Ee ee AUDITING THEORY Final Pre-Board Examination Batch 27 - May 2014 CPA Examinations INSTRUCTION - Select the best answer by MARKING with Pencil No. 2 the letter Of your choice. Follow the marking (one vertical line) as indicated on the Answer Sheet provided. Be sure to mark your answare properly. 1. What is an auditor’s evaluation of a statistical sample for attributes when a test of 100 documents results in 4 errors if the tolerable rate is 5 percent, the expected occurrence rate is 3 percent, and the allowance for sampling risk is 2 percent? a. Accept the sample results as support for lowering the assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected occurrence rate. b, Do not decrease the assessed level of control risk because the sample occurrence rate plus the allowance for sampling risk exceeds the tolerable rate. ¢. Do not decrease the assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected occurrence rate. d. Accept the sample results as support for lowering the assessed level of control risk because the earple occurrence rate plus the allowance for saspling risk exceeds the tolerable rate. D) 2. wich of the fottowing controls would be most effective in assuring that Stoorded purchases ara frce of material errors? Spies nokintig aupcrusant Souprtee the’ atentley’axdarad cx Bicchece Sulete with the geantiey secelved on seemiviny fepsrts- bb. hn aapleyes che Is inaslonant oF tha Toceleing departhant compan «. hecniving reports requive the signature of the individual who suthorieed the parchase 2, Purchase orderer revelving reports, and vendors? IndepenBantiy adtchon an pespictog vetaiepe, Fg Sap sc ne ss invoices are | As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. most likely explanation for this situation is that a. the ocourrence rates of both the auditor's sample and the population exceed the tolerable rate. b, the occurrence rates of both the auditor's sample and the population is less than the tolerable rate. e. the occurrence rate in the auditor’s rate, boi rate. the occurrence rate in the auditor's sample exceeds the tolerable rate but the occurrence rate in the population is less than the tolerable rate. The imple is less than the tolerable t the occurrence rate in the population exceeds the tolerable , While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in face not materially miestated. This situation illustrates the risk’ of ‘ a, Alpha risk. BL Reta riek. ©. Assessing control risk too low. d. Assessing control risk too high. . Which one of the following audit procedures is least likely to be performed prior to the balance sheet date? @. evaluation of internal controle over sales B. physical inventory observation €. evaluation of the collectipility of accounts receivable 4. confirmation of accounts receivableSe Tere Final Pre-Board Examination (Batch 27) Page 2 of 14 Cs. wien one of the following statesents bent describes vy an audi eee ® preliminary estimate of materiality? Er Sn estimate is required by generally accepted auditing standards b, the estimate provides a basis for evaluating likely misstatements -S¢ the cotimate helps the auditor plan the appropriate evidence to accumulate d. estimating materiality early helps the auditor avoid legal liability © + Which one of the following statements best describes a CPAs Feeponsibilities when a material amount of an audit client’s transactions are with related parties? a. The CPA should withdraw from the engagement bs If the disclosure of related party transactions is inadequate, the CPA should qualify his or her audit opinion ©. Unless related party transactions are eliminated from the financial statesents, the auditor must give a qualified or adverse opinion 4. The CPA should ensure the transactions are recorded at fair market values CY ®. ten planning a sample for a substantive test of details, an auditor should consider tolerable misstatenent for the saspie. "this coniacration showld -"be related to the auditor’ s assessnent of inherent risk. B. not Be adjusted for qualitative factors, fb: be related to preliminary Judgeents. about &. not be changed during the audit process. teriality levele. 9. Which one of the following audit tests would most likely constitute a test of controls? @. comparing the production cost of inventory items to a company’s standard price list. B, Inspecting a sample of additions to property, plant and equipment . Examining invoices paid after the fiscal year end 4. Examining invoices paid during the fiecal year 10. Which one of the following is not a valid purpose for performing analytical procedures? a. improve knowledge of the client’s business b. identify material misstatements ¢. assess inherent risk d. aseoss control risk 11. Which one of the following audit tests i ‘procedure method? scanning disbursements for unusual itens comparing account balances to budgeted azounts examining documentation supporting disbursements |. predicting account balances using regression analysis not a valid analytical Perr 32. Which of the following most likely would give the most assurance “concerning the valuation ‘tion of accounts receivabl. 4. Tracing amounts in the subsidiary ledger to details on shipping documents. , Comparing receivable turnover rations to industry statistics. €. Inquiring about receivables pledged under loan agreoments. #: Asseasing the allowance for uncollectible accounte for reasonablene: 13. After discovering a misstatesent in a a: CPA is most likely a. extrapolate the misstatoment to the population as a whole . examine additional saaple items to ensure that the sample results representative were ©. consider iseuing a qualified opinion Ai compare the discovered aisstatenent to the anount considered material ample taken from a population, a 14, Which of the following is the best audit procedure for ‘existence of unrecorded lisbilities? a. Examine confirmation requeate returned by creditors who: appear on 4 subsidiary trial balance of accounts payab), determining the accounts “eas ' RRS | | |b. Bxamis — Pee amine unusual relationships between sonthly accounts payable balances and recorded purchases, = ree i 2 Examine a sample of invoices a few days prior to and subs: “1 8 prior to and subsequent to year end to ascertain whether they have been properly recorded Examine @ sample of cash disbureenente in the period subsequent to your a. (0, 15: A CPA who belioves that an audit client has failed to adequately + disclose financial difficulties which make its going concern status doubtful, should: a, issue a denial of opinion Bb. disclose the information and issue an unqualified opinion f- disclose the information and issue a qualified opinion (d. withdraw from the engagement % 16. The primary objective of procedures perforsed to obtain an undaratanding of an entity’ control environment is to provide the auditor wien: a. sufficient knowledge to assess control risk Jb. knowledge needed to plan the audit ‘c. a basis for determining tests of control ¥ d. a basis for planning analytical procedures ) (17. mo which of the followang matters would sateriality limite not apply when obtaining written client representations? a. Losses from sales coamitments 4 Db. Unasserted claims and assessments c. Fraud involving managesent G. Noncospliance with contractual agreements | The test data method is most likely to be used in auditing a client with a sophisticated computer system when the auditor plans to Ff assess control risk below the maximum level B. Use generalized audit software ©. reduce audat risk to a low level 4 @_ perfor audit procedures consistent with a low level of detection risk (L 19.__an auditor in oat likely to study and evaluate a client-prepared eystem flowchart when: a. assessing control risk Bb. designang analytical procedures [# developing an understanding of the client’ s system @. the planned level of detection risk 1 low. (C/ 20.» purpose of = management sepresentation letter 1s to reduce a, avdie risk to an aggregate level of misstatement that could be considered naterial : bp, an auditor's responasblity to detect material misstatements only to the extent that the letter is relied on. @. the possibility of a misunderstanding concerning managenent’s a. renee responsibility for the financial statements. | the scope of an auditor’s procedures concerning related-party transactions and subsequent events. fp 2 _atsrton scant coutabiaconttmeon is See erection shan She mit made Peters sete Eee ih oe De fp noncreaponge 20 sneerrreted At SPreercueet nite eee ates ieee SF is galore sibstlos a mecha Galata! aaetatagey i Pe eS SPS SET eld oy tei raccoon oe posse i eeetesce “Resa” ‘The Review Schoo! of Accountancy "“@iel No. 735-9807 & 734 suuRAuditing Theory joard Examination (Batch 27) Page 4 of 14 4. presentation and disclosure CQ 23. Which of the following statements ordinarily ie included among the written client representations obtained by the auditor? #, Managenent acknowledges that there are no waterial weaknesses in internal control B. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. ©. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. A Managenent acknowledges responsibility for illegal actions committed by employee: SD 24, smen using attribute saspting to test internal controls, the required sanpie size is Aikely to'be' least affected by th a. assessed level of contre! risk B. tolerable deviation rate g. risk of overreliance 4. population sise Cy 25. wnat ie the type of risk when audited financial statements contain a material misstatement but an unqualified opinion is issued? a. business risk b. inherent risk @. audit risk 4. alpha risk B 26. Which of the following statements best describes the relationship between materiality and the level of assurance in an audat, other things remaining constant? a. as the assessed level of materiality increases, the level of assurance decreases b. as the assessed level of materiality decreases, the level of assurance deer + as desired assurance increases, materiality must decrease there is no relationship between materiality and the level of assurance came aC this may permit the audit of intercompany balances to be performed as “—" of concurrent dates. b. intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions cc. this may reveal whether particular transactions wou! if the parties had not been related. 4d. the business structure may be deliberatel: party transaction Ad have taken place y designed to obscure related- DB pccligh of the feliowing 42 not a valid semence of steps in the audit it Seer cine sot santa, pSoenreaty ge atccatslat setts a ted “nical anaes Satay Seserinlom cotegten assessing inherent risk, Performing certain (C/ 25. ao auditor concludes that there is aubstan ability to continue as a going concern during tuation has not been adequately disclosed in Tn this situation, what type of op ‘tial doubt about an entity’ s the next fiscal year and the the entity’s financial inion should the auditor 2. 8 denial of opinion b. an unqualified opinion to avoid a “self-£uiei1: Lang prophesy” tha E entity will fel a 'y" that theFinal Pre-Board Examination (Batch 27) Page 6 of 18 AG Sw evaluate the effectiveness and efficiency of an organization's methods, policies, and procedures B. to evaluate the effectiveness of an organization’ s internal controls ©. to evaluate the quality of financial reporting of governsen' and not- for-profit organizations aeehay = oh ae 4. to provide assurance that the organization operates in cospliance with relevant laws and regulations A 38. im thich of the following situations would a principal auditor least likely make reference to ancther auditor who audited @ subsidiary of the entity’ The other auditor was retained by the principal auditor and the work wae perforned under the principal auditor's guidance and control. b. The principal auditor finds it impracticable to review the other auditor's work or othervise be satisfied as toa the other auditor!s work. The financial statements audited by the other auditor are material to the consolidated financial statesents covered by the principal auditor's opinion. 4. The principal auditor is unable to be satisfied as to the independence and professional reputation of the other auditor. 4 V39. Which of the following is not normally an objective of a client's internal controls? A. provide assurance that transactions do not occur with a related party b. provide assurance that transactioné are recorded at the proper time ©. provide assurance that transactions are properly authorized 4. provide assurance that transactions are properly included in master Files fy 80. mt as the sspiication of the existence of inherent lamitations of ""apearnat controls? i [AO hat control Fisk cannot be zero B. that detection risk must be greater than rere ©. that aaherent risk will often be @. that the work of internal auditora rarely if ever affects the external auditor’s assessnent of control risk By 41.___imich of the cotiowing events occurring after issuance of an auditor’ s report sost likely would cause tho auditor to aake further inquiries about the previously issued financial statements? a. A technological developsent that could affect the entity’s future ability to continue as a going concern. b. The discovery of information regarding a contingency that existed before the financial atatenents were issued. ©. Tho entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales. & The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report. 4 DD pion of the foltoving intern controle sn an EOP ayetan are nest ainaty tobe tested uoing the tect dave approsch? ae acca sin £ Sativare controls oe Matporivacion controls a (qeorreaned tuner SD) 2 A stisnt(s insistence shat the audited casuite are repo aeeacrtbe’ Slaeal: your and do, eoosues' ts eoaltoed, hereoee? ZA. anny cneectaiaties inherent in the financisl strteceste cannot be Tetlived until several sonthe after the year-end cloning tr rhe tog b. the financial statesents are less reliable because the period somone by the review for subsequent events ie shortened jo. aaty elfente have Decenber Sl Year enda end t0 te digeiene the audit when any of the client's perecenel ace ca fieue © 4. tite pressure created by unrealistic deadlines increases Oy righ errors in judgment and in the performance of audit procedures ty OF rted quickly to completeAuditing theory Final Pre-Board Examination (Batch 27) ge of 14 B14. 24 20 suastor mettovan that the aoope of the audit axanination ne resulted an the auditor being unable ts sompite seth tient re nae evidence with Tespect to an iter includes in the fiaseain, eeeeiate the materiality of the ites will determine the choice ‘Proper audit opinion. The choace could be: wns a. between an unqualified opinion and an adverse opinion b. between a qualified opinion and a denial of opinion be between @ qualified opinion and an adverse opsnion AG between an adverse opinion and a denial of opinion B 45, Which of the following describes the auditor’ s responsibility with respect to the information contained in the client's annuel repost beyond the obligation to express an opinion upon the financial statement. # the auditor's responsibility is limited only to expressing an opinion on the fair presentation of the client’s financial statenents b, the auditor should read the client‘s annual report to advise the client Af there are any inconsistencies with the audited financial statements oF other material aisstatenent of fact @. the auditor should review any future-oriented financial infornation contained in the annual report for complatences d. the auditor must review any Management’ Discussion and Analysis ancluded in the annual report for compliance with guidelines set out by | the Securities and Exchange Commission Dy even aru ete be ects oft « peo Se hel the wed inca Pagroapi creep ooleenlgrg see ici etertect oe aes rs Seances seen erste teats ec teceet teeta segs a ESTE se ectdenon these dite Se Suda pstmt eh Bs 1) ak nic eect? ad wen tres Lexa |sdgaca aso sana afc @, EDP aystems lack the paper trail required to identafy who initiated a “transaction: nS a chadan ace comccercene uate Saas (iy. #8.__ ten evatvating EDP controls), the auditor is faced with the choice of - “8 Juditang around the computer or auditing through the cosputer, When Auditing around the cosputer, the processing of computer applicatio foe investigated. This approach 5 appropriate when a. inherent risk is assessed to be high b. the processing logic of the program used is cosplex EL the computer system ie siaple or uses proven commercial software @. most of the controls reside within the computer application itself By 0, veces seaorsntd eangatenstnited att tog sy won the aon pions, detncoraentad comers worsted sit terbmaguee sety upon tn ee oon pirpoee progress, oi wT eiauung 9 potbia e Listing af tart Sudie progzane, nn sudstor piahiog to, obtain p tasting of au! Aeceunts ent icmyad Giel pe ee nee conten, Pritts ress Caste gooert bert cee ee ESE Te teale pcommn ao oh: ‘ReSA ‘The Review School of AccountancyD 51 D 50. One eyetems-oriented compute: Auditing Theory Final Pre-Board Examination (Batch 27) Page 8 of 14 sisted audit technique employed by auditors is the use of test data. This technique would be used to: a. produce flowcharts from the client’s source code b. obtain knowledge of the client's system g. verify an account balance @. test internal controls 1. ‘The close relationship that can develop between an auditor and a small business client has raised concerns among accounting critics, These concerns are heightened when the auditer provides bath auditing and consulting services to the client. The main concern raised is: a. auditors may not have the sufficient expertise to provide business advice to cliente b, auditors may not be able to maintain client confidentiality with respect to information learned during the course of the consulting engagement client information learned during the consulting engagement gives the auditor an unfair advantage in a competitive bid for the audit gf auditors may not be able to maintain their objectivity when auditing syetens they have provided to clients C 52. When auditing contingent liabilities, which of the following procedures would be least effective? ; Reading the minutes of the board of directors Reviewing the bank confirmation letter. ; Examining customer confirmation replies ; Examining invoices for professional services An accountant providing a compilation service must: be independent of the client assure that the work is performed by a person with adequate training and with the professional care * ¢. carefully review the information provided by the client 4. provide limited assurance that the information follows GAAP Auditors are frequently called upon to provide special reports for clients. In which of the following engagements would the auditor not. issue an opinion? an engagement to audit a foreign subsidiary of a Canadian-owned corporation where the subsidiary’s operations are not considered to be terial to the parent’s financial statements b. an engagement to determine if an entity has complied with ite contractual obligations under a joint venture agreement ©. an engagement to tally votes for an association’ s election 4. an engagement to study @ pension fund’s processing of transactions D2, 2+ tne ansttorbatseve that ie tn tcappropcista to ouly soon wove, dona Ds. be by @ secondary auditor or specialist for a material item included in the financial stateaents, then the materiality of the item will determine the choice of the proper audit opinion, The choice coula ber - Between an unqualified opinion and an adverse opinion between a qualified opinion and a denial of opinion between a qualified opinion and an adverse opinion |. between an adverse opinion and a denial of opinion adequately disclosed, then the materiality of the uncertainty citi Oot SESS Satay sh bestest oe ee eeeeattey a a. between an unqualified opinion and a denial of opinion bs Er SIEIIDE PADRES orion ands "ste oman AE Reieth LRaaEs srunton sala aint of opine $. SST PRIM een cid a aal o optndcn it ensenrstlaict adm Setvregeioves ute sateen ee ttn Fa" eget St fot ted fo Aemuance of the auditor's report, the auditor's responsibeingy sec erore Occurring subsequent to the completion of field wort ret 'Y fOr eventsee Se ee Page 9 of 14 a. Extended to include all events occurring until the date of the last subsequent event referred to. b, Limited to the epecific event referred to Lamited to all events occurring through the date of issuance of the report _& Extend to include a11 events occurring through the date of subsission of the report to the client & do auditors often ignore alpha risk when applying the audit risk model? 2. the costs associated with alpha risk are negligible JB. the design of audit tests results in a low probability that a negative signal would be drawn when the true state of the world is the financial stateaents are fairly presented c. the client is likely to insist upon additional testing if a Type I error 1s committed 4G. errors associated with alpha risk are rarely material C2 saath, Be rebisinany eh of the audit, the client and auditor should 2 each an agreement about the nature and performance of the audit. This agreenont 18 formelized as ‘a, a representation letter b, a managesent letter ¢. an engagement letter d. a letter of credit tv 60. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial stateents provided that S. Sisteibution of the report is to be restricted to the specified parties involved. b. the prospective financial statements are also examined. . the accountant tekes responsability for the adequacy of the procedures performed. d. negative assurance ie expressed on the prospective financial statements taken as a whole a. document processing is accompanied by an appropriate form of generalized susie software? eres ee ronaie ropa nibeecnn Hock sim. Sat wl ap as ‘RII wa entareel aucksors 5, EE eermeaae een: ob Sienliing deep. exncan si, wet seeeerene types of BDF systems of miditors neod audit softwere flexible enough to adjuet to changing Mate sbyectives See eee netics iat dan bbe ead ty, eatin eguarniate (6. _ 16 an the sppiication of an analytion) prooedvra to an stem the auaitor identifies a difference between the actual value of the item and the Sse eset Soa of the item, then the auditOr's next step an to PP invastigaca the cause of the difference i ceoeehgnis Hie em AE ous EO Nae LNG. SORROW bestinn, Pip Thaiyfacel procedure ee ee eeeeee the difference 4a sufficiently Large to farther investigation eran ren eSsemant of Inharant Riak for the itee errant b 64. When an auditor is assessing the auditability of @ small busin client, the auditor should focus upon: waa the intagesty of management and the adequacy of the client’ a control ayatene ta internal,Auditing Theory Final Pre-Board Examination (Batch 27) Page 10 of 14 oe d. whether the client’ whet 8 accounting personnel are well trained and onally qualified SQ FERS Even gomasotent, tne pubic scoountant provides negative goeurance in the report which is issued, This can best ba described bY the phrase: ZF rothing has cone to ay attention ‘b. the financial statements present fairly ©. We are unable to express an opinion d. except for the issues explained above A comfort letter is issued in association with a prospectus when: i the client requests one as evidence that the prospectus is complete | the auditor is required to asses that all material events subsequent to the previous audit have been disclosed | - the auditor believes all the infornation contained in the prospectus is | plausible | 4. the audited financial statements are not current and unaudited interis \ financial statements are included 67. Auditors can usually achieve better relations with auditees if they , emphasize their role aa managesont advisors concentrate on uncovering errors sade by lower-level employees: concentrate on uncovering frauds and emberzlenents, emphasize their role as an insurance policy against potential frauds and embezzlenents. oo me {B20 senses such as 2insting the abiaity of auditors to, solicit clientes, price cutting te obtain new clients, and having one fira provide both Rudi ting and aanagement conselting services to the same client are of Correne concern to the auditang profession because: a. they violate existing code of ethics Bl these practices are viewed by some as threatening the independence of the auditor c. these practices result in the profession receiving adverse publicity Gl they make it difficult for audit practices to earn profite 69. Tt has been suggested that increased fee competition for audits could ead to a loss of auditor independence. Which of the following statements best supports this argunent? | a competition reduces the auditor’s margin of error in estimating the fee Tequired te price the audit profitably b. negotiation over the audit fee may sour the relationship between the auditor and the client o, lower fees force the auditor to take shortcuts in the performance of auditing procedures theraby reducing the effectiveness of the audit price competition may result in the auditor submitting a bid below the Preucl aoet of an initial engagement in the hope of making up the loss in subsequent years (1) -70.__wnich of tne fottoving ss not» potential banueit of having the auditor Le ene esse Tand avoaulting sarvioes to the clleat? provide natn editing srs oma arse Oe itor " Bia provide the consulting services more efficiently than an outside sopetmation acquired during the course of the consulting engagement may b Eip in the planning and perforaing of the audit weevena designed by the auditor as part of a consulting engagesent do + Syeceeed to be audited aa carefully as systens designed by an outside uditor has prior knowledge of their relaability 1 the auditor’ s understanding of the client. ‘This understanding reduces the potential consultant since the at 4. conaulting practice incr Gnd the client's industry, for an audit failureh n. Ct» B» Cm. Tn Eaey Final Pre-Board Examination (Batch 27) Page 11 of 14 If the auditor believes that an item in the financial etatomente has ot een prepared in accordance with GAAP, then the sateriality of the tea w termine the choice of roper audit opinion jo1ce mane Ore the proper audit op: ‘The ch &, between an unqualified opinion and an adverse opinion Wi betwoan a qualified opinion and a denial of opinion ©. between an unqualified opinion and a denial of opinion a. between an adverse opinion and a denial of opinion When considering the valuation assertion for an asset or liability, the proper basis for detersining value is: historical cost aarket value e, GAAP d. Lower of cost or market Which of the Following best describes the meaning of beta risk? aL the probability that the auditer assessed cnntral risk too hagh ‘b. the probability that the auditor will incorrectly iseue an unqualified report ce. the risk that the financial statements contain a material error d. the risk that the auditor has used an insufficiently powerful test The best source of information for planning the audit approach and developing the audit progran would probably be information contained in prior audit reports X. audit procedures found in the permanent audit files D 75. > the lack of proper segregation of duties A 7% (om use of different types of computer programs. These softua: be clasa:fied as generalized audit software, systems utilitre Purpose prograna, custom-written audit programs, or industry spectre audit prograi provincial oil and ¢ A. goferalised audit software b. aysten utility software ‘c. the results of a preliminary survey . the long-range audit plan as it applies to this specific audit Microcomputer environments can be especially difficult for auditors since microcomputers lack many of the controle that are standard with mainframe compaters. Which of the following is not a common control weakness associated with microcomputers? ‘B. improper safeguards over access to the system ¢. anauffrexent protection from improper or unauthorized manipulation of files d. commercial software purchased for use on microcomputers 1s more likely to contain “buga” than proprietary software daveloped by the client It ie eatamated that up to 70% of all computer frauda involves fraudulent input. This is a much higher percentage than for manual syatems because: a. it ie difficult to alter the hard copy documents used in manual systems without detection e b, frauds in manual systems are concentrated more on the theft of information c. computer controls over processing are less reliable than those used in manual systems |g employees with computer passwords have virtually unliaated ability to alter coaputer records Various data-oriented computer-assisted audit techniques rely upon the re packages may + general- An auditor wishing to verafy a client's calecrecs royalty taxes would most likely wast ee 7 industry-specific audit programs h 7. d. general-purpose programs provide future-oriented financial intoreation of thats Eagular dusciosures, Such inforancson may tale the fee og either a forecast or @ projection. The distinction beta es ied & projection as: tween a forecast and Resa ‘The thowiels CONOEE OT Remmedinen...Auditing Theory Final Pre-Board Examination (Batch 27) @. & projection as bas: Page 12 of 14 pehgidection 28 based on assumptions that include hypotheses which ne b, only Foreenses eesnanagenent!'s opinion of the aost Likely set of events © forecasts Fe based on management's planned course of action a BeeIeaES SFE Predictione with a shorter tine horiron then projections ons are Erequently non-quantitative it eaters 79. Wn dD ven planning an audit, the audit 1 the auditor must take steps to provide Feasonable assurance ei ena Sentonavie' shat any material frauds will be detected. This werance it less than that provided ree ction of nonfraudulent meterial misstatements becasoe, 7" “™e Sateetion of a: auditore face less lability for £ellure to detect fraud - frauds are extremely rare and therefore @ lower level of appropriate A. seat frauds are detected by means other than the audit ‘those committing frauds usually take 3 2 peer i the frauds iy teps to prevent the detection of e 80, Which of the following best describes the auditor’s responsibilities with respect to the representations made an a set of financial statements? a. to advise the client’s management on the rules of GAAP to assure that all assertions are complete to provide a reasonable level of assurance that all assertions are true within the bounds of materiality to deteraine that each assertion is p Re erial A 81. Why should the EDP department be independent of the payroll department? . because no departeent should have control of both assets and records Decause payroll inforsation is confidential and it ie important for access to this information to be limited to a minimus nunber of personnal c. because payroll personnel often lack the technical skills needed to operate EDP 4. because application controls would be seriously compromised / gy Det. am anton aneironant, sch of tm fling se ot 8 contd Be Reeaeesrt tctpttae racers ara sconce Sp DLSPOTLAES SPSS TOPLESS ESSER na pontoons (A, 8% __ten 12 the use of computer assisted audit techniques (CAATS) most & appropriate? arPuhen the client’s systes is complex and requires specialized routines to audit b, when the auditor is not fully familiar with the CAATo ©. when the existing program can be used to automate a repetitive task G. when the auditor has decaded to audit around the computer During the planning stage of the audit of a retail client, the auditor notices a decrease in the inventory turnover ratio (cost of goods Goia/average inventory) of 30% from the previous year. Which of the following facts would reinforce the concerns raised by the initial results? van increase in accounts receivable turnover (net sales/average accounts receivable) b. a decrease in the current ratio (current assets/current lisbilities) ¢. an increase in return on assets (net income before interest/average total assets) 4. a decrease in gross margin (gross profit/sales) ea. action, the appropriate treatment is to Teport that wanagement has agreed to take corrective action nit the finding and recommendation Zopore that management bas already taken corrective action repre the finding and recommendation, irrespective of management’ o agreement. J cvs tee HOODIE ET efit st ht sett ete eat aookAuditing Theory Final Pre-Board Examination (Batch 37) Page 13 of 14 auditor's decisi: owner's personal on to audit aro involvement in B 9% te ene muait of 8 audit of a ssi1 business, under auditor required te obtain @ sufficier tena ae en et oe internal centres nt understanding of the client's @. only when intendin st co Tees than theming te test controle n order to ass: W. in order to ecm ©. Af the applicac, a mand any EDP ystems in place the business: - control risk at | for difficulty that an auditer faces in a value for | on ate 3 y th ditor £. flue for soney C 88. wnat as the aa 2: finding personnel with sufficient audit experience B applying auditing standards in thie typeof enseocaent | & Sgterminins the proper criteria for evaluating the audit results Adentafyang the appropriate objectives for tha aeaie A 89. What action should an audi client is uncovered? 4. Keport it to the client’ s audit commtes management determine if the illegal act is material before raising the issue with the client { ©. require the client to accrue all potential aabilities which could arise from the prosecution of the illegal act 4. immediately resign from the engagement. tor take if evidence of an illegal act by & or other appropriate level of b > ost sz oid ottmetsiatece species nat eee ne canging the cease a endor ona ping easel Soars b. remain the sane d. become indeterminate . 7D) 91. me negative form of sosomte neoeivable confuraation request ie useful except ehen cocnet icontnot, slcccmdliy docsnts SesAvabil’g asomidaned 00:8 we. STRGe Ronber of and batancon ace snvotved ‘e. the auditor has reason to believe the persons receiving the requeste Sis Linely’ eo give then sonsiansneton 4, Individual account balances ane telatively 1acge DB s2- re return of a positive confixestion of accounts receivable without an P rcoption attests to the wilectisitity of the receivable balance Scoursey of the receivable belance z SScuracy of the aging of accounts receavable seeeERGY SE the aliovance for uncollectitle accounts cD) nic) si latecbl lle po Somot antheende oy wont admin atin are Manne 5 SS Be of controls and substantive t: 4 anise aire aorratn onia atal wa BD 60, ao aosttor anne seperate costs of outers end mbetantive ton Diomals ma ste eats Senne sate" ee ts oy SUELEE gage aM Selletce tee te none y SreOmLshGG Sor S00 Force a concent (7B! greater than that for teste of cor Te Raview Schoo! of Accountancyhows. k 96. Ko. dD» kh» ‘Auditing Theory Final Pre-Board Examination (Batch 27) Page 14 of 14 igns than that for teste of controle totally independant of that for testa of controle An EDP system is designed to ensure that managenent possesses the information it needa to carry out its functions through the integrated actions of By date gathering, analysis, and reporting functions bs & computer-based information retrieval and decision-making system . statistical and analytical procedures functions 4d Production-budgeting and sales forecasting activities Which of the following conditions would not noraally caus £0 question whether material misstatements exist? fg: Bookkeeping errors are listed on an EDP-generated error listing 3B differences exist between control accounts and supporting aaster files S. transactions are not supported by proper docuaentecion 4. differences are diacloned by confirmations the auditor The CPA reviews Pizza's payroll procedures. An example of an internal control weakness is to assign to a departaent supervisor the responsibility for @. distributing payroll checks to subordinate employees ». reviewing and approving time reporte for subordinates ©. anterviewing applicante for subordinate positions prior to hiring by the personnel departaent d. anatiating requests for salary adjustments for subordinate employees Which of the following situations would impair the independence of the firm or a mexber of the assurance team in an inadvertent violation of the Code as it relates to a financial interest in en assurance client? @ The fire has established policies and procedures that’ require all Professionals to report promptly to the fira any breaches reaultang from the purchase, inheritance or other acquisition of a financial interest in the assurance client b. The farm, prosptly notifies the professional that the financial interest should be disposed of The disposal occurs at the earliest practical date after the identification of the issue, or the professional 1s removed from the assurance team 4. The dispomal occurs and the professional 18 removed from the aesurance team after the completion of the engagement. ™ that enable us Prograsa directly through work stations. a. On-Line computer ayste b. Database managenent. ay ra to access data and ©. Personal computer eystens, tone 4. Database systems. Gh 200. raciiity offered by banks to their customers to store valuable property for safe-keeping ‘a. Options, ©. Repurchase agreements Be. Safe custody 4. Standby facility