CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY ‘APRIL 21, 2018 FINAL PREBOARD EXAMINATION ‘SATURDAY, 5:00PM ~ 6:00PM SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE (ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED. 1. Each time an auditor draws a condusion based on evidence from a sample, an additional risk, Le., sampling risk, is introduced. An example of sampling risk is, ‘A. Improperty applying a proper audit procedure to sample data. 'B. Property applying an improper audit procedure to sample data. C. Drawing an erroneous conclusion from sample data, . Projecting the results of sampling beyond the population tested. 2. Which of the following is a true statement about the auditor's report on comparative financial statements? ‘A. Ifthe financial statements of the prior period have been audited but those of the current. period have not, the auditor should update the report on the prior period and include as € separate paragraph in the report a disclaimer of opinion on the unaudited financial statements. 7 B.A predecessor auditor may reissue the report on the financial statements of a prior pperiod provided (s)he performs certain procedures, induding obtaining representation letters from the successor auditor and from mariagement, and provided (s)he refers in: the relssued report to the work of the successor auditor. . The report should not express an opinion different from that previously expressed on the statements of a prior period because the differences would lessen the public’s ‘confidence in the integrity of the audito’s report. . A continuing auditor may under may under certain circumstances express an opinion different from the previous opinion. 3._ Relative to prospective financial statements, a practitioner may not accept an engagement wo ‘A. Apply agreed-upon procedures. : 8. Perform an examination. ©. Perform a review. D. Perform a compilation. 4, The following statements relate to the auditor's responsibilities regarding related parties ‘and transactions with such parties. Which is incorrect? A. Management is required to implement adequate interna! control to ensure that. transactions with related parties are appropriately identified in the information system ‘and disclosed in the financial statements. B. The auditor should have a sufficient understanding of the entity and its environment to Identify events, transactions, and practices that may result in a risk of material misstatement regarding related parties and transactions with such parties. CC. A financial statement audit cannot be expected to detect all rsiated party transactions. 1D. The auditor is responsible for the Identification and disclosure of related parties and transactions with such parties. Page 1 of 12‘CPAREVIEW 904001 OF THE PHILIPPINES (CPAR) = MANILA [FINAL PREBOARD EXAMINATION ‘AUDITING MgORY 12. 13. 14, 15. 16. v7. 18, wr 2, 2018 SATUROAY 500M = 000 ‘minutes book. ‘The corporation secretary instead offers to give the CPA a certified copy of resolutions and actions relating to accounting matters. ‘During 2018, the research staff of Saliksik Research Corporation devoted its entire efforts ‘toward developing a new pollution-control device. All costs that could be attributed directly to the project were accounted for as deferred charges and classified on the statement of financial position at December 31, 2018, as a noncurrent asset. In the course of his audit of the corporation's 2018 financial statements, Andok, CPA, found persuasive evidence that the research conducted to date would probably result in a marketable product. The deferred research charges are significantly material in relation to both income and total assets. (On January 2, 2019, the Reebok Auto Supply Company received notice from its primary ‘supplier that effective immediately, all wholesale prices would be increased 10 percent. On the basis of the notice, Reebok Auto Supply revalued its December 31, 2016, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; ‘however, the effect of the revaluation was material to current assets but not to total assets ‘or netincome. The increase in valuation is adequately disclosed in the notes to the financial statements. You were engaged to audit the Steelman Company’s financial statements after the close of the companys fiscal year. Because you were not engaged until after the belance sheet date, you were not able to physically observe inventory, which is highly material. On the completion of your audit, you are satisfied that Steelman’s finandal statements are presented faity, indluding inventory about which you were able to satisfy yourself by the se of alternative audit procedures. ACPA has completed his audit of the finandial statements of a bus company for the year ended December 31, 2018. Prior to 2018, the company had been depreciating its buses. ‘over a 10-year period. During 2015, the company determined that @ more realistic ‘estimated life for its buses was 12 years and computed the 2018 depreciation on the basis, Of the revised estimate. The CPA has satisfied himself that the 12-year life is reasonable. “The company has adequately disclosed the change in estimated useful lives ofits buses and the effect of the change on 2018 income in a note to the financial statements. ‘The practice of accountancy includes the following except ‘A. Practice in public accountancy. Practice in education/academe. C. Practice in the government. D. Practice in commerce and industy, when the CPA is appointed as marketing manager of the enterprise. ‘When a professional accountant learns of a materialerror or omission in a tax retum of 2 prior ‘year, he/she has the responsibilty to do the following, except ‘A. promptly advise the dlient or employer of the error or omission and recommend that disclosure be made to the revenue authorities. ‘8. promptly inform the revenue authorities even without the permission of the lent. C. advise the employer to correct the error and recommend that disclosure be made to the revenue authorities. . consider discontinuing association with the client ifthe client does not correct the error. When an auditor has 2 question concerning a client's ability to continue as a going concem, the auditor considers managements plans for dealing withthe situation. That consideration |s most likely to indude consideration of management's plans to A. dispose of assets, B. decrease ownership equity. CC. Increase expenditures on key products. . Invest in derivative securities.‘CPA REVIEW SOH00K OF THE PHILIPPINES (CPAR)~ MANILA FIWAL PREBOARD EXAMINATION AUDTTINGTHEORY gp 2, 2048 SATURDAY 000M = GM 25. 26. 27. 28. 30, 5. A compilation consists principally of inquiries of company personnel and analytical procedures. CC. Since a compilation engagement is not an assurance engagement, we are not required ‘to verify the accuracy or completeness of the information you provided to us to compile these financial statements. D. A compilation is substantially less in scope than an audit in accordance with PSAs, the ‘objective of which is the expression of an opinion. ‘The purpose of the audit procedure to "examine underlying documentation for subsequent. ‘cash disbursements” is to ‘A. Uncover liabilities on the balance sheet which should not have been recorded until a subsequent period. BB. Find the documentation relating to a cash disbursement, C Uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date. 'D. Uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the engagement in accordance with applicable technical and professional standards for that price. This situation may create a self-interest threat to ‘A. Professional competence and due care B. Objectivity © Integrity = D. Professional behavior Which type of subsequent event requires consideration by management and evaluation by the auditor? A Subseavent events thot have a rect eet on the fandl statements and requre justment. - BL Subsequent events that have no direct effect on the financial statements but for which disclosure is advisable. C. Both A and B. D. Neither A nor B. ‘Which of the following fundamental ethical principles prohibits association of professional ‘accountants with reports, retums, communications or other information that is belleved to Contain a materially false or misieading statement? A. Integrity 8. Objectivity . Professional competence and due care . D. Confidentiality ‘Which of the following need not be documented in the working papers as required by PSA. 2307 A. Audit evidence obtained, the audit procedures applied and the testing performed have Provided sufficient competent evidential matter to afford a reasonable basis for an opinion. ‘The work has been adequately planned and supervised. A sufficient understanding of the internal control system had been obtained to plan the audit and to determine the nature, timing and extent of tests to be performed. D. Basis in choosing the members of the audit engagement team. ‘Which of the following sa necessary control procedure for cash disbursements? ‘A. Checks should be signed by the controller and at least one other employee of the ‘company. B Checks should be sequentially numbered, and the numerical sequence’ should be ‘accounted for by the person preparing the bank reconciliation. B e