Professional Documents
Culture Documents
1.
The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement
and limited assurance engagement. Which of the following is the objective of a reasonable
assurance engagement?
a. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
practitioners conclusion.
b. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioners conclusion.
c. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of expression of the
practitioners conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of expression of the
practitioners conclusion.
2.
3.
4.
Suitable criteria
An appropriate subject matter
A two-party relationship involving a practitioner and intended users
Sufficient appropriate evidence
5.
Consulting Engagements
Preparation of Tax Returns
Independent Financial Statement Audit
Agreed-upon procedures Engagement
Compilation
Financial statements audit
Information reliability services
Reviews of prospective financial statements
The risk that the practitioner expresses an inappropriate conclusion when the subject
matter information is materially misstated
a. Assurance engagement risk
b. Materiality risk
c. Non-detection risk
d. Reasonable assurance risk
6.
7.
Which of the following characteristics need not be exhibited in determining the identified
suitability of criteria of a subject matter in an assurance engagement?
a.
b.
c.
d.
8.
Completeness
Relevance
Understandability
Substantial acquisition cost
9.
10.
Agreed-upon procedures
Management consulting
Preparation of tax returns where no conclusion is expressed
Compliance audit
11.
12.
Which of the following best describes why an independent auditor is asked to express an
opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a companys financial
position, cash flow, and operations without the expertise of an independent auditor
b. It is managements responsibility to seek available independent aid in the appraisal of
the financial information shown in its financial statements
c. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements
d. It is a customary courtesy that all stockholders of a company receive an independent
report on managements stewardship in managing the affairs of the business
13.
14.
The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement
and a limited assurance engagement. Which of the following is the objective of a limited
assurance engagement?
a. A reduction in assurance engagement risk to a very low level in the circumstances of
the engagement as a basis for a disclaimer of the practitioners conclusion.
b. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of expression of the
practitioners conclusion
c. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of the
practitioners conclusion
d. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of expression of the
practitioners conclusion
15.
The subject matter of an assurance engagement can take the following forms except
a.
b.
c.
d.
16.
The primary responsibility for the adequacy of disclosure in the financial statements of a
publicly held company rests with the
a.
b.
c.
d.
17.
20.
Clients management
Independent auditor
Audit committee
PICPA
The criteria for evaluating quantitative information vary. Example, in the audit of historical
financial statements by CPA firms, the criteria are usually
a.
b.
c.
d.
19.
Which of the following is responsible for the fairness of the representations made in
financial statements?
a.
b.
c.
d.
18.
Accounting
Auditing
Management
Economics
b. The decision as to loss of independence must be made by the client based upon facts
of the particular case
c. The auditor should not make management decisions for an audit client
d. The auditor who is asked to review management decisions is also competent to make
these decisions and can do so without loss of independence
21.
This refers to the audit procedures that, in the auditors judgment and based on the PSAs
are deemed appropriate in the circumstances to achieve the objective of an audit
a.
b.
c.
d.
22.
23.
General competence
Familiarity with the particular industry of which the auditors client is part
Due professional care
Independence
Which of the following may not be an appropriate form of the subject matter of an
assurance engagement?
a.
b.
c.
d.
26.
A subject matter
Suitable criteria
An engagement process
Appropriate professional fees
25.
24.
Analytical procedures
Scope of an audit
Audit sampling
Documentation
a.
b.
c.
d.
27.
Auditing is based on the assumption that financial data and statements are
a.
b.
c.
d.
28.
Control risk
Inherent risk
Business risk
Detection risk
The primary reason why a CPA firm establishes quality control policies and procedures for
human resources is to
a. Comply with the continuing educational requirements imposed for all staff accountants
in CPA firms
b. Establish in fact as well as in appearance that staff accountants are increasing their
knowledge of accounting and auditing matters
c. Provide a forum for staff accountants to exchange their experiences and views
concerning firm policies and procedures
d. Provide reasonable assurance that staff personnel will have the capability,
competence and commitment to ethical principles required to enable them to fulfill their
responsibilities in accordance with professional standards and regulatory and legal
requirements
29.
30.
The accounting firm should establish policies and procedures assigned to promote an
internal culture based on the recognition that quality is essential in performing
engagements. This may be communicated through the following means except
a.
b.
c.
d.
Training seminars
Formal and informal dialogue
Publication in PICPA newsletter
Mission statements
31.
In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm
is not likely to
a.
b.
c.
d.
32.
A CPA establishes quality control policies and procedures for deciding whether to accept
or continue a client. The primary purpose for establishing such policies and procedures is
to
a. Enable the auditor to attest to the integrity or reliability of a client
b. Comply with the quality control standards established by the regulatory bodies
c. Lessen the exposure to litigation resulting from failure to detect irregularities in client
financial statements
d. Minimize the likelihood of association with clients whose managements lack integrity
33.
In pursuing its quality control objectives with respect to independence, a CPA firm may
use policies and procedures such as the following except
a. Emphasizing independence in mental attitude in firm training programs and in
supervision and review of work
b. Prohibiting employees from owning shares of the stock of publicly traded companies
c. Suggesting that employees conduct their banking transactions with banks that do not
maintain accounts with client firms
d. Assigning employees who may lack independence to research positions that do not
require participation in the field audit work
34.
Engagement risk is influenced by the risks associated with the following except
a.
b.
c.
d.
35.
Which of the following is not an element of quality control that should be considered by a
firm of independent auditors?
a.
b.
c.
d.
36.
A practitioner should plan and conduct the assurance engagement in an effective manner
to meet the objective of the engagement. Which of the following matters need not be a
A firm of CPAs may use policies and procedures such as notifying professional personnel
as to the names of audit clients having publicly held securities and confirming periodically
with such personnel that prohibited relations do not exist. This is done to achieve effective
quality control in which of the following areas?
a.
b.
c.
d.
38.
Relevance
Neutrality
Reliability
Sufficiency
A CPA establishes quality control procedures for deciding whether to accept a new client
or to continue to perform services for a current client. The primary purpose for establishing
such policies and procedures is to
a.
b.
c.
d.
40.
The decision of whether the criteria are suitable involves considering whether the subject
matter of the assurance engagement is capable of reasonably consistent evaluation or
measurement using such criteria. Which of the following characteristics is not considered
necessary in determining whether the criteria are suitable?
a.
b.
c.
d.
39.
Criteria to be used
Engagement objective
Personnel and expertise requirements
Specific format of the assurance report
The accounting firm should establish accounting policies and procedures designed to
provide it with reasonable assurance that the firm and its personnel comply with relevant
ethical requirements. Which of the following is not among the fundamental principles of
professional ethical requirements relating to assurance and related services?
a.
b.
c.
d.
Integrity
Objectivity
Professional competence and due care
Maximization of wealth
41.
An operational audit differs in many ways from an audit of financial statements. Which of
the following is the best example of one of these differences?
a. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement
b. The boundaries of an operational audit are often drawn from an organization chart and
are not limited to a single accounting period
c. Operational audits do not ordinarily result in the preparation of a report
d. The operational audit deals with pre-tax income
42.
43.
44.
Determine whether the financial statements fairly present the entitys operations
Evaluate the feasibility of attaining the entitys operational objectives
Make recommendations for improving future performance
Report on the entitys relative success in attaining profit maximization
A review of any part of an organizations procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a(n)
a.
b.
c.
d.
46.
45.
An audit to determine whether the auditee is following specific procedures or rules set
down by some higher authority is classified as a(n)
a. Audit of financial statements
b. Compliance audit
c. Operational audit
d. Production audit
47.
48.
Which of the following attributes is more closely associated with assurance services
performed by a CPA firm than with other lines of professional work?
a.
b.
c.
d.
49.
Which of the following types of management advisory services may not be performed by a
CPA firm that wants to maintain its independence with respect to the client?
a.
b.
c.
d.
50.
Training employees
Making recommendations for improvements in internal control
Screening and interviewing applicants for a new accounting position
Supervising computer employees
In pursuing its quality control objectives, a CPA firm may maintain records indicating which
of its partners or employees were previously employed by its clients. Which quality control
element would this be most likely to satisfy?
a.
b.
c.
d.
51.
Integrity
Competence
Independence
Keeping informed in current professional developments
In determining the scope and nature of services to be performed in public practice, a CPA
firm should:
a. Require independence for all services performed
b. Determine that the performance of all services is consistent with the firms members
role as professionals
c. Have in place internal control procedures
d. Only perform accounting related services
52.
Error that arises from an isolated event that has not recurred other than or specifically
a.
b.
c.
d.
54.
Which of the following is not one of the concepts in the framework of auditing theory
a.
b.
c.
d.
57.
Economy Audit
No
Yes
Yes
No
Operational auditing refers to the study of business operations for the purpose of making
recommendations for all of the following except
a.
b.
c.
d.
56.
Compliance Audit
Yes
No
Yes
No
55.
Expected error
Anomalous error
Sampling error
Unintentional error
Ethical conduct
Conflict of interest
Evidence
Fair presentation
58.
Internal auditors role in preventing and detecting fraud would not include the
a.
b.
c.
d.
59.
A CPA examines the financial statements of a local bank. According to the Code of Ethics,
the appearance of independence ordinarily would not be impaired if the CPA
a.
b.
c.
d.
60.
A CPA should not undertake a management advisory service engagement that includes
continued participation through implementation, unless
a. Upon implementation of a new study and evaluation of the system of internal control is
performed
b. Upon implementation, the clients personnel will have the knowledge and ability to
adequately maintain and operate such systems as may be involved
c. The CPA accepts overall responsibility for implementation of the chosen course of
action
d. The CPA acquires an overall knowledge of the clients business that is equivalent to
that possessed by management
61.
Santos, a CPA not in public practice, is an employee in the internal audit department of
Towers Company. The management has asked Santos to perform examinations of
potential acquisitions and to express an opinion thereon. Santos will use the reports for
internal purposes and to show to its bankers in accordance with certain loan agreements.
How should Santos sign the report?
a.
b.
c.
d.
62.
Santos, CPA
Santos, Internal Auditor
Santos, CPA (Internal Auditor)
Santos, Internal Auditor (CPA)
63.
The CPA in public practice violates the Code of Ethics for Professional Accountants if he
accepts a fee which was
a.
b.
c.
d.
64.
Contingent fees charged by CPAs engaged in tax practice are permitted under the rules of
professional conduct because
a. This practice establishes fees which are commensurate with the value of the services
b. Attorneys in tax practice customarily set contingent fees
c. Determination by taxing authorities are a matter of judicial proceedings which do not
involve third parties
d. The consequences are based upon findings of judicial proceedings or the findings of
tax authorities
65.
A CPA accepts an engagement for a professional service without violating the rules of
Professional Conduct if the service involves
a. The preparation of cost projections for submission to a government agency as an
application for a rate increase, and the fee will be paid if there is a rate increase
b. Tax preparation, and the fee will be based on whether the CPA signs the tax return
prepared
c. A litigatory, and the fee is not known but it is to be determined by a district court
d. Tax return preparation and the fee is to be based on the amount of taxes saved
66.
The Code of Ethics provides that when a CPA is required to express an opinion on
combined or consolidated financial statements which include a subsidiary, branch, or
other component audited by another independent public accountant, the CPA may
a. Insist on auditing any such component which the CPA deems necessary to warrant the
expression of an opinion
b. Insist only on performing a review of any such component
c. Not insist on auditing any such component but may request copies of all working
papers relevant to the other independent public accountants examinations
d. Not insist on auditing any such component or reviewing working papers belonging to
the other independent public accountant
67.
Which of the following act when committed by a CPA constitute a violation of the Code of
Ethics:
a. Rendering management services to a non-audit client
b. Offering a position with higher salary to a staff member of another CPA
c. Charging professional fee on the savings gained by a client on a tax case
69.
70.
72.
71.
Inform the other CPA in public practice prior to making the offer
Makes the offer verbally to an employee who is not a CPA
Makes the offer on behalf of an audit client
Has an executive search staff that is involved in personal placement
PAS 120, Framework of Philippine Standards on Auditing describes the framework within
which Philippine Standards on Auditing (PSAs) are issued in relation to the services which
may be performed by auditors. It requires that financial statements need to be prepared in
accordance with one, or a combination of the following except:
a. International Accounting Standards
b. Accounting standards generally accepted in the Philippines
c. Other authoritative and comprehensive financial reporting framework designed for use
in financial reporting and identified in the financial statements
d. Procedures recommended by the industry association of accountants
2.
a. a.
b.
c.
d.
3.
Which of the following is not among the ethical principles governing the auditors
professional responsibilities?
a.
b.
c.
d.
4.
Independence
Integrity
Objectivity
Size and profile of clientele
An audit has inherent limitations that affect the auditors ability to detect material
misstatements. Which of the following is not among the factors that result to these
inherent limitations?
a.
b.
c.
d.
5.
Audit
Agreed-upon procedures
Review
Compilation
Use of testing
Inherent limitations of accounting and internal control system
Evidence are basically persuasive rather than conclusive
Physical limitations of auditors due to fatigue and stress
d. Auditing
6.
Which of the following does a firm need not establish and maintain a system of quality
control for?
a.
b.
c.
d.
7.
8.
Which of the following factors will not influence the decision of an auditor of a parent entity
who is also the auditor of a component whether to send a separate audit engagement
letter to the component?
a.
b.
c.
d.
10.
Professional judgment
Reasonable assurance
Professional skepticism
Compliance
Which of the following is not among the factors that are relevant to the auditors
determination of the acceptability of the financial reporting framework to be applied in the
preparation of the financial statements?
a.
b.
c.
d.
9.
d. The teams average cumulative age and length of service to the firm
11.
12.
The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor having now previous connection with the audit, achieve the following except
a. To understand the nature, timing and extent of the audit procedures performed to
comply with the PSAs and applicable legal regulatory requirement
b. To estimate the amount of audit revenue earned corresponding to the bulk of working
papers prepared
c. To understand the results of the audit procedure performed and the audit evidence
obtained
d. To appreciate significant matters arising during the audit, the conclusions reached
thereon and significant professional judgment made in reaching those conclusions
13.
In documenting the nature, timing and extent of audit procedure performed, the auditor
shall record the following except
a.
b.
c.
d.
14.
15.
When auditor suspects material misstatement in the financial statements resulting from
management fraud, he/she may direct inquiries from the following personnel within the
entity except
a. In-house legal counsel
b. Chief ethics officer of equivalent person
Which of the following is not considered among the Fraud risk factors?
a.
b.
c.
d.
17.
The need to meet expectations of third parties to obtain additional equity financing
The granting of significant bonuses if unrealistic profit targets are met
Ineffective control environment
The existence and enforcement of a written code of conduct
Which of the following unusual relationships between the auditor and manager would not
necessarily indicate possibility of fraud?
a. Denial of access to records, facilitate certain employees, vendors or customers or
others from whom audit evidence might be sought
b. Undue time pressures imposed by management to resolve complex or contentious
issues
c. Unusual delays by the entity in providing requested information
d. Willing by management to permit the auditor to meet privately with those charged with
governance
18.
Which of the following is not among the business risks that management faces relation to
the entitys e-commerce activities?
a. Loss of transaction integrity which may be compounded by the lack of an adequate
audit trail in either paper or electronic form
b. Non-compliance with taxation and other legal and regulatory requirements particularly
when internet/e-commerce transactions are conducted across international boundaries
c. Failure to ensure that contracts evidenced only by electronic means are binding
d. Under-reliance on e-commerce when placing significant business systems or other
business transactions on the internet
19.
20.
Projection
Forecast
Probable amount
Accounting estimate
The term that describes the role of persons entrusted with the supervision, control and
direction of an entity is
a. Management
b. Administration
c. Governance
d. Government
21.
The term that 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
a.
b.
c.
d.
22.
This refers to the financial information based on assumptions about events that may
occur in the future and possible actions by an entity
a.
b.
c.
d.
23.
Projected data
Prospective financial information
Accounting estimates
Budget
This refers to the audit procedures deemed necessary in the circumstances deemed
necessary to achieve the objective of the audit
a.
b.
c.
d.
24.
Error
Noncompliance
Fraud
Misstatement
A special purpose auditors report is issued in connection with the independent audit of the
following financial information except
a. Financial statements prepared in accordance with a comprehensive basis of
accounting
b. Specified accounts, elements of accounts or items in a financial statement
c. Compliance with contractual agreements
d. Financial statements prepared in accordance with IFRS
25.
The objective of the ordinary examination by the independent auditor is the expression of
an opinion on
a.
b.
c.
d.
26.
a.
b.
c.
d.
27.
28.
Which of the following is not one of the seven broad categories of financial statement
assertions, as classified in Glossary of Terms?
a.
b.
c.
d.
29.
30.
While performing services for their clients, professionals have a duty to provide a level of
care which is
a.
b.
c.
d.
31.
An arrangement which offers the injured party a potential gain when the lawsuit is
successful but minimal loss when it is unsuccessful is
a. the public defenders office
When the auditor issues an erroneous opinion as the result of an underlying failure to
comply with the requirements of standards on auditing, it results in
a.
b.
c.
d.
33.
business failure
audit failure
audit risk
all of the above
34.
Most accounting and auditing professionals agree that when an audit has failed to uncover
material misstatements, and the wrong type of audit opinion is issued, the audit firm
a.
b.
c.
d.
35.
36.
an accepted practice
a suggestion of negligence
conclusive evidence of negligence
tantamount to criminal behavior
A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by
use of a(n)
a.
b.
c.
d.
37.
The criteria by which the quality of performance of auditing engagements are measured.
This indicates levels of performance which must be attained for the completion of a
satisfactory audit and these relate to the personal qualifications of the auditor and the
exercise of his judgment in performing the examination and in rendering his report. These
are called the
a. Statement of Financial Accounting Standards (SFAS)/ International Accounting
Standards (IAS)
b. Philippine Standards on Auditing (PSA)
c. Cost standards
d. Standards of reporting
38.
39.
Choose one of the following which would describe best the phrase Philippine Standards
on Auditing
a. They identify the policies and procedures for the conduct of the audit
b. They define the nature and extent of the auditors responsibilities
c. They provide guidance to the auditor with respect to planning the audit and writing the
audit report
d. They set forth a measure of the quality of the performance of audit procedures
40.
41.
On every audit engagement, the CPA should comply with applicable PSA
a. without exception
b. except in examinations that result in a qualified report
c. except in engagements where the CPA is associated with unaudited financial
statements
d. except in examinations of interim financial statements
42.
Professional experience is an important aspect of the training and proficiency of the junior
assistant just entering upon an auditing career. Professional experience should be
obtained
a.
b.
c.
d.
43.
An auditor in accepting an audit engagement wherein he does not possess the industry
expertise of the business entity, should
a. engage financial experts familiar with the nature of the business entity
b. obtain a knowledge of matters that relate to the nature of the entitys business
c. refer substantial portion of the audit to another CPA who will act as the principal
auditor
d. first inform management that an unqualified opinion cannot be issued
44.
During the course of an audit engagement, the CPA needed additional studies and
consultation with experts. This additional study and consultation is deemed to be
a.
b.
c.
d.
45.
Juan dela Cruz, CPA, accepted the audit engagement of XYZ Corporation. During the
audit, Juan dela Cruz became aware of the fact that he did not have the competence
required for the engagement. He must
a.
b.
c.
d.
46.
disclaim an opinion
issue a Subject to opinion
suggest that XYZ Corporation engage in another CPA to perform the audit
rely on the competence of client personnel
A CPAs opinion on financial statements is of little value to those who relied on him unless
he
a.
b.
c.
d.
47.
48.
In determining independence with respect to any audit engagement, the ultimate decision
as to whether the auditor is independent must be made by the
a.
b.
c.
d.
49.
auditor
client
audit committee
public
50.
51.
Which of the following best describes why publicly traded public corporations follow the
practice of having the outside auditor appointed by the board of directors or elected by the
stockholders?
a.
b.
c.
d.
52.
It would not be appropriate for the auditor to initiate discussion with the audit committee
concerning with
a. The extent to which the work of internal auditors will influence the scope of the
examination
b. Details of procedures which the auditor intends to apply
c. The extent to which change in the companys organizations will influence the scope of
the examination
d. Details of potential problems which the auditor believes might cause a qualified opinion
53.
With respect to the auditors planning of the year-end examination, which of the following
is always true?
a. An engagement should not be accepted after the fiscal year end
b. An inventory count must be observed at the balance sheet date
c. The clients audit committee should not be told of the specific audit procedures which
will be performed
d. It is an acceptable practice to carry out substantial parts of the examination at interim
dates
54.
Rogers & Co., CPAs have policies requiring that all members of the audit staff submit
weekly time reports to the audit manager, who then prepares a weekly summary work
report regarding variance from the budget for Rogers review. This provides written
evidence of Rogers & Co., CPAs professional concern regarding compliance with which
PSAs?
a.
b.
c.
d.
55.
Quality control
Due professional care
Adequate review
Adequate planning
56.
57.
It has the qualities of being relevant, objective, and free from unknown bias
There is enough of it to afford a reasonable basis for an opinion on financial statement
It has been obtained by random selection
It consistent of written statements made by managers of the enterprise under audit
One of the requirements of the auditing standards is sufficient and evidential matter
should be obtained. The term competent refers primarily to
a.
b.
c.
d.
58.
59.
Madison Corporation has a few large accounts receivable that total P1,000,000. Nassau
Corporation has a great number of small accounts receivable that also total P1,000,000.
The importance of an error in any one account is, therefore, greater for Madison than for
Nassau. This is an example of the auditors concept of
a.
b.
c.
d.
60.
Materiality
Comparative analysis
Reasonable assurance
Relative risk
Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine
Institute of CPAs
b. Materiality depends only on the peso amount of an item relative to other fees in the
financial statements
c. Materiality depends on the nature of an item rather than the peso amount
d. Materiality is a matter of professional judgment
61.
Which of the following best describes the element of relative risk which underlies the
application of the PSAs?
a. Cash audit work may have to be carried out in a more conclusive manner than
inventory audit work
b. Intercompany transactions are usually subject to less detailed scrutiny than arms
length transactions with outside parties
c. Inventories may require more attention by the auditor on an engagement for a
merchandising enterprise than on an engagement for a public utility
d. The scope of the examination need not be expanded if errors that arouse suspicion of
fraud are of relatively insignificant amounts
62.
One of a CPAs firms basic objective is to provide professional services that conform to
professional standards. Reasonable assurance achieving this basic objective is provided
through
a.
b.
c.
d.
64.
65.
When restrictions that significantly limit the scope of the audit are imposed by the client,
the auditor generally should issue which of the following opinions?
a. Except for
b. Disclaimer
c. Adverse
d. Unqualified
An auditor has withdrawn from an audit engagement of a publicly held company after
finding irregularities which may materially affect the financial statements. The auditor
should set forth the reasons and findings in correspondence to the
a.
b.
c.
d.
66.
In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm
is not likely to
a.
b.
c.
d.
67.
to provide evidence of the operations of each element of its system of quality control
68.
In determining the form and content of documentation evidencing the operation of each of
the element of the system of quality control, the following factors should be considered
except
a.
b.
c.
d.
69.
70.
71.
72.
Inherent risk
Control risk
Business risk
Detection risk
73.
PSA 300 (Redrafted), Planning an Audit of Financial Statements, requires, in part, that
audit work be properly planned. Proper planning as intended by this Standard would occur
when the auditor
a. Eliminates the possibility of counting inventory items more than once by arranging to
make extensive test counts
b. Uses negative accounts receivable confirmations instead of positive confirmations
because the latter require mailing of second requests and review of subsequent cash
collections
c. Compares all cash as of a particular date to avoid performing time-consuming cash
cutoff procedures
d. Physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand
74.
The PSA recognizes that early appointment of the independent auditor has many
advantages to the auditor and the client. Which of the following advantages is least likely
to occur as a result of early appointment of the auditor?
a.
b.
c.
d.
75.
Which of the following is a basic tool used by the auditor to control the audit work and
review the progress of the audit?
a.
b.
c.
d.
76.
In the audit of a medium-sized trading company, which one of the following areas would
be expected to require the greatest amount of audit time?
a.
b.
c.
d.
77.
The auditor will be able to plan the audit work so that it may be done expeditiously
The auditor will be able to complete the audit work in less time
The auditor will be able to better plan for the observation of the physical inventories
The auditor will be able to perform the examination more efficiently and will be finished
at an early date after the year end
Liabilities
Assets
Revenues
Owners Equity
During the course of an audit of a medium-sized trading company, which one of the
following areas would be expected to require the greatest amount of audit time?
a.
b.
c.
d.
Assets
Liabilities
Revenues
Owners Equity
78.
79.
The auditor is likely to accumulate more evidence when the audit is for a company
a.
b.
c.
d.
80.
Which of the following statements describes why a properly designed and executed audit
may not detect a material irregularity?
a. Audit procedures that are effective for detecting an unintentional misstatement may be
ineffective for an internal misstatement that is concealed through collusion
b. An audit is designed to provide reasonable assurance of detecting material error, but
there is no similar responsibility concerning material irregularities
c. The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional errors in the financial
statements
d. The auditor did not consider factors influencing audit risk for account balances that
have effects pervasive to the financial statements taken as a whole
81.
Which of the following circumstances most likely would cause an auditor to consider
whether material misstatements exist in an entitys financial statements?
a. Supporting records that should be readily available are frequently not produced when
requested
b. Reportable conditions previously communicated have not been corrected
c. Clerical errors are listed on a monthly computer-generated exception report
d. Differences are discovered during the clients annual physical inventory count
82.
Disclosure of irregularities to parties other than a clients senior management and its audit
committee or board of directors ordinarily is not part of an auditors responsibility.
However, to which of the following outside parties may a duty to disclose irregularities
exist?
To the SEC when the
client reports an auditor
To a successor auditor
when the successor
To a government funding
agency from which the
change
a.
b.
c.
d.
83.
makes appropriate
inquiries
Yes
No
Yes
Yes
Yes
Yes
No
Yes
What assurance does the auditor provide that errors, irregularities, and direct effect illegal
acts that are material to the financial statements will be detected?
a.
b.
c.
d.
Errors
Limited
Limited
Reasonable
Reasonable
Illegal acts
Limited
Reasonable
Limited
Reasonable
2.
When a professional accountant is the auditor of a parent entity and also the auditor of its
subsidiary, branch or division (component), which of the following factors need not be
considered in deciding whether to send separate engagement letter to the component?
a.
b.
c.
d.
3.
On recurring audits, the auditor may decide not to send a new engagement letter each
period. In which of the following situations will there be no need to send a new letter?
a.
b.
c.
d.
4.
Which of the following will not necessarily lead the client to request for the auditor to
change the engagement to one which provides a lower level assurance?
For initial engagements, the auditor should obtain sufficient appropriate audit evidence for
the following except
a. That the opening balances do not contain misstatement that materially affect the
current periods financial statements
b. That the prior periods closing balances have been correctly brought forward to the
current period, or, when appropriate have been restated
c. That appropriate accounting policies are consistently applied or changes in accounting
policies have been properly accounted for or adequately disclosed
d. That the client has informed the predecessor auditor of his appointment as the new
auditor
6.
7.
Which of the following is not one of the three main reasons why the auditor should
properly plan engagements?
a.
b.
c.
d.
8.
One of the major parts of audit planning is preplanning. Which of the following is not
involved during the preplanning phase?
a.
b.
c.
d.
9.
Which of the following would not be a consideration of a CPA firm in deciding whether to
Where client is changing auditors, PSA requires communication between predecessor and
successor auditors. The burden of initiating the communication rests with the
a.
b.
c.
d.
11.
Predecessor
Client
successor
SEC
12.
State whether the CPA will perform audit, review, or compilation services
State whether the CPA will perform tax or management advisor or other services
State any restriction to be imposed on the CPAs work
Identify deadlines for completing the work
State the amount and type of work to be done by clients personnel in generating
auditors workpapers
6. State the CPAs fees for the engagement
7. Inform the client that the CPA does not have responsibility for detecting fraud
The engagement letter will do
a. Numbers 1, 2, 4, and 6
b. Numbers 1, 2, 3, 4, and 6
c. Numbers 1, 3, 5, and 7
d. All seven of the above stated items
13.
c. Can be used to alter the auditors responsibilities under the standards on auditing
d. Is useful only if it is an engagement, but has no effect for review or compilation
services
14.
After preliminary audit arrangements have been made, an engagement confirmation letter
should be sent to the client. The letter usually would not include
a. A reference to the auditors responsibility for the detection of errors or irregularities
b. An estimation of the time to be spent on the audit work by audit staff and management
c. A statement that management advisory services would be made available upon
request
d. A statement that a management letter will be issued outlining comments and
suggestions as to any procedures requiring the clients attention
15.
16.
17.
Preliminary arrangements agreed to by the auditors and the client should be reduced to
writing by the auditors. The best place to set forth these arrangements is in
a.
b.
c.
d.
19.
18.
communicating with the predecessor auditors in connection with a prospective new audit
client?
a. The successor auditors have no responsibility to contact the predecessor auditors
b. The successor auditors should obtain permission from the prospective client to contact
the predecessor auditors
c. The successor auditors should contact the predecessors regardless of whether the
prospective client authorizes contact
d. The successor auditors need not contact the predecessors if the successors are aware
of all available relevant facts
20.
An auditor who accepts an audit engagement and does not possess the industry expertise
of the business entity, should
a. Engage financial experts familiar with the nature of the business entity
b. Obtain a knowledge of matters that relate to the nature of the entitys business
c. Refer a substantial portion of the audit to another CPA who will act as the principal
auditor
d. First inform management that an unqualified opinion cannot be issued
21.
Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessors
a. Awareness of the consistency in the application of financial reporting standards
between periods
b. Evaluation of all matters of continuing accounting significance
c. Opinion of any subsequent events occurring since the predecessors audit report was
issued
d. Understanding as to the reasons for the change of auditors
22.
An auditor who has been invited to submit a proposal for an audit engagement is a
a.
b.
c.
d.
23.
Predecessor auditor
Successor auditor
Principal auditor
Interim auditor
Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a
project study on the expanded food vending operations of the corporation with the
corresponding staffing and compensation package for its executive staff. Dimalanta,
however, has primarily auditing expertise and only in general merchandising operations.
Mr. Dimalanta may properly
a. Accept the engagement and carry it out consistent with the standards on auditing
b. Accept the engagement but exercise due professional care
c. Accept the engagement and acquire the necessary competence or consult with
established authorities
d. Decline the engagement for lack of experience or competence in an entirely new line
of specialization
24.
Engagement letters are widely used in practice for professional engagements of all types.
The primary purpose of the engagement letter is to?
a. Remind management that the primary responsibility for the financial statements rests
with management
b. Satisfy the requirements of the CPAs liability insurance policy
c. Provide a starting point for the auditors preparation of the preliminary audit program
d. Provide a written record of the agreement with the client as to services to be provided
25.
In making arrangements for an audit, there should be a clear understanding between the
auditor and the client as to the following except
a.
b.
c.
d.
26.
When a CPA is approached to perform an audit for the first time, the
CPA should make inquiries of the predecessor auditor. This procedure is necessary
because the predecessor may be able to provide the successor with information that will
assist the successor in determining
a. Whether the predecessors work should be utilized
b. Whether the company follows the policy of rotating its auditors
c. Whether in the predecessors opinion, internal control of the company has been
satisfactory
d. Whether the engagement should be accepted
27.
Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding
a. Disagreements of the predecessor had with the client concerning auditing procedures
and accounting principles
b. The predecessors evaluation of matters of continuing accounting significance
c. The degree of cooperation the predecessor received concerning the inquiry of the
clients lawyer
d. The predecessors assessments of inherent risk and judgments about materiality
28.
The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when
a. Predecessor auditor has poor relations with successor auditor
30.
Which of the following most accurately summarizes what is meant by the term material
misstatement?
a.
b.
c.
d.
31.
32.
Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a.
b.
c.
d.
33.
Managements attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entitys control
environment
a. External policies established by parties outside the entity affect its accounting
practices
b. Management is dominated by one individual who is also a shareholder
c. Internal auditors have direct access to the board of directors and the entitys
management
d. The audit committee is active in overseeing the entitys financial reporting policies
34.
35.
Which of the following factors would most likely to heighten an auditors concern about the
risk of fraudulent financial reporting?
a.
b.
c.
d.
36.
Large amounts of liquid assets that are easily convertible into cash
Low growth and profitability as compared to other entities in the same industry
Financial managements participation in the initial selection of accounting principles
An overly complex organizational structure involving unusual line of authority
An auditor who discovers that a clients employees have paid small bribes to public
officials most likely would withdraw from the engagement if the
a. Client receives financial assistance from a government agency
b. Evidential matter that is necessary to prove that the illegal acts were committed does
not exist
c. Employees actions affect the auditors ability to rely on managements representations
d. Notes to the financial statements fail to disclose the employees actions
1.
Which of the following is most correct concerning the understanding of internal control
needed by auditors to plan the audit?
a. The auditors must understand the control environment, but not the accounting system
or the control procedures
b. The auditors must understand the control environment, the accounting system, and not
the control procedures
c. The auditors must understand the control environment, the accounting system, and
must use judgment as to the control procedures which must be considered
d. The auditors must understand the control environment, the accounting system, and all
control procedures
2.
Which of the following would be of least interest to the auditors in considering internal
control?
a. Procedures that are concerned with the decision processes leading to managements
authorization of transactions
b. Procedures restricting access to assets
c. Procedures related to recording transactions
d. Policies concerning the reconciliation of accounting records to existing assets
3.
4.
Which of the following comes closest to outlining the auditors responsibility for internal
control on all financial statement audits?
a. An understanding of the control environment and the accounting system is necessary;
an understanding of control procedures is necessary for areas in which the auditor is
performing tests of controls
b. The auditor must obtain an understanding of each of the three internal control
elements sufficient to plan the audit
c. When tests of controls have been performed, control risk must be assessed at a level
less than the maximum
d. An understanding of the control environment is necessary, but not of the accounting
system or control procedures unless control risk is assessed at a level less than the
maximum
5.
In the consideration of internal control, the effectiveness of the design of controls is tested
by
a.
b.
c.
d.
6.
Flowcharts
Tests of controls
Substantive tests
Decision tables
A significant deficiency in the design or functioning of the internal control structure that
could adversely affect an organizations ability to record, process, summarize, and report
financial data is referred to as a(n)
a. Material weakness in internal control
For good internal control, which of the following functions should not be assigned to the
companys accounting department?
a.
b.
c.
d.
8.
9.
Which of the following is true about the auditors consideration of internal control?
a. The auditors must assess control risk at a level lower than the maximum
b. The auditors must prepare a flowchart description of internal control for their working
papers
c. The auditors must obtain an understanding of the steps in processing major types of
transactions
d. The auditors must perform tests of controls
10.
Which of the following is an advantage of describing internal control through the use of a
standardized questionnaire?
a. Questionnaires highlight weaknesses in the system
b. Questionnaire are more flexible than other methods of describing internal control
c. Questionnaires usually identify situations in which internal control weaknesses are
compensated for by other strengths in the system
d. Questionnaire provide a clearer more specific portrayal of a clients system than other
methods of describing internal control