Auditing Fundamentals Quiz

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Questions and Answers

Within the context of quality management, what is a primary goal of establishing professional development policies for entry-level personnel in a public accounting firm?

To quickly promote personnel to higher positions within the firm.

To enable all staff to specialize in niche areas of public accounting.

To guarantee that entry-level staff possess adequate knowledge to fulfill their assigned tasks. (correct)

To ensure all personnel can prepare working papers using the same format.

Which of the following best describes the purpose of an engagement quality control review?

To ensure that working papers are standardized and meet firm requirements.

To evaluate the performance of management within the firm.

To objectively evaluate the significant judgments and conclusions made by the engagement team before the auditor's report is issued. (correct)

To provide an independent peer review of the firm's overall quality control policies.

According to the statements about consulting resources, which option below is correct?

It's never appropriate for the engagement team to consult outside the firm.

The engagement team may seek external advice, only if the firm lacks internal resource, following the firms internal policies. (correct)

The engagement team is encouraged to seek advisory services from any commercial organization available.

Professional standards prevent accounting firms from utilizing advisory services.

What is NOT a focus of 'Information and communication', as a component of ISQM1?

Determining the assignment of engagement quality reviewers. (D) Signup and view all the answers

Which of the following is NOT a component of ISQM 1?

Engagement Performance (A) Signup and view all the answers

Which option correctly describes 'Intellectual resources' as an element?

A category of resources which includes basic as well as human resources (A) Signup and view all the answers

The Latin root 'audire', from which the word 'auditing' is derived, most accurately translates to:

To hear (B) Signup and view all the answers

What is the key distinguishing attribute of an auditor when compared to an accountant?

The auditor's accumulation and interpretation of evidence related to a company's financial statements. (A) Signup and view all the answers

An audit that focuses on evaluating the efficiency and effectiveness of an organization's operations, and identifying areas for improvement is best described as a(n):

Operational audit (D) Signup and view all the answers

Which type of audit relies on laws and regulations as its primary evaluation criteria?

Compliance audit (C) Signup and view all the answers

When an auditor's goal is to determine whether a company's financial statements conform with generally accepted accounting principles, this is know as a(n):

Financial statement audit (A) Signup and view all the answers

What is the primary objective of an auditor when conducting a financial statement audit?

Express an opinion on the fair presentation of financial statements in accordance with generally accepted accounting principles. (A) Signup and view all the answers

Which statement best defines the primary focus of an operational audit?

It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls. (C) Signup and view all the answers

Which of the following is a unique characteristic of the auditor's attest function?

Maintaining independence, objectivity, and integrity. (C) Signup and view all the answers

Which statement best describes an assurance engagement?

An engagement providing a moderate level of assurance that the subject matter is plausible in the circumstances. (C) Signup and view all the answers

Based on the provided statements, which best reflects the practice of accountancy by a CPA?

Only Statements 1 and 3 are true. (C) Signup and view all the answers

Which of the following business structures are legally permitted to practice public accountancy?

I, II and III only. (A) Signup and view all the answers

Which of these activities signifies the practice of accountancy, as defined by the profession?

Representing an employer in tax matters before a government agency. (C) Signup and view all the answers

What is the primary focus of an assurance engagement when it comes to the subject matter?

To provide a level of confidence that the subject matter is plausible. (B) Signup and view all the answers

When a CPA is involved in decision-making that requires professional knowledge in accounting, finance, or taxation, this activity is considered:

Directly part of the practice of accountancy. (B) Signup and view all the answers

Which business form is NOT generally allowed to practice public accountancy if it contains non-CPA’s?

A partnership of CPAs, some of whom are non-CPA staff. (D) Signup and view all the answers

A CPA whose certificate has been revoked may apply for reinstatement after demonstrating exemplary conduct for a minimum period of:

Five years (D) Signup and view all the answers

Which of the following is NOT a specified objective of the Philippine Accountancy Act of 2004?

Standardization and regulation of accounting education (D) Signup and view all the answers

Which of the following statements about Continuing Professional Development (CPD) for CPAs is INCORRECT?

To renew a PRC license, CPAs must earn at least 15 CPD units or points through training or learning seminars. (D) Signup and view all the answers

Under what condition can a CPA’s certificate be suspended or revoked?

Refusal to accept an audit engagement with a government corporation. (A) Signup and view all the answers

A registered professional teaching auditing courses is temporarily exempted from CPD requirements upon reaching the age of:

65 years old (D) Signup and view all the answers

How many years of exemplary conduct must a CPA demonstrate after revocation of their certificate to be eligible for reinstatement?

Five years (B) Signup and view all the answers

Which of the following areas is NOT explicitly the aim of the CPD requirements

Business law (C) Signup and view all the answers

How many total CPD units are required over three years and how many are allocated to specific areas?

120 total units with 40 specific units (B) Signup and view all the answers

Which of the following is NOT considered an assurance engagement?

Audit of historical financial statements (C) Signup and view all the answers

What type of threat is created when an audit firm endorses a client's financial projections during investor presentations, aiming to attract more capital?

Advocacy threat (C) Signup and view all the answers

What is the term for the threat that arises when a close relationship with a client leads a firm to be too sympathetic to their interest?

Familiarity threat (B) Signup and view all the answers

Which of the following situations is LEAST likely to create a familiarity threat?

Dealing in shares of an assurance client (A) Signup and view all the answers

Which of the following scenarios represents an intimidation threat?

A member of the assurance team is threatened by the client (A) Signup and view all the answers

Which of the following is NOT a threat to independence?

Objectivity (D) Signup and view all the answers

What type of engagement is best described as an engagement where a professional accountant is requested to apply specific procedures and report on the findings of those procedures?

Agreed-upon procedures engagement (C) Signup and view all the answers

An auditor is performing an assurance engagement for a company. Which situation MOST likely presents a self-review threat?

The auditor previously prepared the financial records of the client (B) Signup and view all the answers

What primary ethical lapse did Antea Bocelli commit when she approved the financial statements with unsupported revenue entries?

Compromising her objectivity by accepting inducements to ignore clear evidence of accounting irregularities (C) Signup and view all the answers

What motivation did the CEO of Blue Skies Corporation have for pressuring Antea Bocelli to disregard the irregular revenue entries?

To artificially inflate the company's financial position and keep positive investor relations, which would be negatively affected by correcting the entries. (D) Signup and view all the answers

According to the context, what is mainly the purpose of an independent auditor reporting on financial statements?

To provide assurance to users of financial statements that different interest between the preparers and the users of financials are taken into account, misstatements are identified, and that internal controls are sound. (B) Signup and view all the answers

In the scenario, what does the lack of supporting documentation for revenue entries specifically indicate to Antea Bocelli?

There's a significant risk that the revenue is incorrectly stated and possibly fraudulent. (C) Signup and view all the answers

What are the potential consequences of Antea Bocelli’s decision to approve financial statements with unsupported revenue?

She may face both professional sanctions and legal actions due to her compromise of ethical and professional standards. (D) Signup and view all the answers

Besides compromising ethical standards, what other risk does Antea Bocelli expose her auditing firm to by agreeing to overlook the unsupported revenue?

The risk of legal liabilities and reputational damage. (D) Signup and view all the answers

If Antea hadn't complied, what would have been the most ethically appropriate course of action?

To confront the CEO about the un-supported revenue and refuse to approve the financial statements until corrected, escalating the issue within her firm. (D) Signup and view all the answers

What fundamental concept was directly undermined by Antea Bocelli’s decision to not disclose the revenue irregularities?

The importance of maintaining public trust and confidence in the accounting profession. (D) Signup and view all the answers

Study Notes

General Instructions

Cheating is strictly prohibited
Examination duration: 2 hours

Primary Responsibility for Financial Statements

Client's management is primarily responsible for the assertions in financial statements

Definition of Auditing

A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results thereof.

Characteristics of Auditing

Systematic process
Objectively obtaining and evaluating evidence about assertions
Ascertaining the degree of correspondence between assertions and established criteria
Communicating results to management

Three Party Relationship in Assurance Engagement

Responsible party
Practitioner
Intended Users

Meaning of Auditing (Latin)

To hear

Distinguishing Trait of Auditors

Auditor's ability to interpret accounting and auditing standards

Types of Audits

Financial statement audit: Determining if financial statements are fairly presented in accordance with generally accepted accounting principles.
Compliance audit: Assessing adherence to laws, regulations, and other specified criteria.
Operational audit: Evaluating efficiency and effectiveness of operations, identifying improvement areas and providing recommendations.

Audits Using Laws & Regulations as Criteria

Compliance audit

Financial Statement Audit Criteria

Generally accepted accounting principles (GAAP)

Auditor's Overall Objective in Financial Statement Audit

Express an opinion on the fair presentation of financial statements in accordance with generally accepted accounting principles.

Operational Audit Description

Evaluating efficiency and effectiveness of operations
Finding areas for improvement
Recommendations to improve performance

Operational Audit focus

Administrative controls related to company operations

Internal Auditing Role

Independent, objective assurance and consulting activity that adds value to operations.

Objectives of Internal Auditing

Reviewing accounting and internal control systems
Examination of financial and operating information
Evaluating the economy, efficiency, and effectiveness of operations
Reviewing compliance with laws, regulations, and external requirements

Relationship Between Internal and External Auditors

Certain aspects of internal auditing can be useful in determining the nature, timing, and extent of external audit procedures.

Third-Party User Expectations of Auditors

Evaluating measurements and disclosures made by management
Providing a reasonable evaluation of financial statements
Determining if financial statements are presented consistently with GAAP
Gathering adequate evidence to validate expressed opinions

Assertion-Based Engagement

An engagement where the responsible party makes assertions about the subject matter, and the evaluator obtains sufficient evidence.

Lack of Professional Skepticism

Relying entirely on management's verbal assurances without verifying or reviewing supporting documentation.

Reliability of Evidence

Evidence is more reliable when it's obtained from independent sources outside the entity, and when internal controls over the information are effective, and when obtained directly by the professional

Assurance Engagement Criteria

An engagement to provide a level of assurance that the subject matter conforms with identifiable criteria.

Practicing Accountancy

A CPA is involved in decision-making that requires accounting, finance, taxation knowledge, or representing an employer to government agencies.

Public Accountancy Practitioners

Individuals who can practice in public accountancy:
- Solo practitioners
- Partnerships of CPAs
- Corporations where all shareholders are CPAs

BOA Member Requirements

Be a natural-born citizen and resident of the Philippines
Possess at least 10 years of work experience in accountancy
Be a registered CPA for at least 10 years in public practice or commerce
Be of good moral character
Have not been convicted of crimes involving moral turpitude
Not have pecuniary interest in educational institutions that offer CPA review classes
Be a certified professional in their respective field of study

Meaningful Experience (Section 28)

Meaningful experience includes academia and/or professional work experience that meets the requirements.

CPA Registration Number Placement

Engraved on the lower part of the space between the bigger and smaller circles in the CPA’s seal.

Professional Ethical Principle Violation

Knowingly approving financial statements without adjusting or disclosing unsupported revenue entries.

CEO's Incentive for Compliance

Maintaining favorable financial performance for the company.

Auditor's Reporting Purpose

Assessing risks of material misstatements in account balances or classes of transactions, and any resulting errors in recorded transactions, using internal controls.

Materiality Effect on Audit Procedures

Higher materiality levels may result in less extensive testing, while lower levels may necessitate more in-depth reviews of specific accounts or transactions.

Purpose of Determining Materiality in Audit

To identify and assess the magnitude of misstatements that could influence users' decisions.

Types of Audit Fees

Contingent fees: Fees are dependent on the success of a transaction.
Flat sum fees: Fee is a fixed amount.

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Description

Test your knowledge on the key principles of auditing, including the responsibilities of management, the systematic processes involved, and the characteristics that define effective auditing practices. This quiz will challenge your understanding of the auditing process and its importance in financial statements.