CPAR Auditing Theory Reviewer PDF

lOMoARcPSD|40026582 CPAR Auditing Theory Reviewer Auditing and Assurance: Specialized Industries (Pontifical and Royal University of Santo Tomas, The Catholic University of the Philippines)...

lOMoARcPSD|40026582 CPAR Auditing Theory Reviewer Auditing and Assurance: Specialized Industries (Pontifical and Royal University of Santo Tomas, The Catholic University of the Philippines) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 1 of 8 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY Overview of Auditing Related PSAs : PSA 100, 120, 200 and 610 1. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the following is not a postulate of auditing? a. No long-term conflict exists between the auditor and the management of the enterprise under audit. b. Economic assertions can be verified. c. The auditor acts exclusively as an auditor. d. An audit has a benefit only to the owners. 2. In all cases, audit reports must a. Be signed by the individual who performed the audit procedures. b. Certify the accuracy of the quantitative information which was audited. c. Communicate the auditor’s finding to the general public. d. Inform readers of the degree of correspondence between the quantifiable information and the established criteria. 3. The auditor communicates the results of his or her work through the medium of the a. Engagement letter c. Management letter. b. Audit report d. Financial statements. 4. As used in auditing, which of the following statements best describes "assertions"? a. Assertions are the representations of management as to the reliability of the information system. b. Assertions are the auditor's findings to be communicated in the audit report. c. Assertions are the representations of management as to the fairness of the financial statements. d. Assertions are found only in the footnotes to the financial statements. 5. The expertise that distinguishes auditors from accountants is in the a. Ability to interpret generally accepted accounting principles. b. Requirement to possess education beyond the Bachelor’s degree. c. Accumulation and interpretation of evidence. d. Ability to interpret ASC Statements. 6. The framework for auditing and related services as addressed by PSA excludes a. Review c. Compilation b. Tax services d. Agreed upon procedure 7. It refers to the level of auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party. a. Confidence level c. Assurance level b. Reasonableness level d. Tolerable level 8. Indicate the level of assurance provided by audit and related services. a b c d Audit High High Negative Absolute Review Moderate None Moderate High Agreed-upon procedures None None None Limited Compilation None None None None 9. Which of the following is true of the report based on agreed-upon-procedures? a. The report is restricted to those parties who have agreed to the procedures to be performed. b. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in the financial information. c. The report states that the auditor has not recognized any basis that requires revision of financial statements. d. The report should state that the procedures performed are limited to analytical procedures and inquiry. AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 2 of 8 10. Which of the following is an objective of a review engagement? a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted accounting principles. b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA. c. Reporting whether material modifications should be made to such financial statements to make them conform with generally accepted accounting principles. d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating results of the client. 11. According to Philippine Standard on Auditing, the procedures employed in doing compilation are: a. Designed to enable the accountant to express a limited assurance. b. Designed to enable the accountant to express a negative assurance. c. Not designed to enable the accountant to express any form of assurance. d. Less extensive than review procedures but more extensive than agreed-upon procedures. 12. Any services in which the CPA firm issues a written communication that express a conclusion with respect to the reliability of a written assertion that is the responsibility of another party is a (n) a. Accounting and bookkeeping service c. Attestation service b. Management advisory service d. Tax service 13. The three types of attestation services are: a. Audits, review, and compilations b. Audits, compilations, and other attestation services c. Reviews, compilations, and other attestation services d. Audits, reviews, and other attestation services 14. Which of the following is not primary category of attestation report? a. Compilation report b. Review report c. Audit report d. Special audit report based on a basis of accounting other than generally accepted accounting principles. 15. The primary goal of the CPA in performing the attest function is to a. Detect fraud b. Examine individual transactions so that the auditor may certify as to their validity c. Determine whether the client's assertions are fairly stated d. Assure the consistent application of correct accounting procedures 16. Which of the following criteria is unique to the independent auditor’s attest function? a. General competence b. Familiarity with the particular industry of each client c. Due professional care d. Independence 17. Assurance engagement a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. b. Is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. c. Is an engagement in which the auditor provides a moderate level of assurance that the information subject to the engagement is free of material misstatement. d. Is an engagement intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the information will meet the needs of an intended user. 18. The single feature that most clearly distinguishes auditing, attestation, and assurance is a. Type of service. c. Scope of services. b. Training required to perform the service d. CPA’s approach to the service AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 3 of 8 19. Identify the following as financial audit (FA), compliance audit (CA), and operational audit (OA). A supervisor is not carrying out his assigned responsibilities. A company’s tax return does not conform to income tax laws and regulations. A municipality’s financial statements correctly show actual cash receipts and disbursements. A company’s receiving department is inefficient. a. CA, CA, FA, OA c. OA, CA, FA, OA b. OA, CA, CA, OA d. CA, CA, FA, CA 20. The criteria for evaluating quantitative information vary. For example, in the audit of historical financial statements by CPA firms, the criteria are usually a. Generally accepted auditing standards. b. Generally accepted accounting principles. c. Regulations of the Internal Revenue Service. d. Regulations of the Securities and Exchange Commission. 21. Which of the following types of audit uses as its criteria laws and regulations? a. Operational audit c. Financial statement audit b. Compliance audit d. Financial audit 22. An operational audit is designed to a. Assess the efficiency and effectiveness of management’s operating procedures b. Assess the presentation of management’s financial statements in accordance with generally accepted accounting principles c. Determine whether management has complied with applicable laws and regulations d. Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee management’s operations 23. A review of any part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a (n) a. Audit of financial statements c. Operational audit b. Compliance audit d. Production audit 24. Which one of the following is more difficult to evaluate objectively? a. Efficiency and effectiveness of operations. b. Compliance with government regulations. c. Presentation of financial statements in accordance with generally accepted accounting principles. d. All three of the above are equally difficult.. 25. Independent auditing can best be described as a a. Branch of accounting b. Discipline that attests to the results of accounting and other operations and data c. Professional activity that measures and communicates financial and business data d. Regulatory function that prevents the issuance of improper financial information 26. A financial statement audit: a. Confirms that financial statement assertion are accurate. b. Lends credibility to the financial statements. c. Guarantees that financial statements are presented fairly. d. Assures that fraud had been detected. 27. Which of the following best describes the objective of an audit of financial statements? a. To express an opinion whether the financial statements are prepared in accordance with prescribed criteria. b. To express an assurance as to the future viability of the entity whose financial statements are being audited. c. To express an assurance about the management’s efficiency or effectiveness in conducting the operations of entity. d. To express an opinion whether the financial statements are prepared, in all material respect, in accordance with an identified financial reporting framework. 28. Because an external auditor is paid a fee by a client company, he or she a. Is absolutely independent and may conduct an audit AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 4 of 8 b. May be sufficiently independent to conduct an audit c. Is never considered to be independent d. Must receive approval of the Securities and Exchange Commission before conducting an audit 29. Which of the following is responsible for an entity’s financial statements? a. The entity’s management c. The entity’s audit committee b. The entity’s internal auditors d. The entity’s board of directors 30. The best statement of the responsibility of the auditor with respect to audited financial statement is: a. The audit of the financial statements relieves management of its responsibilities b. The auditor’s responsibility is confined to his expression of opinion about the audited financial statements. c. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements. d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion. 31. Which of the following least likely limits the auditors ability to detect material misstatement? a. Most audit evidences are conclusive rather than being persuasive. b. The inherent limitations of any accounting and internal control system. c. Audit is based on testing d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting intentional misstatements. 32. Because an examination in accordance with generally accepted auditing standards is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of a. Professional responsiveness c. Objective judgment b. Conservative advocacy d. Professional skepticism 33. Which of the following best describes why an independent auditor reports on financial statements? a. Independent auditors are likely to detect fraud b. Competing interests may exist between management and the users of the statements c. Misstated account balances are generally corrected by an independent audit. d. Ineffective internal controls may exist. 34. An audit can have a significant effect on a. Information Risk c. Business Risk b. The risk-free interest rate d. All of these 35. The main way(s) to reduce information risk is to have a. The user verify the information b. The user share the information risk with management c. Audited financial statements provided d. All of the above 36. Which of the following is an appraisal activity established within an entity as a service to the entity? a. External auditing c. Financial auditing b. Internal auditing d. Compliance auditing 37. The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following: a b c d Review of the accounting and internal control systems Yes Yes Yes Yes Examination of financial and operating information Yes Yes Yes No Review of the economy, efficiency and effectiveness of operations Yes Yes No No Review of compliance with laws, regulations and other external requirements Yes No No No AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 5 of 8 38. To operate effectively, an internal auditor must be independent of a. The line functions of the organizations b. The entity c. The employer-employee relationship which exists for other employees in the organization d. All of the above 39. Internal auditors cannot be independent a. Since they do not possess the CPA license. b. Because they don’t audit financial statements. c. Unless their immediate supervisor is a CPA. d. As long as an employer-employee relationship exists. 40. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to a. Board of Directors. c. Corporate Controller. b. Vice-President for Finance. d. Corporate Stockholders. 41. Which statement is correct regarding the relationship between internal auditing and the external auditor? a. Some judgments relating to the audit of the financial statements are those of the internal auditor. b. The external audit function's objectives vary according to management's requirements. c. Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external audit procedures. d. The external auditor is responsible for the audit opinion expressed, however that responsibility may be reduced by any use made of internal auditing. 42. Which of the following statements is not a distinction between independent auditing and internal auditing? a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors report directly to management. b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity. c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors. d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and performance auditing. 43. Which of the following is a correct qualification of the Chairman and Two Commissioners of the Commission on Audit? a. A citizen of the Philippines. b. At least 40 years of age upon appointment. c. CPA’s with no less than 5 years of auditing experience or members of Philippine bar who have been engaged in law practice for at least 5 years. d. Must not have been candidates for any elective position preceding appointment. 44. The 1986 Constitution provides that the Chairman and Commissioners of the Commission on Audit shall be a. All Certified Public Accountants b. All lawyers c. One or two lawyers and one or two CPAs for a total of three d. Two lawyers and one CPA 45. Which of the following is not one of the duties of the Commission on Audit a. Define the scope of its audit and examination b. Assume fiscal responsibility for the government and its instrumentalities c. Keep the general accounts of the government d. Promulgate accounting rules and regulations 46. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include Program results Compliance Economy and efficiency a. Yes Yes No b. Yes Yes Yes c. No Yes Yes d. No No Yes AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 6 of 8 47. An audit designed to determine the extent to which the desired results of an activity established by the legislative or other authorizing body are being achieved is a (an) a. Economy audit c. Program audit b. Efficiency audit d. Financial related audit 48. A government auditor evaluates a disbursement to determine if it is necessary, excessive or extravagant in accordance with existing rules and regulations. What kind of audit is he conducting? Compliance audit Economy audit a. Yes No b. No Yes c. Yes Yes d. No No QUIZZERS 1. Which of the following is an incorrect phrase? a. Auditing is a systematic process. b. Auditing subjectively obtains and evaluates evidence. c. Auditing evaluates evidence regarding assertions. d. Auditing communicates results to interested users. 2. Which of the following is a correct statement relating to the theoretical framework of auditing? a. The financial data to be audited can be verified. b. Short-term conflicts do not exist between managers who prepare data and auditors who examine data. c. Auditors do not necessarily need independence. d. An audit has a benefit only to the owners. 3. The essence of the attest function is to a. Detect fraud b. Examine individual transactions so that the auditor can certify as to their validity c. Determine whether the client’s financial statements are fairly stated d. Ensure the consistent application of correct accounting procedures 4. In “auditing” accounting data, the concern is with a. Determining whether recorded information properly reflects the economic events that occurred during the accounting period. b. Determining if fraud has occurred. c. Determining if taxable income has been calculated correctly. d. Analyzing the financial information to be sure that it complies with government requirements. 5. Users of financial statements demand independent audit because a. Users demand assurance that fraud does not exist b. Management may not be objective in reporting. c. Users expect auditors to correct management errors. d. Management relies on the auditor to improve internal control. 6. Which of the following types of audits is performed to determine whether an entity’s financial statements are fairly stated in conformity with generally accepted accounting principles? a. Operational audit c. Financial statement audit b. Compliance audit d. Performance audit 7. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis? a. Internal auditing c. Government auditing b. BIR auditing d. External auditing PSA 100 – Assurance engagements 8. Which of the following is incorrect regarding the Philippine Standards on Assurance Engagements (PSAE)? a. It provides an overall framework for assurance engagements intended to provide either a high or moderate level of assurance. AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 7 of 8 b. It provides basic principles and essential procedures for engagements intended to provide a moderate level of assurance. c. When a professional accountant is engaged to perform an assurance engagement for which specific standards exist, those standards apply. d. If no specific standards exist for an assurance engagement, PSAE apply. 9. An assurance engagement should exhibit the following elements except a. A three party relationship c. Appropriate professional fee b. A conclusion d. A subject matter 10. Which of the following is incorrect regarding the “three-party relationship” element of assurance engagements? a. Professional accountants as those persons who are members of an IFAC member body, which should be in public practice. b. The responsible party and the intended user will often be from separate organizations but need not be. c. The responsible party is the person or persons, either as individuals or representatives of an entity, responsible for the subject matter. d. The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose. 11. The following are assurance engagements except a. Financial statements audit c. Review of financial statements b. Information system reliability services d. Tax consulting 12. Engagements frequently performed by professional accountants that are not assurance engagements include the following except a. Agreed-upon procedures. c. Compilation b. Compliance audit d. Management consulting. 13. The subject matter of an assurance engagement may take many forms, including a. Data b. Systems and processes c. Behavior d. All of these 14. The decision as to whether the criteria are suitable involves considering whether the subject matter is capable of reasonably consistent evaluation against or measurement using such criteria. The characteristics for determining whether criteria are suitable include the following, except a. Relevance b. Reliability: c. Understandability: d. Sufficiency 15. When the professional accountant has obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria, he or she can provide what level of assurance? a. None b. High c. Moderate d. Absolute 16. Absolute assurance is generally not attainable as a result of such factors as: a b c d the use of selective testing, Yes Yes Yes No the inherent limitations of control systems Yes Yes Yes Yes the fact that much of the evidence available to the professional accountant is persuasive rather than conclusive Yes Yes No Yes the use of judgment in gathering evidence and drawing conclusions based on that evidence Yes No No No PSA 120 – Framework of PSA 17. The Framework of PSA applies to a. Taxation b. Consultancy c. Accounting advice d. Compilation 18. Agreed-upon procedures provides what level of assurance? a. None b. High c. Moderate d. Absolute 19. Which of the following procedures ordinarily performed during an audit are also performed in review? a. Assessment of accounting and internal control systems b. Test of controls c. Tests of records and of responses to inquiries AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 8 of 8 d. Inquiry and analytical procedures 20. The objective of a review of financial statements a. Is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. b. 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. c. Is to 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. d. Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information. 21. An auditor is associated with financial information when a b c d the auditor attaches a report to that information Yes No Yes No consents to the use of the auditor’s name in a professional connection Yes Yes No No PSA 200 – Objective and general principles governing an audit of FS 22. The auditor’s opinion a. Enhances the credibility of the financial statements. b. Is an assurance as to the future viability of the entity. c. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but not effectiveness. d. Certifies the correctness of the financial statements. 23. Which of the following is incorrect regarding the general principles of an audit? a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified Public Accountants” promulgated by the Philippine Professional Regulation Commission. b. The auditor should conduct an audit in accordance with PSAs. c. The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. d. The auditor would ordinarily expect to find evidence to support management representations and assume they are necessarily correct. 24. It refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. a. Scope of an audit c. Objective of an audit b. Audit program d. Reasonable assurance 25. Which of the following are sources of procedures to be considered by the auditor to conduct an audit in accordance with PSAs? PSA Legislation Terms of Audit Engagement Type of Opinion a. Yes No No No b. No No Yes Yes c. No Yes Yes No d. Yes Yes Yes No - end of AT-5901 - AT-5901 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 1 of 7 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY Professional Accounting Practice Related PSA : Preface to PSA and Related Services 1. The following statements relate to the accounting profession: I. To merit public trust and confidence, the professional person must convince the public that he will place public service ahead of personal reward. II. A CPA certificate is evidence of basic competence in the discipline of accounting at the time the certificate is granted. III. A code of professional conduct is one of the most important distinguishing characteristics of a profession. State whether the foregoing statements are true or false. a. All of the statements are true. c. Only two of the statements are true. b. Only one of the statements is true. d. All of the statements are false. 2. Which of the following is not normally a service rendered by public accountants? a. Management consultation service c. Internal auditing b. Attest function d. Taxation 3. A CPA firm offers management advisory services to clients. Its primary purpose is to a. Furnish professional advice and assistance which will enable the client to improve operations. b. Keep the CPA firm competitive with other firms. c. Establish the firm as a consultant, thus ensuring its future expansion and growth. d. Permit the firm’s staff members to acquire expertise in other areas of practice. 4. The government agency tasked by law of implementing and enforcing the regulatory policies of the national government with respect to the regulation and licensing of the various professions and occupations under its jurisdiction is a. PRC b. BOA c. COA d. SEC 5. Which of the following mostly describes the function of ASPC? a. To monitor full compliance by auditors to PSAs. b. To promulgate auditing standards, practices and procedures that shall be generally accepted by the accounting profession in the Philippines. c. To assist the Board of Accountancy in conducting administrative proceedings on erring CPAs in audit practice. d. To undertake continuing research on both auditing and financial accounting in order to make them responsive to the needs of the public. 6. In the absence of pronouncements issued by the ASPC and the PICPA, published statements and guidelines issued by other authoritative bodies like AICPA, IAASB and AFA are the bases of determining generally accepted auditing standards (GAAS). What effect do these pronouncements provide in determining the GAAS? a. Authoritative b. Persuasive c. Parallel d. Alternative 7. Which statement is incorrect regarding the pronouncements of ASPC? a. The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors. b. PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material. c. PSAs need only be applied to material matters. d. The Interpretations have the same authority as the PAPSs. 8. The Philippine Standards on Auditing issued by ASPC a. Apply to independent examination of financial statements of any entity when such an examination is conducted for the purpose of expressing an opinion thereon. b. Must not apply to other related activities of auditors c. Need to be applied on all audit related matters. AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 2 of 7 d. Require that in no circumstances would an auditor may judge it necessary to depart from a PSA, even though such a departure may result to more effective achievement of the objective of an audit 9. These statements are issued to provide practical assistance to auditors in implementing the PSAs a. Interpretations b. SASP c. PAPS d. SPA 10. A body that is created through the Philippine Accountancy Act of 2004 and is intended to replace the ASPC. a. Auditing and Assurance Standards Council (AASC) b. Financial Reporting Standards Council (FRSC) c. Education Technical Council (ETC) d. Philippine Institute of Certified Public Accountants (PICPA) 11. Which of the following government agencies is represented both to the Auditing Standards and Practices Council and the Auditing and Assurance Standards Council? a. Bangko Sentral ng Pilipinas c. Securities and Exchange Commission b. Bureau of Internal Revenue d. Commission on Higher Education 12. Are the following government agencies represented both to Auditing Standards and Practices Council (ASPC) and the new Auditing and Assurance Standards Council (AASC)? a b c d Board of Accountancy Yes Yes Yes Yes Securities and Exchange Commission Yes Yes No No Commission on Audit Yes Yes Yes Yes Bangko Sentral ng Pilipinas Yes No Yes No 13. Which statement is correct regarding AASC? a. The AASC shall be composed of 15 members plus a Chairman. b. The chairman and members of the AASC shall be appointed by the President of the Philippines upon the recommendation of PRC. c. The chairman and members of the AASC shall have a non-renewable term of 3 years. d. The chairman should have been or presently a senior practitioner in public accountancy. 14. The following sectors represented by the PICPA to the membership of AASC have one representative, except a. Government c. Commerce and industry b. Public practice d. Academe 15. Statements on financial accounting standards constituting GAAP are issued by the a. Philippine Institute of CPAs. c. Audit Standards and Practices Council. b. Securities and Exchange Commission. d. Accounting Standards Council. 16. Indicate whether the following functions would be performed by: P – Partner S – Senior M – Manager AS – Audit Assistant (1) Supervises two or more concurrent audit engagements (2) Performs detailed audit procedures (3) Overall responsibility for audit (4) Signs audit report (1) (2) (3) (4) a. P AS S M b. M S M P c. M AS P P d. P AS S M 17. The amount of audit fees depend largely on the a. Size and capitalization of the company under audit. b. Amount of profit for the year. c. Availability of cash. d. Volume of audit work and degree of competence and responsibilities involved. AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 3 of 7 18. In determining audit fees, an auditor may take into account each of the following except a. Volume and intricacy of work involved. c. Number and cost of manhours needed. b. Degree of responsibility assumed. d. Size and amount of capital of client. 19. Under this method of billing a client, the external auditors charges on the basis of time spent by principals/partners, supervisors, seniors and juniors at predetermined rates agreed upon with the client a. Maximum fee basis c. Flat sum basis b. Retainer basis d. Per diem basis RA No. 9298 – Philippine Accountancy Act of 2004 and its IRR 1. Which of the following is not one of the specified objectives of the Accountancy Act of 2004? a. Examination for registration of CPAs. b. Supervision, control, and regulation of accounting practice. c. Standardization and regulation of accounting education. d. Promulgation of accounting and auditing standards. 2. In all of the following situations except one, a person is deemed to be engaged in professional accounting practice. Which of them is the exception? a. Performing audits or verification of financial transactions and records for more than one client. b. Employed as the department chairman that supervises the BSA program of an educational institution. c. Employment as controller of a private business enterprise and such employment requires that the holder thereof should be a CPA. d. Appointment in the government where first grade civil service eligibility is a prerequisite. 3. A person is not deemed to be engaged in professional accounting practice if a. Her merely holds himself out as skilled in the science and practice of accounting and qualified to render services as a CPA. b. He merely offers to render services as a CPA to the public, but does not actually render such services. c. He offers or renders bookkeeping services to more than one client. d. He installs and revises accounting systems for more than one client. 4. Practice in Public Accountancy shall constitute in a person a. Involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires that the holder thereof must be a certified public accountant. b. In an educational institution which involve teaching of accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects. c. Who holds, or is appointed to, a position in an accounting professional group in government or in a government owned and/or controlled corporation, including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, d. Holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant; or offering or rendering, or both, to more than one client on a fee basis or otherwise. 5. Any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial statements, coordinating with the external auditors for the audit of such financial statements and other related functions shall be occupied only by a duly registered CPA. Provided (choose the incorrect one) a. That the business or company where the above position exists has a paid-up capital of at least P5,000,000 and/or an annual revenue of at least P10,000,000. b. The above provision shall apply only to persons to be employed after the effectivity of the Implementing Rules and Regulations of RA 9298. c. The above provision shall not result to deprivation of the employment of incumbents to the position. d. None of the above. AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 4 of 7 6. The integrated national professional organization of Certified Public Accountants accredited by the BOA and the PRC per PRC accreditation No. 15 dated October 2, 1975. a. Auditing and Assurance Standards Council (AASC) b. Financial Reporting Standards Council (FRSC) c. Education Technical Council (ETC) d. Philippine Institute of Certified Public Accountants (PICPA) 7. As defined in the IRR of RA 9298, it is an organization engaged in the practice of public accountancy, consisting of sole proprietor, either alone or with one or more staff members. a. Firm b. Individual CPA c. Partnership d. Sector 8. The following statements relate to the Board of Accountancy. Which statement is correct? a. The Board consists of a Chairman and six members. b. The chairman and members are appointed by the President of the Philippines upon recommendation of PICPA. c. The Professional Regulation Commission may remove from the Board any member whose certificate to practice has been removed or suspended. d. Majority of the board members shall as much as possible be in public practice. 9. The APO shall submit its nominations with complete documentation to the Commission not later than _____ prior to the expiry of the term of an incumbent chairman or member. a. 30 days b. 60 days c. 90 days d. 120 days 10. A member of the BOA shall, at the time of his/her appointment, possess the following qualifications, except a. Must be a natural-born citizen and resident of the Philippines. b. Must be a duly registered CPA with more than ten (10) years of work experience in any scope of practice of accountancy. c. Must be of good moral character and must not have been convicted of crimes involving moral turpitude. d. Must not be a director or officer of the APO at the time of his/her appointment. 11. Which statement is incorrect regarding the term of office of the chairman and the members of the Board of Accountancy (BOA)? a. The Chairman and members of the Board shall hold office for a term of three years. b. No person who has served two (2) successive complete terms shall be eligible for reappointment until the lapse of one (1) year. c. A person may serve the BOA for not more than twelve years. d. A member of the BOA may continuously serve office for more than nine years. 12. The Board shall exercise the following specific powers, functions and responsibilities: a b c d To supervise the registration, licensure and practice of accountancy Yes Yes Yes Yes To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the accountancy profession Yes No Yes Yes To monitor the conditions affecting the practice of accountancy Yes Yes No Yes To conduct an oversight into the quality of audits of financial statements Yes No Yes No To issue a cease or desist order to any person, association, partnership or corporation engaged in violation of any provision of the Act Yes Yes No Yes 13. Which of the following is not one of the penalties that can be imposed by the Board of Accountancy? a. Fine or imprisonment c. Reprimand b. Revocation of CPA certificate d. Suspension of CPA certificate 14. The creation of FRSC and AASC is intended to assist the BOA in carrying out its function to a. To monitor the conditions affecting the practice of accountancy and adopt such measures, rules and regulations and best practices as may be deemed proper for the AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 5 of 7 enhancement and maintenance of high professional, ethical, accounting and auditing standards. b. To supervise the registration, licensure and practice of accountancy in the Philippines. c. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of RA 9298. d. To prepare, adopt, issue or amend the syllabi of the subjects for examinations. 15. A body that is created to assist the BOA in the attainment of the objective of continuously upgrading the accountancy education in the Philippines to make the Filipino CPAs globally competitive. a. Philippine Institute of Certified Public Accountants (PICPA) b. Education Technical Council (ETC) c. Financial Reporting Standards Council (FRSC) d. Associations of CPAs in Education (ACPAE) 16. Which of the following is are grounds for suspension or removal of members of BOA? I. Neglect of duty or incompetence. II. Violation or tolerance of any violation of the CPA’s Code of Ethics. III. Final judgment of crimes involving moral turpitude. IV. Rigging of the certified public accountant’s licensure examination results. a. I, II, III and IV b. I, II and III c. III and IV d. I, III and IV 17. The following statements relate to CPA examination ratings. Which of the following is incorrect? a. To pass the examination, candidates should obtain a general weighted average of 75% and above, with no rating in any subject less than 65%. b. Candidates who obtain a rating of 75% and above in at least four subjects shall receive a conditional credit for the subjects passed. c. Candidates who failed in four complete examinations shall no longer be allowed to take the examinations the fifth time. d. Conditioned candidates shall take an examination in the remaining subjects within two years from the preceding examination. 18. The Board, subject to the approval of the Commission, may revise or exclude any of the subjects and their syllabi, and add new ones as the need arises. Provided that the change shall not be more often than every a. 2 years b. 3 years c. 4 years d. 5 years 19. The BOA shall submit to the PRC the ratings obtained by each candidate within how many calendar days after the examination? a. 5 days b. 10 days c. 15 days d. 30 days 20. A Professional Identification Card bearing the registration number, date of issuance, expiry date, duly signed by the chairperson of the Commission, shall be issued to every registrant renewable every a. Two years b. Three years c. Four years d. Five years 21. The certified public accountant shall be required to indicate which of the following numbers on the documents he/she signs, uses or issues in connection with the practice of his/her profession? A b c d His/her Certificate of Registration Yes Yes Yes No Professional Identification Card Yes Yes Yes Yes Professional Tax Receipt Yes Yes No Yes Telephone Yes No No No 22. The BOA shall not refuse the registration of any person who successfully passed the CPA examinations if a. Convicted by a court of competent jurisdiction of a criminal offense involving moral turpitude b. Convicted for a political offense. c. Guilty of immoral and dishonorable conduct d. None of the above. AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 6 of 7 23. Which of the following is not one of the grounds for proceedings against a CPA? a. Gross negligence or incompetence in the practice of his profession. b. Engaging in public practice while being employed in a private enterprise. c. Insanity. d. Immoral or dishonorable conduct. 24. A person whose CPA certificate has been revoked a. Can no longer be reinstated as a CPA b. Is automatically reinstated as a CPA after two years if the has acted in an exemplary manner c. May be reinstated as a CPA by the Board of Accountancy after two years if he has acted in an exemplary manner d. May be reinstated by the PRC after two years if he has acted in an exemplary manner 25. Who is not permitted by law to practice accountancy? a. A corporation whose stockholders are all CPAs b. A partnership of CPAs c. An individual CPA practitioner d. A partnership of CPAs with some non-CPA staff 26. A certificate of accreditation shall be issued to certified public accountants in public practice only upon showing, in accordance with rules and regulations promulgated by the Board and approved by the Commission, that such registrant has acquired how many years of meaningful experience in any of the areas of public practice? a. One b. Two c. Three d. Four 27. A meaningful experience shall be considered as satisfactory compliance with the requirements of Section 28 of RA 9298 if it is earned in (Choose the incorrect one) a. Commerce and industry and shall include significant involvement in general accounting, budgeting, tax administration, internal auditing, liaison with external auditors, representing his/her employer before government agencies on tax and matters related to accounting or any other related functions. b. Academe/education and shall include teaching for at least three (3) trimesters or two (2) semesters subjects in either financial accounting, business law and tax, auditing problems, auditing theory, financial management and management services. c. Government and shall include significant involvement in general accounting, budgeting, tax administration, internal auditing, liaison with the Commission on Audit or any other related functions. d. Public practice and shall include at least two years as audit assistant and at least one year as auditor in charge of audit engagement covering full audit functions of significant clients. 28. The Accountancy Law provides that all working papers made during an audit shall be the property of the auditor. These working papers shall include the following, except: a. Schedules and memoranda made by the CPA and his staff. b. Working papers prepared and submitted by the client. c. Excerpts or copies of documents furnished the auditor. d. Reports submitted by the CPA to the client. 29. Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members thereof shall register with the BOA and the PRC. If the application for registration of AB and Co., CPAs was approved on August 30, 2005, it shall file for renewal on or before a. September 30, 2007 c. December 31, 2007 b. September 30, 2008 d. August 30, 2008 30. Which statement is correct regarding CPE requirements for renewal of professional license? a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years, provided that a minimum of twenty (20) credit units shall be earned in each year. b. A registered professional shall be permanently exempted from CPE requirements upon reaching the age of 60 years old. c. A registered professional who is working abroad shall be temporarily exempted from compliance with CPE requirement during his/her stay abroad, provided that he/she is has been out of the country for at least one year immediately prior to the date of renewal. AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 7 of 7 d. Those who failed to renew professional licenses for a period of five (5) continuous years from initial registration, or from last renewal shall be declared delinquent. 31. Any person who shall violate any of the provisions of RA 9298 or any of its implementing rules and regulations as promulgated by the Board subject to the approval of the Commission, shall, upon conviction, be punished by a. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period not exceeding two (2) years or both. b. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment for a period not exceeding two (2) years or both. c. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period not exceeding three (3) years or both. d. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment for a period not exceeding three (3) years or both. 32. The primary duty to enforce the provisions of RA 9298 and its IRR rests with a. The PRC c. The PRC and BOA b. The BOA d. The AASC 33. The PICPA shall renew its Certificate of Accreditation once every how many years after the date of the Resolution granting the petition for re-accreditation and the issuance of the said certificate upon submission of the requirements? a. 2 years b. 3 years c. 4 years d. 6 years 34. Below are the names of three CPA firms and pertinent facts relative to each firm. Unless otherwise indicated, the individuals named are CPAs and partners, and there are no other partners. Which firm name and related facts indicates a violation of the IRR of RA 9298? a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and Angela are continuing the firm) b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is omitted in the firm name) c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a sole proprietor) d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was admitted into the partnership 2 months after Bibi’s death.) - end of AT-5902 - AT-5902 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 1 of 10 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY PROFESSIONAL AND LEGAL RESPONSIBILITIES Related PSAs : PSA 240rev, 250 and 260 PSA 240(rev) – The Auditor’s Responsibility to Consider Fraud and Error in the Audit of FS 1. The primary responsibility for the prevention and detection of fraud and error rests with a. The auditor. c. The management of an entity. b. Those charged with governance. d. Both b and c. 2. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should a. Search for errors that would have a material effect and for fraud that would have either material or immaterial effect on the financial statements. b. Consider the risk of misstatements in the financial statements resulting from fraud or error. c. Search for fraud that would have a material effect and for errors that would have either material or immaterial effect on the financial statements. d. Consider the risk of material misstatements in the financial statements resulting from fraud or error. 3. The following are examples of error, except a. A mistake in gathering or processing data from which financial statements are prepared. b. An incorrect accounting estimate arising from oversight or misinterpretation of facts. c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. d. Misrepresentation in the financial statements of events, transactions or other significant information. 4. The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding fraud? a. Auditors make legal determinations of whether fraud has actually occurred. b. Misstatement of the financial statements may not be the objective of some frauds. c. Fraud involving one or more members of management or those charged with governance is referred to as “employee fraud”. d. Fraud involving only employees of the entity is referred to as “management fraud”. 5. The types of intentional misstatements that are relevant to the auditor’s consideration of fraud include I. Misstatements resulting from fraudulent financial reporting II. Misstatements resulting from misappropriation of assets a. I and II b. I only c. II only d. Neither I nor II 6. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involve a. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which the financial statements are prepared. b. Misrepresentation in, or intentional omission from, the financial statements of events, transactions or other significant information. c. Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received. 7. Which of the following illustrates a perceived opportunity to commit fraud? a. Individuals are living beyond their means. b. Management is under pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 2 of 10 c. An individual believes internal control could be circumvented because the individual is in a position of trust or has knowledge of specific weaknesses in the internal control system. d. All of the above. 8. Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in an audit of financial statements? a. The auditor is not and cannot be held responsible for the prevention of fraud and error. b. In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. c. The auditor should design test of controls to reduce to an acceptably low level the risk that misstatements resulting from fraud and error that are material to the financial statements taken as a whole will not be detected. d. When the auditor encounters circumstances that may indicate that there is a material misstatement in the financial statements resulting from fraud or error, the auditor should perform procedures to determine whether the financial statements are materially misstated. 9. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because a. The effect of fraudulent act is likely omitted in the accounting records. b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence. c. Fraud is always a result of connivance between or among employees. d. The auditor is responsible to detect errors but not fraud. 10. Which of the following statements describes why a properly designed and executed audit may not detect a material fraud? a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. b. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. d. The auditor did not consider factors influencing audit risk for account balances that have pervasive effects on the financial statements taken as a whole. 11. The auditor’s ability to detect a fraud depends on factors such as I. The skillfulness of the perpetrator. II. The frequency and extent of manipulation. III. The degree of collusion involved. IV. The relative size of individual amounts manipulated. V. The seniority of those involved. a. All of the above b. I, III and V only c. I, II, III and V only d. III and V only 12. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is a. Greater for employee fraud because of the higher crime rate among blue collar workers. b. Greater for management fraud because of management’s ability to override existing internal controls. c. Greater for employee fraud because of the larger number of employees in the organization. d. Greater for management fraud because managers are inherently smarter than employees. 13. The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error, in and of itself, indicates: a b c d a failure to obtain reasonable assurance Yes Yes Yes No inadequate planning, performance or judgment Yes No No No the absence of professional competence and due care Yes Yes No No a failure to comply with PSAs Yes No No No AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 3 of 10 14. Whether the auditor has performed an audit in accordance with PSAs is determined by a. The adequacy of the audit procedures performed in the circumstances and the suitability of the auditor’s report based on the result of these procedures. b. The absence of material misstatements. c. The absence of material errors. d. The Securities and Exchange Commission. 15. When planning the audit, which of the following is least likely a purpose of the auditor’s inquiries of management? a. To obtain an understanding of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud. b. To obtain knowledge of management’s understanding regarding the accounting and internal control systems in place to prevent and detect error. c. To determine whether management has discovered any material errors. d. To determine extent of authentication of documentation. 16. Which of the following best describes what is meant by the term “fraud risk factor”? a. Factors whose presence indicates that the risk of fraud is high. b. Factors whose presence often has been observed in circumstances where frauds have occurred. c. Factors whose presence requires modifications of planned audit procedures. d. Reportable conditions identified during an audit. 17. Which of the following is least likely a category of fraud risk factors that relate to misstatements resulting from fraudulent financial reporting? a. Management’s characteristics and influence over the control environment. b. Industry conditions. c. Operating characteristics and financial stability. d. Susceptibility of assets to misappropriation. 18. Fraud risk factors relating to management’s characteristics and influence over the control environment a. Pertain to management’s abilities, pressures, style, and attitude relating to internal control and the financial reporting process. b. Involve the economic and regulatory environment in which the entity operates. c. Pertain to the nature and complexity of the entity and its transactions, the entity’s financial condition, and its profitability. d. Involve the lack of controls designed to prevent or detect misappropriation of assets. 19. Which of the following is least likely an example of fraud risk factors relating to management’s characteristics and influence over the control environment? a. There is motivation for management to engage in fraudulent financial reporting. b. There is a failure by management to display and communicate an appropriate attitude regarding internal control and the financial reporting process. c. Non-financial management participates excessively in, or is preoccupied with, the selection of accounting principles or the determination of significant estimates. d. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity. 20. The following are examples of fraud risk factors relating to industry conditions, except a. There is a high turnover of management, counsel or board members. b. A high degree of competition or market saturation, accompanied by declining margins. c. A declining industry with increasing business failures and significant declines in customer demand. d. Rapid changes in the industry, such as high vulnerability to rapidly changing technology or rapid product obsolescence. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 4 of 10 21. Which of the following is most likely an example of fraud risk factor relating to management’s characteristics and influence over the control environment? a. There is a strained relationship between management and the current or predecessor auditor. b. Inability to generate cash flows from operations while reporting earnings and earnings growth. c. Significant related party transactions which are not in the ordinary course of business. d. Significant, unusual or highly complex transactions (especially those close to year-end) that pose difficult questions concerning substance over form. 22. Examples of fraud risk factors relating to susceptibility of assets to misappropriation include the following, except a. Large amounts of cash on hand or processed. b. Inventory characteristics, such as small size combined with high value and high demand. c. Easily convertible assets, such as bearer bonds, diamonds or computer chips. d. Lack of appropriate management oversight. 23. Judgments about the risk of material misstatements resulting from fraud may affect the audit in the following ways, except a. The application of professional skepticism may include increased sensitivity in the selection of the nature and extent of documentation to be examined in support of material transactions. b. The knowledge, skill and ability of members of the audit team assigned significant audit responsibilities need to be commensurate with the auditor’s assessment of the level of risk for the engagement. c. The auditor may decide to consider further management’s selection and application of significant accounting policies, particularly those related to revenue recognition, asset valuation or capitalizing versus expensing. d. The auditor’s ability to assess control risk at high level may be reduced. 24. The nature, timing and extent of procedures may need to be modified in the following ways as possible responses to the auditor’s assessment of the risk of material misstatement resulting from both fraudulent financial reporting and misappropriation of assets. a. The nature of audit procedures performed may need to be changed to obtain evidence that is more reliable or to obtain additional corroborative information. b. The timing of substantive procedures may need to be altered to be closer to, or at, year-end. c. The extent of the procedures applied will need to reflect the assessment of the risk of material misstatement resulting from fraud. d. All of the above. 25. The auditor may encounter circumstances that, individually or in combination, indicate the possibility that the financial statements may contain a material misstatement resulting from fraud or error. These circumstances include the following, except a. Unrealistic time deadlines for audit completion imposed by management. b. Conflicting or unsatisfactory evidence provided by management or employees. c. Information provided unwillingly or after unreasonable delay. d. Transactions recorded in accordance with management’s general or specific authorization. 26. Which of the following circumstances most likely indicate the possibility of fraud or error? a. Management engages in frank communication with appropriate third parties, such as regulators and bankers. b. Evidence of an unduly lavish lifestyle by officers or employees. c. Conservative application of accounting principles. d. Minimal differences from expectations disclosed by analytical procedures. 27. Which of the following should the auditor likely to do when the application of planned audit procedures indicates the possible existence of fraud or error? a. The auditor should resign in order to avoid legal responsibility. b. He should discuss the matter with the person whom he believes is involved with the irregularities. c. He should consider the potential effect on the financial statements. d. He should refer the suspected fraud or error to the internal auditor. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 5 of 10 28. If the auditor believes an indicated fraud or error could have a material effect on the financial statements, the nature, timing and extent of the procedures to be performed depends on the auditor’s judgment as to a. The type of fraud or error. b. The likelihood that a particular type of fraud or error could have a material effect on the financial statements. c. The likelihood of their occurrence. d. All of the above. 29. The auditor should document a. Fraud risk factors identified as being present during the auditor’s assessment process. b. The auditor’s response to fraud risk factors identified. c. Both a and b. d. Neither a nor b. 30. The auditor least likely obtains written representations from management that the management: a. Acknowledges its responsibility for the implementation and operations of accounting and internal control systems that are designed to prevent and detect fraud and error. b. Believes the effects of those uncorrected financial statement misstatements aggregated by the auditor during the audit are material, both individually and in the aggregate, to the financial statements taken as a whole. c. Has disclosed to the auditor all significant facts relating to any frauds or suspected frauds known to management that may have affected the entity. d. Has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud. 31. Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the appropriate level of management on a timely basis is important because it enables management to take action as necessary. Ordinarily, the appropriate level of management is a. At least equal to the level of the persons who appear to be involved with the misstatement or suspected fraud. b. At least one level above the persons who appear to be involved with the misstatement or suspected fraud. c. The audit committee of the board of directors. d. The head of internal audit department. 32. The auditor may encounter exceptional circumstances that bring into question the auditor’s ability to continue performing the audit, including where a. The entity does not take the remedial action regarding fraud that the auditor considers necessary in the circumstances, even when the fraud is not material to the financial statements. b. The auditor’s consideration of the risk of material misstatement resulting from fraud and the results of audit tests indicate a significant risk of material and pervasive fraud. c. The auditor has significant concern about the competence or integrity of management or those charged with governance. d. All of the above. PSA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements 1. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to a. Increase the assessed level of control risk. b. Recommend remedial actions to the audit committee. c. Evaluate the effect on the financial statements. d. Determine the reliability of management’s representations. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 6 of 10 2. Mac, CPA, is auditing the financial statements of TL’s Retailing, Inc. What assurance does Mac provide that direct effect illegal acts that are material to TL’s financial statements, and illegal acts that have a material, indirect effect on the financial statements will be detected? Direct effect illegal acts Indirect effect illegal acts a. Reasonable None b. Reasonable Reasonable c. Limited None d. Limited Reasonable 3. The most likely explanation why the auditor’s examination cannot reasonably be expected to bring all illegal acts by the client to the auditor’s attention is that a. Illegal acts are perpetrated by management override of internal accounting controls. b. Illegal acts by clients often relate to operating aspects rather than accounting aspects. c. The client’s system of internal accounting control may be so strong that the auditor performs only minimal substantive testing. d. Illegal acts may be perpetrated by the only person in the client’s organization with access to both assets and the accounting records. 4. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the a. Illegal act affects auditor’s ability to rely on management representations. b. Illegal act has material financial statement implications. c. Illegal act has received widespread publicity. d. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements. 5. If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take? a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected illegal acts will be communicated to stockholders. b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on the financial statements. c. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements. d. Notify each member of the audit committee of the board of directors about the nature of the acts and request that they advise an approach to be taken by the auditor. 6. An audit client’s board of directors and audit committee refused to take action about an immaterial illegal act that was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor’s decision to withdraw was primarily due to doubt concerning a. Inadequate financial statement disclosures. b. Compliance with the laws. c. Scope limitations resulting from the inaction. d. Reliance on management’s representation. 7. Which of the following is incorrect about the auditor’s responsibility of evaluating noncompliance by the entity to laws and regulations? a. An audit cannot be expected to detect noncompliance with all laws and regulations. b. Noncompliance refers to acts of omission or commission by the entity being audited which are contrary to prevailing laws or regulations. c. Noncompliance includes personal misconduct of entity management or employers though they are unrelated to the entity’s business activities. d. Detection of noncompliance, regardless of materiality, requires considerations of the implications for the integrity of management or employees. 8. What is expected of auditor in determining noncompliance by an entity to existing laws and regulations? a. Whether an act constitutes noncompliance is a legal determination that is ordinarily within the auditor’s professional competence. b. The auditor’s training, experience and understanding of the entity and its industry cannot provide a basis for recognition that some acts coming to the auditor’s attention may constitute noncompliance with laws and regulations. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 7 of 10 c. The determination as to whether a particular act constitutes or is likely to constitute noncompliance is generally based on the understanding of the auditor but ultimately can only be determined by an expert who is qualified to practice law. d. In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with the framework. 9. When the auditor becomes aware of information concerning a possible noncompliance to laws or regulations, the auditor should appropriately: a. Obtain an understanding of the nature of the act and the circumstances in which it has occurred, and evaluate the possible effect on the financial statements. b. Discuss his suspicion with the management. c. Ask management to determine whether a violation is really committed. d. Consult with the entity’s legal counsel as to what appropriate action the auditor should do. 10. If the auditor suspects that members of senior management, including members of the board of directors, are involved in noncompliance to laws as regulations, and he believes his report may not be acted upon, he would: a. Do nothing. b. Issue a disclaimer of opinion. c. Consider seeking legal advice. d. Make special investigation in order to fully determine the extent of client’s noncompliance. 11. Which of the following circumstances regarding the entity’s noncompliance to laws or regulations may cause the auditor to resign from an engagement? a. The auditor is unable to determine whether noncompliance has occurred. b. If the auditor concludes that the noncompliance has a material effect on the financial statements and has not been properly reflected in the financial statements. c. When the entity does not take remedial action that he considers necessary in the circumstances even when the noncompliance is not material to financial statements. d. When the disclosure of the effect of noncompliance to legal authority is necessary. 12. Examples of the type of information that may come to the auditor's attention that may indicate that noncompliance with laws or regulations has occurred least likely include a. Investigation by government departments or payment of fines or penalties. b. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its industry or to the services actually received. c. Unusual transactions with companies registered in tax havens. d. Media comment. PSA 260 – Communications of Audit Matters with Those Charged with Governance 1. Which statement is incorrect regarding PSA 260? a. The purpose of this PSA is to establish standards and provide guidance on communication of audit matters arising from the audit of financial statements between the auditor and those charged with governance of an entity. b. These communications relate to audit matters of governance interest as defined in this PSA. c. This PSA provides guidance on communications by the auditor to parties outside the entity, for example, external regulatory or supervisory agencies. d. All the above statements are correct. 2. Which statement is incorrect regarding the auditor’s communications of audit matters with those charged with governance? a. The auditor should communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an entity. b. Those charged with governance ordinarily are accountable for ensuring that the entity achieves its objectives, financial reporting, and reporting to interested parties. c. “Audit matters of governance interest” are those that arise from the audit of financial statements and, in the opinion of the auditor, are either important or relevant to those charged with governance in overseeing the financial reporting and disclosure process. d. Audit matters of governance interest include only those matters that have come to the attention of the auditor as a result of the performance of the audit. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 8 of 10 3. The role of persons entrusted with the supervision, control and direction of an entity a. Governance c. Government b. Board of directors d. Management 4. Which statement is correct regarding “audit matters of governance interest”? a. These are matters that arise from the audit of financial statements and, in the opinion of the auditor, are either important or relevant to those charged with governance in overseeing the financial reporting and disclosure process. b. These include only those matters that have come to the attention of the auditor as a result of the performance of the audit. c. The auditor is required, in an audit in accordance with PSAs, to design procedures for the specific purpose of identifying these matters. d. The auditor is not required to communicate these matters with those charged with governance of an entity. 5. Which statement is incorrect regarding the auditor’s communications of audit matters with those charged with governance? a. The auditor should communicate audit matters of governance interest upon completion of the engagement. b. The auditor’s communications with those charged with governance may be made orally or in writing. c. When audit matters of governance interest are communicated orally, the auditor documents in the working papers the matters communicated and any responses to those matters. d. Ordinarily, the auditor initially discusses audit matters of governance interest with management, except where those matters relate to questions of management competence or integrity. Other Professional Responsibilities 1. An auditor’s overall objective in a financial statement audit is to a. Determine that all individual accounts and footnotes are fairly presented. b. Employ the audit risk model. c. Express an opinion on the fair presentation of the financial statements in accordance with generally accepted accounting principles. d. Detect all errors and fraud. 2. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the a. Partner assigned to the audit engagement. c. Auditor in-charge of field work. b. Management of the company. d. Securities and Exchange Commission. 3. Reasonable assurance means: a. Gathering of all available corroborating evidence for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole. b. Gathering of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole. c. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements, taken as a whole, are free from any misstatements. d. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements are free of material unintentional misstatements. 4. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a. the audit program. c. generally accepted auditing standards. b. the auditor’s judgment. d. the auditor’s working papers. 5. Which of the following best describes a trend in litigation involving CPAs? a. A CPA cannot render an opinion on a company unless the CPA has audited all affiliates of that company. b. A CPA may successfully assert as a defense that the CPA had no motive to be part of a fraud. c. A CPA may be exposed to criminal as well as civil liability. AT-5904 Downloaded by Prjshxjs sjwnehfhkbfhrbqjfkebciwnt ([email protected])  lOMoARcPSD|40026582 Page 9 of 10 d. A CPA is primarily responsible for a client’s footnotes in an annual report filed with the SEC. 6. In performing MAS engagements, CPAs should not take any positions that might a. Constitute advice and assistance b. Provide technical assistance in implementation c. Result in new organizational policies and procedures d. Impair their