.
12. The following statements are ordinarily included in the separate auditor’s
report on an entity’s compliance with contractual agreements, except
The auditor’s report should include a statement that, in the auditor’s opinion, the
entity has complied with particular provisions of the contractual agreement.
PSA 810
Engagements to Report on Summary Financial Statements
13. An auditor may report on summary financial statements that are derived from
complete audited financial statements if the
2. An addressee;
4. A description is management’s responsibility for the summary financial statements, explaining the
management is responsible for the preparation of the summary financial statements in accordance
with the applied criteria.
5. A statement that the auditor is responsible for expressing an opinion on the summary financial
statements based on the procedures required by the PSA.
A. CPA has audited and expressed an opinion on the complete financial statements.
B. CPA expressed limited assurance that the financial statements are presented in
accordance with PRFS.
C. Summary financial statements are not fairly presented in all material respects.
D. Summary financial statements are prepared in accordance with special purpose financial
reporting framework.
PSRE 2400
Engagements to Review Financial Statements
15. In a review engagement, the practitioner and the client should agree on the
terms of the engagement. The agreed terms would be recorded in an engagement
letter or other suitable form such as a contract. The engagement letter should
include all of the following, except
A. A provision that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts.
B. A provision that any errors, fraud, or noncompliance with laws and regulations that come to the
practitioner’s attention need not be reported.
C. A sample of the report expected to be rendered.
D. The objective of the service to be performed.
Although a review engagement cannot be relied upon to disclose whether fraud,
errors, or noncompliance with the laws and regulations exist, the engagement
letter should indicate to the client that the practitioner will inform management or
the board of directors of any material matters that will come to the practitioner’s
attention.
Matters that would be included in the engagement letter include: The objective of the service to be
performed.
• The fact that the engagement cannot be relied upon to disclose errors. Illegal acts, or
other irregularities, for example, fraud or defalcations that may exist.
• A statement that the audit is not to be performed and that an audit opinion will not be
rendered. To emphasize that point and to avoid confusion, the practitioner may also
consider pointing out that a review engagement will not satisfy any statutory or third
party requirements for an audit.
16. Which of the following procedures should a practitioner perform during an
engagement to review an entity’s financial statements?
A. Comparing the financial statements with anticipated results in budgets and forecasts.
B. Studying the relationships of financial statement elements expected to conform to
predictable patterns.
C. Inquiring of management about actions taken at the board of directors’ meetings.
D. Observing the safeguards over access to and use of assets and records.
18. Which of the following inquiries or analytical procedures ordinarily is
performed in an engagement to review an entity’s financial statements?
A. Confirm with the entity’s lawyer that material loss contingencies are disclosed.
B. Understand the accounting principles of the industry in which the entity operates.
C. Develop audit programs to determine whether the entity’s financial statements are fairly
presented.
D. Assess the risk that a material misstatement could occur in a financial statement
assertion.
22. Which of the following would not be included in a practitioner’s report based
upon a review of an entity’s financial statements?
A. A statement that the financial statements are the responsibility of the company’s
management.
B. A statement describing the principal procedures performed.
C. A statement that the review was conducted in accordance with PSA
D. A statement describing the practitioner’s conclusions based upon the results of the review.
The review report includes a statement that the review was conducted in
accordance with the Philippine Standard on Review Engagement 2400. Moreover,
the report indicates that a review consists principally of inquiries and analytical
procedures and provides less assurance than an audit.
23. The date of the review report should
A. Not be earlier than the date on which the financial statements were approved by
management.
B. Be earlier than the date on which the financial statements were approved by management.
C. Coincide with the date of the financial statements.
D. Not be later than the date of the financial statements.
According to the standard, a practitioner should date the review report as of the
date the review is completed, which includes performing procedures relating to
events occurring up to the date of the report. However, since the practitioner’s
responsibility is to report on the financial statements as prepared and presented by
the management, the practitioner should not date the report earlier than the date
on which the financial statements were approved by management.
24. During an engagement to review the financial statements of an entity, a
practitioner becomes aware of a material departure from PFRS. If the practitioner
decides to modify the review report because management will not revise the
financial statements, the practitioner should
A. I only
B. II only
C. Either I or II
D.Neither I or II
The standard provides that if there has been a material scope limitation, the
review report should describe the limitation and either:
• PSRE 2410 applies to reviews of historical financial information by the entity’s auditor.
• Reviews of other historical information fall under PSAE 3000 (Revised). Assurance
Engagements other than Audits or Reviews of Historical Financial Information.
28. A practitioner’s review of an entity’s financial statements does not provide
assurance that he/she will become aware of all significant matters that would be
disclosed in an audit. However, if the practitioner has become aware that
information coming to his/her attention may be materially misstated, the
practitioner should
A. Carry out additional or more extensive procedures as are necessary to achieve limited
assurance.
B. Withdraw immediately from the engagement.
C. Perform a complete audit and issue modified auditor’s report.
D. Downgrade the engagement to a compilation and issue the appropriate report.
According to PSRE 2400, if the practitioner has reason to believe that the
information subject to review may be materially misstated, he/she should carry
out additional or more extensive procedures as are necessary to be able to express
negative assurance or to confirm that a modified report is required.
PSRE 2410
Review of Interim Financial Information Performed by the independent Auditor of the
Entity
correct?
A. To obtain reasonable assurance that the interim financial information is free from
material misstatement.
B. To enable the auditor to express a conclusion whether, on the basis of the review,
anything has come to the auditor’s attention that causes the auditor to believe that the
interim financial information is not prepared, in all material respects, in accordance
with an applicable financial reporting framework.
C. To provide a basis of expressing an opinion whether the interim financial information
is presented fairly, in all material respects, in accordance with an applicable financial
reporting framework.
D. The objective of a review of interim financial information is similar to that of an audit
conducted in accordance with PSAs.
According to PSRE 2410 “The objective of an engagement to review interim
financial information is to enable the auditor to express a conclusion whether, on
the basis of the review, anything has come to the auditor’s attention that causes
the auditor to believe that the interim financial information is not prepared, in all
material respects, in accordance with an applicable financial reporting
framework.”
Answer A is incorrect because a review of interim financial information, in
contrast to an audit, is not designed to obtain reasonable assurance that the interim
financial information is free from material misstatement. A review consists of
making inquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. It does not provide
all of the evidence that would be required in an audit.
Answer C is incorrect because a review of interim financial information does not
provide a basis for expressing an opinion whether the financial information is
presented fairly, in all material respects, in accordance with an applicable
financial reporting framework.
Answer D is incorrect because the objective of a review of interim financial
information differs significantly from that of an audit conducted in accordance
with PSAs.
30. Which of the following procedures ordinarily should be applied when an
independent auditor conducts a review of interim financial information of an
entity?
I. Identify the types of potential misstatements and consider the likelihood of their
occurrence.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
31. The following procedures are ordinarily performed in an engagement to review interim
financial information, except
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
PSRS 4400 (Engagements on Agreed-upon Procedures) states, “In certain
circumstances, for example, when the procedures have been agreed to between
the regulator, industry representatives and representatives of the accounting
profession, the auditor may not be able to discuss the procedures with all the
parties who will receive the report. In such cases, the auditor may consider, for
example, discussing the procedures to be applies with appropriate representatives
of the parties involved, reviewing relevant correspondence from such parties or
sending them a draft of the type of report that will be issued.”
34. The auditor may accept an engagement to perform specified procedures on the
specific subject matter of specified elements, accounts, or items of a financial
statement if
A. Identification of the purpose for which the agreed-upon procedures were performed.
B. An expression of positive assurance based on the specific procedures performed.
C. A statement that the auditor is independent of the entity.
D. A general description of the procedures performed.
According to PSRS 4400, the report on an agreed-upon procedures engagement
needs to describe the purpose and the agreed-upon procedures of the engagement
in sufficient detail to enable the users of the report to understand the nature and
extent of the work performed.
Answer B is incorrect because the report should include a statement that the
procedures performed do not constitute either an audit or a review and, as such,
no assurance is expressed.
Answer C is incorrect because the report should contain a statement that the
auditor is not independent of the entity if such is the case.
Answer D is incorrect because the report should include a listing of the specific
procedures performed.
37. An agreed-upon procedures engagement may involve the auditor in performing
certain procedures concerning
A. Identification of the purpose for which the agreed-upon procedures were performed.
B. A summary of procedures performed.
C. Limited assurance on the information presented.
D. Use of the report is restricted.
The accountant’s report should include a statement that the procedures performed
do not constitute either an audit or a review and, as such, no assurance is
expressed.
According to PSRS 4400, the report of factual findings should contain:
a. Title;
b. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures);
c. Identification of specific financial or non-financial information to which the agreed-
upon procedures have been applied;
d. A statement that the procedures performed were those agreed-upon with the
recipient;
e. A statement that the engagement was performed in accordance with the PSRS
applicable to agreed-upon procedures engagements;
f. A statement that the auditor is not independent if such is the case;
g. Identification of the purpose for which the agreed-upon procedures were performed;
h. A listing of the agreed-upon procedures performed;
i. A description of the auditor’s factual findings including sufficient details of errors
and exceptions found;
j. A statement that the procedures performed do not constitute either an audit or a
review and, as such, no assurance is expressed.
k. A statement that had the auditor performed additional procedures, an audit or a
review, other matters might have come to light that would have been reported;
l. A statement that the report is restricted to those parties that have agreed to the
procedures to be performed;
m. A statement (when applicable) that the report relates only to the elements, accounts,
items or financial and nonfinancial information specified and that it does not extend
to the entity’s financial statements taken as a whole;
n. Date of the report;
o. Auditor’s address; and
p. Auditor’s signature
PSRS 4410
Engagements to Compile Financial Information
The standard further provides that, “The accountant ordinarily obtains knowledge
of these matters through experience with the entity or inquiry of the entity’s
personnel.”
PSRS 4110, par. 13 provides that the accountant is not ordinarily required to:
a) make any inquiries of management to assess the reliability and completeness of the information
provided;
b) assess internal controls;
c) verify any matters; or
d) verify any explanations.
45. Each page of the financial information compiled by the accountant should include the
following reference, except
A. “Unaudited”
B. “Compiled without Audit or Review”
C. “Refer to Compilation Report”
D. “Compiled, Negative Assurance Expressed”
Answer C is incorrect because it describes negative (or limited) assurance provided in a review
engagement.
Answer D is incorrect because an audit provides a high, but not absolute level of
assurance that the financial information is free of material misstatement.
47. When compiling an entity’s financial statements, an accountant would be least likely to:
A. Obtain an acknowledgment from management of its responsibility for the
financial statements.
B. Perform analytical procedures designed to identify relationships that appear to
be unusual. C. Plan the work.
D. Read compiled financial statements and consider whether they appear to
include adequate disclosures.
Analytical procedures are necessary in review and audit engagements; not in compilation
engagements.
Answer C is incorrect because the work should be planned to ensure that an effective
engagement will be performed.
Answer D is incorrect because the accountant should read the compiled financial
statements and consider they are free from obvious material misstatements,
including:
• Mistakes in the application of PFRS.
• Nondisclosure of PFRS and any known departures thereof.
• Nondisclosure of any other significant matters of which the accountant has
become aware.
48. When compiling the financial statements of an entity, an accountant should
A. Understand the accounting principles and practices of the entity’s industry.
B. Inquire of key personnel concerning related parties and subsequent events.
C. Perform ratio analyses of the financial data of comparable periods.
D. Review agreements with financial institutions for restriction of cash balances.
PSRS 4410 states, “The accountant should obtain general knowledge of the
business and operations of the entity and should be familiar with the accounting
principles and practices of the industry in which the entity operates and with the
form and content of the financial information that is appropriate in the
circumstances.”
Answer B and D are incorrect because inquiries concerning related parties and
subsequent events, and procedures to obtain corroborating evidence about
restriction on cash balances are appropriate in an audit.
Answer C is incorrect because analytical procedures such as ratio analyses are appropriate in
review and audit engagements.
49. Which of the following should not be included in an accountant’s report based
upon the compilation of an entity’s financial statements?
A. A statement that a compilation of the company’s financial statements was made in
accordance with the PSA applicable to compilation engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or review the statements.
D. A statement that the accountant does not express an opinion but provides only a
negative assurance on the statements.
The accountant’s report should indicate that since no audit or review was performed, no
assurance is expressed.
PSRS 4410 States that if the accountant becomes aware that information supplied
by management is incorrect, incomplete, or otherwise unsatisfactory, he/she
should request management to provide additional information or correct that
deficiencies. The accountant should withdraw from the engagement if the
management refuses to do so.
Answers A and B are incorrect because the accountant should not express any
form of assurance on complied financial statements.
Answer D is incorrect because the accountant has no responsibility to upgrade the engagement to a
review.
PSAE 3400
The Examination of Prospective Financial Information
Answers B, C, and D are incorrect because the party responsible for assumptions
identified in preparation of prospective financial information is usually the
entity’s management.
53. Given one or more hypothetical assumptions, a responsible party may
prepare, to the best of its knowledge and belief, an entity’s expected
financial position, result of operations, and cash flows. Such prospective
financial
statements are known as A.
Partial presentations
B. Financial projections
C. Financial forecast
D. Pro forma financial statements
Financial projections are prepared on the basis on hypothetical assumptions which are not
necessarily expected to take place.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
PSAE 3400 states, “The auditor should not accept, or should withdraw from, an
engagement when the assumptions are clearly unrealistic or when the auditor
believes that the prospective financial information will be inappropriate for the
intended use.”
A. I only
B. II only
C. Either I or II
D. Neither I nor II
PSAE 3400 states, “When the auditor believes that the presentation and disclosure
of the prospective financial information is not adequate, the auditor should
express a qualified or adverse opinion in the report on the prospective financial
information, or withdraw from the engagement as appropriate.”
TRUE OR FALSE
1. A CPA firm can issue a compilation report only if the engagement partner
has no direct or material indirect financial interest in the client.
2. A compilation of financial statements provides negative assurance regarding
the financial statements.
3. A review engagement is not currently an acceptable form of association with
prospective financial statements.
4. The statement that “Nothing came to our attention which would indicate that
these statements are not fairly presented” expresses a disclaimer of opinion.
5. When a practitioner examines projected financial statements, the
practitioner’s report should include a separate paragraph that describes the
limitation on the usefulness of the presentation.
6. The concept of limited assurance is provided for in agreedupon procedures
engagement.
7. Use of agreed-upon procedures report is restricted to the specified users.
8. An audit review requires less evidence related to internal control than a
review.
9. A practitioner who reviews the financial statements of an entity should issue
a report stating that a review provides only limited assurance that a financial
statements are fairly presented.
10. An accountant’s report issued after compiling the financial statements of an
entity should state that a compilation is limited to presenting in the form of
financial statements information that is the representation of management.
11. Before performing a review of an entity’s financial statements, a practitioner
should obtain a sufficient level of knowledge of the accounting principles
and practices of the industry in which the entity operates.
12. An accountant’s report issued after compiling the financial statements of an
entity should state that a compilation is substantially less scope than an audit
in accordance with PSA, the objective of which is the expression of an
opinion.
13. Negative assurance is not permissible in reports based upon a review
engagement.
14. Compilation reports are normally dated as of the client’s balance sheet date.
15. An accountant’s report issued after compiling the financial statements of an
entity should state that a compilation consists principally of inquiries of
company personnel and analytical procedures.
16. Accepting an engagement to examine an entity’s financial projection most
likely would be appropriate if the projection were to be distributed to a bank
with which the entity is negotiating for a loan.
17. A non-audit engagement in which the accountant undertakes to present, in
the form of financial statements, information that is the representation of
management, without undertaking to express any assurance on the
statements is called an agreed-upon procedures engagement.
18. A CPA must be independent to issue a review report.
19. A practitioner’s report on agreed-upon procedures that is in the form of
procedures and findings should contain an acknowledgement of the
practitioner’s responsibility for the sufficiency of the procedures.
20. When performing compilation services, the accountant is required to obtain
an understanding of the client’s internal control.
21. An agreed-upon procedures engagement is one in which the auditor and
management or a third party agree that the auditor will apply his/her
judgement to determine procedures to be performed.
22. The CPA may issue a report on whether the summary financial statements
derived from the audited financial statements are consistent, in all material
respects, with those financial statements, in accordance with PFRS.
23. When an accountant compiles a financial forecast, the accountant’s report
should include a caveat that the prospective results of the financial forecast
may not be achieved.
24. General use statements are prepared for use by known contractual parties.
25. Financial projections can be provided for general use.
KEY ANSWERS
1. A 19. C 37. D
2. C 20. A 38. D 3. C 21. B 39. B 4. A 22. C 40. C 5. B 23.
A 41. D 6. D 24. D 42. A 7. C 25. C 43. D 8. C 26. D 44. A 9. B
27. B 45. D
10. A 28. A 46. A 11. A 29. B 47. B 12. B 30. C 48. A 13. A
31. C 49. D
14. A 32. A 50. C 15. B 33. D 51. B 16. C 34. C 52. A 17. D
35. D 53. B
18. A 36. A 54. D
55. C 5. True 18. True
56. A 6. False 19. False
57. C 7. True 20. False
58. C 8. False 21. False
59. D 9. False 22. True
60. C 10. True 23. True
11. True 24. False
TRUE OR FALSE 12. False 25. False
13. False
1. False 14. False
2. False 15. False
3. True 16. True
4. False 17. False
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