Philippine Standards on Quality Control, Auditing, and Assurance (PDF)

 Preface to the Philippine Standards on Quality Control, Auditing Review, Other Assurance and Related Services  Philippine Framework for Assurance Engagements  Objective and General Principles governing an Audit of Financial Statements(PSA 200 ) 1. The preface t...

 Preface to the Philippine Standards on Quality Control, Auditing Review, Other Assurance and Related Services  Philippine Framework for Assurance Engagements  Objective and General Principles governing an Audit of Financial Statements(PSA 200 ) 1. The preface to the Philippine Standards on Quality Control, Auditing, Other Assurance and Related Services is issued to facilitate understanding of the I Objectives and operating procedures of the Auditing and Assurance Standards Council (AASC). II Scope and authority of the documents issued by the AASC. A. I only B. II only C. Both I and II D. Neither I nor II 2. Its mission is the promulgation of auditing standards, practices and procedures which shall be generally accepted by the accounting profession in the Philippines. A. Financial Reporting Standards Council (FRSC). B. Auditing and Assurance Standards Council (AASC). C. International Federation of Accountants (IFAC). D. Philippine Institute of Public Accountants (PICPA). 3. Which of the following are collectively referred to as “Engagement Standards”? A. PSAs and PSREs B. PSAs, PSREs and PSAEs C. PSAs, PSREs, PSAEs and PSRSs D. PSAs, PSREs, PSAEs, PSRSs and PSQCs 4. Which of the following Philippine Standards are to be applied to compilation engagements, engagements to apply agreed-upon procedures to information and other related services engagements as specified by the AASC? A. PSAs B. PSAEs C. PSRSs D. PSREs 5. These are issued to provide interpretive guidance and practical assistance to professional accountants in implementing PSAs and to promote good practice. A. PAPSs B. Practical Statements C. PRSPSs D. PAEPSs 6. Professional accountants should be aware of and consider Practice Statements applicable to the engagement. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement need not explain how the basic principles and essential procedures in the Engagement Standard(s) addressed by the Practice Statement have been complied with. A. Both statements are true. B. Both statements are false. C. True; False D. False; True 7. The Philippine Framework for Assurance Engagements defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs and PSAEs apply. The Philippine Framework for Assurance Engagements is not itself establish standards or provide procedural requirements for the performance of assurance engagements. A. Both statements are true. B. Both statements are false. C. True; False D. False; True 8. Which of the following statements best describes assurance services? A. Independent professional services that are intended to enhance the credibility of information to meet the needs of an intended user. B. Services designed to express an opinion on the fairness of historical financial statements based on the results of an audit. C. The preparation of the financial statements or the collection, classification, and summarization of other financial information. D. Services designed for the improvement of operations, resulting in better outcomes. 9. The following statements relate to the two types of assurance engagements that a practitioner is permitted to perform: reasonable assurance engagement and limited assurance engagement. Statement 1 The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion. Statement 2 The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement, as the basis for a positive of expression of the practitioner’s conclusion. Statement 3 The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a negative form of expression of the practitioner’s conclusion. Statement 1 Statement 2 Statement 3 A. False True True B. True False False C. True True False D. False False True 10. A practitioner who is engaged to perform an assurance engagement other than an audit or a review of historical financial information should comply with which of the following standards? A. PSAEs B. PSAEs and PSAs C. PSAs and PSREs D. PSAEs, PSREs and PSAs 11. Assurance engagements encompass the following types of services, except A. Attestation services B. Review engagements C. Audit of historical financial statements D. Management consulting 12. Assurance services differ from consulting services in that they I Focus on providing advice. II Involve monitoring of one party by another. A I only B. II only C. Both I and II D. Neither I nor II 13. Assurance engagements involve A. Two separate parties: a professional accountant and an intended user. B. Two separate parties: a professional accountant and a responsible party. C. Two separate parties: a responsible party and an intended user. D. Three separate parties: a professional accountant, a responsible party and an intended user. 14. An assurance engagement should have which of the following elements? I A three party relationship involving a practitioner, a responsible party and intended users. II An appropriate subject matter. III Suitable criteria. IV Sufficient appropriate evidence. V A written assurance report. A. I, II, and III only B. II, III, IV and V only C. I, II, III and IV only D. I, II, III, IV and V. 15. The subject matter of an assurance engagement may include A. Historical or prospective financial information. B. An entity’s internal control or IT system. C. Compliance with regulations. D. All of the above. 16. These are the benchmarks used to evaluate or measure the subject matter of an assurance engagement. A. Criteria B. GAAP C. Assertions D. Conclusions 17. Suitable criteria should have which of the following characteristics? I Relevance IV Neutrality II Completeness V Understandability III Reliability A. I, II, and III only B. II, III, IV and V only C. I, II, III and IV only D. I, II, III, IV and V. 18. In an assurance engagement, the person or persons, either as individuals or representatives of an entity, responsible for the subject matter is the A. Intended user B. Responsible party C. Practitioner D. Client 19. In an assurance engagement, the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose is the A. Intended user B. Responsible party C. Management D. Client 20. An assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. An assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is not materially misstated. A. True; False B. Both statements are true C. False; True D. Both statements are false. 21. What level of assurance is provided by the auditor in an audit engagement? A. Absolute B High, but not absolute C. Moderate D. No assurance 22. What level of assurance is provided by the auditor in a review engagement? A. No assurance B. High, but not absolute C. Reasonable D. Moderate 23. What assurance is provided by the auditor in an agreed-upon procedures engagement? A. Reasonable B. Absolute C. Moderate D. No assurance 24. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information. What type of assurance is provided by the accountant when he/she performs this engagement? A. Positive assurance B. Negative assurance C. No assurance D. Limited assurance 25. The following statements relate to a review of financial statements. Which is incorrect? A. The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework. B. A review comprises inquiry and analytical procedures which are designed to review the  reliability of an assertion that it is the responsibility of one party for use by another party. C. A review ordinarily involves an assessment of accounting and internal control systems, tests of records, and of responses to inquiries by obtaining corroborating evidence through inspection, observation, confirmation, and computation. D. The level of assurance provided in a review report is less than that given in an audit report. 26. In an engagement to perform agreed-upon procedures, an auditor is engaged to A. Carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. B. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information. C. Provide a moderate level of assurance that the information is free of material misstatement. D. Provide a high, but not absolute, level of assurance that the information is free of material misstatement. 27. Which of the following statements concerning compilation engagement is incorrect? A. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information. B. The procedures employed in a compilation engagement enable the accountant to express a moderate level of assurance on the compiled financial information. C. Users of the compiled financial information derive some benefit as a result of the accountant’s involvement because the service has been performed with due professional skill and care. D. A compilation engagement ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information. 28. The auditor should conduct an audit in accordance with Philippine Standards on Auditing. The auditor should plan and perform the audit with an attitude of professional skepticism. A. Both statements are true B. True; False C. Both statements are false. D. False; True 29. The primary reason for a financial statement audit by an independent CPA is to A. Provide increased assurance to users as to the fairness of the financial statements. B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. C. Satisfy governmental regulatory requirements. D. Relieve management of responsibility for the financial statements. 30. Independent auditing can best be described as A. A branch of accounting. B. A professional activity that measures and communicates financial and business data. C. A discipline which attest to the results of accounting and other functional operations and data. D. A regulatory function that prevents the issuance of improper financial information. 31. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements? A. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion. B. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor’s responsibilities. C. Making suggestions that are adopted about the form and content of an entity’s financial statements impairs an auditor’s independence. D. The auditor’s report should provide an assurance as to the future viability of the entity. 32. What is the proper organizational role of internal auditing? A. To serve as an independent, objective assurance and consulting activity that adds value to operations. B. To assist the external auditor to reduce external audit fees. C. To perform studies to assist in the attainment of more efficient operations. D. To serve as the investigative arm of he of the audit committee of the board of directors. 33. Which of the following best describes the scope of internal auditing as it has developed to date? A. Internal auditing involves appraising the economy and efficiency with which resources are employed. B. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets. C. Internal auditing has evolved to more of an operational orientation from a strictly financial orientation. D. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets. 34. Which of the following is considered a primary reason for creating an internal audit department? A. To evaluate and improve the effectiveness of control processes. B. To ensure the accuracy, reliability, and timeliness of financial and operating data used in management’s decision making. C. To relieve management of the responsibility for establishing effective controls. D. To safeguard resources entrusted to the organization. 35. In conducting an appraisal of the economy and efficiency with which company resources are used, an internal auditor’s responsibility is to A. Verify the accuracy of asset valuation. B. Review the reliability of operating information. C. Verify the existence of assets. D. Determine whether operating standards have been established. 36. Operational audits generally have been conducted by internal and COA auditors, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide A. A measure of management performance in meeting organizational goals. B. The results of internal examinations of financial and accounting matters to a company’s top-level management. C. Aid to the independent auditor, who is conducting the examination of the financial statements. D. A means of assurance that internal accounting controls are functioning as planned. 37. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also A. Accuracy B. Compliance C. Evaluation D. Internal Control 38. A governmental audit may extend beyond an audit leading to the expression of opinion on the fairness of financial presentation to include Program Results Compliance Economy and Efficiency A. Yes Yes Yes B. Yes Yes No C. Yes No Yes D. No Yes Yes 39. An objective of a performance audit is to determine whether an entity’s A. Operational information is in accordance with government auditing standards. B. Specific operating units are functioning economically and efficiently. C. Financial statements present fairly the results of operations. D. Internal control is adequately operating as designed. 40. In comparison to the independent auditor, an internal auditor is more likely to be concerned with A. Legal and regulatory compliance. B. Cost accounting procedures. C. Operational auditing. D. Internal control system. 41. A pervasive characteristics of a CPA’s role in a consulting services engagement is that of being a (an) A. Independent practitioner. B. Computer expert. C. Confidential reviewer. D. Objective advisor. 42. Which of the following statements concerning consulting services is false? A. The performance of consulting services for audit clients does not, in and of itself, impair the auditor’s independence. B. Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of other parties. C. Consulting services ordinarily involve external reporting. D. Most CPAs, including those who provide audit and tax services, also provide consulting services to their clients. 43. Which of the following are considered consulting services? Advisory Services Transaction Services Assurance Services A. No Yes Yes B. Yes Yes No C. Yes No Yes D. Yes Yes Yes 44. Reyes, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is his most appropriate action? A. Accept the engagement and perform it in accordance with PSAs. B. Accept the engagement and perform additional research or consult with others to obtain sufficient competence. C. Accept the engagement and issue a report vouching for the achievability of the results of the merger. D. Decline the engagement because he lacks sufficient knowledge. 45. Which of the following statements applies to consultation services engagements? A. A practitioner should obtain an understanding of the internal control to assess control risk. B. A practitioner is not permitted to compile a financial forecast. C. A practitioner should obtain sufficient relevant data to complete the engagement. D. A practitioner is to maintain an appearance of independence. ---------------------------------------------------------------------------------------------------------  PSQC1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services  PSA 220 (revised) Quality Control for Audits of Historical Financial  PSA 210 (amended by PSA 700 revised) Terms of Audit Engagements 1. One of a CPA firm’s basic objectives is to provide professional services that comply with professional standards and regulatory and legal requirements. Reasonable assurance of achieving this basic objective is provided through A. A system of quality control. B. Continuing professional education. C. Compliance with generally accepted reporting standards. D. Compliance with the fundamental principles of the Philippine Code of Ethics. 2. Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures? Human Resources Monitoring Engagement Performance A. Yes Yes No B. Yes Yes Yes C. No Yes Yes D. Yes No Yes 3. Quality control policies and procedures should provide the firm with reasonable assurance that the policies and procedures relating to the other elements of quality control are being effectively applied. This statement defines the quality control element of A. Acceptance and continuance of client relationships and specific engagements. B. Ethical requirements. C. Monitoring. D. Leadership responsibility for quality within the firm. 4. A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To achieve this goal, the firm most likely would establish procedures for A. Evaluating prospective and continuing client relationships. B. Reviewing engagement working papers and reports. C. Requiring personnel to adhere to the applicable independence rules. D. Maintaining personnel files containing documentation related to the evaluation of personnel. 5. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. Enable the CPA firm to attest to the reliability of the client. B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients. C. Minimize the likelihood of association with clients whose management lacks integrity. D. Anticipate before performing any field work whether an unqualified opinion can be expressed. 6. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include A. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily. B. Consideration of whether sufficient appropriate evidential matter may be obtained to afford a reasonable basis for an opinion. C. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding the prospective client and its management. D. Consideration of whether internal control is sufficiently effective to permit a reduction in the extent of required substantive tests. 7. According to PSQC 1, a firm should establish policies and procedures to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements is ordinarily performed on a cyclical basis. Engagements selected for inspection include A. At least one engagement for each engagement partner over an inspection cycle, which ordinarily spans no more than 2 years. B. At least one engagement for each engagement partner over an inspection cycle, which ordinarily spans no more than 1 year. C. At least 3 engagement for each engagement partner over an inspection cycle, which ordinarily spans no more than 5 years D. At least one engagement for each engagement partner over an inspection cycle, which ordinarily spans no more than 3 years. 8. Under PSQC 1, the firm should communicate the results of the monitoring of its quality control system to engagement partners and other appropriate individuals within the firm at least A. Monthly B. Weekly C. Quarterly D. Annually 9. As defined in PSQC 1, it is a process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report. A. Engagement quality control review. B. Engagement performance. C. Monitoring. D. Continuing professional education. 10. PSA 220 (revised) requires the engagement partner to consider whether members of the engagement team have complied with the ethical requirements relating to audit engagements of the Philippine Code. The Philippine Code establishes the fundamental principles of professional ethics, which include I Integrity II Objectivity III Professional competence and due care IV Confidentiality V Professional behavior A. I, II, IV, and V only. B. II, III, IV, and V only. C. I, III, IV, and V only. D. I, II, III, IV and V. 11. For audits of financial statements of listed entities, the engagement partner should A. Determine that an engagement quality control reviewer has been appointed. B. Discuss significant matters arising during the audit engagement, including those identified during the engagement quality control review, with the engagement quality reviewer. C. Not issue the auditor’s report until the completion of the engagement quality control review. D. All of the above. 12. An engagement quality control review should include an objective evaluation of I. The significant judgments made by the engagement team. II The conclusions reached in formulating the auditor’s report. A. I only B. II only C. Both I and II. D. Neither I nor II. 13. A firm’s system of quality control should ordinarily provide for the maintenance of A. A file of minutes of staff meetings. B. Updated personnel files. C. Documentation to provide evidence of the operation of each element of its system of quality control. D. Documentation to demonstrate compliance with regulatory requirements. 14. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the A. Auditor’s system of quality control has been maintained at a high level. B. Results are consistent with the conclusions to be presented in the auditor’s report. C. Audit procedures performed are approved in the professional standards. D. Audit has been performed by persons having adequate technical training and proficiency as auditors. 15 The nature and extent of a CPA firm’s quality control policies and procedures depend on The CPA The Nature of the Cost- Benefit Firm’s Size CPA Firm’s Practice Considerations A. Yes Yes Yes B. Yes Yes No C. Yes No Yes D. No Yes Yes 16. The engagement letter documents and confirms the A B C D Auditor’s acceptance of the appointment Yes Yes Yes Yes Objective and scope of the audit Yes No Yes Yes Extent of the auditor’s responsibilities to the client No Yes No Yes Form of any reports Yes No No Yes 17. An auditor’s document includes the following: “We will conduct our audit in accordance with Philippine Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.” The above passage is most likely from a/an A. Emphasis-of-matter paragraph of a “subject to” qualified auditor’s report. B. Letter of acceptance C. Engagement letter. D. Management representation letter. 18. Which of the following statements would least likely appear in an auditor’s engagement letter? A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. B. Management is responsible for making all financial records and related information available to us. C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected. D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. 19. The auditor of a parent entity who is also the auditor of its subsidiary, branch or division (component) should send a separate engagement letter to the entity’s component. On recurring audits, the auditor should send a new engagement letter each period. A. Both statements are true. B. Both statements are false. C. True; False D. False: True 20. An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should A. Withdraw and consider whether there is any obligation to report to other parties the circumstances necessitating the withdrawal. B. Issue a report that includes reference to the original engagement and any procedures that may have been perform in the original engagement. C. Not agree to a change of engagement where there is no reasonable justification for doing so. D. Consider the change reasonable if it relates to information that is incorrect, incomplete or otherwise unsatisfactorily.  PSA 300 (rev.) Planning an Audit of Financial Statements  PSA 315 UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT ASSESSING THE RISKS OF MATERIAL MISSTATEMENT 1. According to PSA 300, it involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit risk to an acceptably low level. A. Reporting B. Planning C. Field work D. Organizing 2. Adequate planning of the audit work helps to ensure that A B C D Appropriate attention is devoted to important areas of the audit Yes No Yes No Potential problems are identified Yes Yes Yes No The work is completed expeditiously No Yes Yes No 3. The auditor should plan the audit so that the audit will be performed in an effective manner. The extent of planning will vary according to the A B C D Size of the entity Yes Yes No No Complexity of the audit Yes No Yes No Auditor’s experience with the entity and knowledge of the business Yes Yes Yes No 4. Obtaining knowledge of the entity’s business is an important part of planning the audit work. The auditor’s knowledge of the entity’s business assists in the identification of events, transactions and practices which may have a material effect on the financial statements A. Both statements are true. B. Both statements are false. C. True; False D. False: True 5. According to PSA 300, the auditor may discuss elements of planning with those charged with governance and the entity’s management. The audit plan sets the scope, timing and direction of the audit guides the development of the more detailed overall audit strategy. The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. A. False; False; True B. True; True; False C. True; False; False D. False; True; False 6. Which of the following matters should be considered by the auditor in developing the overall audit strategy? A. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit. B. Conditions requiring special attention, such as the existence of related parties. C. The setting of materiality levels for audit purposes. D. All of the above. 7. Audit risk has three components: inherent risk, control risk, and detection risk. Which of the following statements is correct? A. Detection risk is a function of the efficiency of an auditing procedure. B. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk. C. The risk that material misstatements will not be prevented or detected on a timely basis by internal control can be reduced to zero by effective controls. D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor. 8. Which of the following audit risk components may be assessed in quantitative terms? Inherent Risk Control Risk Detection Risk A. Yes No Yes B. Yes Yes Yes C. No No No D. No No Yes 9. Some account balances, such as those for retirement benefits and finance leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is referred to as A. Audit risk B. Detection risk C. Inherent risk D. Control risk 10. There is an inverse relationship that exists between the acceptable level of detection risk and the A. Risk of failing to discover material misstatements. B. Assurance provided by substantive tests. C. Preliminary judgments about materiality levels. D. Risk of misapplying audit procedures. 11. It is the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives. A. Internal auditing B. Internal control C. Business strategy D. Accounting process 12. This internal control component is the foundation for all other components. It sets the tone of the organization, provides discipline and structure, and influences the control consciousness of employees. A. Control activities B. Monitoring of controls C. Control environment D. The entity’s risk assessment process. 13. Which of the following are considered control environment elements? Commitment to Competence Detection Risk Organizational Structure A. No Yes No B. Yes Yes Yes C. Yes No Yes D. No No Yes 14. Which of the following statements concerning the relevance of various types of controls to a financial statements audit is correct? A. All controls are ordinarily relevant to a financial statement audit. B. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. C. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but other controls may also be relevant. D. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken. 15. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the quality of internal control performance of time. It involves assessing the design and operations of control on a timely basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring activities, separate evaluations, or a combination of the two. An entity’s ongoing monitoring activities often include A. Periodic reporting by the entity’s internal auditors about the functioning of internal control. B. Reviewing the purchasing function. C. Periodic audits by the audit committee. D. The audit of the annual financial statements. 16. Control activities constitute one of the five components of internal control. Which of the following is not included in this internal control component? A. Segregation of duties B. Performance reviews C. An internal audit function D. Authorization 17. An internal control system that is working effectively A. Eliminates risk and potential loss to the entity. B. Cannot be circumvented by management. C. Reduces the need for management to review exception reports on a day-to-day basis. D. Is unaffected by changing circumstances and conditions encountered by the entity. 18. When considering an entity’s system of internal control, one of the auditor’s major concerns is to ascertain whether internal control is designed to provide reasonable assurance that A. Financial statements are fairly presented. B. The accounting manager reviews al accounting transactions. C. Profit margins are maximized, and operational efficiency is optimized. D. Corporate morale problems are addressed immediately and effectively. 19. When obtaining knowledge about an entity’s internal control, it is important for the auditor to consider the competence of its employees, because their competence bears directly and importantly upon the A. Cost-benefit relationship of internal control. B. Comparison of recorded accountability with assets. C. Achievement of the objectives of internal control. D. Timing of substantive tests to be performed. 20. Control activities are the policies and procedures that help ensure that management directives are carried out. These include activities relating to authorization, performance reviews, information processing, physical controls, and segregation of duties. There is proper segregation of duties when an individual who A. Records a transaction does not compare the accounting record of the asset with the asset itself. B. Authorizes a transaction and records it. C. Authorizes a transaction and maintains custody of the asset that resulted from the transaction. D. Maintains custody of an asset and has access to the accounting records for the asset. 21. An auditor should obtain sufficient knowledge of an entity’s information system, including the related business processes relevant to financial reporting, to understand the A. Policies used to detect the concealment of fraud. B. Process used to prepare significant accounting estimates. C. Safeguards used to limit access to computer facilities. D. Procedures used to assure proper authorization of transactions. 22. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with A. Knowledge necessary to plan the audit. B. A basis for modifying tests of controls. C. Information necessary to prepare flowcharts. D. Evidence to use in reducing detection risk. 23. In obtaining an understanding of internal control relevant to the audit, an auditor is required to obtain knowledge about the A. Effectiveness of controls that have been implemented. B. Consistency with which controls are currently being applied. C. Design of the controls pertaining to internal control components. D. Controls related to each class of transactions and account balance. 24. The auditor uses the understanding of internal control to I Identify types of potential misstatements. II Consider factors that affect the risks of material misstatements. III Design the nature, timing, and extent of further audit procedures. A. I and II only. B. I and III only. C. II and III only D. I, II, and III 25. Information about segregation of duties ordinarily is best obtained by A. Performing tests of transactions that corroborate management’s financial statements assertions. B. Developing audit objectives that reduce control risk. C. Observing employees as they apply specific controls. D. Obtaining a flowchart of activities performed by entity personnel. 26. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of material misstatements at the financial statement level, and at the assertion level for classes of transactions, account balances, and disclosures. Some of these risks, in the auditor’s judgment, require special audit consideration, such as those that involve fraud or complex transactions. Such risks are called A. Business risks B. Audit risks C. Significant risks D. Material risks 27. As a result of obtaining an understanding of an entity’s internal control system, the auditor may become aware of material weaknesses in the design or implementation of internal control. The auditor is required to communicate this matter to A. Those charged with governance or management B. Chief executive officer C. Securities and Exchange Commission D. Board of Accountancy 28. Which of the following controls most likely would provide reasonable assurance that all credit sales transactions of an entity are recorded? A. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. B. The accounting department supervisor independently reconciles, on a monthly basis, the accounts receivable subsidiary ledger to the accounts receivable control account. C. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. D. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. 29. A sound internal control procedure should require that defective merchandise returned by customers be presented initially to the A. Receiving clerk B. Accounts receivable supervisor C. Billing clerk D. Shipping department supervisor 30. Macho Dancer Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped but not invoiced. The inadequate controls could cause what type of misstatement in each of the following accounts? Revenues Receivables Inventories A. Understatement Understatement Understatement B. Overstatement Overstatement Understatement C. Understatement Understatement Overstatement D. Overstatement Overstatement Overstatement 31. Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger? A. Each shipment of goods on credit is supported by a prenumbered sales invoice. B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control account in the general ledger. C. Daily sales summaries are compared to daily postings to the accounts receivable ledger. D. Each sales invoice is supported by a prenumbered shipping document. 32. The auditor’s primary objective in obtaining an understanding of the client’s controls over the purchasing function is to A. Investigate the recording of unusual transactions regarding raw materials. B. Determine the reliability of financial reporting by the purchasing function. C. Observe the annual physical count. D. Ascertain that raw materials paid for are on hand. 33. Effective controls relevant to purchasing of raw materials should usually include all of the following, except A. Determining the need for the raw materials prior to preparing the purchase order. B. Systematic reporting of product changes that will affect raw materials. C. Obtaining financial approval prior to making a commitment. D. Obtaining third-party written quality and quantity reports prior to payment for the raw materials. 34. Which of the following controls is not usually performed in the accounts payable department? A. Indicating on the voucher the affected asset and expense accounts to be debited. B. Approving vouchers for payment by having an authorized employee sign the vouchers. C. Accounting for unused prenumbered purchase orders and receiving reports. D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and receiving report. 35. The following are appropriate questions on an internal control questionnaire concerning purchase transactions, except A. Are all goods received in a centralized receiving department and counted, inspected, and compared with purchase orders on receipt? B. Are intact cash receipts deposited daily in the bank? C. Are prenumbered purchase orders and receiving reports used and accounted for? D. Are an approved purchase requisition and a signed purchase order required for each purchase? 36. Which of the following is of least concern to an auditor in assessing the risks of material misstatement? A. Signed checks are distributed by the controller to approved payees. B. Checks are signed by one person. C. Cash receipts are not deposited intact daily. D. Treasurer does not verify the names and addresses of check payees. 37. Which of the following is an essential control procedure to ensure the accuracy of the recorded inventory quantities? A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy. B. Testing inventory extensions. C. Performing a gross profit test. D. Establishing a cutoff for goods received and shipped. 38. Effective internal controls over inventories are designed and implemented for the following reasons, except A. Inventories typically represent a large component of an entity’s current assets. B. Inventories are the most liquid assets. C. Inventories directly affect the financial performance of an entity. D. Inventories typically represent a large portion of an entity’s total assets. 39. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate. Tests reveals that 2% of the peso amount of purchases do not get into inventory because of breakage and inventory pilferage by employees. The company estimates that these losses could be reduced to 0.5% of purchases by designing and implementing certain controls costing approximately P350,000. Should the controls be designed and implemented? A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft. B. Yes, because the ideal system of internal control is the most extensive one. C. No, because the cost of designing and implementing the added controls exceeds the projected savings. D. Yes, because the expected benefits to be derived exceed the cost of the added controls. 40. Which of the following controls most likely would be implemented to achieve the production cycle control objective of maintaining accurate inventory records? A. Periodic inventory counts are used to adjust the perpetual inventory records. B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. C. Perpetual inventory records are periodically compared with the net realizable value of individual inventory items. D. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are independently matched before payment is approved. 41. Which of the following is the most likely procedure an auditor would perform in obtaining an understanding of a manufacturing entity’s internal control for inventory balances? A. Perform test counts of inventory when observing the entity’s physical count. B. Perform analytical procedures designed to identify significant cost variances. C. Analyze the liquidity and turnover ratio of the inventory. D. Review the entity’s description of inventory policies and procedures. 42. The following controls are appropriate for property, plant, and equipment (PPE), except, A. Written policies for capitalization and expenditure and review of application of depreciation methods. B. Disposal of fully depreciated PPE items. C. Proper authority for acquisition and retirement of PPE items. D. Detailed PPE records and physical controls over PPE items. 43. An internal control objective concerning property, plant, and equipment (PPE) acquisitions is that they be recorded at the correct amounts and in the proper period, and properly classified. In which of the following conditions would an auditor most likely to assess a high level of risk of material misstatements? A. All material acquisitions of PPE are required to be approved by the board of directors. B. Most additions are self-constructed by the entity. C. Recently acquired loans include covenants that preclude further plant acquisitions for 5 years. D. Gross PPE increased 30% during the current period. 44. Which of the following controls would an entity most likely used in safeguarding against the loss of trading securities? A. The independent auditor traces all purchases and sales of trading securities through the subsidiary ledgers to the general ledger. B. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities. C. The internal auditor inspects the trading securities in the entity’s safe each year on the balance sheet date. D. A designated member of the board of directors controls the securities in a bank safe- deposit box. 45. The following controls are designed to protect investment securities, except A. Investment securities should be properly controlled physically in order to prevent unauthorized usage. B. Custody over investment securities should be limited to personnel having record-keeping responsibility over the securities. C. Securities should be registered in the entity’s name. D. Access to securities should be vested in two individuals. 46. Effective controls over the payroll function may include A. Custody of rate authorization records by the supervisor of the payroll department. B. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department. C. Verification of agreement of job time tickets with employee clock card hours by a payroll department employee. D. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific job. 47. Organizational independence in the processing of payroll can be achieved by segregating the functions of authorization, record-keeping, and custody of assets. Which one of the following functional separations is not required for internal control purposes? A. Separation of payroll preparation and paycheck distribution. B. Separation of personnel function from payroll preparation. C. Separation of timekeeping from payroll preparation. D. Separation of payroll preparation and maintenance of year-to-date records. 48. Which of the following situations represents an internal control weakness in the payroll department? A. The timekeeping function is independent of the payroll department. B. Payroll records are periodically reconciled with tax reports. C. Paychecks are distributed by the employees’ immediate supervisor. D. Payroll department personnel are rotated in their duties. 49. Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department? A. Authorizing the addition or deletion of employees from the payroll. B. Authorizing overtime hours. C. Collection and retention of unclaimed paychecks. D. Distributing paychecks. 50. Employees of a manufacturing entity are often required to use time cards and job time tickets. Which of the following statements concerning the use of these documents is incorrect? A. Time reported on job time tickets should be reconciled to time cards. B. Payroll should be calculated based on job time tickets. C. Each employee should have only one time card. D. An employee may have one or many job time tickets in a day. -------------------------------------------------------------------------------------------------------------------  PSA 330 THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS 1. In a financial statement audit, the auditor is required to perform tests of controls when I. The auditor’s risk assessment includes an expectation of the operating effectiveness of controls. II. When substantive procedures alone do not provide sufficient appropriate Audit evidence at the assertion level. A. I only B. II only C. Either I or II D. Neither I nor II 2. Tests of controls are concerned primarily with each of the following questions, except A. By whom were the controls applied? B. Were the necessary controls consistently performed? C. How were the controls applied? D. Why were the controls? 3. Control risk should be assessed in terms of A. Specific control procedures. B. Types of potential fraud. C. Financial statement assertions. D. Control environment factors. 4. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Inquiry and analytical procedures. B. Inquiry and observation. C. Analytical procedures and confirmation. D. Confirmation and observation. 5. The following statements relate to the use of audit evidence when testing the operating effectiveness of relevant controls. Which is false? A. An auditor who obtains sufficient appropriate audit evidence about the operating effectiveness of controls during the interim period should no longer obtain additional evidence of operating effectiveness for the remaining period. B. An auditor may plan to use audit evidence about the operating effectiveness of controls obtained in prior audits. C. If an auditor plans to rely on controls that have changed since they were last tested, the auditor should test the operating effectiveness of such controls in the current audit. D. Audit evidence pertaining only to appoint in time may be sufficient for the auditor’s purpose, for example, when testing controls over an entity’s physical count of inventories at year-end. 6. After gaining an understanding of internal control and assessing the risks of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that A. Additional evidence to support a further reduction in control risks is not available. B. It is not possible or practicable to reduce the risks of material misstatement at the assertion level to an acceptably low level with audit evidence obtained only from substantive test procedures. C. There were many internal control weaknesses that could allow misstatements to enter the accounting system. D. An increased in the assessed level of control risk is justified for certain financial statement assertions. 7. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes A. Controls are unlikely to pertain to the assertions. B. The entity’s control components are interrelated. C. Sufficient appropriate audit evidence to support the assertions is likely to be available. D. More emphasis on tests of controls than substantive tests is warranted. 8. Which of the following statements is correct concerning an auditor’s assessment of control risk? A. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control. B. Evidence about the operation of controls in prior audits may not be considered during the current year’s assessment of control risk. C. The basis for an auditor’s conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level. D. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating effectively. 9. According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), an auditor who plans to rely on controls that have not changed since they were last tested should test the operating effectiveness of such controls at least once every A. Second audit B. Third audit C. Fourth audit D. Fifth audit 10. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would A. Increase inherent risk. B. Increase materiality level. C. Decrease inherent risk. D. Decrease detection risk. 11. When an auditor increases the planned assessed level of control risk because certain controls were determined to be ineffective, the auditor would most likely increase the A. Extent of tests of details. B. Level of inherent risk. C. Extent of tests of controls. D. Level of detection risk. 12. Regardless of the assessed level of control risk, an auditor would perform some A. Tests of controls to determine the effectiveness of internal control policies. B. Analytical procedures to verify the design of internal control procedures. C. Substantive tests to restrict detection risk for significant transaction classes. D. Dual-purpose tests to evaluate both the risk of monetary misstatements and preliminary control risk. 13. When an accounting application is processed by computer, an auditor cannot verify the reliable operation of programmed control procedures by A. Manually comparing detail transaction files used by an edit program with the program’s generated error listings to determine that errors were properly identified by the edit program. B. Constructing a processing system for accounting applications and processing actual data from throughout the period through both the client’s program and the auditor’s program. C. Manually reperforming, as of a moment in time, the processing of input data and comparing the simulated results with the actual results. D. Periodically submitting auditor-prepared test data to the same computer process and evaluating the results. 14. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a variety of techniques, including A. Reperformance and observation. B. Inquiry and analytical procedures. C. Comparison and confirmation. D. Inspection and verification. 15. An auditor intends to perform tests of control on a client’s cash disbursement procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Inquiry and analytical procedures. B. Inquiry and observation. C. Analytical procedures and confirmation. D. Confirmation and observation. 16. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales invoices. D. Inspect unused sales invoices for consecutive prenumbering. 17. An auditor is least likely to test controls that provide for A. Approval of the purchase and sale of trading securities. B. Classification of revenue and expense transactions by product line. C. Segregation of the functions of recording disbursements and reconciling the bank account. D. Comparison of receiving reports and vendor’s invoices with purchase orders. 18. An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing, and extent of the A. Attribute tests B. Compliance tests C. Tests of controls D. Substantive tests 19. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs A. Tests of controls and extensive tests of property, plant and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year. 20. Which of the following procedures concerning accounts receivable would an auditor most likely to perform to obtain evidential matter in support of an assessed level of controls risk below the maximum level? A. Observing an entity’s employee prepare the schedule of past due accounts receivable, B. Sending confirmation request’s to an entity’s principal customers to verify the existence of accounts receivable. C. Inspecting an entity’s analysis of accounts receivable for unusual balances. D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable. 21. Tests of controls are least likely to be omitted with regard to A. Accounts believed to be subject to ineffective controls. B. Accounts representing few transactions. C. Accounts representing many transactions. D. Subsequent events. 22. Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed? A. Confirmations of receivables verifying account balances. B. Letters of representations corroborating inventory pricing. C. Attorney’s responses to the auditor’s inquiries. D. Client records documenting the use of computer programs. 23. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? A. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C. Select and examine cancelled checks and ascertain that the related receiving reports are dated no earlier than the checks. D. Select and examine cancelled checks and ascertain that the related receiving reports are dated no later than the checks. 24. Based on observations made during an audit, the independent auditor should discuss with management the effectiveness of the company’s controls that protect against the purchase of A. Required supplies provided by vendor who offers no trade discounts. B. Required supplies provided by vendor who offers no cash discounts. C. Inventory items acquired based on an economic order quantity (EOQ) inventory management concept. D. Supplies individually ordered, without considering possible volume discounts. 25. In assessing control risk for the purchasing cycle, the auditor will be least influenced by A. The effectiveness of the controls in other cycles, e.g., the sales-receivables-cash receipts cycle. B. The existence within the purchasing cycle of internal control strengths that offset weaknesses. C. The audit work performed in the purchasing cycle by the company’s internal auditor. D. The availability of a company manual describing policies and procedures for the purchasing cycle.  PSA 320 AUDIT MATERIALITY  PSA 520 ANALYTICAL PROCEDURES  PSA 550 RELATED PARTIES  PSA 610 CONSIDERING THE WORK OF INTERNAL AUDIT  PSA 620 USING THE WORK OF AN EXPERT Materiality should be considered by the auditor when determining the nature, timing and extent of audit procedures. There is an inverse relationship between materiality and the level of audit risk. Materiality need not be considered when evaluating the effect of misstatements. A. True; True; False B. False; False; True C. True; True; True D. False; False; True 2. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality. A. The anticipated sample size of the planned substantive tests. B. The entity’s annualized interim financial statements. C. The results of the internal control questionnaire. D. The contents of the management representation letter. 3. In evaluating the fair presentation of the financial statements, the auditor should assess whether the aggregate of uncorrected misstatements that have been identified during the audit is material. The aggregate of uncorrected misstatements comprises I. Specific misstatements identified by the auditor including the net effect of uncorrected misstatements identified during the audit of previous period. II. The auditor’s best estimate of other misstatements which cannot be specifically identified. A. I only B. II only C. Both I and II. D. Neither I nor II. 4. A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. 5. For audits of financial statements made in accordance with PSAs, the use of analytical procedures is required to some extent In the Planning Stage As a Substantive Test In the Final Review Stage A. No Yes Yes B. Yes Yes No C. Yes No Yes D. No No No 6. Analytical procedures used in planning an audit should focus on A. Reducing the scope of tests of controls and substantive tests. B. Providing assurance that potential material misstatements will be identified. C. Enhancing the auditor’s understanding of the client’s business and identifying areas of potential risk. D. Assessing the adequacy of the available evidential matter. 7. Which of the following statements concerning analytical procedures is true? A. Analytical procedures may be omitted entirely for some financial statement audits. B. Analytical procedures used in planning the audit should not use nonfinancial information. C. Analytical procedures usually are effective and efficient for tests of controls. D. Analytical procedures alone may provide the appropriate level of assurance for some assertions. 8. Which of the following would not be considered an analytical procedure? A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. C. Computing accounts receivable turnover by dividing credit sales by the average net receivables. D. Developing the expected sales based on the sales trend of the prior five years. 9. Which of the following procedures would an auditor most likely to perform in planning a financial statement audit? A. Inquiring about the client’s legal counsel concerning pending litigation. B. Comparing the financial statements with anticipated results. C. Examining computer-generated exception reports to verify the effectiveness of internal control. D. Searching for unauthorized transactions that may aid in directing unrecorded liabilities. 10. Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive tests? A. Relationships involving balance sheet accounts. B. Transactions subject to management discretion. C. Relationships involving income statement accounts. D. Data subject to audit testing in the prior period. 11. The primary objective of analytical procedures used in the overall review stage of an audit is to A. Obtain evidence from details testing to corroborate particular assertions. B. Identify areas that represent specific risks relevant to the audit. C. Assist the auditor in assessing the validity of the conclusions reached. D. Satisfy doubts when questions arise about a client’s ability to continue in existence. 12. Analytical procedures used in the overall review stage of an audit generally include A. Considering unusual or unexpected account balances that were not previously identified. B. Performing tests of transactions to corroborate management’s financial statement assertions. C. Gathering evidence concerning account balances that have not changed from the prior year. D. Retesting controls that appeared to be ineffective during the assessment of control risk. 13. When auditing related party transactions, an auditor places primary emphasis on A. Confirming the existence of the related parties. B. Verifying the valuation of the related party transactions. C. Evaluating the disclosure of the related party transactions. D. Ascertaining the rights and obligations of the related parties. 14. Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions. A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. B. Vouching accounting records for recurring transactions recorded just after the balance sheet date. C. Reviewing confirmations of loans receivable and payable for indications of guarantees. D. Performing analytical procedures for indications of possible financial difficulties. 15. Which of the following most likely would indicate the existence of related parties? A. Writing down obsolete inventory just before year-end. B. Failing to correct previously identified internal control deficiencies. C. Depending on a single product for the success of the entity. D. Borrowing money at an interest rate significantly below the market rate. 16. After determining that a related party transactions has, in fact, occurred an auditor should A. Substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions. B. Perform analytical procedures to verify whether similar transactions have occurred, but were not recorded. C. Obtain an understanding of the purpose of the transactions. D. Determine whether a particular transaction would have occurred if the parties had not been related. 17. The external auditor should obtain a sufficient understanding of the internal audit function because A. The understanding of the internal audit function is an important substantive test to be performed by the external auditor. B. The audit programs, working papers, and reports of internal auditors may often be used as a substitute for the work of the external auditor’s staff. C. The procedures performed by the internal audit staff may eliminate the external auditor’s need for considering internal control. D. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the external auditor’s procedures. 18. If the external auditor decides that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, he/she should assess the internal auditors’ A. Efficiency and experience B. Independence and review skills C. Training and supervisory skills D. Competence and objectivity 19. In assessing the technical competence of an internal auditor, an external auditor most likely would obtain information about the A. Quality of working paper documentation, reports, and recommendations. B. Organizational level to which the internal auditor reports. C. Influence of management on the internal auditor’ duties. D. Entity’s commitment to integrity and ethical values. 20. PSA 620 (Using the Work of an Expert) provides guidance on using the work of an expert as audit evidence. According to this standard, an expert may be A. Contracted by the auditor but never by the entity. B. Contracted by the entity but never by the auditor. C. Contracted but not employed by the entity. D. Contracted or employed by the entity or auditor. 21. Which of the following statements is correct concerning the auditor’s use of the work of an expert? A. The auditor is required to perform substantive test procedures to verify the expert’s assumptions and findings. B. The auditor should obtain an understanding of the methods and assumptions used by the expert. C. The should not have an understanding of the nature of the work to be performed by the expert. D. The expert should not have an understanding of the auditor’s corroborative use of the expert’s findings. 22. In using the work of an expert, an understanding should exist among the auditor, the entity and the expert as to the nature, scope, and objective of the expert’s work. The documentation of this understanding should cover A. The conditions under which a division of responsibility may be necessary. B. A statement that the expert assumes no responsibility to update the expert’s report for future events or circumstances. C. The intended use by the auditor of the expert’s work, including the possible communication to third parties of the expert’s identity and extent of involvement. D. The auditor’s disclaimer as to whether the expert’s findings corroborate the representations in the financial statements. 23. Which of the following is not an expert upon whose work an auditor may rely? A. Actuary B. Engineer C. Appraiser D. Internal auditor 24. If the results of the expert’s work do not provide sufficient appropriate audit evidence or are not consistent with other audit evidence, the auditor should A. Report the matter to the appropriate regulatory agency of the government. B. Resolve the matter. C. Withdraw from the engagement. D. Express an unqualified opinion with reference to the work of the expert. 25. When issuing an unmodified auditor’s report, the auditor A. May refer to the work of an expert. B. Should refer to the work of an expert to indicate a division of responsibility. C. Should include in the auditor’s report the identity of the expert and the extent of the expert’s involvement. D. Should not refer to the expert’s work.  PSA 500 (revised) Audit Evidence  PSA 501 Audit Evidence – Additional Considerations on Specific Items  PSA 505 External Confirmations  PSA 230 (revised) Audit Documentation 1. Which of the following statements concerning audit evidence is correct? A. To be appropriate, audit evidence should be either reliable or relevant, but it need not be both. B. The measure of the validity of audit evidence lies in the auditor’s judgment. C. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test. D. A client’s accounting records can be sufficient audit evidence to support the financial statements. 2. The quantity of audit evidence needed is affected by the risk of misstatement and also by the quality of such audit evidence. The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. A. Both statements are true. B. Both statements are false. C. True; False D. False; True 3. Which of the following is a false statement about audit objectives? A. There should be one- to –one relationship between audit objectives and procedures. B. Audit objectives should be developed in light of management assertions about the financial statement components. C. Selection of tests to meet audit objectives should depend upon the understanding of internal control. D. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions. 4. Management makes certain assertions that are embodied in financial statement components; for example, two such categories of assertions are completeness and valuation and allocation. Which of the following is not a broad category of management assertions? A. Rights and obligations B. Completeness C. Existence D. Errors or fraud 5. The objective of tests of details of transactions performed as substantive tests is to A. Comply with generally accepted auditing standards. B. Attain assurance about the reliability of the accounting system. C. Detect material misstatements in the financial statements. D. Evaluate whether management’s policies and procedures operated effectively. 6. In testing the existence assertion for an asset, an auditor ordinarily works from the A. Financial statements to the potentially unrecorded items. B. Potentially unrecorded items to the financial statements. C. Accounting records to the supporting evidence. D. Supporting evidence to the accounting records. 7. In determining whether transactions have been recorded, the direction of the audit testing should be from the A. General ledger balances B. Adjusted trial balance C. Original source documents D. General journal entries 8. Which of the following statements concerning evidential matter is true? A. Appropriate evidence supporting management’s assertions should be convincing rather than merely persuasive. B. Effective internal control contributes little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client’s accounting records cannot be considered sufficient evidence to support the financial statements. 9. Which of the following is an example of “other information” that could be used by an auditor as evidential matter supporting the financial statements. A. Worksheets supporting cost allocations. B. Confirmation of accounts receivable. C. Special journals. D. Accounting manuals. 10. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? A. Bank statement obtained from the client. B. Test counts of inventory made by the auditor. C. Prenumbered purchase order forms. D. Correspondence from the client’s attorney about litigation. 11. Which of the following types of audit evidence is the most persuasive? A. Prenumbered purchase order forms. B. Client worksheets supporting cost allocations. C. Bank statements obtained from the client. D. Client representation letter. 12. Which of the following generalizations does not relate to the appropriateness of evidence? A. Audit evidence from external sources (for example, confirmation received from a third party) is more reliable than the generated internally. B. An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C. Audit evidence generated internally is more reliable when the related accounting and internal control systems are effective. D. Audit evidence obtained directly by the auditor is more reliable than that obtained from the entity. 13. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for the A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness. 14. Which of the following statements concerning audit evidence is correct? A. An audit usually involves the authentication of documentation. B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not others. C. Audit evidence obtained from an independent external source is always reliable. D. An entity’s accounting records can be sufficient audit evidence to support the financial statements. 15. PSA 500 requires the auditor to use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatements and the design and performance of further audit procedures. Assertions about classes of transactions include occurrence, completeness, accuracy, cutoff, and A. Valuation and and allocation. B. Rights and obligations. C. Existence. D. Classification. !6. In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely to be justified? A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to few major customers. D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. 17. Which of the following statements is correct concerning the use of negative confirmation requests? A. Unreturned negative confirmation requests rarely provide significant explicit evidence. B. Negative confirmation requests are effective when detection risk is low. C. Unreturned negative confirmation requests indicate that alternative procedures are necessary. D. Negative confirmation requests are effective when understatements of account balances are suspected. 18. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management’s financial statement assertion of A. Existence B. Rights and obligations C. Valuation and allocation D. Completeness 19. Which of the following might be detected by an auditor’s review of the client’s sales cut-off? A. Excessive goods returned for credit. B. Unrecorded sales discounts. C. Lapping of year-end accounts receivable. D. Inflated sales for the year. 20. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of A. Classification C. Rights and obligations. B. Cutoff D. Existence 21. Which of the following most likely would give the most assurance concerning the valuation and allocation assertion of accounts receivable? A. Vouching amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios with industry statistics for reasonableness. C. Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectible accounts for reasonableness. 22. Confirmation is “the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions.” Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation. B. Valuation and rights and obligations. C. Rights and obligations and existence D. Existence and completeness 23. An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents’ exceptions and comments. By this procedure the auditor would be most likely to learn of which of the following? A. One of the cashiers has been covering a personal embezzlement by lapping. B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C. One of the computer control clerks has been removing all sales invoices applicable to his account from the data file. D. The credit manager has misappropriated remittances from customers whose accounts have been written off. 24. The auditor may consider confirming accounts receivable balances at an interim date if A. Collections subsequent to year-end are to be reviewed B. The assessed level of risk of material misstatement relative to financial statement assertions about receivables is acceptably low. C. Negative confirmations are to be used for a sample of accounts. D. Cash and accounts receivable are audited at the same time. 25. When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would A. Inspect the allowance account to verify whether the accounts were subsequently written off. B. Increased the assessed level of detection risk for the valuation and completeness assertions. C. Send the customer a second confirmation. D. Increase the assessed level of inherent risk for the revenue cycle. 26. The return of positive accounts receivable confirmation without an exception attests to the A. Collectibility of the accounts receivable. B. Accuracy of the aging of accounts receivable. C. Accuracy of the receivables balance. D. Accuracy of the allowance for bad debts. 27. Which of the following procedures would an auditor most likely to perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. Review the cash receipts journal for the month prior to year-end. B. Intensify the study of internal control concerning the revenue cycle. C. Increased the assessed level of detection risk for the existence assertion. D. Inspect the shipping records documenting the merchandise sold to the debtors. 28. Which of the following sets of information does an auditor usually confirm on one form? A. Accounts payable and purchase commitments. B. Cash in bank and collateral for loans. C. Inventory on consignment and contingent liabilities. D. Accounts receivable and accrued interest receivable. 29. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Detect kiting activities that may otherwise not be discovered. B. Corroborate information regarding deposit and loan balances. C. Provide data necessary to prepare proof of cash. D. Request information about contingent liabilities and secured transactions. 30. Which of the audit procedures is the most appropriate when internal control over cash is weak or when a client request for an investigation of cash transactions? A. Proof of cash. B. Bank reconciliation. C. Cash confirmation. D. Evaluate ratio of cash to current liabilities 31. The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may A. Not believe that the bank is obligated to verify confidential information to third party. B. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation. C. Not have access to the client’s cutoff bank statement. D. Be unaware of all the financial relationships that the bank has with the client. 32. An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after year-end. B. The last checks recorded before year-end were actually made by year-end. C. Cash balances were overstated because of kiting. D. Any unusual payments to or receipts from related parties occurred. 33. Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? A. Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s statement of cash flows. B. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances. C. Vouch all bank transfers for the last week of the year and first week of the subsequent year. D. Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts. 34. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most likely would vouch A. Inventory tags noted during the auditor’s observation to items listed in the inventory listing schedule. B. Inventory tags noted during the auditor’s observation to items listed in the receiving reports and vendors’ invoices. C. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets. D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule. 35. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of A. Rights and obligations B. Completeness C. Existence D. Valuation and allocation 36. While observing a client’s annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to record A. Purchase discounts C. Sales B. Purchase returns D. Sales returns 37. The primary source of information to be reported about litigation, claims, and assessments is the A. Client’s lawyer C. Client’s management B. Court records D. Independent auditor 38. Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments? A. Requests the client’s lawyer to evaluate whether the client’s pending litigation, claims, and assessments indicate a going concern problem. B. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims, and assessment to which the lawyer has devoted substantive attention. C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. D. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements. 39. Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments? A. Inquire of and discuss with management the policies and procedures adopted for litigation, claims, and assertions. B. Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. C. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. D. Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements. 40. The following are ordinarily excluded from audit documentation: A B C D Superseded drafts of working papers and financial statements Yes No No Yes Notes that reflect incomplete or preliminary thinking Yes Yes No No Previous copies of documents corrected for typographical or other errors Yes Yes Yes Yes Duplicates of documents Yes No Yes No 41. The auditor should complete the assembly of the final audit file on a timely basis after the date of the auditor’s report. As PSQC 1 indicates, _____ days after the date of the auditor’s report is ordinarily an appropriate time limit within which to complete the assembly of the final audit file. A. 30 C. 60 B. 90 D. 120 42. After the assembly of the final audit file has been completed, the auditor should not delete or discard audit documentation before the end of its retention period. As PSQC 1 indicates, the retention period for audit engagements ordinarily is no shorter than _____ years from the date of the auditor’s report. A. 5 C. 3 B. 7 D. 10 43. In documenting the nature, timing and extent of audit procedures performed, the auditor should record I. Who performed the audit work and the date such work was completed. II. Who reviewed the audit work and the date and extent of such review. A. I only C. Both I and II B. II only D. Neither I nor II 44. The permanent (continuing) file of an auditor’s working papers most likely would include copies of the A. Lead schedules C. Bank statements B. Attorneys’ letters D. Debt agreements 45. The current file of an auditor’s working papers most likely would include copy of the A. Bank reconciliation C. Articles of incorporation B. Pension plan contract D. Flowchart of the internal control activities PSA 240 (revised 2005) The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements PSA 250 Consider of Laws and Regulations in an Audit of Financial Statements PSA 260 Communications of Audit Matters with those Charged with Governance 1. Misstatements in the financial statements can arise from fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is I Intentional or unintentional II Rational or irrational A. I only C. Both I and II B. II only D. Neither I nor II 2. ”Error” includes A. Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements. C. An incorrect accounting estimate arising from oversight or misinterpretation of facts. D. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or disclosure. 3. Fraud involving one or more members of management or those charged with governance is referred to as A. Management fraud C. Fraudulent financial reporting. B. Employee fraud. D. Misappropriation of assets. 4. The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from A. Management fraud. B. Employee fraud. C. Misappropriation of assets. D. Collusion within the entity or with third parties. 5. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It may be accomplished in a number of ways, including A. Embezzling receipts. B. Stealing physical assets or intellectual property. C. Using an entity’s assets for personal use. D. Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared. 6. Which of the following conditions are generally present when misstatements due to fraud occur? I Incentive o