Auditing Questions Part 2

78. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the following except a. Employee collusion. b. Falsified documentation. c. Need to apply professional judgment in evaluating fraud risk factors. d. Professional skepticism. (x) 79. Philippine Standards on Auditing (PSAs) a. must be followed on every audit, but the auditor may choose an alternative course of action if it is justifiable (x) b. must be followed only on those audits which must be submitted to the SEC c. are ideal standards that are rarely, if ever, attained d. must be followed by CPAs who are members of the PICPA, but they are optional for CPAs who are not members of the PICPA 80. All of the following organizations are represented in both the Financial Reporting Standards Council (FRSC) and the Auditing and Assurance Standards Council (AASC), except: a. Professional Regulatory Board of Accountancy b. Bangko Sentral ng Pilipinas c. Bureau of Internal Revenue (x) d. Commission on Audit 81. PSAs include standards on reporting. Which of the following is not one of the focus of PSA 700, the Auditor’s Report on Financial Statements? a. adequacy of informative disclosures b. circumstances when GAAP are not consistently followed c. whether statements were prepared in accordance with GAAP d. sufÏcient appropriate evidence is to be obtained to support the audit conclusions (x) 82. Because external auditors are paid fees by their clients, external auditors a. are absolutely independent and may conduct audits b. may be sufÏciently independent to conduct audits (x) c. are never considered to be independent d. must receive approval of the SEC before conducting audits 83. Which of the following situations best illustrates the application of professional skepticism? a. G, CPA, is engaged in discussions with J, the client’s controller. G obtains several oral representations from J, which the former readily accepts without further work or support from other audit procedures. b. G, CPA has decided to continue with the audit of FLS Company. Throughout the course of the audit, G does not believe any of the representations made by J, controller. c. G, CPA, is discussing several audit issues with J, a member of top management. Throughout the meeting with J, G neither assumes that J is dishonest, nor assumes unquestioned honesty in J’s oral representations. (x) d. G, CPA is engaged in discussions with J, the client’s controller, regarding several audit issues. Throughout the meeting with J, J neither assumes that G is dishonest, nor assumes unquestioned honesty in G’s oral representations. 84. Objectivity refers to a practitioner’s ability: a. To remain impartial. (x) b. To identify assertions that are appropriate. c. To be unyielding in all disputes. d. To choose independently between accounting principles and auditing standards. 85. Before a. b. c. d. accepting an engagement to audit a new client, a CPA is required to obtain An understanding of prospective client’s industry and business. The prospective client’s signature to the engagement letter. A preliminary understanding of the prospective client’s control environment. The prospective client’s consent to make inquiries of the predecessor auditor, if any. (x) 86. In financial statement audit, audit risk represents the probability that a. internal control fails and the failure is not detected by the auditor’s procedures b. the auditor unknowingly fails to modify an opinion on materiality misstated financial statements (x) c. inherent and control risk cause errors that could be material to the financial statements d. the auditor is not retained to conduct financial statement audit in the succeeding year 87. If the auditor concludes that there is reasonable justification to change the engagement and if the audit work performed complies with the PSAs applicable to the changed engagement, the report issued would be that appropriate for: a. The original engagement, without reference to the original engagement. b. The revised terms of engagement, without reference to the original engagement. (x) c. The revised terms of engagement, with reference to the original engagement. d. The original engagement, with reference to the revised engagement. 88. Which of the following services provides the highest level of assurance to third parties about a company’s financial statements? a. Audit (x) b. Review c. Compilation d. Write-up work 89. When CPA firms do an audit of historical financial statements, part of the audit usually consists of identifying operational problems and making recommendations they may benefit the audit client. The recommendations can be made orally but they are typically made by use of a a. Letter of representation b. Engagement letter. c. Management letter. (x) d. Client letter. 90. Which of the following best describes what is meant by the term “fraud risk factor”? a. Factors whose presence indicates that the risk of fraud is high. b. Factors whose presences often have been observed in circumstances where frauds have occurred. (x) c. Factors whose presence requires modification of planned audit procedures. d. Reportable conditions identified during an audit. 91. The most difÏcult type of misstatement to detect is fraud based on a. The over-recording of transactions. b. The non-recording of transactions. (x) c. Recorded transactions in subsidiaries. d. Related party receivables. 92. Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor’s assessment of the risk of misstatement due to fraud? a. Checks for significant amounts outstanding at year end. b. Computer generated documents. c. Missing documents. (x) d. Year-end adjusting journal entries. 93. Which of the following most accurately summarizes what is meant by the term “material misstatement?” a. Fraud and direct-effect illegal acts. b. Fraud involving senior management and material fraud. c. Material error, material fraud, and certain illegal acts. (x) d. Material error and material illegal acts. 94. Which of the following is most likely to be a response to the auditor’s assessment that the risk of material misstatement due to fraud for the existence of inventory is high? a. Observe test counts of inventory of certain locations on an unannounced basis. (x) b. Perform analytical procedures rather than taking test counts. c. Request that the inventories be counted prior to year-end. d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count. 95. Which of the following is not a component of audit planning? a. Observing the client’s annual physical inventory-taking and making test counts of selected items. (x) b. Making arrangements with the client concerning the timing of audit fieldwork and use of the client’s staff in completing certain phases of the examination. c. Obtaining an understanding of the entity and its environment, including its internal control. d. Developing audit programs. 96. In planning an examination, the auditor would consider all of the following matters, except a. Anticipated reliance on internal controls b. Preliminary judgment about materiality levels for audit purposes c. Financial statements items likely to require adjustment d. The kind of audit opinion likely to be given (x) 97. In developing the overall audit plan for a new client, a factor not to be considered is a. The terms of the engagement and any statutory responsibilities b. The client’s business, including the structure of the organization and accounting system used c. The amount of estimated audit fee (x) d. The audit risks and procedures to be performed to achieve audit objectives 98. A CPA may reduce audit work on a first time audit by reviewing the working papers of the predecessor auditor. The predecessor should permit the successor to review working papers relating to matters of continuing significance, such as those that relate to a. Extent of reliance on the work of specialists b. Fee arrangements and summaries of payments c. Analysis of contingencies (x) d. Staff hours required to complete the engagement 99. Following PSAs, which of the following is not one of the assertions made in financial statements by management concerning each major account and class of transactions? a. Relevance. (x) b. Existence. c. Valuation. d. Presentation and disclosure. 100. Assertions are representations of management that are embodied in financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation? a. Property is recorded at historical cost. b. Trade accounts receivable in the balance sheet are stated at net realizable value. c. Notes payable in the balance sheet include all such obligations of the entity. (x) d. Property cost is systematically allocated to appropriate accounting period. 101. 102. Which statement is correct? a. A review involves the application of audit skills and techniques and the gathering of evidence. (x) b. A review comprises inquiry, confirmation, and analytical procedures which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party. c. In a compilation engagement, the accountant is engaged to use auditing expertise as opposed to accounting expertise. d. Since no assurance is expressed in a compilation engagement, users of compiled information derive no benefit, even when the service has been performed with due professional skill and care. Adequate planning helps ensure that appropriate attention is devoted: a b(x) c d To important areas of the audit So that potential problems are promptly identified Yes So that the work is completed expeditiously No Yes Yes Yes Yes Yes No No Yes No Yes 103. Which of the following procedures would an auditor most likely perform in planning a financial statement audit? a. Reviewing investment transactions of the audit period to determine whether related parties were created. b. Performing analytical procedures to identify areas that may represent specific risks. (x) c. Reading the minutes of stockholder and director meeting to discover whether any unusual transactions have occurred. d. Obtaining a written representation letter from the client to emphasize management’s responsibilities. 104. A preliminary or entrance conference with the auditee is a useful step in avoiding misunderstandings. Which of the following items is usually not covered in a preliminary conference? a. Special problems known to be relevant to the audit. b. Extent to which the independent auditor will need assistance and cooperation from the organization’s personnel. c. Condition of accounting records and other data sources which may affect the cope of the audit and difÏculty of completion. d. Audit program to be followed. (x) 105. Audit programs generally include procedures necessary to test actual transactions and resulting balances. These procedures are primarily designed to a. Detect irregularities that result in misstated financial statements. b. Test the adequacy of internal control. c. Gather corroborative evidence (x) d. Obtain information for informative disclosures. 106. A procedure designed to test for peso errors or irregularities directly affecting the correctness of financial statement balances is a a. Substantive test. (x) b. Compliance test. c. Test of controls. d. Definition of peso-unit sampling. 107. The following statements relate to the scope of practice of accountancy. Which one is correct? a. Practice in Education/Academe shall constitute in a person in an educational institution which involve teaching of accounting, auditing, management advisory services, accounting aspects of finance, business law, taxation, and other technically-related subjects. (x) b. Members of the Integrated Bar of the Philippines are the only ones allowed to teach business law and taxation. c. In connection with the practice of accountancy in commerce and industry, any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial statements, coordinating with the external auditors for the audit of such financial statements and other related functions shall be occupied only by a duly registered CPA, provided that such business or company must have authorized capital of at least Five Million Pesos (5,000,000.00) and/or annual revenue of at least Ten Million Pesos (10,000,000.00). d. Practice in government shall constitute in a person who holds, or is appointed to, a position in an accounting professional group in government or in a governmentowned and/or controlled corporation, excluding those performing proprietary functions, where decision-making requires knowledge in the science of accounting. 108. The following, except one, are the duties normally performed by the engagement partner: a. To manage the firm. b. To establish contact with clients. c. To discuss with the client problems that may arise during the audit. (x) d. To decide on questions of policy. 109. Which of the following is not a power of the Professional Regulatory Board of Accountancy? a. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of RA9298 b. To hold exclusive power to administer oaths in connection with the administration of RA9298 (x) c. To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the accountancy profession d. To monitor the conditions affecting the practice of accountancy and adopt such measures, including promulgation of accounting and auditing standards, rules and regulations and best practices, as may be deemed proper for the enhancement and maintenance of high professional, ethical, accounting and auditing standards. 110. Which of the following factors or conditions is an auditor least likely to plan an audit to discover? a. Financial pressures affecting employees. (x) b. High turnover of senior management. c. Inadequate monitoring of significant controls. d. Inability to generate positive cash flows from operations. 111. Which of the following is the best criterion for evaluating a staff auditor’s work performance? a. Quantity of deficiency findings. b. Ability to get along with clients. c. Working papers appearance. d. Fulfillment of objectives set forth in the audit. (x) 112. International Standards on Auditing (ISAs) on which the PSAs are based are generally applicable to the public sector, including government business enterprises. However, the applicability of the equivalent PSAs on Philippine public sector entities has not been addressed by the Auditing Standards and Practices Council (Note: The ASPC has been replaced by the Auditing and Assurance Standards Council). It is the understanding of the ASPC that this matter will be addressed by: a. The Association of CPAs in Public Practice itself in due course. b. The Commission on Audit itself in due course. (x) c. The Professional Regulation Commission of the Philippines itself in due course. d. The Professional Regulatory Board of Accountancy itself in due course. 113. Materiality should be considered by the auditor when: a. Determining the nature, timing and extent of audit procedures and evaluating the effect of misstatements. (x) b. Evaluating the effect of misstatements. c. Determining the nature, timing and extent of audit procedures. d. Evaluating the effect of misstatements but not when determining the nature, timing and extent of audit procedures. 114. 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. (x) 115. Pirma and Lang, CPAs, is doing the 2006 audit of SAN MIGUEL BEEF. The partner assigned to the engagement, Mr. Pirma, works at the Manila ofÏce of the firm. Which of the following audit firm personnel should obtain a sufÏcient understanding of San Miguel Beef and its environment, including its internal control? a. Assistants assigned to the Manila OfÏce of Pirma and Lang, CPAs. b. The whole team assigned to the San Miguel Beef audit engagement. (x) c. All firm professionals, regardless of their involvement in the engagement. d. Only Mr. Pirma, since is he is the one to sign the audit report for San Miguel Beef’s 2006 financial statements. 116. The following statements relate to Councils mentioned in the Implementing Rules and Regulations of the Philippine Accountancy Act of 2004. Which of these statements is incorrect? a. The Chairpersons of the FRSC and the AASC shall both be appointed by the Professional Regulation Commission. b. Any member of any existing accounting and auditing standard-setting council shall not be disqualified from being appointed to the FRSC and the AASC as the case may be for the terms provided herein. c. The Education Technical Council was created to assist the Professional Regulation Commission in carrying out its powers and functions and to further assist in the attainment of the objective of continuously upgrading the accountancy education in the Philippines. (x) d. The PRC CPE Council shall be composed of a chairperson and two (2) members. 117. Auditing standards require the auditor to obtain an understanding of the client’s internal controls a. for every audit (x) b. for first-time audits c. sufÏcient to find any frauds which may exist d. whenever it would be appropriate 118. Which of the following best describes the interrelated components of internal control? a. Organizational structure, management philosophy, and planning. b. Control environment, risk assessment, control activities, information and communication systems, and monitoring. (x) c. Risk assessment, backup facilities, responsibility accounting and natural laws. d. Legal environment of the firm, management philosophy and organizational structure. 119. An auditor should obtain sufÏcient knowledge of an entity’s information system relevant to financial reporting to understand the a. Safeguards used to limit access to computer facilities b. Process used to prepare significant accounting estimates (x) c. Procedures used to assure proper authorization of transactions d. Policies used to detect the concealment of fraud 120. Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives concerning a. Reliability of financial reporting b. Elimination of all fraud (x) c. Compliance with applicable laws and regulations d. Effectiveness and efÏciency of operations 121. The following statements relate to reinstatement, reissuance and replacement of revoked or lost certificates. Which one of these statement(s) is(are) correct? (1) The Board may, after the expiration of two (2) years from the date of revocation of a certificate of registration and upon application and for reasons deemed proper and sufÏcient, reinstate the validity of a revoked certificate of registration and in so doing, may, in its discretion, exempt the applicant from taking another examination. (2) A new certificate of registration to replace lost, destroyed, or mutilated certificate/license may be issued, subject to the rules promulgated by the Board and the Commission, upon payment of the required fees. (3) The Board shall issue a resolution, subject to the approval of the Commission in granting a petition for reinstatement to the practice of accountancy. a. b. c. d. (1) and (2) (1) and (3) (2) and (3) (1), (2), and (3) (x) 122. Experience has shown that certain conditions in an organization are symptoms of possible management fraud. Which of the following conditions would not be considered indicators of possible fraud? a. b. c. d. 123. Managers regularly assuming subordinates’ duties. Managers dealing in matters outside their profit center’s scope. Managers not complying with corporate directives and procedures. Managers subject to formal performance reviews on a regular basis. (x) Which of the following statements is incorrect? a. Internal auditing relates to audit which serves the needs of management. b. Government auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efÏciency, effectiveness and compliance. c. A compliance audit is designed to evaluate the efÏciency and effectiveness of an organization or some part thereof. (x) d. CPA firms, internal auditors and governmental auditors can perform operational audits. 124. A comprehensive and constructive examination of the organizational structure of a company, institution, or branch of government or any component thereof, its plans and objectives, its means of operation and its use of human and physical facilities to reveal defects or irregularities and to indicate possible improvements is called a. Financial audit b. Management audit (x) c. Government audit d. Internal audit 125. In an audit situation, communication between the successor and predecessor auditors should be a. Documented in an engagement letter. b. Acknowledged in a representation letter. c. Initiated by the successor auditor. (x) d. Written and included in the audit report. 126. a An auditor who has been invited to submit a proposal for an audit engagement is a. b. c. d. Predecessor auditor. Successor auditor. (x) Principal auditor. Interim auditor. 127. JM, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client’s refusal to permit this will bear directly on JM’s decision concerning the a. Adequacy of the preplanned audit program b. Ability to establish consistency in application of accounting principles between years. c. Apparent scope limitation. d. Integrity of management. (x) 128. The auditors will not ordinarily initiate discussion with the audit committee concerning the a. Extent to which the work of internal auditors will influence the scope of the examination. b. Extent to which change in the company’s organization will influence the scope of the examination. c. Details of potential problems which the auditors believe might cause a qualified opinion. d. Details of the procedures which the auditors intend to apply. (x) 129. The policy on delegation states that there is to be sufÏcient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality. These procedures include the following, except: a. Provide for the approval of the scheduling and stafÏng of the audit by the auditor. (x) b. Provide procedures for planning audits. c. Provide procedures for maintaining the firm’s standards of quality for the work performed. d. Provide on-the-job training during the performance of audits. 130. According to the IRR, how many representatives of the Quality Review Committee will come from the accredited national professional organization of CPAs? a. Five members (x) b. Four members c. Six members d. Seven members 131. Which of the following statements is incorrect? a. Per PSA 220, the auditor means the person with the final responsibility for the audit. b. The auditor should implement those quality control procedures which are, in the context of the policies and procedures of the firm, appropriate for the individual audit. c. The work performed by each assistant needs to be reviewed by personnel of at least equal competence. d. The procedures on skills and competence include those for hiring, for professional responsibilities and for advancement. (x) 132. The following fraud risk factors relate to industry conditions, except: a. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity. b. A high degree of competition or market saturation, accompanied by declining margins. c. Unusually rapid growth or profitability, especially compared with that of other companies in the same industry. (x) d. A declining industry with increasing business failures and significant declines in customer demand. 133. If there is a risk of material misstatement resulting from fraud that may involve or result in improper revenue recognition, which of the following is the most appropriate course of action for the auditor to take? a. Review the entity’s inventory records to help identify locations, areas or items for specific attention during or after the physical inventory count. b. Confirm with customers certain relevant contract terms and the absence of side agreements. (x) c. Perform tests of non-standard journal entries affecting long-term liabilities to confirm that they are adequately supported and reflect the underlying events and transactions. d. Request the assistance of an expert, taking care to ensure that the expert’s assumptions, methods or findings have also been reviewed by the auditor. 134. When evaluating the possible effect of noncompliance on the financial statements, the auditor considers the following, except: a. The potential financial consequences, such as fines, penalties, damages, threat of expropriation of assets, enforced discontinuation of operations, and litigation. b. Whether the auditor should be held responsible for preventing such noncompliance. (x) c. Whether the potential financial consequences require disclosure. d. Whether the potential financial consequences are so serious as to call into question the fair presentation given by the financial statements. 135. According to the Implementing Rules and Regulations, which portion of RA9298 embodies the legislative intent in enacting the Philippine Accountancy Act of 2004? a. Short title. b. Objectives. c. Declaration of policy (x) d. Scope of practice. 136. Practice of public accountancy shall constitute in a person, be it his/her individual capacity, or as a partner or as a staff member in an accounting or auditing firm, holding out himself or herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a CPA, or offering or rendering, or both, to more than one client on a fee basis or otherwise, services such as the following, except: a. The audit or verification of financial transactions and accounting records. b. The preparation, signing or certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules, exhibits, statements or reports which are to be used by stockholders or for publication or for credit purposes, or to be filed with a court or government agency, or to be used for any other purpose. c. The design, installation, review, and revision of accounting systems and controls. d. When he/she represents clients before government agencies on tax and other matters outside the province of accounting. (x) 137. The following statements pertain to the rules and regulations on the accreditation of individual CPAs, firms and partnerships of CPAs engaged in the public practice of accountancy. Which one is correct? a. Within sixty days from the effective date of the revised rules and regulations, individual CPAs, firms, and partnerships of CPAs who/which are not yet registered shall register with the Board and the Commission in the manner provided for in the Implementing Rules and Regulations of the Philippine Accountancy Act of 2004. b. The registration shall be valid for a period of two years. c. Renewal of registration shall be made every three years on or before November 30 on the year of expiry upon compliance with the requirements set forth in the Implementing Rules and Regulations. d. The registration of applicants approved during any month of the year shall expire on the third year following its approval. (x) 138. Individual CPAs, firms, and partnerships of CPAs organized after the effective date of the revised rules and regulations set forth in Annex A of the IRR shall register with the board and the commission and: a. Shall not commence the practice of public accountancy until a valid Certificate of Registration has been issued. (x) b. Shall not commence the practice of public accountancy until a valid Certificate of Commissioning has been issued. c. Subject to favorable recommendation of the Board, shall be issued the corresponding certificate of registration to practice public accountancy, with such certificate being valid for two years. d. Subject to favorable recommendation of the Commission, shall be issued the corresponding certificate of registration to practice public accountancy, with such certificate being valid for three years. 139. Which of the following statements is incorrect? a. The auditor should plan the audit so that the engagement will be performed in an effective manner. b. Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit report, in order to reduce audit risk to an acceptably low level. (x) c. Planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efÏciency of the planning process. d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the engagement. 140. a. b. c. d. In performing MAS engagement, CPAs should not take any positions that might Constitute advice and assistance. Provide technical assistance in implementation. Result in new organizational structure. Impair their objectivity. (x) 141. The overall attitude and awareness of an entity’s board of directors concerning the importance of the internal control structure usually is reflected in its a. computer-based controls b. system of segregation of duties c. control environment (x) d. safeguards over access to assets 142. Which of the following statements is incorrect? a. Competence as a CPA includes having the required technical qualifications to perform an audit engagement. b. Generally accepted auditing standards are best described as the conventions, rules and procedures that are necessary to define the accepted accounting practices at a particular time. (x) c. Generally, evidential matter is considered sufÏcient when there is enough of it to afford a reasonable basis for an opinion. d. An annual report is a document, which an entity ordinarily issues on an annual basis, which includes its financial statements together with the audit report thereon. 143. The following statements relate to the Philippine Institute of Certified Public Accountants (PICPA). Which one is incorrect? a. A director can only represent a sector in a region if he/she has been a member in good standing in such sector in the region for at least two years at the time of his/her nomination. b. There shall only be fourteen national directors, unless there is a valid reason to have additional representation. (x) c. The national directors shall be apportioned according to sectors in the four geographic sectors based on the ratio of latest available number of members in good standing from those areas. d. It shall have a full-time career Executive Director who shall implement the policies promulgated by the PICPA Board of Directors and shall have direct supervision over the PICPA Secretariat. 144. Which of the following cases illustrate a violation of the provisions of RA9298 and its IRR regarding the rule on temporary and special permits? a. F, foreign CPA, is internationally recognized as one of the foremost experts in computerized fraud audits. In the judgment of the Board of Accountancy, obtaining the services of F is essential for the advancement of accountancy in the Philippines. F is granted a temporary/special permit to provide training to Filipino auditors regarding the finer points of his specialization, and his permit is restricted to this particular engagement. b. L, foreign CPA, is called for a specific purpose which, in the judgment of the Board of Accountancy, is essential for the development of the country. L is granted a temporary/ special permit to practice for the particular work that he is being engaged. There is no Filipino CPA qualified for such specific purpose. c. C, foreign CPA, is called for consultation, which, in the judgment of the Board of Accountancy, is essential for the development of the country. C is granted a temporary/ special permit to practice for the particular consultation that she is being engaged. There is no Filipino CPA qualified for such consultation. d. S, foreign CPA, is engaged as professor in special international accounting modules which are essential to accountancy education in the Philippines. She was given a temporary/special permit which restricts her practice to teaching and performing compilation work for local enterprises. (x) 145. The following except one, are examples of the type of information that may come to the auditor’s attention that may indicate that noncompliance with laws or regulations has occurred: a. Investigation by government departments or payment of fines or penalties. b. Payments for unspecified services or loans to consultants, related parties, employees or government employees. c. Purchasing at prices approximating market price. (x) d. Existence of an accounting system which fails, whether by design or by accident, to provide an adequate audit trail or sufficient evidence. 146. Eugene, CPA is planning the audit of Ghostfighter Corporation’s 2006 financial statements. In documenting the terms of engagement, which of the following statements is most likely to appear in Eugene’s engagement letter? a. “Fees for our services are based on our regular per diem rates, plus travel and other out-of pocket expenses and a certain percentage of the tax savings as a result of audit adjustments to net income.” b. “Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.” (x) c. “During the course of our audit, we may observe opportunities for economy in, or improved controls over your operations.” d. “In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems which did not come to our notice.” 147. The following statements pertain to audit planning and materiality. Which one is incorrect? a. The extent of planning will vary according to the size of the entity, the auditor’s experience with the entity and knowledge of the business, and the complexity of the audit engagement. b. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful. c. Materiality is most useful in assessing the scope of an auditor’s program relating to various amounts. d. An overall audit program is first prepared, followed by the development of the overall audit plan and the establishment of an overall audit strategy. (x) 148. The auditor’s duty of confidentiality would ordinarily preclude the reporting of fraud or error to a third party. However, in certain circumstances, the duty of confidentiality is justifiably overridden by the following, except: a. Law. b. Statute. c. Courts of law. d. Pressure from a competitor of the audit client. (x) 149. Which of the following statements is correct? a. A profession is distinguished by certain characteristics, one of which is the collection of fees for services rendered and the fee is based on written agreements with the client. b. Retainer fee basis is the method of billing clients whereby the billing is done on the basis of actual time spent by the staff multiplied by the hourly rates agreed upon. c. The sole proprietorship, corporate, and partnership forms of business organization are the only allowable legal forms of public accounting practice in the Philippines. d. The Securities and Exchange Commission shall not register any corporation organized for the practice of public accountancy. (x) 150. The audit procedures deemed necessary in the circumstances to achieve the objective of the audit refer to: a. Audit program b. Audit objective c. Substantive procedures d. Scope of an audit (x)