re =) CPA REVIEW SCHOOL OF THE PHILIPPINES Ay Manila ‘AUDITING THEORY APRIL 22, 2017 FINAL PREBOARD EXAMINATION SATURDAY, 8:00AM — 9:00AM SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ‘ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED. A SA 700 (Revised, Feing an Opin ad Reporting on PrenclSnerers ope: a 1. A complete set of special purpose financial statements. IL. A complete set of general purpose financial statements. TIL A Single financial statement or of @ specific element, account or item of a financial statement.¢ pO A. Tonly. na C. Monly. B. Land II only. D. 1,11, and III. (> Which financial reporting framework is designed to meet the common financial information néeds of a wide range of users? A. Fair presentation framework. C. Special purpose framework. B. Compliance framework. D. General purpose framework.) ~ 3. According to PSA 710, Communicating Key Audit Matters in the Independent Auditor's Report, the auditor shall determine, from the matters communicated with those charged with governance those matters that required significant auditor attention in performing the ‘audit. In making this determination, which of the following should be taken i 1. Areas of higher assessed risk Of material misstatement, or significant risks identhed in accordance with PSA 315. TI. Significant auditor judgment relating to areas in the nancial statements that invaived significant management judgment. m. ‘The effect. on the aut of significant events or transactions that occurred during the period. +A. Land Il only. ¢. Land Il only B. Il and Il only. D.LUandi. 44, An auditor concludes that there is a material inconsistency in the other information i af annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not ire revision, but the dient is unwilling to revise or eliminate the material incoresiney STE other information. under these circumstances, What action would the auditor most likely take? 1 A a acc the situation dosed because the other information 's not In the audited financial statements. B. Issue an selcent for" qualified opinion after discussing the matter with the dent's aust committee. Co eermttee opinion on the fancial statements after exniaiing the nme Disclaim an era separate “other Information” section folowing the Bass for Opinion ‘Section. 0. SEBO tne auditor's report to Incude a separate section with » headed Coie Ret on caserng he uncoreced material misstatement ofthe other Informatie. Page | of 10GERREVIEW SCHOOL OF THE PHILIPPINES (CBAR) ~ MANILA FINAL PREBOARD EXAMIMATION. sy (_&) proatione's report issued after comping the Manca statements of n entty shoud state that: ‘A. We are not aware of any material modifications that should be made to the ‘accompanying financial statements. ° 8B. A compilation consists principally of inquiries of company personnel and analytical procedures. C. Since 2 compilation engagement Is not an assurance engagement, we are not required to verify the accuracy or completeness OF the Information you provided to us to compile these financial statements. . A compilation is substantially less in scope than an audit in accordance with PSAs, the ‘objective of which is the expression of an opinion.» (6 Ifthe financial statements have been Prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting is inappropriate, the auditor shall express a/an CY. ot cat cere ns) ‘A. Unmodified opinion, but the aucitors report shouid include an "Other matter” section that describes the inappropriate use of the going concern basis of accounting. 8. Unmodified opinion ifthe financial statements disclose the inappropriate use of the going ‘concern basis of accounting. Qualified or Adverse opinion if the financial statements fail to disclose the inappropriate use of the going concem basis of accounting. 1. Adverse opinion regardless of whether or not the financial statements include disclosure Of the inappropriateness of management's use of the going concer basis of accounting. 2 What paragraph in the auditor’s report refers to a matter appropriately eG ¢ Opinion. We weds oy, PHEAS ~ WY D. Key Audit Matters Page 2 of 10Rimming SLO OF THe mame (oan) — mana mints TSTATIES ome gen Sie 12. An auditor Is auditing a mi wtual fund company that uses a transfer agent to handle (// ect fr shaehcdes Wich of the folowing scons bythe sudo woud be ost iene for htereg irate she a ender hort era cat? . Feports on intemal control In operation and its operating effectiveness 9, Medved by the agent's own aud, . Review prior-year workpapers to determine whether the number of transactions Processed by the agent has materially increased. Perform an audit on the internal control function of the agent. D. Perform tests of controls on a sample of the audited firm's transactions through the — ent \ 33m staining watenrepresetations frm management, materaty Its ornarty woud apply to representations related to: fA. Amounts concerning related party transactions. ~~ B. Irregularities involving members of management. C. The availability of financial records. D. The completeness of minutes of directors’ meetings. a} (34 practioner has been engaged to comple the financial statements of an entity. The financial statements contain many departures from PFRS because of inadequacies in the F accounting records. The practitioner believes that modification of the compilation report is, 4 Rok adequate to indicate the defences. Under these ircumstances, the pracioner ‘A. Inform management that the engagement can proceed only if distribution of the accountant!'s report is restricted to Internal use. Withdraw from the engagement and provide no further service conceming these financial statements. ae C. Quantify the effects of the departures from PFRS and describe the departures from PERS: ina special report. D. Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions. Finandaal forecast ~*~ _Einangial prosection ~~ ‘Yes ‘Yes B. Yes Noy a No Yes D. No No _35¢ Which of the folowing prospective financial statements i(are) appropriate for general use? A an of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments? ‘AcwTnspect checks included with the client’s cutoff bank statement. B. Obtain a letter of representations from the client's underwriter of securities. C. Apply ratio analysis on the current-year’s liability accounts. D. Read the file of comespondence from taxing authorities. (37 Tian sping, 225% Gane me foley aces wre Ne SNES effect on the size of the sample? A. Tolerable rate of deviation. B, Number of items in the population. C. Degree of assurence desired. D. Planned assessed level of control risk. 4 “a test of a payroll system involved comparing an indhadual's number of overtime Pours A es lth on average of weekly overtime during a similar period in @ prior year andl 0 evaluating the results. This is an example of what type of test? A. Range test. C. Category test. B. Detail test. (1. Reasonableness test. Page 3 of 10Pa Review sc4004 OF THE PHILPINES (CPAR)— MONA cS ‘AUDITING THEORY exanarion i 2 7 TRAY Lea A 39 Which of the following statements is correct concerni peuary in eesensing © clert’s pansion cbigaSon@te pee ee ieee YA. The auditor is required to understand the objectives and scope of the actilary's work. B._ The reasonableness of the actuary’s assumptions Is strictly the auditors responsiblity. W CC. The client is required to consent to the auditor's use ofthe actuary's work. B. the actuary has a relationship with the cen, te utr may not sete actuary 20-Which of the following information that comes to an auditor's attention most likely would raise 2 question about the occurrence of ilegal ects? A. The exchange of property for similar property in a nonmonetary transaction. B. The presence of several difficult-o-audit transactions affecting expense accounts. LB C. The failure to develop adequate procedures that detect unauthorized purchases. D. The discovery of unexplained payments made to government employees.\/ ah 21) An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice: A. Eliminates the use of certain statistical sampling methods that would otherwise be available. oO B. prasumnes that the auditor wil perform the tests as ofthe balance sheet date. ~ C. Should be especially considered when there are rapidly changing economic conditions. D. Potentially increases the riskthat errors that exist at the balance sheet date will not be detectes. When a dlient engages in transactions involving derivatives, the auditor should: Develop an understanding of the economic substance of each derivative: B. Confirm with the client's broker whether the derivatives are for trading purposes. K CC. Notify the audit committee about the risks involved in derivative transactions. D. Add 2n explanatory paragraph to the auditor's report describing the nsks associated > with each derivative. ® ‘Analytical procedures performed during an(audit indicate that accounts receivable doubled 4 since the end of the prior year. However, the allowance for doubtful accounts as 2 percentage of accounts recelvabie remained about the same. Which of the following dient explanations would satisfy the auditor? AA orecter percentage of accounts receivable are listed in the "more than 120 days ‘overdue category than in the prior yesr. Ge, 8. Intemal contre! activities over the recording of cash receipts have been improved since SZ the end of the prior year. ©) The client opened 2 second retail outlet dpring the current year and its credit sales aporoximately equaled the older outlet. }. The cent tightened its credit policy during the curent year and sold considerably fess merchandise to customers with poor crea ratings. * ~ Coa yihenn Py eh of the following statements is correct about the sample size in | samppiing nine fon steers es te SEB SE EE A Coste should consider the tolerable rate of devation frm the contras beng vested In determining semple sa v < ictus B. ‘As the likely rate of deviatic p ( c 3 abe isk of asessing col sk no fw has no effec on the panne are the i the factors to be condderd, th population ize has the remaster 2°i | PA REVIEW scHOOL. ftioue aane OF = PUPS (ony — ms (FOAL PREBOARD EXAMINATION se 1 STL = ees B. Management acknowledges that the entity has had recurring operating losses. C. The Gals unable to reven the predenestor autor's workan papers, ®. Management is unwilling to permit inquiry of its legal counsel 26.) Which of the following factors most fi i iS) er ee a en Oem ee A. The organizational status of the director of internal audit. ~ « B. The professional certifications of the internal audit staff. C. The consistency of the internal audit reports with the results of work performed. D. The appropriateness of internal audit conclusions in the circumstances. <2] Which ofthe folowing i incorrec? Philippine Framework for Assurance Engagements |S he yA describes the objective and elements of assurance engagements intended to provide either a reasonable assurance or limited assurance. 18. Identifies engagements to which Phipine Standards on Audtirg,Piipine Standards ce t ‘on Review Engagements, and Philippine Standards on Assurance Engagements apply. . establishes standards or provides procedural requirements for the performance of ‘assurance engagements. A yD. provides a frame of re for the Auditing and Assurance Standards Cound in its » ~~ adoption of International Standards on Auditing, International Standards on Review z Eo es or eres Share ems E0soor ee OE (28) The decison of whether the create suitable invlves considering Woes St BON matter of the assurance engagement is capable of reasonably consistent evaluation of Measurement using such criteria. Which of the following characteristics is not considered necessary in determining whether the criteria are suitable? Xie) A. Relevance C. Reliability \ B. Neutrality, D. Suffidency > —*+) ‘When a professional accountant leams of a material errpr-ofQjission in @ tax return of @ prior year, he/she has the responsibility to do the following, xcept’ A ‘promptly advise the client or employer of the error or Gmission and recommend that disclosure be made to the revenue authontties. B. promptly inform the revenue authorities even without the permission of the client. 19) C. advise the employer to correct the error and recommend that disclosure be made to the revenue authorities. D. ‘consider discontinuing association with the client if the client does not correct the error. “30-This threat to independence occurs when a member of the assurance team has an immediate "who isa director or officer of the assurance client. ‘A. Familiarity threat ¥ CC. Self-review threat a B. Advocacy threat D. Intimidation threat AD €. CPAs lose their Independence if they acquire 2 material indirect nancial interest \n 2 on r tify_predictable lips_when applying analytical procedures. (© Bee EPS case om tae Raowra oars mo By — yield the highest level of evidence? k A. Interest expense. | B. Allowance for doubtful accounts. CC. Accounts receivable. 7 1D. Accounts payable. Page 5 of 10(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)- MANILA ww Loko (The audit report date is important to users because it indicates ‘A. the last day of the fiscal period. B. the date on which the financial statements were filed with the Securities and Exchange ‘Commission, C. the last date on which users may institute a lawsuit against either client or auditor. D. the last day of the auditor's responsibility for the review of significant events that ‘occurred after the date ofthe financial statements, AC inch ofthe following factors is most ky to affect the extent ofthe documentation ofthe auditors understanding of a clients system of internal controls? A. The industry and the business and regulatory environments in which the client operates. The degree to which information technology is used in the accounting function. * b C. The relationship between management, the board of directors, and external stakeholders. D. The degree to which the auditor intends to use intemal audit personnel to perform ‘substantive tests. 3 Which of the following 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? on pee ‘A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party eee . Inspecting ttle documents to verify whether any real property is pledged as collaterel. D. Inquiring of the entity's legal counsel about litigation, clalms, and assessments. 7 36. )The auditor's responsibilty for failure to detect fraud arises ‘whenever the amounts involved are material. 'B. only when the examination was specifically designed to detect fraud. G when such failure clearly results from failure to comply with auditing standards. ~~ DB. ‘only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor. aan wan 37, Which ofthe following is an Inherelt imitation in internal control? ‘A. Incompatible duties. B. Lack of segregation of duties. ( C. Faulty human judgment. D. Lack of an audit committee. Gus wrhcs (s fort letters ordinarily are: oN texas oy Addressed to the client's Staned by the clients ~ A ‘Audit committee Independent auditor B. _Undenwriter of securities Senior management é ‘Audit committee Senior management D. Underwriter of securities Independent aucitor yy 9, Management's emphasis on meeting pro} profit goals most likely would significantly 7) Tintuenoe an enbiy's control environ ‘A. Internal auditors have direct access to tie entity's board of directors. B.A significant portion of management compensation is represented by stock options. —— 7 C. Bxtermal policies established by parties outside the entity affect accounting polices. 2 D. The audit committee is active in averseeing the entity's financial reporting policies. 7 Winch of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? ‘A. Merchandise received is not promptly reconciled to the outstanding purchase order file. (e 8. Obsolete items included in inventory balances are rarely reduced to the lower of cast or market value. Page 6 0f 10