Accountancy Questions and Answers

'AUDmNG THEORY !FINAL PREBOARD EXAMINATION 1 SETA INSТRUCТIONS: CHOOSE ТНЕ ВЕSТ ANSWER FOR. fJ\.CH OF ТНЕ FOLLOWING. FULLУ SHADE ONLY ONE ВОХ FOR ЕАСН ГТЕМ. SТRJCТLY NO ERASURES ALLOWED. 1. The following statements relate to the auditor's responsibllities regarding related parties апd transactions with such parties. Which is incoгrect? А. Management is required to implement adequate internal control to ensure that tг.шsactions with related parties аге appropriately identified in the information system and disdosed in the financial statements. В. The auditor should have а sufficient understanding of the entity and its environment to identify eveпts, transactions, and practices that may result in а risk of mateгial misstatement regardlng related parties and traпsactions with such parties. С. А financial statement audit cannot Ье expected to detect all related рагtу transactions. ,_•: D.i Тhе auditor is responsiЫe for the identification and disdosure of related parties and transactions with such parties. 2. The communication Ьetween an external auditor and а dient is confidential. Ordinarily, А. The client is not required to answer an extemal auditor's questions in certain circumstances. В. An extemal auditor is not permitted to testify in а court of law without the permission of the client. С. An extemal auditoг is not required to divulge client information even if demanded Ьу а _subpoena. ,• D. ;An external auditor should not disclose information oЬtained in the course of the eпgagement wittюut the client's pem,ission. The Auditing and Assurance Stanc:tards Council {МSС) was estaЫlshed Ьу the А. : Professional Regulation Commission (PRC) upon the recommendatlon of the Воагd of Accountaпcy (ВОА). В. PICPA. с. PICPA and the Association of CPAs in PuЫic Practice (АСРАРР). D. International Federatioп of Accountants (IFAC). 4. When an auditor believes that ап understanding with the client has not Ьееn estaЫished, he or she should ordiпarily А. Регfо1тn the audit with increased professional skepticism . . -В. • Decline to accept ог perform the audit. С. Assess coпtrol risk at the maxin1un1 level and perform а primarily substantive audit. D. Modify the scope of the audit to reflect ап increased risk of material misstatement due to froud. -� On January 2, 2016, the TANYA СО. recelved а notice from its primary suppliers that effect1ve immediately all wholesale prices would Ье Jncreased 10%. On the basis of the notice, TANYA revalued its December 31, 2015 inventory to reflect the hlgher costs. As а result, tl1e statement offinancial position reflects inventory stated at ап amount higher than its net realizaЬle value. Тhе inventory constituted а rnaterial proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. In reporting оп the company's financial statements fог the уеаг ended December 31, 2015, in which inventory is valued atthe adjusted amount, the auditor would most likely А. Express ап unmodified opinion provided the nature of the adjustment and the amounts involved are disclosed in notes to tJ-ie financial statements. В. : Express а qualifie9 opinion. С. Disclaim an opinion. D. Express an adverse opinion. б. When approached to perfoгm an audit for the first time, the СРА should make inquiries of the predecessor auditor. This is а necessary procedure Ьecause the predecessor may Ье аЫе to provide the successor with information that wifl assist the successor in determining А. Whether the predecessor's work should Ье used. В. Whether the company follows the policy of rotating its auditors. С. Whether in the predecessor's opinion intemal control af the company has been satisfactory. . D. 'Whether the engagement should Ье aa:epted. 7 .. As а result of sampling procedures applied as tests of controJs, ап auditor incorrectly assesses control risk higher thaл appropriate. Тhе most likely explanation for this situation is that А. Тhе deviation rate in the auditor's sample is less than the toleraЫe га\:€, but the deviation rate in the population exceeds the toleraЫe ra.te. ..Б- ;,Тhе deviation rate in the auditor's sample exceeds the toleraЫe rate, but the deviation • • rate in the population is less than the toleraЫe rate. С. Тhе deviation rates of both the auditor's sample and the population exceed the toleraЫe rate. D. The deviation rates of Ьoth the auditor's sample апd the population are less than the tolernЫe 1ote. 8. А client decldes not to make an auditor"s proposed adjustments that collectively аге not material, and wants the auditor to issue the report based on the unadjusted numЬers. Which of the following statements is correct regarding the finandal statement presentation? А. The financia/ st.atements do not conform wit/1 PFRS. В. The financial statements contain unadjusted misstatements that should result in а qualified opinion. С. The financial statements аге free from material misstat:€ment, but disclosure of the proposed adjustments is required in the notes to the financial statements. "D.. Тhе financial statements аге free from material misstatement, and no disclosure is requiгed in the notes to the ftnancial statements. 9. lndicate which changes would require an emphasis of matter paragraph ln the audlt report. The СРА concludes there is substantial doubt aЬout the entity's aЫlity to continue as а qoing concem А. Yes в. No Yes с._,> D. No The СРА makes reference to the work of an expert to indicate shared responsibllity in an unmodified opinion Yes Yes No No 10. If requested to perform а review engagement for an entity in which ап accountant has an immatenal direct financial interest, the accountant is А. Not independent and, therefore, may issue а review report, but тау поt issue an auditor's report. В. Not independent and. therefore, may not Ье associated v1ith the entity's financial statements. , С. i Not independent and, therefore, may not issue а review report. D. Independent Ьecause the financial interest is immaterial and, therefore, may issue а review report. .11. Using your knowledge ofthe relationships among ассерtаЫ� audit risk, inherent risk, coпtrol risk, planned detection risk, toleraЫe misstatement, and pjanned evidence, determine the effect оп planned evidence (increase ог decrease) of changtJg each of the following factors, while the other factors remaln unchanged. 1. An increase in ассерtаЫе audit risk. 2. 3. 4. 5. Ап increase iп iпherent risk. А decrease in control risk. Ап increase in planned dete:tion risk. An increase in toleraЫe misstatement. � 1ncгease Decrease Increase Increase Incгease 12 Decrease Decrease Increase Decrease Increase � 1ncrease Increase Decrease Increase Decrease . ь� Decrease Increase Decrease Decrease Decrease 12. А requirement that worxing papers Ье reviewed Ьу the supervisor, and any def1ciencies Ье discussed v,ith the preparer is an example of а quality control procedure in the area of А. Acceptance and continuance of client relationships and specific engagements. В. Human resources. С. Relevant ethical requirements. D. Engagement performance. 13. P-s а result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred Ьecause the true deviation rate in the population was А. Less than the risk of assessing control risk too low, based оп the auditor's sample. В. Less than the deviation rate in the auditor's sample. С. More than the risk of assessing control risk too low, Ьased оп the auditor's sample . .· О.) Маге than the deviation rate in the auditor's sample. Тhе date of the end of the latest period covered Ьу the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit is the А. Date the financia! statements are issued . .. В. Date of the auditor's report. С._· Date of the financial statements. о. Date of approval of the flnancial statements. 15. An external auditor will use intemal auditors to assist in the audit of accounts receivaЫe. Of the following procedures, the опе that would Ье most appropriate for the internal auditors to perform is the А. Assessment of control risk for accounts receivaЫe. В. Determination of the numЬer of positive confirmation requests to Ье mailed to substantiate the existence of accounts гесеjvаЫе. -.С., Preparation of ап aged trial balance of accounts receivaЫe. D. Establishment of the amount of accounts receivaЫe that is considered material. 16. Тhе Philippine Standards оп Assurance Engagements (PSAEs) аге to Ье applied in А.. Assurance eлgagements dealing with suЬject matters other than historic.al financial infonnation. В. Compilation eпgagements and agreements to apply agreed-upon procedures to informatlon. С. Тhе audit or review of historical finandal information. D. Assurance engagements dealing with hist:orical financial information . . .р. Тhе adverse effects of events cгusing an auditor to Ьelieve there is substantial doubt aЬ9ut an entity's aЬility to continue as а going concern would most likely Ье mitigated Ьу evidence relating to the А. AЬility to expand operations into new product lines in the future. В. Feasibllity of plans to purchase leased equipment at less than market value. С. MarketaЫlity of assets that managemeni: plans to sell. D. • Committed arrangements to convert preference shares to long-term deЬt. 18. An audit client's desc:ription that irs finandal statements are prepared in accordance with а particular applicaЫe fiпancial reporting framework is appropriate onty if . А .Тhе finandal statements comply with all the requirements of that framework that аге effective during the period covered Ьу the financial statements. В. The finandal statements are in substantial compliance with that framework. Pagr., 3 of16 С. The finandal stёltements adequately disclose the significant accounting policies selected and applied. D. The terminology used ir1 the financial statements, including the title of each financial statement, is appropriate. 19. Which of the following is the least persuasive documentation in support of an auditor's opinion? А. Notation of inferences drawn from ГcJtios and trends. В. Notation of appГcJisers' conclusions documented in the auditor's working papers. С. Usts of negative confirmation requests for which no response was received Ьу the auditor. !Schedules of details of physical i11ventory counts .::onducted Ьу the client. ,12, ·-�.' An auditor is auditing а mutual fund company that uses а transfer agent to handle accouлting for shareholders. Which of the following actions Ьу the auditor would Ье most efflcient for obtaining informatlon about the transfer agent's internal controls? А. Review prior-year workpapers to determine v,hether the number of transactions processed Ьу the agent has materially increased. В. Perform ап audit on the internal control function of the agent . .С. Perform tests of coпtrols on а sample of the audited firm·s transactions through the agent. , D. )Review reports on intemal contro! placed in operation and its operating effectiveness ·-- • produoed Ьу the agent's own auditor. 21. Which ofthe following is most likeiy to Ье а response to the auditor's assessment that the risk of material misstatement due to fraud for the existence of inventory is high? А. Perform analytica1 procedures rather than taking test courits. В. Request that inventories Ье oounted prior to year-€nd. С. Request that inventory counts at the various locations Ье counted оп different dates so as to allow the same auditor to Ье present at every count. ;С).. Observe test counts of lnventory at certain locatioпs on an unannounced basis. 22. If the statement of financia! position of а company is dated Decembe1· 31, 2015, the audit report is dated February 18, 2016, and both аге released on February 25, 2016, thls indicates that the auditor has searched for subsequent events that оссuггеd up to: А. December 31, 2015 ,С. 'Februarv 18, 2016 В. January 1, 2016 February 25, 2016 ·о: 23. Тhе following аге the Ьenefits claimed fог the practice of determining materiality in the initial planning stage of starting an audit, except А. Avoiding the proЫem of doing too little work (underauditing). 5. Avoiding the proЫem of doing mcre work than necessary (overauditing) . . _ с.> Вeing able to decide early what kind of audit opinion to express. D. Вeing аЫе to fine tune the audit work for effectiveness and efficiency. f'¼· When the audited financial statements of the prior уеаг аге presented together with tl'юse of the current year, the continuing эuditor's report should cover А Only the current уеаг, but the prior ye.ar's report should Ье referred to. В. Only the current уеаг, but t:h� prior year's report should Ье presented. С. Only the current year. D. 8oth ye2rs. �5. In which circumstance will the auditor not consider the need to modify the report? А. The client's legal counsel is req1Jested to advise whether а material act is legal or illegal but refuses to do so. В. The auditor concludes that the effect of an illegal act creates substantial doubt aЬout the entity's aЬility to continue as а going concern. С. The audttor ooncludes that the effect of an illegai act, taken alone ог with similar acts, is material in. amount and has not been properJy accounted for or disclosed in the financial statements. < D.__ AII of the ciгcumstances require mcdification of the auditor's report. : 26. Which of the following is а step in an auditor's decision to assess control risk at ЬeJow ; maximum? А. AppJy analytical procedures to Ьoth financial data and nonfinancial information to detect conditions that тау indicate weak control. В. Perforrn t.ests of details of transactions and account balances to identify potential errors апd inregularities. -• С. 1Identify specitk control procedures that аге likely to detect ог prevent material misstatements. D. _Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testlng. 2.7. Whjch of the foJlowing statements c::onceming the auditш's responsibility regarding sut:Jsequent events is incorrect? А. Тhе auditor should perform audit pro"-edures designed to oЬtain sufficient appropriate ·audit evidence that all events up to the date of the auditor's report that may require ;adjustment of, or disclosure in, the financial statements have Ьееn identified. ,В. :Тhе audit procedures to identify events that may require adjustment of, or disclosure in, the financial statements should Ье performed as nе.аг as practicaЫe to the date of issuance of the audited financia! statements. С. When the auditor becomes aware c,f events which materially affect the financial statements, the auditoг should consider whether such events аге ргореr1у accounted for апd adequately disclosed in the fin< 1ncial statements. D. Тhе auditoг does not have апу respcr.sibl!ity to perform audit proceduгes ог make ;inquiry regarding the financial statements aft:er the date of the auditor's report. �а. An auditoг should Ье аые to collect and evaluate documentary evidence. When evaluating and interpreting evidence, the auditor must ье concemed about drawing unwarranted conclusions. An example of а valid conclusion is А. Correct inventory valuation determined from observation. of physical inventcry counts. В. Proper accounts рауаЫе cutoff at year-end determined fi-om а review of raw materials requisitions . С Existence of а company саг deterrnined from the examination of а paid invoice. О. Client ownership determined from cutside inquiries about r:onsigned goods. -�- Тhе auditor is required to oЬtain геаsопаЫе assurance about whether the financial statements аге free of material misst:;зtement, whether due to fгaud ог еггоr. In all cases when геаsопаЫе assuгance cannot Ье obtained, the auditor's report should coпtain а/ап А. Unmodified opinion в. . Qualifled or adverse opinion С. Quallfled ог disclaimer of opin!on D. Disclaimer of opinion 30. Accepting an engagement to examine an entity's financial projection most likely would Ье appropriate if the projection were to Ье distributed to А. AII employees who work for the entity. В. Potential stockholders who гequest а prospectus ог а registration statement. .•С. А Ьапk with which the entity is negotiating fог а loan. о. AII stockholders of record as of the report date. �- When the financial statements contain materia! but not pervasive misstatements Ьecause the accounting policies se1ected аге not consistent with the applicaЫe finaпcial reporting .framework, tl1e audit-or should , А. . Express а qualified opinion and descriЬe the matter giving rise to the modification in а 'separate paragraph. В. Express а qualified oplnlon and describe the matter giving rise to the modification wlthin the oplnion paragraph. С. Disclaim ап opinion and descriЬe the matter giving rise to the modification in а separete paragraph. D. Disclaim an opinion and describe the matter giving гise to the modification within the opinion paragraph. 32. V✓hich of the following is tгue of generalized audit software progrэms? А. Тhеу can Ье used only in auditing on-Hne computer systems. В. Тhеу сап Ье used оп апу computer without modification . . С., They each have their own characteristics that the auditor must carefully consider before • ·-·-· using in а given audit situation. D. They еnаЫе the auditor to perform all manual tests of control procedures less expensively. -�З. An auditor concludes that there is а material inconsistenc:y in the other information in an annual report to shareholders c.ontaining audited finandal statements. The audltor ьelieves that the financial statements do nat require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take? А. C.OOsider the situatioл closed because the other informatioп is not in the audited financial statements. В. Issue ап "except for" qualified opinion after disrussing the matter with the client's audit committee. С. Disclaim an opinion on the financial statements after explaining the material inconsistency in а separate "other matter" paгagraph . . D. , Revise the auditor's report to include а separate "other matter" paragraph descril:>ing the material lnconslstency. /�- VGR Corporation has пumerous customers. А customer file is kept оп disk. Each customer file contains name, address, credit limit, and account oolance. Тhе auditor wishes to test this fi!e to determine whet:her credit limits аге being exceeded. Тhе ьest pгocedure for the auditor to fo!low would Ье to . А Develop test data that would cause some account ьa1ances to exceed the credit limit and determine if the system properly detects such situation. в. , Develop program to compare credit limits with aocount ьalances and print out the details of any account with а Ьalance exceeding its credit limit. С. Request а printout of a!J acc;ouпt Ьalances so they сап Ье manually checked against the credit limits. D. Request а printout of а sample account Ьalances so they can Ье individually checked against the credit limits. 35. Which of the following statements is not correct:7 А It is possiЫe to vагу the samp!e size from one unit to 100% of the items lп the population . . В. • Тhе decision of how many items to test should not Ье inftuenced Ьу the increased costs • • of performing the additional tests. С. Тhе decision of how many items to test musl: Ье made 1:>у the auditor for each audit procedure. D. The sample size for any given procedure is likely to vary from audit to audit. 36. VJhen discussing contrnl risk and the audit risk model, which one ofthe following statements is fulse? А Тhе relationship betweeп control risk and evidence is direct. В. The relationship Ьetween control r1sk and detectlon risk is inverse. С C.Ontrol risk is а measure of the auditor's assessment of the llkelihood that errors wiJI not Ье prevented or detected Ьу the client's internal control system. If the auditor conc!udes that an internal control system is completely ineffective to prevent ог detect errors, he/she would assign а 0% to 11:ontrol risk. о., 37. А СРА audits the tinancial statements of а client that is поt � puЬlic interest entity. The СРА has also Ьееn asked to perform Ьookkeeping functions forj th.e client. Under the Code of Ethics for CPAs in the Philippines, which ofthe following a/:tivities would impair the CPA's independence with respect to the client? The СРА records tranSc!ctions in accordance with dassificatlons determlned Ьу management. В. The СРА prepares financial statements from а trial balance provided Ьу management. с. The СРА posts adjusting journal entries prepared Ьу management to the trial Ьаlапсе. , D. , The СРА authorizes client transactions and reports them to management. А. Duri'ng the уеаг, the research staff of Buni Со. devoted its entire efforts toward developing а skin cancer ointment. AII costs that could Ье attributed directly to the project were accqunted for as deferred charges and classified on the statement of financial position as an asset. If the amounts involved are· material, the auditor should А 1:X!Jress an unmodified opinion with an emphasis of matter paragraph explaining the uncertainty of cost recovery. В. Disclaim an opinion. С. jExpress an adverse opinion. Express ап unmodified opinion provided that the uncertainty about ultimate realization the deferred charges is disclosed in the notes. ;о.' !; 1 39. 1 Audit documentatlon should possess certain characteristics. Which of the followlng Is оле of the characteri stics? Audit documentation should Ье indexed and cross-referenced Yes А. No в. Yes No D. !f:,-; Audit documentation should Ье organized to Ьenefit the client's staff Yes No No Yes 40. Ап accountant may perfurm an agreed-upon procedures engagement regarding prospect ive financial statemeлts pr ovided that f : А. ·use o the report is to Ье restricted to the specified users. В. The prospective financia statemeлts are also examined. l С. ResponsiЬility for the sufficiency of the procedures performed is taken Ьу the acmuntant. D. Negative assuгance is expressed оп the prospective financial statement!; taken as а whole. 41. А "proof of cash" used Ьу an auditor f А. Proves that the client's yea r -end balance o cash is fair ly stated. В. Confinns that the client has ргорег/у separated the custody functlon from the recording l function with respect to cas 1. С. Validates that client's bank did not make an error during the period tJeing examined. r f . D. Determines i there were any unauthorized disbursements ог unrecorded deposits fo the given period. 42. Ап audit in accordance with PSAs is performed on the premise that maлagement and, where appropriate, those charged with governance have responsibllities that are fundamental to f f f .the conduct o the audit. Vv'hich o the fo!lowiлg is not опе o those responsiЫlities? y f . А. , То comply with al relevant PSAs in the prepar.эtion апd presentation o the entit 's l ftлandal statements. В. То provide the auditor with all informatio11, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements. r С. То provide unrestrkted access to those within the entity fгom whom the audito determines it necessary to obtain auait evidence. D. То design, implement, and maintain lnternal contro relevant to the preparation and l r f presentatioл o financlal statemeпts that are free from material misstatement, whethe caused Ьу fraud or егrог. 43. Whith o the following comparisons would an audito most . likely make in evaluating an y entit 's costs and expenses? r А. The current yea 's accounts receivaЫe with the prior year's accounts receivaЫe. Р 1: 7 ofl6 1 f r . В,, Тhе current year's payroll expense with the prior уе.аг's payroll expense. The budgeted current year's sales with the prior year's sales. D. The budgeted current year's warranty expense with the current уеаг's contingent liabllities. ·с. 44. _ PSA 620 considers the following individuals as "experts", except А • Ап lndividual with expertlse in app!ying methods of accounting for deferтed income tax. в. An ехрегt in taxation law. С Ап irdividual with expertise in complex mcdeling for the purpose of valuing financial instruments. D. An individual with expertise in the valuation of assets acquired and liaЬilities assumed in business comЬinations. 45. Which of the following is an internal contro! that would prevent paid cash disbursement documents from Ьeing presented for payment а second time? А. Unsigned checks should Ье prepared Ьу individuals who are responsiЬle for signing checks. В. Cash disbursement documents should Ье approved Ьу at least two responsiЫe maпagement officials. с. The date оп cash disbursement documents should Ье within а few days of the date that the document is presented for payment. D. .Тhе official signing the checl< should compare the checl< with the documents and should deface the documents. 46. Which of the following circumstances would an auditor most lil< ely consider а risk factor relating to misstatements arising from fraudulent fir'lancial reporting? А Several members of management have recently purchased additional shares of the entity' s stock. в. Several members ofthe Ьoard ofdirectcrs have recently sold shares ofthe entity's stock. С. Тhе entity distributes financial foгecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend Ьу using agg ressive accounting practices. 47. Which of the following statements about internal control system is correct? А А proper1y maintained intemal control system reasonaЫy ensures that colluslon among employees cannot occur. В. The establishment and maintenance of the intemal control system is an important responsibllity of the intemal auditor. С Ал exceptiona!ly strong intemal control system is enough for the auditor to eliminate substaпtive tests оп а significant account balance. D, • The cost-Ьenefit relationship is а primarycriterion that should Ье considered in designing an intemal control system. Which of the following is the most objective type of evidence? А А letter written Ьу the dient's attomey discussing the likely outcome of outstanding lawsuits . В. The physical count of securities and cash. С. Inquiries of the credit ma nager about the col!ectibility of noncurrent accounts receivaЫe. о. Observatlon of cobwebs оп some inventory Ыпs. Which of the following is an example of the concept of inherent risk? А Loans receivaЫe for а finance company are less likely to Ье collectiЫe than those of а ьапk в. Audits with larger sample sizes аге less risky than those with smaller sample sizes. С. Accounting systems with vouchers have mапу more c6ntrols built in, so the risk that there will Ье errors in the financial statements is reduced. D. Humans make more errors than computers; therefore, 'а manual accounting system is riskier than an IТ system. 50. As а condition of obtaining а loan from Metro Manila вank, Mandarin Corp. is required to submit an audited statement of financial positioп but not the re!ated statemeпts of income, changes iп equity, ог cash flows. Mandariп would like to eпgage а С?А to audit only its statement of finaпclal position. Under these cfrcumstances, the СРА А. Мау not audit only Mandarin's statement of flnancial positlon lf the amount of the foan is material to the financial statements taken as а whole. в. Мау not audit only Mandarin's statement of financial position if мandarin is поt а tisted entity. С. Мау audit on!y Mandarin's statement offinancial position ifthe СРА disclaims an opinion on the other financial statements. D.. Мау audit only Mandarin's statement of finandal position if access to the information underlying the basic financial statemeпts is поt limited. · М. An auditor expressed а qualified opinion on the prior year's financial statements Ьecause of а fack of adequate disclosure. These financial statements are proper1y гestated in the cunгent уеаг and pre.sented in comparative furm with the current year's finaпdal statements. The audltor's updated report оп the prior year's financial statements should А. ве accompanfed Ьу the audltor's orlglnal report оп the prior year's fiпandal statements. В. Continue to express а qualified opinion оп the prior year's flnandal statements . . · С. Make no reference to the type of opinion expressed on the prfor year's ftnancial statements. D. Express an unmodified opinion оп the restated financial statements af the prior year. 52. Reyes, СРА, is planning the audit of Кika's company. Kiko verЬally asserts to Reyes that all expenses for the year have been recorded in the accounts. Кiko's representation in this regard А. Is sufficient evidence for Reyes to conclude ttiatthe completeness assertion is supported for the expenses. В. Сап епаЫе Reyes to minimize his wori< оп the assessment of control risk for the completeness of expenses. С. Should Ье disregarded Ьecause it is поt in writing. D. Is not considered а suffkient basis for Reyes to coпclude that alf expenses have been 'recorded. 53. А service organization's intemal control may interact with that ofthe dient. The user auditor А. Is not required to evaluate the service organization's controls. В. Should obtain absolute assurance that the service organization's internal control will prevent or detect errors or fraud . С. Should not consider weakлesses in the service organization's inteгnal control to Ье weaknesses in the client's system. D. Need not Ье concerned with the service organization's intemaf mntrol if the client has effective controls related to ser"llice organization processing. 54. Which of the fdfowing statements best describes а positive request for confirmation of an accounts receivaЫe Ьаlапсе? А. Тhе customer will Ье asked to indicate to the auditor the curтent balance in the account. В. Тhе customer will Ье asked to respond to the confirmation request only if the Ьalance indicated in the request is incorrect. С. ; Jhe customer will ье asked to inform the au::litor whether the balance lndicated in the • •• • request is correct and to respond regardless of whether such stated balance is correct. D. Тhе customer will Ье asked to indicate to the auditor the balance in his/her account only if it is positive (i.e., greater than zero). Professional judgment А. Shoufd Ье exerdsed in pfanning and performing an audit of financial statements but need not Ье documented. В. Сап Ье used as the justitication for the decisions made Ьу the auditor that эге not supported Ьу the facts and circumstances ofthe engagement. С. Is necessaгy in the evafuation of management's judgments in applying the entity's applicaЫe financial reporting framework. с 9 oflб D, 1s used In maklng declslons about materiality and audit risk. 56. Financial statements prepared in accordance with а financial reporting framework deslgned to meet the financial information needs of spedfic users аге referтed to as .д. Special purpose financial statements В. Special purpose framework С. General puгpose financial statements D. Specific purpose financial statements 57. The following are valid statements concerning ап internal control system, except А. No one person should Ье responsiЫe for the custodial responsiЫlity and the recording responsibllity for an asset. в. Transactions must Ье ргорегlу authorized before such transactions are processed. С. вecause of the cost/benefit relationship, а client may apply control procedures on а test ьasis. р.. Control procedures reasonaЫy lnsure that collusion among employees cannot occur. ,, ., · 58. Which of the following audit procedures is best for identifying unrecorded trade accounts рауаЫе? А. Examining unusual relationships between monthly accounts рауаЫе ьaIances and recorded cash payments. в. ReconcШng vendor's statements to the file of receiving reports to identify items received just prior to the balance sheet date. . .с • Reviewing cash disbursements гecorded subsequent to the balance sheet date to determine whether the related рауаЫеs apply to the prior period. D. lnvestigating рауаЫеs recorded just prior to �nd just subsequent to the balance sheet date to determine whether they аге supported Ьу receiving reports. 59. After testing а client's intemal control activities, an auditor discovers а number of significant deficiencies in the operatJon of а client's internal controls. Under these circumstances the auditor most likely would А . Issue а disclaimer of opinion about the internal controls as part of the auditor's report. ✓ Increase the assessment of control risk and increase the extent of substantive tests. С Issue а qualified opinion of this finding as part of the auditor's report. D. Withdraw from the audit because the internal controls are ineffective. в: 60. Assuming the toleraЫe deviation rate is 5 percent, the expected population deviation rate is 3 percent, and the allowance for sampling risk is 2 percent. What should an auditor conclude iftests of 100 randomly chosen documents reveal 4 deviations? А. Accept the sample results as support for assessing control risk Ьelow the maximum level because the toleraЫe deviation rate less the allowance for sampling risk equals the expected population deviation 1< te. -В. Assess control risk at the maximum level beca•Jse the sample deviation гаtе plus the allowance for sampling risk exceeds the to!eraЫe deviation rate. С. Assess control risk at the maxlmurn level because the toleraЫe deviation rate plus the allowance for sampling risk exceeds the e.xpected populatlon deviation rate. D. Accept the sample result as support for assessing control risk Ьelow the maximum Ьeca•Jse the sample deviation rate plus the aJlowance for sampling risk exceeds the .toleraЫe гаtе. Hazel Corp. maintains а large internal audit staff that reports directly to the chief financial officer. Audit reports prepared Ьу the intemal auditors indicatethat the system is functio11ing as it should and that the accounting records are reliaЫe. Ап independent at.ditor will ргоЬаЫу А. Eliminate tests of controls. В. Increase the depth of the study and evaluation of administrative controls . ...-С, Avoid duplicating the work peгformed Ьу the intemal audit staff. D. Place limit.Ed reliance оп the work performed Ьу the internal audit staff. 62. When an on-line, real-time computer system is in use, the computer control procedures can Ье strengthened Ьу - А. Making а validity check of identification number Ьеfоге а user сап obtain access to the computer fHes. В. Preparing batch totals to provide assurance that file updates are made for the entire :OUtput. С. i Providing fог the separatioл of duties between data input and error listing operations. D. , Attachlng plastic file protection rings to reels of magnetic tape before new data сап Ье : entered оп the file. 63. An ·accountant has Ьее-1 engaged to compile pro forrna flnancial lnformation. During the accountant's acceptance procedures, it is discavered that the accountant is not independent with respect to the company. What action should the accountant take with regard to compilation? А. : Тhе accountant should discuss the lack of independence with legal counsel to determine : whether it is appropriate to accept the engagement . . В.) The accountant should disclose the lack of independence in the accouпtant's compilation report. С. The accountaпt stюuld withdraw from the engagement. D. Тhе account:ant should compile the pro forma information but stюuld not provide а compilation report. 64. .Under the Code of Ethics, independence Js most likely impaired when . А. .'An immediate famiJy memьer of а mеmЬег of the audit team is а director of the client. В. Тhе firm purchases goods anct services from the client. С. Тhе firm ргерагеs а client's tax returns. D. Тhе firm and the client have an insignificaпt business relatioпship Jnvolving an immaterial fiпandal interest. 65.. Which of the following is not а valid basis for omitting an audit test? А. ,Тhе difficulty and expense involved in testing а particular item. В:· Тhе relative risk iпvolved. С. Тhе degree of reliance оп the relevant intema1 controls. D. The relationship between the cost of oЬtaining evidence апd its usefulness. Asslstants to whom work is delegated пееd appropriate direction. Direct!on involves А. Informing asslstants of theJr responsibllities and the objectives of the procedures they аге to perform. В., Iпforming assistants of matteгs, such as tre nature of the entity's business and possiЬle accounting ог auditing proЫems that may affect the nature, tlmlng, and exteпt of audit procedures with wnich they are involved. , С. ,вoth А апd в . . о: Neither А ПОГ в. 67. Which one of the following statements conceming sampling risk and nonsampling risk is correct? А. Neither sampling risk nor пonsampling risk can Ье reduced Ьу the auditor. В. Sampling risk, but поt пoпsampling lisk, can Ье reduced Ьу the auditor. С. Nonsampling risk, but not sampling tisk, сап Ье reduced Ьу the auditor. . D. _'ВOth sampliпg risk and nonsamp!iпg risk сап Ье reduced Ьу the auditor. -pg. Which of the following statements relating to stratification is iпcorrect? А .. When performing tests of detalls of trnnsactlons and account Ьalances, the population is o�en stratified Ьу monetaгy vaiue. В. Тhе results of audit procedures applied to а sample of ltems wlthin а stratum сап Ье projected to the entire populatior.. , C.i When verifying the valuation assertioп for accouпts receivaЫe, accouпt balaпces may Ье stratified Ьу age. D. S1:ratification reduces the variabllity of items within eacli stratum. 69. An auditor's report оп financial statements prepared in accordance with the financial reporting DГDVisions of а сопtГсЭсt (that is, а SDeCial DUrpose framework) to comply Y1ith the provisions ofthat contract should include all ofthe following except А. An oplnlon as to whether the flnancial statements are presented fair1y, in all material respects, in accordance with the financial reporting provlSions ofthe amtract. в. А statement that indicates the basis of acrounting used. С Ал opinion as to whether the basis of accounting used is appropriate under the circumstances. D. Reference to the note to the financial statements that descriЬes the Ьasis of presentation. 70. Which of the following constitutes the most significant risk within the purchasing cycle? А.: Receiving department personnel sign receiving documents without inspecting or couпting the goods. в. Large quantlties of relatively iпexpensive parts are stored in open areas пезr work stations to reduce production slow-aowns. С. Роог records of transfers Ьetween warehouses o�en result in unnecessary purchases and excess inventories. D. Warehouse personnel do па: compare quantities received to quantities shown оп transfer tickets. Which of the following is not ап internal control weakness re!ated to factory equipment? А. Checks issued in payment of acquisitions of equipment are not signed Ьу the controller. 13, AII acquisitions offactoгy equipment are required to Ье made Ьу the department in need ofthe equipment. С. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D. Proceeds from sales offully depreciated equipment are credited to other income. 72. Which ofthe followlng describes how the objective of а review of financial statements differs from the objective of а compilation engagement? А. The primary objective of а review engagement is to test the completeness of the financial statements prepared, but а compilation tests for reasonaЫeness. В. The primary objective of а review engagement is to provide positive assurance that the financial statements are fair1y presented, but а compilation provides no such assuгance. , С. In а review engagement, accountants provide 1imited assurance, but а compilation expresses no assurance. D. In а review engagement, accountants provide геаsопаЫе о, positive assurance that the financial statements are fairly presented, but а compilation provides limited assurance. 73. When ап auditor tests the intemal controls of а computetized accounting system, which of the foilowing is true of the test data approach? А. Test data аге coded to а dummy subsidia1y so they сап Ье extracted from the system under actual operating conditions. В. Test data programs need not Ье tailoг-made Ьу the auditor for each client's computer applications. С. Test data programs usually c:onsist of all possiЬle valid and invalid conditions regarding compliance with internal controls. D. Test data аге processed with the client's complJter and the results аге compared with the auditor's predetermined results. 74. Which of the foliowing statements is true? А. Audit procedures on the sample itern will vary as а result of using either statistical or nonstatistical sampling. В. The audit proceduгes will Ье the same for either stc1tistiCl'II or nonstatistical sampling but they must Ье performed differently for each. С. Statistical sampling requires quantltatlve audit procedures whereas nonstatistical sampling requires judgmental auelit procedures. . D., Audit procedures оп the sample item will not vary as а result of using either statistical ог пonstatistical sampling. 75. The, objective of а reasonaЫe assurance engagemeпt is а reduction in assuгance eng�gement risk А. То а level that is ассерtаЫе ln the drcumstances of the engagement as а ьasis fог а negatl ve fom, of expression of the pract itloner's concruslon. В.. То an ассерtаЫу low tevel in the circumstances of the engagement as а Ьosis for а positive foгm of expression of the practitioner's conclusion. С. То а leve that is ассерtаЫе in the circumstances of the engagement as а Ьosis for а l qualified form of expression of the practitioner 's condusion. D. то а vегу low level in the circumstances of the engagement as а Ьasis for а disclaimer of the practitioner's condusion . ..�. In а practitioner's review of interim financial information, the practitioner typically performs l each of the fo lowing, except А. Reading the minutes of the meetings of shareholders, those charged with govemance, and other appropriate committees to ident ify matters that may affect the interim • Jinanclal lnformatlon. В" Obtaining corтoЬorating externat•evidence. С. [nquiring of members of management responsiЫe for financial and accountlng matters. D. f-PP lying financial ratios to the interim financial information. necessary at 77. An auditor concludes that the omission of а substantve i procedure considered l the!ume of the audit may impair the auditor's current aЬility to suppcrt the previous y expressed opinion. The auditor need rюt apply the omitted procedure if the А. Risk of adverse. puЫicity or litigation is low. • a -в:· Results of other procedures that were applied tend to compens te for the procedure omitted. С. Auditor's opinion was qua\ified because of а departure from PFRS. D. Resu\ts of the subsequent period's tests of controls make the omitted procedure less important. 78. Which ofthe following statements would not normally Ье included in а representat!on letter for а review of interim finandal information? А. То the best of our knowledge and belief, по events have o::curred subsequent to the balance sheet and through the date of this letter that wou1d require adjustment to or disclosure in the interim financial infoi!llation. в. We acknowledge our responsiЬility for the design and imptementation of programs and controls to prevent and detect fraud. _ .с .· We understand that а review consists principally of performing analytical procedures апd making inquiries aЬout the interim finandal information. D. \We havs made availaЫe to you all financial records and data. 79. The auditor ordinarily assesses сопtгоl risk at а high level for some or all assertions when А. The entity's accouпting and intemal control systems аге not effective. В. Evaluating the effectiveness of the entity's accounting and intemal сопtгоl systems would поt Ье efficient. �- . Either А or в. D. • Neither А nor В. 80. А!! ofthe following аге examples of substantive tests to verify the valuation of net accounts receivaЫe except the А. RecompLitation ofthe allowance for bad debts. Inspection of acco1JПts for curreпt versus noncurrent status i n the statement of financia! positicn. С. Inspection of the accounts receivaЫe aging schedule. D. Comparison of the allowance for bad debts with past periods. , в: , : 81. Th� following statements relate to the fundamental principles of professional ethics: 13 of 16 8 /� .' !;; Q True True False False Integrity implies falr deaDng and truthfulness. Тhе principle of oЬjectivity imposes an oЬligatlon оп all professional accountants to maintain professional True False True False knowledge and skill at the level гequired. Тhе principle of prcfessional Ьehavior requires all professional accountants to act diligently in accorda псе witfl applicaЫe technical and professional False False True True standards when rendering professtonal services. 82. The standard states that the auditor may decide to select specific items from а population Ьased on such factors as the auditor's understanding of the entity, the assessed risk of material misstatement, апd the characteristics ofthe population being tested. Specific items that may Ье selected for testlng usually include the following, except А. Items that аге of high value. В. Items that аге suspicious, unusual, risk-prone, or have а htstory of error . . С. • AII items whose values do not exceed а certain amount so as to verify only а small • proportion of the total amount of class oftransactions or account balance. D. Items that provide information aЬout matters such as the nature ofthe entity, t�Ie nature of transactions, and intemal control.. 83. Which statement is inoorrect when at.diting in а 05 environment? А. А as environment exists when а computer of any type or size is involved in the pгoces.sing Ьу the entity of financial information of significance to the audit, whether that computer is operated Ьу the entity or Ьу а third party. В. The auditor should consider how а 05 environment affects the audit. С. The use of а computer changes the processing, storage and communication of financial informatlon and may affect the accounting and internal control systems employed Ьу theentity. р. )'А CIS environment changes the overall objective and scope of an audit. 84. Which of the following Ьest descriЬes а CPA's engagement to report оп an entity's intemal .. control? .,.А. )дn assurance engagement to examine and report оп management's written assertions about the effectiveness of its internal control. В. An audit engagement to rелdег an opinion on the entity's intemal control. С. А pro5Pective engagement to project, 1Ьr а period of time not to exceed one yfxJr, and report оп the expect:ed benefits of the entity's intemal control. D. А consulting engagement to provide constructive advice to the entity оп its intemal control. 85. Which of the following factors would most likely lnfluence an auditor's consideration of the reliabllity of data when performing analytical procedures? А. Whetherthe data were developed in а oomputerized or а manual accounting system. В. Whether the data were prepared on the cash Ьasis or in conformity with PFRS. ,· С. • Whether the data were developed under а system with adequate controls. D. Whether the data were processed in an online system or а batch entry system. 86. Ап auditor reconciles the total of the acoounts receivaЫe subsidiary ledger to the general ledger control account as of October 31, 2ОХ1. Ву this procedure the auditor would Ье most likely to le.am which of the following? А. An OctoЬer invoice was improper1y computed. В. An October check from а customer was posted in error to the account of another customer. ,С. , Ап openlng balance in а subsidiary ledger account was improperiy carried forward from the prevюus accounting period. D. An account halance is past due and should Ье written off. 87. Which of the following is likely to Ье determined first when perfurming tests of details for accounts receivaЫe? А. Recorded accounts гесеivаЫе exist. _в. •. Accounts receivaЫe in the aged tnal halance agree with related mast:er fi!e amounts, • and the total is oorrectly added and agrees with the general ledger. С. Accounts receivable are owned. D. Exist:ing accounts rece!vaЬle are induded. 88. The Code of ahics fof- Professional Accountants in the Philippines provides the categories . of threats that could comprcrnise or could Ье perceived to compromise а professianal accountant's compllance wlth the fundamental pnncJples. The thгeat that the professJonaJ accountant wш not appropnately evaluate the results of а prevlous judgment made or service performed on which the accountant will rely wheл furming а judgment as part of providing а curreлt service is called Self-review threat. • А. Advocacv threat. в. Familiarity threat. '·о_' Intimldation tnreat. с. Вefore assessing control risk at а level Jower than the maximum, the auditDr oЬtains reasonaьte assurance that cont:rols are in use and oper.rting effectjvely. This assurance is most likely oЬtained in part Ьу ,д. Preparing flowcharts. В. Performing suЬstantive tests. С. Analyzing tests trends and гatias. D... Inspection of documents. ос 90. Ariel, СРА, was engaged Ьу а group of royalty reciplents to apply agreed-upan procedures to nnanClal data supplied Ьу Modesta Со. regarding Modesta's written assertion aьout its compliance with contractual requirements to рау royalties. Ariel's report оп theSe agreed­ upon procedures should contain а (an) А. Disclaimer of opinion aЬOut the fair pгesentation of Мodest:a's financial statements. , В. Ust of the procedures performed and Ariel's findi�s. С. Opinion about the effect!veness of Мodesta's intemal control activities conceming royalty payrnents. D. Acknowledgment that the sufficiency ofthe procedures is solely Ariel's respansibllity. Tradng copies of computer-prepared sa!es invoices to copies of the correspanding computer-prepared shipping documents provides evidence that , А. Shipments to wstomers were properly bllled, В. Entries in tne accounts receivaЫe suЬsidiary ledger were for sales actually shipped. С. Sales ЬШеd to custcmers were actually shipped. D. No duplicate shipments tD aJstomers were made. lhe preliminary assessment of oontrot riSК iS the proc:ess of evaluatlng the efficiaicy of an entity's accounting and intemal control systems in preventing or detectlng and corтecting material misstaternents. Тhе auditor should document in the audit working papers the understanding oЬtained of the entity's accounting and intemal control systems and the assessment of control risk. There will always Ье some control risk Ьecause of the inherent I imitations of any accounting and !nternal control systems. А. ·False; True; TnJe. С. False; False; True. В. True; True; False. D. True; false; True. 93. In performing an audit, whlch one of the followrng procedures would Ье consldered а "substantive test"? А.· :Q:impanng last year's interest expense with this year's in�re.st expense. в. Comparing signatures on checks with the signatures of authorized check signers. С. Reviewing initials оп recelving dOOJments. D. Reviewing procedures, followed in receiving, depositing, and disЬursing of cash. 94. Whlch of the following drcumst.ances mav create self-interesi: threats for а profe;sional accountant in public practice? ".,_А,: А financlal interest in а clieлt ог joint ly holding а financial interest with а dient. f Performing а service for а client that dlrect ly affects the subject matter o the assurance engagement. С. Вeing threatened with litigation, D. Acting as ап advocate оп behalf of ап assurance client in litigation or disputes with third parties. в. Iп assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the С. Audit quality rontrols А. Effect iveness of the audit. D. Selection of the sample ···в. \Efficiency of the audit. 96. Which statement is incorrect regarding the characteristics of а CIS or ganizational structure? А. Certain data pюcessing personnel may Ье the on ly ones with а detailed knowledge of the interтelationship Ьеtwееп the source of data, how it is processed and the distribution and use of the output. в. Мапу conventionr al controls ьased on adequate segregation of lncompatlЬle functioлs may not exist, o iп the absence of access and other controls, may Ье less effect ive. С. Transaction and master file data аге о�еп concentrated, usual ly iп machine-readaЫe form . D. : Systems employing OS methods do not include manual operations since the numbe r of persons involved in the processing of financial information is sign ificant ly reduced. 97. Safeguards created Ьу the profession, legislation ог regulation include the following, except А. COntinuing professional development requirements. в. Professional standards. С. riгm·wide and engagement specific safeguards. ·о; Educational, training and experience requirements for entry into the profession. 98. At the conclusion of an auФt, an auditor is reviewing the evidence gathered in support of the finandal statements. With regard to the valuation of inveпtory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take? А. Consult with the aud it committee and issue а disclaimer of opinion. __В., Consult with the audit committee апd lssue а qualified opiпion. ,с. ' Obtain additional evidence regaгding the valuation of inventory. D. Obtain а statement from management supporting ther inventoгy valuation. --�- Which afthe following is а necessary coпtrol procedure for cash disbursernents? _ А. Checks shauld Ье sigпed Ьу the controiler and at !east one other employee of the ,соmрапу. в.,' Checks should Ье sequentially numbered, and the numerical sequence should Ье acrouпted for Ьу the person preparing the bank reconciliation. С. Checks and supporting documents should marked "paid" immediately aft:er the check is retuгned with the bank statement. D. Checks should Ье sent directJy to the рауее Ьу the employee who prepares documents that authorize check preparation. ье 100. The_purpose ofthe audit procedure to "examine underiying documentation for subsequent cash disbursements" is to А. Uncover liaЫlities оп the Ьаlапсе sheet which should поt have Ьееn recorded until а subsequent period . .В. Find the documeпtation relating to а cash disbursement. С. J Uncover payrneпts made iп а subsequent accounting period fог liabllities that existed at " - the Ьаlапсе sheet date. D. Uncover cash disbursernents recorded iп а subsequent acrounting period which should Ье recorded in this period. -- END OF EXAMINAПON -· Page 16 of 16