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ATPW-7501
CPA REVIEW SCHOOL OF TH PHILIPPINES
M ;: n i 1 oi
AUDITING THEORY CPA Review
1. The Philippine Framework for Assurance Engagc!ments identifies two types of assurance
engagements a practitioner ts pernittec to pe rfc rm: a reasonable assurance engagement
and a limited assurance engagement. Which ot the follo"'!ing is the objective of a limited
assurance engagementi
A. A reduction in assurance engagement risk tc a very low level in the circu01stances of
the engagement as a basis for a diclaimer ot the practitioner's conclusion.
B. A reduction in assurance engagement r!.k to an acceptably low level in the
circumstances of the engagement as a basi for a positive form of expression of the
practitioner's conclusion.
C. A reduction in assurance engagement nst. to a leve! that is acceptable in the
circumstances of the en agement: as a .basis fvr ct negative form of expression of the
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practitioner's conclusion.
2. The subject matter of an assurance eng2gemen1: can take the following forms, except
A. Historical or prospective financial statemel'lts.
B. Performance of an entity that could indicte effi,iency and effectiveness.
C. The entity's internal control.
D. Evaluation of a capital investment proposal.
3. This refer; to the audit procedures that, in tile cuditor's judgment and based on the PSAs
are deemed appropriate in the circumstanc to Khieve the objective of an audit.
A. Analytical procedures. C. Audit sampling.
B. Scope of an audit. D. Dccumentation.
4. A firm of CPAs may use policies and procedure such as notifying professional personnel
as to the names of audit clients having publicly '1eld securities and confirming periodically
with such personnel that prohibited ii:l a tio ns do not exist. This is done to achieve
effective quality control in which of the tollo'l'.!ing 9reas? ! :
5 . The decision as to whether the criteria are s11itable involves considering whether the
subject matter of the assurance engagement is capable of reasonably consistent
evaluation or measurement using such criteria. Which of the following characteristics is
not considered necessary in determinin! whethe the criteria are suitable?
A. Relevance. C. Reliability.
B. Neutrality. D. Sufficiency.
6. Which of the following conditions most i1keiy w< 1U1d pose the greatest risk in accepting a
new audit engagement>
A. Staff will need to be rescheduled to rnver thi0; new client.
B. There will be a client-imposed scope limitatio1.
C. The firm will have to hire an expert in one acdi;: area.
D. The client's financial reporting s1stem has be::n in place for 10 years.
As a condition of obtaining a Joan from Metro Ma n i !:3 Be l.:, Maasim Corp. is quired to submit
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7.
an audited statement of financial position but not te ated statements of income, changes
in equity, or cash flows. Maasim would like to e-1qa,;e ,j CPA to audit only its statement of
financial position. Under these circumstances. rl1e :PA
It May not audit only Maaslm's statement: f fir ,'. i ncia l position if the amount of tlie loan is
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CPA REVIEW SCHOOLOFTHE PHILIPPINES jCPAR1
ATPW-7501
B. May not audit only Maasim's statement of i'inoncial position if Maasi is not a listed ntity.
C. May audit only Masim's statement of financi2 I position if the CPA d1scla1ms an opinion
. . on
the other financial statements.
D. May audit only Maasim's statliment of fina11Cial position if access to: the information
underlying the basic financial statements is no1: limited.
8. Using your knowledge of the relationships amon acceptable audit risk, in erent
risk, contr ol
_ ne tJ
h
he
risk, planned detection risk, tolerable. misstaterr.ent, and planned evidence, detrmi
factors,
effect on planned evidence (increase or decrease) of changing each of the following
while the other factors remain unchanged.
A B c D
1. An increase in acceptable audit risk. ir.crec.se Decrease Increase. Decrease
2. An increase in inherent risk. Decrease . Decrease Increase Increase
3. A decrease in control risk . lncrec:se
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Increase Decrease Decrease
4. An increase in planned detection risk. Increc1se ,Decrease Increase Decrease
5. An increase in tolerable misstatemer1t lncre1se Increase Decrease Decrease
9. Which of the following payroll control activities would most effectively ensure that
payment is made only for v1ork performed?
A. Require all employees to record amval ad departure by using the time clock.
B. Have a payroll clerk recalculate all time earns .
10. Which. of the following statements ordinarily is not included among the written client
representations made by the chief executi>;e off cer and the chief financial officer?
A. "Sufficient evidential matter has been ma,je available to the auditor to permit the
C. !;)sensitive to variations.
8. Consistent with prior periods. D. Similar to industry guidelines.
12. When CPA firms do an audit of historical financial statements, part of the audit usually
consists of identifying operational problems and making recommendations that may
benefit the audit client. The recommenaation; can be rnade orally but they are typically
made by use of a .
A. Letter of represemations. C. :'-lanagement letter.
B. Engagement letter. D. Client letter.
13. ---- refers tu the appiication of relP-vant training, knowledge ano experience,
within the context provided by auiting, accounting and ethical standards in maklng
informed decisions about the courses of action that are appropriate in the circumstances
of the audit engagement.
A. Professional judgment. C. Frofessronal skepticism.
B. Reasonable assur<nce. D. Compliance .
14. Which
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l5. When the auditor issues an erroneOL1s opini0:1 as the result of an underlying failure to
comply with the requirements of standards.on 3Uditing, it results in
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ATPW-7501
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D. The firm should establish policies and procdures requiring appropriate documentation
to provide evidence of the operations of eiJ :h element of its system of quality control.
17. Criteria 1 r
need to be available to the intended JJSers in an ass u aric! 'eng ag em ent o allow
them to understand how the subject mat'ter r.as been evaluated or measured. Which of.
the following is not among the ways by whic.1 these criteria could be made available to
the intended users?
A. Publicly
B. Through inclusion in a clear m a ner i1 n the presentation of the subject matter.
information.
C. Thro ugh inclusion in the firm's office policy manual .
D. Thro ug h inclusion in a clear manner in the assurance report.
18. The most reliable procedure for an auditor to use to test the existence of a client's
inventory at an outside lo cation woulu be to:
A. h
Observe physical counts of t e inventory itms.
B. Trace the total on the inventory liring rn tt1e generai ledger inventory account.
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C. Obtain a confirmation from the client indic<-.ting nven tory ownership.
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D. Analytically compare the current:year inve11t:0ry bala ce to the prior-year balance.
fraud.
20. The primary purpose of performing analytical prxedures in the planning phase of an audit is
to
A. Help the auditor ootain an understa ding of 1.ne client's industry and business.
21. Which of the following circumstances would <.n auditor most likely consider a risk faCtor
n
rel ati g to misstatements arising from fraudulE nt financial reporting?
A. Several members of managemem hcfve r :cently purchased additional shares of the
entity's stock. .
B. Several members of the board or dir ect 1 s have recently sold shares of the
o en tity 's
stock.
C. The entity distributes financial forecasts tc fin a
anci l analysts that predict conservative
o erating esults .
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CPREVIEWSCHOOLOFTHEPHILIPPINES(CPAI:J ATPW-7501
less important.
23. The auditor's risk assessment procedures shoulj always include the following, except
A. Inquiries of management and .of others within the entity.
B. Analytical procedures.
C. Observation and inspection.
D. subsi:antive test procedures and tests oi' co;1trols.
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25. The auditor should obtain an understanding ol the entity's objectives and strategies, and
those business risks that may result in risk5 of material misstatement. Which of the
following statements concerning file entity's business risk is incorrect?
A. Business risk is broader than the risk of material misstatement of the financial
statements, though it includes the latter.
B. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatement.
C. The auditor has a responsibility to identify or assess all business risks.
D. Business risk may arise from the developr.ient of new products or services that may
fail. "
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26 A retailing entity uses the Internet to execute arid record its purchase transactions. The
entity's auditor recognizes that the documentatipn of details of transactions will be
. retained for only a short period of .time. To compensate for this limitation, the auditor
27. Which of the followinr statements concerning itUdit risk and its components is incorrect?
A. Regardless of the assessed levels of inhE!rent and control risks, the auditor shQuld
always perform some substantive proce.jures for material account balances and
classes of transactions.
B. The higher the assessment of inherent :ind control risks, the more evidence the
auditor should obtain from the performano! of substantive procedures.
C. The assessed level of inherent risk need n)t be considered in determining the nature,
timing, and extent of substantive proceciures required to reduce audit risk to an
acceptably low levet.
D. After obtaining an understanding of tne a :count ing and internal control systems, the
auditor should m::ike a preliminary assessinel'}t of cntrol .r.is
t the assertion level,
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for each material account balance or c ss of tran sact i ons.
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When obtaining an understanding of control!; that relevant to the audit, the auditor is .
required to
A. Evaluate the design of those controls.
29. If an auditor is satisfied that sufficient evidence supports management's assertions about
an uncertainty and its presentation or d isc losure, the auditor should
A. Express a modified opinion with an Emphasis of Matter paragrap h.
B. Express an unmo difi ed opinion w ith an Emph:isis of Matter paragraph.
C. Express an unmodified opinion ith an Other Matter paragraph.
D. Express a qualified opinion or disclaim an opi1ion, depe nding upon the materiality of
the loss.
30. A client makes test counts on the bats of J s: 1tistical plan. The auditor observes such
counts as are deemed necessary and is ab1e to : i ecome satisfied as to the reliability of the
client's procedures. In reporting on the results .: r tile audit, the auditor
A. Must qualify the opinion if the inverli:Ories w-cre material.
B. Can express an unmodifted o pin ion.
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end inventories.
r:>. Is required to disclaim an opinion ir the lnvertories were material.
31. Which of the following audit procedures most l1<ely would assist an auditor in identifying
conditions and events that may indicate sub5 :antial doubt about an entity's ability to
co ntinu e as a g oi ng concern?
A. Confirming with third parties the details gf ar raagements to maintain financial support.
B. Comparing the entity's depreciationand assEt capitalization policies to other entities in
the ind ustry.
C. Reconciling the cash balance per books witi1 the cutoff bank statement and the ba1k
confirmation.
D. Inspecting title documents to verify whether any assets are pledged as collateral. . "
32. Which of the following factors would most !ikely influence an auditor's consideration of ttie
reliability of data when performing analytical pre cedures?
A. Whether the data were developed m a computerized or a manual accoun tin g sy stem .
B. Whether the data were prepared on the cast 1 basis or in conformity with PFRS.
C. Whether the data were developed unjer a ' stern with adequate controls.
D. Whether the data were processed 1n an '?n111. system or a batct\111try system.
B. Application controls relate to various aspects ,-f the TT function including physical securi"ty
and the processing of transactions in various c.;c!es.
c. Application controls relate to all aspeccs of thf IT function.
D. Application controls relate to the processing of individual transactions.
34. An entity's management is responsible for thE preparation and fair presentation of the
financial statements. lts responsibility' includes he fol low in g, except
A. Designing, implementing, and.maintaining i 1terna1 control relevant to the preparation
and presentation of financial statements.
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CPAREVIEWSCHOOLOF THE PHILIPPINES(CPAR) "ATPW-7501 ..
36. The following statements relate to the use )f analytical procedures as substantive
procedures. Which is false7
A. Substantive analytical procedures are applic2ble when there is only a small. volume of
transactions. ,
B. The application of substantive analytical pro:edures is based on the expectation that
relationships amonJ data exist and continue n the absence of known conditions to the
contrary.
C. The presence of relationships among data provides evidence as to the completeness,
accuracy, and occurrence of transactions captured in the information produced by the
entity's information system.
D. Reliance on the results of substantive ar alytical procedures will depend @n the
auditor's assessment of the risk that the analytical procedurs may identif>t
relationships as expected when, in fact,- a mEh!r;iar misstatement exists.,
37. The reliability of data is influenced by its source and by its nature and is dependent on the
Circumstances under which it is obtained . Which of the following should the auditor
consider in determining whether data is reliat:e for purposes of designing substantive
analytical procedures?
38. The confirmation of customers' accounts receivc:ble rarely provides reliable evidence about
39. Which of the following items is not request<!d on a standard bank account balance '
confirmation form?
A. The principal amount paid on adirect liabilit(.
B. Maturity date of a direct liability.
c. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records .
D. The accounts receivable subsidiary ledger <ind accounts payable subsidiary ledger are
maintained by the same person.
41. When using confirmations to proviae eviden:e about the completeness assertion for
i ely is
accounts payable, the appropriate population most
able iu bs1d1ary ! dger. . .
A. Amounts recordea in tr.e accounts par: ,
done busine ss.
B. vendors with whom the entity has previousy
fi!t!.
c. Invoices filed in the entity's open invoice ,
quent to t'1e balance sheet date.
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D. Payees of checks drawn in the month subs,:
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C. Purchases are made from parties re:lated to tuyers or other company offi cials .
D. Purchases are made against blanket or open purchase orders for certain tyQes of
items. .
43. When outside firms of nonaccoun tants soecializing in the taking of physical inventories are
used to count, list, price, and subsequently compute the total peso amount of inventmy
on hanq at the date of the physical count, the aL.ditor will ordinarily
A. Co nside r the reduced audit effort with l'eSpect to the physical count of inventory as a
s co pe l i m itatio n .
B. Make or observe some physical col!nts of tt e inventory, recompute certain inventory
B. The chief financial officer will not sign the rr anagement representation letter until the
.
45. Which of the followin1 is the best audit test o evaluate the accuracy of the inventory
records for materials inventory in a production OJeration?
A. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing.
B. Trace selected inventory receipts tc, perpetu<,I inventory records.
C. Vouch selected postings in the perpet ual i nv : ntory records to source docunients.
D. Perform turnover tests for materials inventor)'
46. The physical count of inventory of a ;t:taiier \vas higher than shown by the pe :petual
records. Whicn of the following could r:::olain tti =difference?
A. Inventory items had baen counted bu'( t!'w. rags. placed on the items had not bee'n
taken off the items and added to the invento !"' '1ccumulation sheets.
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B. An item purchased "FOB shipping point" 1ad not arrived yet at the date of the
inventory count and had not been reflected 1 th perpe.tual records.
c. Credit memos for several items returned by wstomers had not been recorded.
D. No journal entry had been made on the reuiler's books for several items returned ta
its suppliers.
47: d
After issuing an auditor's report, an au itor has :-io obligation to make continuing inuiries
concerning audited financial statements. unle"ss:
A. Information about a material transtiction th)'( occurred just after the auditor's report
was issued is deemed to be reliable.
B. A final resolution 1s made of a contingent liability that had been disclosed in t e h
financial statement:!;.
C. Information that existed at the report date and may affect the report comes to the
auditor's attention.
D. An event occurs just after the auditor's n:0ort was issued that affects the entity's
ability to continue as a going concern.
48. One payroll audit ob_jective is to det::rmine vhether the employees received pay in
1
amounts recoroed in the payroll journal. To acn eve this objective, the auditor should
- Determine whether a proper segreqatiori o;'duties exists tiet:Y.A!(!i recording P.ayroll
49. The following statements relate to the forrr. and wntent of working papers.
Which is
0false?
p :s
A. The a udi or should prepare working p a e which are sufficiently complete an
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detailed to provide an overall understanding c.f the audit. .
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B. The aud tor should include in the working papers information on planning the audit
work; the nature, timing, and extent of tr.e audit procedures perf rm:d ad the
results of such procedures; and the conclusions drawn from the audit ev1denc
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obtained.
C. Working papers should include documentation of every matter the au pi tor consi ders
during the audit. I
D. Working papers shcu!d include the auditor's :easoning on all sign ifican t matters which J
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I require the exercise of judgment, together wi:h his/her conclusion thereon.
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50. Which of the following factors would least lir-!y
a ec t the form, content, a d extent "of an
auditor's working papers?
A. The content of the representati0n letter.
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1' B. The identified risks of mate i alr misstat m ent .
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C. The audit methodology and tools used.
D. The significance of the audit evidence obtainE d. .
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51. Financial statements prepared in accorcancc: with a financial reporting framework
designed to meet the financial information needs of specific users are referr d to as
A. Special purpose financial statements
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6. Special purpose framework
C. General purpose financial statements
D. Specific purpose financial statements
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52. The following are examples of special purpose frc .meworks, except
A. A tax basis of accounting for a set' cf financi:1l statements that accompany an entity's
tax return.
B. The cash receipts and oisbursemer.ts basis of accouming for cash fiow information
that an entity may be requested to prcpure 1:c r creditors.
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C. Philippine Financial Reporting Standf!rds {P.FR) promulgated
by
the Financiai
Reporting Standard Council (FRSC).
D. The financial reporting provisions of i'.1 contra(t (fo[ example, a financing agreement).
53. Which of the f oilowing statements is corre<:t with respect to an auditor's report
expressing an opinion on a specific element on a financial statement?
A. The auditor who hcis expressed an adverse ()pinion on the financial statements as a
whole can never express an unmodmed opinion on a specific element in these financial
statements.
B. i
The materiality determined for a specif c eterrient of a financial statement may be
lower than the materiality determined for the entity's complete set of financial
statements.
c. Such a report can only be issued if the audit)r is also engaged to audit the entire set
of financial statements.
D. The attention devoted to the specific eleme1t is usually less than it would be if the
financial stat s
e me nt as a w hole were audited
engagement? . . . .
tth ailtic.1pated results budgets and forecasts.
A. comparing the financial stater;1ents \ I
elemen.ts .e
s;'lttr;1ent
B. Studying th.: relationships or financi x:i:wf'te
al d to conform to
predictable patterns.
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c. Inquiring of management about action
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lil tne financial statements were approved by
A. Not be e arI.1er than the date on whic
management. __ : ____________
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B. Be earlier than the date on whicr, the tinancial statements were approved by
management.
C. Coincide with the balance sheet date.
o.. Not be later than the balance sheet date.
56. Which of the fol l owing is a false stiiJ te ment conctrning fraud?
A. Fraud generally involves incentive or pr ssure tu commit fraud, a perc eived
opportunity to do so, and some rationalizatio11 of th e act.
B. Two types of misstatements relevant to tht: au d itor include material misstatements
arising from fraudulent financial r.eporting i1nd material misstatements arising from
misappropriation of assets.
C. Fraud involves actions of management but <:<eludes the actions of employees or third
parti es .
D. An audit rarely involve!'i the authentication of documentation; thus, fraud may go
u ndetected by the auditor. . '
57. Under which of the following conditions may an -auditor's observation procedure !'or
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inventory be performed du ring or after the end ,:f the period under audit?
A. When the client maintains periodic inventory records.
B. When the auditor finds minimal variations in client records and test counts in prior
periods.
C. When total i. nventory has not variedmorE! th:m 5% in the last five years.
D. When well-kept perpetual inventory recerds are checked by the client periodically by
58. An entity installed antivirus software en all its personal computers. The software wcis
designed to prevent initial infections, stop relication attempts, detect infections after
their occurrence, mark affected system compo1ents, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
A.. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too comp1ex.
59. Which of the following procedures most likely would give tM gtf.Gtest assurance that
securities held. as investments are safeguarded'
A. There is no access to securities between tr:e year end and the date of the auditor's
security count.
B. Proceeds from the sale of investments are received by an employee who does net
execution.
D. Access to securities requires the signatures rnd presence of two designated officials.
60. An auditor is determining if internal control rel<Eive to the revenue cycle of a wholesaling
entity is operating effectively in minimizing Ihe failure to prepare sales invoices. The
auditor most likely would select a ample of tra!1sactions from the population represented
.
A. Cash receipts file. C. Customer order file.
B. Shipping document file. D. S;,les invoice file.
Gl. Which of the following procedures wuuld an auditor most likely perform prior to the
balance sheet date?
A. Review subsequent ever.ts.
B. Perform search for unretorded liabiiities . '
C. Send inquiry letter to client's legal coun sel.
D. Review detail and test significant travel and =ntertainment expenses.
62. An entity's contingency plans for computer infor 1nation systems should
. .
include appropriate
backup agreements. Which of the following arrangements would be considered _!:o ---
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63. Which of the following factors would least- likely affect the extent of .the a uditor's
consideratio n of the client's internal controls?
A. The amount of time budgeted to complete :.he engagement.
B. The size and complexity of the client.
C. The nature of specific relevant controls.
D. The auditor's prior exprience with client operations.
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64 . An auditor compared the current-year gross r.nargin with the prior-year gross margin to
determine if cost of sates is reasonable. What 1ype -0f audit procedure was performed?
A . Test of transactions. C. :est of conttols.
B. Analytical procedures. D. ;est of details.
65. Image processing can be used to convert paper documents into electronic images. Which
of the following concepts distinguishes th retention of computerized audit doGuments
from the traditional hard copy form?
A. Analyses, conclusions, and recommendations are filed on electronic media and are
therefore subject to computer system controls and security procedures.
B. Evidential support for all findings is copied and provided to local management during
the closing conference and to each person eceiving the final report.
C . Computerized data files can be used irt corr puter audit proced ures.
D. Audit programs can be standardized to eliminate the need for a preliminary survey at
each location.
66. When erroneous data are detected by computer program controls, such data may be
excluded from processing and printed on an e rror repor:: . Who should review and follow
up this error report7
A. Systems analyst C. c;omQuter operator ! ":'
B. Data control group D computer programmer
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67. A receiving clerk keyed in a shipment from a remote terminal and inadvertently omitted
the purchase order number. Whi'h of the follJWing controls would most likely detect this
error?
A. Completeness check C. iequence check
B. Compatibility check D. 11.easonableness test
68. One common type of CAAT is the use of audit software to process data of audit
significance from the entity's information system . An audit software that ha widespread
popularity because it is easy to use and requin!S little computer background on the part of
the auditor; it can be used on troth mainframe and PC systems; it allows the auditor to
perform his/her tests independent of the enticy's comptJter pro essing personnel; and it
. forrn.ts and st_ructures 1s called a
can be used to audit the data in most file
A. Customized program
B. Purpose-written program
c. Utility program ,.
software (GA. ,)
D . Package or generalized audit
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CPAREVIEWSCHOOLOFTHEPHILIP
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70._ Which of the following statements
A. The auditor may combine
con ce rn ino t1 ;;:! a ditors use of assertions is correct?
the as ertio s about transactions and events with the
assertion s about acco unt bala nces
.
B . In every audit engagement, the auditor should use the assertions as described in l'SA
500, i.e., the assertions should always fa.I into three categories: assertions abqut
classes of transactions and events, account l >alances, and presentation and discl osu re .
C. There should always be a separate asseit ion related to cutoff of transactions and
events .
D. The completeness assertion deals on;1 witt whether all transactions and events that
should have been recorded have been recoded.
7 1 . Which of the followin1 would least likely affec: the appropriateness of evidence available
to an auditor?
A. The sam p ling mett1od employed bv hE: aud1 :pr to obta i n a s9(ll ple of such evidence.
B. The relevance of such evidence to th e financral statement assertW being verifieil.
.
C. The relationship of the preparer of such evicence to the entity being audited.
D. The timeliness of such evidence.
72. A uditors may use positive and/or 'neg ativ e forms of confirmation requests . An a ud ito r
most likely will use
A. The negative form for small balances.
B. The positive form, when the combined ass!SSed level of inherent an d control risk r
.related assertions is accepta bly low, an d tne neg ative form when it is unacceptably
h ig h.
C. The positive form to confirm all balances re.ardless or size.
D. A combin a tion of th e two forlJlS, with the .)ositive form used for trade balances and
the negative form for other balance.
7 3 . To reduce the risks associated with accepting Nx responses to requests for confirmations
of accounts receivable, an auditor mo.st likely w.)uld
A. I nsp e ct the faxes for fo rge ri es or aiteratiu is and consider them to be acceptable if
none are noted
Consider the faxes to be non response5 c.nc val uate them as u nadj usted di fferen ces.
.
B.
C. Verify the sources and contents of tne faxes. in teleph0ne calls to the.senders.
D. Examine the shipping documents that proviu2,evit1ence for the existence asserti on .
control identified during the audit to those c iarged with governance on a timely basis.
A. I only. C. m only.
Audit efficiency may ne i m proved when the am piing unit is defined as the i ndividua l
monetary units that comprise the popu l ation . r his technique is called
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76. In planni ng a statistical sample for a test of c< inrols, an auditor increased the expected
population deviation rate (EDR) from :he pnrn ,.-ear'. rate because of the results of the
prior year's tests of c0ntrols and tne overall. co1 1vo1 environm ent ! l auditor most likely
would then increase the planned
A. Risk of assessing control risk too low C. A:lowance for sampling risk
B. Sample size D. T.)lerable deviation rate
n. Which of the following statements is correct :on cerni ng statistical sa mpling in tests of
controls?
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CPAREVIEWSCHOOLOFTHEPHILIPPINES(CPAR) ATPW-7501
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A. In determining the tolerable rate, an a ud i:? r considers detection risk and the sample
size.
B: Deviations from specific control activities at a given rate ordinarily result iri
misstatements at a lower rate.
C. As the population size increases, the sample size should increase proportionately.
D. There is an inverse relationship between che expected population deviation rate and
the sample size.
78. The firm shall obtain written col'lfirmation of :ompliance with its policies and procedures
on independence fro m all firm personnel required to be independent by relevant ethical
requirements .
A. At least annually C. At h!ast semi-annually
79. On January 21 2015, the TANYA co. receivtd a notice from its primary suppliers that
effective immediatelv all wholesale prices would be increased 10%. On the bais of the
notice, TANYA revallled its December 3 1 , 201-l inventory to reflect the" higher costs. As a
result, the statement cf financial position ref!eCts inventory stated at an amount higher
than its net realizable value. The invento constituted a material proportion of total
. assets; however, the effect of the revaluaticx1 was matrial to current assets but not ta .
total assets or net income. In reporting on the company's financial statements for the
year ended December 31, 2014, in which inVE!ntory is valued at the adjusted amount, the .
auditor would most likely
A. Express an unmodified opinion . provided the nature of the adjustment and the
amounts involved are disclosed in notes to the financial statements.
80. SAMANTHA APARTMENTS CO. completed construction and began to lease a 100-unit
apartment on May 28, 2013. During June, 50 units were leased, and an additional 30
u nits were leased in July 2014.
During the month o1 May 2013, the company charged to expense P46,000 for the cost of
advertising, a grand opening party, and tl'e advertising agency fee for planning the
campaign. At December 31, 2014, the statement of financial position reflected Pl75,000
of initial d irect costs incurred by the company including commissions and legal tees paid in
negotiating the lease. These initial direct co:.ts are shown as ah''at:ldition to the carrying
amount of the leased asset and is being recognized as an expense over the term of the
During your audit of the company's financial !;tatements for the year ended December 31,
2014 (conducted i n accordance with PSAs), no facts other than those described abov.e
came to your knowledge that would cause your opinion to be other than that the financial
statements were presented fairly in accordance with Philippine Financial Reporting
Standards.
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CPA REVIEW SCHOOL OF THE PHILIPPIN ES
M ci n i I a
ATPW-7502
CPA Review
B. Determine whether there is substantial aouc t about the entity's ability to continue c1s a
going concern.
C . Scan the entity's records for the period iu t after the balance sheet date to tdentify
_i
subsequent events requ ring disclosure. .
.
D. Consider whether the financial statements <ir.free from obvious material mistakes in
the application of c1ccounting principles.
2. Which of the followinq describes how the ob1: ctive of 2 review of financial statements
differs from the objective of a compilation eng 1 1ement? a
3. Which of the following procedures is usually the first step in reviewing the financial
statements of an entity?
A. Make preliminary Judgments about risk ar.1 i materiality to determine the scope and
nature of the proCE'.dUieS to be perk rma.
B. Obtain a general understanding of. tt1P. entity's oran1:.!alion, its operating
characteristics, and its products or servi<:es.
C. Assess the risk of material misstatement ans1ng from fraudulent financial reporting and
the misappropriation of assets ..
D. Perform a preliminary assessment of the o!Jerating efficiency of the entity's interrral
control activities.
'
of the following pmspective financial ST f}tents is(are) appropriate for general
use?
5. Which
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6. Prior to commencing Held work, an auditor usually discusses the general audit strategy
with the client's management . Which of the following details do management and the
auditor usually agree upon at this time?
A. The specific matters to be included i.n the.communicatio n with the audit committ e. ;
B. The minimum amount of misstatements that may be considered to be reportable
conditions.
C. The schedules and analyses that the client's 5taff should prepare.
D. The effects that inadequate controls may ha11e over the safeguarding of assets.
8. Restrictions imposed Gy a client prohibit t:hf: c. bser1atior1 of phy.S i ffi ! inventories, which
account for 35% of all assets. Alternative aud,f procedures cannot 6e applied, although
o
the auditor was able to examine satisfact ry evidence for all other items in the financial
statements. The auditor should issue a(an)
A. "EXcept for" qualified opinion.
B. Disclaimer of opinion.
C. Unmodified opinion with a separate Emphasis of Matter paragraph.
D. Unmodified opinion with an explanation in the Auditor's Responsibility paragraph.
9. A client decides not to make an auditor's prop1 >sed adjustments that collectively are not
material, and wants the auditor to issue the r port based on the unadjusted numbers.
---
Which of the following statements is correct regarding the financial statement
presentation?
A. The financial statements are free from material misbtatement, and rlo disclosure is
I
1
required in the notes to the financial statemmts.
B. The financial statements do not conform witri PFRS.
C. The financial statements contain unadjustE:d misstatements that should result in a
qualified opinion.
D. The financial statements are free f.-om ma0:erial misstatement, but disclosure of the
proposed adjustments is requi red in the notES to the financial statements.
. .
10
.
. An auditor concludes that there is a mateial in. :d11sistency in the other information in an
annual repon: to shcireholders containing aL.dited financial statements. The auditor
p
believes that the financial statements o not re 1uire- revision, but the client is unwilling to
revise or eliminate the material inconsistenc> in the ofher information. Under these
circumstances, what action would the auditor m)st likely take'
A. Consider the situation closed because the other information is not in the audited
financial statements.
Issue a n "except for" qualified optt1ion "aft<r discussing the matter with the elient's
B.
audit comm ittee .
. c. Disclaim an opinion on the financial st3tements after explaining the material
r" p<1rag raph.
inconsistency in a separate "other matte
o. Revise the auditor's report to include a separate "other matter" paragraph describillg
on f
t : ;y
e ento aluation.
D. Obt ain a statement from man
a g e "' n .... p
g
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CPAREVIEW SCHOOLOF THE PHILIPPINES(CPAl{1 ATPW-7 :illt
12: After testing a client's internal cont 0l activtties, an auditor discovers a numbe r of
significant deficiencies in the operation bf " dient's internal controls. Under these
circumstances the auditor most likely would
. ,
A. Issue a disclaimer of opinion about the interial controls as part of the aud1 or s repo .
B. Increase the assessment of control risk and increase the extent of substantive tests.
C. Issue a qualified opinion of this finding as P"rt of the auditor's report.
D. Withdraw from the audit because the i nterr.;il controls are ineffective.
13. When an auditor tests the internal controls of e: computerized accounting system, whicll
of
14. An audit supervis r reviewed the work perforned by the staff to determine if the audit
was adequately performed. The supervisor acccmplished this by primarily reviewing which
of the following?
A. Checklists. C. I\ 1 a lytica l procedures.
B. Working papers. D. Fnancial statements.
15.
.
In which of the following circumstances is sJbstantive. testing of accounts receivable
. before the balance sheet date most apropriate
A. The client has a new sales incentive progra1 in place.
B. Internal controls during the remaining period are effective.
C. There is a high turnover of senior m anage m c:n t. -
D. It is 2 first engagement of a new client.
17. Which of the fol lowing strategies mo$t l i kely could im prove the response rate of the
confirmations of accounts receivable?
A. Restrict the selection of account:.; ro be :o n fi rm e d to those customers with large
balances.
B. Include a list of items or invoices thut consti :ute the customers' account balances.
C. Explain to customers that discrepancies wi!I be investigated by an independent th ird
party.
D. Ask customers to respond to the cu nrl r ma ti c n requests directly to the auditor by fa>:.
l8. A CPA firm is compleung the fieldwor;. for an ::udit of Sweden Co. for the c urrent year
ended December 31. 1-h e manager in ch a rge or. the audit: is performg the final steps in
the ev_idence accumulat_ion phase of the audit and notes that there have
been several
h n ges in Swed en during the year under a1 1dit. Which of the following items would
md1cate there could be substantiI doubt about Sweden's
ability to continue as a going
concern for a reasonable period of time: ?
A. Cash infusion by a venture capital firm .
B . Recurring o :king capital shortage
.
C. A lack of significant contracts
with n ew cu stn mers.
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CPAREVIEWSCHOOLOFTHE PHILIPPINES(CPAR)
ATY\V-7502 .
D. Term debt refinanced with a new bank.
19. Which of the following procedu res would an "auditor most likely perform in o btaining .
20. On March 1, Gu an zon , CPA, expres sed an unm odified opinion on the fin a n c ial sta teme nts
of Apex Co. On July l, Guanzon's internal inspection program discovered that engagement
personnel failed to observe Apex's physical inv1?ntory. Guanzon believe s that this qmission
impairs Guanzon's ability to support the un ,11odified opinion. If Apx's creditors re
cu rrently relying on G uanzbn 's opinion, G1,Janzo. t>pould first:
A. Request Apex's management to com rn un io te to its creditors that Guanzon's op i n i on
Reissue Guanzon's auditor's report with a,1 " other matter" paragraph describing the
B.
depa rtu re from PSAs.
C. Undertake to apply the al tern ative procedures that would provide a satisfactory ba!:ois
for Guanzon's opinion.
D. Advise Apex's board of directors todisclose this development in its next interim report.
2L A client is a defendant in a patent infrtnge ;,ent lawsuit against a major competitor. Which
of the following items wou ld least likely be i 1cluded in the attorney's response to the
auditor's letter of inquiry?
A. A decription of potentia l litigation in other natters or related to an unfavorable verdict
in the patent infringement lawsuit .
B. A discussion of case progress and th! stra!egy currently in place by client
23. A client maintains a large data center where 3ccess is iimited to authorized employE!'es.
How may an auditor best determine the effectiveness of this co ntrol a ctivity?
A. Inspect the policy m anual establishi ng this control activity.
s.
B. Ask the chief technology officer about known problem
c. Observe whether the data center monit
is ored.
.
t a possible understatement of
If the obJect1ve of an aud '1tor ' s
test of details. is . to detec
s fron: th e..
.
sales, the aud ito r most likely wo
.
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CPAREVIEWSCHOOLOFTHEPHILIPPINES
(CP AH1 ATPW-7502
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A. Sales invoices to the shipping documents.
/
B. Cah :eceipts journal to the sales journai.
r
26.
Which of the following circumsta ces would permit a n independent a uditor to accept a n
engag emen t after the dose of the fisca: year?
A. Issuance of a disclaime r of opinion as a r=sult of inability to conduct certain tests
required by generally accepted auditing sta1 1dards due to the timing of acceptance f>f
the engagement.
B. Assessment of control risk below the maximt1m level.
C. Receipt of an assertion from the precedin auditor that the entity will be zible to
continue as a goin9 concern.
D. Remedy of lim itations resulting from accepti n ttie engagement after the close of the
end of the year, such as those relat:ng to th existence of physical inventory.
27. !n a financial statement audit, inherent -?sk is e aluated to help an auditor assess which of
the following?
;s. Which of the following factors is most reieva11t when an auditor considers the cl ient's
organizational structur0. in the context oi' cont;c.: risk?
A. Management's attitude toward infor1nat1on p-ocessing and accounting departments.
B. The organization's recruiting and hiring prac1 ices.
C. Physical proximity of the accounting functior to upper management.
D. The suitability of the client's lines of reportai
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29. Which of the following statements mos( likely \/11ould be included in an engagement letter
30. Which of the following represents an inherent lin itation of internal controls?
A. Bank reconciliations are not per-formed on a :imely basis.
B. The CEO can request a check with no ourchc:.se order.
C. Customer credit checks are not perform ed.
D. Shipping documents are not matched to sale:> invoices.
31. An auditor's tests of controls for conpletene:;s for the revenue cycle usually include
determining wnether:
A. Each receivable is collected subsequent tei tl 1 2 year end.
B. An invoice is prepared fr each shippinQ doo 11Vent.
c. Each invoice is supported by a customer purr:ha"se orde:.
D. Each credit memo is properly approved.
32. An auditor is testing the reasonableness of div1c;end income from investments in publicly
. .
.
held companies. The auditor most likely would compute the amount that should have
been received and recorded by the cliem by:
A. Reading the details of the board of directors' meetings.
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\ iTAREVIEWSCHOOLOFTHE r HILIPP!NES(C:PAG,l
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ATPW-7502
33: An auditor who uses the work of an ex'pert ma' refer to the expert in the auditor's.report
if the:
A. Auditor bel ieves that the expert's findings ar reasonable in the circumstances.
B. Expert's findings support the related assertirns in the financial statements.
C. Auditor modifies the report because of the difference between the client's and the
expert's valuations of an asset.
D . Expert's findings provide the auditor" wit1 greater assurance of reliability about
management's representations.
34 . . In attri bute sampling, a 25% change in which of the fol lowing factors will have the
smallest effect on the size of the sample?
A. Tolerable rate of deviation .
B. Number of items in the population.
C. Degree of assurance desired.
! 1:
0. Planned assessed level of control risk.
A. The deviation rate in the auditor's sample is less than the tolerable rate, but the
.
.
deviation rate in the population exceeds the tolerable rate.
B. The deviation rate in the auditor's samp!e e>:ceeds the tolerable rate, but the deviation
rate in the population is less than th to:erable rate . .
C. The deviation rates of both the auditor's sample and the population xceed the
tolerable rate.
D. The deviation rates of both th auditor's sample and the population are less than the
tolerable rate.
For which of the following audit tests would a CPA most likely use attribute sampling?
.
36.
A. Identifying entries posted to incorrect accow1ts.
B. Estimating the amount in an expense accour1t.
C. Evaluating the reasonableness of depreciaticn expense.
D. Selecting receivables fo r confirmation of aw ;unt balances .
. .
confirmations rnay
. '
be less efficient than the
38. An accountant agrees r.o the client's request. to i:ha nge an engagement from a review to a
.
compilation of financial statements. Thfl compilation report should include:
.
A. No reference to the origin al engag ement:
B. Reference to a depa rture from PSP..s . .
c. scope l i mitations that may have resulted in the change of engage ment.
y perfor med.
D. Inform ation about review procedures alread
regarding:
A. The predecessor's evalu ation of au?
.
1t nk
dgment a bot ma tena
a n JU 1ty
1 .
.
p essor, s audit rep rt wa issued.
ts that occur red s1.nce ;:he edec
B. Subs eque nt even
as to the r<!asons for the chan ge in auditors.
C. The p1-e decessor 's 1.inderstand ing
g 1natter 01 con tmu11J g.g rnf1cance.
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CPA REVIEWSCHOOL OETHE PHILIP
PINE S (CPA i; . ATPW-7502
A. Make inquiries to understan
d the p rnti i :: msequerice of the deviation .
B. Assume that the deviation is a n isolated "occurrenc without audit significance.
e
C. Report the matter to the next higher level
D. I ncrease sample size of tests of
o t authority within the entity.
controls.
44. Which of the followino would be a c onsider;icion in planning a sample for a test of
,.. subsequent cash receipts?
A. Preliminary judgments about materiality leves .
B. The amount of bad debt write-offs 1n the pm1r year.
C. The- size of the intercompany receivoble bala Ke.
'
" The auditor's allow;:ible risk of asses::;i:ig conirol risk is too low.
45. An auditor reconciles the total of the acc ou nts r =ceivable subsidiary ledger to the general
ledger control account as of October 3l, 20XJ . By this procedure the auditor would be
most likely to learn which of the followirig?
46. Auditors try to identify pred i ctab le rlationsh1p3 when applying analytical procedures.
Relationship involving transactions from which o : the following accounts most likely would
yield the highest level of evidence?
A. Interest exnse. C. Ac :ounts receivable.
B. t-.llowance for doubrful accoun'; . :.:.. f.I 0unts payab!e.
. . ' =
.
47. Which of management
the following roles -.vould typically be acknowledged i n a
management representation letter?
A. Management has the responsibility h.'r the dsign of controls to detect fraud.
B. Management_ communicates its \Aiews on eth11:al behavior to its employees.
C. Management's knowledge of fraud is comrnu1 1!cated to the audit committee.
D. Management's compensation is contingent uron operating results.
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CfA..MYIEWSCHOOLOF THEPHILIPPINES(CPARl ATPW-7502
48. What type of evidence would provide the h i1nest levei of assurance in an assurance
engagement?
49. Which of the following procedures wouid be m ost appropriate for testing the
) completeness assertion as it applies to inventOI''?
A. Scanning perpetual inventory, production, and purchasing records.
B. Examining paid vendor invoices.
C. Tracing inventory items from the ti.lg listing Dack to the physical inventory quantities.
D. Performing cutoff procedures for shipping ilr.1d receivi n g .
50. Whi c of the followin1 activiti=s perforr.iec! by . 1 department supervisor most likely would
help in the prevention or detection of a payroll t rauc1?
A. Distributing paychecks directly to de::iartmer t employees.
B. Setting the pay rate for .departmental emplo 1ees .
. .
51. An auditor is concerned about a policy If i!ian gement ove rride as a limitation of internal
control. Which of the following tests would oest assess the validity of the auditor's
concern?
A. Matching purchase orders to accounts payat le.
B. Verifying that approved spending limits are not exceeded.
C. Tracing sales orders to the revenue account.
S3. In whicfl of the following circumstances wouic1 an auditor expect to find that an entity
im plemented automatE:d controls to reCi uce risk; ol misstatement?
! 1 1
Which of tile followin1 explanations best describes why an auditor may decide to reduce
objective?
tests of details for a particular audit
soon aftr the :)alance sheet date.
A. The audit is being performed
ced in performing thf planned proced ures.
B. Audit staff are experien
s have revea l ed no unusJ al or unexpected results.
C A lytical -1roce dure
0. :
re wer ma ny transactio
ns posted to the account during the period.
Existence or
Presentation
and disclosun
occuirence
Yes
A. Yes
No
Yes
B. Yes
c. No
Nu . '
D. No
CPP:REVIEWSCHOOLOFTHE PHILIP(CPAR)
PINES ATPW-7502
56. When a company's stock record books are maintained by an outside registra r or tran;fer
agent,. th e auditor should obtain confirmation from the registrar or tran sfe r agent
concerning the:
57 Which rn= the foll ow i ng outcomes 1s t1 likely t eneftt of information technology usec for
1:
internal control?
58. When an auditor has substantial douot about: an entity's ability to continue as a going
concern because of the probable discontinua.1Ce of operations, the auditor most likely
would express a qualified opinion if:
A. The effects of the adverse financial conditio 1s likely will cause a bankruptcy filing.
B. Information about the entity's ability to cont inue as a going concern is not disclosed.
C. Management has no plans to reduce or del<1y future expenditures.
D. Negative trends and recurringoperating los!ies appea: to be irreversible.
59. An auditor plans to apply substantive tests to r.1e details of asset and liability accounts as
of an interim date rather than as of th e balanc :l sheet date. The auditor should be aw8:re
that this pra ctice :
A. Eliminates the us1?. of certain stat!Stical sampling methods that would otherwise be
available.
B. Presumes that the auditor will repeforrn chi ! tests as of the balance heet date. .
C. Should be especially cotisidered when here .ar rapidly changing economic conditions.
' D. Potentially increases the risk that error th 1t exist at the balance sheet date will not
be detected.
60. A practitioner's report on agreed-upon procedures that is in the form of procedures and
findings should contain:
A. Negative assurance that the procedures c:id not necessarily disclose all reportable
conditions.
B. An acknowledgment of the practitioner's responsibility for the sufficiency of the
procedures.
C. A statement of restrictions on the use of thE report.
D. A disclaimer of opinion on the entity's financial statements.
31. Which of the followin9 statements is corre.c:t about the sample size in statistical sampling
when testing internal controls?
A. Tue auditor should consider the tolerable rate of deviation from the controls being
tested in determining sample size.
B. As the likely rate of deviation decreases, the auditor should increase the planned
sample size.
C. The allowable risk of assessing control rik too low has no effect on the planned
sample size. . = ,
D. Of all the factors to be considered, th population size has the greatest effect-on the
sample size.
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63. A successor auditor is required to attempt c;m m1..1 nication with the predecessor auditor
:
'
prior to:
A. Performing test ot controls.
B. Testing beginning balances for the current 1ear.
C. Making a proposal for the audit engagemert.
D. Accepting the engagement.
Which ol' the followinq factors most lii-:eiy woLld cause a CPA to decline to accept a new
! 1:
66 .
audit engagement?
A. The CPA does not understand the entity's cperations and ind ustry.
.
B. Management acknowledges that the entity 1as had recurring operating losses.
C. The CPA is unable to review ttie predecesscr auditor's working papers.
D. Management is unwilling to permit inquiry o'.
its legal counsel.
67. As a result of tests of controls, an auditor as>esses control risk too high. Zhis i ncorrect
assessment most likely occurred because:
A. Control risk based on the auditor's sample :S less than the true operating effectiveness
of the client's control activity.
B. The auditor believes that the control activity relates to the client's assertions when, in
----
fact, it does not.
C.. The auditor believes that the controi activity will reduce the extent of substantive
testing when, in fact, it will not.
D. Control risk based on the auditor's sar,1 ple is greater than the true operating
effectiveness of the client's control activity.
68. An auditor's report on financial statements prepared in accordance with the financial
reportin9 provisions of a contract (that is, a pecial p urpose framework) to comply with
the provisions of that contract should incluc!e o .I of the following, except
A. An opinion as to whetner the financi I staif!Qle11ts are presented fai rly, in a l l material
respects, in accordance with the financial npo'rting provisions of the contract.
B. A statement that indicates the basis of acc(unting used.
c. An opinion as to whether the basis of ;iccounting .used is appropriate under the
circumstances.
o. Reference to the note to the financial statements that describes the basis -0f
presentati on.
. .
. 69. When an auditor reports on financial state r;ien-:s repared on an entity's income ta'x basis,
the audi tor's report shou ld
financial statements.
D. Include an explan ation of how the results of operations differ from the cash receipts
accounting .
and disb ursements bas is of
70.
entity, the audit or may wiil coll)ply yvith relevant ethical
A. Accept th e en agen:i en t
provided the <: uditor
those pertain ina - to indepe :
ndeno'? 'elating to fjnancial
me nts, inc lud ing
require
to the au dit.
s rele van t
ts an d a 11 PSA
stateme nt aud it eng age men
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.,
C. Not accept the engageme nt uniess also en(.aged to audit the full financial stateme nts
of the entity.
71 . An auditor has i den ti fie d the controller:; revie of the bank reconciliation a s a control to
test. In connection wi-ch this test, the auditor !11terviews (he controller tu understand the
specific data reviewed on the reconciliation. In 3dition, the auditor verifies that the bank
".73. Two overriding considerations affect the man y v ays an a u d itor can accumul ate evidence:
1. Sufficient appropriate evidence must b1 accumulated to meet the auditor's
professional responsibility.
2. Cost of accumulating evidence should be mmimized.
74. Wh ich of the following is not ordinarily performd in response to the risk of managem erit
override?
A. Evaluating the rationale for significant unusual transactions.
B. Observe counts of inventory at all locations.
C. Review accounting estimates for bia::;.
D. Test appropriateness of journal entries and < djustments.
75. In aud i ting an entity's computerized payroll tra11sactions, an auditor would be least likely
to use test data to test controls concerning:
A. Overpayment of employees for hours riot worked.
B. Control and distribution of unclaimed checl<.$.
C. Withholding of taxes and Social Security rnrnributions.
D. Missing employee identification numbers.
An auditor established a P180,000 tole rab l e rn sstatement for an asset with an account
th
i'6.
balance of P3,000,00l1. The auditor selecte:; a sample of every 20 item frm the
population that represented the asse acm1 .m t. balance and d iscovered a net
overstatement of Pl0,500 { P l l , 100 overstatem :it:S minus P600 understatements). Under
these circumstances, the auditor most l!kely wold conclude that
A.,. The asset account is fairly stated iiecause o,e toierable. misstatement exceeds the net
of projected actual overstatements and unde rstatemerns.
B. The asset account is fairly stated because th total projected misstatement is less than
the tolerable misstatement.
C. There is an unacceptably high ris k. th at . tl11! actual misstatements in the population
exceed the tolerable misstatement ::iecause the total projected misstatement exceeds
the tolerable misstatement.
D. There is an unacceptably hig h risk that the tolerable misstatement is more than
the
sum of actual overstatements and understatl!ments.
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78. In an audit of special purpose financial st:itements, the auditor shall obtain an
understanding of
I. The purpose for which the financial statern1nts are prepared.
79. Whenever a report, fi l ed on a printed form designed by authorities, calls upQn t:he
, , independent auditor to make an asse n:io n i:hat the audiror believes is riot justified, the
auditor should
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80. An auditor may express an opinion on an entity s accounts receivable balance even if the
.
. auditor has disclaimed an opinion on the financ,af statements taken as a whole provided .
the
A. Report on the accounts receivable is presnted separately from the disclaimer of
D. Report on the accounts receivable discloses tne rea:mr. for th e disclaimer of opinion on
the fin anci al state m ents .
82.
financi ai sta :ements that a re derived from an entity's
In the auditor's report on summary
basis of accountin g .
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CPA REVIEW SCHOOL OF THE PHILIPPINES ATPW-7503
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AUDITING THEORY CPA Review
RANDOM NOTES
2. SRC Rule 68, as amended, is effective for audit-:d financial statements covering periods
ended D ecembe r 31, 2011 and onwards, and for interim fi n a nci a l statements starting
the first quarter of 2012, and thereafter.
3. Part I of SRC Rule 68, as amended, deal with the general financial reporting
requirements of the SEC to the following entities:
4. Rule 68, as amended, deleted the term "Gem rally Accepted Accounting Principles (or
GAAP)" and replaced it with Financial eporting Framework.
5. Large and/or publicly accountable entities snail llse.as their financial reporting fra mework
'the
a. Philippine Financial Reporting Standards, or
b. Financial Reporting Framework Applicable to Banks, Insurance Companies or Pre-need
as allowed by the SEC or the appropriate reJ Jlatory agency.
6. If an SME that uses the PFRS for SMEs in a cw rent year breaches the floor or ceiling 9f
the size criteria at the end of that current year, and the event that caused the change is
considered "significant and continuing", the mtity shall transition to the applicable
financial reporting framework in the next accouming period.
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8. The failure of any of t'le prescribed signatories to sign tile SMR constitutes a material
i \.I deficiency in the financial statements.
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9 . In the case of branch offices or regional operating headquarters of foreign corporations,,
the SMR shall be signed by its local manager who is in charge of its operations within
:\ the Philippines.
:!11 10. The SMR of the entities covered undei:; Pa rt II of 'Rule 68, as amended, shall be signed
i under oath.
11. Report .of Independent Auditor when the Compa!1y Incurred Capital Deficiency
The external auditor at' a company which h s in:urred a capital deficiency shall provide in
the audit report an emphas is paragraph indicating the following information:
a. The fact that the company has incurred a e<1pital deficiency that raises an issue on its
going concern status;
b. A brief discussion of a concrete plan of the :ompany to address the capital deficiency
and reference to ti 1e note to financial stater nents that provides a complete disclosure
of the said plan;
c. A statement that the auditor conductd ;(Jfficierit audit
proc'i:Jures for verify the
In case the company fails to prese,nt to the ex;:ernal auditor a concrete plan or sufficient
supporting documen; to address the capital -deficiency, the auditor shall provide an
emphasis paragraph indicating that the company is no longer a going concern and
should use liquidation basis in the preparation of its financial statements.
12. It is considered as a violation of Rule 68, as amended, if the audited financial statements
covered by Part II of tl1e Rule with an auditor's opinion ocher than unqualified arising from
the following:
a. Deviation(s) from the required t'inanci<1I reporti ng framework; or
b. Scope limitations imposed by the comJ:ia ny.
1 3 . Under Rule 68, as amended, fraud means an intentionai act by one or more individual
among management, employees, or. third par:ies that results in a misrepresentation ,of
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financial statements which reduces or inrn! ses the consolidated total assets, total
liabilities or income of the company by 50/o.
14. Under Rule 68, as ame11ded, error means m unintentional mistak i n the finandal
statements which reduces or increases the ojrtsolidated total assets, total liabilities or
income of the company by 5/o .
15. 0The financial statement of companies not cove"ed by SRCRule 68 should be accompanied
by a certification under oath by the company's Treasurer or Chief finance
Officer.
tements .
the aud ited fina nci al sta
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18. Which of the following proced u res
1s map ropriate when .
the entity's management is
rmat1. on requiremPnts
una ble to provide the aud
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schedule format for the clien to co mplete or use as. a t
tio n statement or
gu1d e.
C. The itor shall discuss
with ma n ag ement a ,1d/or those cha rg ed with governance the
possibility of outsou rcing the
preparation 01 audit information req ui rem ents t6 third
party serv.ice providers.
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incomplete ana i nsuffi ci ent audit information
19. In situations where the client provided
requirements, the auditor shall consider the following, except
A. Communicate in writing the issues and concErns on the incomplete and i n sufficient
audit information req ui reme nts with .ma mger n ent and/or those cha rged with
govern ance.
B. Discuss if the audit information requirem nts can be revised to meet adequately the
needs of the a uditor .
C. Express a qualified or an adverse opinion.
D . Discuss with management and/or those charged with governance the possibility of
outsourcing the completion of the Information to third .party service provi ders .
20. The term "tentative financial statements" is generally used at present to refer to a s-et
of incomplete or unaudited financial statement:; accompanied by a report of an external
auditor who has not yet completed his audit of ! uch financial statements.
n. Which of the following statements :oncerni11g the form and content of inter-bank
confirmations is incorrect;'
A. The form and content of a confirmation fequst letter will d enM1n the purpose fo r p
same time.
C. The confirmation request shoul d be preparr.j in a clear and concise manner to ensure
ready comprehension by the confirming bank.
D. Whenever possible:, the confirmation requesc should be prepared in the language or .
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the requesting bank or in the language normally used for business purposes.
22. Which of the following are required to oe reported by th e external a ud itor to the BSP?
r. Any material finding during the audit involving fraud or d is honesty which .will reduce
capital funds by at least one. percent ( 1 %. .
II. Adjustments or potential losses amountinc1 to at least one percent (1 %) of capital
funds of the bani<.
III. Any finding to the effect that the total bal"1 k assets, on a going concern pasis, are no
longer adequate to cover the totai ciaims of creditors.
A. I and II only. C II ar. d III only.
B. I and III on ly . D. I. II, and III .
b. The risk of loss arising from future movements 1n the exchange rates applicable to foreign
currency assets, liabilities, rights and obligation i. Currency risk
c.
The risk of loss arising from factors s ch as 0fail Jre to maintain safe custody or negligellce in
the management or assets on behalf ?f ottler p3rties. Fiduciary risk
d. The risk that a movement in interest rates wou d have an adverse effect on the value of assets
and liabilities or would affect interest cash flow. Interest rate risk
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e. The risk that contracts are documented incorrectly or are not legally enforceable in the relevant
jurisdiction in which the contracts are to be enfcrced or where the counterparties operate.
Legal and documentary risk
.
f. The risk of loss arising from the changes in the I >an k's ability to sell or dispose of an asset.
Liquidity risk
g. The risk associated with the imperfections and subjectivity of valuation models used to
determine the values of assets or liabilities. Modeling risk
h. The risk of direct or indirect loss resulting from inadequate or failed internal proceses, people
and systems or from external events. Operaticnal risk
i. The risk of loss arising from adverse changes i n market prites, including interest rates, foreign
exchange rates, equity and commodity prices arid from movements in the market prices of
investments. Price risk
j. The risk o f loss arising from failure to comply with regulatory or legal requirements i n the
relevant jurisdiction in which the bank operates. Regulatory risk
k. The nsk of failure or a customer or counterpart} to perforrn the terms of a ontract. This
failure creates the need tb replace the failed traspction with another at the current market
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price. It is sometimes called performance risk. Replacement risk
bank's reputation arising from failure to proper11 manage some of the above risks, or from
involvement in improper or illegal activities by the bank or its senior management, such as
money laundering or attempts to cover up lossEs. Reputational risk
customer or counterparty. This will generally re suit in toss to the bank of the full principal
m. The risk that one side of a transaction'will be Sf'ttled without value being received from.the
n. The risk of loss arising from the possi bility of th bank not having sufficient funds to meet 11'$ I:
obligations, or from the bank's inability to acces capital markets to raise required funds.
Solvency risk
o. The risk of loss arising when a counterparty's ohligation is not denominated In the
counterparty's home currency. The counterpany may not obtain the currency of the obligation
irrespective of the counterparty's particular fina,icial condition. Transfer risk
24. In the exercise of its power to conduct O\'ersight into the quality of audits, the BOA
De pa rtme nt of t he
an
C. Oversight Committee
supervised by a/an
A. Executive Committee
D. Acceiu ntab i l ity Board
B. sup ervisory Board
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27. The Head of the QARD who
will be appo.. nte9 by .
A. Chief Inspector
:he Executive Committee is the
. C. Cfuef uditor
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0 . Chief l.luality Assu ra nce Reviewe r
B. Chief of Adm inistration .
30 . . CPAs in p u bl ic practice are required to reg1!;ter with the QAR program under the
prescribed category. Those whose clients are pu bl ic -in te rest entities (listed and no t-lis te.d
but with pub lic accountability) should register un jer
A. Category A C. Categ 1 iry C
B. Category B c. Categilry D
Section 19 provides that CPA practitioners sho ul d b1! registered in accordance with the following
categories:
Catego ry A - registration for CPA practitio1.1ers handling clients that use the full IFRS or
their Philippine equivalents. These would civer CPA pra cti tioners auditing ublic-interest
entities (listed and not-listed but With public ilCCOUntability).
Catego ry B - registration for CPA practitioners handling clients that. use the IFRS or their
Philippine equivalents for Small and Medium ;ized enterprises.
:: n . What is the effectivity date 'of the BOA Re!jolutlof\ C>. 88 (Seri es of 200B) prescribing the
rules and regulations for the accreditation of aG ounting tea chers?
A. Ju ne 4, 2008 C. Decei':1ber, 3 l , 2008
8. June 20, 2008 D. June W, 2008
32. Which of the following requirements for the accredi tation of acc0unting teachers shall not
apply to thos e CPAs cilready engaged in teachng as of the effe ctivity date of the Rules
and Regulations?
I. Poss essio n of relevant Master's degree.
IL Co mp leti on of 12 units of re levant education s ubj ects from th e CHED recognized
schools.
III. A total of 3 years meaningful experience in actual accounting work either in Pu ql ic
Practice, Commerce & Industry or Governr nent sector.
IV. Proof that the CPA has undergone Conti nuing Professional Education (CPE).
A. I and II o nly C. I and IV only
8. II and III only J. II only
33. The following statements relate to the req u ire m ent to complete 12 units of relevant
education subjects for the a ccredita tion of acco1 mting teachers. Which i s incorrect?
A. For purposes of compliance, the -2 unit:: may be earned from the undergraduate
education prograr.i or from a g1aduate .: gree ,progra m . of! ,flY Higher Education
Institution (HEI) duly recog n i zed by CH Eb .
B. The 12 units meiy be earned from in-srvice or in-house trainings on relevant .
.
34. Which of the fol l o w i ng shall be considered proof of compliance with the CPE requirement
for accreditation of accounting teachers7
I. Certification of CPE units from accredited :PE provid e rs issued by the PICPA.
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i II. Certificate of Attendance or other proofs >r meaningful participation in other CPE
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programs as approved by the PRC/CPE Council 'llpon recommendation of the PICPA
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of the individual CPA of a minim um of si)ty (60) cre"dit units earned for the past
immediate 3 years.
A. I only C. Either or II
B . II only D. Neither I nor II
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36. According to the Transitory Provisions of the BOA Resolution No. 88, any tenured/fu] I
time/full load faculty member who does not meec the accreditation requirements as of tile
effectivity date of the Rules and Regulations may be issued a Provisional Accreditation.
Choose the correct statement.
I. The Provisional Accreditation will be valid for a period not exceeding 3 years unless
earlit!r withdrawn, revoked, or cancelled for cause by the BOA.
II. The Provisional Accreditation may be issuec! Dnly once and is no1 1 tenewable.
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iII. The transitory provision shall also apply t> returning teachers who have not been
teaching for the last 5 years.
A. I only C . II and III only
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D. I, II, c t;id III
B. I and II only -
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37. In case of an initial public offering ( I PC) ct seCL:rities by a company, the inter-irn financial
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statements to accompany the Registration Statement (SEC Form 12-1, as amended) shall .
38. The COA chairman and the two ( 2 ) commission.:!rs shall be appoi nted by the president: of
the Philippines with consent of the Commission on Appointments for a term of
A. 5 years C. 7 yea ..s
B. 6 years D. 9 yea s
]9. In an initial public offering of securities, a writcen communication from the indendent
accountant to an underwriter about proced1!res ,the accountant prformed on the
unaudited financial statements and sctieduli!S1 accompanying a client's registration
statement. Comfort letter
40. R ;
efers to a company's maintaining a steady rat. of earnings growth over a series of years,
thereby providing no reason for the financial markets to impute unexpected risk in the
41. All the components whose financia l ' inform2tion is included in 'the group financial
statements. Group
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