CRC-ACE REVIEW SCHOOL ‘The Professional CPA Review School ‘MLA (02) 735-9031 BAG (074) 422-1420 AUDITING THEORY A J.G. SALOSAGCOL PREWEEK JULY 2014 & 9. “The objective of an audit of financial statements is a. To assist an entity in the preparation of financial statements." b. To express an opinion whether the financial statements are prepared, in all matetial respects, in accordance with an identified financial reporting framework. . c. To enable an auditor to state whether, on the basis of the procedures performed, anything has come to the auditor's attention thet causes the auditor to believe that the financial statements arc not prepared, in all rantetial respects in accordance with an identified financial reporting framework. facr/ 4. To guarantee that all material misstatements in the financial statements are detected. faq x crore Which of the following best describes the reason why an independent auditor reports on financial ‘statements? Ee OR ne act ser Aes ‘a. A management feaud may exist and itis shore lifely to be detected by independent auditors. b, Different interests may exist between the company preparing the statements and the persons Goring the statoments. ¢. A misstatement of account balances may exist and is genctally corrected as the result of the independent auditor's work. 4..A poorly designed internal contzol system may be in existence. Which of the following statements does not describe a condition that creates a demand for auditing? a. Conflict between an information preparer and a user can result in biased information. | b, Information.can have substantial economic consequences for a decision-maker. c. Expertise is often required for information preparation and verification : 4. Users can dizeetly aeaess the quality of information, ‘Material misstatements may emanate from all of the following except a fenud € non-compliance with laws and regulations b. errors 4d. limitations of the audit “The primary difference between financial sistement errors and fraud is that 1. “Errore are intentional misstatements by misnagement, while fraud involves unintentional mistakes of omissions bb. Eerots ate unintentional mistakes or omissions, while fraud involves intentional misstatements. c. There is no difference as erzors and frauds have the sume meaning. G. Exrors are more likely to provide an indication that an illegal act has occuzred. Which of the following statements best identifies the two types of fraud? ‘a. Theft of assets and employee fraud. bb. Misappropriation of asset and defaleation ¢. Management fraud and fraudulent financial reposting Gi. Praudulenf financial reporting and misappropriation of assets. figleia /entestensy q onch Which of the following is not an example of fraud? ‘i. misappropsiation of assets. «. Misinterpeetation of facts b. Reenrding transactions without substance. _d. Omission of the effecte of transactions “Which of the following, if material, would be an fEregularity> feet ee ‘nistakes in the application of accounting peiaeiples clerical mistakes in the accounting data underlying the financial statements misappropriation of an astet or groups of assets misinterpretstions of facts that existed when the fisisincial statements were prepared nog? Peaudulent financial reporting is often called a. management feaud. bb, theft of assets. _. defalcation, dv employee fraud,D1. pv. ee Co. re te oF cased Cone se sage Tired Come tate) Peter fa 3 Fi cap ame Hemel Co ta i gna Dre me te bth I sek einen! Otis PB ct 3 Pavan Syp60) ——_ 4g Page 2 of 27 CRC-ACE/AT_Preweek GULY 2014 Batch) age When is the auditor responsible (or detecting fraud? 2. When dhe faud did not result from colsion. Wi ments Ef Wien thied pasties are likely to rely qn the client's financial statements. Wren the elencs system of internal control is judged by the auditor to be inadequate: 5, When the applicalon of generally accepted auditing standards would have uncovered ‘Ne fh respect to errors and itregularities, the auditor should plan to ; With erp te erovs that would have 2 material effect and for irregularities that would have cither material ‘or immaterial effect on the financial statements. : bb. Scurch for inegulasitis that would have a material effeet and for errors that would have either material or immaterial effect on the Gnancial statements. 1 : ec Souch for emors or itreglasites that would have a material effect on the financial statements. Saree eer ce inegulasties chat have either material or immaterial effect on the financi! statements, With respect to exrors and fisud, which of the following should be past of an auditor's planning’ of the audit engagement? ‘ an plonning to search for errors or fraud that would have a matesal or immaterial effect on the financial statements : planning to discover errors or fraud that ate cither material or immaterial c._ planning to discover errors or fraud that are immaterial i 4. planning to consider factors affecting the risk of material misstatement both st the financial statement and the account balance level Rete 0, seanplbth 4 be? peat, D He 7 He othe] Seep AD, be “The auditor is most likely 10 presume that a highctisk of 2 Gefaleatiopbonsts if wits 4. The client is a multinational company that does business in numerous foreign countries. ‘sida \b. The client does business with several related parties. Qos ert c. Inadequate segregation of duties places an employee in a position to pespetzate and conceal thefts; = settee d. Inadequate employee training results in leagthy EDP exception reports cach month. 9) talichy chenodhit Because an examination in accordance with generally accepted auditing standasds is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of 2 Professional responsiveness €. Objective judgment b. Conservative advocacy 4d. Professional skepticism, 3. Which of the following is a category of risk factors that should be considered in relation to misstatements atising from misapproptiation of assets? a. Industry conditions ¢. Management characteristics. b. Operating chasacteristics i . Controls. . Which of the following is a category of risk factors that should be considered in relation to misstatements ‘ising from fraudulent financial reporting? 2. Susceptibility of assets to misappropriation ¢. Industry conditions b, Assets that can be easily be converted to cash = d. Internal Controls. W ite oct DR ered EL cane Based on PSA 250, noncompliance cefei{"to” * ~~ a. intentional acts of one or more individuals which result in misstatement in financial statemé b, unintentional mistakes in the financial statements ee & personal misconduct hy the entity’s management or employees 4. cts of omission or commission by the client which are contrary to prevailing laws and regulations ‘Tn making a decision to accept of continue with a client, the auditor should consider: : a ob « 4g Its competence : YES YES YES YES Its own independence YES NO YES NO Its ability to service the client properly bi YES YES YES NO ‘The integrity of the client’s management © YES YES NO YES7 CCRC-ACE/AT.Prewek QULY 2014 Buch) pagedof7 B 10. What wil an auditor who bus been proposed for an audit engagement uualy do prior accePtng #268 lien? . eet ye fnmcinl statements ofthe clint as x mensure of goodwill | % ; De he och per he pnp chy, conte oe prdaceor stort determine With the Pa disagreements between che client andthe audit firms veik ce he former auditor and seview work papers: ( ob» et) e. Obmin the potential elent’s permission to Senin ee eee review on the potential client in aecordunce with professional standards. sm an independent aditor is sppronched to perform an audit for the Gt time, he oF she should make Dy 2 Winn nero crsr nadie, Tngues ne necesry cau che predcenor may Be le fo reid the successor with inforroaton that wil asst the successor in determining whether fh the predecessor's work should be used the company rotates auditors €._ in the predecessor's opinion, control tisk is low ithe engagement should be accepted request the © 21. When one auditor sueceeds another; the successor auditor should . voncerning the status of the prior yeat's 2. Client to instruct its atorney to send a letter of audit inquiry © ligauon, claims, and assessments. b. Predecessor auditor to submit a lst of corrected. Client to authorize the predecessor auditor to alow a review of the predecessor auditor's working papers. : 4. Predecessor auditor to update t interna) accounting control weaknesses that have not been the prior year’s report to thé date of the change of auditors. 22. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? ‘a. Analysis of balance sheet accounts. b. Analysis of income statement accounts €. All marters of continuing accounting significance. 4. Facts that might bear on the integrity of management. 23, Before accepting an audit engagement, a successor auditor should make specific inquiries of the pting gas predecessor auditor regarding the predecessor's ‘a. Awareness of the consistency in the application of generally accepted accounting principles between periods. Evaluation of all matters of continuing accounting significance. Opinion of any subsequent events occurzing since the predecessor’ audit report was istued. ‘d._ Understanding as to the reasons for the change of auditors. B According ro PSA 210, the auditor and the lent should agree on the terms of engagement, The agreed tesms would need to be recorded in a(n) ‘4. memorandum to be placed in the permanent section of the auditing working papers b. engagement letter client representation letter d. comfort letter : D_ 25. The form and content of the engagement leters may vary for each client, but they would generally include reference to all of the following, except: 4. Objective and the scope of the audit of financial statements. on b. The fact that because of the inherent limitations of the audit, there isa risk that material misstatement may remain undiscovered. | Form of the reports to be issued. 0G Me rin bh itn =X 4. A statement that other consulting services may be made available upon request. ‘ xe e E f : 26. In wi ing situati is D fs wich of the following situations would the suditor be unlikely to send a new engagement letter to a 4. a change in terms of the engagement ». a significant change in the nature or size of the client’s business . © s recent change of client management 4. a recent change in the partner and/or staff in the audit engagementCRC-ACB/AT_Preweek JULY 2014 Batch) Page 4 of 27 igites eongoat sete abiok, “OEE A a eval , AL 27. After an auditor had been engaged to perform the first audit for 2 nonpublic entity, the client requested to change the engagement to a review. In which of the following situations would there be a reasonable Basis to comply with the client's request? a. The client’s bank required an audit before committing to 2 loan, but the client subsequently acquired alternative financing. b, The auditor was prohibited by the client from corresponding with the clic ¢. Management refused to sign the client reptesentation letter, 4. The auditing procedures were substantially complete and the auditor dete:mined that an unqualified opinion was wartanted, but there was n disagreement concerning the audit fee. t's legal counsel, @ 28 Client may sometimes sequest the auditor to change the mntute of the engagement from audit to review of financial statements, Which of the following circumstances wonld most likely cause the auditor not to honor the client’s request? —_— > “ae There was a sudden change in the entity’s requirements. abt b. There was a misunderstanding concerning the nature of service originally requested. ¢. The client does not want the auditor to send confirmation letters to some of its major customers. Lape d. The cost of completing the audit is high and the client does not need audited financial statements, fateh DD 29. Ifthe auditor concludes that'thete is a reasonable justification to change the engagement, the report issued would be that appropriate for the revised terms of the engagement. In addition, the report should make reference to: Original engagement Procedures performed a Yes : Yes b. Yes No « No Yes d. No No A, 30. This involves developing an overall stuategy for the expected conduct and scope of the examination; the nature, extent, and timing of which vary with the size and complexity, and experience with and knowledge of the entity a, Audit planning b. Audit procedure c. Audit program d, Audit working papers ‘A. 31. Bauly appointment of the auditor enables preliminary work to be performed by the auditor which benefits the client in that it permits the examination to.be performed in . a. A more efficient manner b. A more thorough manner c. Accordance with quality control standards d. Accordance with generally accepted auditing standards B 32 When planning an examination, an auditor should : 4, Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaize. b. Make preliminary jadgments about materiality levels for audit purposes. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. d. Prepare a preliminaty draft of the management representation letter, A 33. In considering materiality for planning puxposes, aa auditor believes that misstatements aggregating P100,000 would have a material effect on ia entity’s income statement, but that misstatements would have ro aggregate P200,000 to materially affect the balance shect. Ordinarily, it would be appropriate to design» auditing procedures that would be expected to detect misstatements that aggregate , * Pacig avbvality” bem atje yo. — P100,000 rex) , b,P150,000 =, P200,000 4, P300,000, re PH bay ror «(Dic aol = deat Py ellie iin or Brie oor tet 34 “Tolerable misstatement” is the term used to indicate materiality at the: |e 0. yn 5 « ‘a, balance sheet level, 4, company-wide level, 1 Heir any Pee 'b, account balance level. . transactions level. ‘ Roms naijad ‘ Shes c. income statement level. : ‘eteipicat mciah & necitod a +Page 5 of 27 * CRC-ACE/AT_Preweek QULY 2014 Batch) level of materiality decreases, the amount of evidence required will Be wasn oeeiae re erat anion bias es ' van sco ace dee he mown of ieee ied i gm ee a ep on ‘ittee pace, decrease. gy a Me x kx Tw ; 17. Ina financial statemént audit, audit risk represents the probability that Be ral contol fala and the failce isnot detected by the audit's procedures 1b the auditor ankinowingly fils to modify an opinion on materiality misstated financial statements C jnherent and control tsk eause errors that could be material tothe financial statements firancal statement audit in the sueceeding year 4. the auditor is not retained to conduct a i A. 38: Ina financial statement audit inherent sk represents | athe susceptibility of an account balance to error that could be inateral B. the tsk that error could occur and not be prevented or detected by the intemal control structure the risk that ettor could occur and not be detected by the auditor’s procedures G._ the risk that the auditor fils to modify materially misstated financial statements a. Detection risk Control risk b. Business risk d. Inherent risk B 2% Which ofthe folowing is nota competent of audit isk? (D. 40. The risk that an auditor's procedutes will lead to the conclusion that a matesial error does not exist in an account bilance when, ia fac, such exror does exists referred to a8 i a Audit isk b. Inherent risk ‘@ Controlnek —d, Detection risk i D 41. Whatis the magnitude of eudit risk if inherent risk is 50, control risk .40, and detection tisk .10? a. 20 b. 10 6 04 d. notgiven ", 02 {) 42 Which ofthe following descriptions best describes inherent risk? | 2. Auditors fail to discover material misstatement in the course of their audit and do not modify their audit opinion. ‘A company’s internal control fails to identify a material misstatement in a timely fashion. b Auditing proceduees fail to find 2 material misstatement. d. The possibility that a material misstatement will occur in any given account before considering internal contzol. fafa! obserce rind x D 43. The probability of an auditor's procedures leading to the conclusion that a material exror does not exist in an account balance when, in fact, such error does exist is referred to as a. Prevention tisk Control ti b, Inherent risk 4. Detection risk. antly affected by the nature, amount and timing, of 44, Which of the following types of tisk is signi > substantive auditing’ pro a. Inherent risk b, Control risk {© 45, As the acceptable level of detection risk decreases, an auditor would LEAST likely change ad a. the timing of substantive tests by performing them at year-end. ~~ 7 m b. nature of substantive tests from a less effective to a mote effective procedure HL? = c. Detection risk d. Sufficiency risk c._timing of tests of controls by performing them at several dates rather than at one tine extent of substantive tests such as using larger sample size C46. As the acceptable level of detection tisk decreases the auditor may gy & perform tests of contol at yearend sather than at interim '._inczease the level of inherent and control risks ] Design more effective substantive procedures " 4. Use larger sample size for tests of controlsi \ 4 ee A 8. ya any Wictad Me 8, oriwand, Eo PAP mips) Aerie ite gs 5 Met bet te Sa pe Pipe -ACE/AT_Prewéek QUL atch) 9 Retort WD a, CRC-ACE/AT_Prewcek QULY 2014 Batch) llega awe m Risk assessment procedures would include all of the following except Obsihes a. Inquiries of management and others within the entity. 4 ded papre Hf eae b. Analytical procedures. " €. Observation and iospection. 4d. Reperformance of client's procedures, . re =f st ist auditor in Analytical procedures used as of risk assessment procedure are performed primarily to assist the au a, Identifying areas that may represent specific risks. Egashoct (Ph yJi1> b, Obtaining knowledge about the design of internal control. - Canpsien ©. Obtaining knowiedge about the operating elfectiveness of the clont’s internal control. © : GL Gathering corroborative evidence about the validity of an account balance. Leedgolin ip Har or telual poclvakos ‘The primary responsibility for establishing and maintaining an intetnal control structure rests with a. The external auditors Foon, QPP) * Bie You? Te 1b. The internal auditors Ip Sehigahy Brats Chueh) 6, Managsinent and thove changed with govecnance vay (6) Lata fren . The controller ot the treasurer : ' Yn pall Seem npn ¥ Meatetl ey Thal BHC dean Which of she folowing intra contol objectives would be most rvant «Sif a a. Operational objective — chal naetteet soils. b, Compliance objective - rguloty awa c Financial reporting objective = yen auciye ee os d. Administrative control objective ope aides =» towel b2 cundnl ol bey. . . aliations in an infernal control structure must be considered it’ evlChting its effectiveness in and detecting errors and irregularities. Inherent limitations do not include - Misunderstanding of instructions, mistakes of judgment, personal carelessness, distraction, or Fatigue. = finer bir bb. Incompatible functions performed by the same person, Collision among employees. d. Management override of certain policies or procedures. . When considering the effectiveness of a system of internal accounting control, the auditor should recognize that inherent limitations do exist, Which of the following is an example of an inherent limitation ina system of internal accounting control? a. The effectiveness of procedures depends on the segregation of employee duties. b. Procedures are designed to assure the execution and recording of transactions in accordance with management's authorization * In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment 4. Procedures for handling large numbers of transactions are processed by electronic data processing equipment Which of the following is not an clement of an entity’s internal contgol structure? frases ee pl a. Contiol risk —, Owed Kai Pipae Cpt Ott b., Control activities Fit Beco) fry Seng Pate dato c,| Information and communication [litte BR Comedies (anal 1" She contcl enekonmene 5 4 spe) in Fringed (label) ma ape The overall attitude and awareness of an entity's board of directors concerning the importance of the internal contol structure usually is teflected in ite a, Computer-based controls «. Control envitonment 2 b. System of segregation of duties d. Safeguards over access to assets Which of the following factors are included in an entity's contzol environrnent? Comaitaat te Cop beat ‘Acdit” Assignment of Management Opening ato Bian Committee Responsibility Sqle 4 T. a YES. NO. Fos gueadly © Shay, b YES YES : Pr . NO YES fen 4 YES “YES oeB59 The policies and procedes A. 61. An auditor's consideration about internal cor B62 When ol: ToBrewert JULY 2014 Basch) D see Clemente aad how they have been ince of the Ealewing except 2 otegnty and ettacal values b. Commutment to enemperenct © Oryanieatonal ssractare 4. Informanon and communications srvtems B57. Which of the fotoming factors are included im an enoy's corti exvronment? Commument 10 Segregation cf Dunes Organmatonal Seracture Comperence ee! ttn) : * Yes Yes No 6 Yes“ No ~ Yes > © No Yes Yes 4 ves Yes Yes A, 58 Whuch of the following statemenss best describes the entity's mek sssessment process? a, Entity’s provers of idenufing business sks relevant to Bnancal reporung objectives and deciding about actions to address those nsks b. Entity’s assessment of audit risks affecting the Enancial statements, ¢. Entity’s process of evaluzting the nicks of misstatements due to fraud, . Entity's assessment of risks thet internal control may fail to detect misstatements affecting the I statements 1 management directives are carried out are referred to as the: res that help ensure th a. Control environmen b. Control activines c Monitoring of controls d._ Information system A, © Which of the fllosing i not an example of specific contol activities? a. Paiticipation of those charged with governance b. Authonzation of transactions €. Segregation of Duties 4. Performance Reviews Tis whether 2. a specific control prevents or detects and corrects, materia] misstatements in classes of transactions, account balances oF disclosures, and their related assertions. b. a spécific control contributes to efficiency and effectiveness of entity's operation. © the control reasonably ensures that the entity complies with government laws and regulation: . the control prevents coJusion among em3! ‘take erstaading of the entig’s ins control, the aiditor should obtain knowledge about the system's: ~ ” - 1) Wenn Nene ta Duis Operating ativencn : . “ve Yes Teinney raed oe Ok b Yee No, Dir ian abt peodens < Vex No’ € Yea Yes a A, 63. Evaluanng the design of the ertty’s internal control would involve a. Considering whether the control, i ot in combination with other controls, is capable of effcctvely preventing. or detecting and correcting, material misstatements. Determining whether contol exists and the entity is using It. Determining whether the control is operating effectively. Deteemining the consistency of application of internal control procedures. e aeo t 8 & 64. 66. 66. a. 69. 70. n. 2. 2B. . The purpose of tests of controls is to provide reasonable CRC-ACE/AT_Preweck QULY 2014 Batch) Page 8 of 27 valk ~ amg Obtaining knowledge about whether the contol is implemented can best be obtained by a. Inquity of clent’s personnel. b. Reading procedures mantal c. Tmcing tranzactions through the information system relevant to financial reporting. 4. Performing tests of control. Tests of controls are directed towards control Effectiveness Efficiency a Yes Yes b No No « Yes No a. No Yes Tests of controls are designed to obtain evidence to support the auditor's assessment of control tisk a. atahigh level & atzero level b. at less than high level . at the maximum level Which of the following is the correct order for performing the auditing procedures A through C below A= Tests of Controls B = Preparation of a flowchart depicting the clent’s internal control structure C= Substantive tests a, ABC b. ACB © BAC d, BCA assurance that a. the extent of substantive testing is minimized b. evidence will be obtained to determine an assessed level of control tisk ‘c. cerors and irregularities are prevented or detected in 4 timely manner d the auditor has an understanding of the control environment Afier documenting internal control in an audit engagement, the auditor may perform tests on. those controls that the auditor plans to rely on those controls in which deficiencies were identified those controls that have a material effect on the financial statement balances a zandom sample of the controls that were reviewed Bogs A consideration of internal control made during an audit is usually not sufficient to express an opinion on an entity’s controls because a. weaknesses in the system may go unnoticed during the audit engagement b. a consideration of internal control is not necessarily made during an audit engagemerit ©. only'those controls on which an auditor intends to zely are reviewed, tested, and evaluated d. controls can change each year Tests of controls are directed towards contzol Efetiveness Effcensy a Yes Yes b No No « Yes No a. No Yes The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a = 2, test of conitrols ¢. dual purpose test b. substantive test d. test of balances ‘Which of the following procedures most likely would be included as part of an auditor's test of controls a Inspection ‘Confirmation b. Reconeitiation d. Analytical proceduresCRAG (AT Preweek JULY 2014 Batch) Page 9 of 27 Miter considering a client’s internal control, an auditor has concladed that the system is well designed and is functioning as anticipated. Under these circumstances, the auditor would most likely Sage 4 cease to perform farther substantive tests , not increase the extent of planned substantive tests ©. inctease the extent of anticipated analytical procedures 4. perform all tests of controls to the extent outlined in the preplanned audit program 75. In an auditor's consideration of intemal control, the completion of a questionnaire is most closely ‘associated with which of the following? a. separation of duties €. flowchart accuracy b. understanding the system d. tests of controls 76. In consideting internal contzol within the revenue/receipt cycle, what is the purpose of a transaction walk through? a. to assure that employees are performing assigned functions accurately b. to confirm the auditor's understanding of the internal control structure c. to select documents for detailed tests of controls b . d._toverify the results of the auditor's sampling plan 4 i pt — 0” Va shine!’ & Gt 77, When auditing “around” the computer, the independent auditor focuses solely upon the source documents veeeg data. b. Con lias * data. b. Compliance techniques _¢. EDP processing, EDP output Gia) Bt) iy sped /tet a , ° ee 78, The auditor's objective to determine whether the client's computer programs can correctly handle valid and invalid transactions as they arise is accomplished through the. a, Test data approach, ‘c. Microcomputer-aided auditing approach. b. Generalized audit software approach. d. Generally accepted auditing standards. 79. When an auditor tests a computerized accounting system, which of the following is true of the test data approach? a, Several transactions of each type must be tested Oy 9p ype uh invalel Urdchea) b. Test data must consist of all possible valid and invalid conditions c. The program tested is different from the program used throughout the year by the client d. Test data are processed by the client’s computer programs under the anditor’s control 80, Which of the following compurer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. Parallel simulation. ©. Integrated test facility b. Generalized audit software programming, . d. Test data approach. 81, Which of the following methods of testing application controls utilizes software prepared by the auditors and applied to the client's data? a. parallel simulation ce, test data b. integrated test facility d. exception teport tests 82. Which of the following is an incorrect statement regarding testing strategies related to auditing through the computer? ot a. The test data apptoach involves processing the client's data on a test basis to determine the integrity of the system. b. The test data approach involves processing the auditor’s test computer-performéd controls are working properly. . + ¢. Test data should include all relevant data conditions that the auditor is interested in testing. d. When the auditor uses the embedded audit module approach, an audit module is inserted in the client’s system to capture transactions with certain characteristics, 83, Assume that an auditor estimated that 10,000 checks were issued during the accounting period. Tf an application control that performs a limit check for each check request is to be subjected to the auditor's test-data approach, the sample chould include a. approximately1,000 test items b. anumber of test items determined by the auditor to be sufficient under the circumstances c anumber of test items determined by the auditor’s reference to the appropriate sampling tables 4. one transaction 755sCRC-ACE/AT_Preweek JULY 2014 Batch) Page 10 of 27 to verify processing by making use of audit test vagne, These audit test programs “simulate” the processing logic of an spplication progtarh or rreerers under review. Which saement indicates de use of parallel simulation audit techniques? 2. Live transactions are processed using live programs Live teansactions are processed with test master file ¢. Test transactions are processed using test programs ._ Live transactions are processed using test programs 84. Pazallel simulation is an audit technique employed 5, A control which relates to all parts of the EDP system is called a(n) a. Systems control b. General control. Applications control 44. Universal control 86, Controls which apply to a specific use of the system are called ‘a. Systems controls ——_-b. General controls. c. Applications controls d. User controls 87. An auditor anticipates assessing control sists {etlevel in a computerized environment. Under these circumstances, on which of the following procedures would the auditor initially focus? a. Programmed control procedures ‘¢ Output control procedures b. Application contol procedures &. General control procedure 88, Which of the following is not a general contzol? a. The plan of organization and operation of EDP activity. b. Procedures for documenting, reviewing, and approving systems and programs. ¢. Processing controls. 4, Monitoring Controls 89. An auditor's investigation of a company’s electronic data processing control procedures has disclosed the following four circumstances. Indicate which circumstance constitutes a weakness in internal control 1. Machine operators do not have access to the complete tun manual. b. Machine operators are closely supervised by progremmers. ¢. Peogeammers do not have the authorization to operate equipment. 4. Only one generation of back-up files is stored in an off-premises location, 90, Internal control is ineffective when computer department personnel a. Parucipate in computer software acquisition decision, . D. Design documentation for computerized systeins. cc. Originate changes in master files. 4, Provide physical secusity for program files. 91. The'management of ABC Co. suspects thst someone is tampering with pay. rates by entering changes through the company's remote terminals located in the factory. The method ABC Co. should implement to protect the system from these unauthorized alterations to the system’s files is a.Batch totals. b, Checkpoint recovery . Passwords d.Record count * 92, Totals of amounis in computer-record data fields, which are NOT usually added but are used only for data processing control purposes are called. a. Records totals b. Hash totals Processing data totals 4, Ficld totals. 93. A hash total of employee numbers is part of the input to a payroll master file update program. ‘The program compares the hash total to the total computed for transactions applied to the master file. ‘The purpose of this proceduce is to: PG a, Verify that employee numbers are valid. . Aabersal b. Verify that only authorized employces are paid ‘Sl thee c. Detect errors in payroll calculations. ty : 4d. Detect the omission of transaction processing, fifee Ny - ‘eg es Prax ed tart ~ . tyPage 11 of 27 CRC-ACE/AT_Preweek QULY 2014 Batch) i wl ad accuracy of A) 94, Which of the following controls is a processing control designed to ensure the reliability and accurscy ata processing? ; I exeartd : Limit Test Validity Check Test 4 * Yes Yes i No Ne . No ¥ a Yes . ing system? 95. Which of the following is not an advantage of a computerized accounting syste a. Computers process tansactions uniformly. Computers hep alleviate human erors . Computers can process many transactions quickly Computes leave a tough audit ai which can be esl followed. 96, Compared to a manual system, a CBIS generally. 4 ree Reduces segregation of duties. T Tl. Tnceeases segregation of duties. X IL Decreases manual inspection of processing results. T IV. Increases manual inspection of processing tesults. a Land IIT © [and IV b., Mand MT @ WandIV B97. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based is called: a. audit working papers b. audit evidence audit assertions . audit standards A. 98. Ie refers to the material (working papers) prepared by and for, or obtained and retained by the auditor in connection with the performance of the audit. a. Documentation ». Accounting data © Audit report 4. Corroborative evidence 99. The sufficiency and appropuiateness of evidential matter ultimately is based on the a. Availability of corroborating data. c. Pertinence of the evidence. b. PSA d. Judgrnent of the auditor. (100. An audit procedure that involves examining records, documents, or tangible assets is a. computation b. tracing . inspection d. observation B 101, An sudit procedure that consists of looking at the process or procedure being performed others is called a. inspection b. observation . inquiry d. computation B 102, Which of the following assertions does not relate to balances at period ena? a. Existence b. Occurence cc. Rights and Obligation d. Valuation or allocation ae me “ale 103. Management assertions are 4. directly related to generally accepted auditing standards, b. directly related to generally accepted accounting principles. © indizectly related to generally accepted auditing standards. indirectly related to generally accepted accounting principles. D 106 IF the objective of a tet of details is to detect overstatements of sales, the auditor should eee ttansnctions from the . 2. Cash receipts journal to the sales journal ¢, Source documents to the accounting records 5 Salesjournl tothe cash receipts joumal Accounting econds to the source decameneCRC-ACE/AT_Preweck QULY 2014 Barch) Page 12 of 27 105. Which of the following statements is not correct? 4, Te would be a violation of the completeness assertion if management take place, b. The completeness a assertion, is =HAE . c. The completeness assertion is concemed with the possibility of omitting items from the financial statements that should have been included, d. The existence /occurrence assertion is eoncerne st would secord a sale that did not ssertions deals with matters opposite from those of the existence/occurrence .d with inclusion of amount that should not have been. 106. The geneval audit objectives of valtityind completeness emphasize opposite audit concerns. a. validity deals with potential overstacement and completeness deals with understatement, ‘. validity deals with potential understatement and completeness deals with overstatement. c. validity and completeness may each deal with overstatements or understatements, but not in the same transaction. validity always deal with overstatement but completeness may deal with either over, or understatements,, : 107, In determining whether transactions have been recorded, the direction of the audit testing should be from the a, General ledger balances ¢. Original source documents b. Adjusted tral balance d. General journal entzies 108, Tests of detailfo¢ balances are specific procedures intended to a. identify the details of the internal contzol system. b. prove that the accounts with material balances are classified correctly. test for monetary errors in the financial statements. 4. prove that the trial balance is in balance. 109. Which of the following auditing procedures is least likely to disclose an understatement? a. vouching b, tracing ¢. Confirming 4d. Counting 110. In the context of an audit of financial statements, substantive tests aze audit procedures that a. . may be eliminated under certain conditions b, are designed to discover significant subsequent events may be either tests of transactions, direct tests of financial balances, or analytical tests will increase proportionately with the auditor's assessment of control risk 111. It involves analysis of significant ratios and trends including the resulting investigation of fluctuations ‘and relationships that are inconsistent with other relevant information or which deviate from predicted amounts. a. Reasonable test b. Trend Analysis ©. Ratio Analysis . d. Analytical procedures 4 112. PSA 520 states that analytical procedures can be used in the: 1 Planning 5 Testing phase fe oP yee Wel ge Te tual Orem ee Ct) b Yes No Yes: & Yes No » No da No Yes No * 113. Analytical procedures used in planning an audit should focus 6n Identifying areas that Enhancing the auditor's Obtaining may represent understanding of the client's corroborative + ‘specific risks business evidence a. , Yes ‘Yes ‘Yes _O Yo z Yes Ng (0) c lo No No 4 No Yes : NoCRC-ACE/AT_Preweek JULY 2014 Batch) Page 13 of 27 114, Analytical procedures applied as a substantive test ‘a. Assist the auditor in determining the validity of the conclusions reached. b. Assist the auditor in understanding the client’s business, : ¢. Assist the auditor in identifying ateaé of potential isk, d. Assist the auditor in reducing the detection tisk for specific financial statement assertion. 115, When analytical procedures identify significant fluctuations or relationships or relationships that are inconsistent with other relevant information of that deviste from predicted amounts, the auditor should withdraw from the engagement . assume that the financial statements contain material exrors or fraud examine all corroborating evidence available Conduct further investigation aoe 116, ‘To comply with the requirement of PSA 520, analytical procedures should be applied in the planning and testing phases of the audit in the testing and overall review stages of the audit in the planning, testing, and overall review stages of the audit |. in the planning and overall review stages of the audit poge 117. Which of the following is not an information source for developing analytical procedures used in the audit? - a. Relationships among financial statement elements b. Relationships between financial and relevant non financial data c. Comparison of financial data with anticipated results (¢.g., budget and forecasts) 4. Comparison of current year financial data with projections for next year’s fpancial results| dl ke agree 118, Investigation of unusual fluctuations ordinarily begins with 2. inquiries of management b. applying additional modified procedures obtaining evidence to corroborate management's repzesentation . comparison of financial information with expectations 119. In testing the existence assection for an asset, an auditor otdinarily works from the a. Financial statements to the potentially unrecorded items. b, Potentially unrecorded items to the financial statements ‘¢. Accounting records to the supporting evidence d. Supporting evidence to the accounting records. 120. Regardless of the assessed level of control rick, an auditor would perform some a. Test of control policies and procedures in order to determine their operating effectiveness b. Analytical procedures to verify the design of controls Substantive test to restrict detection risk for significant transactions classes. d. Duslpuspose tests to evaluate both the tisk of monetary misstatement and preliminary control risk. 121. Ieinvolves the application of audit procedures to less than 100% of items within an account balance oF ‘class of transactions to be able to draw conclusions about the characteristics of the entire population. a. Incomplete tests . Audit sampling, b. Selective testing 4. Random testing 122, An error that acises from an isolated event that has not recutred other than on specifically identifiable ‘occasions and is therefore not representative of errors in the population. * a. tolerble error b, sampling error ¢. non-sampling error d, anomalous extor 123. According to PSA 530, the process of dividing the population into sub-population is ealled a. stratification b. random selection c, projection 4. division 124. When the auditor’s objective is to test for overstatement of accaunts payable, the population could be defined as ‘a. unpaid invoice b. vendor's statement _c. receiving report d. accounts payable listingPage 14 of 27 CRC-ACE/AT_Preweek QULY 2014 Batch) ) 125. Principal methods of sampling selection include all of the following except . a. Haphazard b. Systematic e-mndom number dastatistical (126. A method of sampling telecon that involves selecting + group of contiguous items from within the opalacion is called i stratified selection ¢. block selection 1b. systematic selection dd. value-weighted selection (127 In which sampling method is the probability of selection of an item proportional to the size or the value of the item (¢.g.a P1,000 item is 10 times more likely to be selected than « P100 item)? a. Discovery sampling b. Ratio estimation —_c. Value- weighted sampling d. ti Suatified sampling C128, “Subsequent events” for reporting purposes are defined as events which occur subsequent to the a. Balance sheet date. >. Date of the auditor's report. ¢ Balance sheet date but prior to the date of the auditor's report. d. Date of the auditor's report and concer contingencies which are not reflected in the financial statements. B 129. The following events all occurred after the balance sheet date (6/30/14) but prior to the auditor’s report (9/10/14), Which one would requize an adjustment to the account balances as of 6/30/14? a. Client will market a new series of equity securities (P2 million of prefetted stock) on 8/1/14. b, Unused equipment on the books at 6/30/14 for P100,000 was disposed of 7/31/14 for P60,000. ©. Securities costing P30,000 held for temporary investment on 6/30/14 declined in value by one-third when the marker took a plunge on 8/15/14 4. Inventory valued at P100,000 on 6/30/14 was destroyed in a fire on 8/1/14 |) 130. The date of the audit report is important because ‘a, ‘The user has a right to expect that the audicor has performed certain procedures to detect subsequent events that would materially affect the financial statements through the date of the report b. The auditor bills time to the client up to and including the audit report date, and the statement to the client should reflect this date PSAs requize all audits to be performed on a timely basis It should coincide with the date of the financial statements ao A 131. ‘The audit report should not be dated . Earlier than the date management approves the financial statement PR rg — GOK 1b. Earlier than the date of issuance of the financial statements ¢. Earlier than the date of the issuance of the audit report. 4. Later than the balance sheet date. - A 132. Am auditor may reasonably iseue a qualified opinion for 4 yp Inadequate Divslosure FRE Seope Limitation a. Yes Yes >. No Yes e Yes No. a No . No D 133. Which of che following circumstances will not affect the auditor’s opinion? a. a limitation on the scope of the auditor's work imposed by the client b, allimitation on the scope of the auditor's work imposed by the circumstances. Disagreement with management about matters such as acceptability of the accounting policies of the methods of their application. * 4. Significant uncertainties affecting the Financial statements. orpalyrol C_ 134, Tf the auditor is unable to determine whether frnisd or error has occurzed because of limitations imposed by the circumstances, the audROF Would most likely istue a report that contains: 3. An unqualiGed opinion ', an anguatified opinion with an emphasis of q pinion wit hasis of a matter paragenph qualified opinion " Pe etait an adverse opinionCE SAT _Deewerk QULY 2014 Barehy - aggac gate of * 135. If the resulr he audit procedures dy not enable the auiitor to conchae that dhe seats 38, F the nea of the aad recs 2 9 eager trfowes 10 at te Gna SHEER, the auditor's report should be modited to unchide: = ae uh eapanatory pean b A duelazmer of opumon a eet oo Giclaner of opision d Either qualified o adverse opuuoad con lek I ke witen 136. If the auditor is unable ot sppropdaie cunlence concerning the opening balances, tb 08's ‘asiied Cosas ae Comes Dhaene Coes ; a YES NO} b YES NO e yes YES ; é NO YE: PS webin . 137. If the current periods accounting policies hare not been conssiensh in reason to the cpesing balances and if the change has not been propedy accounted for and disclosed, the auditor's report should include ica Ope b NO. © YES 4 YES 138, Which of the following statements is not correct sbout "emphasis of a matter paragraph”? fa. ‘The addition of such paragraph is not to be construed as a modification of the auditor's report. F 1b, The addition of such paragraph docs not affect the auditor's opinion. Tr ¢. The paragraph would preferably be presented after the opinion paragraph TO 4. The paragraph is normally used by the auditor to highlight certain items in the financial statements 139. When there are muinple uncestainges ty af nancial statements, the auditor's report would moat Tkely contain t a, an unqualified opinion «A dclaimer of opinion b. A qualifed opinion & Anadverse opimion 140, This exists when othe ssintements. nation contained in the audited financial a. material misstatement of fact ay niakd $f «material inconsistency b, ‘material error & material difference 141. The “other information” in a published report containing audited financial statements may be relevant to-an independent auditors examination. With respect to “other information” a. The auditor's respoasibiity does no: extend beyond the financial information identified in the report b. The auditor is obligated to perform auditing procedutes to corroborate “other information” contained in a document ¢ The auditor need not be concemed with the “other information” 4. The auditor must include the “other information” in the report 142 An audhtot concludes that there is a matetial inconsistency in the othet information in an gnnual teport o shareholders containing audited financial statements. If the auditor concludes that the financial testements do not require eeviion, but the chent refuses to revise oF eliminate the matera! inconsistency, the auditor may 4 Teaue an “encept for” qualified opinion afte discussing the matter withthe chert’ boatd of b. Consuler the matt closed since the other information is in the audited financial statements ©. _Disclim an opinion on the financial statements after explaining the material inconsistency in @ parm explanatory paragraph Revise the auditor's report to include a separnte paragraph describing the material inconsistency OM Afye 16 of 27 CRC-ACE/AT_Preweek QULY 2014 Batch) Page ‘ “ it aud jants” does not apply t0 143, PSA 800 “the auditor's eport on specia! purpose audlt eaBigerl NG A aoa oie at nancial statements prepaced in accordance with GAAP the Philippint ere * aad of financial sintements prepared in accordance with the e85 eh Cisburser basis of accouncing, Audit engagement that financial starements. . Reports on summarized involves expression of an opinion on one oF more components of the financial staternents decived from annual audited financial statements, D144. Which of the folowing is nota special purpose audit engagement as provided by PSA 800? 4. Reports on summarized financial statements, BL Reports on financial statements prepared wsing ©. Reports on components of financial statements. 4G. Reports on prospective financial statements. other comprehensive basis of accounting, esponsible party may prepare, to the best of its 145, Given one or more hypothetical assumptions, # c d changes in cash knowledge and belief, an entity's expected nancial position, results of operations, an flows. Such prospective financial statements are known 88 . a. Pro forma financial statements c. Financial projections b. Partial presentation: d. Financial forecasts 2 146, Financial projection is prospective financial information prepared on the basis off Hyposbeical A mixture of bestestimate and Absnrnptions Best estimate OG fypothetical assumptions a ‘Yes Yes Yes b. Yes No Yes « ‘Yes No No @ No Yes No : C 17. ‘Which of the following engagements would most likely require restriction as to the distribution of the report . { 2. audit c: agreed-upon procedures Db. review a. compilation C148. The level of assurance that is provided by « CPA in a review engagement a. High b, Reasonable . Moderate 4. Low D 149. The level of assurance that is provided by the CPA on a compilation report is a. Low b. High . moderate d. none J) 150. Ifthe CPA is not independent, which of the following engagements can be accepted? a, Examination be audit c. review 4, compilation C151 Ifthe CPA is not fomiliar with the specialized industry necounting principles, but pla level of knowledge, which of the following engagements may be feepi eet 1 Compilation UReview II Audit a Tonly b.Tand II only c.Allof the above’ d. None of theabove + C152. An accountant should pérform analytical procedi i a rm analytical procedures during an engagements 1 Audit tneie Wank a. Yes, Yes, Yes b. No, Yes, No ©. Yes, Yes, No 4. Yes, No, No 153, According to PSA, audi c Accosding to PSA, audit related serves do not inchude: +b, Compilation , Consultancy d. Agrecd-upon procedures 15% Which of the following services provides modemte level of assurance? a. Audit 5 Review c Agreed-upon procedures 4. CompilationCRC-ACE/AT_Preweek QULY 2014 Batch) pss C159. i 160, C 16 D162. Q 163. 0 164. B 16. A report on factual Sindings is the end product of the auditor when perforrning a. Examination © Review b. Audit & Agreed-upon procedures What level of assurance does an accountant give on compilation report? 2. None b. Low © Modente @ High Which of the following procedures would an accountant most likely pezform ins compuation engagement? a. collect, classify and summarize@ financial information. %. apply analytical procedures ©. assess risk components d. test the accounting records ‘Which of the following procedures is not included ina review engagement? a. inquiries of management b. inquiries regarding subsequent events c. procedures designed to identify unusual fluctuations d._astuey and evaluation of internal control According to Philippine Standard on Auditing, the procedures employed in doing compilation are: 8. Designed to enable the accountant to express a Limited assurance b. Designed to enable the accountant to express a negative assurance . 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 ‘What level of assurance does the CPA provide under the following engagements? Agiecd-wpon Audit Review procedure Compilation a High Moderate None None ». High Limited Low None & Moderate Moderate None None d Reasonable Negative None Low ACPA, while performing an audit, strives to achieve independence in appearance in order to a. Reduce risk and lability b, Become independent in mund. ‘ ©. Maintain public confidence in the profession. a. Comply with the generally accepted standarés of fieldwork The concept of materialicy would be least important to an auditor in determining, a, transactions that should be reviewed b. the need for disclosing a particular transaction or event c. the extent of audit work planned for particular account d._ the effect of an auditor's direct financial interest in a client The primary factor that distinguishes a direct from an indirect financial interest is the a. Materiality of the amount involve b, Control over investment decisions . Risk associated with such investment ._Relationship between the investor and investee. Ultimately, the decision as to whether the CPA is independent or not, will be made by the a. Client ©. Public 1b. Audit committee d. Auditor Independence is required whenever a professional accountant performs: professional services assurance services non-assurance services tax consultancy services eneCRC-ACE/AT_Preweek JULY 2014 arch) Page 18 of 27 {166 | ww. D168, dD t0s. B 170. A 171, D172 Dd 173. ‘The member of the assurance team and the firm should be independent of the assurance client during the period of the assurance engagement. For this purpose, the period of the engagement: : a Starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, “ ; D. Starts when the assurance team begins to perform assurance services and ends when the fieldwork is completed. ‘c. Starts when the engagement letter is prepared and ends when the fieldwork is completed, . Starts when the engagement letter is prepazed and ends when the assurance report is issued. ‘This occurs when a fitm of a member of the assurance team could benefit form # financial intezest in an assurance client. Cig Ts a. selfinterest threat &. idvocacy threat b. selfreview threat d. familiarity threat ‘This occurs when, by virtue of a close relationship with an assurance client, its directors, officers of employees, a firm or a member of ihe asturanice tear Becomes too sympathetic to the client's interest a. self-interest threat advocacy threat b, self-review threat 4. Familiarity threat ‘According to the Philippine Code of Ethics, independence is potentially affected by self-interest, self- review, advocacy, familiatity and intimidation threats. Which of the following best describes “advocacy threat”? s 8. This occurs when a firm or a member of the assurance team could benefit from’ financial interest inan assurance client. J b. This occurs when any product or judgment of a previous engagement needs to be re-evaluated in reaching conclusions on the assurance engagement = CR “ c. This occurs when 2 member of assurance team was previously a director or officer of the assurance client. Fon 4. This occurs when a firrn, or 2 member of the assurance team, (promotes, or may be perceived to _promote, an assurance client's position or opinion to the point that objectivity may, or may BE (perceived to be, compromised. This occurs when any product or judgment of a previous assurance engagement or non-assurance engagement needs to be rvaluated in resching conclusions on the assurance engagement or when a member of the HEURMCeTeMTrw: previously a director of officer of the assurance client, or was an employee in a position to exert ditect and significant influence over the subject matter if the assurance engagement. a, self-interest threat advocacy threat >, self-review threat 4, fumiiasty threat This threat tc independence occurs when 2 member of the assurance team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client a. intimidation threat familiarity threat * b. advocacy thieat d. self-interest threat Which of the following cizcumstances would least likely create self-interest threat? 8, Contingent fees relating to asturance engagements b. A direct financial interest or material indirect financial interest in an assurance client c. A loan or guarantee to or from an assurance client or any of its directors of officers 4. Having a close personal relationship between a member of the assurance team>and the assurance client, its directors, officers or employees. fom lion Which of the following would most likely create a self-review threat? a. Financial interest in a client b. litigation involving professional accountant and a dient ¢. a former partner joins the assurance client eve ste nihczrof'sclegelenstea tanaer OF hetoluenceesxn0 ™ 175, A 179. C180 A Bt. CRC-ACE/AT_Preweek JULY 2014 Batch) Page 19 of 27 Examples of circumstances that may create self-review threat do not include Preparation of original data used to generate financial statements or ptepatstion of other records that are the subject matter of the assurance engagement, Bb. amember of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement, i c. performing services for an assurance client that disectly affect the subject matter of the assurance engugement. 4. potential employment with an assurance client, Which of the following is an example of an intimidation threat that may affect the independence of the professional accountant? 4. Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement. Threat of replacement over a disagreement with the application of an accounting principle. Deaiing in, or being a promoter of, share or other securities in an audit client. ‘A member of the assurance team having an immediate fotnily member or close family member who is a director or officer of the assurance client. aos Using the same senior personnel on an assurance engagement over a long petiod of time would most likely’ create a. intimidation threat . familiarity threat b, advocacy threat 4. self-interest threat ‘When the total fees generated by an assurance client represent a large proportion of a firm’s toral fees, the dependence on that client or elient group and coneera about the possibility of tosing the elient will most likely create: a. self-interest threat ¢ intimidation threat b. self-review threat 4. familiarity threat When threats to independence that ate other than those cleatly insignificant are identified, the professional accountant should : continue the assurance engagement but with hcightened level of professional skepticism downgrade the nature of engagement to one that does not require independence. assign more experienced staff to the assurance engagement. apply appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. aoge Which of the following statements about CPA’s financial interest in a client is incorrect? a. ‘Immaterial indirect financial interest impairs the CPA’s independence b. Immaterial direct financial interest impairs the CPA’s independence ¢. Material direct financial interest impairs the CPA’s independence. d._ Material indirect financial interest impairs the CPA's independence. ,~ — ‘ ci OF a nietwork fizm, has agl matesial indirect financial interest in an audit client of the firms, the self-interest threat cteated would be so significant no safeguards could reduce the threat to-an acceptable level. The action appropriate to permit the firm to perform the engagement would be to. ‘a, dispose of the Ginancial interest b. dispose of a sufficient amount of it so that the semaining interest is no longer material Either a orb . Neither a nor b ¢ Which of the following is not one of the qualifications of the members of the Board of Accountancy? a. He/She must be a natural-born CPA and a resident of the Philippines. b. He/She must be a duly Certified Public Accountant with at least ten years of experience in practice of accountancy. He/She must not have any direct or indirect pecuninty interest in any school, college, university, or institution offering a BS Accountancy course of institution conducting review classes in preparation for the licensure examination at the time of his appointment to the Board. d. He/She must not be a director ot officer of PICBA at the time of his appointment.o 182. 183. 186. 185, 186. 187, 188. 199, 190. Page 20 of 27 CRC-ACE/AT_Preweek JULY 2014 Batch) a : i at ‘The Philippine Code of Ethics requires that lead engagement partners of listed entities be rotated Teast once every a. 2yeats ee Syears b. 3 years 7 years “The following statements relate to the tesm of office of the chairman and the members of the Board of ‘Accountancy (BOA). @ L No yoy ‘who has served two (2) successive complete terms shall be cligible for reappointment until the lapse of one (1) year : IL Appointment to fil up an unexpired term is not to be considered a complete term TIL Aperson may serve in the Board of Accountancy for eight consecutive years. IV. _ No person shall seeve in the Board for more than 12 years. a, All statements are ve . Only Land Ih are true b. Only I and IV are true a. Only I, and IV are true se “The Board of Accountaney may issue certificate of registration and professional identification card co any successful examinee: a. Ofunsound mind b. Convicted by a couirt of political offense ©. Guilty of immoral or dishonorable conduct. oa Who has falsely represented himself/ herself in his /her application for examination. Who is not permitted by RA 9298 to practice public accountancy? a, A corporation, whose stockholders are all CPAs, b. A general partnership. c, A limited liability partnership. d. A sole proprietorship. According to RA 9298, if « partner in a two-member partnership dies, the surviving partner may ‘continue to practice as an individual under the existing firm tide which includes the deceased pattner’s a, Fora period of ti b. Fer a period of time not to exceed two years. ©. Indefinitely. 4. Until the partnership pay-out to the deceased partner’s estate is terminated, 1e not to exceed five years. CPAs, firms and partnerships of CPAs engaged 1n the practice of public accountancy including partners and staff members thereof, shall register with the Commission and the Board, such registration to be renewed every three years on or before a. Apel 15 ¢. Septembet 30 b. December 31 . May 31 If the application for registration to practice public accountancy of ‘Tit and Co. CPAs, was approved on July 31, 2012, the registration shall expire on a. September 30,2014. ren ow bypwe b, September 30, 2015. July 31, 2035. d. December 31, 2014 A cextificate of accreditation shall be issued to CPA's in public practice only upon showing, in accordance with rules and regulations promulgated by the Board and approved by the PRC, that such registration hos acquired a minimum of ____ years meaningful experience in any of the areas of public practice including taxation, a2 b.3 a4 as It involves a-study or appraisal by the Board or its duly authorized representatives, of the quality of audit of financial statements through an evaluation of the quality control measures instituted by the CPA firm to asceztain compliance with ethical and technical standards of public practice. 8. Quality review ¢. Compliance audit b. Peer review 4. External auditCRC-ACE/AT_Preweek QULY 2014 Batch) 4A 191. Com b B19 Page 21 of 27 AUCPAs who are considesed in the practice of accountancy shall abide by the requirement rules and tegulitions. on continuing professional education. For this puspobe, it is required that all registered CPAs must complete a number of CPE units of 5 2. 60 credit units in three years cc. 30 credit units in three years b. 45 credit units in three years d._ 15 credit units in three years A registered professional shal be permanently exempted from CPE requirements upon reaching the age of a. 55 years old e. 65 years old b, 60 years old d. 70 years old ‘A registered CPA who is working or practicing his/her profession or furthering his/her srudice aaa be remporatly exempred from compliance with CPE requirements during the period of fua/her stay abroad, provided that prio to the date of renewal he/she has becn out of the country for atleast a. Four years c. Three years b. Two years One year ‘Affixing the CPA’s seal and signature on the auditor's report is an indication of: 4. CPA's acceptance of responsibilty for the financial statements audited. b. Compliance by the CPA of the requisite accounting and auditing standards and rules. ¢. CPA’s accreditation to practice public accountancy: 4. Fair presentation of financial statements audited. Audit of Cash Bb 196. 197. b 198. co” "An auditor gathers evidence regarding the validity of deposits in transit by examining the Bank confirmation, b. Cut off bank statement. Year-end bank statement. 6. Bank reconciliation “To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except ‘a Cutoff bank statement. b. Year-end bank statement. ¢: Bank confirmation, _d. General ledger. Which of the following errors will be discovered as a result of the audit of the bank reconeiliation? a. Failure to record bank deposit b.. Billing customer for an improper amount €., Payment for taw materials that were not received. 4. Payment of interest to an affiliate for an amount in excess of the existing rate, ‘An auditor oxdinasily sends a standard confirmation request to all banks with which the client has done Dusiness during che year under audit, regardless of the year-end balance. A purpose of this procedure is to 9. Provide the data necessary to prepare a proof of cash bb. Request that a cutoff bank statement and related checks be sent to the auditor c. Defect kiting activities that may otherwise not be discovered 4d, Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation ‘An auditor should ‘trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether fa. The cash receipts journal was held open for a dew days after the year-end. 1b. ‘The last checks recorded before the year-end were actually mailed by the year-end. . Cash balances were overstated because of kiting, : 4. Any wnusual payments to or reccipts from related parties occurred.ee eee ae Page 220f27 200. The information below was txken from the bank trnnsfer schedule prepared duang the audit of For & Cavs hraneat statements for the year ended December 31, 2014. Assure all checks are dated! and issued on December 30, 2014. . Disbursement date Receipt date CheskNo, From To - PexBacks Pci Bank PerBooks Pu Bank 101 Nauonal Federal «=—sDec. 30 Jan # Dec. 30 Jan. 3 202 County Sure jan Jan 2 Dec 30 Dee. 31 5 303 Federal Amencan Dec. 31 Jan. 3 Jan 2 Jan. 2 404 Stare Republic fan. 2 Jan.2 0 Janz Dec. 31 Which of the following checks might indicate GUM chp anf Panel disbe sere a. #101 and #363. b. #202 and 7404. c. S101 and #404. @. #202 and #303. (L201. A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital? 1. Simultaneous confirmanons. + € Sumultaneous venfications. b. Simultaneous bank reconciliations. d. Sumultaneous surprise cash count, Listed below are four interbank cash transfers of a cent for late December 31, 2014 and enrly January 2008. Disbursing date Receiving dat Per baak Per books Pezbaak Per books a 12/31 12/30 A2/3T 12/30 b. 01/02 12/30 12/31 12/31 c 01/03 12/31 01/02 01/02 a 01/03 12/31 01/02 12/34 202. Which of the following cash transfers mdicates an error inca poll at December 31, 201s a 203. Which of the following cash transfers would appear as a deposit in transit on December 31, 2014, « bank reconeilinuon? viaR——x bak (reuxt ) D 204, Which of the cash transfers would not appear as an outstanding check on December 31, 2014, bank reconcilintion? Vist F bak Audit of Receivables b 205, External confirmation of accounts receivable provides strong evidence about management's assertion of a. Completeness & Disclosure b. Existence 4. Valuation BM Aforn of receivable confirmation where the respondent is asked to reply to the auditor only in the event of disagiecment with the information provided in the request. a. Positive external confirmation ¢. Blank confirmation 1b. Negative extemal confirmation 4. Standard confirmation C207. The negative confirmation sequests may be used in all of the following conditions except, ‘a, A large number of smail balances is involved. b. A substantial number of errors are not expected. The assessed level of inherent and control tisk is high. d. The acceptable level of detection ask is high. f} 208. Which of the following procedures would an auditor most likely perform for year-end accounts recewvable confiemations when replies to second request are not received? ‘a. Review the cash receipts journal for the month prior to year end, b. Intensify the study of uirernal financial controls concerning the revenue cycle Increase the asseveed level of detection rink of the existence asrertion. ._ Inspect the shipping recorda documenting the merchandise sold to the debtors ,5 210, p 2. A 2 Page 23 of 27 When the auditor seeks to conftin certain balances or other information, and management requests the auditor not to do so, the awlitor should first i aia i Apply alternative procedures to obtain sufficient appropriate evidence regarding that matter. Coder the request as a scope limitation sufficient fo prechude an unqualified opinion Consider whether there ate valid reasons for the client's request, Taform the audit committee about the restrictions imposed by the management, pose In auditing accounts receivable the negative form of confismation request most likely would be used when =i a. Recipicnts ate likely to setuin postive confirmation requests w/o verifying the accuracy of the information. 7 b. The combined assessed level of inherent and control risk relative to accounts receivable is lows. eee call number of accounts receivable are involved but a relatively large mumber of etrors are expected, Spats ; 4. The auditor performs a dual-purpose test that assesses control risk and obtains substantive evidence, Which of the following is the best argument agninst the use of negative accounts receivable confirmations? a. The cost-per-response is excessively high. b. There is no way of knowing if the intended recipients received them. € Recipients are likely to fecl that in reality the confirmation isa subtle request for payment. 4d. The inference drawa from receiving no reply may not be correct. “The use of posiuve (as opposed to the negative) form of receivables confirmation is indicated when a. Internal control surrounding accounts receivable is considered effective. b. There is reascn to believe that a substantial number errors exist cA large number of small balances are involved. . There is reason to believe a significant portion of the requests will be answered. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An - auditor most likely will use a. The positive form to confirm all balances regardless of size. b. A combination of the two forms, with the positive form used for large balances and the negative form for the small balances. <. A combination of the two forms, with the positive form used for trade receivables and the negative form, for other receivables. 4. The positive form when controls related to seceivables are satisfactory, and the negative form when controls related to seceivables are unsatisfactory. ‘An auditor usually perform alternative procedures to substantiate the existence of accounts receivable when a. No reply to a positive confirmation request is received. _¢. Collectibility of the receivables is in doubt b. No reply to a negative confirmation request is received. _d. Pledging of the receivables is probable. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation procedures, In such situations the best alternative procedure the auditor might resort to would be a. Examining subsequent receipts of year-end accounts receivable. b.Reviewing accounts reccivable aging schedules prepared at the balance sheet dgte and at a subsequent date, - ¢. Requesting that management increase the allowince for uncollectible accounts by an amount equal ag, ome percentage of the alance in those accounts that cannot be confirmed. Performing an overall analytic review of accounts receivable and sales on a year-to-year basis.Cc 2. Page 24 of 27 Which of the following internal contzol procedures most likely would detee lapping of collections from * customers? ; i : a. Independent internal verification of dates of entry in the cash receipes journal with dates of daily ‘cash summaries ; ee * b, Authorization of writeofis of’ uncollectible accounts by a supervisor independent of credit approval s . Segregation of duties between receiving eash and posting the accounts receivable ledger. 4, Supervisory compatison of the daily cash summary with the sum of the cash receipts journal entries. : An auditor's tisk of misstatement of accounts receivable is lenst likely to increase if there is a. An increase in customer complaints about their accounts. * b. A general slowdown in cash collections, An increase in the allowance for doubtful accounts. 4. An increase in slow paying accounts, 218 Which of the following questions would an auditor ask while auditing accounts receivable to add value Q 2°. p22. (- ma. & 223. 4 2 toan audie? a Are accounts receivable pledged? b. Are customers satisfied with your billing procedures? €. Are any accounts receivables due from related paities? d._ Is there a separation of duties between the recording of cash receipts and the handling of cash? Audit of inventory ‘When auditing inventories, an auditor would least likely verify that ' a. ‘The financial statement presentation of inventories is appropriate. b, Damaged goods and obsolete items have been properly accounted for. «. Allinventory owned by the client is on hand at the time of the count. d. The client has used proper inventory pricing, ‘The primary objective of a CPA’s observation of a client's physical inventory count is to Discover whether a client has counted pasticulie inventory items of group of items. Obtain ditect knowledge that the inventory exists and has been properly counted. Provide an appraisal of the quality of merchandise on hand on the day of the physical count, Allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are reasonably accounted. aoge {f the assessed level of control tisk related to inventory is high, an auditor would probably a. Increase the extent of tests of controls of the inventory eycle. 'b. * Request the client to schedule the physical inventory count at the end of the year. ¢. Tnsist that the client perform physical counts of inventory items several times duting the jear. 4. Apply gross profit tests to ascertain the reasonableriess of the physicnl counts. ‘The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cut-offs dre adequate. The audit steps should be designed to detect whether merchandise included in the physica! count at year-end was not recouded as a 4. Sale in the subsequent period, ¢. Sale in the current period, b. Purchase in the current period. 4. Purchase return in the subsequent period, An auditor selected items for test counts while observing a client’s physical inventory. The auditor then tmced the test counts {0 the client's inventory listing. This’ procedute most likely obtained evidence concerning management's assertion of 8. Rights and obligations. b. Completeness. ¢. Existence or occurrence, _d. Valuation. For several years a client's physical inventory count has been lower than what was shown on the books at the tme of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to record some > a, Purchases returned to vendors, ¢. Sales discounts allowed. b, Sales returns received, d. Cash purchases.D 238. wen ons RRR Sa SN RE Page 25 of 27 To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely Would trace 4. Tnventory tags noted during the audito schedule. ee Inventory tags noted during dhe auditor's observation to”items listed in receiving reports and, vendor's invoices. lees tated in the inventory listing schedule to thventory tags and the auditor's recorded count sheets. ‘observation to items listed in the inventory listing b 4d. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule. An inventory tumover is useful to the auditor because it may detect 1. Inadequacies in inventory pricing, c. The optimum automatic reorder points. b. Methods of avoiding cyclical holding costs. d. The existence of obsolete meschandise. Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? B= Phytol oom cil /o, a. Testing the entity's computation of standard overhead rates. e Pe-auet | heey b. Obtaining confirmation of inventories pledged under loan agreements. PY be geod & Reviewing shipping and receiving cut-off procedures for inventories. e~ d. Tracing test counts to the entity's inventory listing, Vo = Rampulche~ When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obsain evidence that: Ail goods purchased before year-end are received before the physical inventory count. No goods held on consignment for customers are included in the inventory balance. No goods observed during the physical count are pledged ot sold. All goods owned at year-end are included in the inventory balance. A CPA is engaged in the annual audit of a client for the year ended December 31, 2014. The client took complete physical inventory under the CPA’s observation on December 15 and adjusted its inventory control account and detail perpetual inventory records to agree with the physical inventory. ‘The client considers a sale to be made in the period that goods are shipped. Listed in the following table are four items taken from the CPA’s sales cutoff worksheet. Which item does not require an adjusting entey on the elicnt’s books? Recorded as a sale Credited to inventory control 12/31 12/31 12/16 12/12 Audit of investments and other non-current assets, é 250. When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent 2° Theft b. Isregular endorsement c, Substitution d, Deposits in transit c 251. Which of the following would provide'the best evidential matter pertaining to the annual valuation of a 232, long-term investment in which the independent auditor’s client owas 1 30% voting interest? 2. Market quotations of the investee company's stock. b. Current fair value of the investce company's assets. 5 Audited Gnancial statements of the investee company. fully Mell d. Historical cost of the investee company’s assets. Of the following, which is the most efficient audit procedure for testing accrued interest earned on boad investment? ‘a. tracing interest declaration to an independent record book b. recomputing interest earned . confirming interest rate with the issuer of the bonds @._vouching the receipt and deposit of interest checks C233. To obtain evidence about proper valuation of investment in an associate, the auditox would most likely a. Compare the cost of the investment with the market valuation at the balance sheet date. b. Confirm the investment transaction with the associate. «. Obtain audited financial statements of the associate. 4. Recompute the carrying value of the investment5 235. Which of the following is a customary audit pr p = audit assertion that all 0 238, In violation of a company policy, (2. Aweakness mene tse ens ee Page 26 of 27 f 24. Which of te following combination of procedures would an nudtor mont ely perform (2 obuin evidence about fixed assets additions? . ‘. Inspecting documents and physically examining assets . b. Recomputing calculations and obpaining written management representations c. Observing operating activities and corsiparing balances to prior period balances §. Confiuniag ownership and coctoborating transactions through inquizies of client personnel, ion of the legal ownership of ocedure for the verific real property? . : w. Eeamination of correspondence with the corporate counsel concerning acquisition matters ‘ed and on file with the Register of Deeds b, Examination of ownership documents register : ©. Examination of corporation minutes and resolutions concerning the approval to acquire property plant and equipment 4, Examination of deeds and tide guaranty policies on hand J) 236. Accompanied by the production manager, the CPA tours RAMS plant, Which of the following errors or questionable prnctices has the best chance of being detected by the auditing procedure given? ‘2. Depreciation expense was recognited in 2014 for a machine which was fully depreciated b, Overhead has been under-applied : ¢. Necessary plant maintenance was not pesformed during the year dd. Insurance coverage on the plant has been allowed to Inpse ‘An auditor analyze repairs and maintenance accounts primarily to obtain evidence in suppor of thé aintenance have been recorded in the proper petiod 'a. Noncapitalizable expenditures for repairs and ms riod b. Expenditures for property and equipment have been recorded in the proper pe <¢, Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense d. Expenditures for property and equipment have not been charged to expense Arden Company ervoncously capitalized the cost of the painting its warehouse. The auditor examining Arden's financial statemerrts would most likely detect this when a. Discussing capitalization policies with Arden’s contzoller b. Examining maintenance expense accounts ¢. Observing, during the physical inventory ob: . Examining the consuruction work orders supp internal control over recording reticements of equipment may cause an auditor to arch for equipment that is still on hand but no servation, that the warehouse had been painted jorting items capitalized during the year . ‘a. Tine additions to the "other assets" account to se longer being used b. Select certain items o: «. Inspect certain items of equipn d. Review the subsidiary ledger to ascertain wl equipment during the year equipment from the accounting records and locate them in the plant ment in the plant and trace those items to the accounting records ihether depreciation was tiken on each item of A. 280. Determining, that proper stnounts of deprecintion ste expensed provides assurance about management's assertions of 2. Valuation and alloestion _b Completeness Rights & obligations __d Existence or occurrence Audit of liabilities and stockholders’ equity 241. The auditor will most likely perform extensive tests for possible understatement of: a. Revenues . Liabilities ; b. Assets d, Capital 242, Which of the following assestions is of principal concern fo the anilitors in the examination of accounts payable? ©. Valuation. : a. Existence. b. Completeness. d, Authorization. 243. Which of the following procedures is least likely to be completed before the balance sheet date? + ‘a. Observation of inventory ¢, Seatch for untecorded liabilities. Germigy Pb b. Review of internal contzol over cash disbursements. d. Confirmation of receivables. 244, In the audit of a medium-sized manufncturing concern, which of the following areas would be expected to require the least amount of audit time? a. revenue b. assets . lisbilities d. owner's equity246, 247. 248. 249. 250, 251, 282. 253. 234, Page 27 of 27 1t for detecting unrecorded liabilities at the Which of the following audit procedures is the most effi balance sheet date? ala cree sheet date a. confirming large accounts payable balances at the balatice F Bb. comparing cash disbursements in the subsequent period with the accounts payable tral balance at year end . examining purchase orders issued for several days prior to the close of the year d, obtaining a letter from the client's attorney Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because a, there is a duplication of cutoff tests " ’b. accounts payable balances at che balance sheet date may not be paid before the auclit is completed € conespondence with the audit client’s attorney will veal all egal action by vendors for nonpayment 4. there is likely to be other reliable external evidence available to support the balances Which of the following is not used to test overstatement and understatement of accounts payable? ‘a. cash receipts records. . canceled voucher packages b. cash disbursement records d, unmatched recciving report ‘The auditor’s program for examining long-term debt should inclade 2. verification of the existence of the bondholders ». examination of any bond trust agreement ¢. inspection of the accounts payable subsidiary ledger 4. investigation of credits to the bond interest income account Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine ‘whether the related payabies apply to the prior period. b. Tnvestigating payables tecorded just prior to and just subsequent to the balance sheet date to- determine whether they are supported by receiving reports. Examining unusual relationships between monthly accounts payable balances and recorded cash vayments. - a Reconaliag vendor's statements to the file of receiving reports to identify items received just prior to the balance sheet date. To determine whether accounts payzble are complete, aa auditor performs a test to-verify that all merchandise received is recorded. The population of documents for this test consists of all a. Vendor's invoices. ¢. Receiving reports. b. Purchase order's 4. Cancelled checks. During the course of an audit, an auditor observes that the recorded interest expense seems excessive in relation to the balance in long-term debt. This observation could lead the auditor to suspect that a. long-term debt is understated . discount on bonds payable is overstated b, long-term debt is overstated . premium on bonds payable is understated OF the following, which is the most efficient audit procedute audit procedure for verification of interest expense’on bonds payable? a. Tracing interest declarations to an independent record book. b. Recompiating interest expense, . © Confirming interest rate with the holder of the bonds. 4. Examining the cancelled interest checks. Which of the following is the most important consideration of an audi stockholdes” equity section ofa client's balance sheet? a. Changes in the capital etock account are verified by an independent stock transfer agent. b. Sate in the capital stock account can be traced to a resolution in the minutes of the board of irector’s meeting. . ©. Cash dividends during the year under audit are audit are approved by the stockholders, 4. Stock dividends are capitalized at par ot stated value on the dividend declaration date. All comporate capital stock transactions should ultimately be traced to the ‘a. minutes of the board of directors ¢. cash disbursements journal . cash receipts journal d, numbeted stock certificates GOD BLESS! itor when examining the