Auditing Theory Test Bank 8.

An auditor's working papers will generally be least likely to

include documentation showing how the
Select the best answer for each of the following a) Client's schedules were prepared
questions.  b) Engagement had been planned
c) Client's system of internal control had been reviewed and
1. Broadly defined, the subject matter of any audit consists of evaluated
a)Financial statements d) Unusual matters were resolved
b) Economic data
c) Assertions 9. Which of the following sampling methods would be most
d) Operating data appropriate in performing tests of controls over authorization
of cash disbursements
a) Attributes
2. The third standard of field work states that sufficient b) Variables
competent evidential matter may in part be obtained through c) Ratio
the following methods except d) Stratified
a) Inspection
b) Observation 10. Analytical procedures used in the overall review stage of
c) Confirmation an audit generally include
d) Reconciliation a) Considering unusual or unexpected account balances
that were not previously identified
b) Performing test of transactions to corroborate
management's financial statement assertions
3. If an auditor believes that material error or fraud exist, the
auditor should c) Gathering evidence concerning account balances that have
not changed from the prior year
a) Consider the implications and discuss the matter with
appropriate levels of management d) Re-testing control procedures that appeared to be
ineffective during the assessment of control risk
b) Make the investigation necessary to determine whether
errors or fraud have in fact occurred
11. Results of the financial statement audit are communicated
c) Request that management investigate whether errors or
fraud have in fact occurred to users through
a) Financial statement
d) Consider whether errors or fraud where the result of
employee's failure to comply with specific controls b) Written management assertion
c) Audit report
d) None of the above
4. Which of the following is not normally performed in the 12. What is the primary difference between financial reporting
pre-planning or pre-engagement phase? risk and audit risk?
a) Deciding whether to accept or reject an audit engagement a) The application of accounting principles
b) Inquiring from predecessor auditor b) Responsibilities of the respective parties involved
c) Preparing an engagement letter c) Demands of users of financial statements
d) Making a preliminary estimate of materiality d) Risks of being sued by third parties

5. On the basis of the audit evidence gathered and evaluated, 13. Relationship between control risk and detection risk is
an auditor decides to increase the assessed level of control ordinarily
risk from that originally planned. To achieve an overall audit a) Parallel
risk level that is substantially the same as the planned audit b) Inverse
risk level, the auditor would c) Direct
d) Equal
a) Decrease substantive testing
b) Increase inherent risk 14. A representation letter issued by a client
c) Decrease detection risk a) Is essential for the preparation of the audit program
d) Increase materiality levels b) Is a substitute for testing
c) Does not reduce the auditor's responsibility
6. An effective internal control d) Reduces the auditor's responsibility only to the extent that
a) Cannot be circumvented by management it is relied upon
b) Can reduce the cost of an external audit
c) Can prevent collusion among employees 15. The recruitment of senior management for an assurance
d) Eliminates risks and potential loss to the organization client, such as those in a position to affect the subject of the
assurance engagement may least likely create
7. In auditing through a computer, the test data method is a) Self-interest threat
used by auditors to test the b) Advocacy threat
a) Accuracy of input data c) Intimidation threat
b) Validity of the output d) Familiarity threat
c) Procedures contained within the program
d) Normalcy of distribution of test data
16. In reviewing the audit work performed, the engagement 23. Which of the following procedures is not included in a
partner review engagement on a nonpublic entity
a) Must review all audit documentation a) Inquiries of management
b) Need not review all audit documentation, but may do b) Inquiries regarding events subsequent to the balance sheet
so date
c) Need not review all audit documentation c) Any procedures designed to identify relationships among
d) Must ask the staff performing the audit work to sign the data that appear to be unusual
audit report d) A study and evaluation of internal control structure

17. The independent auditor lends credibility to client’s 24. In planning the audit engagement, the auditor should
financial statements by consider each of the following except
a) Maintaining a clear-cut distinction between management’s a) The kind of opinion that will likely be given
representations and the auditor’s representation b) Matters relating to the entity’s business and the industry in
b) Testifying under oath about client’s financial statements which it operates
c) Stating in the auditor’s management letter that the c) The entity’s accounting policies and procedures
examination was made in accordance with generally accepted d) Anticipated levels of control risk and materiality
auditing standards
d) Attaching an auditor’s opinion to the client’s financial 25. What assurance is provided by the practitioner in an
statements agreed-upon procedures engagement?
a) Reasonable
18. The most difficult type of misstatement to detect is fraud b) Absolute
based on  c) Moderate
a) The over-recording of transactions d) No assurance
b) The non-recording of transactions
c) Recorded transactions in subsidiaries
d) Related party receivables 26. To test for unsupported entries in the journal, the direction
of audit testing should be from the
19. Assuming a recurring audit, in which of the following a) Journal entries
situations would the auditor be unlikely to send a new b) Ledger entries
engagement letter to the client? c) Original source documents
a) A recent change in partner and/or staff involved in the d) Externally generated documents
audit engagement
b) A change in the terms of engagement 27. For good internal control, the purchasing department
c) A recent change of client management should not be responsible for
d) A significant change in the nature or size of the client's a) Authorizing the acquisition of goods
business b) Finding the lowest cost vendor
c) Reviewing the vendors catalog descriptions and prices for
20. When an auditor expresses an adverse opinion standardized items
he/sheshould disclose the substantive reasons for such d) Designing the purchase order form
anopinion in an explanatory paragraph
a) Within the notes to the financial statements 28. Involves tracing a few transactions through the accounting
b) Preceding the opinion paragraph system
c) Following the opinion paragraph a) Test of controls
d) Preceding the introductory paragraph b) Walk-through test
c) Analytical procedures
21. Tolerable error means d) Substantive procedures
a) An error that arises from an isolated event that has not
recurred other than on specifically identifiable occasions and 29. This exists, when other information, not related to matters
is therefore not representative of errors in the population appearing in the financial statements, is incorrectly stated or
b) An error that the auditor expects to be present in the presented
population a) Material inconsistency
c) The maximum error in a population that the auditor is b) Material misstatement
willing to accept c) Material misstatement of fact
d) The possibility that the auditor's conclusion, based on a d) Material error affecting the other information
sample may be different from the conclusion reached if the
entire population were subjected to the same audit procedure 30. Who appoints the members of the Board of Accountancy
a) The chairman of BOA
22. Examples of events or conditions, which individually or b) The president of the Philippines
collectively, may cast significant doubt about the going c) The chairman of the PRC
concern assumption include the following except d) The president of PICPA
a) Net liability or net current liability position
b) Change from credit to cash-on-delivery transactions with 31. An auditor is required to obtain an understanding of the
suppliers entity's business, including business cycles and reasons for
c) Labor difficulties or shortages of important supplies business fluctuations. What is the audit purpose most directly
d) Compliance with capital or other statutory served by obtaining this understanding?
requirements a) To enable the auditor to accurately identify significant
deficiencies in internal control a) Eliminates the use of certain statistical sampling methods
that would otherwise be available
b) To assist the auditor in accurately interpreting b) Presumes that the auditor will reperform the tests of the
information obtained during an audit balance sheet date
c) To allow the auditor to more accurately perform tests of c) Should be especially considered when there are rapidly
controls changing economic conditions
d) To decide whether it will be necessary to perform analytical d) Potentially increases the risk that errors that exist at
procedures the balance sheet date will not be detected

32. Which of the following is not true about the report release 39. Close family include the following, except
date? a) Parent
a) It is defined as the date after which existing b) Sibling
documentation must not be deleted, and additions to the c) Non-dependent child
documentation file must be documented as such d) Spouse
b) It is often the date on which the report is delivered to the
client 40. A computer-assisted audit technique that is most likely to
c) It is the date on which the auditor grants the client be effective in a continuous auditing environment is
permission to use the report a) Parallel simulation
d) It is used to define the beginning of the retention period b) Controlled reprocessing
c) Embedded audit modules
d) Transaction tripping
33. An auditor should not issue a report on
a) Quarterly financial information
b) Internal control 41. Which of the following is not prohibited by the Code of
c) Management performance Professional Ethics for CPAs?
d) The achievability of forecasts a) Advertising and solicitation of clients
b) Payment of commissions to obtain a client
34. Which of the following procedures would an auditor most c) Receiving a contingent fee on a tax case before the
likely perform to obtain evidence about the occurrence of Bureau of Internal Revenue
subsequent events? d) Offering employment to a staff member of another CPA
a) Confirming a sample of material accounts receivable without first informing the CPA
established after year-end
b) Comparing the financial statements being reported on with 42. The management's assessment of the entity's ability to
those of the prior period continue as a going concern covers a period of
c) Investigating personnel changes in the accounting a) Not longer than 12 months from balance sheet date
department occurring after year-end b) At least 12 months from the balance sheet date
d) Inquiring as to whether any unusual adjustments were c) Not longer than 12 months from the date of audit report
made after year-end d) At least 12 months from the date of audit report

35. To which of the following matters would materiality limits 43. To obtain evidential matter about control risk, an auditor
not apply when obtaining written client representations? selects tests from a variety of techniques including
a) Violations of state labor regulations a) Inquiry
b) Disclosure of line-of-credit arrangements b) Analytical procedures
c) Information about related party transactions c) Calculation
d) Instances of fraud involving management d) Confirmation

36. Who ultimately determines the scope of the audit? 44. The need for independent audits of financial statements
a) The auditor can be attributed to all of the following conditions except
b) The client a) Remoteness
c) Both a and b b) Consequence
d) Neither a nor b c) Complexity of subject matter
d) Validity
37. Financial statements prepared in accordance with a
financial reporting framework designed to meet the financial 45. After issuing a report an auditor includes that an auditing
information needs of specific users are referred to as procedure considered necessary at the time of the
a) Special purpose financial statements examination was omitted from the examination. The auditor
b) Special purpose framework should first
c) General purpose financial statements a) Undertake to apply the omitted procedure or alternative
d) Specific purpose financial statements procedures that would provide a satisfactory basis for the
auditor's opinion
b) Assess the importance of the omitted procedure to the
auditor's ability to support the opinion expressed on the
financial statements taken as a whole
c) Notify the audit committee or the board of directors that
38. An auditor plans to apply substantive tests to the details of the auditor's opinion can no longer be relied upon
asset and liability accounts as of an interim date rather than as d) Review the results of other procedures that were applied to
of the balance sheet date. The auditor should be aware that compensate for the one omitted or to make its omission less
this practice important
 d) Communicating the conclusions reached

46. This quality control element requires a CPA firm to 54. Users of the audit report can reasonably expect the
establish policies and procedures to provide it with reasonable audited financial statements to be
assurance that engagements are performed in accordance a) Complete and contain many of the important financial
with professional standards and regulatory and legal disclosures
requirements, and that the firm or the engagement partner b) Presented fairly according to the substance of GAAP
issue reports that are appropriate in the circumstances c) Free from all errors
a) Ethical requirements d) All of the above
b) Engagement performance
c) Monitoring 55. Which of the following services is the broadest and most
d) Human resources inclusive
a) Audit
47. Communication with a predecessor auditor is initiated by b) Attestation
a) Management c) Assurance
b) The successor auditor d) Compliance
c) The audit committee of the board of directors
d) The chair of the board of directors 56. One reason why an auditor makes an analytical review of
the client’s operations is to identify
48. In which of the following may confidential information not a) Improper separation of accounting and other financial
be disclosed? duties
a) To comply with the quality review of a member body or b) Weakness of a material nature in the system of internal
professional body accounting control
b) To submit evidence in the course of legal proceedings c) Unusual transactions
c) Acquiring information in the course performing d) Non-compliance with prescribed control procedures
professional services and use that information for
personal advantages 57. Analytical procedures used in planning an audit should
d) When consent to disclose information is given by the client focus on identifying
a) Material weaknesses in the internal control structure
49. The auditor should perform the following risk assessment b) The predictability of financial data from individual
procedures to obtain an understanding of the entity and its transactions
environment, including its internal control, except c) The various assertions that are embodied in the financial
a) Inquiries of management and others within the entity statements
b) Reperformance d) Areas that may represent specific risk relevant to audit
c) Analytical procedures
d) Observation and inspection 58. An integrated test facility (ITF) would be appropriate when
the auditor needs to
50. The auditor should determine overall responses to address a) Trace a complex logic path through an application system
the risks of material misstatement at the financial statement b) Verify processing accuracy concurrently with
level. Such responses most likely include processing
a) Assigning less experienced staff c) Monitor transactions in an application system continuously
b) Performing predictable further audit procedures d) Verify load module integrity for production programs
c) Performing substantive procedures at an interim date
instead of at period end 59. The rotation of senior accounting personnel can be
d) Emphasizing to the audit team the need to maintain regarded as a safeguard
professional skepticism in gathering and evaluating audit a) Created by the profession
evidence b) Within the client’s systems and procedures
c) In the work environment
51. The need for assurance services arises for all of the d) Created within the business community
following reason except
a) Potential bias in providing information 60. If certain forms are not consecutively numbered
b) Closeness between a user and the organization a) Systematic sampling may be appropriate
c) Complexity of the processing systems b) Selection of a random sample probably is not possible
d) Remoteness between a user and the organization c) Stratified sampling should be used
d) Random number tables cannot be used

52. Which one of the following is not a key attribute needed

to perform assurance?
a) Subject matter knowledge
b) Independence 61. A cash shortage may be concealed by transporting funds
c) Established criteria or standards from one location to another or by converting negotiable
d) Accounting skills assets to cash. Because of this, which of the following is vital?
a) Simultaneous confirmations
53. Which one of the following is not part of the attest b) Simultaneous bank reconciliations
process? c) Simultaneous verification
a) Providing the accuracy of the books and records d) Simultaneous surprise cash count
b) Gathering evidence about assertions
c) Evaluating evidence against objective criteria 62. Which of the following is most likely to indicate a
significant deficiency relating to a client's anti-fraud
programs? 69. Which of the following is most likely to be unique to the
a) A broad scope of internal audit activities audit work of CPAs as compared to work performed by
b) A "whistle-blower" program that encourages anonymous practitioners of other professions?
submissions a) Due professional care
c) Audit committee passivity when conducting oversight b) Competence
functions c) Independence
d) Lack of performance of criminal background investigations d) Complex body of knowledge
for likely customers
70. Which of the following would an auditor most likely use in
63. Which of the following is not an attestation standard? determining the auditor's preliminary judgment about
a) Sufficient evidence shall be obtained to provide a materiality?
reasonable basis for the conclusion that is expressed in the a) The anticipated sample size of the planned substantive tests
report b) The entity's annualized interim financial statements
b) The report shall identify the subject matter on the assertion c) The results of the internal control questionnaire
being reported on and state the character of the engagement d) The contents of the management representation letter
c) The work shall be adequately planned and assistants, if any,
shall be properly supervised 71. Which of the following conditions identified during
d) A sufficient understanding of internal control shall be fieldwork of an audit is most likely to affect the auditor's
obtained to plan the engagement assessment of the risk of misstatement due to fraud?
a) Checks for significant amounts outstanding at year-end
64. Proper segregation of functional responsibilities calls for b) Computer generated documents
separation of the functions of c) Missing documents
a) Authorization, execution, and payment d) Year-end adjusting journal entries.
b) Authorization, recording, and custody
c) Custody, execution, and reporting 72. An auditor ordinarily uses a working trial balance
d) Authorization, payment, and recording resembling the financial statements without footnotes, but
containing columns for
65. Control risk should be assessed in terms of a) Cash flow increases and decreases
a) Specific controls b) Audit objectives and assertions
b) Types of potential fraud c) Reclassifications and adjustments
c) Financial statement assertions d) Reconciliations and tick marks
d) Control environment factors
73. The risk that an auditor will conclude, based on
66. Which of the following is not a step in an auditor's substantive tests, that a material misstatement does not exist
assessment of control risk? in an account balance when in fact such misstatement does
a) Evaluate the effectiveness of internal control with tests of exist is referred to as
controls a) Detection risk
b) Obtain an understanding of the entity's information system b) Sampling risk
and control environment c) Non-sampling risk
c) Perform tests of details of transactions to detect d) Inherent risk
material misstatements in the financial statements
d) Consider whether controls can have a pervasive effect on 74. The usefulness of the standard bank confirmation request
financial statement assertions may be limited because the bank employee who completes
the form may
67. Which of the following procedures would an auditor a) Be unaware of all the financial relationships that the
ordinarily perform first in evaluating management's bank has with the client
accounting estimates for reasonableness? b) Not believe that the bank is obligated to verify confidential
a) Develop independent expectations of management's information to a third party
estimates c) Sign and return the form without inspecting the accuracy of
b) Consider the appropriateness of the key factors or the client's bank reconciliation
assumptions used in preparing the estimates d) Not have access to the client's cutoff bank statement
c) Test the calculations used by management in developing
the estimates
d) Obtain an understanding of how management 75. A material weakness is a significant deficiency (or
developed its estimates combination of significant deficiencies) that results in a
68. An entity's income statements were misstated due to the reasonable possibility that a misstatement of at least 'what
recording of journal entries that involved debits and credits to amount will not be prevented or detected?
an unusual combination of expense and revenue accounts. a) An amount greater than zero
The auditor most likely could have detected this fraudulent b) An amount greater than zero, but at least inconsequential
financial reporting by c) An amount greater than inconsequential
a) Tracing a sample of journal entries to the general ledger d) A material amount
b) Evaluating the effectiveness of internal control
c) Investigating the reconciliations between controlling 76. The existence of audit risk is recognized by the statement
accounts and subsidiary records in the auditor's standard report that the auditor
d) Performing analytical procedures designed to disclose a) Obtains reasonable assurance about whether the
differences from expectations financial statements are free of material misstatement.
b) Assesses the accounting principles used and also evaluates d) Classification
the overall financial statement presentation.
c) Realizes some matters either individually or in the 83. When performing a review of an issuer company, which is
aggregate, are important while other matters are not least likely to be included in the CPA's inquires of
important. management members with responsibility for financial and
d) Is responsible for expressing an opinion on the financial accounting matters?
statements, which arc the responsibility of management. a) Subsequent events
b) Significant journal entries and other adjustments
77. Which of the following services would be most likely to be c) Communications with related parties
structured as an attest engagement? d) Unusual or complex situations affecting the financial
a) Advocating a client's position in tax matter. statements
b) A consulting engagement to develop a new database
system for the revenue cycle. 84. The adverse effects of events causing an auditor to believe
c) An engagement to issue a report addressing an entity's there is substantial doubt about an entity's ability to continue
compliance with requirements of specified laws. as a going concern would most likely be mitigated by
d) The compilation of a client's forecast information. evidence relating to the
a) Ability to expand operations into new product lines in the
78. Which of the following is ordinarily considered to be a future.
fraud risk factor? b) Feasibility of plans to purchase leased equipment at Jess
a) The company's financial statements include a number than market value.
of last minute material adjustments. c) Marketability of assets that management plans to sell.
b) Management regularly informs investors of forecast d) Committed arrangements to convert preferred stock to
information. long-term debt.
c) The company has experienced increasing earnings over the
previous five years. 85. One reason that an auditor only obtains reasonable, and
d) The company's president is included as a member of the not absolute, assurance that financial statements are free from
board of directors. material misstatement is
a) Comprehensive basis reporting
79. Which is least likely to be a question asked of client b) Employee collusion
personnel during a walk-through in an audit of the internal c) Material misstatements
control of an issuer (public) company? d) Professional skepticism
a) What do you do when you find an error'? 86. When an auditor concludes there is substantial doubt
b) Who is most likely to commit fraud among your about a continuing audit client's ability to continue as a going
coworkers? concern for a reasonable period of time, the auditor's
c) What kind of errors have you found? responsibility is to
d) Have you ever been asked to override the process or a) Issue a qualified or adverse opinion, depending upon
controls? materiality, due to the possible effects on the financial
statements.
80. An auditor who uses the work of a specialist may refer to b) Consider the adequacy of disclosure about the client's
and identify the specialist ill the auditor's report if the possible inability to continue as a going concern.
a) Specialist is also considered to be a related party. c) Report to the client's audit committee that management's
b) Auditor indicates a division of responsibility related to the accounting estimates may need to be adjusted.
work of the specialist. d) Reissue the prior year's auditors report and add an
c) Specialist's work provides the auditor greater assurance of explanatory paragraph that specifically refers to "substantial
reliability.  doubt" and "going concern."
d) Auditor expresses an "except for" qualified opinion or
an adverse opinion related to the work of the specialist. 87. The accountant who is not independent may perform
which of the following types of engagements?
a) Audit
81. Which of the following statements concerning evidential b) Agreed-upon procedures
matter is correct? c) Compilation
a) Appropriate evidence supporting management's assertions d) Review
should be convincing rather than merely persuasive.
b) Effective internal control contributes little to the reliability 88. Which of the following should an auditor obtain from the
of the evidence created within the entity. predecessor auditor prior to accepting an audit engagement?
c) The cost of obtaining evidence is not an important a) Analysis of balance sheet accounts
consideration to an auditor in deciding what evidence should b) Analysis of income statement accounts
be obtained. c) All matters of continuing accounting significance
d) A client's accounting data cannot be considered d) Facts that might bear on the integrity of management
sufficient audit evidence to support the financial
statements. 89. Which is least likely to be a response when an auditor has
obtained evidence indicating a risk of material misstatement
82. Confirmations of accounts receivable address which in the area of inventory?
assertion most directly? a) Request inventory counts at the end of each month.
a) Completeness b) Discuss questions of inventory valuation with any other
b) Existence auditors involved with the audit.
c) Valuation c) Make oral inquiries of major suppliers in addition to written
confirmations. change on reported net income.
d) Perform inventory observations on an unannounced basis.
96. An abnormal fluctuation in gross profit that might suggest
90. The independent auditor selects several transactions in the need for extended audit procedures for sales and
each functional area and traces them through the entire inventories would most likely be identified in the planning
system, paying special attention to evidence about whether or phase of the audit by the use of
not the controls are in operation. This is an example of a(n) a) Tests of transactions and balances
a) Application test b) A preliminary review of internal control
b) Test of controls c) Specialized audit programs
c) Substantive test d) Analytical procedures
d) Test of a function
97. Which of the following statements best describes the
91. Accounting control procedures within computer ethical standard of the profession pertaining to advertising
processing may leave no visible evidence indicating that the and solicitation?
procedures were performed. In such instances, the auditor a) All forms of advertising and solicitation are prohibited.
should test these controls by b) There are no prohibitions regarding the manner in which
a) Making corroborative inquiries. CPAs may solicit new business.
b) Observing the separation of duties of personnel. c) A CPA may advertise in any manner that is not false,
c) Reviewing transactions submitted for processing and misleading, or deceptive.
comparing them to related output. d) A CPA may only solicit new clients through mass mailings.
d) Reviewing the run manual.
98. A note to the financial statements of a bank indicates that
92. If information is for management's use only, which of the all of the records relating to its business operations are stored
following forms of CPA association with financial information on magnetic disks; and that there are no emergency back-up
is most likely to result in no report being issued? systems or duplicate disks stored since the bank and their
a) An agreed-upon procedures engagement auditors consider the occurrence of a catastrophe to be
b) An audit remote. Based upon this, one would expect the auditor's
c) A compilation report to express
d) A review a) An adverse opinion
b) An "except for" opinion
93. In obtaining an understanding of a manufacturing entity's c) An unqualified opinion
internal control over inventory balances, an auditor most likely d) A qualified opinion
would
a) Review the entity's descriptions of inventory policies 99. Which of the following is not typically performed when
and procedures. accountants are performing a review of the financial
b) Perform test counts of inventory during the entity's physical statements of a nonissuer?
count. a) Analytical procedures applied to financial data
c) Analyze inventory turnover statistics-to identify slow- b) Inquiries about significant subsequent events
moving and obsolete items. c) Inquiries of the client's attorney about legal matters
d) Analyze monthly production reports to identify variances d) Obtaining an understanding of the accounting principles
and unusual transactions. followed by the client's industry

94. When auditing merchandise inventory at year-end, the

auditor performs a purchase cutoff test to obtain evidence 100. Which of the following is least likely to be a restricted use
that report?
a) All goods owned at year-end are included in the a) A report on financial statements prepared following a
inventory balance. comprehensive basis of accounting other than generally
b) All goods purchased before year-end are received before accepted accounting principles.
the physical inventory count. b) A report on internal control significant deficiencies noted in
c) No goods held on consignment for customers are included an audit.
in the inventory balance. c) A required communication with the audit committee.
d) No goods observed during the physical count are pledged d) A report on compliance with aspects of contractual
or sold. agreements.

95. A company has changed its method of inventory valuation CHAPTER 1

from an unacceptable one toone in conformity with generally
accepted accounting principles. The auditor's MULTIPLE CHOICE
6report on the financial statements of the year of the change b 1. To become a Certified Public Accountant
should include (CPA), an individual must pass the Uniform CPA
a) No reference to consistency. Examination and
b) A reference to a prior period adjustment in the opinion
paragraph. a. Demonstrate his or her independence.
c) An explanatory paragraph explaining the change. b. Comply with state education and experience
d) A justification for making the change and the impact of the requirements.
c. Obtain employment with a public accounting b 6. An independent audit aids in the
firm. communication of economic data because the
d. Become a member of the AICPA. audit
b 2. Which of the following statements is an a. Confirms the accuracy of management's
example of an assertion made by management in financial representations.
an b. Lends credibility to the financial statements.
entity's financial statements? c. Guarantees that financial data are fairly
a. The financial statements were prepared in an presented.
unbiased manner. d. Assures the readers of financial statements that
b. Reported inventory balances reflect all related any fraudulent activity has been corrected.
transactions for the period. (AICPA ADAPTED)
c. Reported accounts receivable does not include 2
any uncollectible accounts. c 7. Which of the following types of audits are
d. The scope of the auditors' investigation was not most similar?
limited in any way by management. a. Operational audits and compliance audits.
d 3. Statements on Auditing Standards b. Independent financial statement audits and
a. Relate to the filing requirements and operational audits.
enforcement activities of the SEC. c. Compliance audits and independent financial
b. Describe procedures to be applied in specific statement audits.
areas of audit activity to eliminate inconsistencies d. Internal audits and independent financial
in statement audits.
audit practice. c 8. The Auditing Standards Board
c. Are intended to limit the degree of auditor a. Sets rules and regulations that govern public
judgment needed to fulfill the attest function. accounting firms.
d. Interpret standards that provide guidelines or b. Is an arm of the Financial Accounting Standard
measures of quality for an independent audit. Board.
d 4. The primary purpose of an independent c. Is a senior technical body of the AICPA
financial statement audit is to designated to issue authoritative auditing
a. Provide a basis for assessing management's pronouncements.
performance. d. Reports directly to the Securities and Exchange
b. Comply with state and federal regulatory Commission.
requirements. c 9. The essence of the attest function is to
c. Assure management that the financial a. Detect fraud.
statements are unbiased and free from material b. Examine individual transactions so that the
error. auditor can certify as to their validity.
d. Provide users with an unbiased opinion about c. Determine whether the client's financial
the fairness of information reported in the statements are fairly stated.
financial d. Ensure the consistent application of correct
statements. accounting procedures.
b 5. Independent auditing can best be described as (AICPA ADAPTED)
a d 10. Which of the following criteria is unique to
a. Branch of accounting. the independent auditor's attest function?
b. Discipline that attests to the results of a. General competence.
accounting and other operations and data. b. Familiarity with the particular industry of each
c. Professional activity that measures and client.
communicates financial and business data. c. Due professional care.
d. Regulatory function that prevents the issuance d. Independence. (AICPA ADAPTED)
of improper financial information. c 11. The definition of auditing contained within
(AICPA ADAPTED) A Statement of Basic Auditing Concepts
recognizes
that auditing includes both a(an)
a. Documentation process and an evaluation c. The Auditing Standards Board.
process. d. The Accounting and Review Services
b. Evaluation process and a reporting process. Committee.
c. Investigative process and a reporting process. c 17. Which of the following incorrectly matches
d. Documentation process and a reporting the authoritative body with its authoritative
process. pronouncements?
a 12. An operational audit is designed to a. Accounting and Review Services Committee:
a. Assess the efficiency and effectiveness of "Statements on Standards for Accounting and
management's operating procedures. Review Services"
b. Assess the presentation of management's b. Auditing Standards Board: "Statements on
financial statements in accordance with generally Auditing Standards"
accepted accounting principles. c. Auditing Standards Executive Committee:
c. Determine whether management has complied "Statements on Auditing Procedure"
with applicable laws and regulations. d. Securities and Exchange Commission:
d. Determine whether the audit committee of the "Financial Reporting Releases"
board of directors is effectively discharging its a 18. A license to practice as a certified public
responsibility to oversee management's accountant is granted by
operations. a. State boards of accountancy.
b 13. The market for auditing services is driven b. The AICPA.
by c. State societies of CPAs.
a. The regulatory authority of the Securities and d. The SEC.
Exchange Commission. b 19. The purpose of a compliance audit for a
b. A demand by external users of financial governmental entity is to determine whether
statements. a. Financial statements comply with GAAP and
c. Pronouncements issued by the Auditing whether the entity is operating efficiently.
Standards Board. b. Financial statements comply with GAAP and
d. Congress at the federal level and elected the entity has complied with applicable laws and
legislative bodies at the state level. regulations.
3 c. The entity has complied with applicable laws
a 14. The first contemporary audit related and regulations.
legislation was the d. Financial statements comply with GAAP.
a. Securities Act of 1933. a 20. The audit process is
b. Securities Exchange Act of 1934. a. A special application of the scientific method
c. British Joint Stock Companies Act of 1844. of inquiry.
d. Companies Act of 1947. b. Regulated by the AICPA.
a 15. The first authoritative auditing c. The only service a CPA is allowed to perform
pronouncement in the U.S. was by law.
a. Statement on Auditing Procedures No. 1, d. Performed only by CPAs.
"Extensions of Auditing Procedures." 4
b. Statement on Auditing Standards No. 1, d 21. Which of the following has historically had
"Codification of SASs." the least influence on the practice of public
c. "Uniform Accounting: A Tentative Proposal accounting?
Submitted by the Federal Reserve Board (1917)." a. The Governmental Accounting Standards
d. "Examination of Financial Statements by Board.
Independent Public Accountants (1936)." b. The Institute of Internal Auditors.
a 16. The first authoritative audit standards- c. The Securities and Exchange Commission.
setting body empowered to issue auditing d. The U.S. Congress.
pronouncements b 22. Independent auditing can best be described
in the U.S. was the as
a. The Committee on Auditing Procedure. a. A subset of accounting.
b. The Auditing Standards Executive Committee.
b. A professional activity that attests to the fair gives limited assurance about whether an entity’s
presentation of financial statements. financial statements conform to generally
c. A professional activity that measures and accept accounting principles.
communicates financial accounting data. 5
d. A regulatory activity that prevents the issuance 3. What is the economic value of a financial
of improper financial information. statement audit?
(AICPA ADAPTED) Answer:
c 23. An independent audit is important to readers Financial statement audits reduce the information
of financial statements because it risk (the risk that information in financial
a. Provides a measure of management's statements is misstated materially), and
stewardship function. reductions in information risk which in turn
b. Measures and communicates the financial data reduce a
included in financial statements. company’s cost of capital (the cost a company
c. Objectively examines and reports on endures to issue equity or incur debt).
management's financial statements. 4. Define the attestation service of auditing.
d. Reports on the accuracy of information in the Answer:
financial statements. Auditing is a systematic process of objectively
(AICPA ADAPTED) obtaining and evaluating evidence regarding
a 24. The reason an independent auditor gathers assertions about economic actions and events to
evidence is to ascertain the degree of correspondence between
a. Form an opinion on the financial statements. those assertions and established criteria and
b. Detect fraud. communicating the results to interested users.
c. Evaluate management. PROBLEMS
d. Evaluate internal controls. (AICPA 1. In your role of Chief Financial Officer, you are
ADAPTED) requested to explain to the Board of Directors
SHORT ANSWER why audits of the company are made by (a)
1. What measure of self-regulation is in place to internal auditors, (b) independent auditors, and
monitor the performance of the public (c)
accounting profession in the area of assurance governmental auditors. The Board has voiced an
services? opinion that it might be better if the company’s
Answer: internal auditors completed all audits. What are
The Public Oversight Board (POB) is an the issues that you would need to explain to the
autonomous body that monitors the performance Board?
of the Answer:
public accounting firms that audit publicly traded It is important to explain the differences in the
U.S. companies. The POB is comprised of five roles of the three types of accountants and the
members which meets eight times a year and purpose of each different form of audit:
oversees peer reviews, and issues status reports I. Internal auditors are auditors employed by the
that company to assess the efficiency and
recommend improvements in the self-regulation effectiveness of management’s operations.
process. Internal auditors perform operational audits.
2. Describe two attestation services that are Operational audits focus on information systems
common performed by public accounting firms. and operating procedures, not on
Answer: recorded dollar amounts or reported financial
(1) Agreed-upon procedures: An engagement information, and address an entity’s entire
where the attestor (or auditing firm) is engaged to scope of operations or selected procedures.
examine an item using procedures agreed upon by II. Independent auditors or governmental
the contracting parties. auditors perform compliance audits.
(2) Reviews: An attestation service for financial Compliance audits may be designed to
statements where the public accounting firm determine whether an entity’s statements are
presented fairly in accordance with GAAP and together to provide quality advice for strategic
may also be designed to determine whether decision making.
the entity has complied with applicable laws and  Focus on the Customer, Client, and Market
regulations that may have a material – Able to anticipate and meet the
effect on financial statements. changing needs of clients, employers, customers,
III. Independent auditors perform financial and markets better than competitors.
statement audits. Financial statement audits are  Interpretation of Converging Information –
an attestation service in which an independent Able to interpret and provide a broader
auditor offers assurance about context using financial and nonfinancial
management’s written financial statement information.
assertions.  Technologically Adapt – Able to utilize and
It is imperative that the Board of Directors leverage technology in ways that add
understands that the different types of auditors value to clients, customers, and employees.
have III. Core Services:
different areas of professional expertise and  Assurance and Information Integrity –
authority. The value of each form of audit would Provide a variety of services that improve
be and assure the quality of information, or its
negated if completed by the inappropriate audit context, for business decision making.
professional.  Management Consulting and Performance
2. The AICPA’s “CPA Vision Project: 2011 and Management – Provide advice and
Beyond,” contemplates values and competencies insight on the financial and nonfinancial
that improve an assurer’s ability to judge the performance of an organization’s operational
quality of information assured. List and define the and strategic process through broad business
elements outlined within the CPA Vision Project. knowledge and judgment.
I. Core Values:  Technology Services – Provide services that
 Continuing Education and Lifelong leverage technology to improve
Learning – CPAs believe in continuing objectives and decision making, including
education beyond certification and believe it is business application processes, system
important to continually acquire new integrity, knowledge management, system
skills and knowledge. security, and integration of new business
 Competence – CPAs are able to perform high- processes and practices.
quality work in a capable, efficient,  Financial Planning – Provide a variety of
and appropriate manner. services to organizations and individuals
 Integrity – CPAs conduct themselves with that interpret and add value by utilizing a wide
honesty and professional ethics. range of financial information. These
 Attuned to Broad Business Issues – CPAs are include everything from tax planning and
in tune with the overall realities of financial statement analysis to structuring
the business environment. investment portfolios and complex financial
 Objectivity – CPAs are able to deal with statements.
information free of distortions, personal  International Services – Provide services to
bias, or conflicts of interest. support and facilitate commerce in the
II. Core Competencies: global market.
 Communications and Leadership Skills – CHAPTER 2
Able to give and exchange information MULTIPLE CHOICE
within meaningful context and with appropriate a. 1. Due professional care requires
delivery and interpersonal skills. Able a. A critical review of the work done at every
to influence, inspire, and motivate others to level of supervision.
achieve results. b. The examination of all corroborating evidence
 Strategic and Critical Thinking Skills – Able available.
to link data, knowledge, and insight c. The exercise of error-free judgment.
d. A consideration of internal control structure d. Public. (AICPA ADAPTED)
that includes tests of controls.( 8
AICPA ADAPTED) c 7. Madison Corporation has a few large
c 2. The first general standard requires that the accounts receivable that total $1,000,000. Nassau
audit of financial statements be performed by a Corporation has a great number of small accounts
person receivable that also total $1,000,000. The
or persons having adequate technical training and importance of an error in any one account is,
a. Independence with respect to the financial therefore, greater for Madison than for Nassau.
statements and supplementary disclosures. This
b. Exercising professional care as judged by peer is an example of the auditor's concept of
reviewers. a. Account bias.
c. Proficiency as an auditor, which likely has b. Audit risk.
been acquired from previous experience. c. Materiality.
d. Objectivity as an auditor, as verified by proper d. Reasonable assurance. (AICPA ADAPTED)
supervision. (AICPA ADAPTED) b 8. Which of the following best describes what is
d 3. An auditor, while performing an audit, strives meant by generally accepted auditing standards?
to achieve the appearance of independence in a. Acts to be performed by the auditor.
order b. Measures of the quality of an auditor's
to performance.
a. Reduce risk and liability. c. Procedures used to gather evidence to support
b. Comply with the generally accepted standards financial statements.
of fieldwork. d. Audit objectives generally determined on audit
c. Become independent in fact. engagements. (AICPA ADAPTED)
d. Maintain public confidence in the profession. b 9. There is an inverse relationship between the
(AICPA ADAPTED) effectiveness of an entity's internal control
d 4. Adequate technical training and proficiency structure
as an auditor encompasses an ability to and the
understand a a. Reliability of financial statements.
computer system sufficiently to identify and b. Extent of detailed audit tests required.
evaluate c. Degree of staff supervision required in the
a. The processing and imparting of information. performance of an audit.
b. Essential accounting control features. d. Fairness of management assertions in the
c. All control procedures. financial statements.
d. The degree to which programming conforms to a 10. Which of the following best describes the
the application of generally accepted accounting character of the three generally accepted auditing
principles. (AICPA ADAPTED) standards classified as general standards?
c 5. Competence as a certified public accountant a. Criteria for competence, independence, and
includes all of the following except professional care of individuals performing the
a. Having the technical qualifications to perform audit.
an engagement. b. Criteria for the content of the financial
b. Possessing the ability to supervise and evaluate statements and related footnote disclosures.
the quality of staff work. c. Criteria for the content of the auditor's report.
c. Warranting the infallibility of the work d. The requirements for planning and supervision.
performed. (AICPA ADAPTED)
d. Consulting others if additional technical c 11. The generally accepted standards of
information is needed. (AICPA ADAPTED) fieldwork relate to
a 6. Ultimately, the decision about whether or not a. The competence, independence, and
an auditor is independent must be made by the professional care of persons performing the audit.
a. Auditor. b. Criteria for the content of the auditor's report
b. Client. on financial statements.
c. Audit committee. c. Audit planning and evidence gathering.
d. The need to maintain independence in mental c. Supervision.
attitude. (AICPA ADAPTED) d. Consultation. (AICPA ADAPTED)
d 12. Which of the following statements is correct d 17. Williams & Co., a large international public
concerning the concept of materiality? accounting firm, is due to have a peer review. The
a. Materiality is determined by reference to peer review will most likely be performed by
AICPA guidelines. a. Employees and partners of Williams & Co.
b. Materiality depends only on the dollar amount who are not associated with the particular audit
involved. being
c. Materiality depends on the nature of an item reviewed.
rather than on the dollar amount. b. Audit review staff of the Securities and
d. Materiality is a matter of professional Exchange Commission.
judgment. (AICPA ADAPTED) c. Audit review staff of the AICPA.
a 13. The generally accepted standards of d. Employees and partners of another firm.
reporting encompass all of the following except (AICPA ADAPTED)
a. Consideration of an entity's internal control b 18. In a financial statement audit, audit risk
structure. represents the probability that
b. Consistent application of accounting principles. a. Internal control fails and the failure is not
c. Informative disclosures. detected by the auditor's procedures.
d. Conformity of financial statements with b. The auditor unknowingly fails to modify an
GAAP. opinion on materially misstated financial
9 statements.
c 14. An objective of the fourth generally c. Inherent and control risk cause errors that could
accepted standard of reporting, relating to the be material to the financial statements.
expression of d. The auditor is not retained to conduct a
an opinion, is to financial statement audit in the succeeding year.
a. Prohibit the auditor from issuing a report that a 19. In a financial statement audit, inherent risk
does not include an opinion on the financial represents
statements taken as a whole. a. The susceptibility of an account balance to
b. Inform users that the financial statements and error that could be material.
related notes are the joint responsibility of the b. The risk that error could occur and not be
auditor and management. prevented or detected by the internal control
c. Prevent users of financial statements from structure.
misinterpreting the degree of responsibility c. The risk that error could occur and not be
assumed detected by the auditor's procedures.
by the auditor. d. The risk that the auditor fails to modify
d. Ensure adequate informative disclosures in the materially misstated financial statements.
financial statements. d 20. What is the magnitude of audit risk if
d 15. The least important evidence of a public inherent risk is .50, control risk .40, and detection
accounting firm's evaluation of its system of risk .10?
quality a. .20.
controls would concern the firm's policies and b. .10.
procedures with respect to c. .04.
a. Employment (hiring). d. Not determinable from the facts given.
b. Confidentiality of audit engagements. 10
c. Assigning personnel to audit engagements. c 21. The "hallmark" of auditing is
d. Determination of audit fees. (AICPA a. Available audit technology.
ADAPTED) b. Generally accepted auditing standards.
a 16. Which of the following is not an element of c. Professional judgment.
quality control? d. Materiality and audit risk.
a. Documentation. d 22. An auditor is most likely to refer to one or
b. Inspection. more of the three general auditing standards in
determining d. As a professional possessing the degree of skill
a. The nature of a report qualification. commonly possessed by others in the field.
b. The scope of auditing procedures. (AICPA ADAPTED)
c. Requirements for the consideration of internal 11
control. a 27. The first standard of fieldwork, which states
d. Whether the auditor should undertake an audit that the work is to be adequately planned, and
engagement. (AICPA ADAPTED) assistants, if any, are to be properly supervised,
a 23. Which of the following is mandatory if the recognizes that
auditor is to comply with the general standards of a. Early appointment of the auditor is
the advantageous both to the auditor and to the client.
AICPA’s generally accepted auditing standards? b. Acceptance of an audit engagement after the
a. Adequate technical training close of the client's fiscal year is generally not
b. Use analytical procedures. permissible.
c. Use statistical sampling when feasible on an c. Appointment of the auditor subsequent to the
audit engagement. physical count of inventories requires a
d. Confirmation of material accounts receivable disclaimer
balances. (AICPA ADAPTED) of opinion.
b 24. The first general standard requires that a d. Performance of substantial parts of the
person or persons have adequate technical engagement is necessary at interim dates.
training and (AICPA ADAPTED)
proficiency as an auditor. This standard is met by b 28. In connection with the third generally
a. Understanding business and finance. accepted auditing standard of fieldwork, an
b. Education and experience in auditing. auditor
c. Continuing professional education. examines corroborating evidential matter that
d. Knowledge of Statements of Auditing includes all of the following except
Standards. (AICPA ADAPTED) a. Client accounting manuals.
a 25. What is the meaning of the generally b. Written client representations.
accepted auditing standard that requires that the c. Vendor invoices.
auditor be d. Minutes of board meetings. (AICPA
independent? ADAPTED)
a. The auditor must be without bias with respect a 29. Which of the following underlies the
to the client audited. application of generally accepted auditing
b. The auditor must adopt a critical attitude standards,
during the audit. particularly the standards of fieldwork and
c. The auditor's sole obligation is to third parties. reporting?
d. The auditor may have a direct ownership a. The elements of materiality and risk.
interest in the client's business if it is not material. b. The element of internal control.
(AICPA ADAPTED) c. The element of corroborating evidence.
d 26. The third general standard states that due d. The element of reasonable assurance. (AICPA
care is to be exercised in the performance of an ADAPTED)
audit, c 30. The fourth generally accepted auditing
and should be interpreted to mean that an auditor standard of reporting requires an auditor to render
who undertakes an engagement assumes a duty a report
to perform whenever an auditor's name is associated with
a. With reasonable diligence and without fault or financial statements. The overall purpose of the
error. fourth standard of reporting is to require that
b. As a professional who will assume reports
responsibility for losses consequent upon error of a. Assure that the auditor is independent with
judgment. respect to the financial statements audited.
c. To the satisfaction of the client and third
parties.
b. State that the audit has been conducted in a. Rotating employees from assignment to
accordance with generally accepted auditing assignment on a random basis to aid in the staff
standards. training
c. Indicate the character of the engagement and effort.
the degree of responsibility assumed by the b. Requiring timely identification of the staffing
auditor. requirements of specific engagements so that
d. Express whether the accounting principles used enough qualified personnel can be made
in preparing the financial statements have been available.
applied consistently in the period audited. c. Allowing staff to select the assignments of their
(AICPA ADAPTED) choice to promote better client relationships.
d 31. The auditor's judgment concerning the d. Assigning a number of employees to each
overall fairness of the presentation of financial engagement in excess of the number required so
positions, as not
results of operations, and cash flows is applied to overburden the staff and interfere with the
within the framework of quality of the audit work performed.
a. Quality control. (AICPA ADAPTED)
b. Generally accepted auditing standards that d 35. A public accounting firm studies its
include the concept of materiality. personnel advancement experience to determine
c. The auditor's evaluation of the audited whether
company's internal controls. individuals meeting stated criteria are assigned
d. Generally accepted accounting principles. increased degrees of responsibility. This is
(AICPA ADAPTED) evidence of the firm's adherence to
d 32. The concept of materiality would be least a. Generally accepted auditing standards.
important to an auditor in determining b. Attestation standards.
a. Transactions that should be reviewed. c. Supervision and review.
b. The need for disclosing a particular transaction d. Quality control standards. (AICPA
or event. ADAPTED)
c. The extent of audit work planned for particular d 36. Which of the following statements best
accounts. describes the primary purpose of Statements on
d. The effects of an auditor's direct financial Auditing
interest in a client. (AICPA ADAPTED) Standards?
12 a. Guides intended to set forth auditing
b 33. The objective of quality control mandates procedures that are applicable to a variety of
that a public accounting firm should establish situations.
policies b. Outlines intended to narrow the areas of
and procedures for professional development that inconsistency and divergence of auditor opinion.
provide reasonable assurance that all c. Authoritative statements, enforced through the
entry-level personnel code of professional conduct, and intended to
a. Prepare working papers that are standardized in limit
form and content. the degree of auditor judgment.
b. Have the knowledge required to enable them to d. Interpretations intended to clarify the meaning
fulfill responsibilities assigned. of generally accepted auditing standards.
c. Will advance within the organization. (AICPA ADAPTED)
d. Develop specialties in specific areas of public SHORT ANSWER
accounting. (AICPA ADAPTED) 1. Describe what is meant by planned detection
b 34. In pursuing its quality control objectives risk and what effect planned detection risk would
with respect to assigning personnel to have on evidence.
engagements, a Answer:
public accounting firm may use policies and Detection risk is the likelihood that error could
procedures such as occur and not be detected by the auditor’s
procedures. Detection risk is inversely related to by the auditor or auditors.
the amount of audit evidence an auditor would 3. Due professional care is to be exercised in the
plan to gather. As detection risk goes up, the performance of the audit and the preparation of
amount of evidence gathered goes down. the report.
13 Standards of FieldWork
2. Define inherent risk and name two examples of 4. The work is to be adequately planned and
factors that may increase inherent risk. assistants, if any, are to be properly supervised.
Answer: 5. A sufficient understanding of internal control is
Inherent risk is the susceptibility of an account to be obtained to plan the audit and to
balance to error that could be material assuming determine the nature, timing, and extent of tests
there are no related internal controls. Examples to be performed.
will vary among students, including: the client's 6. Sufficient competent evidential matter is to be
business or industry, management's obtained through inspection, observation,
predisposition to manage earnings, and insights inquiries, and confirmation to afford a reasonable
obtained and basis for an opinion regarding the
from prior engagements. financial statements under audit.
3. What is the importance of internal controls to Standards of Reporting
an auditor in an audit engagement? 7. The report shall state whether the financial
Answer: statements are presented in accordance with
The second standard of fieldwork within GAAS, generally accepted accounting principles.
requires that an auditor obtain an understanding 14
of an entity's internal controls to help in planning 8. The report shall identify those circumstances in
the audit and designing audit tests. which such principles have not been
4. What is the demand for due care within an consistently observed in the current period in
audit or attestation engagement? relation to the preceding period.
Answer: 9. Informative disclosures in the financial
Competent professional staff should plan statements are to be regarded as reasonably
attestation and audit engagements, and the work adequate
of all unless otherwise stated in the report.
assistants assigned to the engagement should be 10. The report shall either contain an expression
supervised. of opinion regarding the financial statements
5. Differentiate between independence in fact and taken as a whole, or an assertion to the effect that
independence in appearance. an overall opinion cannot be expressed.
Answer: When an overall opinion cannot be expressed, the
Independence of fact is a state of mind, an reasons, therefore, should be stated. In all
attitude of impartiality, which underlies both an cases where an auditor’s name is associated with
attestation standard and a GAAS. Independence financial statements, the report should
in appearance is the ability to demonstrate contain a clear-cut indication of the character of
independence by remaining free of any overt the auditor’s work, if any, and the degree of
interest in a client that would damage the responsibility the auditor is taking.
appearance of independence. 2. The following four situations involve the
PROBLEMS process of planning audit evidence requirements.
1. List and describe the ten GAAS. Calculate the planned detection risk for each
Answer: different situation.
General Standards Situations
1. The audit is to be performed by a person or Risk 1 2 3 4
persons having adequate technical training and Acceptable Audit Risk 5% 5% 1% 1%
proficiency as an auditor. Inherent Risk 100% 60% 50% 40%
2. In all matters relating to the assignment, Control Risk 100% 40% 50% 60%
independence in mental attitude is to be Planned Detection Risk ? ? ? ?
maintained Answer:
 Situation #1 Planned Detection Risk .05 c. No Yes
 Situation #2 Planned Detection Risk .2083 d. No No (AICPA ADAPTED)
 Situation #3 Planned Detection Risk .04 a 4. The management of a client company
 Situation #4 Planned Detection Risk .0417 believes that the statement of cash flow is not a
useful
CHAPTER 3 document and refuses to include one in the annual
MULTIPLE CHOICE report to stockholders. As a result, the
c 1. An auditor's report contains the following auditor's opinion should be
sentences: a. Qualified due to inadequate disclosure.
We did not audit the financial statements of B b. Qualified due to a scope limitation.
Company, a consolidated subsidiary, which c. Adverse.
statements reflect total assets and revenues d. Unqualified. (AICPA ADAPTED)
constituting 20 percent and 22 percent, 16
respectively, d 5. An auditor would issue an adverse opinion if
of the related consolidated totals. These a. The audit was begun by other independent
statements were audited by other auditors, whose auditors who withdrew from the engagement.
report b. A qualified opinion cannot be given because
has been furnished to us, and our opinion, the auditor lacks independence.
insofar as it relates to the amounts included for B c. The restriction on the scope of the audit was
Company, is based solely upon the report of the significant.
other auditors. d. The statements taken as a whole do not fairly
These sentences present the financial position, results of
a. Disclaim an opinion. operations,
b. Qualify the opinion. and cash flows of the company. (AICPA
c. Divide responsibility. ADAPTED)
d. Should not be part of the audit report. (AICPA d 6. The fourth reporting standard requires that
ADAPTED) the auditor's report contain either an expression of
c 2. In which of the following situations would opinion regarding the financial statements taken
the auditor appropriately issue a standard as a whole or an assertion that an opinion cannot
unqualified be expressed. The objective of the fourth standard
report with no explanatory paragraph concerning is to prevent
consistency? a. An auditor from reporting on one basic
a. A change in the method of accounting for financial statement and not the others.
specific subsidiaries that comprise the group of b. An auditor from expressing different opinions
companies for which consolidated statements are on each of the basic financial statements.
presented. c. Management from reducing its responsibility
b. A change from an accounting principle that is for the basic financial statements.
not generally accepted to one that is generally d. Misinterpretations about the degree of
accepted. responsibility the auditor assumes.
c. A change in the percentage used to calculate (AICPA ADAPTED)
the provision for warranty expense. d 7. An auditor's opinion reads as follows: "In our
d. Correction of a mistake in the application of a opinion, except for the above-mentioned
generally accepted accounting principle. limitation
(AICPA ADAPTED) on the scope of our audit...” This is an example of
b 3. When financial statements are presented that a(n)
are not in conformity with generally accepted a. Review opinion.
accounting principles, an auditor may issue a(n) b. Emphasis on a matter.
Qualified Adverse c. Qualified opinion.
opinion opinion d. Unacceptable reporting practice. (AICPA
a. Yes No ADAPTED)
b. Yes Yes
c 8. An auditor's report includes a statement that paragraph that emphasizes a matter included in
"the financial statements do not present fairly the the notes to the financial statements. The
financial position in conformity with generally auditor's report would be deficient if the
accepted accounting principles." This auditor's explanatory paragraph states that the entity
report was probably issued in connection with a. Is a component of a larger business enterprise.
financial statements that were b. Has changed from the completed contract
a. Prepared on a comprehensive basis for method to the percentage of completion method
accounting other than GAAP. to
b. Restricted for use by management. account for long-term construction contracts.
c. Misleading. c. Has had a significant subsequent event.
d. Condensed. (AICPA ADAPTED) d. Has accounting reclassifications that enhance
c 9. If the auditor believes there is minimal the comparability between years.
likelihood that resolution of an uncertainty will (AICPA ADAPTED)
have a d 13. Raider, Inc., uses the last-in, first-out
material effect on the financial statements, the method to value half of its inventory and the first-
auditor would issue a(n) in, firstout
a. Qualified opinion. method to value the other half. Assuming the
b. Adverse opinion. auditor is satisfied in all other respects, under
c. Unqualified opinion. these circumstances the auditor will issue a(n)
d. Disclaimer of opinion. (AICPA ADAPTED) a. Opinion modified due to inconsistency.
b 10. If an accounting change has no material b. Unqualified opinion with an explanatory
effect on the financial statements in the current middle paragraph.
year but c. Qualified or adverse opinion, depending on
the change is reasonably certain to have a materiality.
material effect in later years, the change should d. Unqualified opinion. (AICPA ADAPTED)
be d 14. Under which of the following sets of
a. Treated as a consistency modification in the circumstances might an auditor disclaim an
auditor's report for the current year. opinion?
b. Disclosed in the notes to the financial a. The financial statements contain a departure
statements of the current year. from GAAP, the effect of which is material.
c. Disclosed in the notes to the financial b. The principal auditor decides to make
statements and referred to in the auditor's report reference to the report of another auditor who
for the audited a
current year. subsidiary.
d. Treated as a subsequent event. (AICPA c. There has been a material change between
ADAPTED) periods in the method of the application of
17 accounting
c 11. When comparative financial statements are principles.
presented, the fourth reporting standard, which d. There were significant limitations on the scope
refers of the audit.
to financial statements "taken as a whole," should a 15. An auditor includes an explanatory
be considered to apply to the financial paragraph in an otherwise unqualified report in
statement of the order to
a. Periods presented plus one preceding period. emphasize that the entity being reported on is a
b. Current period only. subsidiary of another business enterprise. The
c. Current period and those of the other periods inclusion of this paragraph
presented. a. Is appropriate and would not negate the
d. Current and immediately preceding period unqualified opinion.
only. (AICPA ADAPTED) b. Is a qualification.
b 12. An auditor's standard report expresses an c. Is a violation of generally accepted reporting
unqualified opinion and includes an explanatory standards if this information is disclosed in
footnotes to the financial statements. the financial position, results of operations, and
d. Necessitates a revision of the opinion cash flows in conformity with GAAP.
paragraph to include the phrase "with the b 20. Under Statement on Auditing Standards No.
foregoing 59, "The Auditor's Consideration of an Entity's
explanation." Ability to Continue as a Going Concern," an
18 independent auditor is responsible to
c 16. In which of the following circumstances a. Predict whether the entity will be in business
would an adverse opinion be appropriate? one year from the balance sheet date.
a. The auditor is not independent with respect to b. Evaluate whether there is substantial doubt
the enterprise being audited. about the entity's ability to continue as a going
b. An uncertainty prevents the issuance of an concern.
unqualified report. c. Weigh mitigating factors against contrary
c. The statements are not in conformity with information about the entity's ability to continue
authoritative statements regarding accounting for as a
pension plans. going concern.
d. A client-imposed scope limitation prevents the d. Report the entity's ability to continue as a
auditor from complying with generally accepted going concern to senior management and to the
auditing standards. board
b 17. An audit report should be dated as of of directors.
a. the date the report is delivered to the entity c 21. Does an auditor make the following
audited. representations explicitly or implicitly in a
b. the date of the last day of fieldwork. standard audit
c. the balance sheet date of the latest period report on comparative financial statements?
reported on. Consistent application Examination of
d. the date a letter of audit inquiry is received of accounting principles evidence on a test basis
from the entity's attorney of record. a. Explicitly Explicitly
d 18. An auditor completed fieldwork on b. Implicitly Implicitly
February 10, 2005 for a December 31, 2004 year- c. Implicitly Explicitly
end client. d. Explicitly Implicitly (AICPA ADAPTED)
A significant subsequent event occurred on 19
February 22, 2005. In this case, which of the a 22. An auditor is unable to determine the
following report dates would not be appropriate? amounts associated with illegal acts committed
a. February 10, 2005. by a client.
b. February 10, except Note 1, February 22, 2005. The auditor would most likely
c. February 22, 2005. a. Issue either a qualified opinion or a disclaimer
d. December 31, 2004. of opinion.
d 19. Which of the following statements indicates b. Issue an adverse opinion.
a qualified opinion? c. Issue either a qualified opinion or an adverse
a. The financial statements do not present fairly in opinion.
all material respects the financial position, results d. Issue a disclaimer of opinion. (AICPA
of operations, and cash flows in conformity with ADAPTED)
GAAP. b 23. A principal auditor is satisfied both with the
b. The auditor does not express an opinion on the independence and professional reputation of
financial statements. another
c. The financial statements present fairly in all auditor who audited a subsidiary, but wants to
material respects the financial position, results of share responsibility with the other auditor in the
operations, and cash flows in conformity with audit report. The principal auditor should
GAAP. a. Modify the scope and opinion paragraphs of
d. Except for the effects of a matter, the financial the report.
statements present fairly in all material respects b. Modify the introductory and opinion
paragraphs of the report.
c. Not modify the report except for including an d. An adverse opinion. (AICPA ADAPTED)
explanatory paragraph. b 28. An auditor concludes that there is
d. Modify the opinion paragraph of the report. substantial doubt about an entity's ability to
(AICPA ADAPTED) continue as a going
a 24. An auditor may issue a qualified opinion for concern. If the entity's disclosures about
Inadequate Scope continued existence are adequate, the audit report
Disclosure Limitation may
a. Yes Yes include
b. Yes No A disclaimer of opinion A qualified opinion
c. No Yes a. Yes Yes
d. No No (AICPA ADAPTED) b. No No
a 25. An explanatory paragraph following an c. No Yes
opinion paragraph describes an uncertainty as d. Yes No (AICPA ADAPTED)
follows: a 29. Keller, CPA, was about to issue an
As discussed in Note X to the financial unqualified opinion on the financial statements of
statements, the company is a defendant in a Lupton
lawsuit Television Broadcasting Company when a letter
alleging infringement of certain patent rights and was received from Lupton's independent
claiming damages. Discovery proceedings counsel. The letter stated that the Federal
are in progress. The ultimate outcome of the Communications Commission has notified
litigation cannot presently be determined. Lupton that
Accordingly, no provision for any liability that its broadcasting license will not be renewed
may result upon adjudication has been made in because of alleged irregularities in its
the accompanying financial statements. broadcasting
What type of opinion should the auditor express practices. Lupton cannot continue to operate
in this circumstance? without the license. Keller has also learned that
a. Unqualified. Lupton and its independent counsel plan to take
b. Qualified. all necessary legal action to retain the license.
c. Disclaimer. The letter from independent counsel, however,
d. Adverse. (AICPA ADAPTED) states that a favorable outcome of any legal action
d 26. An auditor's report that refers to a departure is highly uncertain. On the basis of this
from generally accepted accounting principles information, what action should Keller take?
includes the language, “In our opinion, with the a. Issue an unqualified opinion, with an
foregoing explanation, the financial statements explanatory paragraph that describes the matter--
referred to above present fairly ...” This is a/an giving rise
a. Adverse opinion. to the uncertainty.
b. Qualified opinion. b. Issue an unqualified opinion if full disclosure is
c. Unqualified opinion with an explanatory made of the matter in a note to the financial
paragraph. statements.
d. Example of inappropriate reporting. (AICPA c. Issue an adverse opinion and disclose all
ADAPTED) reasons why.
20 d. Issue a piecemeal opinion with full disclosure
b 27. When management prepares financial made of the license dispute in a note to the
statements on the basis of a going concern and the financial statements. (AICPA ADAPTED)
auditor d 30. If the auditor believes that required
believes the company may not continue as a disclosures are omitted from the financial
going concern, the auditor should issue statements, the
a. A qualified opinion. auditor should decide between issuing
b. An unqualified opinion with an explanatory a. A qualified opinion or an adverse opinion.
paragraph. b. A disclaimer of opinion or a qualified opinion.
c. A disclaimer of opinion. c. An adverse opinion or a disclaimer of opinion.
d. An unqualified opinion or a qualified opinion. material that a qualified opinion is unwarranted.)
(AICPA ADAPTED) 2. When the client limits the scope of an audit
b 31. An auditor's report on comparative financial engagement and the auditor believes this
statements should be dated as of the date the limitation of
a. Report is issued. scope to be material in nature, what is the action
b. Auditor's fieldwork is completed. to be taken by the auditor?
c. Fiscal year ends. Answer:
d. Last subsequent event occurred. (AICPA The auditor must issue a disclaimer of opinion, as
ADAPTED) the auditor does not have sufficient evidence to
21 reach an opinion.
b 32. An auditor is confronted with an exception 3. When an opinion is based upon the work of
sufficiently material to warrant departing from separate auditors, as is the case with subsidiary
the companies, in compiling the work of both audits
standard wording of an unqualified report. If the and expressing an opinion on the combined
exception relates to a departure from generally statements, how is the principle auditor
accepted accounting principles, the auditor must determined?
decide between Answer:
a. An adverse opinion and an unqualified opinion. AU Sec. 543 requires that the following factors
b. An adverse opinion and a qualified opinion. be considered:
c. An adverse opinion and a disclaimer of  The materiality of the financial statements
opinion. audited by each auditor,
d. A disclaimer of opinion and a qualified  The extent of each auditor's knowledge of the
opinion. (AICPA ADAPTED) overall financial statements, and
a 33. An auditor had expressed a qualified  The significance of the financial statements
opinion on the financial statements of a prior audited in relation to the combined entity
period because taken as a whole.
the client's financial statements departed from 4. What type of audit opinion would be issued to
generally accepted accounting principles. The reflect a material departure from GAAP? Also
prior explain the modifications needed to be made to
period statements are restated in the current the audit report.
period to conform with generally accepted 22
accounting principles. The auditor's updated Answer:
report on the prior period statements should A qualified opinion is required unless the auditor
a. Express an unqualified opinion about the can demonstrate that owing to rare and unusual
restated financial statements. circumstances, complying with the
b. Be accompanied by the auditor's original report pronouncement would cause the financial
on the prior period. statements to be
c. Bear the same date as the auditor's original misleading. A qualified opinion for a material
report on the prior period. departure from GAAP requires an explanatory
d. Qualify the opinion concerning the restated paragraph to disclose the misstatement and a
financial statements because of a change in modified opinion paragraph.
accounting principles. (AICPA ADAPTED) CHAPTER 4
SHORT ANSWER MULTIPLE CHOICE
1. When would an auditor issue an adverse c 1. Of the following, which is the least
opinion? persuasive type of audit evidence?
Answer: a. Documents mailed by outsiders to the auditor.
Adverse opinions are issued when financial b. Correspondence between auditor and vendors.
statements depart from GAAP, or when c. Copies of sales invoices inspected by the
management auditor.
is unable to justify an accounting change (and the d. Computations made by the auditor. (AICPA
effect of the departure or change is so highly ADAPTED)
c 2. Analytical procedures are b. Are designed to discover significant
a. Substantive tests designed to evaluate a system subsequent events.
of internal control. c. May be either tests of transactions, direct tests
b. Tests of controls designed to evaluate the of financial balances, or analytical tests.
validity of management's representation letter. d. Will increase proportionately with the auditor's
c. Substantive tests designed to evaluate the assessment of control risk.(
reasonableness of financial information. AICPA ADAPTED)
d. Tests of controls designed to evaluate the 26
reasonableness of financial information. a 8. Which of the following elements ultimately
(AICPA ADAPTED) determines the specific auditing procedures that
c 3. Which of the following best describes the are
primary purpose of audit procedures? necessary in the circumstances to afford a
a. To detect errors or irregularities. reasonable basis for an opinion?
b. To comply with generally accepted accounting a. Auditor judgment.
principles. b. Materiality.
c. To gather corroborative evidence. c. Relative risk.
d. To verify the accuracy of account balances. d. Reasonable assurance. (AICPA ADAPTED)
(AICPA ADAPTED) d 9. Which of the following factors will least
d 4. The procedures specifically outlined in an affect the independent auditor's judgment as to
audit program are primarily designed to the
a. Protect the auditor in the event of litigation. quantity, type, and content of the working papers
b. Detect errors or irregularities. desirable for a particular engagement?
c. Test internal control structure. a. Nature of the auditor's report.
d. Gather evidence. (AICPA ADAPTED) b. Nature of the financial statements, schedules,
b 5. Which of the following is ordinarily designed or other information upon which the auditor is
to detect possible material dollar errors on the reporting.
financial statements? c. Need for supervision and review.
a. Tests of controls. d. Number of personnel assigned to the audit.
b. Analytical procedures. (AICPA ADAPTED)
c. Computer controls. a 10. An auditor's working papers will generally
d. Post audit working paper review. (AICPA be least likely to include documentation showing
ADAPTED) how
d 6. Which of the following statements relating to the
the competence of evidential matter is always a. Client's schedules were prepared.
true? b. Engagement had been planned.
a. Evidential matter gathered by an auditor from c. Client's internal control structure had been
outside an enterprise is reliable. reviewed and evaluated.
b. Accounting data developed under satisfactory d. Unusual matters were resolved. (AICPA
conditions of internal control are more relevant ADAPTED)
than data developed under unsatisfactory c 11. Which of the following is not a primary
conditions. purpose of audit working papers?
c. Oral representations made by management are a. To coordinate the examination.
not valid. b. To assist in preparation of the audit report.
d. Evidence gathered by auditors must be both c. To support the financial statements.
valid and relevant to be considered competent. d. To provide evidence of the audit work
(AICPA ADAPTED) performed. (AICPA ADAPTED)
c 7. In the context of an audit of financial b 12. The understanding between the client and
statements, substantive tests are audit procedures the auditor as to the degree of responsibility to be
that assumed by each is normally set forth in a(n)
a. May be eliminated under certain conditions. a. Representation letter.
b. Engagement letter.
c. Management letter. b. Evidence will be obtained to determine an
d. Comfort letter. (AICPA ADAPTED) assessed level of control risk.
b 13. Audit evidence takes different forms and c. Errors and irregularities are prevented or
varies in persuasiveness. Which of the following detected in a timely manner.
is the d. The auditor has an understanding of the control
least persuasive type of evidence? environment. (AICPA ADAPTED)
a. Vendor's invoice. c 18. An auditor's working papers should
b. Bank statement obtained from the client. a. Not be permitted to serve as a reference source
c. Computations made by the auditor. for the client.
d. Canceled checks. (AICPA ADAPTED) b. Not contain comments critical of management.
b 14. The following statements were made in a c. Show that the accounting records agree or
discussion of audit evidence by two independent reconcile with the financial statements.
auditors. Which statement is untrue? d. Be considered the primary support for the
a. “I am seldom convinced beyond all doubt financial statements being audited.
about all aspects of the financial statements being (AICPA ADAPTED)
audited.” c 19. Which of the following is not a factor
b. “I would not undertake that procedure because, affecting the independent auditor's judgment
at best, the results would only be persuasive and about the
I'm looking for convincing evidence.” quantity, type, and content of audit working
c. “I evaluate the degree of risk involved in papers?
deciding the kind of evidence I will gather.” a. The needs for supervision and review of the
d. “I evaluate the usefulness of the evidence I can work performed by assistants.
obtain against the cost to obtain it.” b. The nature and condition of the client's records
(AICPA ADAPTED) and internal controls.
27 c. The expertise of client personnel and their
b 15. As the acceptable level of detection risk participation in preparing schedules.
decreases, an auditor may change the d. The type of the financial statements, schedules,
a. Timing of substantive tests by performing them or other information on which the auditor is
at an interim date rather than at year-end. reporting. (AICPA ADAPTED)
b. Nature of substantive tests from a less effective c 20. During an audit engagement, data are
to a more effective procedure. compiled and included in the audit working
c. Timing of tests of controls by performing them papers. The
at several dates rather than at one time. working papers are
d. Assessed level of inherent risk to a higher a. A client-owned record of conclusions reached
amount. (AICPA ADAPTED) by the auditors who performed the engagement.
d 16. When an independent auditor is approached b. Evidence supporting financial statements.
to perform an audit for the first time, he or she c. Support for the auditor's compliance with
should make inquiries of the predecessor auditor. generally accepted auditing standards.
Inquiries are necessary because the predecessor d. A record to be used as a basis for the following
may be able to provide the successor with year's engagement. (AICPA ADAPTED)
information that will assist the successor in c 21. The current file of the auditor's working
determining whether papers generally should include
a. The predecessor's work should be used. a. A flowchart of the internal controls.
b. The company rotates auditors. b. Organization charts.
c. Control risk is low, in the predecessor’s c. A copy of the financial statements.
opinion. d. Copies of bond and note indentures. (AICPA
d. The engagement should be accepted. (AICPA ADAPTED)
ADAPTED) 28
b 17. The purpose of tests of controls is to b 22. Using laptop computers in auditing may
provide reasonable assurance that affect the methods used to review the work of
a. The extent of substantive testing is minimized. staff
assistants because Answer:
a. Supervisory personnel may not have an a. Controls that create documentation (leave an
understanding of the capabilities and limitations audit trail).
of b. Controls that do not create documentation.
computers. 3. How do tests of controls and tests of details
b. Working paper documentation may not contain differ from one another?
readily observable details of calculations. Answer:
c. The audit field work standards for supervision Tests of controls provide evidence about whether
may differ. misstatement is likely (a means to assess control
d. Documenting the supervisory review may risk), and substantive tests of details provide
require assistance of management services evidence about whether misstatement actually
personnel. exists
(AICPA ADAPTED) (a means to control detection risk).
c 23. Which of the following persons is not a 29
specialist upon whose work an auditor may rely? 4. List and define the four categories of ratios
a. Actuary. used in ratio analysis.
b. Appraiser. Answer:
c. Internal auditor. 1. Activity ratios – measure management’s
d. Engineer. (AICPA ADAPTED) effectiveness in managing available resources,
b 24. In which of the following instances would among them total assets, inventory and
an auditor be least likely to require the assistance receivables.
of a 2. Profitability ratios – measure management’s
specialist? effectiveness in turning a profit on their
a. Assessing the value of inventories of works of investment in assets and on shareholders’
art. investments in the company, and can be more
b. Determining the quantities of materials stored comprehensive than income statements.
in piles. 3. Liquidity ratios – compare short-term assets to
c. Determining the value of unlisted securities. short-term liabilities, and measure
d. Determining the assessed value of fixed assets. management’s ability to meet current obligations.
(AICPA ADAPTED) 4. Solvency ratios – measure management’s long-
SHORT ANSWER term financial dexterity in one of two
1. Evidential matter consists of the accounting ways: effectiveness in managing borrowed funds
data that underlies management’s financial or in generating income on borrowed
statements and the information that supports the funds.
accounting data. Please compare underlying 5. Describe the evidence normally included in
accounting data with corroborating information. working papers.
Answer: Answer:
Underlying accounting data includes records of  Evidence that work was adequately planned,
original entry (e.g., journals), general and supervised, and reviewed.
subsidiary ledgers, data files, and spreadsheets  Evidence that internal control was considered
that capture the details summarized in financial as a basis for planning substantive tests.
statements. Corroborating information includes  Evidence that sufficient competent evidential
checks, records of electronic fund transfers, matter was obtained.
invoices, contracts, minutes of meetings, and
other documents; written representations from
vendors, attorneys, banks, and other third parties;
and information obtained by questioning PROBLEMS
management or by observing a client’s employees 1. Analytical procedures allow the auditor to
at work. reach conclusions about the details in an account
2. List the two control activities that audit clients by
use in practice.
testing aggregated data. Well-designed analytical Answers will vary in the Balance Sheet account
procedures offer an alternative to tests of details example. Presented is the answer as it pertains to
especially in low-risk accounts. the asset account - Inventory
Required: Assertion Definition Balance Sheet Account
(a) List two ratios from each category of ratios: Example (Inventory)
activity ratios, profitability ratios, liquidity ratios, Existence or Occurrence All recorded assets,
and solvency ratios. liabilities,
(b) Present the method of calculating the ratios. and equities exist, and all
Answer: recorded transactions occurred.
Student’s answers will vary but will contain ratios Inventory physically exists.
and calculation methods from the following Completeness All transactions and accounts
list: that should be presented in the
Ratio Method of Calculation financial statements are
Activity Ratios presented.
Asset Turnover Net Sales/Total Assets Inventory includes all products
Inventory Turnover Cost of Sales/Average on hand.
Inventory Rights and Obligations Assets are the rights, and
Number of Days Supply in Inventory 360 Days/ liabilities are the obligations, of
Inventory Turnover the entity.
Accounts Receivable Turnover Net The entity has legal title or
Sales/Average Accounts Receivable similar rights of ownership.
Number of Days Sales in Receivables 360 Valuation or Allocation Assets, liabilities,
Days/Accounts Receivable Turnover equities,
Profitability Ratios revenues, and expenses are
Return on Assets Operating Income Before included in the financial
Interest and Taxes statements at appropriate
/Average Total Assets amounts; revenues, costs, and
Return on Equity Operating Income Before expenses are allocated to the
Interest and Taxes proper accounting periods.
/Average Shareholders Equity Inventory is properly stated at
Operating Margin Operating Income Before the lower of cost or market.
Interest and Taxes Presentation and Disclosure Financial statement
/Net Sales components
30 are properly classified,
Liquidity Ratios described, and disclosed.
Current Ratio Current Assets/Current Liabilities Inventory is properly classified
Quick Ratio Cash, Marketable Securities, and as a current asset.
Receivables
/Current Liabilities CHAPTER 5
Solvency Ratios MULTIPLE CHOICE
Debt to Equity Ratio Long-Term c 1. Client strategy templates provide a means for
Debt/Shareholders Equity an auditor to
Times Interest Earned Income Before Interest and a. Acquire, evaluate, and document evidence.
Taxes/Interest Expense b. Focus on transactions likely to affect audit risk.
Asset Leverage Total Assets/Shareholders Equity c. Compile the strategies and characteristics of an
2. (a) Name and define the five financial entity.
statement assertions d. Distinguish between engagement risk and audit
(b) Relate each of the financial statement risk.
assertions to a Balance Sheet specific account. a 2. The U.S. market for health care services has
Answer: experienced a number of cost-containment
initiatives, including
a. Generic substitution. d. Accordance with generally accepted auditing
b. Exclusivity periods. standards. (AICPA ADAPTED)
c. Backorders. 32
d. Patent abatement. d 7. Which of the following should an auditor
b 3. Balanced scorecards provide a means for an obtain from the predecessor auditor prior to
auditor to accepting
a. Evaluate an entity’s profitability, liquidity, and an audit engagement?
solvency. a. Analysis of balance sheet accounts.
b. Compile data about an entity’s financial, b. Analysis of income statement accounts.
customer, business, and learning perspectives. c. All matters of continuing accounting
c. Identify financial ratios most relevant to an significance.
entity. d. Facts that might bear on the integrity of
d. Establish trends. management. (AICPA ADAPTED)
b 4. The internal business perspective of a d 8. A difference of opinion over accounting and
balanced scorecard measures all of the following auditing matters relative to a particular phase of
except the
a. Product development. audit arises between an assistant auditor and the
b. Productivity. auditor responsible for the engagement. After
c. Core competencies. appropriate consultation, the assistant auditor
d. Quality. asks to be disassociated from the resolution of the
d 5. Prior to the acceptance of an audit matter. The working papers would probably be
engagement with a client who has terminated the a. Silent on the matter since it is an internal
services of matter of the firm.
the predecessor auditor, the CPA should b. Expanded to note that the assistant auditor is
a. Contact the predecessor auditor without completely disassociated from responsibility for
advising the prospective client and request a the
complete auditor's opinion.
report of the circumstance leading to the c. Expanded to document the additional work
termination with the understanding that all required since all disagreements of this type will
information require expanded substantive testing.
disclosed will be kept confidential. d. Expanded to document the assistant auditor's
b. Accept the engagement without contacting the position and how the difference of opinion was
predecessor auditor since the CPA can include resolved. (AICPA ADAPTED)
audit procedures to verify the reason given by the d 9. Which of the following situations would
client for the termination. most likely require special audit planning by the
c. Not communicate with the predecessor auditor auditor?
because this would in effect be asking the auditor a. Some items of factory and office equipment do
to violate the confidential relationship between not bear identification numbers.
auditor and client. b. Depreciation methods used on the client's tax
d. Advise the client of the intention to contact the return differ from those used on the books.
predecessor auditor and request permission for c. Assets costing less than $500 are expensed
the even though the expected life exceeds one year.
contact. (AICPA ADAPTED) d. Inventory comprises precious stones. (AICPA
a 6. Early appointment of the auditor enables ADAPTED)
preliminary work to be performed by the auditor, b 10. What is the responsibility of a successor
which auditor to communicate with the predecessor
benefits the client in that it permits the auditor in
examination to be performed in connection with a prospective new client?
a. A more efficient manner. a. The successor auditor has no responsibility to
b. A more thorough manner. contact the predecessor auditor.
c. Accordance with quality control standards.
b. The successor auditor should obtain permission a. Make inquiries of the proposed client's legal
from the prospective client to contact the counsel.
predecessor auditor. b. Review financial statements of the proposed
c. The successor auditor should contact the client.
predecessor auditor if the client authorizes c. Make inquiries of previous auditors.
contact. d. Review the personnel practices of the proposed
d. The successor auditor need not contact the client. (AICPA ADAPTED)
predecessor if the successor is aware of all a 15. The independent auditor's plan for an audit
available in accordance with generally accepted auditing
relevant facts. (AICPA ADAPTED) standards is influenced by the possibility of
d 11. The auditor will not ordinarily initiate material errors. The auditor will therefore conduct
discussion with the audit committee concerning the examination with an attitude of
the a. Professional skepticism.
a. Extent to which the work of internal auditors b. Subjective mistrust.
will influence the scope of the examination. c. Objective indifference.
b. Extent to which change in the company's d. Professional responsiveness. (AICPA
organization will influence the scope of the ADAPTED)
examination. d 16. In using the work of a specialist, an
c. Details of potential problems the auditor understanding should exist among the auditor, the
believes might cause a qualified opinion. client, and
d. Details of the procedures the auditor intends to the specialist as to the nature of the work to be
apply. (AICPA ADAPTED) performed by the specialist. Preferably, the
d 12. With respect to the auditor's planning of a understanding should be documented and would
year-end examination, which of the following include all of the following except
statements is always true? a. The objectives and scope of the specialist's
a. An engagement should not be accepted after work.
the fiscal year-end. b. The specialist's representations as to her or his
b. An inventory count must be observed at the relationship, if any, to the client.
balance sheet date. c. The specialist's understanding of the auditor's
c. The client's audit committee should not be told corroborative use of the specialist's findings in
of the specific audit procedures that will be relation to the representations in the financial
performed. statements.
d. It is an acceptable practice to carry out d. A statement that the methods or assumptions to
substantial parts of the examination at interim be used are not inconsistent with those used by
dates. the client. (AICPA ADAPTED)
(AICPA ADAPTED) SHORT ANSWER
33 1. Explain the difference between errors and
d 13. In planning an audit engagement, which of fraud.
the following affects the independent auditor's Answer:
judgment as to the quantity, type, and content of Errors are unintentional misstatements or
working papers? omission in financial statements whereas fraud
a. The estimated occurrence rate of attributes. arises
b. The preliminary evaluations based on from fraudulent financial reporting and from
substantive testing. misappropriation of assets.
c. The content of the client's representation letter. 2. Explain what is meant by professional
d. The anticipated nature of the auditor's report. skepticism.
(AICPA ADAPTED)
d 14. In pursuing its quality control objectives Answer:
with respect to acceptance of a client, a CPA firm Professional skepticism is an attitude which
is not recognizes that managements may have incentive
likely to
to intentionally misstate amounts or disclosures in b. Employees in the normal course of performing
the financial statements. their assigned functions.
34 c. Management when reviewing interim financial
3. Explain the importance of substantive tests in statements and reconciling account balances.
the audit process. d. Outside consultants who issue a special-
Answer: purpose report on internal control structure.
The purpose of substantive tests is to detect (AICPA ADAPTED)
material misstatements that had not been b 2. Internal control procedures are not designed
prevented or to provide reasonable assurance that
detected by the entity’s internal controls. The a. Transactions are executed in accordance with
nature, timing, and extent of substantive tests map management's authorization.
to the assessed level of detection risk and will b. Irregularities will be eliminated.
vary depending on the client’s industry. c. Access to assets is permitted only in
4. What is a deliverable and what is its purpose? accordance with management's authorization.
Answer: d. The recorded accountability for assets is
In an assurance service to assess the relevance of compared with the existing assets at reasonable
benchmarking measures, the deliverable is an intervals.
open-ended, nonstandardized report to senior (AICPA ADAPTED)
management and the board of directors. The c 3. Which of the following is the correct order
report for performing the auditing procedures A through
could conclude whether management’s C
performance measures are relevant to the below?
company’s A =Tests of controls
goals and mission, and whether management’s B = Preparation of a flowchart depicting the
information system offer reliable measures. client's internal control structure
5. During the course of the financial statement C = Substantive tests
audit, the auditor may receive written or oral a. ABC.
representations from management. With such b. ACB.
representations, what is a requirement of SAS No. c. BAC.
85? d. BCA. (AICPA ADAPTED)
Answer: a 4. A secondary purpose of the auditor's
SAS No. 85, “Client Representations,” requires consideration of internal control is to provide
that an auditor obtain written representation from a. A basis for constructive suggestions about
management in the form of a management improvements in internal control structure.
representation letter. The representation an b. A basis for assessing control risk.
auditor c. An assurance that the records and documents
obtains from management depends on the have been maintained in accordance with existing
circumstances of the engagement but, at a company policies and procedures.
minimum, d. A basis for the determination of the resultant
management is required to represent that the extent of the tests to which auditing procedures
financial statements are presented fairly in are
conformity with GAAP. to be restricted. (AICPA ADAPTED)
c 5. When considering internal control, an auditor
CHAPTER 6 must be aware of the concept of reasonable
MULTIPLE CHOICE assurance, which recognizes that
b 1. In general, a material weakness in internal a. Employment of competent personnel provides
control may be defined as a condition in which assurance that the objectives of internal control
material errors or irregularities may occur and not will be achieved.
be detected within a timely period by b. Establishment and maintenance of internal
a. An independent auditor during tests of controls. control is an important responsibility of the
management and not of the auditor.
c. Cost of internal control procedures should not d. The fairness of the financial statement
exceed the benefits expected to be derived from presentation. (AICPA ADAPTED)
the d 10. After consideration of a client's internal
control. control, an auditor might decide to
d. Segregation of incompatible functions is a. Increase the extent of substantive testing in
necessary to ascertain that the control procedures areas where the control structure is strong.
are b. Reduce the extent of tests of controls in areas
effective. (AICPA ADAPTED) where the controls are strong.
38 c. Reduce the extent of both substantive tests and
b 6. After considering a client's internal control, tests of controls in areas where the controls are
an auditor has concluded that the system is well strong.
designed and is functioning as anticipated. Under d. Increase the extent of substantive testing in
these circumstances, the auditor would most areas where the controls are weak.
likely (AICPA ADAPTED)
a. Cease to perform further substantive tests. a 11. After documenting internal control in an
b. Not increase the extent of planned substantive audit engagement, the auditor may perform tests
tests. on
c. Increase the extent of anticipated analytical a. Those controls that the auditor plans to rely on.
procedures. b. Those controls in which deficiencies were
d. Perform all tests of controls to the extent identified.
outlined in the preplanned audit program. c. Those controls that have a material effect on
(AICPA ADAPTED) the financial statement balances.
c 7. The primary purpose of the auditor's d. A random sample of the controls that were
consideration of internal control is to provide a reviewed. (AICPA ADAPTED)
basis for a 12. The auditor is examining copies of sales
a. Determining whether procedures and records invoices only for the initials of the person
that are concerned with the safeguarding of assets responsible for
are reliable. checking the extensions. This is an example of a
b. Constructive suggestions to clients concerning a. Test of controls.
deficiencies in internal control. b. Substantive test.
c. Determining the nature, timing, and extent of c. Dual-purpose test.
audit tests to be applied. d. Test of balances. (AICPA ADAPTED)
d. The expression of an opinion. (AICPA 39
ADAPTED) b 13. In an auditor's consideration of internal
b 8. The purpose of tests of controls is to provide control, the completion of a questionnaire is most
reasonable assurance that the closely
a. Accounting treatment of transactions and associated with which of the following?
balances is valid and proper. a. Separation of duties.
b. Control procedures are functioning as intended. b. Understanding the system.
c. Entity has complied with disclosure c. Flowchart accuracy.
requirements of GAAP. d. Tests of controls. (AICPA ADAPTED)
d. Entity has complied with requirements of b 14. The reliance placed on substantive tests in
quality control. (AICPA ADAPTED) relation to control risk varies in a relationship that
b 9. The auditor's review of the client's internal is
control is documented in order to substantiate ordinarily
a. Conformity of the accounting records with a. Parallel.
GAAP. b. Inverse.
b. Compliance with generally accepted auditing c. Direct.
standards. d. Equal. (AICPA ADAPTED)
c. Adherence to requirements of management. c 15. The auditor observes client employees in
order to
a. Prepare a flowchart. 40
b. Update information contained in the a 20. A CPA's consideration of internal control in
organization and procedure manuals. an audit
c. Corroborate the information obtained during a. Is generally more limited than that made in
the initial review of the system. connection with an engagement to express an
d. Determine the extent of compliance with opinion
quality control standards. (AICPA ADAPTED) on internal control.
c 16. A consideration of internal control made b. Is generally more extensive than that made in
during an audit is usually not sufficient to express connection with an engagement to express an
an opinion on internal control.
opinion on an entity's controls because c. Will generally be identical to that made in
a. Weaknesses in the system may go unnoticed connection with an engagement to express an
during the audit engagement. opinion
b. A consideration of internal control is not on internal control.
necessarily made during an audit engagement. d. Will generally result in the CPA expressing an
c. Only those controls on which an auditor opinion on the internal control.
intends to rely are reviewed, tested, and (AICPA ADAPTED)
evaluated. c 21. The auditor who becomes aware of
d. Controls can change each year. (AICPA reportable conditions is required to communicate
ADAPTED) this to the
a 17. An auditor's report on internal control of a a. Audit committee and client's legal counsel.
publicly held company would ordinarily be of b. Board of directors and internal auditors.
least use to c. Senior management and board of directors.
a. Shareholders. d. Internal auditors and senior management.
b. Officers. (AICPA ADAPTED)
c. Directors. d 22. Which of the following is not a purpose of
d. Regulatory agencies. (AICPA ADAPTED) an auditor's attempt to understand internal control
a 18. The accountant's report expressing an when a client processes accounting information
opinion on an entity's internal controls should by computer?
state that the a. Determine the extent to which the computer is
a. Establishment and maintenance of internal used in significant accounting applications.
control is the responsibility of management. b. Understand the flow of transactions in the
b. Objectives of the client's internal controls are system.
being met. c. Comprehend the basic structure of accounting
c. Consideration of the internal controls was control.
conducted in accordance with generally accepted d. Identify the controls that can be relied on when
auditing standards. designing substantive tests of details.
d. Inherent limitations of the client's internal (AICPA ADAPTED)
controls were examined. (AICPA ADAPTED) d 23. Which of the following is likely to be of
d 19. The accountant's report expressing an least importance to an auditor when assessing
opinion on an entity's internal controls would not control
include a risk in a company that processes data by
a. Description of the scope of the engagement. computer?
b. Specific date that the report covers rather than a. The segregation of duties within the computer
a period of time. department.
c. Brief explanation of the broad objectives and b. The control over source documents.
inherent limitations of internal control. c. The documentation maintained for accounting
d. Statement that the entity's internal controls are applications.
consistent with that of the prior year after giving d. The cost-benefit ratio of data processing
effect to subsequent changes. (AICPA operations. (AICPA ADAPTED)
ADAPTED)
b 24. In considering a client's internal control a 27. Which of the following methods of testing
structure in a computer environment, the auditor application controls utilizes software prepared by
will the
encounter general controls and application auditors and applied to the client's data?
controls. Which of the following is an application a. Parallel simulation.
control? b. Integrated test facility.
a. Organization charts. c. Test data.
b. Hash total. d. Exception report tests. (AICPA ADAPTED)
c. Systems flowcharts. c 28. The test–data method is used by auditors to
d. Control over program changes. (AICPA test the
ADAPTED) a. Accuracy of input data.
a 25. Auditing by testing the input and output of a b. Validity of the output.
computer system--i.e., auditing "around" the c. Procedures contained within the program.
computer--instead of the computer software itself d. Normalcy of distribution of test data. (AICPA
will ADAPTED)
a. Not detect program errors that do not appear in c 29. Which of the following is true of
the output sampled. generalized audit software?
b. Detect all program errors, regardless of the a. They can be used only in auditing on-line
nature of the output. computer systems.
c. Provide the auditor with the same type of b. They can be used on any computer without
evidence. modification.
d. Not provide the auditor with confidence in the c. They each have their own characteristics,
results of the auditing procedures. which the auditor must carefully consider before
(AICPA ADAPTED) using
41 in a given audit situation.
b 26. Smith Corporation has numerous customers. d. They enable the auditor to perform all manual
A customer file is kept on disk. Each customer compliance test procedures less expensively.
file (AICPA ADAPTED)
contains the name, address, credit limit, and d 30. Assume that an auditor estimated that
account balance. The auditor wishes to test this 10,000 checks were issued during the accounting
file period. If
to determine whether credit limits are being an application control that performs a limit check
exceeded. The best procedure for the auditor to for each check request is to be subjected to the
follow would be to auditor's test–data approach, the sample should
a. Develop test data that would cause some include:
account balances to exceed the credit limit and a. Approximately 1,000 test items.
determine if the system properly detects such b. A number of test items determined by the
situations. auditor to be sufficient under the circumstances.
b. Develop a program to compare credit limits c. A number of test items determined by the
with account balances and print out the details of auditor's reference to the appropriate sampling
any tables.
account with a balance exceeding its credit limit. d. One transaction. (AICPA ADAPTED)
c. Request a printout of all account balances so d 31. PC DOS, MS DOS, and AppleDOS are
they can be manually checked against the credit examples of
limits. a. Application software.
d. Request a printout of a sample of account b. Generalized audit software.
balances so they can be individually checked c. Database management systems.
against d. Operating software.
the credit limits. (AICPA ADAPTED) 42
c 32. Which of the following is not an example of
a computer-assisted audit technique?
a. Integrated test data. d 38. Which of the following statements about
b. Audit modules. internal control is correct?
c. Disk operating systems. a. Properly maintained internal controls
d. Audit hooks. reasonably assure that collusion among
c 33. Which of the following statements most employees cannot
likely represents a disadvantage for an entity that occur.
maintains computer data files rather than manual b. Establishing and maintaining internal control is
files? the internal auditor's responsibility.
a. It's usually more difficult to detect c. Exceptionally strong control allows the auditor
transposition errors. to eliminate substantive tests of details.
b. Transactions are usually authorized before they d. The cost-benefit relationship should be
are executed and recorded. considered in designing internal controls.
c. It's usually easier for unauthorized persons to (AICPA ADAPTED)
access and alter the files. 43
d. Random error is more common when similar b 39. Which of the following is not done by an
transactions are processed in different ways. auditor when obtaining an understanding of an
b 34. Transaction authorization within an entity's
organization may be either specific or general. An internal controls?
example of a. Identify the types of potential misstatements
specific transaction authorization is the that can occur.
a. Setting of automatic reorder points. b. Consider the operating effectiveness of the
b. Approval of a construction budget for a new internal controls.
warehouse. c. Design substantive tests.
c. Establishment of a customer's credit limits. d. Consider factors that affect the risk of material
d. Establishment of sales prices. (AICPA misstatements. (AICPA ADAPTED)
ADAPTED) c 40. Which of the following audit tests would be
a 35. Proper segregation of functional a test of controls?
responsibilities calls for separation of the a. Tests of the specific items making up the
functions of balance in a financial statement account.
a. Authorization, execution, and recording. b. Comparing inventory prices to vendors'
b. Authorization, execution, and payment. invoices.
c. Custody, execution, and reporting. c. Comparing signatures on canceled checks to
d. Authorization, payment, and recording. board of directors' authorizations.
(AICPA ADAPTED) d. Tests of the additions to property, plant, and
b 36. An auditor should consider the competence equipment by physical inspections.
of a client's employees because their competence (AICPA ADAPTED)
bears directly and importantly on the c 41. The sequence of steps in gathering evidence
a. Cost-benefit relationship of internal control. as the basis of the auditor's opinion is:
b. Achievement of the objectives of internal a. Substantive tests, documentation of control
control. structure, and tests of controls.
c. Comparison of recorded accountability with b. Documentation of control structure, substantive
assets on hand. tests, and tests of controls.
d. Timing of the tests to be performed. (AICPA c. Documentation of control structure, tests of
ADAPTED) controls, and substantive tests.
a 37. Which of the following elements is not a d. Tests of controls, documentation of control
part of an entity's internal controls? structure, and substantive tests.
a. Control risk. (AICPA ADAPTED)
b. Control activities. c 42. Which of the following procedures is
c. The accounting system. essential to determining whether necessary
d. The control environment. (AICPA ADAPTED) control activities
were prescribed and are being followed?
a. Developing questionnaires and checklists. a. Material irregularities or illegal acts perpetrated
b. Evaluating the entity's procedures for risk by management.
assessment. b. Significant deficiencies in the design or
c. Documenting and testing controls. operation of internal control.
d. Observing employees and making inquiries. c. Flagrant violations of the entity's documented
(AICPA ADAPTED) conflict-of-interest policies.
b 43. Evidence about segregation of duties is best d. Intentional attempts by client personnel to limit
obtained by the scope of the auditor's work.
a. Inspecting documents that contain the initials (AICPA ADAPTED)
of who performed control activities. d 48. Which of the following statements best
b. Direct personal observation of employees who describes a weakness often associated with
perform control activities. computers?
c. Preparing a flowchart of who performs the a. Computer equipment is more subject to
duties. systems error than manual processing is subject to
d. Making inquiries of coworkers about the human
employee who performs the duties. error.
(AICPA ADAPTED) b. Computer equipment processes and records
a 44. An auditor's flowchart of a client's internal similar transactions in a similar manner.
controls is a diagram depicting the auditor's c. Control activities for detecting invalid and
a. Understanding of the internal controls. unusual transactions are less effective than
b. Program for tests of controls. manual
c. Documentation of having considered the control activities.
internal controls. d. Functions that would normally be separated in
d. Understanding of the types of irregularities that a manual system are combined in a computer
are probable. (AICPA ADAPTED) system. (AICPA ADAPTED)
a 45. An auditor is required to communicate b 49. Accounting functions that are normally
significant deficiencies in internal control to considered incompatible in a manual system are
a. Audit committee of the board of directors. often
b. Creditors and board of directors. combined by computer software. This
c. Board of directors and internal auditors. necessitates an application control that prevents
d. Internal auditors and senior management. unapproved
(AICPA ADAPTED) a. Access to the computer library.
44 b. Revisions to existing software.
b 46. An auditor has concluded that a client's c. Usage of software.
internal controls are well designed and d. Testing of modified software. (AICPA
functioning as ADAPTED)
expected. Under these circumstances the auditor b 50. When software or files can be accessed
would most likely from on-line servers, users should be required to
a. Cease to perform further substantive tests. enter
b. Not increase the extent of planned substantive a. A parity check.
tests. b. A personal identification code.
c. Increase the extent of planned analytical c. A self-diagnosis test.
procedures. d. An echo check.
d. Perform all tests of controls to the extent b 51. An auditor's consideration of a company's
outlined in the audit program. (AICPA computer control activities has disclosed the
ADAPTED) following
b 47. Reportable conditions are matters that come four circumstances. Indicate which circumstance
to an auditor's attention and that should be constitutes a significant deficiency in internal
communicated to an entity's audit committee control.
because they represent a. Computer operators do not have access to the
complete software support documentation.
b. Computer operators are closely supervised by The COSO Report defines internal control as “a
programmers. process effected by an entity’s board of directors,
c. Programmers are not authorized to operate management, and other personnel, designed to
computers. provide reasonable assurance regarding the
d. Only one generation of backup files is stored in achievement of objectives in the following
an off-premises location. (AICPA ADAPTED) categories:
45  Effectiveness and efficiency of operations.
a 52. A control feature requires the computer to  Reliability of financial reporting.
send signals to the printer to activate the print  Compliance with applicable laws and
mechanism for each character. The print regulations.”
mechanism, just prior to printing, sends a signal 3. What are the three phases of an entity’s
back to internal controls that must be considered by an
the computer verifying that the proper print auditor?
position has been activated. This type of Answer:
hardware i. Obtain an understanding of how management
control is referred to as a/an has designed policies and procedures
a. Echo check. for the control environment, risk assessment, the
b. Validity check. control activities, information and
c. Signal check. communication, and monitoring.
d. Check digit. (AICPA ADAPTED) ii. Assess control risk for the policies and
d 53. In a computer system, hardware controls are procedures that have been placed in operation.
designed to iii. Determine the nature, timing, and extent of
a. Arrange data in a logical sequence for substantive tests.
processing. 46
b. Correct errors in software. 4. Explain how restricted use reports differ from
c. Monitor and detect errors in source documents. general use reports.
d. Detect and control errors arising from use of Answer:
equipment. (AICPA ADAPTED) Restricted use reports are intended for specified
b 54. The primary objective of procedures parties in contrast to general use reports that
performed to obtain an understanding of internal are not intended for use by specified parties.
control is 5. Explain the importance of segregation of duties
to provide an auditor with in the control environment. Also describe how to
a. Evidential matter to use in reducing detection achieve this important control function.
risk. Answer:
b. Knowledge necessary to plan the audit. Segregation of duties or responsibilities aid in
c. A basis from which to modify tests of controls. preventing any one employee, acting alone, from
d. Information necessary to prepare flowcharts. committing and concealing frauds. Optimum
(AICPA ADAPTED) segregation of duties exists when collusion is
SHORT ANSWER necessary to circumvent controls.
1. Describe what is meant by reportable To achieve optimum segregation of
conditions. responsibilities or duties, an entity’s management,
Answer: custodial
Reportable conditions are significant deficiencies accounting, and monitoring functions should be
in internal control discovered during an audit performed by different employees. Transaction
that could adversely affect the entity’s ability to authorization, transaction execution, transaction
record, process, summarize, and report financial recording, and independent checks on
data. performance must be performed by different
2. Explain the purpose of the COSO report and employees.
what objectives it achieves. PROBLEMS
Answer:
1. In a well-designed and executed audit, the 2. Documenting the system’s internal controls
auditor’s objective in considering an entity’s and identifying transaction cycles – An
control auditor uses one or more of three means to
environment is to obtain an understanding of document an entity’s internal control: narrative
management’s and the board of directors’ memoranda, flowcharts, and questionnaires.
attitude, 3. Performing a transaction walk-through – A
awareness, and actions concerning the following single transaction for each major segment of
items: the internal controls is selected and followed
a. Integrity and ethical values through the accounting system.
b. Human resource policies and practices 4. Identifying controls that reduce to a
c. Commitment and competence relatively low level the risk of material
d. Assignment of authority and responsibility misstatements – An auditor evaluates whether
e. Board of directors or audit committee the entity’s control activities can be relied on
f. Organizational structure in assessing control risk below the maximum.
g. Management’s philosophy and operating style.
For each of the items above please provide one CHAPTER 10
example of what knowledge the auditor is MULTIPLE CHOICE
attempting to obtain. c 1. A sales cutoff test of billings complements
Answer: tests of
a. Do codes of conduct describe acceptable a. Sales returns.
business practice, conflicts of interest, and b. Cash.
standards of ethical behavior? c. Accounts receivable.
b. Are there policies for hiring, training, d. Sales allowances. (AICPA ADAPTED)
promoting, and compensating employees? a 2. An auditor should perform alternative
c. Are employees committed to quality? procedures to substantiate the existence of
d. Are the responsibilities of key managers accounts
defined? receivable when
e. Is the board independent of management? a. No reply to a positive confirmation request is
f. Does information flow to the appropriate levels received.
of management? b. No reply to a negative confirmation request is
g. What is management’s attitude toward received.
manipulated or falsified records? c. Collectability of the receivables is in doubt.
2. Name and describe the four steps in obtaining d. Pledging of the receivables is probable.
an understanding of internal control. (AICPA ADAPTED)
47 a 3. In the confirmation of accounts receivable,
Answer: the auditor would most likely
1. Performing a preliminary review – Before a. Confirm a sample of the inactive accounts.
expending time and effort to document an b. Seek to obtain positive confirmations for at
entity’s internal controls, an auditor first reviews least 50 percent of the total dollar amount of the
prior-year audit working papers and client receivables.
procedures manuals, makes inquiries of c. Confirm all receivables from agencies of the
management, and observes client personnel to federal government.
obtain d. Send confirmation requests within one month
a general understanding of the control of the fiscal year-end.
environment, management’s assessments of the (AICPA ADAPTED)
risk b 4. Auditors may use positive and/or negative
they face, the control activities, the flow of forms of confirmation requests for accounts
information and communication throughout the receivable. An auditor most likely will use
accounting system, and how management a. The positive form to confirm all balances,
monitors internal controls. regardless of size.
b. A combination of the two forms, with the c. Excessive sales discounts.
positive form used for large balances and the d. Unauthorized goods returned for credit.
negative (AICPA ADAPTED)
form for small balances. a 9. The auditor should ordinarily mail
c. A combination of the two forms, with the confirmation requests to all banks with which the
positive form used for trade receivables and the client has
negative form for other receivables. conducted any business during the year,
d. The positive form when the control structure regardless of the year-end balance, since
related to receivables are satisfactory, and the a. The confirmation form also seeks information
negative form when controls are unsatisfactory. about indebtedness to the bank.
(AICPA ADAPTED) b. This procedure will detect kiting activities,
c 5. An auditor reconciles the total of the which would otherwise not be detected.
accounts receivable subsidiary ledger to the c. The mailing of confirmation forms to all such
general ledger banks is required by generally accepted auditing
control account, as of October 31, 2005. By this standards.
procedure, the auditor would be most likely to d. This procedure relieves the auditor of any
learn which of the following? responsibility with respect to non-detection of
a. An October invoice was improperly computed. forged
b. An October check from a customer was posted checks. (AICPA ADAPTED)
in error to the account of another customer with a d 10. Once an auditor has determined that
similar name. accounts receivable have increased due to slow
c. An opening balance in a subsidiary ledger collections in
account was improperly carried forward from the a "tight money" environment, the auditor would
previous accounting period. be likely to
d. An account balance is past due and should be a. Increase the balance in the allowance for bad
written off. (AICPA ADAPTED) debts account.
d 6. Which of the following is the best argument b. Review the going-concern ramifications.
against the use of negative accounts receivable c. Review the credit and collection policy.
confirmations? d. Expand tests of collectability. (AICPA
a. The cost-per-response is excessively high. ADAPTED)
b. There is no way of knowing if the intended d 11. To gather evidence about the balance per
recipients received them. bank in a bank reconciliation, an auditor would
c. Recipients are likely to feel that in reality the examine
confirmation is a subtle request for payment. all of the following except the
d. The inference drawn from receiving no reply a. Cutoff bank statement.
may not be correct. (AICPA ADAPTED) b. Year-end bank statement.
70 c. Bank confirmation.
d 7. If accounts receivable turned over 7.1 times d. General ledger. (AICPA ADAPTED)
in 2005, as compared to only 5.6 times in 2004, it b 12. Two months before year-end, the
is bookkeeper erroneously recorded the receipt of a
possible that there were long-term
a. Unrecorded credit sales in 2005. bank loan by a debit to cash and a credit to sales.
b. Unrecorded cash receipts in 2005. Which of the following is the most effective
c. More thorough credit investigations made by procedure for detecting this type of error?
the company in late 2005. a. Analyze the notes payable journal.
d. Fictitious sales in 2005. (AICPA ADAPTED) b. Analyze bank confirmation information.
a 8. Which of the following would most likely be c. Prepare year-end bank reconciliation.
detected by an auditor's review of a client's sales d. Prepare a year-end bank transfer schedule.
cutoff? (AICPA ADAPTED)
a. Unrecorded sales for the year.
b. Lapping of year-end accounts receivable.
b 13. An auditor would be least likely to use a. Review composition of authenticated deposit
confirmations in connection with the examination slips.
of b. Review subsequent bank statements and
a. Inventories. canceled checks received directly from the banks.
b. Refundable income taxes. c. Prepare a schedule of bank transfers from the
c. Long-term debt. client's books.
d. Stockholders' equity. (AICPA ADAPTED) d. Prepare year-end bank reconciliations. (AICPA
71 ADAPTED)
c 14. As one of the year-end audit procedures, the b 18. An auditor who is engaged to examine the
auditor instructed the client's personnel to prepare financial statements of a business enterprise will
a request a cutoff bank statement primarily in order
standard bank confirmation request for a bank to
account that had been closed during the year. a. Verify the cash balance reported on the bank
After the client's treasurer had signed the request, confirmation.
it was mailed by the assistant treasurer. What b. Verify reconciling items on the client's bank
is the major flaw in this audit procedure? reconciliation.
a. The confirmation request was signed by the c. Detect lapping.
treasurer. d. Detect kiting. (AICPA ADAPTED)
b. Sending the request was meaningless because a 19. Which of the following audit procedures
the account was closed before the year-end. would be most appropriate to address the
c. The request was mailed by the assistant existence
treasurer. assertion for sales?
d. The CPA did not sign the confirmation request a. Confirm receivables balances.
before it was mailed. (AICPA ADAPTED) b. Perform analytical procedures.
b 15. An unrecorded check issued during the last c. Review collectability.
week of the year would most likely be discovered d. Confirm cash deposits in banks.
by b 20. Which of the following financial statement
the auditor when the assertions is not addressed by the confirmation of
a. Check register for the last month is reviewed. accounts receivable?
b. Cutoff bank statement is reconciled. a. Existence.
c. Bank confirmation is reviewed. b. Presentation and disclosure.
d. Search for unrecorded liabilities is performed. c. Rights.
(AICPA ADAPTED) d. Valuation.
d 16. An auditor compares information on 72
canceled checks with information contained in c 21. Audit working papers often include a client-
the cash prepared, aged trial balance of accounts
disbursement journal. The objective of this test is receivable as
to determine that of the balance sheet date. An aging is best used
a. Recorded cash disbursement transactions are by the auditor to
properly authorized. a. Evaluate controls over credit sales.
b. Proper cash purchase discounts have been b. Test the accuracy of recorded charge sales.
recorded. c. Estimate credit losses.
c. Cash disbursements are for goods and services d. Verify the validity of the recorded receivables.
actually received. (AICPA ADAPTED)
d. No discrepancies exist between the data on the a 22. An entity's financial statements were
checks and the data in the journal. misstated over a period of years due to large
(AICPA ADAPTED) amounts of
b 17. Which of the following is one of the better revenue having been recorded in journal entries
auditing techniques that might be used by an that involved debits and credits to an illogical
auditor to combination of accounts. The auditor could most
detect kiting? likely have been alerted to this irregularity by
a. Scanning the general journal for unusual a 26. Customers with substantial due balances
entries. have failed to reply after second requests had
b. Performing cutoff tests at year-end. been
c. Tracing a sample of journal entries to the mailed to them directly. Which of the following
general ledger. audit procedures is most appropriate?
d. Examining documents supporting sales returns a. Examine shipping documents.
and allowances recorded after year-end. b. Review cash collections during the year being
(AICPA ADAPTED) audited.
a 23. When auditing the allowance for c. Intensify the study of internal controls for
uncollectible accounts, the least reliance should receivables.
be placed on d. Increase the balance in the accounts receivable
which of the following? allowance account. (AICPA ADAPTED)
a. The credit manager's opinion. 73
b. An aging of past due accounts. d 27. The negative form of accounts receivable
c. Collection experience of the client's collection confirmation is not useful when
agency. a. Internal control is considered to be effective.
d. Ratios that show the past relationship of the b. A large number of small balances are involved.
allowance to net credit sales. c. The auditor has reason to believe that persons
(AICPA ADAPTED) receiving the requests are likely to consider
d 24. In determining the existence of accounts them.
receivable, which of the following would the d. Individual account balances are relatively
auditor large. (AICPA ADAPTED)
consider most reliable? c 28. Negative confirmation of accounts
a. Documents that supports the accounts receivable is less effective than positive
receivable balance. confirmation of
b. Credits to accounts receivable from the cash accounts receivable because
receipts book after the close of business at year- a. A majority of recipients are usually unwilling
end. to respond objectively.
c. Direct telephone communication between b. Some recipients may report incorrect balances
auditor and debtor. that require extensive follow-up.
d. Confirmation replies received directly from c. The auditor cannot infer that all
customers. (AICPA ADAPTED) nonrespondents have verified the account
a 25. An auditor confirms a representative information.
number of open accounts receivable as of d. Negative confirmations do not produce
December 31 and evidence that is statistically quantifiable.
investigates respondents' exceptions and (AICPA ADAPTED)
comments. By this procedure, the auditor would a 29. You are auditing the financial statements of
most a small rural municipality. The receivable
likely to learn of which of the following? balances
a. One of the cashiers has been covering represent residents' delinquent real estate taxes.
embezzlement by lapping. Control risk is at the maximum. To determine the
b. One of the sales clerks has not been preparing existence of the accounts receivable balances at
charge slips for credit sales to family and friends. the balance sheet date, you would most likely
c. One of the computer control clerks has been a. Send positive confirmation requests.
removing from the data file all sales invoices b. Send negative confirmation requests.
applicable to his own account. c. Examine evidence of subsequent cash receipts.
d. The credit manager has misappropriated d. Inspect internal records such as copies of tax
remittances from customers whose accounts have invoices that had been mailed to the residents.
been (AICPA ADAPTED)
written off. (AICPA ADAPTED) SHORT ANSWER
1. Name the assertions that management presents debtors will not return the confirmation request.
within company financial statements. 5. What is the general purpose of cutoff bank
Answer: Existence or Occurrence statements in the course of an audit?
 Completeness Answer:
 Rights and Obligations Unlike typical month-end bank statements, cutoff
 Valuation or Allocation bank statements do not represent a full month’s
 Presentation and Disclosure transactions. They represent transactions for a
2. In planning substantive audit procedures, the short period after year-end and are used by
nature, timing, and extent of what three types of auditors
risk to verify reconciling items appearing on year-end
are considered? Define these risks. bank reconciliations prepared by the client.
Answer: Detection risk – the likelihood that PROBLEMS
error could occur and not be detected by audit 1. Review the following formula. Define the
procedures. variables used within the equation and then
 Control risk – the likelihood that material explain the
error could occur and not be detected by ending product as it pertains to the confirmation
internal control. of accounts receivables balances.
 Inherent risk – the susceptibility of an account n = RF x B
balance to material error for which TE – ( AE x EF )
there is no related internal control. Answer:
3. Which three assertions are addressed by the use B = Population size – the total size of the
of confirmation statements in confirming account to be reviewed.
receivables balances? Why? TE = Tolerable error – the maximum monetary
74 error that may exist without causing the
Answer: Existence – to substantiate that financial statements to be misstated materially.
recorded receivables exist at the balance sheet RF = Reliability factor – the reliability for
date. overstatement differences.
 Rights – to confirm that recorded receivables AE = Anticipated error – the error the auditor
represent rights the audited entity holds believes to be present.
over debtors EF = Expansion factor
 Valuation – to confirm that receivables are n = The sample size of evidence that will be
reported at appropriate amounts. randomly selected and confirmed to substantiate
4. Define, then compare and contrast, positive the balances of accounts receivables customers.
confirmations and negative confirmations. 2. The use of substantive tests in cash balances
Answer: are planned to substantiate management’s five
Positive confirmations request that a customer financial statements assertions. Describe five of
review the account balance listed on the the substantive tests used in auditing cash
confirmation and respond to the auditor directly balances and note the assertion(s) these tests
about whether the balance is correct or incorrect. would prove.
Positive conformations are coined “blank form” 75
confirmations, and request that the respondent Answer:
supply the balance. Positive confirmations are Students may list any of the following nine tests
appropriate when individual account balances are noted within the chapter:
relatively large or when substantial numbers of Assertion(s) Procedure
inaccuracies or frauds are expected. Existence, Rights, Valuation Confirm year-end
Negative confirmations in contrast request that a cash balances with all
debtor respond to the auditor only if the balance banks and other depositories.
in an attached statement is incorrect. Negative Valuation Verify mathematical accuracy of
confirmations are generally appropriate when recorded
internal control is adequate, balances are small, cash balances by footing cash journals.
and the auditor has no reason to believe that
Valuation Verify mathematical accuracy of d 2. An internal control questionnaire indicates
recorded that an approved receiving report must
cash balances by tracing totals to the general accompany
ledger and to the year-end bank every check request for payment of merchandise.
reconciliations prepared by the client. Which of the following procedures provides
Valuation Verify mathematical accuracy of the greatest assurance that this control is
recorded operating effectively?
cash balances by testing cash on hand as a. Select and examine receiving reports and
necessary. ascertain that the related canceled checks are
Existence, Completeness, Valuation Test cutoff dated no
by obtaining cutoff bank earlier than the receiving reports.
statements directly from banks and: b. Select and examine receiving reports and
 Verifying accuracy of cutoff bank ascertain that the related canceled checks are
statements. dated no
 Examining information on cutoff later than the receiving reports.
bank statements and trace to c. Select and examine canceled checks and
reconciling items in year-end bank ascertain that the related receiving reports are
reconciliation and to entries in cash dated no
journals. earlier than the checks.
 Considering necessity of preparing a d. Select and examine canceled checks and
proof of cash. ascertain that the related receiving reports are
Existence, Completeness, Valuation Test cutoff dated no
by reconciling recorded cash later than the checks. (AICPA ADAPTED)
balances with returned bank confirmations. c 3. The accounts payable department receives
Existence, Completeness, Valuation Test cutoff the purchase order form to accomplish all of the
by examining intercompany and following except
interbank transfers near year-end. a. Compare invoice price to purchase order price.
Presentation and disclosure Review financial b. Ensure that the purchase had been properly
statements to determine authorized.
whether cash balances are properly classified c. Ensure that the party requesting the goods had
and disclosed. received the goods.
Presentation and disclosure Review financial d. Compare quantity ordered to quantity
statements to determine purchased. (AICPA ADAPTED)
whether disclosures are adequate. b 4. For effective internal control purposes, which
of the following individuals should be responsible
CHAPTER 11 for mailing signed checks?
MULTIPLE CHOICE a. Receptionist.
b 1. A client erroneously recorded a large b. Treasurer.
purchase twice. Which of the following control c. Accounts payable clerk.
procedures d. Payroll clerk. (AICPA ADAPTED)
would be most likely to detect this error in a a 5. A client's expenditure/disbursement cycle
timely and efficient manner? begins with requisitions from user departments
a. Footing the purchases journal. and
b. Reconciling vendors' monthly statements with ends with the receipt of materials and the
subsidiary payable ledger accounts. recognition of a liability. An auditor's primary
c. Tracing totals from the purchases journal to the objective in reviewing this cycle is to
ledger accounts. a. Evaluate the reliability of information
d. Sending written quarterly confirmations to all generated by the cycle.
vendors. (AICPA ADAPTED) b. Investigate the physical handling and recording
of unusual acquisitions of materials.
c. Consider the need to be on hand for the annual a 10. An effective internal control procedure that
physical inventory count if this system is not protects against the preparation of improper or
functioning properly. inaccurate disbursements is to require that all
d. Ascertain that materials said to be ordered, checks be
received, and paid for are on hand. a. Signed by an official after necessary supporting
(AICPA ADAPTED) evidence has been examined.
78 b. Reviewed by the treasurer before mailing.
b 6. Which of the following is a primary function c. Sequentially numbered and accounted for by
of the purchasing department? internal auditors.
a. Authorizing the acquisition of goods. d. Perforated or otherwise effectively canceled
b. Ensuring the acquisition of goods of a specified when they are returned with the bank statement.
quality. (AICPA ADAPTED)
c. Verifying the propriety of goods of a specified a 11. As an in-charge auditor, you are reviewing a
quality. write-up of internal control in cash receipt and
d. Reducing expenditures for goods acquired. disbursement procedures. Which of the following
(AICPA ADAPTED) deficiencies alone should cause you the least
d 7. An auditor is planning the consideration of concern?
internal control over the a. Checks are signed by only one person.
expenditure/disbursement b. Signed checks are distributed by the controller
cycle. The auditor will be least influenced by to approved payees.
a. The availability of a company procedures c. The treasurer fails to establish bona fide names
manual describing purchasing and cash and addresses of check payees.
disbursement d. Cash disbursements are made directly out of
procedures. cash receipts. (AICPA ADAPTED)
b. The scope and results of work performed by c 12. Matching the supplier's invoice, the
the company's internal auditors. purchase, and the receiving report normally
c. The existence within the purchasing should be the
department of control procedures that offset responsibility of the
deficiencies. a. Receiving department.
d. The strength or deficiency of control b. Purchasing department.
procedures in other areas, e.g., sales and accounts c. Accounting function.
receivable. (AICPA ADAPTED) d. Treasury function. (AICPA ADAPTED)
a 8. Omitting quantities from copies of purchase 79
orders sent to the receiving department is a a 13. To avoid potential errors and irregularities,
control well-designed controls in the accounts payable
procedure intended mainly to area
a. Ensure that goods received are physically should include a separation of which of the
counted by receiving department personnel. following functions?
b. Identify and return damaged goods as soon as a. Cash disbursements and vendor invoice
they are received. verification.
c. Provide a crosscheck for verifying the accuracy b. Vendor invoice verification and merchandise
of perpetual inventory records. ordering.
d. Prevent theft of goods by receiving department c. Physical handling of merchandise received and
personnel. preparation of receiving reports.
d 9. Which of the following is not an appropriate d. Check signing and cancellation of payment
activity for the treasurer's department? documentation. (AICPA ADAPTED)
a. Prepare checks. b 14. Which of the following is a necessary
b. Forward checks to vendors. control procedure for cash disbursements?
c. Cancel vouchers. a. Checks should be signed by the controller and
d. Prepare vouchers. at least one other employee of the company.
b. Checks should be sequentially numbered, and a. Department that initiated the requisition.
the numerical sequence should be accounted for b. Receiving department.
by c. Purchasing agent.
the person preparing the bank reconciliation. d. Accounts payable department. (AICPA
c. Checks and supporting documents should be ADAPTED)
marked "Paid" immediately after the check is 80
returned with the bank statement. c 20. When goods are received, the receiving
d. Checks should be sent directly to the payee by clerk should match the goods with the
the employee who prepares documents that a. Purchase order and requisition.
authorize check preparation. (AICPA b. Vendor's invoice and the receiving report.
ADAPTED) c. Vendor's shipping document and the purchase
b 15. Which of the following is not a common order.
activity of the expenditure/disbursement cycle? d. Receiving report and the vendor's shipping
a. Purchasing. document. (AICPA ADAPTED)
b. Fixed asset additions. a 21. The accounts payable department should
c. Receiving. compare the information on each vendor's invoice
d. Recording. with
b 16. Which of the following functions is not the
appropriate for the accounts payable department? a. Receiving report and the purchase order.
a. Compare purchase requisitions, purchase b. Receiving report and the voucher.
orders, receiving reports, and vendors' invoices. c. Vendor's packing slip and the purchase order.
b. Prepare purchase orders. d. Vendor's packing slip and the voucher.
c. Prepare voucher and daily summary. (AICPA ADAPTED)
d. File voucher package by due date. c 22. Effective internal control over the purchase
d 17. The accounts payable department generally of raw materials should usually include all of the
should following procedures except
a. Cancel supporting documentation after a cash a. Reporting product changes that will affect raw
payment is mailed. materials needs.
b. Approve the price and quantity of each b. Determining the need for raw materials prior to
purchase requisition. preparing a purchase order.
c. Assure that the quantity ordered is omitted c. Obtaining third-party written quality and
from the receiving department's copy of the quantity reports prior to paying for the raw
purchase materials.
order. d. Obtaining approval prior to making a purchase
d. Agree the vendor's invoice with the receiving commitment. (AICPA ADAPTED)
report and purchase order. (AICPA ADAPTED) a 23. To improve control over merchandise
d 18. Based on observations made during an purchases, a company's receiving department
audit, an independent auditor should discuss with should
management the effectiveness of procedures that a. Accept merchandise only if an approved
control against the purchase of purchase order is on hand.
a. Supplies purchased from a vendor who offers b. Accept and count all merchandise received
no trade or cash discounts. from known vendors.
b. Inventory acquired just-in-time. c. Rely on shipping documents to prepare
c. Equipment that is needed but does not qualify receiving reports.
for investment tax credit. d. Be responsible for handling merchandise but
d. Supplies ordered without considering potential not for preparing receiving reports.
volume discounts. (AICPA ADAPTED) (AICPA ADAPTED)
b 19. Internal control is improved when the b 24. To assure that disbursements are neither
quantity of merchandise ordered is omitted from improper nor inaccurate, an entity could require
the copy that all
of the purchase order sent to the checks be
a. Signed by an officer after supporting b 29. An audit of accounts payable is ordinarily
documentation has been examined. not designed to
b. Reviewed by the treasurer before mailing. a. Detect substantially past due accounts.
c. Numbered sequentially and accounted for by b. Verify that accounts payable were properly
internal auditors. authorized.
d. Canceled when they are returned with the bank c. Determine the reasonableness of recorded
statement. (AICPA ADAPTED) liabilities.
a 25. The mailing of disbursement checks and d. Determine that all existing liabilities at the
remittance advices should be controlled by the balance sheet date have been recorded.
employee (AICPA ADAPTED)
who c 30. When an auditor selects a sample of items
a. Signed the checks last. from the vouchers payable register for the last
b. Approved the vouchers for payment. month
c. Matched the receiving reports, purchase orders, of the period under audit and traces them to
and vendor invoices. underlying documents, the auditor is gathering
d. Verified the mathematical accuracy of the evidence primarily to support the assertion that
vouchers and remittance advices. a. Recorded obligations were paid.
(AICPA ADAPTED) b. Incurred obligations were recorded in the
b 26. An auditor plans to examine a sample of 20 correct period.
checks for countersignatures as prescribed by the c. Recorded obligations were valid.
client's internal control procedures. One of the d. Cash disbursements were recorded as incurred
checks in the sample cannot be found. The obligations. (AICPA ADAPTED)
auditor b 31. Which of the following audit procedures is
should the most efficient at detecting unrecorded
a. Evaluate the results as if sample size had been liabilities at
19. the balance sheet date?
b. Treat the missing check as a deviation. a. Confirm large accounts payable balances at the
c. Treat the missing check in the same manner as balance sheet date.
the majority of the other 19 checks, i.e., b. Compare cash disbursements in the subsequent
countersigned or not. period with the accounts payable trial
d. Choose another check to replace the missing balance at year-end.
check in the sample. (AICPA ADAPTED) c. Examine purchase orders issued for several
81 days prior to the close of the year.
c 27. Which of the following procedures relating d. Obtain a letter from the client's attorney.
to the audit of accounts payable could the auditor (AICPA ADAPTED)
delegate entirely to the client's employees? b 32. Which of the following audit procedures is
a. Test footings in the accounts payable ledger. least likely to detect an unrecorded liability?
b. Reconcile unpaid invoices to vendors' a. Analysis and recomputation of interest
statements. expense.
c. Prepare a schedule of accounts payable. b. Analysis and recomputation of depreciation
d. Mail confirmations for selected account expense.
balances. (AICPA ADAPTED) c. Mailing a standard bank confirmation form.
a 28. In order to establish accounts payable d. Reading the minutes of board of directors'
cutoff, an auditor will most likely meetings. (AICPA ADAPTED)
a. Coordinate cutoff tests with the physical 2. Name the two major business functions
inventory observation. associated with the expenditure/disbursement
b. Compare cutoff reports with purchase orders. cycle.
c. Compare vendors' invoices with vendors' Answer: Resources (goods and services) are
statements. acquired from vendors and employees in
d. Coordinate the mailing of confirmations with exchange for obligations to pay.
cutoff tests. (AICPA ADAPTED)  Obligations to vendors and employees are paid.
3. In the recording process of the a. Recorded obligations were paid.
expenditure/disbursement cycle, how can b. Incurred obligations were recorded in the
management protect correct period.
against inaccurate account balances and misstated c. Recorded obligations were valid.
financial statements? d. Cash disbursements were recorded as incurred
Answer: obligations. (AICPA ADAPTED)
To protect against inaccurate account balances a 2. An auditor usually examines receiving
and therefore against misstated financial reports to support entries in the
statements, management should institute policies a. Voucher register and sales returns journal.
to assure that all purchases and cash b. Sales journal and sales returns journal.
disbursements are recorded properly and in the c. Voucher register and sales journal.
proper period. Management could control the d. Check register and sales journal. (AICPA
recording function by preparing input totals, by ADAPTED)
reconciling journals and subsidiary ledgers, and a 3. Unrecorded liabilities are most likely to be
by establishing procedures for processing and found during the review of which of the
recording. following
4. Following system documentation and assuming documents?
that controls are potentially reliable in assessing a. Unpaid bills.
control risk below that maximum, what are the b. Shipping records.
next steps the auditor would take in the c. Bills of lading.
identification of control procedures? d. Unmatched sales invoices. (AICPA
Answer: ADAPTED)
The auditor would: b 4. An examination of the balance in the
 Identify the system’s control objectives. accounts payable account is ordinarily not
 Consider the potential errors or frauds that designed to
might result if specific control objectives a. Detect accounts payable that are substantially
are not met. past due.
 Determine what control procedures b. Verify that accounts payable were properly
management uses to prevent or detect potentially authorized.
material errors or frauds. c. Ascertain the reasonableness of recorded
 Design tests of controls. liabilities.
5. In what ways can management safeguard cash d. Determine that all existing liabilities at the
or other company assets? balance sheet date have been recorded.
Answer: (AICPA ADAPTED)
Management could safeguard cash and other c 5. Confirmation of accounts payable balances
company assets by: a. Is usually performed at interim dates rather
 Restrict access to purchasing and cash than at year-end.
disbursement records and forms. b. Is not effective in testing for unrecorded
 Prenumber and control forms and documents; liabilities.
maintaining lists and samples of c. Is particularly useful when the auditor suspects
authorized signatures. liabilities may be materially understated.
 Segregating responsibility for authorizing, d. Is required by generally accepted auditing
executing, and recording. standards.
CHAPTER 12 a 6. In order to efficiently establish the
MULTIPLE CHOICE correctness of the accounts payable cutoff, the
c 1. When an auditor selects a sample of items auditor will be
from the vouchers payable register for the last most likely to
month a. Coordinate cutoff tests with physical inventory
of the period audited and traces the items to observation.
underlying documents, the auditor is gathering b. Compare cutoff reports with purchase orders.
evidence primarily in support of the assertion that
c. Compare vendors' invoices with vendors' than in the confirmation of accounts receivable.
statements. d. It is less likely that the confirmation request
d. Coordinate mailing of confirmations with sent to the supplier will show the amount owed
cutoff tests. (AICPA ADAPTED) than
86 that the request sent to the debtor will show the
a 7. A client's purchasing system ends with the amount due. (AICPA ADAPTED)
assumption of a liability and the eventual c 10. In connection with a review of the prepaid
payment of insurance account, which of the following
the liability. Which of the following best procedures
describes the auditor's primary concern with does the auditor generally not perform?
respect to a. Recompute the portion of the premium that
liabilities resulting from the purchasing system? expired during the year.
a. Accounts payable are not materially b. Prepare excerpts of insurance policies for audit
understated. working papers.
b. Authority to incur liabilities is restricted to one c. Confirm premium rates with an independent
designated person. insurance broker.
c. Acquisition of materials is not made from one d. Examine support for premium payments.
vendor or one group of vendors. (AICPA ADAPTED)
d. Commitments for all purchases are made only b 11. An auditor reviews the 2005 prepaid
after established competitive bidding procedures insurance ledger and balances the total to the
are followed. (AICPA ADAPTED) general ledger
d 8. Auditor confirmation of accounts payable account. Which bad practice/error will most
balances at the balance sheet date may be likely be detected by this procedure?
unnecessary a. The client's excess liability coverage, which
because expired December 31, 2004, was not renewed in
a. There is a duplication of cutoff tests. 2005.
b. Accounts payable balances at the balance sheet b. A premium refund for a three-year policy
date may not be paid before the audit is expiring in 2003 was credited to the account and
completed. not
c. Correspondence with the audit client's attorney amortized.
will reveal all legal action by vendors for c. The client has not recognized the probable loss
nonpayment. associated with a damage suit that is only
d. There is likely to be other reliable external partially
evidence available to support the balances. covered by insurance.
(AICPA ADAPTED) d. An insurer improperly computed the amount of
d 9. Only one of the following four statements, a premium paid by the client.
which compare confirmation of accounts payable (AICPA ADAPTED)
with 87
suppliers and confirmation of accounts receivable a 12. The audit procedures used to verify accrued
with debtors, is true. The true statement is that liabilities differ from those used to verify
a. Confirmation of accounts payable with accounts
suppliers is a more widely accepted auditing payable because
procedure a. Accrued liabilities usually pertain to services of
than is confirmation of accounts receivable with a continuing nature, while accounts payable are
debtors. the result of completed transactions.
b. As compared to the confirmation of accounts b. Accrued liability balances are less material
payable, the confirmation of accounts receivable than accounts payable balances.
will tend to emphasize accounts with zero c. Evidence supporting accrued liabilities is
balances at the balance sheet date. nonexistent, while evidence supporting accounts
c. Statistical sampling techniques are more widely payable is readily available.
accepted in the confirmation accounts payable
d. Accrued liabilities at year-end will become b. The disbursement of cash for premiums.
accounts payable during the following year. c. The physical custody of the assets insured.
(AICPA ADAPTED) d. The recording of expense and premium
a 13. In substantive tests of purchases and disbursements.
accounts payable, which of the following audit 88
procedures is c 19. Companies may be held liable for all of the
most appropriate for addressing the assertions of following except:
existence or occurrence? a. Noncompliance with environmental laws and
a. Test cutoff. regulations.
b. Verify accounts payable trial balance. b. Remedial cleanup of hazardous waste sites.
c. Test for unrecorded liabilities. c. Owners and operators before hazardous waste
d. Perform analytical procedures. was disposed.
d 14. Which of the following audit procedures is d. Personal injury or damage caused by hazardous
not appropriate for addressing the assertion of waste.
valuation? SHORT ANSWER
a. Verify accounts payable trial balance. 1. Name the four basic sources that are used to
b. Confirm with creditors. search for unrecorded payables.
c. Test for unrecorded liabilities. Answer:a. A year-end accounts payable trial
d. Perform analytical procedures. balance
c 15. Which of the following is true about the b. The cash disbursements journal
audit procedure of confirming accounts payable? c. Canceled (paid) voucher package
a. Payables confirmation are most appropriate d. The file of unmatched receiving reports (filed
when the auditor expects understatement errors. in an unpaid vouchers file)
b. It is not productive to mail second requests. 2. Name the three basic sources that are used to
c. The auditor is not required by current test for overstated payables.
professional pronouncements to justify his or her Answer:a. A year-end accounts payable trial
opinion balance
on financial statements when payables are not b. The cash disbursements journal
confirmed. c. Canceled (paid) voucher packages
d. Payables are usually confirmed as of an interim 3. What is the role of analytical procedures in
date. testing of payables?
c 16. Which of the following would not likely be Answer:
included in an accounts payable confirmation? Analytical procedures can be used to identify
a. An itemized statement of amounts owed. accounts that appear reasonable in relation to
b. An itemized statement of merchandise other
consigned. accounts and therefore do not require additional
c. An itemized statement of cash paid near the substantive testing, or accounts that appear
balance sheet date. unusual or unreasonable and therefore do require
d. An itemized list of any notes or other additional substantive testing.
obligations. 4. In the audit of property taxes, an auditor is
a 17. Which of the following is not used to test concerned with an entity’s controls over what
overstatements and understatements of accounts three
payable? activities?
a. Cash receipts records. Answer: Recognition of accrued taxes
b. Cash disbursement records.  Recording of expense for taxes owed
c. Canceled voucher packages.  Disbursement of cash for taxes
d. Unmatched receiving reports. 5. In the audit of prepaid insurance, an auditor is
c 18. In testing prepaid insurance, controls over concerned with three predominant controls. List
which of the following are not of concern to the these three controls.
auditor? Answer: The acquisition of new insurance
a. The acquisition of new insurance policies. policies
 The disbursement of cash for premiums a. Comparison of daily journal entries with
 The recording of expense and premium factory labor summary.
disbursements b. Examination of routing tickets from finished
89 goods on delivery.
PROBLEMS c. Reconciliation of work-in-process inventory
1. List the related financial statement assertions with cost records.
with the audit procedure used to substantiate the d. Recomputation of direct labor based on
Purchase or Accounts Payable account balance. inspection of time cards. (AICPA ADAPTED)
Answer: b 3. For appropriate segregation of duties,
ASSERTION AUDIT PROCEDURE journalizing and posting summary payroll
Existence or occurrence Confirm balances with transactions
creditors should be assigned to
Existence or occurrence Test cutoff a. The treasurer's department.
Completeness Test for unrecorded liabilities b. General accounting.
Completeness Perform analytical procedures c. Payroll accounting.
Completeness Test cutoff d. The timekeeping department. (AICPA
Rights and obligations Confirm with creditors ADAPTED)
Rights and obligations Test for unrecorded d 4. The proper use of prenumbered termination
liabilities notice forms by the payroll department should
Valuation or allocation Verify accounts payable provide assurance that all
trial balance a. Uncashed payroll checks were issued to
Valuation or allocation Confirm with creditors employees who have not been terminated.
Valuation or allocation Test for unrecorded b. Personnel files are kept up to date.
liabilities c. Employees who have not been terminated
Presentation and disclosure Compare statement receive their payroll checks.
presentation and disclosure d. Terminated employees are removed from the
with those required by GAAP payroll. (AICPA ADAPTED)
2. You have been engaged by XYZ Company to c 5. Hitech, Inc., has changed from a
audit the financial statements for year-ended conventional to a computerized payroll clock card
12/31/05. Confirmation letters are sent to each of system.
the company’s A/P vendors to substantiate Factory employees now record time in and out
Accounts Payable balances. Please issue a sample with magnetic cards, and the computer system
confirmation request to one of XYZ automatically updates all payroll records.
Company’s vendors based upon the following Because of this change,
information. The date of the confirmation will be a. The auditor must audit through the computer.
1/7/06. b. Internal control has improved.
c. Part of the audit trail has been lost.
CHAPTER 13 d. The potential for payroll-related fraud has been
MULTIPLE CHOICE diminished. (AICPA ADAPTED)
c 1. An auditor will ordinarily determine whether a 6. In the weekly computer run to prepare
payroll checks are properly endorsed during the payroll checks, a check was printed for an
testing of employee who
a. Time cards. had been terminated the previous week. Which of
b. The voucher system. the following control procedures, if properly
c. Cash in bank. utilized, would have been most effective in
d. Accrued payroll. (AICPA ADAPTED) preventing the error or assuring prompt
a 2. Which of the following control procedures detection?
could best prevent direct labor from being a. A control total for hours worked, prepared
charged to from time cards collected by the timekeeping
manufacturing overhead? department.
b. Requiring the treasurer's office to account for c. Internal controls relating to payroll
the numbers of the prenumbered checks issued to disbursements are operating effectively.
the computer department for the processing of the d. All employees worked the number of hours for
payroll. which their pay was computed.
c. Use of a check digit for employee numbers. (AICPA ADAPTED)
d. Use of a header label for the payroll input a 11. Which of the following procedures is most
sheet. (AICPA ADAPTED) effective in providing reasonable assurance that
92 payroll checks are distributed only to bona fide
c 7. To minimize the opportunities for fraud, employees?
unclaimed cash payroll should be a. An employee independent of payroll
a. Deposited in a safe deposit box. preparation compares endorsements on canceled
b. Held by the payroll custodian. payroll
c. Deposited in a special bank account. checks with employee signatures in personnel
d. Held by the controller. (AICPA ADAPTED) records.
d 8. A large retail enterprise has established a b. All changes in pay rates and deductions are
policy that requires that the paymaster deliver all reviewed and approved by a responsible official
unclaimed payroll checks to the internal auditing independent of payroll preparation and
department at the end of each payroll distribution.
distribution day. This policy was most likely c. All unclaimed paychecks are returned to an
adopted in order to employee independent of payroll preparation and
a. Assure that employees who were absent on a distribution.
payroll distribution day are not paid for that day. d. All personnel and payroll records and
b. Prevent the paymaster from cashing checks documents are prenumbered and physically
that are unclaimed for several weeks. protected from
c. Prevent a bona fide employee's check from unauthorized access.
being claimed by another employee. d 12. Personnel department responsibilities
d. Detect any fictitious employee who may have should be separated from payroll preparation to
been placed on the payroll. a. Separate the custody of assets from the
(AICPA ADAPTED) recording function.
a 9. In the audit of the following types of profit- b. Establish clear lines of authority and
oriented enterprises, which one would the auditor accountability.
be c. Separate the authorization of transactions from
most likely to place special emphasis on testing the recording function.
the internal controls over proper classification of d. Separate the authorization of transactions from
payroll transactions? the execution of transactions.
a. A manufacturing organization. 93
b. A retailing organization. d 13. For internal control purposes, which of the
c. A wholesaling organization. following individuals should preferably be
d. A service organization. (AICPA ADAPTED) responsible
d 10. A common audit procedure in the audit of for the distribution of payroll checks?
payroll transactions involves tracing selected a. Bookkeeper.
items b. Payroll clerk.
from the payroll journal to employee time cards c. Cashier.
that have been approved by supervisory d. Receptionist. (AICPA ADAPTED)
personnel. This procedure is designed to provide b 14. A factory foreman discharged an hourly
evidence in support of the audit proposition that worker but did not notify the payroll department.
a. Only bona fide employees worked, and their The
pay was properly computed. foreman then forged the worker's signature on
b. Jobs on which employees worked were time cards, and, when giving out the checks,
charged with the appropriate labor cost.
diverted the payroll checks drawn for the d. Verify employment applications.
discharged worker to his own use. The most 94
effective b 19. Of the financial statement accounts listed
procedure for preventing this activity is to below, which is not likely affected by the
a. Require written authorization for all employees accuracy of
added to or removed from the payroll. payroll and account distribution?
b. Have a "paymaster" who has no other payroll a. Cost of sales.
responsibility distribute the payroll checks. b. Accrued taxes.
c. Have someone other than persons who prepare c. Cash.
or distribute payroll obtain custody of unclaimed d. Finished goods inventory.
checks. b 20. In auditing postretirement healthcare
d. From time to time, rotate persons distributing benefits, auditors face what's called the attribution
the payroll. (AICPA ADAPTED) period,
a 15. Which of the following is not a common which is the period from the date the employee:
activity within personnel and payroll? a. Was hired to the date the employee terminated
a. Initiate terminations. employment.
b. Prepare and update personnel records. b. Was hired to the date the employee is eligible
c. Prepare and record payroll. to receive benefits.
d. Distribute paychecks to employees. c. Was terminated to the date the employee is
b 16. Which of the following control procedures eligible to receive benefits.
is inappropriate to prevent errors or irregularities d. Was terminated to the date the employee
resulting form hiring unqualified employees? receives benefits.
a. Establish clear statements of hiring policies and d 21. Effective controls over payroll would
procedures. include which of the following controls?
b. Maintain updated listings of authorized pay a. Total time recorded on time cards should be
rates and deductions. reconciled with job reports by employees
c. Maintain updated personnel records for all responsible
employees. for those specific jobs.
d. Verify employment applications. b. Payroll department employees should be
a 17. What control objective is served by supervised by the management of the personnel
management's establishing and documenting department.
account c. Payroll department employees should be
distribution procedures? responsible for maintaining employee personnel
a. Amounts due to employees should be recorded records.
at the proper amounts, be recorded in the proper d. Total time spent on jobs should be compared
period, and be properly classified. with total time indicated on time records.
b. All payroll cash disbursements should be based (AICPA ADAPTED)
upon a recognized liability. b 22. One of the auditor's objectives in observing
c. Payroll and personnel procedures should be the actual distribution of payroll checks is to
established in accordance with management's determine that every name on the payroll is that
authorization. of a bona fide employee. The payroll
d. Employees should be hired according to observation is an auditing procedure that is
criteria authorized by management. generally performed for which of the following
b 18. Which of the following control procedures reasons?
is most likely to prevent errors or irregularities a. The professional standards that are generally
related accepted require the auditor to perform the
to access to assets? payroll
a. Reconcile appropriate ledgers and journals. observation.
b. Prenumber and control forms and documents. b. The various phases of payroll work are not
c. Establish personnel and payroll procedures sufficiently segregated to afford effective control.
manuals.
c. The independent auditor uses personal control risk below the maximum, substantive
judgment and decides to observe the payroll testing focuses on analytical procedures such as
distribution ratio analysis.
on a particular audit. 5. Narrate the tests of controls in the distribution
d. The standards that are generally accepted by of paychecks.
the profession are interpreted to mean that payroll Answer:
observation is expected on an audit unless The auditor would obtain a sample of canceled
circumstances dictate otherwise. payroll checks and then trace details of sample
(AICPA ADAPTED) checks (payee name, date, amount, and check
SHORT ANSWER number) to entries in the payroll register. The
1. Name the two major business functions auditor would then compare endorsements on
encompassed by personnel and payroll. checks with signatures in employee personnel
Answer: Resources (services) are acquired records. The auditor would also take control of
from employees in exchange for obligations to payroll checks just prior to distribution by
pay. department supervisors, and personally distribute
 Obligations to employees are paid. checks to properly identified employees.
2. What safeguards should management utilize to PROBLEMS
safeguard payroll from fraud? 1. Substantive tests of payroll focus primarily or
Answer: exclusively on analytical procedures. Describe
Student answers will vary but will generally five
concern the safeguarding of personnel records of the analytical procedures that may be used in
and the audit of payroll.
payroll records and forms. For example, to Answer:
minimize the likelihood of fraud, personnel Students may answer in a variety of ways
records including the following procedures:
95  Compare both direct labor and payroll to
should not be accessible to employees who are budgets and to prior years.
responsible for preparing, approving, or  Compare the ratios of payroll to total expenses
distributing payroll. and payroll to sales with prior years.
3. To safeguard payroll, what procedures should  Compare the ratios of direct labor to cost of
be followed when employees are terminated? sales and direct labor to sales with prior
Answer: years.
When employees are terminated, the personnel  Compare commissioned sales payroll to sales
department should determine the nature and terms times average commission rates.
of any related termination settlement, such as  Compare payroll to prior-year payroll adjusted
lump sum cash payments and accrued vacation for pay rate changes and the number
pay. of employees.
The payroll department should be advised  Compare the ratio of payroll tax expense to
immediately of the termination settlement and payroll with prior years.
notified  Compare accrued payroll and accrued payroll
that further compensation has ceased. tax expense with prior years.
4. As internal evidence prepared by the client is
the only pervasive audit evidence available for CHAPTER 14
testing payroll what must the auditor rely on to MULTIPLE CHOICE
substantiate payroll? b 1. To strengthen control procedures over the
Answer: custody of heavy mobile equipment, the client
Auditors rely predominately on tests of controls would
rather than substantive procedures when auditing most likely institute a policy requiring a periodic
payroll. If the tests of controls indicate that a. Increase in insurance coverage.
control procedures can be relied on in assessing b. Inspection of equipment and reconciliation
with accounting records.
c. Verification of liens, pledges, and a 6. When perpetual inventory records are
collateralizations. maintained in quantities and in dollars, and
d. Accounting for work orders. (AICPA internal control
ADAPTED) procedures over inventory are deficient, the
c 2. To improve accountability for fixed asset auditor would probably
retirements, management most likely would a. Want the client to schedule the physical
implement inventory count at the end of the year.
an internal control structure that includes b. Insist that the client perform physical counts of
a. Continuous analysis of the repairs and inventory items several times during the year.
maintenance account. c. Increase the extent of tests for unrecorded
b. Periodic inquiry of plant executives by internal liabilities at the end of the year.
auditors as to whether any plant assets have been d. Have to disclaim an opinion on the income
retired. statement that year. (AICPA ADAPTED)
c. Continuous utilization of serially numbered 98
retirement work orders. a 7. Purchase cutoff procedures should be
d. Periodic inspection of insurance policies by designed to test whether or not all inventory
internal auditors. (AICPA ADAPTED) a. Purchased and received before the year-end
b 3. From the auditor's point of view, inventory was recorded.
counts are more acceptable prior to the year-end, b. Was carried at the lower of cost or market on
when the year-end balance sheet.
a. Internal control is deficient. c. Was paid for by the company on the year-end
b. Accurate perpetual inventory records are balance sheet.
maintained. d. Owned by the company is in the possession of
c. Inventory is slow moving. the company. (AICPA ADAPTED)
d. Significant amounts of inventory are held on c 8. In tests of property, plant, and equipment, the
consignment. (AICPA ADAPTED) auditor tries to determine all of the following
c 4. Apex Manufacturing Corporation mass except the
produces eight different products. The controller a. Adequacy of the internal control.
who is b. Extent of property abandoned during the year.
interested in strengthening control procedures c. Adequacy of replacement funds.
over the accounting for materials used in d. Reasonableness of depreciation. (AICPA
production would be most likely to implement ADAPTED)
a. An economic order quantity (EOQ) system. b 9. An auditor has accounted for a sequence of
b. A job order cost accounting system. inventory tags and is now going to trace
c. A perpetual inventory system. information
d. A separation of duties among production on a representative number of tags to the physical
personnel. (AICPA ADAPTED) inventory sheets. The purpose of this
a 5. For several years, a client's physical procedure is to obtain assurance that
inventory count has been lower than what was a. The final inventory is valued at cost.
shown on the b. All inventory represented by an inventory tag
books at the time of the count so that downward is listed on the inventory sheets.
adjustments to the inventory account were c. All inventory represented by an inventory tag is
required. Contributing to the inventory problem bona fide.
could be deficiencies in internal control that led d. Inventory sheets do not include untagged
to the failure to record some inventory items. (AICPA ADAPTED)
a. Purchases returned to vendors. b 10. The physical count of inventory of a retailer
b. Sales returns received. was higher than shown by the perpetual records.
c. Sales discounts allowed. Which of the following could explain the
d. Cash purchases. (AICPA ADAPTED) difference?
a. Inventory items had been counted, but the tags
placed on the items had not been taken off the
items and added to the inventory accumulation b. Capital expenditures have been properly
sheets. authorized.
b. Credit memos for several items returned by c. Noncapitalizable expenditures have been
customers had not been recorded. properly expensed.
c. No journal entry had been made on the d. Expenditures for plant assets have been
retailer's books for several items returned to its capitalized. (AICPA ADAPTED)
suppliers. a 15. Which of the following explanations might
d. An item purchased "FOB shipping point" had satisfy an auditor who discovers significant debits
not arrived at the date of the inventory count and to
had not been reflected in the perpetual records. an accumulated depreciation account?
(AICPA ADAPTED) a. Extraordinary repairs have lengthened the life
c 11. A client's physical count of inventories was of an asset.
higher than the inventory quantities per the b. Prior years' depreciation charges were
perpetual erroneously understated.
records. This situation could be the result of the c. A reserve for possible loss on retirement has
failure to record been recorded.
a. Sales. d. An asset has been recorded at its fair value.
b. Sales discounts. (AICPA ADAPTED)
c. Purchases. c 16. Which of the following activities is not
d. Purchase returns. (AICPA ADAPTED) common to the conversion cycle?
d 12. The controller of Excello Manufacturing, a. Maintaining perpetual inventory records.
Inc., wants to use ratio analysis to identify the b. Accounting for fixed asset disposals and
possible retirements.
existence of idle equipment or the possibility that c. Implementing a just-in-time order entry
equipment has been disposed of without having system.
been written off. Which of the following ratios d. Recording depreciation allocations.
would best accomplish this objective? d 17. When an outside specialist has assumed full
a. Depreciation expense divided by book value of responsibility for taking the client's physical
manufacturing equipment. inventory, reliance on the specialist's report is
b. Accumulated depreciation divided by book acceptable if
value of manufacturing equipment. a. The auditor is satisfied about the specialist's
c. Repairs and maintenance cost divided by direct reputation and competence.
labor costs. b. Circumstances make it impracticable or
d. Gross manufacturing equipment cost divided impossible for the auditor either to do the work
by units produced. (AICPA ADAPTED) personally or to observe the specialist's work.
99 c. The auditor performs the same tests and
b 13. The accuracy of perpetual inventory records procedures as would have been applicable if the
may be established, in part, by comparing client's
inventory employees took the physical inventory.
records with d. The auditor's report assumes full responsibility.
a. Purchase requisitions. (AICPA ADAPTED)
b. Receiving reports. d 18. An auditor's tests of a client's cost
c. Purchase orders. accounting system are designed primarily to
d. Vendor payments. (AICPA ADAPTED) determine that
d 14. The audit procedure of analyzing the repairs a. Quantities on hand have been computed based
and maintenance accounts is primarily designed on acceptable methods that reasonably
to approximate actual quantities on hand.
provide evidence in support of the audit b. Physical inventories substantially agree with
proposition that all book inventories.
a. Expenditures for plant assets have been c. The system complies with generally accepted
recorded in the proper period. accounting principles and functions as planned.
d. Costs have been assigned properly to finished c. Sale in the current period.
goods, work in process, and cost of goods sold. d. Purchase return in the subsequent period.
(AICPA ADAPTED) (AICPA ADAPTED)
100 d 24. An auditor would be most likely to learn of
d 19. Sanbor Corporation's parts inventory slow-moving inventory through
consists of thousands of different items that are a. Inquiry of sales personnel.
small in b. Inquiry of stores personnel.
value individually, but quite significant in total. c. Physical observation of inventory.
Sanbor could establish effective control over the d. Review of perpetual inventory records.
parts by requiring (AICPA ADAPTED)
a. An officer's approval of requisitions for b 25. Which of the following internal control
inventory parts. efficiencies relates to factory equipment?
b. Maintaining inventory records for all parts a. Checks issued in payment of purchases of
included in the inventory. equipment are not signed by the controller.
c. Physical counts on a cycle basis rather than at b. All purchases of factory equipment are
year-end. required to be made by the department that needs
d. Separation of the storekeeping function from the
the production and inventory record-keeping equipment.
functions. (AICPA ADAPTED) c. Factory equipment replacements are generally
c 20. When verifying debits to a manufacturing made when estimated useful lives have expired.
company's perpetual inventory records, an auditor d. Proceeds from sales of fully depreciated
would be most interested in testing a sample of equipment are credited to other income.
purchase (AICPA ADAPTED)
a. Approvals. 101
b. Requisitions. c 26. When auditing fixed assets, an auditor
c. Invoices. attempts to determine all of the following except
d. Orders. (AICPA ADAPTED) a. Control risk.
c 21. Assets may suffer an impairment in value b. Property abandoned during the year.
for a variety of reasons, but not likely as a result c. Adequacy of replacement funds.
of: d. Reasonableness of depreciation. (AICPA
a. A corporate restructuring. ADAPTED)
b. Slumping demand for uncompetitive products. c 27. Which of the following is the best evidence
c. Significant increases in market share. that an entity owns real estate at the balance sheet
d. Obsolescence. date?
a 22. Which of the following is not likely a a. Title insurance policy.
motive for management to manipulate the timing b. Original deed.
and c. Paid real estate tax bills.
amount of impaired asset writedowns? d. Closing statement. (AICPA ADAPTED)
a. Steady increases in earnings per share over the b 28. Which of the following procedures would
past 5 years. least likely lead the auditor to detect unrecorded
b. Income smoothing. fixed
c. A "big bath." asset disposals?
d. An abnormally unprofitable year. a. Examine insurance policies.
c 23. The audit of year-end physical inventories b. Review repairs and maintenance expense.
should include steps to verify that the client's c. Review property tax files.
purchases and sales cutoffs were adequate. The d. Scan invoices for fixed asset additions.
audit steps should be designed to detect whether (AICPA ADAPTED)
merchandise included in the physical count at c 29. The auditor may conclude that depreciation
year-end was not recorded as a charges are insufficient by noting
a. Sale in the subsequent period. a. Insured values greatly in excess of book values.
b. Purchase in the current period. b. Large amounts of fully depreciated assets.
c. Continuous trade-ins of relatively new assets. inventory from inventory recording, cost
d. Excessive recurring losses on assets retired. accounting, and general accounting. Management
(AICPA ADAPTED) should also restrict access to production, cost
d 30. In violation of company policy, Lowell accounting, and perpetual inventory records,
Company erroneously capitalized the cost of preventing misuse, destruction, or loss of
painting its inventory or inventory records.
warehouse. An auditor would most likely detect 4. Explain the internal controls management can
this when use to assure control over the transaction
a. Discussing capitalization policies with Lowell's authorization of fixed assets. Address the separate
controller. controls for transaction authorization,
b. Examining maintenance expense accounts. execution, and recording.
c. Observing that the warehouse had been Answer:
painted. To control unauthorized transactions,
d. Examining construction work orders that management could develop written procedures
support items capitalized during the year. for all
(AICPA ADAPTED) additions, disposals, and retirements, and
SHORT ANSWER periodically compare scrap sale prices with
1. Explain the conversion cycle. published
Answer: price lists.
The conversion cycle encompasses the production Transaction Authorization – Prepare written
of finished products for sale, and relates procedures for all additions, disposals, and
directly to two other cycles. It uses resources and retirements. Periodically compare prices received
information provided by the for scrap with published prices.
expenditure/disbursement cycles and provides Transaction Execution – Establish procedures
resources and information to the revenue/receipt for operating, using, moving, and otherwise
cycle. controlling fixed assets. Restrict access to
2. To control inventory recording what controls movable fixed assets.
should management have in place? Recording – Establish procedures for processing
Answer: and recording fixed asset transaction. Establish
To avoid misstated or misplaced inventory used procedures for identifying fixed assets eligible for
or transferred inventory should be recorded in disposal. Maintain detailed fixed assets
the correct amounts, be recognized in the proper records. Periodically reconcile fixed asset records
period, and be classified properly. To control with existing assets and investigate
102 differences. Establish policies for determining
inventory recording, management could establish depreciation methods and for calculating
processing and recording procedures, depreciation on all categories of fixed assets.
prenumber and control material release forms and 5. Describe the preliminary review process as it
production orders, and maintain logs of pertains to obtaining an understanding of a
inventory movement into and out of storerooms client’s
and production. inventory controls relating to inventory.
3. How should management safeguard inventory Answer:
from fraud or misappropriation? An auditor performs the preliminary review for
Answer: inventory by reading the client’s procedures
Access to inventory should be restricted to manuals and by interviewing client personnel
personnel authorized by management. who are responsible for perpetual inventory
Management records, cost records, and inventory accounting.
could establish physical control over inventory, Assuming the existing controls appear
maintain insurance, both for inventory and for potentially reliable in assessing control risk below
inventory personnel in the form of fidelity bonds the maximum, an auditor proceeds by
and segregate responsibility for handling documenting the system.
CHAPTER 15 c. Comparing recorded dividends with amounts
MULTIPLE CHOICE appearing on Federal Information Form 1099.
d 1. A company holds bearer bonds as a short- d. Comparing recorded dividends with a standard
term investment. Responsibility for custody of financial reporting service's record of dividends.
these (AICPA ADAPTED)
bonds and submission of coupons for periodic a 6. A company has temporarily excess funds to
interest collections probably should be delegated invest. The board of directors decided to purchase
to marketable securities and assigned the future
the purchase and sale decisions to a responsible
a. Chief accountant. financial executive. The best person(s) to make
b. Internal auditor. periodic reviews of the investment activity would
c. Cashier. be
d. Treasurer. (AICPA ADAPTED) a. The investment committee of the board of
b 2. Of the following, which is the most efficient directors.
audit procedure for testing accrued interest earned b. The treasurer.
on bond investments? c. The corporate controller.
a. Tracing interest declarations to an independent d. The chief operating officer of the company.
record book. (AICPA ADAPTED)
b. Recomputing interest earned. 108
c. Confirming interest rate with the issuer of the a 7. Which of the following is a responsibility
bonds. that should not be assigned to only one
d. Vouching the receipt and deposit of interest employee?
checks. (AICPA ADAPTED) a. Access to securities in the company's safe
d 3. During the audit of a publicly held company, deposit box.
the auditor could obtain written confirmation b. Custodianship of the cash working fund.
regarding long-term bond transactions from the c. Reconciliation of bank statements.
a. Bond holders. d. Custodianship of tools and small equipment.
b. Client's attorney. (AICPA ADAPTED)
c. Internal auditors. a 8. When no independent stock transfer agents
d. Trustee. (AICPA ADAPTED) are employed and the corporation issues its own
b 4. The auditor's program for examining long- stocks and maintains stock records, canceled
term debt should include stock certificates should
a. Verification of the existence of the a. Be defaced to prevent reissuance and attached
bondholders. to their corresponding stubs.
b. Examination of any bond trust agreement. b. Not be defaced but segregated from other stock
c. Inspection of the accounts payable subsidiary certificates and retained in a canceled certificates
ledger. file.
d. Investigation of credits to the bond interest c. Be destroyed to prevent fraudulent reissuance.
income account. (AICPA ADAPTED) d. Be defaced and sent to the secretary of state.
d 5. Jones was engaged to audit the financial (AICPA ADAPTED)
statements of Gamma Corporation, a June 30 a 9. Which of the following is not one of the
year-end auditor's concerns in an examination of
client. Having completed testing of the marketable
investment securities, which of the following is securities?
the best a. To determine whether securities are authentic.
method of verifying the accuracy of recorded b. To determine whether securities are the
dividend income? property of the client.
a. Tracing recorded dividend income to cash c. To determine whether securities actually exist.
receipts records and validated deposit slips. d. To determine whether securities are properly
b. Utilizing analytical review techniques and classified on the balance sheet.
statistical sampling. (AICPA ADAPTED)
c 10. When negotiable securities are of d. Authorized, issued, and outstanding during the
considerable volume, planning by the auditor is year. (AICPA ADAPTED)
necessary to b 15. The auditor's program for testing long-term
guard against debt should include steps that require
a. Unauthorized negotiation of the securities a. Verifying the existence of the bondholders.
before they are counted. b. Examining any bond trust indenture.
b. Unrecorded sales of securities after they are c. Inspecting the accounts payable subsidiary
counted. ledger.
c. Substitution of securities already counted for d. Investigating credits to bond interest income.
other securities which should be on hand but are (AICPA ADAPTED)
not. b 16. During the year under audit, a company has
d. Substitution of authentic securities with completed a private placement of a substantial
counterfeit securities. (AICPA ADAPTED) amount of bonds. Which of the following steps is
b 11. During its fiscal year, a company issued, at the most important in the auditor's tests of
a discount, a substantial amount of first-mortgage existence?
bonds. When performing audit work, the a. Confirm the amount issued with the bond
independent auditor trustee.
a. Confirms the existence of the bondholders. b. Trace cash received from the issue to the
b. Reviews the minutes for authorization. accounting records.
c. Traces the net cash received from the issuance c. Examine bond records maintained by the
to the bonds payable account. transfer agent.
d. Inspects the records maintained by the bond d. Recompute annual interest cost and the
trustee. (AICPA ADAPTED) effective yield. (AICPA ADAPTED)
d 12. In the audit of a medium-sized a 17. During the course of an audit, an auditor
manufacturing concern, which of the following observes that the recorded interest expense seems
areas would be excessive in relation to the balance in long-term
expected to require the least amount of audit debt. This observation could lead the auditor to
time? suspect that
a. Revenue. a. Long-term debt is understated.
b. Assets. b. Discount on bonds payable is overstated.
c. Liabilities. c. Long-term debt is overstated.
d. Owner's equity. (AICPA ADAPTED) d. Premium on bonds payable is understated.
a 13. All corporate capital stock transactions (AICPA ADAPTED)
should ultimately be traced to the d 18. Which of the following information is most
a. Minutes of the board of directors. important when auditing shareholders’ equity?
b. Cash receipts journal. a. Changes in the capital stock account are
c. Cash disbursements journal. verified by an independent stock transfer agent.
d. Numbered stock certificates. (AICPA b. Stock dividends and/or stock splits during the
ADAPTED) year were approved by the shareholders.
109 c. Stock dividends are capitalized at par or stated
c 14. If a company employs a capital stock value on the dividend declaration date.
registrar and/or a transfer agent, the registrar or d. Entries in the capital stock account can be
agent traced to a resolution in the minutes of the board
should be requested to confirm directly to the of
auditor the number of shares of each class of directors' meetings. (AICPA ADAPTED)
stock SHORT ANSWER
a. Surrendered and canceled during the year. 1. Describe the three ways that the existence or
b. Authorized at the balance sheet date. occurrence of long-term debt can be tested.
c. Issued and outstanding at the balance sheet Answer:
date. Existence and occurrence can be tested by:
 Confirming with creditors all recorded loans An auditor tests valuation by examining
and other notes payable, including documentation supporting transactions recorded
terms, due dates, and accrued interest. and by
 To support the results of confirmation recalculating dividend and interest income.
procedures, the auditor physically examines all Examining supporting documentation
bond indentures and other long-term indebtedness substantiates
agreements, thereby determining historical cost only so an auditor needs to also
whether all outstanding debt was confirmed. examine market quotations to assure that
 The auditor physically inspects unissued marketable equity securities are reported at the
instruments, thereby testing whether all lower of aggregated cost or market, and that
issued securities are recorded as long-term debt. marketable debt securities are reported at the
110 lower of cost or cost less permanent declines in
2. Explain how an auditor would test existence or market value.
occurrence for capital stock. 5. Describe the process the auditor would use to
Answer: confirm bonds and interest payments.
The auditor would foot and crossfoot the client's Answer:
schedule of changes in shareholders' equity Bonds and interest payments should be confirmed
balances, account for unissued or retired shares, directly with trustees, determining whether the
and if detailed records and stock certificates are debt exists, is valued properly, and represents a
maintained externally, confirm shares outstanding bona fide obligation.
with registrars and transfer agents. The auditor
would also examine supporting documentation CHAPTER 16
and authorizations for any stock issuance, stock MULTIPLE CHOICE
dividends and stock splits occurring during the c 1. An auditor accepted an engagement to audit
year. If securities transactions are executed by the 2005 financial statements of EFG Corporation
independent registrars or transfer agents, the and began the fieldwork on September 30. EFG
auditor would also confirm capital stock gave the auditor the 2005 financial statements on
transactions January 17, 2006. The auditor completed the
and balances directly with the registrar or agent. fieldwork on February 10, 2006, and delivered
3. Describe how an auditor would test for rights the
to investment securities and long-term debt report on February 16, 2006. The client's
obligations. representation letter normally would be dated
Answer: a. December 31, 2005.
Rights to investments are tested by confirming b. January 17, 2006.
securities held by external trustees/brokers and/or c. February 10, 2006.
by physically inspecting securities on hand, d. February 16, 2006. (AICPA ADAPTED)
depending on whether the securities are b 2. The audit inquiry letter to the client's legal
maintained counsel should be mailed only by the
internally or externally. Long-term debt a. Client after the auditor has reviewed it for
obligations are tested by confirming loans and appropriate content.
other b. Auditor after preparation by the client and
notes with creditors, by examining bond review by the auditor.
indentures and other indebtedness agreements, c. Auditor's attorney after preparation by the
and by client and review by the auditor.
confirming bond and serial note balances and d. Client after review by the auditor's attorney.
interest payments with trustees. (AICPA ADAPTED)
4. Explain the process involved to test for the a 3. A written representation letter from a client's
assertion of valuation of marketable securities. management that, among other matters,
Answer: acknowledges responsibility for the fair
presentation of financial statements, should
normally be
signed by the d. Examining customer confirmation replies.
a. Chief executive officer and the chief financial (AICPA ADAPTED)
officer. d 8. Management's refusal to furnish a written
b. Chief financial officer and the chairman of the representation on a matter, which the auditor
board of directors. considers
c. Chairman of the audit committee of the board essential, constitutes
of directors. a. Prima facie evidence that the financial
d. Chief executive officer, the chairman of the statements are not presented fairly.
board of directors, and the client's lawyer. b. A violation of the Foreign Corrupt Practices
(AICPA ADAPTED) Act.
b 4. If a lawyer refuses to furnish corroborating c. An uncertainty sufficient to preclude an
information regarding litigation, claims, and unqualified opinion.
assessments, the auditor should d. A scope limitation sufficient to preclude an
a. Honor the confidentiality of the client–lawyer unqualified opinion. (AICPA ADAPTED)
relationship. c 9. A representation letter issued by a client
b. Consider the refusal to be tantamount to a a. Is essential for the preparation of the audit
scope limitation. program.
c. Seek to obtain the corroborating information b. Is a substitute for testing.
from management. c. Does not reduce the auditor's responsibility.
d. Disclose the fact in a footnote to the financial d. Reduces the auditor's responsibility only to the
statements. (AICPA ADAPTED) extent it is relied upon. (AICPA ADAPTED)
b 5. An auditor should obtain written d 10. Which of the following subsequent events
representations from management concerning will be least likely to result in an adjustment to
litigation claims the
and assessments. These representations may be financial statements?
limited to matters that are considered either a. Culmination of events affecting the realization
individually or collectively material, provided an of accounts receivable owned as of the balance
understanding on the limits of materiality for sheet date.
this purpose has been reached by b. Culmination of events affecting the realization
a. The auditor and the client's lawyer. of inventories owned as of the balance sheet date.
b. Management and the auditor. c. Material changes in the settlement of liabilities,
c. Management, the client's lawyer, and the which were estimated as of the balance sheet
auditor. date.
d. The auditor independently of management. d. Material changes in the quoted market prices of
(AICPA ADAPTED) listed investment securities since the balance
c 6. Which of the following auditing procedures sheet date. (AICPA ADAPTED)
is ordinarily performed last? b 11. Which of the following material events
a. Reading of the minutes of the director's occurring subsequent to the December 31, 2004,
meetings. balance
b. Confirming accounts payable. sheet would not ordinarily result in an adjustment
c. Obtaining a management representation letter. to the financial statements before they are
d. Testing of the purchasing function. (AICPA issued on March 2, 2005?
ADAPTED) a. Write-off of a receivable from a debtor who
114 had suffered from a deteriorating financial
d 7. When auditing contingent liabilities, which condition
of the following procedures would be least for the past six years. The debtor filed for
effective? bankruptcy on January 23, 2005.
a. Reading the minutes of the board of directors. b. Acquisition of a subsidiary on January 23,
b. Reviewing the bank confirmation letter. 2005. Acquisition had begun in December 2004.
c. Examining invoices for professional services.
c. Settlement of extended litigation on January SHORT ANSWER
23, 2005, in excess of the recorded year-end 1. Describe an auditor's responsibilities to the
balance. client after the audit work has been completed.
d. A 3-for-5 reverse stock split effective on Answer:
January 23, 2005. (AICPA ADAPTED) An auditor continues to be responsible to:
c 12. "Subsequent events" for reporting purposes  Communicate with the audit committee,
are defined as events which occur subsequent to including fraudulent financial reporting,
the  To discover facts existing at the date of the
a. Balance sheet date. auditor's report, and
b. Date of the auditor's report.  To consider omitted procedures after the report
c. Balance sheet date but prior to the date of the date.
auditor's report. 2. Describe the two classifications of types of
d. Date of the auditor's report and concern subsequent events.
contingencies that are not reflected in the Answer: Type I Events: Subsequent events
financial that reveal or confirm conditions existing at or
statements. (AICPA ADAPTED) before the balance sheet date and require
115 adjustment to the financial statements.
c 13. Which of the following is not a subsequent  Type II Events: Subsequent events that reveal
events procedure? conditions arising after the balance
a. Review available interim financial information. sheet date and require disclosure in, but not
b. Read available minutes of meetings of adjustment to, the financial statements.
stockholders and directors. 3. What is required to be present in the notes for
c. Make inquiries with respect to the financial Type II subsequent events?
statements covered by the auditor's previously Answer: Explanatory note.
issued  Parenthetical explanation.
report if new information has become available  Reference in the financial statements to pro
during the current examination that might affect forma information.
that report.  If warranted, a qualified opinion, adverse
d. Discuss with officers the current status of items opinion, or disclaimer opinion.
in the financial statements that were accounted 116
for on the basis of tentative, preliminary, or 4. Explain the purpose of management
inconclusive data. (AICPA ADAPTED) representation letters in a financial statement
a 14. After an auditor has issued an audit report audit.
on a nonpublic entity, there is no obligation to Answer:
make Management representation letters add
any further audit tests or inquiries with respect to persuasiveness to management's representations,
the audited financial statements covered by that both
report unless written and oral.
a. New information comes to the auditor's 5. The audit/engagement partner is responsible
attention concerning an event that occurred prior for reaching an overall opinion on an entity's
to the financial position, result of operations, and cash
date of the auditor's report that may have affected flows, only after what three steps?
the auditor's report. Answer: Performing an overall review of the
b. Material adverse events occur after the date of financial statements through analytical
the report. procedures,
c. Final determination or resolution was made on  Reviewing audit working papers, and
matters that had resulted in a qualification in the  Obtaining a review of the working papers by an
auditor's report. audit partner not assigned to the
d. Final determination or resolution was made of engagement.
a contingency that had been disclosed. CHAPTER 17
(AICPA ADAPTED) MULTIPLE CHOICE
d 1. Which of the following is generally more d. Audited financial data required by GAAP.
important in a review than in a compilation? (AICPA ADAPTED)
a. Determining the accounting basis on which the b 5. Which of the following best describes the
financial statements are to be presented. auditor's responsibility for "other information"
b. Gaining familiarity with industry accounting included
principles and practices. in the annual report to stockholders, which
c. Obtaining a signed engagement letter. contains financial statements and the auditor's
d. Obtaining a signed representation letter. report?
(AICPA ADAPTED) a. The auditor has no obligation to read the "other
d 2. Which of the following procedures is not information."
included in a review engagement on a nonpublic b. The auditor has no obligation to corroborate
entity? the "other information" but should read the "other
a. Inquiries of management. information" to determine whether it is materially
b. Inquiries regarding events subsequent to the inconsistent with the financial statements.
balance sheet date. c. The auditor should extend the examination to
c. Any procedures designed to identify the extent necessary to verify the "other
relationships among data that appear to be information."
unusual. d. The auditor must modify the auditor's report to
d. A study and evaluation of internal control state that the "other information is unaudited" or
structure. (AICPA ADAPTED) "not covered by the auditor's report." (AICPA
c 3. When auditing a public entity's financial ADAPTED)
statements that include segment information, the d 6. When an independent audit report is
auditor incorporated by reference in a SEC registration
should statement, a
a. Make certain the segment information is prospectus that includes a statement about the
labeled "unaudited" and determine that the independent accountant's involvement should
information refer
is consistent with audited information. to the independent accountant as
b. Make certain the segment information is a. Auditor of the financial reports.
labeled "unaudited" and perform only analytical b. Management's designate before the SEC.
review c. Certified preparer of the report.
procedures on the segment information. d. Expert in auditing and accounting. (AICPA
c. Audit the segment information and, if the ADAPTED)
information is adequate and in conformity with 120
GAAP, c 7. If information accompanying the basic
do not make reference to the segment information financial statements in an auditor-submitted
in the auditor's report. document has
d. Audit the segment information and, if the been subjected to auditing procedures, the auditor
information is adequate and in conformity with may express an opinion which states that the
GAAP, accompanying information is fairly stated in
refer to the segment information in the auditor's a. Conformity with generally accepted accounting
report. (AICPA ADAPTED) principles.
a 4. If management chooses to place b. Terms of negative assurance.
supplementary information required by the FASB c. All material respects in relation to the basic
in footnotes financial statements taken as a whole.
attached to the financial statements, this d. Conformity with principles for presenting
information should be clearly marked as accompanying information. (AICPA ADAPTED)
a. Unaudited. b 8. The auditor's inquiries of management
b. Supplementary information required by the regarding supplementary information on the
FASB. effects of
c. Disclosures required by the FASB.
price level changes should be directed to the a 13. Which of the following would not be
judgments made concerning included in an accountant's review report on the
a. Relevance and validity. financial
b. Measurement and presentation. statements of a nonpublic entity?
c. Accuracy and objectivity. a. A statement that the review was made in
d. Rights and obligations. (AICPA ADAPTED) accordance with generally accepted auditing
a 9. Comfort letters are ordinarily signed by the standards.
a. Independent auditor. b. A statement that all information included in the
b. Client. financial statements is the representation of
c. Client's lawyer. management.
d. Internal auditor. (AICPA ADAPTED) c. A statement describing the principal procedures
c 10. When an auditor submits a document performed.
containing audited financial statements to a client, d. A statement describing the auditor's
the conclusions based on the results of the review.
auditor has the responsibility to report on (AICPA ADAPTED)
a. Only the basic financial statements included in a 14. An accountant who is not independent may
the document. issue a
b. The basic financial statements and only that a. Compilation report.
additional information required to be presented in b. Review report.
accordance with provisions of the FASB. c. Comfort letter.
c. All of the information included in the d. Qualified opinion. (AICPA ADAPTED)
document. c 15. The objective of a review of the interim
d. Only that portion of the document which was financial information of a public company is to
audited. (AICPA ADAPTED) a. Provide the accountant with a basis for
b 11. An accountant's compilation report should expressing of an opinion.
be dated as of the date of b. Estimate the accuracy of financial statements
a. Completion of fieldwork. from limited tests of accounting records.
b. Completion of the engagement. c. Provide the accountant with a basis for
c. Transmittal of the compilation report. reporting to the board of directors or
d. The latest subsequent event referred to in the shareholders.
notes to the financial statements. d. Obtain corroborating evidence through
(AICPA ADAPTED) inspection, observation, and confirmation.
b 12. A CPA has been engaged to compile (AICPA ADAPTED)
financial statements for a nonpublic client. Which b 16. An auditor's report would be designated as a
of the special report when it is issued in connection with
following statements best describes this which of the following financial statements?
engagement? a. Financial statements for an interim period that
a. The CPA must perform the basic accepted are subjected to a limited review.
auditing procedures necessary to determine that b. Financial statements that are prepared in
the accordance with a comprehensive basis of
statements are in conformity with GAAP. accounting
b. The CPA is performing an accounting service other than GAAP.
rather than an examination of financial c. Financial statements that purport to be in
statements. accordance with GAAP but do not include a
c. The financial statements are representations of statement
both management and the CPA. of cash flows.
d. The CPA may prepare the statements from the d. Financial statements that are unaudited and are
books but may not assist in adjusting and closing prepared from a client's accounting records.
the books. (AICPA ADAPTED) (AICPA ADAPTED)
121
a 17. An auditor has been engaged to audit a. An estimate of the dollar amount of the
financial statements that were prepared on a cash probable loss.
basis. The b. An opinion about whether the loss is possible,
auditor probable, or remote.
a. Must ascertain that there is proper disclosure of c. Information concerning the progress of cases to
the fact that the cash basis has been used, the date.
general nature of material items omitted, and the d. Corroborative evidential matter. (AICPA
net effect of the omissions. ADAPTED)
b. May not be associated with statements that are a 22. A lawyer's response to an auditor's request
not in accordance with GAAP. for information concerning litigation, claims, and
c. Must render a qualified report explaining the assessments will ordinarily contain which of the
departure from GAAP in the opinion paragraph. following information?
d. Must restate the financial statements on an a. An explanation for limitations on the scope of
accrual basis and then issue the standard report. the response.
(AICPA ADAPTED) b. A statement of concurrence with the client's
d 18. When issuing a comfort letter to determination of which unasserted possible
underwriters, the accountant should claims
a. File a copy with the SEC. warrant specification.
b. Disclaim an opinion. c. Confidential information that would be
c. Avoid any reference to the accountant's prejudicial to the client's defense if publicized.
independence. d. An assertion that the list of possible unasserted
d. Express negative assurance. (AICPA claims identified by the client represents all
ADAPTED) claims of which the lawyer may be aware.
122 (AICPA ADAPTED)
a 19. An auditor should not issue a report on c 23. A lawyer's response to a letter of audit
a. The achievability of forecasts. inquiry may be limited to matters that are
b. Internal control. considered
c. Management performance. individually or collectively material to the
d. Quarterly financial information. (AICPA financial statements if
ADAPTED) a. The auditor has instructed the lawyer about the
b 20. Under which of the following circumstances limits of materiality in financial statements.
may audited financial statements contain a note b. The client and the auditor have agreed on the
disclosing a subsequent event that is labeled limits of materiality and the lawyer has been
unaudited? notified.
a. When the subsequent event does not require c. The lawyer and auditor have reached an
adjustment of the financial statements. understanding about the limits of materiality.
b. When the event occurs after completion of d. The lawyer's response to the inquiry explains
fieldwork and before issuance of the auditor's the legal meaning of materiality limits and
report. establishes quantitative parameters. (AICPA
c. When audit procedures with respect to the ADAPTED)
subsequent event were not performed by the b 24. An attorney is responding to an independent
auditor. auditor as a result of the audit client's letter of
d. When the event occurs between the date of the inquiry. The attorney may appropriately limit the
auditor's original report and the date of the response to
reissuance of the report. (AICPA ADAPTED) a. Asserted claims and litigation.
d 21. Auditors often request that the audit client b. Matters to which the attorney has given
send a letter of inquiry to those attorneys who substantive attention in the form of legal
have consultation or
been consulted with respect to litigation, claims, representation.
or assessments. The primary reason for this c. Asserted, overtly threatened, or pending claims
request is to provide the auditor with and litigation.
d. Items that have an extremely high probability b. Laws and regulations in conjunction with a
of being resolved to the client's detriment. regulatory agency's criteria.
(AICPA ADAPTED) c. The GAO's government auditing standards.
123 d. The Single Audit Act.
SHORT ANSWER a 3. Under generally accepted auditing standards,
1. Compare and contrast a review engagement an auditor's responsibility to detect and report
and a compilation engagement. violations of laws and regulations is to
Answer: a. Assess the risk that violations of laws and
In a review engagement, an attestation service, regulations may cause materially misstated
the independent accountant performs analytical financial
procedures, makes inquiries of management, and statements and to design the audit accordingly.
issues a report that provides negative assurance, b. Report all violations of laws and regulations to
using language that states the accountant is “not the U.S. GAO.
aware of any material modifications that should c. Detect all violations of laws and regulations,
be made to the financial statements in order for including those that are neither direct nor
them to be conformity with GAAP.” In a material.
compilation engagement, the accountant compiles d. Coordinate the search for violations of laws
financial statements from management’s and regulations with all agencies from which the
unaudited and unreviewed accounts, and issues a entity has received financial assistance.
report that provides literally no assurance. c 4. In assessing whether management has
2. Describe what is involved in a review of overlooked relevant laws and regulations, the
financial statements. auditor
Answer: would perform all of the following except
A review of financial statements consists of a. Obtain written representations from
“performing inquiry and analytical procedures management.
that b. Review relevant portions of grant and loan
provide the accountant with a reasonable basis for agreements.
expressing negative assurance that there are no c. Confirm grant arrangements with granting
material modifications that should be made to the agencies.
statements in order for them to be in conformity d. Discuss laws and regulations with the entity's
with GAAP, or if applicable, with another chief financial officer and legal counsel.
comprehensive basis of accounting.” a 5. Program audits performed for governmental
CHAPTER 18 entities include
MULTIPLE CHOICE a. Determining the extent to which the desired
d 1. In addition to assessing the fairness of the results or benefits established by the legislature
entity's financial statements, a governmental are
financial being achieved.
statement audit is concerned with evaluating b. Determining whether the entity is acquiring
a. Internal control. resources economically and efficiently.
b. Efficiency. c. Determining whether the financial statements
c. Accuracy. are presented fairly.
d. Compliance. d. Determining whether the entity has adhered
b 2. Statement on Auditing Standards No. 74, with specific financial compliance requirements.
"Compliance Auditing Applicable to 128
Governmental d 6. In a governmental financial audit, the auditor
Entities and to Other Recipients of Governmental is required to test an entity's compliance with
Financial Assistance," describes an applicable laws and regulations and to prepare a
independent auditor's responsibilities for all but written report that provides all of the following
which of the following? except
a. Laws and regulations under generally accepted a. Positive assurance on items tested.
auditing standards. b. Negative assurance on items not tested.
c. A description of material instances of b 11. An independent auditor might consider the
noncompliance for items tested. procedures performed by the internal auditors
d. A description of the entity's performance on because
major financial assistance programs. a. They are employees whose work must be
c 7. Under government auditing standards issued reviewed during substantive testing.
by the U.S. GAO, a report on internal control b. They are employees of the client, but their
should work might be relied on.
address all of the following except c. Their work impacts upon the cost-benefit
a. The entity's internal control categories. tradeoff in evaluating inherent limitations.
b. The scope of the work performed in obtaining d. Their degree of independence may be inferred
an understanding of the entity's internal controls. by the nature of their work.
c. The auditor's opinion on the appropriateness of (AICPA ADAPTED)
the internal control in complying with future 129
grants. d 12. Taylor Sales Corp. maintains a large full-
d. Deficiencies in internal control not significant time internal audit staff, which reports directly to
enough to be considered reportable conditions the
under SAS No. 60, "Communication of Internal chief accountant. Audit reports prepared by the
Control Structure Related Matters Noted in an internal auditors indicate that the system is
Audit." functioning as it should and that control risk is
a 8. In which of the following circumstances low. The independent auditor will probably
would a governmental entity have the option of a. Eliminate compliance testing.
not b. Increase tests of controls.
complying with the Single Audit Act? c. Avoid duplicating the work performed by the
a. Governmental entities receiving less than internal audit staff.
$25,000 per year. d. Place limited reliance on the work performed
b. Governmental entities receiving over by the internal audit staff. (AICPA ADAPTED)
$1,000,000 per year. a 13. When an independent auditor decides that
c. Governmental entities receiving over $500,000 the work performed by internal auditors may have
per year. a
d. Governmental entities receiving over $100,000 bearing on the nature, timing, and extent of
per year. contemplated audit procedures, the independent
c 9. In an audit of a governmental entity under the auditor should plan to evaluate the objectivity of
Single Audit Act, which of the following the internal auditors. Relative to objectivity, the
questions independent auditor should
are not appropriate? a. Consider the organization level to which
a. Are the costs reasonable and necessary? internal auditors report the results of their work.
b. Do the costs conform to applicable grant b. Review the quality control program in effect
requirements? for the internal audit staff.
c. Are the costs the result of purchases made by c. Examine the quality of the internal audit
competitive bid? reports.
d. Are the costs net of applicable credits such as d. Consider the qualifications of the internal audit
purchase discounts? staff. (AICPA ADAPTED)
c 10. To provide for the greatest degree of b 14. In connection with the audit of financial
independence in performing internal auditing statements by an independent auditor, the client
functions, an suggests
internal auditor most likely should report to the that members of the internal audit staff be utilized
a. Financial vice-president. to minimize audit costs. Which of the
b. Corporate controller. following tasks could most appropriately be
c. Board of directors. delegated to the internal audit staff?
d. Corporate stockholders.
a. Selection of accounts receivable for a. Stockholders.
confirmation, based on the internal auditor's b. Personnel and operating activities.
judgment as to c. Independent (external) auditors.
how many accounts and which accounts will d. Board of directors.
provide sufficient coverage. c 19. In a financial statement audit, the
b. Preparation of schedules for negative accounts independent auditor would not rely on the work
receivable responses. of an internal
c. Evaluation of the internal control for accounts auditor in
receivable and sales. a. Obtaining an understanding of the internal
d. Determination of the adequacy of the control structure.
allowance for doubtful accounts. (AICPA b. Assessing risk.
ADAPTED) c. Determining a preliminary estimate of
c 15. Which of the following activities is typically materiality.
associated with operational auditing? d. Performing substantive tests.
a. Determining whether the financial statements SHORT ANSWER
are an accurate representation of the entity's 1. Explain the purpose of economy and efficiency
operations. audits.
b. Evaluating the feasibility of attaining the Answer:
entity's operational objectives. Economy and efficiency audits determine:
c. Making recommendations for improving  Whether an entity acquires, protects, and uses
performance. resources economically and efficiently,
d. Reporting on the entity's relative success in  The causes of diseconomies or inefficiencies,
meeting profitability goals. and
b 16. The overall objective of internal auditing is  Whether the entity has complied with laws and
to regulations that bear on economy and
a. Design and implement an effective internal efficiency.
control structure. 2. Explain the purpose of program audits.
b. Assist the independent auditors in gathering Answer:
evidence needed to form an opinion on the Program audits determine:
fairness  The extent to which a program achieves the
of the financial statements. results or benefits established by the
c. Ensure that assets are properly accounted for granting legislature or authorizing body,
and protected from loss or misuse.  The effectiveness of an organization, program,
d. Provide information about any phase of activity, or function,
business activity to assist members of  Whether the entity complies with laws and
management in regulations applicable to the program.
discharging their responsibilities. 3. Explain the purpose of the Single Audit Act of
d 17. Usually, an operational audit is performed 1984.
a. By independent external auditors. Answer:
b. By a team consisting of an equal number of Congress enacted the Single Audit Act of 1984
external and internal auditors. which was intended to improve the financial
c. Only when an operating division is management of state and local governments
experiencing declines in productivity or receiving federal funds, establish uniform audit
profitability. requirements for federal grant recipients, promote
d. By internal auditors at the request of top efficient and effective use of audit resources,
management or the board of directors. and ensure that federal departments and agencies
130 rely on one audit report only: the single audit
b 18. For an internal auditor to render impartial report. In 1996, the Single Audit Act Amendment
and unbiased judgments, he or she must be amended the Act.
independent
of the entity's
4. An internal auditor and his/her staff attempt to d. Testimonials and endorsements. (AICPA
familiarize themselves with the specific activity ADAPTED)
to a 3. According to the AICPA Code of
be reviewed. Describe the preliminary Professional Conduct, a member who has a
considerations for familiarizations. financial interest in
131 a partnership that invests in a potential client is
Answer: Review the internal audit working considered to have
paper files and reports from prior operational a. An indirect financial interest in the client.
audits. b. A direct financial interest in the client.
 Discuss and coordinate the timing and scope of c. No financial interest in the client.
the review with the manager of the d. A partial financial interest in the client.
activity to be audited. (AICPA ADAPTED)
 Coordinate staff requirements with the director a 4. The AICPA Rules of Conduct will ordinarily
of internal auditing to assure that the be considered to have been violated when the
operational audit can be completed on time. member represents that specific consulting
5. An internal auditor’s documented evidence services will be performed for a stated fee and it
should be examined on a test basis to provide an is
independent auditor with a basis for judging the apparent at the time of the representation that the
adequacy and appropriateness of the internal a. Actual fee would be substantially higher.
auditor’s competency and objectivity in what b. Actual fee would be substantially lower than
areas of internal audit work? the fees charged by other members for
Answer: The scope of internal audit work comparable
 Audit programs services.
 Working paper documentation c. Fee was a competitive bid.
 Conclusion reached d. Member would not be independent. (AICPA
 Any reports prepared ADAPTED)
d 5. In which of the following instances would
CHAPTER 19 the independence of the CPA not be considered to
MULTIPLE CHOICE be
c 1. A client company has not paid its 2004 audit impaired? The CPA has been retained as the
fees. According to the AICPA Code of auditor of a brokerage firm
Professional a. Which owes the CPA audit fees for more than
Conduct, for the auditor to be considered one year.
independent with respect to the 2005 audit, the b. In which the CPA has a large active margin
2004 account.
audit fees must be paid before the c. In which the CPA's brother is the controller.
a. 2004 report is issued. d. Which owes the CPA audit fees for services in
b. 2005 fieldwork is started. the current year and has just filed a petition for
c. 2005 report is issued. bankruptcy. (AICPA ADAPTED)
d. 2006 fieldwork is started. (AICPA ADAPTED) a 6. Pursuant to the AICPA rules of conduct, the
d 2. Inclusion of which of the following in a auditor's responsibility to the profession is
promotional brochure published by a public defined
accounting by
firm would be most likely to result in a violation a. The AICPA Code of Professional Conduct.
of the AICPA rules of conduct? b. Federal laws governing licensed professionals
a. Reprints of newspaper articles that praise the who are involved in interstate commerce.
firm's expertise. c. Statements on Auditing Standards.
b. Services offered and fees for such services, d. The Bylaws of the AICPA. (AICPA
including hourly rates and fixed fees. ADAPTED)
c. Educational and professional attainments of 134
partners.
a 7. In performing an audit, Jackson, CPA, a. Performing an audit from the viewpoint of the
discovers that the professional competence public.
necessary for b. Avoiding the appearance of significant
the engagement is lacking. Jackson informs interests in the affairs of an audit client.
management of the situation and recommends c. Possessing the ability to act with integrity and
another local firm, and management engages this objectivity.
other firm. Under these circumstances d. Accepting responsibility to act professionally
a. Jackson may request compensation from the and in accordance with a professional code of
other firm for any professional services rendered ethics. (AICPA ADAPTED)
to c 11. The appearance of independence of a CPA,
it in connection with the engagement. or that CPA's firm, could be impaired if the CPA
b. Jackson may accept a referral fee from the a. Owns a unit in a cooperative apartment house
other firm. where each unit has a vote in the cooperative, and
c. Jackson has violated the AICPA Code of the CPA, who does not participate in the
Professional Conduct because of nonfulfillment management, has been retained as the auditor for
of the the
duty of performance. cooperative.
d. Jackson's lack of competence should be b. Joins a trade association that is a client and
construed to be a violation of generally accepted serves in a nonmanagement capacity.
auditing c. Accepts a gift from a client.
standards. (AICPA ADAPTED) d. None of the above. (AICPA ADAPTED)
c 8. In which of the following instances would the 135
independence of the CPA not be considered to be c 12. An audit independence issue might be raised
impaired? The CPA has been retained as the by the auditor's participation in management
auditor of a advisory services engagements. Which of the
a. Charitable organization in which an employee following statements is most consistent with the
of the CPA serves as treasurer. profession's attitude toward this issue?
b. Municipality in which the CPA owns $25,000 a. Information obtained as a result of a consulting
of the $2,500,000 indebtedness of the engagement is confidential to that engagement
municipality. and should not influence performance of the attest
c. Cooperative apartment house in which the CPA function.
owns an apartment and is not part of the b. The decision as to loss of independence must
management. be made by the client based on the facts of the
d. Company in which the CPA's investment club particular case.
owns a one-tenth interest. (AICPA ADAPTED) c. The auditor should not make management
d 9. The AICPA Code of Professional Conduct decisions for an audit client.
recognizes that the reliance of the public, the d. The auditor who is asked to review
government, and the financial community on management decisions is also competent to make
sound financial reporting imposes particular these
obligations on CPAs. The Code derives its decisions and can do so without loss of
authority from independence. (AICPA ADAPTED)
a. Public laws enacted over the years. a 13. The AICPA Code of Professional Conduct
b. General acceptance of the Code by the states, in part, that a CPA should maintain
financial community. integrity
c. Requirements of governmental regulatory and objectivity. Objectivity in the Code refers to a
agencies, such as the SEC. CPA's ability
d. Bylaws of the AICPA. (AICPA ADAPTED) a. To maintain an impartial attitude on all matters
c 10. Which of the following most completely that come under the CPA's review.
describes how independence has been defined by b. To independently distinguish between
the accounting practices that are acceptable and those
profession? that are
not. d. Holding 10 of 1,000 outstanding shares as an
c. To be unyielding in all matters dealing with investment in a commercial corporation that
auditing procedures. performs bookkeeping services. (AICPA
d. To independently choose between alternate ADAPTED)
accounting principles and auditing standards. 136
(AICPA ADAPTED) b 17. Which organizations operate to enforce
c 14. The AICPA Code of Professional Conduct ethical conduct among certified public
states that a CPA shall not disclose any accountants?
confidential a. The SEC and state boards of accountancy.
information obtained in the course of a b. The AICPA, state societies of CPAs, and state
professional engagement except with the consent boards of accountancy.
of his or c. The AICPA, state societies of CPAs, and the
her client. In which of the situations that follow SEC.
would disclosure by a CPA be in violation of the d. The National Association of State Boards of
Code? Accountancy.
a. Disclosing confidential information to properly a 18. Cases involving ethical misconduct reach
discharge the CPA's responsibilities in the Joint Trial Board if
accordance with the profession's standards. a. Both the AICPA or state society of CPAs
b. Disclosing confidential information in concur on their findings, but do not issue a joint
compliance with a subpoena issued by a court. administrative reprimand.
c. Disclosing confidential information to another b. The AICPA refers the case owing to its own
accountant interested in purchasing the CPA's backlog of ethics cases.
practice. c. The state board of accountancy disagrees with
d. Disclosing confidential information in a review a ruling by either the AICPA or the state society
of the CPA's professional practice by a peer of
review team. (AICPA ADAPTED) CPAs.
a 15. Which of the following fee arrangements is d. The case has national implications.
in violation of the AICPA Code of Professional d 19. The Principles of the AICPA's Code of
Conduct? Professional Conduct
a. A fee based on whether the CPA's report on the a. Are enforceable on AICPA members.
client's financial statements results in the b. Derive their authority from state boards of
approval of a bank loan. accountancy.
b. A fee based on the outcome of a bankruptcy c. Include the Code's Rules of Conduct.
proceeding. d. Express each member's responsibilities to the
c. A fee based on the nature of the service public, to clients, and to colleagues in the
rendered and the CPA's particular expertise profession.
instead of the d 20. Which of the following describes most
actual time spent on the engagement. completely how the profession defines
d. A fee based on the fee charged by the prior independence?
auditor. (AICPA ADAPTED) a. Performing an audit from the public's point of
a 16. Which of the following is prohibited by the view.
AICPA Code of Professional Conduct? b. Avoiding the appearance of a significant
a. Use of a firm name that indicates interest in an audit client's interests.
specialization. c. Resisting a client’s reluctance to reveal
b. Practice of public accounting in the form of a evidence.
professional corporation. d. Accepting responsibility to act professionally
c. Use of the partnership name for a limited and in accordance with a professional Code of
period by one of the partners in a public Conduct.
accounting b 21. Which of the following publications does
firm after the death or withdrawal of all other not qualify as a statement of generally accepted
partners.
accounting principles under the Code of d 25. The AICPA Code of Professional Conduct
Professional Conduct? would be violated if a member accepted a fee for
a. Accounting interpretations issued by the services and the fee was
FASB. a. Fixed by a public authority.
b. Accounting interpretations issued by the b. Based on a price quotation submitted in
AICPA. competitive bidding.
c. AICPA Accounting Research Bulletins. c. Based on the result of judicial proceedings.
d. Statements of Financial Accounting Standards d. Payable after a specified finding was attained.
issued by the FASB. d 26. Inclusion of which of the following
c 22. Which of the following is required for a statements in a CPA's advertisement is not
firm's letterhead to include “Member of the acceptable under
American the AICPA Code of Professional Conduct?
Institute of Certified Public Accountants?” a. Paul Fall
a. At least one of the partners must be a member. Certified Public Accountant
b. The partners whose names appear in the firm Fluency in Spanish and French
name must be members. b. Paul Fall
c. All partners must be members. Certified Public Accountant
d. The firm must be a dues paying member. Tax Specialist
b 23. In which of the following circumstances c. Paul Fall
would a CPA be bound to refrain from disclosing Certified Public Accountant
confidential information obtained during a Free Consultation
professional engagement? d. Paul Fall
a. The CPA is issued a summons enforceable by a Certified Public Accountant
court order that orders the CPA to present Endorsed by the AICPA
confidential information. a 27. Which of the following is prohibited by the
b. A major stockholder of a client company seeks AICPA Code of Professional Conduct?
accounting information from the CPA after a. A firm that designates itself “Members of the
management declined to disclose the information. AICPA” when one partner has been expelled
c. Confidential client information is made from
available as part of a quality review of the CPA's the AICPA.
practice b. Practice of public accounting in the form of a
by a review team authorized by the AICPA. professional corporation.
d. An inquiry by a disciplinary body of a state c. Use of the partnership name for a limited
CPA society requests confidential client period by one of the partners in a public
information. accounting
137 firm after the death or withdrawal of all other
b 24. Richard, CPA, performs accounting services partners.
for Norton Corporation. Norton wishes to offer d. Holding as an investment 10 of 1,000
shares to the public and asks Richard to audit the outstanding shares in a commercial corporation
financial statements. Richard refers Norton to that
Cruz, CPA, who is more competent in the area of performs bookkeeping services.
registration statements. Cruz performs the audit SHORT ANSWER
of Norton's financial statements and subsequently 1. Name the four instances in which litigation
thanks Richard for the referral by giving would impair auditor independence.
Richard a portion of the audit fee. Richard Answer: Litigation by management alleging
accepts the fee. Who, if anyone, has violated deficiencies in audit work.
professional ethics?  Litigation by the auditor alleging management
a. Only Richard. fraud or deceit.
b. Both Richard and Cruz. 138
c. Only Cruz.  An expressed intent by management to
d. Neither Richard nor Cruz. commence litigation alleging deficiencies in
audit work. control performed by practitioners not otherwise
 Litigation unrelated to audit work but material employed by the firm reviewed.
nevertheless either to the firm’s or to PROBLEMS
the client’s financial statements. 1. For each of the following five elements of
2. Address the ways that the SEC judges quality control you are required to define the
independence in a relationship or service. element
Answer: of quality control and also to give one example of
To judge independence, the SEC considers four quality control policies.
general issues. Whether a relationship or a a. Independence, Integrity, and Objectivity
service: b. Personnel Management
 Creates a mutual or conflicting interest. c. Acceptance and Continuance of Clients
 Places the auditor in the position of auditing his 139
or her own work. d. Engagement Performance
 Results in the auditor acting as a client’s e. Monitoring
management or employee. Answer:
 Places the auditor in the position of acting as Note - examples may vary among students.
the client’s advocate. a. Independence, Integrity, and Objectivity –
3. Describe the purpose of Rule 302 as it pertains Establish policies to provide reasonable
to AICPA members. assurance that all staff are independent of attest
Answer: clients to the extent required by the
Rule 302 prohibits fee arrangements with audit AICPA Code of Professional Conduct.
and attest clients whereby no fee is paid unless a  Example – Require that all staff identify attest
particular outcome is attained or the fee is clients in which they own securities.
contingent upon a particular outcome, the intent b. Personnel Management – Establish policies
being for hiring, advancement, assigning
to remove AICPA members from potentially personnel to engagements, and professional
compromising conflicts of interest. Rule 302 development.
offers  Example – Designate a staff member to assign
several opportunities for AICPA members to personnel to engagements. Base
enter into contingent fee arrangements with assignments on engagement needs and on staff
nonattest service clients. career development.
4. Compare and contrast the successor auditor c. Acceptance and Continuance of Clients –
and the predecessor auditor. Establish policies to preclude accepting or
Answer: continuing services for managements that lack
A successor auditor is one who has accepted an integrity.
engagement or been invited to submit a proposal,  Example – Outsource background checks for
and places the burden on the successor to initiate all proposed clients’ management.
communication with the predecessor auditor, d. Engagement Performance – Establish polices
the auditor precedes the successor auditor. for planning, performing, supervising,
5. Describe the two methods of self-regulation reviewing, documenting, and communicating the
that is used to monitor public accounting firm’s results of each engagement.
standards of quality control and quality review.  Example – Assign staff to review planning
Answer: memos, working papers, and reports, and
Today, self-regulation is achieved through two designate a consulting partner for each industry
means: the firm serves.
 Quality control – the internal policies and e. Monitoring – Establish policies for monitoring
procedures a firm designs to assure compliance with the firm’s quality
consistent performance and achievement across control policies and procedures.
engagements.  Example – Assign an assessment director to
 Peer review/Quality review – an independent document quality control compliance.
outside review of a firm’s quality
2. Name and define the six Principles of audit of the Lamp Corp., Harrison, CPA, did not
Professional Conduct. detect the embezzlement of a material amount of
Answer: funds by the company's controller. As a matter of
a. Responsibilities – In carrying out their common law, to what extent would Harrison
responsibilities as professional, members should be liable to the Lamp Corp. for losses attributable
exercise sensitive professional and moral to the theft?
judgment in all other activities. a. No liability since the ordinary examination
b. The Public Interest – Members should accept cannot be relied on to detect defalcations.
the obligation to act in a way that will b. No liability because privity of contract is
serve the public interest, honor the public trust, lacking.
and demonstrate commitment to c. Liable for losses attributable to her or his
professionalism. negligence.
c. Integrity – To maintain and broaden public d. Liable only if it could be proved that he or she
confidence, members should perform all was grossly negligent. (AICPA ADAPTED)
professional responsibilities with the highest b 3. The Apex Surety Company wrote a general
sense of integrity. fidelity bond covering defalcations by the
d. Objectivity and Independence – A member employees
should maintain objectivity and be free of of Watson, Inc. Thereafter, Grand, an employee
conflicts of interest in discharging professional of Watson, embezzled $18,999 of company
responsibilities. A member in public funds. When his activities were discovered, Apex
practice should be independent in fact and paid Watson the full amount in accordance
appearance when providing auditing and other with the terms of the fidelity bond and then
attestation services. sought recovery against Watson's auditors, Kane
e. Due Care – A member should observe the &
profession’s technical and ethical standards, Dobbs, CPAs. Which of the following would be
strive continually to improve competence and the Kane & Dobbs' best defense?
quality of services, and discharge a. Apex is not in privity of contract.
professional responsibility to the best of the b. The shortages were the result of clever
member’s ability. forgeries and collusive fraud that would not be
f. Scope and Nature of Services – A member in detected by
public practice should observe the Code an examination made in accordance with
of Professional Conduct in determining the scope generally accepted auditing standards.
and nature of services to be provided. c. Kane & Dobbs were not guilty of either gross
negligence or fraud.
CHAPTER 20 d. Kane & Dobbs were not aware of the Apex-
MULTIPLE CHOICE Watson surety relationship. (AICPA ADAPTED)
c 1. Which of the following best describes a trend b 4. Martin Corporation orally engaged Humm &
in litigation involving CPAs? Dawson to audit its year-end financial statements.
a. A CPA cannot render an opinion on a company The engagement was to be completed within two
unless the CPA has audited all affiliates of that months after the close of Martin's fiscal year for
company. a fixed fee of $2,500. Under these circumstances,
b. A CPA may successfully assert as a defense what obligation is assumed by Humm &
that the CPA had no motive to be part of a fraud. Dawson?
c. A CPA may be exposed to criminal as well as a. None. The contract is unenforceable since it is
civil liability. not in writing.
d. A CPA is primarily responsible for a client's b. An implied promise to exercise reasonable
footnotes in an annual report filed with the SEC. standards of competence and care.
(AICPA ADAPTED) c. An implied obligation to take extraordinary
c 2. As a consequence of failure to adhere to steps to discover all defalcations.
generally accepted auditing standards in the d. The obligation of an insurer of its work, which
course of an is liable without fault. (AICPA ADAPTED)
a 5. One of the most significant aspects of the b 9. Hall purchased bonds for Eon Corp. in a
Continental Vending case was that it public offering subject to the Securities Act of
a. Created a more general awareness of the 1933.
auditor's exposure to criminal prosecution. Kosson and Co., CPAs, rendered an unqualified
b. Extended the auditor's responsibility for opinion on Eon's financial statements, which
financial statements of subsidiaries. were included in Eon's registration statement.
c. Extended the auditor's responsibility for events Kosson is being sued by Hall based on
after the end of the audit period. misstatements contained in the financial
d. Defined the auditor's common-law statements. In order to be successful, Hall must
responsibilities to third parties. (AICPA prove
ADAPTED) materiality of Kosson's
142 Damages Misstatement Scienter
b 6. The 1136 Tenants case was chiefly important a. Yes Yes Yes
because of its emphasis on the legal liability of b. Yes Yes No
the c. Yes No No
CPA when d. No Yes Yes (AICPA ADAPTED)
a. Performing a review of financial statements. b 10. Lewis & Clark, CPAs, rendered an
b. An engagement letter is not obtained. unqualified opinion on the financial statements of
c. An audit results in a disclaimer of opinion. a company
d. Preparing letters for underwriters. (AICPA that sold common stock in a public offering
ADAPTED) subject to the Securities Act of 1933. Based on a
d 7. In which of the following statements about a false statement in the financial statements, Lewis
public accounting firm's action is scienter or its & Clark are being sued by an investor who
equivalent absent? purchased shares of this public offering. Which of
a. Reckless disregard for the truth. the following represents a viable defense?
b. Actual knowledge of fraud. a. The investor has not met the burden of proving
c. Intent to gain monetarily by concealing fraud. fraud or negligence by Lewis & Clark.
d. Performance of substandard auditing b. The investor did not actually rely on the false
procedures. (AICPA ADAPTED) statement.
c 8. Doe and Co., CPAs, issued an unqualified c. Detection of the false statement by Lewis &
opinion on the 2005 financial statements of Marx Clark occurred after their examination date.
Corp. These financial statements were included in d. The false statement is immaterial in the overall
Marx's annual report and form 10K filed with context of the financial statements.
the SEC. Doe did not detect material (AICPA ADAPTED)
misstatements in the financial statements as a 143
result of c 11. Gibson is suing Simpson & Sloan, CPAs, to
negligence in the performance of the audit. Based recover losses incurred in connection with
on the financial statements, Fitch purchased Gibson's
stock in Marx. Shortly thereafter, Marx became transactions in Zebra Corporation securities.
insolvent, causing the price of the stock to Zebra's Annual Form 10-K Report contained
decline drastically. Fitch has commenced legal material false and misleading statements in the
action against Doe for damages based on Section financial statements audited by Simpson & Sloan.
10(b) and Rule 10b-5 of the Securities Exchange To recover under the Securities and Exchange
Act of 1934. Doe's best defense to such an Act of 1934, Gibson must, among other things,
action would be that establish that
a. Fitch lacks privity to sue. a. All of his past transactions in Zebra securities,
b. The engagement letter specifically disclaimed both before and after the auditors' report date,
all liability to third parties. resulted in net losses.
c. There is no proof of scienter. b. The transaction in Zebra securities that resulted
d. There has been no subsequent sale for which a in a loss occurred within 90 days of the auditors'
loss can be computed. (AICPA ADAPTED) report date.
c. He relied on the financial statements in his an independent auditor with a reasonable basis for
decision to purchase or sell Zebra securities. the expression of an opinion?
d. The market price of the stock dropped a. The audit program.
significantly after Zebra issued corrected b. The auditor's judgment.
financial c. Generally accepted auditing standards.
statements. (AICPA ADAPTED) d. The auditor's working papers. (AICPA
b 12. Humm & Dawson had been engaged to ADAPTED)
audit the Martin Corporation's financial b 15. An auditor who believes that a material
statements. irregularity may exist should initially
Although an engagement letter was not prepared, a. Discuss the matter with those believed to be
Martin agreed orally to a fixed fee of $2,500. involved in the perpetration of the material
Which of the following best describes the irregularity.
obligation assumed by Humm & Dawson? b. Discuss the matter with a higher level of
a. None; the agreement is not in writing. management.
b. An implied promise to exercise due care. c. Withdraw from the engagement.
c. An implied obligation to detect all fraud. d. Consult legal counsel. (AICPA ADAPTED)
d. An implied obligation to detect all illegal acts. 144
(AICPA ADAPTED) c 16. Which of the following, if material, would
d 13. Winslow Manufacturing, Inc. sought a be an irregularity?
$200,000 loan from National Lending a. Mistakes in the application of accounting
Corporation. principles.
National Lending insisted that audited financial b. Clerical mistakes in the accounting data
statements be submitted before granting credit. underlying the financial statements.
Winslow agreed. An audit was performed by an c. Misappropriation of an asset or groups of
independent auditor who submitted an audit assets.
report to Winslow that was to be used solely for d. Misinterpretations of facts that existed when
the purpose of negotiating a loan from National. the financial statements were prepared.
National, upon reading the audited financial (AICPA ADAPTED)
statements, decided in good faith not to extend d 17. When unable to determine the amounts
the associated with certain illegal acts committed by
credit desired. Certain ratios, used routinely by a client,
National in reaching credit decisions, were judged the auditor would most likely issue
insufficient. Winslow used copies of the audited a. A review opinion with a separate explanatory
financial statements to obtain credit elsewhere. paragraph.
Despite complying with generally accepted b. Only an adverse opinion.
auditing standards, the independent auditor failed c. Either a qualified opinion or an adverse
to opinion.
discover a sophisticated embezzlement scheme d. Either a qualified opinion or a disclaimer of
perpetrated by Winslow's chief financial officer. opinion. (AICPA ADAPTED)
The auditor is liable to c 18. The auditor is most likely to presume that a
a. Third parties who relied on the audited high risk of irregularities exists if
financial statements to extend credit. a. The client is a multinational company that does
b. Winslow to repay the audit fee because business in numerous foreign countries.
National did not extend credit. b. The client does business with several related
c. Winslow for any losses Winslow suffered as a parties.
result of failing to discover the embezzlement. c. Inadequate segregation of duties places an
d. None of the parties. (AICPA ADAPTED) employee in a position to perpetrate and conceal
b 14. Which of the following ultimately thefts.
determines the specific audit procedures d. Inadequate employee training results in lengthy
necessary to provide EDP exception reports each month.
(AICPA ADAPTED)
a 19. An auditor who finds that the client has c 23. Purchasers of securities have brought suit
committed an illegal act would be most likely to against an independent auditor under the
withdraw from the engagement when the Securities Act
a. Illegal act affects the auditor's ability to rely on of 1933. The firm will prevail in the suit, even
management representations. though the firm issued an unqualified opinion on
b. Illegal act has material financial statement materially misstated financial statements, if
implications. a. The firm was unaware of the material
c. Illegal act has received widespread publicity. misstatements.
d. Auditor cannot reasonably estimate the effect b. The purchasers had no direct dealings with the
of the illegal act on the financial statements. auditor.
(AICPA ADAPTED) c. The firm can show that the purchasers did not
c 20. The Foreign Corrupt Practices Act requires rely on the financial statements.
that d. The firm can show that there was no intent to
a. Auditors engaged to examine the financial deceive or manipulate the purchasers.
statements of publicly held companies report all (AICPA ADAPTED)
illegal a 24. When seeking to recover stock market
payments to the SEC. losses from a public accounting firm on the basis
b. Privately held companies devise and maintain of an
an adequate internal control structure. unqualified opinion that accompanied a
c. Publicly held companies devise and maintain registration statement, an investor must establish
an adequate internal control structure. that
d. U.S. firms doing business abroad report sizable a. The audited financial statements were
payments to non-U.S. citizens to the Justice materially misstated.
Department. (AICPA ADAPTED) b. He or she relied on the financial statements.
a 21. Donalds & Company, CPAs, audited the c. The firm did not act in good faith.
financial statements included in the annual report d. If the firm had exercised due care, the material
submitted by Markum Industries, Inc. to the misstatement would have been discovered.
Securities and Exchange Commission. The audit (AICPA ADAPTED)
was c 25. An auditor is subject to criminal liability if
deficient in several respects. Markum is now he or she
insolvent and unable to satisfy shareholders' a. Refuses to return a client's working papers.
claims. b. Performs an audit negligently.
The shareholders have taken legal action against c. Willfully omits a material fact required to be
Donalds under Section 10b and Rule 10b-5 of stated in a registration statement.
the Securities Exchange Act of 1934. Which of d. Willfully breaches a contract with a client.
the following is Donalds' best defense? (AICPA ADAPTED)
a. Donalds did not intend to deceive, manipulate, a 26. If an independent auditor believes that
or defraud Markum's shareholders. material errors or fraud exist, he or she should
b. Section 10b does not apply. a. Consider the implications and discuss the
c. Donalds was not in privity to the shareholders. matter with appropriate levels of management.
d. The engagement letter specifically disclaimed b. Make the investigation necessary to determine
liability to any third party. (AICPA ADAPTED) whether the errors or fraud have, in fact,
145 occurred.
a 22. A third party sues a public accounting firm c. Request that management investigate whether
for negligence under common law on the basis of the errors or fraud have, in fact, occurred.
materially false financial statements. Which of d. Consider whether the errors or fraud were the
the following is the firm's defense? result of a failure by employees to comply with
a. Lack of privity. existing internal controls. (AICPA ADAPTED)
b. Lack of reliance. d 27. With respect to errors and fraud, which of
c. Lack of intent. the following should be part of an auditor's
d. Contributory negligence. (AICPA ADAPTED) planning of
the audit engagement? c. Modify the extent of auditing procedures.
a. Plan to search for errors or fraud that would d. Report the act to high-level personnel within
have a material or immaterial effect on the the client's organization. (AICPA ADAPTED)
financial d 31. An audit client's board of directors and audit
statements. committee refused to take action about an
b. Plan to discover errors or fraud that are either immaterial illegal act that was brought to their
material or immaterial. attention by the auditor. Because of their failure
c. Plan to discover errors or fraud that are to
material. act, the auditor withdrew from the engagement.
d. Plan to consider factors affecting the risk of The auditor's decision to withdraw was primarily
material misstatement both at the financial due to doubts concerning
statement and the account balance level. (AICPA a. Inadequate financial statement disclosures.
ADAPTED) b. Compliance with the Foreign Corrupt Practices
146 Act.
d 28. An audit conducted in accordance with c. Scope limitations resulting from the inaction.
generally accepted auditing standards generally d. Reliance on management's representations.
should (AICPA ADAPTED)
a. Be expected to provide assurance that illegal b 32. Which of the following statements correctly
acts will be detected when internal control is describes the unlawful influence provision of the
effective. Foreign Corrupt Practices Act? The Act applies
b. Be relied on to disclose violations of truth in a. Only to multinational corporations.
lending laws. b. To all domestic corporations engaged in
c. Include a plan to actively search for illegal acts. interstate commerce.
d. Not be relied on to provide assurance that c. To corporations whose securities are registered
illegal acts will be detected. (AICPA ADAPTED) under the Securities Exchange Act of 1934.
c 29. If an auditor believes a client may have d. To corporations engaged in foreign commerce.
committed illegal acts, which of the following (AICPA ADAPTED)
actions SHORT ANSWER
should the auditor take? 1. Compare and contrast common law with
a. Consult with the client's counsel and the statutory law.
auditor's counsel to determine how the suspected Answer:
illegal The source of common law is the written
acts will be communicated to stockholders. opinions of prior courts within a state (legal
b. Extend auditing procedures to determine precedent),
whether the suspected illegal acts have a material each state having its own common law. Common
effect law is based in the doctrine of stare decisis,
on the financial statements. which is the handing down precedent-setting
c. Make inquiries of the client's management and principles of law to succeeding cases.
obtain an understanding of the circumstances 147
underlying the acts and of other evidence to Statutory law refers to written statutes
determine the effects of the acts on the financial established by Congress at the federal level and
statements. by state
d. Notify each member of the audit committee of legislatures at the state level. Federal (and state)
the board of directors about nature of the acts and courts are bound by federal (state) statutes,
request that they advise an approach to be taken unless the statue violates the U.S. (state)
by the auditor. (AICPA ADAPTED) constitution.
d 30. If an illegal act is discovered during the 2. Under common law, clients may bring action
audit of a publicly held company, the auditor against an auditor for breach of contract or for
should tort.
a. Notify the regulatory authorities. Explain these two violations of common law.
b. Determine who was responsible for the act. Answer:
Clients may sue for breach of contract because Answer:
clients are parties (they are in privity) to an Ordinary negligence means a lack of reasonable
express or implied contract for audit services. care when performing services, such as a
Suits for breach of contract usually allege that an departure from one of the generally accepted
auditor violated either GAAS or the auditor– auditing standards. When used alone, the term
client confidential relationship. negligence is generally understood to mean
A tort is a wrongful act, other than breach of ordinary negligence.
contract, which results in injury to another Gross negligence is a lack of even minimum care
person. when performing services, such as a reckless
Suits in tort usually allege negligence, gross departure from GAAS.
negligence, or fraud. Fraud is an intentional misstatement or omission
3. Explain the difference between (a) primary of a material fact or a theft that results in
beneficiaries, (b) foreseen third parties, another party being deceived and then injured.
(c) foreseeable third parties. The operative word is intentional.
Answer: 5. The extent of an independent auditor’s liability
Primary beneficiaries are specifically identified under either common or statutory law rests on
to auditors as the beneficiaries of audit services four essential points. Name and describe the four
– the auditor would not have been engaged were essential points.
it not for the primary beneficiary. Answer:
Foreseen third parties are not specifically  The plaintiff sustained a damage or loss.
identified as beneficiaries of audit services,  The audited financial statements were
although materially misstated.
the auditor knows their general identity and  The plaintiff relied on the financial statements.
specific purpose of an audit report.  The auditor’s conduct was deficient.
Foreseeable third parties are parties who have a PROBLEMS
reasonable need to rely on an entity’s financial 1. Complete the chart below illustrating the
statements but, because they’re the furthest minimum basis for potential auditor liability and
removed from a contractual agreement for audit the
services, generally enjoy the least favorable burden of proof placed upon the plaintiff as it
position in auditor liability cases. pertains to specified Securities acts and rules.
4. Compare ordinary negligence, gross
negligence, and fraud as it pertains to the audit
process.
Audited Financial Statements - The Basics CPA-02325 Type1 M/C A-D Corr Ans: C PM#3
CPA-02320 Type1 M/C A-D Corr Ans: A PM#2 A 1-01
A 1-01 2. CPA-02325 Au Nov 91 #23 Page 3
1. CPA-02320 Au Nov 93 #52 Page 58 For an entity's financial statements to be
Several sources of GAAP consulted by an auditor presented fairly in conformity with generally
are in conflict as to the application of an accepted accounting principles, the principles
accounting principle. Which of the following selected should:
should the auditor consider the most a. Be applied on a basis consistent with those
authoritative? followed in the prior year.
a. FASB Technical Bulletins. b. Be approved by the Auditing Standards Board
b. AICPA Accounting Interpretations. or the appropriate industry subcommittee.
c. FASB Statements of Financial Accounting c. Reflect transactions in a manner that presents
Concepts. the financial statements within a range of
d. AICPA Technical Practice Aids. acceptable limits.
CPA-02320 Explanation d. Match the principles used by most other
Choice "a" is correct. In accordance with the entities within the entity's particular industry.
GAAP hierarchy, FASB Technical Bulletins are CPA-02325 Explanation
considered the most authoritative of the sources Choice "c" is correct. Financial statements are
listed in the question. presented fairly in conformity with GAAP when
there are no material misstatements included Which of the following accurately depicts the
therein. The fact that there may occasionally be auditor's responsibility with respect to Statements
immaterial misstatements means that the on Auditing Standards?
financial statements are correct "within a range of a. The auditor is required to follow the guidance
acceptable limits." provided by the Standards, without exception.
CPA-04613 Type1 M/C A-D Corr Ans: C PM#4 b. The auditor is generally required to follow the
A 1-01 guidance provided by Standards with which he or
3. CPA-04613 Au R04 #8 Page 3 she is familiar, but will not be held responsible for
Which of the following statements is correct departing from provisions of which he or she was
concerning an auditor's responsibilities regarding unaware.
financial c. The auditor is generally required to follow the
statements? guidance provided by the Standards, unless
a. An auditor may not draft an entity's financial following such guidance would result in an audit
statements based on information from that is not cost-effective.
management's d. The auditor is generally required to follow the
accounting system. guidance provided by the Standards, and should
b. The adoption of sound accounting policies is be able to justify any departures.
an implicit part of an auditor's responsibilities. CPA-02299 Explanation
c. An auditor's responsibilities for audited financial Choice "d" is correct. The auditor is generally
statements are confined to the expression of the required to follow the guidance provided by the
auditor's opinion. Standards, and should be able to justify any
d. Making suggestions that are adopted about an departures.
entity's internal control environment impairs an CPA-02309 Type1 M/C A-D Corr Ans: B PM#5
auditor's independence. A 1-02
CPA-04613 Explanation 6. CPA-02309 Au Nov 95 #74 Page 11
Choice "c" is correct. An auditor's responsibility is In the first audit of a new client, an auditor was
to express an opinion on financial statements able to extend auditing procedures to gather
based on an audit. sufficient evidence about consistency. Under
Professional Standards these circumstances, the auditor should:
CPA-02298 Type1 M/C A-D Corr Ans: C PM#1 a. Not report on the client's income statement.
A 1-02 b. Not refer to consistency in the auditor's report.
4. CPA-02298 Au C02 #1A Page 6 c. State that the consistency standard does not
Which of the following provides the most apply.
authoritative guidance for an auditor? d. State that the accounting principles have been
a. An AICPA audit and accounting guide that applied consistently.
provides specific guidance with respect to the
accounting practices in the client's industry. CPA-02309 Explanation
b. A Journal of Accountancy article discussing Choice "b" is correct. The auditor's standard
implementation of a new standard. report implies that the auditor is satisfied that the
c. General guidance provided by a Statement on comparability of financial statements between
Auditing Standards. periods has not been materially affected by
d. Specific guidance provided by an interpretation changes in accounting principles and that such
of a Statement on Auditing Standards. principles have been consistently applied
CPA-02298 Explanation between or among periods. Since the auditor has
Choice "c" is correct. General guidance provided gathered sufficient evidence about consistency,
by a Statement on Auditing Standards is the most no reference need be made in the report.
authoritative of level of auditing guidance.
Auditors are required to comply with SASs, and CPA-02315 Type1 M/C A-D Corr Ans: D PM#6
should be prepared to justify any departures A 1-02
therefrom. 7. CPA-02315 Au May 95 #23 Page 8
the auditor. The third general standard states that due care is
CPA-02299 Type1 M/C A-D Corr Ans: D PM#2 to be exercised in the performance of an audit.
A 1-02 This standard is ordinarily interpreted to require:
5. CPA-02299 Au C02 #2 Page 8 a. Thorough review of the existing safeguards
over access to assets and records.
b. Limited review of the indications of employee c. Professional skepticism.
fraud and illegal acts. d. Impartial conservatism.
c. Objective review of the adequacy of the CPA-02800 Explanation
technical training and proficiency of firm Choice "c" is correct. The auditor should plan and
personnel. perform the audit with an attitude of professional
d. Critical review of the judgment exercised at skepticism. This attitude includes a questioning
every level of supervision. mind and a critical assessment of audit evidence.
CPA-02315 Explanation CPA-02820 Type1 M/C A-D Corr Ans: C PM#10
Choice "d" is correct. The third general standard A 1-02
of due care is ordinarily interpreted to require 11. CPA-02820 C03 #15 Page 26
critical review of the judgment exercised at every Which of the following is not an example of the
level of supervision, and the judgment exercised application of professional skepticism?
by those assisting in the audit. a. Designing additional auditing procedures to
CPA-02330 Type1 M/C A-D Corr Ans: C PM#7 obtain more reliable evidence in support of a
A 1-02 particular financial statement assertion.
8. CPA-02330 Au May 91 #52 Page 8 b. Obtaining corroboration of management's
The concept of materiality would be least explanations through consultation with a
important to an auditor when considering the: specialist.
a. Adequacy of disclosure of a client's illegal act. c. Inquiring of prior year engagement personnel
b. Discovery of weaknesses in a client's internal regarding their assessment of management's
control. honesty and integrity.
c. Effects of a direct financial interest in the client d. Using third party confirmations to provide
on the CPA's independence. support for management's representations.
d. Decision whether to use positive or negative CPA-02820 Explanation
confirmations of accounts receivable. Choice "c" is correct. The auditor should consider
CPA-02330 Explanation that fraud might occur regardless of any past
Choice "c" is correct. Any direct financial interest experience with the entity. An assessment of
in a client impairs independence, even if it is management's honesty and integrity performed
immaterial. during the previous year would not necessarily be
CPA-04640 Type1 M/C A-D Corr Ans: A PM#8 relevant to the current year's audit.
A 1-02 CPA-05465 Type1 M/C A-D Corr Ans: C PM#11
9. CPA-04640 Au C05 #1 Page 4 A 1-02
An auditor of a nonpublic company must conduct 12. CPA-05465 Released 2007 Page 8
the audit in accordance with: Which of the following categories is included in
I. ASB standards. generally accepted auditing standards?
II. PCAOB standards. a. Standards of review.
a. I. b. Standards of planning.
b. Both I and II. c. Standards of fieldwork.
c. Either I or II, but not both. d. Standards of evidence.
d. II. CPA-05465 Explanation
CPA-04640 Explanation Choice "c" is correct. Generally accepted auditing
Choice "a" is correct. An auditor of a nonpublic standards include three categories: general
company must conduct the audit in accordance standards,
with ASB standards of fieldwork, and standards of
standards. reporting.

CPA-02800 Type1 M/C A-D Corr Ans: C PM#9 Reports on Audited Financial Statements
A 1-02 CPA-02351 Type1 M/C A-D Corr Ans: B PM#1
10. CPA-02800 Au May 94 #11 Page 9 A 1-03
Because of the risk of material misstatement, an 13. CPA-02351 Au R03 #10 Page 23
audit of financial statements in accordance with When qualifying an opinion because of an
generally accepted auditing standards should be insufficiency of audit evidence, an auditor should
planned and performed with an attitude of: refer to the situation in the:
a. Objective judgment. Scope Notes to the
b. Independent integrity. paragraph financial statements
a. Yes Yes expenditures might all be considered mitigating
b. Yes No factors.
c. No Yes CPA-02379 Type1 M/C A-D Corr Ans: B PM#6
d. No No A 1-03
CPA-02351 Explanation 16. CPA-02379 Au R01 #17 Page 24
Choice "b" is correct. When a qualified opinion is In which of the following situations would an
issued due to a lack of sufficient audit evidence, auditor ordinarily choose between expressing a
the lack of evidence should be disclosed in an qualified opinion or an adverse opinion?
explanatory paragraph before the opinion a. The auditor did not observe the entity's
paragraph. Since insufficient evidence is a scope physical inventory and is unable to become
limitation, the scope paragraph should also be satisfied about its balance by other auditing
modified to refer to the procedures.
limitation and to the explanatory paragraph that b. Conditions that cause the auditor to have
discusses it. substantial doubt about the entity's ability to
CPA-02360 Type1 M/C A-D Corr Ans: C PM#2 continue as a going concern are inadequately
A 1-03 disclosed.
14. CPA-02360 Au C02 #3 Page 23 c. There has been a change in accounting
When an auditor believes there is substantial principles that has a material effect on the
doubt about the ability of an entity to continue as comparability of the entity's financial statements.
a going concern, all of the following should be d. The auditor is unable to apply necessary
included in the audit documentation, except: procedures concerning an investor's share of an
a. The conditions that gave rise to the substantial investee's earnings recognized on the equity
doubt. method.
b. The auditor's conclusion about whether CPA-02379 Explanation
substantial doubt remains or is alleviated. Choice "b" is correct. Inadequate disclosure of the
c. Management's conclusion regarding whether substantial doubt about an entity's ability to
substantial doubt remains or is alleviated. continue
d. The effect of the auditor's conclusion on the as a going concern is a departure from GAAP,
auditor's report. resulting in either a qualified or adverse opinion.
CPA-02360 Explanation CPA-02385 Type1 M/C A-D Corr Ans: B PM#7
Choice "c" is correct. Whether substantial doubt A 1-03
remains or is alleviated is a judgment call made 17. CPA-02385 Au R98 #13 Page 22
by the auditor, and there is no requirement to Which of the following conditions or events most
document management's opinion on the matter. likely would cause an auditor to have substantial
CPA-02366 Type1 M/C A-D Corr Ans: C PM#3 doubt about an entity's ability to continue as a
A 1-03 going concern?
15. CPA-02366 Au R02 #11 Page 23 a. Significant related party transactions are
After considering an entity's negative trends and pervasive.
financial difficulties, an auditor has substantial b. Usual trade credit from suppliers is denied.
doubt about the entity's ability to continue as a c. Arrearages in preferred stock dividends are
going concern. The auditor's considerations paid.
relating to management's plans for dealing with d. Restrictions on the disposal of principal assets
the adverse effects of these conditions most likely are present.
would include management's plans to: CPA-02385 Explanation
a. Increase current dividend distributions. Choice "b" is correct. Indications of possible
b. Reduce existing lines of credit. financial difficulties, such as denial of usual trade
c. Increase ownership equity. credit from
d. Purchase assets formerly leased. suppliers, may cause an auditor to have
CPA-02366 Explanation substantial doubt about an entity's ability to
Choice "c" is correct. The auditor considers any of continue as a going concern.
management's plans that might serve to mitigate CPA-02395 Type1 M/C A-D Corr Ans: A PM#9
the adverse effects of particular conditions and A 1-03
events. Typically, plans to increase ownership 18. CPA-02395 Au R98 #15 Page 35
equity, to borrow money, to restructure debt, to In the first audit of a client, an auditor was not
sell assets, and/or to reduce or delay able to gather sufficient evidence about the
consistent application of accounting principles
between the current and prior year, as well as the other auditor has an excellent reputation, the
amounts of assets or liabilities at the beginning of principal auditor must see the
the current year. This was due to the client's work to be able to assume responsibility for it.
record retention policies. If the amounts in CPA-02424 Type1 M/C A-D Corr Ans: D PM#12
question could materially affect current operating A 1-03
results, the auditor would: 20. CPA-02424 Au Nov 95 #59 Page 23
a. Be unable to express an opinion on the current Cooper, CPA, believes there is substantial doubt
year's results of operations and cash flows. about the ability of Zero Corp. to continue as a
b. Express a qualified opinion on the financial going concern for a reasonable period of time. In
statements because of a client-imposed scope evaluating Zero's plans for dealing with the
limitation. adverse effects of future conditions and events,
c. Withdraw from the engagement and refuse to Cooper most likely would consider, as a
be associated with the financial statements. mitigating factor, Zero's plans to:
d. Specifically state that the financial statements a. Discuss with lenders the terms of all debt and
are not comparable to the prior year due to an loan agreements.
uncertainty. b. Strengthen internal controls over cash
CPA-02395 Explanation disbursements.
Choice "a" is correct. Since the auditor was c. Purchase production facilities currently being
unable to gather sufficient evidence on the leased from a related party.
beginning d. Postpone expenditures for research and
balances of the balance sheet accounts, the development projects.
auditor would be unable to express an opinion on CPA-02424 Explanation
the current year's results of operations and cash Choice "d" is correct. When assessing
flows. The auditor could express an opinion on management's plans for dealing with the adverse
the statement of effects of future conditions and events, mitigating
financial position. factors would include:
CPA-02398 Type1 M/C A-D Corr Ans: B PM#10 1. The postponement of expenditures (including
A 1-03 R&D),
19. CPA-02398 Au R97 #5 (Adapted) Page 20 2. Plans to dispose of assets,
Pell, CPA, decides to serve as principal auditor in 3. Plans to borrow money or restructure debt,
the audit of the financial statements of Tech 4. Plans to increase ownership equity (sell stock).
Consolidated, Inc. Smith, CPA, audits one of Choice "a" is incorrect. Discussions with lenders
Tech's subsidiaries. In which situation(s) should regarding terms would not be a mitigating factor.
Pell make reference to Smith's audit? Actual agreements regarding restructuring of debt
I. Pell reviews Smith's audit documentation and or amendments to covenants would be required.
assumes responsibility for Smith's work, but CPA-02438 Type1 M/C A-D Corr Ans: C PM#13
expresses a qualified opinion on Tech's financial A 1-03
statements. 21. CPA-02438 Au Nov 95 #62 Page 14
II. Pell is unable to review Smith's audit Which of the following statements is a basic
documentation; however, Pell's inquiries indicate element of the auditor's standard report?
that Smith has a. The disclosures provide reasonable assurance
an excellent reputation for professional that the financial statements are free of material
competence and integrity. misstatement.
a. I only. b. The auditor evaluated the overall internal
b. II only. control.
c. Both I and II. c. An audit includes assessing significant
d. Neither I nor II. estimates made by management.
CPA-02398 Explanation d. The financial statements are consistent with
Choice "b" is correct. The principal auditor makes those of the prior period.
reference in the audit report to the work of the CPA-02438 Explanation
other auditor when the principal auditor is unable Choice "c" is correct. The auditor's standard audit
to review the other auditor's audit documentation. report includes a statement that "An audit
This is because the principal auditor will be includes assessing...significant estimates made
unable to be satisfied concerning the work by management..."
performed by the other auditor. Even though the CPA-02441 Type1 M/C A-D Corr Ans: B PM#14
A 1-03
22. CPA-02441 Au Nov 95 #63 Page 39 or adverse opinion. A material weakness must be
An auditor may not issue a qualified opinion reported to management and those charged with
when: governance, but would not be disclosed in an
a. An accounting principle at variance with GAAP explanatory paragraph appended to an otherwise
is used. unqualified opinion.
b. The auditor lacks independence with respect to CPA-02456 Type1 M/C A-D Corr Ans: A PM#18
the audited entity. A 1-03
c. A scope limitation prevents the auditor from 25. CPA-02456 Au Nov 95 #67 Page 25
completing an important audit procedure. Digit Co. uses the FIFO method of costing for its
d. The auditor's report refers to the work of a international subsidiary's inventory and LIFO for
specialist. its domestic inventory. Under these
CPA-02441 Explanation circumstances, the auditor's report on Digit's
Choice "b" is correct. If the auditor lacks financial statements should express an:
independence with respect to an audit client, the a. Unqualified opinion.
auditor must disclaim an opinion on the financial b. Opinion qualified because of a lack of
statements. A qualified opinion is not an option. consistency.
CPA-02444 Type1 M/C A-D Corr Ans: D PM#15 c. Opinion qualified because of a departure from
A 1-03 GAAP.
23. CPA-02444 Au Nov 95 #64 Page 22 d. Adverse opinion.
An auditor most likely would express an CPA-02456 Explanation
unqualified opinion and would not add Choice "a" is correct. GAAP allows a company to
explanatory language to the report if the auditor: use different methods for costing different
a. Wishes to emphasize that the entity had inventories as long as the methods are disclosed.
significant transactions with related parties. Thus, the audit report would be unqualified; there
b. Concurs with the entity's change in its method is no departure from GAAP. for costing inventory
of computing depreciation. is permissible under GAAP, and
c. Discovers that supplementary information would not result in an adverse report.
required by FASB has been omitted. CPA-02460 Type1 M/C A-D Corr Ans: D PM#19
d. Believes that there is a probable likelihood of a A 1-03
material loss resulting from an uncertainty that is 26. CPA-02460 Au Nov 95 #69 Page 35
sufficiently supported and disclosed. In which of the following circumstances would an
CPA-02444 Explanation auditor not express an unqualified opinion?
Choice "d" is correct. An auditor most likely would a. There has been a material change between
express an unqualified opinion and would not add periods in accounting principles.
explanatory language to the report if the auditor b. Quarterly financial data required by the SEC
believes that there is a probable likelihood of a has been omitted.
material loss resulting from an uncertainty that is c. The auditor wishes to emphasize an unusually
sufficiently supported and disclosed. important subsequent event.
CPA-02448 Type1 M/C A-D Corr Ans: D PM#16 d. The auditor is unable to obtain audited financial
A 1-03 statements of a consolidated investee.
24. CPA-02448 Au Nov 95 #65 Page 19 CPA-02460 Explanation
An auditor would express an unqualified opinion Choice "d" is correct. The inability to obtain
with an explanatory paragraph added to the audited financial statements of a consolidated
auditor's investee represents a scope limitation which may
report for: result in either a qualified opinion or a disclaimer
A material weakness of opinion.
An unjustified in internal
accounting change control CPA-02465 Type1 M/C A-D Corr Ans: A PM#20
a. Yes Yes A 1-03
b. Yes No 27. CPA-02465 Au Nov 95 #70 (Adapted)
c. No Yes Page22
d. No No Management of Edgington Industries plans to
CPA-02448 Explanation disclose an uncertainty as follows:
Choice "d" is correct. An unjustified accounting The Company is a defendant in a lawsuit alleging
change may cause the auditor to issue a qualified infringement of certain patent rights and claiming
damages. Discovery proceedings are in progress. may be included in the going concern disclosure
The ultimate outcome of the litigation cannot but is not specifically required.
presently be determined. Accordingly, no CPA-02479 Type1 M/C A-D Corr Ans: A PM#23
provision for any liability that may result upon A 1-03
adjudication hasbeen made in the accompanying 29. CPA-02479 Au Nov 95 #73 Page 25
financial statements. The auditor is satisfied that Mead, CPA, had substantial doubt about Tech
sufficient audit evidence supports management's Co.'s ability to continue as a going concern when
assertions about the nature and disclosure of the reporting on Tech's audited financial statements
uncertainty. What type of opinion should the for the year ended June 30, 19X4. That doubt has
auditor express under these circumstances? been removed in 19X5. What is Mead's reporting
a. Unqualified without an explanatory paragraph. responsibility if Tech is presenting its financial
b. "Subject to" qualified. statements for the year ended June 30, 19X5, on
c. "Except for" qualified. a comparative basis with those of 19X4?
d. Disclaimer of opinion. a. The explanatory paragraph included in the
CPA-02465 Explanation 19X4 auditor's report should not be repeated.
Choice "a" is correct. The note presented b. The explanatory paragraph included in the
describes an uncertainty that is properly 19X4 auditor's report should be repeated in its
disclosed. An explanatory paragraph is not entirety.
required in the unqualified opinion. c. A different explanatory paragraph describing
CPA-02474 Type1 M/C A-D Corr Ans: D PM#22 Mead's reasons for the removal of doubt should
A 1-03 be included.
28. CPA-02474 Au Nov 95 #72 Page 23 d. A different explanatory paragraph describing
Kane, CPA, concludes that there is substantial Tech's plans for financial recovery should be
doubt about Lima Co.'s ability to continue as a included.
going concern for a reasonable period of time. If CPA-02479 Explanation
Lima's financial statements adequately disclose Choice "a" is correct. If substantial doubt about
its financial difficulties, Kane's auditor's report is the entity's ability to continue as a going concern
required to include an explanatory paragraph that has been removed in the current period, the
specifically uses explanatory paragraph included in the prior period
the phrase(s): auditor's report should not be repeated, and no
"Possible "Reasonable period description of the reasons or plans for recovery
discontinuance of time, not to need be included.
of operations" exceed one year" Choice "b" is incorrect. If doubt about the going
a. Yes Yes concern assumption has been removed in the
b. Yes No current period, it is not appropriate to include the
c. No Yes explanatory paragraph from the prior year in the
d. No No auditor's report
CPA-02474 Explanation for the current year.
Choice "d" is correct. If, after considering CPA-02494 Type1 M/C A-D Corr Ans: A PM#25
identified conditions and events and A 1-03
management's plans, the auditor concludes that 30. CPA-02494 Au Nov 95 #78 Page 13
substantial doubt about the entity's ability to March, CPA, is engaged by Monday Corp., a
continue as a going concern for a reasonable client, to audit the financial statements of Wall
period of time remains, the audit report should Corp., a company that is not March's client.
include an explanatory paragraph (following the Monday expects to present Wall's audited
opinion paragraph) to reflect that conclusion. This financial statements with March's auditor's report
conclusion should be expressed through the use to 1st Federal Bank to obtain financing in
of the phrase "substantial doubt about its (the Monday's attempt to purchase Wall.
entity's) ability to continue as a going concern" [or
similar wording that includes the terms In these circumstances, March's auditor's report
"substantial doubt" and "going concern"]. The would usually be addressed to:
"reasonable period...not to exceed one year" is a. Monday Corp., the client that engaged March.
inherent in the definition of going concern and is b. Wall Corp., the entity audited by March.
not explicitly stated in the audit report. The c. 1st Federal Bank.
phrase "possible discontinuation of operations" d. Both Monday Corp. and 1st Federal Bank.
CPA-02494 Explanation
Choice "a" is correct. The auditors should a. Inspecting title documents to verify whether
address their report to the entity that engaged any assets are pledged as collateral.
them. In this case, Monday Corp. engaged the b. Confirming with third parties the details of
auditor to perform an acquisition audit and the arrangements to maintain financial support.
report should be addressed to Monday. c. Reconciling the cash balance per books with
CPA-02548 Type1 M/C A-D Corr Ans: B PM#28 the cut-off bank statement and the bank
A 1-03 confirmation.
31. CPA-02548 Au Nov 94 #67 (Adapted) Page d. Comparing the entity's depreciation and asset
47 capitalization policies to other entities in the
An auditor issued an audit report that was dual industry.
dated for a subsequent event occurring after the CPA-02559 Explanation
original date of the auditor's report but before Choice "b" is correct. Confirming with third parties
issuance of the related financial statements. The the details of arrangements to provide or
auditor's responsibility for events occurring "maintain
subsequent to the original report date was: (needed) financial support" is an audit procedure
a. Limited to include only events occurring up to that may identify doubts about an entity's ability to
the date of the last subsequent event referenced. continue as a going concern.
b. Limited to the specific event referenced. CPA-02566 Type1 M/C A-D Corr Ans: B PM#31
c. Extended to subsequent events occurring A 1-03
through the later date. 34. CPA-02566 Au May 94 #61 Page 39
d. Extended to include all events occurring since When an independent CPA assists in preparing
the original report date. the financial statements of a publicly held entity,
CPA-02548 Explanation but has not audited or reviewed them, the CPA
Choice "b" is correct. When an auditor issues a should issue a disclaimer of opinion. In such
report that is dual dated for a subsequent event situations, the CPA has no responsibility to apply
occurring after the original date of the auditor's any procedures beyond:
report, but before issuance of the related financial a. Documenting that internal control is not being
statements, the auditor's responsibility for events relied on.
occurring subsequent to the original report date is b. Reading the financial statements for obvious
limited to the specific event referenced. material misstatements.
CPA-02553 Type1 M/C A-D Corr Ans: D PM#29 c. Ascertaining whether the financial statements
A 1-03 are in conformity with GAAP.
32. CPA-02553 Au Nov 94 #76 Page 39 d. Determining whether management has elected
When an independent CPA is associated with the to omit substantially all required disclosures.
financial statements of a publicly held entity but CPA-02566 Explanation
has not audited or reviewed such statements, the Choice "b" is correct. The accountant is only
appropriate form of report to be issued must required to read the financial statements for
include a(an): obvious material misstatements.
a. Regulation S-X exemption. Choice "a" is incorrect. The accountant need not
b. Report on pro forma financial statements. document that internal control is not being relied
c. Unaudited association report. on.
d. Disclaimer of opinion. CPA-02743 Type1 M/C A-D Corr Ans: B PM#32
CPA-02553 Explanation A 1-03
Choice "d" is correct. When an accountant is 35. CPA-02743 Au May 94 #62 Page 24
associated with the financial statements of a When an auditor concludes there is substantial
public entity, but has not audited or reviewed doubt about a continuing audit client's ability to
such statements, the accountant must issue a continue
report disclaiming any opinion on the statements. as a going concern for a reasonable period of
CPA-02559 Type1 M/C A-D Corr Ans: B PM#30 time, the auditor's responsibility is to:
A 1-03 a. Issue a qualified or adverse opinion, depending
33. CPA-02559 Au May 94 #55 Page 22 upon materiality, due to the possible effects on
Which of the following auditing procedures most the financial statements.
likely would assist an auditor in identifying b. Consider the adequacy of disclosure about the
conditions and events that may indicate client's possible inability to continue as a going
substantial doubt about an entity's ability to concern.
continue as a going concern?
c. Report to the client's audit committee that Choice "d" is correct. Emphasis of a matter
management's accounting estimates may need to should be disclosed in an explanatory paragraph
be adjusted. appended to an otherwise unqualified opinion.
d. Reissue the prior year's auditor's report and CPA-02753 Type1 M/C A-D Corr Ans: C PM#35
add an explanatory paragraph that specifically A 1-03
refers to "substantial doubt" and "going concern." 38. CPA-02753 Au May 94 #73 Page 25
CPA-02743 Explanation When there has been a change in accounting
Choice "b" is correct. When an auditor concludes principles, but the effect of the change on the
there is substantial doubt about an entity's ability comparability of the financial statements is not
to continue as a going concern for a reasonable material, the auditor should:
period of time, the auditor's responsibility is to a. Refer to the change in an explanatory
consider the adequacy of disclosure about the paragraph.
entity's possible inability to continue as a going b. Explicitly concur that the change is preferred.
concern and include an explanatory paragraph in c. Not refer to consistency in the auditor's report.
the audit report. d. Refer to the change in the opinion paragraph.
CPA-02746 Type1 M/C A-D Corr Ans: A PM#33 CPA-02753 Explanation
A 1-03 Choice "c" is correct. If an accounting change has
36. CPA-02746 Au May 94 #65 Page 20 no material effect on the comparability of the
Reference in a principal auditor's report to the fact financial statements, the auditor does not need to
that part of the audit was performed by another recognize the change in the current year's audit
auditor most likely would be an indication of the: report.
a. Divided responsibility between the auditors CPA-02758 Type1 M/C A-D Corr Ans: D PM#36
who conducted the audits of the components of A 1-03
the overall financial statements. 39. CPA-02758 Au May 94 #74 Page 16
b. Lack of materiality of the portion of the financial When single-year financial statements are
statements audited by the other auditor. presented, an auditor ordinarily would express an
c. Principal auditor's recognition of the other unqualified opinion in an unmodified report if the:
auditor's competence, reputation, and a. Auditor is unable to obtain audited financial
professional certification. statements supporting the entity's investment in a
d. Different opinions the auditors are expressing foreign affiliate.
on the components of the financial statements b. Entity declines to present a statement of cash
that each audited. flows with its balance sheet and related
CPA-02746 Explanation statements of income and retained earnings.
Choice "a" is correct. Reference to another c. Auditor wishes to emphasize an accounting
auditor indicates division of responsibility for the matter affecting the comparability of the financial
audits of the components of the overall financial statements with those of the prior year.
statements. d. Prior year's financial statements were audited
CPA-02749 Type1 M/C A-D Corr Ans: D PM#34 by another CPA whose report, which expressed
A 1-03 an unqualified opinion, is not presented.
37. CPA-02749 Au May 94 #69 Page 24 CPA-02758 Explanation
An auditor includes a separate paragraph in an Choice "d" is correct. Since only single-year
otherwise unmodified report to emphasize that financial statements are presented, the fact that
the entity being reported on had significant another CPA audited the prior year's financial
transactions with related parties. The inclusion of statements is not relevant. Therefore, the auditor
this separate paragraph: would express an unqualified opinion in an
a. Is considered an "except for" qualification of unmodified report.
the opinion. CPA-02768 Type1 M/C A-D Corr Ans: B PM#38
b. Violates generally accepted auditing standards A 1-03
if this information is already disclosed in footnotes 40. CPA-02768 Au May 94 #76 Page 34
to the financial statements. Park, CPA, was engaged to audit the financial
c. Necessitates a revision of the opinion statements of Tech Co., a new client, for the year
paragraph to include the phrase "with the ended December 31, 20X3. Park obtained
foregoing explanation." sufficient audit evidence for all of Tech's financial
d. Is appropriate and would not negate the statement items except Tech's opening inventory.
unqualified opinion. Due to inadequate financial records, Park could
CPA-02749 Explanation not verify Tech's January 1, 20X3, inventory
balances. Park's opinion on Tech's 20X3 financial d. Information comes to the auditor's attention
statements most likely will that raises substantial doubt about the entity's
be: ability to
continue as a going concern.
a. Disclaimer Disclaimer CPA-02791 Explanation
b. Unqualified Disclaimer Choice "c" is correct. An adverse opinion is
c. Disclaimer Adverse issued when the financial statements are not
d. Unqualified Adverse presented in
CPA-02768 Explanation accordance with GAAP.
Choice "b" is correct. When the auditor is unable CPA-02854 Type1 M/C A-D Corr Ans: D PM#43
to satisfy himself or herself regarding the amount A 1-03
of beginning inventory, he or she must disclaim 43. CPA-02854 Au Nov 93 #46 Page 37
an opinion on the income statement because of When disclaiming an opinion due to a client-
the inability to verify the cost of goods sold during imposed scope limitation, an auditor should
the year. The auditor may, however, still be able indicate in a separate paragraph why the audit
to issue an unqualified opinion on the balance did not comply with generally accepted auditing
sheet, since inventory can be verified as of the standards. The auditor should also omit the:
balance sheet date. Scope Opinion
CPA-02771 Type1 M/C A-D Corr Ans: C PM#39 paragraph paragraph
A 1-03 a. No Yes
41. CPA-02771 Au May 94 #77 Page 14 b. Yes Yes
Which paragraphs of an auditor's standard report c. No No
on financial statements should refer to generally d. Yes No
accepted auditing standards (GAAS) and CPA-02854 Explanation
generally accepted accounting principles Choice "d" is correct. When disclaiming an
(GAAP)? opinion because of scope limitations, the auditor
should indicate in a separate paragraph(s) the
GAAS GAAP reasons that the audit did not comply with GAAS.
a. Opening Scope The auditor should also omit the scope
b. Scope Scope paragraph. The opinion paragraph is not omitted;
c. Scope Opinion however it indicates that no opinion is expressed.
d. Opening Opinion CPA-02855 Type1 M/C A-D Corr Ans: C PM#44
CPA-02771 Explanation A 1-03
Choice "c" is correct. The auditor states that the 44. CPA-02855 Au Nov 93 #49 Page 36
audit was conducted in accordance with GAAS in An auditor decides to issue a qualified opinion on
The scope paragraph. The auditor expresses an an entity's financial statements because a major
opinion on the financial statements' conformity inadequacy in its computerized accounting
with GAAP in the opinion paragraph. records prevents the auditor from applying
. necessary procedures. The opinion paragraph of
CPA-02791 Type1 M/C A-D Corr Ans: C PM#41 the auditor's report should state that the
A 1-03 qualification pertains to:
42. CPA-02791 Au May 94 #87 Page 31 a. A client-imposed scope limitation.
In which of the following circumstances would an b. A departure from generally accepted auditing
auditor be most likely to express an adverse standards.
opinion? c. The possible effects on the financial
a. The chief executive officer refuses the statements.
auditor d. Inadequate disclosure of necessary
b. access to minutes of board of directors' information.
meetings. CPA-02855 Explanation
b. Tests of controls show that the entity's internal Choice "c" is correct. When an auditor qualifies
control is so poor that it cannot be relied upon. his opinion because of a scope limitation, the
c. The financial statements are not in conformity wording in the opinion paragraph should indicate
with the FASB Statements regarding the that the qualification pertains to the possible
capitalization of leases. effects on the financial statements and not to the
scope limitation itself.
CPA-02858 Type1 M/C A-D Corr Ans: D PM#45 c. Review report.
A 1-03 d. Unqualified opinion with a separate
45. CPA-02858 Au Nov 93 #51 Page 28 explanatory paragraph.
When an auditor qualifies an opinion because of CPA-02860 Explanation
inadequate disclosure, the auditor should Choice "b" is correct. If a company issues
describe the nature of the omission in a separate financial statements that purport to present
explanatory paragraph and modify the: financial position and results of operations but
Introductory Scope omits the related statement of cash flows, the
paragraph paragraph auditor will normally conclude that the omission
a. Yes Yes requires qualification of the opinion.
b. Yes No CPA-02864 Type1 M/C A-D Corr Ans: B PM#48
c. No Yes A 1-03
d. No No 48. CPA-02864 Au May 93 #47 Page 19
CPA-02858 Explanation In which of the following circumstances would an
Choice "d" is correct. In a report qualified for auditor most likely add an explanatory paragraph
inadequate disclosure, the auditor would add an to the standard report while not affecting the
explanatory paragraph and modify the opinion auditor's unqualified opinion?
paragraph, but the introductory and scope a. The auditor is asked to report on the balance
paragraphs would not be modified. sheet, but not on the other basic financial
. statements.
CPA-02859 Type1 M/C A-D Corr Ans: C PM#46 b. There is substantial doubt about the entity's
A 1-03 ability to continue as a going concern.
46. CPA-02859 Au Nov 93 #55 Page 25 c. Management's estimates of the effects of future
An entity changed from the straight-line method events are unreasonable.
to the declining balance method of depreciation d. Certain transactions cannot be tested because
for all newly acquired assets. This change has no of management's records retention policy.
material effect on the current year's financial CPA-02864 Explanation
statements, but is reasonably certain to have a Choice "b" is correct. If, after considering
substantial effect in later years. If the change is identified conditions and events and
disclosed in the notes to the financial statements, management's plans, the
the auditor should issue a report with a(an): auditor concludes that substantial doubt about the
a. "Except for" qualified opinion. entity's ability to continue as a going concern for a
b. Explanatory paragraph. reasonable period of time remains, the audit
c. Unqualified opinion. report should include an explanatory paragraph to
d. Consistency modification. reflect that conclusion.
CPA-02859 Explanation CPA-02869 Type1 M/C A-D Corr Ans: D PM#49
Choice "c" is correct. If an accounting change has A 1-03
no material effect on the financial statements in 49. CPA-02869 Au May 93 #49 Page 25
the current year, but a material future effect, the When an entity changes its method of accounting
auditor must ensure that the change is disclosed for income taxes, which has a material effect on
in the footnotes whenever the financial comparability, the auditor should refer to the
statements of the change period are presented, change in an explanatory paragraph added to the
but does not have to recognize the change in the auditor's report. This paragraph should identify
current year's audit report. the nature of the change and:
a. Explain why the change is justified under
generally accepted accounting principles.
CPA-02860 Type1 M/C A-D Corr Ans: B PM#47 b. Describe the cumulative effect of the change
A 1-03 on the audited financial statements.
47. CPA-02860 Au May 93 #46 Page 28 c. State the auditor's explicit concurrence with or
If a publicly held company issues financial opposition to the change.
statements that purport to present its financial d. Refer to the financial statement note that
position and results of operations but omits the discusses the change in detail.
statement of cash flows, the auditor ordinarily will
express a(an): CPA-02869 Explanation
a. Disclaimer of opinion. Choice "d" is correct. The paragraph should refer
b. Qualified opinion. to the note in the financial statements that
Discusses the change in detail. Following is an c. Purchase equipment and production facilities
example of an appropriate explanatory currently being leased.
paragraph: "As discussed in Note X to the d. Negotiate reductions in required dividends
financial statements, the company changed its being paid on preferred stock.
method of accounting for income taxes in CPA-02878 Explanation
X2." Choice "d" is correct. Negotiating reductions in
CPA-02874 Type1 M/C A-D Corr Ans: A PM#50 required dividends would conserve cash, which
A 1-03 would be a mitigating factor in Davis' concerns
50. CPA-02874 Au May 93 #50 Page 35 about Hill's ability to continue as a going concern.
Green, CPA, was engaged to audit the financial Choice "a" is incorrect. Accelerating R&D projects
statements of Essex Co. after its fiscal year had would use cash and impair the company's ability
ended. The timing of Green's appointment as to continue as a going concern.
auditor and the start of fieldwork made CPA-02884 Type1 M/C A-D Corr Ans: D PM#52
confirmation of accounts receivable by direct A 1-03
communication with the debtors ineffective. 52. CPA-02884 Au May 93 #55 Page 21
However, Green applied other procedures and In the auditor's report, the principal auditor
was satisfied as to the reasonableness of the decides not to make reference to another CPA
account balances. Green's auditor's report who audited a client's subsidiary. The principal
most likely contained a(an): auditor could justify this decision if, among other
a. Unqualified opinion. requirements, the principal auditor:
b. Unqualified opinion with an explanatory a. Issues an unqualified opinion on the
paragraph. b. consolidated financial statements.
c. Qualified opinion due to a scope limitation.
d. Qualified opinion due to a departure from c. Learns that the other CPA issued an
generally accepted auditing standards. unqualified opinion on the subsidiary's
CPA-02874 Explanation financial
Choice "a" is correct. There is a presumption that d. statements.
the auditor will request the confirmation of c. Is unable to review the audit programs and
accounts receivable during an audit unless audit documentation of the other CPA.
accounts receivable are immaterial, the use of d. Is satisfied as to the independence and
confirmations would be ineffective, or the professional reputation of the other CPA.
assessed inherent risk is so low that the evidence CPA-02884 Explanation
expected to be provided by analytical Choice "d" is correct. If, among other
procedures or other substantive tests of details requirements, the principal auditor is satisfied as
would be sufficient. In this example, the to the independence and the professional
confirmation of accounts receivable by direct reputation of the other auditor, the principal
communication with the debtors would be auditor may express an opinion on the financial
ineffective. If Green was able to apply alternative statements taken as a whole without making
audit procedures and was satisfied as to the reference to the audit of the
reasonableness of the account balances, then an Other auditor.
unqualified opinion could be issued.
CPA-02878 Type1 M/C A-D Corr Ans: D PM#51
A 1-03
51. CPA-02878 Au May 93 #53 Page 24
Davis, CPA, believes there is substantial doubt
about the ability of Hill Co. to continue as a going
concern for a reasonable period of time. In CPA-02886 Type1 M/C A-D Corr Ans: A PM#53
evaluating Hill's plans for dealing with the adverse A 1-03
effects of future conditions and events, Davis 53. CPA-02886 Au May 93 #56 (Adapted) Page
most likely would consider, as a mitigating factor, 35
Hill's plans to: A limitation on the scope of an audit sufficient to
a. Accelerate research and development projects preclude an unqualified opinion will usually result
related to future products. when management:
b. Accumulate treasury stock at prices favorable a. Is unable to obtain audited financial statements
to Hill's historic price range. supporting the entity's investment in a foreign
subsidiary.
b. Refuses to disclose in the notes to the financial When an auditor expresses an adverse opinion,
statements related party transactions authorized the opinion paragraph should include:
by the Board of Directors. a. The principal effects of the departure from
c. Does not provide the auditor with an generally accepted accounting principles.
engagement letter specifying the responsibilities b. A direct reference to a separate paragraph
of both the entity and the auditor. disclosing the basis for the opinion.
d. Fails to correct a significant deficiency in c. The substantive reasons for the financial
internal control communicated to those charged statements being misleading.
with governance after the prior year's audit. d. A description of the uncertainty or scope
CPA-02886 Explanation limitation that prevents an unqualified opinion.
Choice "a" is correct. Restrictions on the scope of CPA-02912 Explanation
the audit, such as the timing of the work, the Choice "b" is correct. The opinion paragraph in an
inability to obtain sufficient appropriate audit adverse opinion reads, "in our opinion, because
evidence, or an inadequacy in the accounting of the effects of the matters discussed in the
records, may require the auditor to qualify or preceding paragraphs, the financial
disclaim an opinion. Inability to obtain audited statements...."
financial statements supporting the CPA-02914 Type1 M/C A-D Corr Ans: A PM#56
entity's investment in a foreign subsidiary is such A 1-03
a restriction on the scope of the audit. 56. CPA-02914 Au Nov 92 #48 Page 34
CPA-02900 Type1 M/C A-D Corr Ans: B PM#54 Under which of the following circumstances would
A 1-03 a disclaimer of opinion not be appropriate?
54. CPA-02900 Au May 93 #58 Page 27 a. The financial statements fail to contain
In which of the following situations would an adequate disclosure of related party transactions.
auditor ordinarily choose between expressing an b. The client refuses to permit its attorney to
"except for" qualified opinion or an adverse furnish information requested in a letter of audit
opinion? inquiry.
a. The auditor did not observe the entity's c. The auditor is engaged after fiscal year-end
physical inventory and is unable to become and is unable to observe physical inventories or
satisfied as to its apply alternative procedures to verify their
balance by other auditing procedures. balances.
b. The financial statements fail to disclose d. The auditor is unable to determine the amounts
information that is required by generally accepted associated with illegal acts committed by the
accounting client's management.
principles. CPA-02914 Explanation
c. The auditor is asked to report only on the Choice "a" is correct. The failure of the financial
entity's balance sheet and not on the other basic statements to contain adequate disclosure of
financial related party transactions, or other required
statements. disclosures, would result in a qualified or adverse
d. Events disclosed in the financial statements opinion, not a disclaimer of opinion.
cause the auditor to have substantial doubt about CPA-02915 Type1 M/C A-D Corr Ans: A PM#57
the entity's ability to continue as a going concern. A 1-03
CPA-02900 Explanation 57. CPA-02915 Au Nov 92 #49 Page 23
Choice "b" is correct. Failure to disclose Green, CPA, concludes that there is substantial
information that is required by GAAP is a doubt about JKL Co.'s ability to continue as a
departure from GAAP. going
Departures from GAAP result in a qualified or an concern. If JKL's financial statements adequately
adverse opinion. disclose its financial difficulties, Green's auditor's
Choice "a" is incorrect. If the auditor is unable to report
observe physical inventory and is unable to should:
become satisfied through alternative means, that Include an
is a scope limitation. Scope limitations result in explanatory Specifically
either a qualified opinion or a disclaimer of paragraph Specifically use the
opinion. following the use the words
CPA-02912 Type1 M/C A-D Corr Ans: B PM#55 opinion words "going "substantial
A 1-03 paragraph concern" doubt"
55. CPA-02912 Au Nov 92 #47 Page 31 a. Yes Yes Yes
b. Yes Yes No Choice "c" is incorrect. If the change in
c. Yes No Yes accounting principle is not accounted for properly,
d. No Yes Yes then a qualified opinion would be appropriate and
CPA-02915 Explanation the explanatory paragraph would appear before
Choice "a" is correct. "Yes - Yes - Yes." the opinion paragraph.
When a CPA concludes that there is substantial CPA-02923 Type1 M/C A-D Corr Ans: D PM#60
doubt about an entity's ability to continue as a A 1-03
going concern and the entity adequately 60. CPA-02923 Au Nov 91 #21 Page 14
discloses its financial difficulties, an unqualified How does an auditor make the following
opinion is appropriate. An explanatory paragraph representations when issuing the standard
(following the opinion paragraph) should be used auditor's report on
to highlight the situation. comparative financial statements?
This paragraph should include the phrases Examination of Consistent
"substantial doubt" and "going concern." evidence on a application of
. test basis accounting principles
CPA-02916 Type1 M/C A-D Corr Ans: C PM#58 a. Explicitly Explicitly
A 1-03 b. Implicitly Implicitly
58. CPA-02916 Au Nov 91 #16 Page 26 c. Implicitly Explicitly
An auditor may reasonably issue an "except for" d. Explicitly Implicitly
qualified opinion for a(an): CPA-02923 Explanation
Scope Unjustified Choice "d" is correct. Explicitly - Implicitly.
limitation accounting change The auditor explicitly states in the scope
a. Yes No paragraph of his opinion: "an audit includes
b. No Yes examining, on a test basis, evidence
c. Yes Yes supporting..." Consistency is implied in the
d. No No auditor's standard report.
CPA-02916 Explanation CPA-02926 Type1 M/C A-D Corr Ans: D PM#61
Choice "c" is correct. Yes - Yes. A 1-03
An "except for" qualified opinion is expressed 61. CPA-02926 Au Nov 91 #22 (Adapted) Page
when the "exceptions to GAAP" are not material 32
enough to warrant an adverse opinion, or when An auditor was unable to obtain sufficient
scope restrictions are not material enough to appropriate audit evidence concerning certain
warrant a disclaimer. transactions due to an inadequacy in the entity's
CPA-02919 Type1 M/C A-D Corr Ans: B PM#59 accounting records. The auditor would choose
A 1-03 between issuing a(an):
59. CPA-02919 Au Nov 91 #18 Page 25 a. Qualified opinion and an unqualified opinion
The following explanatory paragraph was with an explanatory paragraph.
included in an auditor's report to indicate a lack of b. Unqualified opinion with an explanatory
consistency: paragraph and an adverse opinion.
"As discussed in note T to the financial c. Adverse opinion and a disclaimer of opinion.
statements, the company changed its method of d. Disclaimer of opinion and a qualified opinion.
computing depreciation in X0."
How should the auditor report on this matter if the
auditor concurred with the change?
Type of Location of
opinion explanatory paragraph CPA-02926 Explanation
a. Unqualified Before opinion paragraph Choice "d" is correct. Client-imposed restrictions
b. Unqualified After opinion paragraph of scope such as those caused by inadequate
c. Qualified Before opinion paragraph records would cause the auditor to choose
d. Qualified After opinion paragraph between issuing a disclaimer of opinion and a
CPA-02919 Explanation qualified opinion.
Choice "b" is correct. If the auditor concurred with CPA-02929 Type1 M/C A-D Corr Ans: A PM#62
the change, a lack of consistency in applying A 1-03
GAAP would result in an unqualified opinion with 62. CPA-02929 Au Nov 91 #30 Page 21
an explanatory paragraph following the opinion
paragraph.
In which of the following situations would a auditor would modify his/her report (all three
principal auditor least likely make reference to paragraphs), but
another auditor would not add an explanatory paragraph.
who audited a subsidiary of the entity? CPA-02947 Type1 M/C A-D Corr Ans: A PM#64
a. The other auditor was retained by the principal A 1-03
auditor and the work was performed under the 64. CPA-02947 Au Nov 90 #8 Page 25
principal auditor's guidance and control. When there has been a change in accounting
b. The principal auditor finds it impracticable to principle that materially affects the comparability
review the other auditor's work or otherwise be of the comparative financial statements presented
satisfied and the auditor concurs with the change, the
as to the other auditor's work. auditor should:
c. The financial statements audited by the other Issue an Refer to the
auditor are material to the consolidated financial Concur "except for" change in an
statements covered by the principal auditor's explicitly with qualified explanatory
opinion. the change opinion paragraph
d. The principal auditor is unable to be satisfied a. No No Yes
as to the independence and professional b. Yes No Yes
reputation of c. Yes Yes No
the other auditor. d. No Yes No
CPA-02929 Explanation CPA-02947 Explanation
Choice "a" is correct. When the principal auditor Choice "a" is correct. No - No - Yes.
assumes responsibility for the other auditor's When a change in accounting principle materially
work, the principal auditor would not mention the affects the comparability of the comparative FS,
other auditor in his audit report (opinion). The the auditor should refer to the change in an
principal auditor would generally assume explanatory paragraph following the unqualified
responsibility after reviewing the audit opinion paragraph.
documentation of the other auditor and CPA-02948 Type1 M/C A-D Corr Ans: D PM#65
performing supplemental audit tests, or by A 1-03
reputation, e.g., if the other auditor is a 65. CPA-02948 Au May 90 #22 Page 35
correspondent (foreign) firm in which the principal When a qualified opinion results from a limitation
auditor has developed confidence. on the scope of the audit, the situation should be
CPA-02946 Type1 M/C A-D Corr Ans: B PM#63 described in an explanatory paragraph:
A 1-03 a. Preceding the opinion paragraph and referred
63. CPA-02946 Au Nov 90 #6 Page 21 to only in the scope paragraph of the auditor's
In which of the following situations would an report.
auditor ordinarily issue an unqualified audit b. Following the opinion paragraph and referred
opinion without an explanatory paragraph? to in both the scope and opinion paragraphs of
a. The auditor wishes to emphasize that the entity the auditor's report.
had significant related party transactions. c. Following the opinion paragraph and referred
b. The auditor decides to make reference to the to only in the scope paragraph of the auditor's
report of another auditor as a basis, in part, for report.
the auditor's opinion. d. Preceding the opinion paragraph and referred
c. The entity issues financial statements that to in both the scope and opinion paragraphs of
present financial position and results of the auditor's report.
operations, but omits the statement of cash flows.
d. The auditor has substantial doubt about the
entity's ability to continue as a going concern, but
the circumstances are fully disclosed in the
financial statements. CPA-02948 Explanation
CPA-02946 Explanation Choice "d" is correct. When a qualified opinion
Choice "b" is correct. An auditor would generally results from a limitation of scope, it should be
issue an unqualified audit opinion without an described in an explanatory paragraph preceding
explanatory paragraph when the auditor decides the opinion paragraph and referred to in both the
to make reference to the report of another auditor scope and opinion paragraphs of the auditor's
as a basis, in part, for the auditor's opinion. The report.
CPA-02950 Type1 M/C A-D Corr Ans: B PM#66 c. Following the opinion paragraph.
A 1-03 d. Within the notes to the financial statements.
66. CPA-02950 Au Nov 89 #4 Page 35 CPA-03002 Explanation
Restrictions imposed by a client prohibit the Choice "b" is correct. The auditor should disclose
observation of physical inventories, which the substantive reasons for expressing an
account for 35% of adverse opinion in a separate explanatory
all assets. Alternative audit procedures cannot be paragraph preceding the opinion paragraph.
applied, although the auditor was able to examine CPA-03029 Type1 M/C A-D Corr Ans: B PM#69
satisfactory evidence for all other items in the A 1-03
financial statements. The auditor should issue 69. CPA-03029 Au Nov 89 #14 Page 26
a(an): When management does not provide reasonable
a. "Except for" qualified opinion. justification that a change in accounting principle
b. Disclaimer of opinion. is preferable and it presents comparative financial
c. Unqualified opinion with a separate explanatory statements, the auditor should express a qualified
paragraph. opinion:
d. Unqualified opinion with an explanation in the a. Only in the year of the accounting principle
scope paragraph. change.
CPA-02950 Explanation b. Each year that the financial statements initially
Choice "b" is correct. Restrictions of scope reflecting the change are presented.
imposed on the audit of such a large (35%) asset c. Each year until management changes back to
would require a disclaimer of opinion. the accounting principle formerly used.
CPA-02992 Type1 M/C A-D Corr Ans: D PM#67 d. Only if the change is to an accounting principle
A 1-03 that is not generally accepted.
67. CPA-02992 Au Nov 89 #9 Page 24 CPA-03029 Explanation
An auditor concludes that there is substantial Choice "b" is correct. When management does
doubt about an entity's ability to continue as a not provide reasonable justification that a change
going concern for a reasonable period of time. If in accounting principle is preferable and it
the entity's disclosures concerning this matter are presents comparative FS, the auditor should
adequate, the audit report may include a(an): express a qualified opinion each year that the FS
Disclaimer "Except for" initially reflecting the change are presented.
of opinion qualified opinion CPA-03035 Type1 M/C A-D Corr Ans: B PM#70
a. Yes Yes A 1-03
b. No No 70. CPA-03035 Au Nov 89 #16 Page 39
c. No Yes When an independent CPA is associated with the
d. Yes No financial statements of a publicly held entity but
CPA-02992 Explanation has not audited or reviewed such statements, the
Choice "d" is correct. Yes - No. appropriate form of report to be issued must
If an auditor concludes that there is substantial include a(an):
doubt about an entity's ability to continue as a a. Compilation report.
going concern and that the entity's disclosures b. Disclaimer of opinion.
are adequate, then the audit report may be either: c. Unaudited association report.
- Unqualified with explanatory paragraph, or d. Qualified opinion.
- Disclaimed. CPA-03035 Explanation
(Generally, an unqualified opinion is issued, but Choice "b" is correct. A "disclaimer of opinion"
the auditor is not prohibited from choosing to must be issued when a CPA is "associated" with
issue a disclaimer.) FS of a publicly held entity, but has not audited or
(interim) reviewed such FS.
CPA-04616 Type1 M/C A-D Corr Ans: A PM#71
CPA-03002 Type1 M/C A-D Corr Ans: B PM#68 A 1-03
A 1-03 71. CPA-04616 Au R04 #19 Page 35
68. CPA-03002 Au Nov 89 #13 Page 32 Restrictions imposed by a retail entity that is a
An auditor should disclose the substantive new client prevent an auditor from observing any
reasons for expressing an adverse opinion in an physical inventories. These inventories account
explanatory paragraph: for 40% of the entity's assets. Alternative auditing
a. Preceding the scope paragraph. procedures cannot be applied due to the nature
b. Preceding the opinion paragraph.
of the entity's records. Under these Choice "d" is correct. If a liability is significant
circumstances, the auditor enough, it may give rise to a situation in which
should express a(an): there is substantial doubt about an entity's ability
a. Disclaimer of opinion. to continue as a going concern. Inquiring of an
b. Qualified opinion. entity's legal counsel about litigation, claims, and
c. Adverse opinion. assessments is one way to determine whether
d. Unqualified opinion with an explanatory such a liability exists.
paragraph.
CPA-04616 Explanation CPA-05349 Type1 M/C A-D Corr Ans: D PM#74
Choice "a" is correct. Since the auditor is unable A 1-03
to observe inventory or apply alternative audit 74. CPA-05349 Released 2006 Page 14
procedures, a scope limitation exists. Due to the A CPA's standard report on audited financial
significance of the inventory balance (40% of total statements would be inappropriate if it referred to:
assets is quite material), a disclaimer of opinion a. Management's responsibility for the financial
(rather than simply a qualification) is appropriate. statements.
CPA-04707 Type1 M/C A-D Corr Ans: A PM#72 b. An assessment of the entity's accounting
A 1-03 principles.
72. CPA-04707 Released 2005 Page 22 c. Significant estimates made by management.
Which of the following audit procedures most d. The CPA's assessment of sampling risk
likely would assist an auditor in identifying factors.
conditions and events that may indicate CPA-05349 Explanation
substantial doubt about an entity's ability to Choice "d" is correct. The CPA's standard report
continue as a going concern? on audited financial statements does not include
a. Reading the minutes of meetings of the matters related to the auditor's assessment of
stockholders and the board of directors. specific risk factors.
b. Comparing the market value of property to CPA-05358 Type1 M/C A-D Corr Ans: B PM#75
amounts owed on the property. A 1-03
c. Reviewing lease agreements to determine 75. CPA-05358 Released 2006 Page 24
whether leased assets should be capitalized. When an auditor has substantial doubt about an
d. Inspecting title documents to verify whether entity's ability to continue as a going concern
any assets are pledged as collateral. because of the probable discontinuance of
CPA-04707 Explanation operations, the auditor most likely would express
Choice "a" is correct. The auditor should examine a qualified opinion if:
any evidence that appears contrary to the basic a. The effects of the adverse financial conditions
principle of going concern. Reviewing the minutes likely will cause a bankruptcy filing.
from stockholder and board of director meetings b. Information about the entity's ability to continue
is one procedure that is used in this regard. as a going concern is not disclosed.
CPA-05337 Type1 M/C A-D Corr Ans: D PM#73 c. Management has no plans to reduce or delay
A 1-03 future expenditures.
73. CPA-05337 Released 2006 Page 22 d. Negative trends and recurring operating losses
Which of the following procedures most likely appear to be irreversible.
would assist an auditor in identifying conditions CPA-05358 Explanation
and events that may indicate substantial doubt Choice "b" is correct. In a situation where it is
about an entity's ability to continue as a going likely that an entity's operations will be
concern? discontinued, disclosure of information about the
a. Performing cutoff tests of sales transactions entity's ability to continue as a going concern is
with customers with long-standing receivable required by GAAP.
balances. Failure to make such disclosure would be a
b. Evaluating the entity's procedures for departure from GAAP, resulting in either a
identifying and recording related party qualified or adverse opinion. report.
transactions. CPA-05364 Type1 M/C A-D Corr Ans: C PM#76
c. Inspecting title documents to verify whether A 1-03
any real property is pledged as collateral. 76. CPA-05364 Released 2006 Page 23
d. Inquiring of the entity's legal counsel about An auditor believes that there is substantial doubt
litigation, claims, and assessments. about an entity's ability to continue as a going
CPA-05337 Explanation concern for a reasonable period of time. In
evaluating the entity's plans for dealing with the b. The financial statements are prepared on the
adverse effects of future conditions and events, entity's income tax basis.
the auditor most likely would consider, as a c. There are significant deficiencies in the design
mitigating factor, the entity's plans to: and operation of the entity's internal control.
a. Repurchase the entity's stock at a price below d. Analytical procedures indicate that many year-
its book value. end account balances are not comparable with
b. Issue stock options to key executives. the prior year's balances.
c. Lease rather than purchase operating facilities. CPA-05482 Explanation
d. Accelerate the due date of an existing Choice "a" is correct. If the auditor is unable to
mortgage. obtain the audited financial statements of a
CPA-05364 Explanation significant subsidiary, a scope limitation exists.
Choice "c" is correct. Leasing rather than Assuming the effect is material, the auditor would
purchasing operating facilities results in reduced issue either a qualified opinion or a disclaimer of
(or at least delayed) expenditures, which is a opinion.
mitigating factor in a going concern situation. Reports on Comparative Financial Statements
Choice "a" is incorrect. Mitigating factors in a CPA-03043 Type1 M/C A-D Corr Ans: D PM#2
going concern situation include plans to dispose A 1-04
of assets, plans to borrow money or restructure 79. CPA-03043 Au Nov 95 #76 Page 45
debt, plans to reduce or delay expenditures, or Jewel, CPA, audited Infinite Co.'s prior-year
plans to increase ownership equity. Repurchasing financial statements. These statements are
stock is an outflow of cash that would reduce presented with those of the current year for
ownership equity; as such, it is not a mitigating comparative purposes without Jewel's auditor's
factor. report, which expressed a qualified opinion. In
CPA-05379 Type1 M/C A-D Corr Ans: C PM#77 drafting the current year's auditor's report, Crain,
A 1-03 CPA, the successor auditor, should:
77. CPA-05379 Page 13 I. Not name Jewel as the predecessor auditor.
Which of the following is true regarding the II. Indicate the type of report issued by Jewel.
standard audit report for an issuer? III. Indicate the substantive reasons for Jewel's
a. Reference should be made in the scope qualification.
paragraph to both PCAOB standards and a. I only.
generally accepted auditing standards. b. I and II only.
b. PCAOB standards should not be mentioned at c. II and III only.
all, although their use is implied in the standard d. I, II, and III.
auditor's report. CPA-03043 Explanation
c. Reference should be made in the scope Choice "d" is correct. If the financial statements of
paragraph to PCAOB standards, and in the a prior period have been audited by a
opinion paragraph to generally accepted predecessor auditor whose report is not
accounting principles. presented, the successor auditor should indicate
d. Reference may be made in the scope in the introductory paragraph of the report 1) that
paragraph to either PCAOB standards or the financial statements of the prior period were
generally accepted auditing standards. audited by another auditor, 2) the
CPA-05379 Explanation date of his report, 3) the type of report issued by
Choice "c" is correct. An auditor reporting on the the predecessor auditor, and 4) if the report was
audit of financial statements of an issuer should other
indicate in the scope paragraph that the than a standard unqualified report, the
engagement was conducted in accordance with substantive reasons therefor. The successor
PCAOB standards, and should refer to GAAP in auditor may name the predecessor auditor only if
the opinion paragraph. the predecessor auditor's practice was acquired
CPA-05482 Type1 M/C A-D Corr Ans: A PM#78 by or merged with that of the successor auditor.
A 1-03 CPA-03069 Type1 M/C A-D Corr Ans: A PM#3
78. CPA-05482 Released 2007 Page 35 A 1-04
Under which of the following circumstances would 80. CPA-03069 Au Nov 95 #86 Page 45
an auditor's expression of an unqualified opinion A registration statement filed with the SEC
be inappropriate? contains the reports of two independent auditors
a. The auditor is unable to obtain the audited on their audits of financial statements for different
financial statements of a significant subsidiary. periods. The predecessor auditor who audited the
prior-period financial statements generally should financial statements. The representation letter
obtain Letter of representation from the: from the former client's management will indicate
a. Successor independent auditor. whether its previous representations are still
b. Client's audit committee. accurate and whether there have
c. Principal underwriter. been any subsequent events affecting the
d. Securities and Exchange Commission. previous financial statements.
CPA-03069 Explanation CPA-03092 Type1 M/C A-D Corr Ans: C PM#5
Choice "a" is correct. Before reissuing the prior A 1-04
year's audit report on the financial statements of a 82. CPA-03092 Au May 94 #66 Page 45
former client, the auditor should 1) read the In May X4, an auditor reissues the auditor's report
financial statements of the current period, 2) on the X2 financial statements at a continuing
compare the prior period information that the client's request. The X2 financial statements are
auditor reported on with the financial statements not restated and the auditor does not revise the
to be presented for comparative purposes, and 3) wording of the report. The auditor should:
obtain letters of representation from management a. Dual date the reissued report.
of the former client and from the successor b. Use the release date of the reissued report.
auditor. The representation letter from c. Use the original report date on the reissued
management should indicate whether any of report.
management's previous representations should d. Use the current-period auditor's report date on
be modified and whether there have been any the reissued report.
subsequent events that would affect the previous CPA-03092 Explanation
financial statements. The representation letter Choice "c" is correct. If the auditor reissues the
from the successor auditor should state whether audit report at the client's request, the auditor
the successor auditor's audit disclosed any issues should use the original report date on the
of a material nature that might affect the previous reissued report. Use of a subsequent date implies
financial statements. that the auditor has done additional work.
CPA-03075 Type1 M/C A-D Corr Ans: D PM#4 .
A 1-04 CPA-03095 Type1 M/C A-D Corr Ans: D PM#6
81. CPA-03075 Au Nov 94 #77 (Adapted) Page A 1-04
45 83. CPA-03095 Au May 94 #90 Page 43
Before reissuing the prior year's auditor's report An auditor expressed a qualified opinion on the
on the financial statements of a former client, the prior year's financial statements because of a lack
predecessor auditor should obtain letters of Of adequate disclosure. These financial
representation from the: statements are properly restated in the current
a. Former client's management and the board of year and presented in comparative form with the
directors. current year's financial statements. The auditor's
b. Former client's attorney and management. updated report on the prior year's financial
c. Former client's board of directors and the statements should:
successor auditor. a. Be accompanied by the auditor's original report
d. Successor auditor and the former client's on the prior year's financial statements.
management. b. Continue to express a qualified opinion on the
CPA-03075 Explanation prior year's financial statements.
Choice "d" is correct. Before reissuing the prior c. Make no reference to the type of opinion
year's auditor's report on the financial statements expressed on the prior year's financial
of a former client, the auditor should 1) read the statements.
financial statements of the current period, 2) d. Express an unqualified opinion on the restated
compare the prior-period information that the financial statements of the prior year.
auditor reported on with the financial statements CPA-03095 Explanation
to be presented for comparative purposes, 3) Choice "d" is correct. If an auditor has previously
obtain a letter of representation from the qualified his or her opinion on financial
successor auditor, and 4) obtain a letter of statements of a prior period, and the prior period
representation from the former client's statements are restated to conform with GAAP,
management. The representation letter from the the auditor should express an unqualified opinion
successor auditor will state whether the on the restated financial statements. In addition,
successor's audit revealed any issues of a the auditor would state the substantive reasons
material nature that might affect the previous
for the change in opinion in an explanatory on the prior-period financial statements should
paragraph preceding the opinion express an unqualified opinion concerning the
paragraph. restated financial statements.
CPA-03097 Type1 M/C A-D Corr Ans: A PM#7 Events Occurring After Year-end
A 1-04 CPA-03104 Type1 M/C A-D Corr Ans: A PM#1
84. CPA-03097 Au Nov 93 #48 Page 45 A 1-05
Comparative financial statements include the 86. CPA-03104 Au C03 #1 Page 47
financial statements of the prior year that were Which of the following statements is not true
audited by a predecessor auditor whose report is regarding the auditor's responsibility for
not presented. If the predecessor's report was subsequent events?
qualified, the successor should: a. The auditor has an active responsibility to
a. Indicate the substantive reasons for the make continuing inquiries between the date of the
qualification in the predecessor auditor's opinion. auditor's report and the date on which the report
b. Request the client to reissue the predecessor's is submitted.
report on the prior year's statements. b. The auditor has an active responsibility to
c. Issue an updated comparative audit report make continuing inquiries between the date of the
indicating the division of responsibility. financial statements and the date of the auditor's
d. Express an opinion only on the current year's report.
statements and make no reference to the prior c. The auditor has an active responsibility to
year's statements. make continuing inquiries between the date of the
CPA-03097 Explanation financial statements and the date on which
Choice "a" is correct. If the financial statements of sufficient appropriate audit evidence has been
a prior period have been audited by a obtained.
predecessor auditor whose report is not d. The auditor has no active responsibility to
presented, the successor auditor should indicate make continuing inquiries after the date of the
in the introductory paragraph of the audit report auditor's report.
(1) that the financial statements of the prior period CPA-03104 Explanation
were audited by another auditor, (2) the type of Choice "a" is correct. The auditor has no active
report issued, and (3) if the report was other than responsibility to make continuing inquiries
standard, the substantive reasons therefor. between the date of the auditor's report and the
CPA-03101 Type1 M/C A-D Corr Ans: A PM#8 date on which the report is submitted. The
A 1-04 auditor's active responsibility stops on the date of
85. CPA-03101 Au May 90 #17 Page 43 the auditor's report.
An auditor has previously expressed a qualified Choice "d" is incorrect. The auditor has no active
opinion on the financial statements of a prior responsibility to make continuing inquiries after
period because of a departure from generally the date of the auditor's report.
accepted accounting principles. The prior-period CPA-03110 Type1 M/C A-D Corr Ans: D PM#3
financial statements are restated in the current A 1-05
period to conform with generally accepted 87. CPA-03110 Au Nov 95 #56 Page 47
accounting principles. The auditor's updated Which of the following procedures would an
report on the prior-period financial statements auditor most likely perform to obtain evidence
should: about the
a. Express an unqualified opinion concerning the occurrence of subsequent events?
restated financial statements. a. Confirming a sample of material accounts
b. Be accompanied by the original auditor's report receivable established after year-end.
on the prior period. b. Comparing the financial statements being
c. Bear the same date as the original auditor's reported on with those of the prior period.
report on the prior period. c. Investigating personnel changes in the
d. Qualify the opinion concerning the restated accounting department occurring after year-end.
financial statements because of a change in d. Inquiring as to whether any unusual
accounting adjustments were made after year-end.
principle. CPA-03110 Explanation
CPA-03101 Explanation Choice "d" is correct. An auditor would most likely
Choice "a" is correct. When prior-period financial inquire as to whether any unusual adjustments
statements are restated in the current period to were made after year-end that would require
conform with GAAP, the auditor's updated report
adjustment to and/or disclosure in the year-end Choice "a" is incorrect. Changes in employee pay
financial statements. rates occurring after year-end would have no
CPA-03114 Type1 M/C A-D Corr Ans: C PM#4 effect on
A 1-05 the year under audit.
88. CPA-03114 Au Nov 95 #85 Page 46 CPA-03138 Type1 M/C A-D Corr Ans: C PM#6
Which of the following events occurring after the A 1-05
issuance of an auditor's report most likely would 90. CPA-03138 Au May 95 #85 Page 49
cause the auditor to make further inquiries about An auditor is considering whether the omission of
the previously issued financial statements? a substantive procedure considered necessary at
a. An uninsured natural disaster occurs that may the time of an audit may impair the auditor's
affect the entity's ability to continue as a going present ability to support the previously
concern. expressed opinion. The auditor need not apply
b. A contingency is resolved that had been the omitted procedure if the:
disclosed in the audited financial statements. a. Financial statements and auditor's report were
c. New information is discovered concerning not distributed beyond management and the
undisclosed lease transactions of the audited board of directors.
period. b. Auditor's previously expressed opinion was
d. A subsidiary is sold that accounts for 25% of qualified because of a departure from GAAP.
the entity's consolidated net income. c. Results of other procedures that were applied
CPA-03114 Explanation tend to compensate for the procedure omitted.
Choice "c" is correct. The question addresses the d. Omission is due to unreasonable delays by
subsequent discovery of facts that may have client personnel in providing data on a timely
existed at the balance sheet date. Such events basis.
will often require an adjustment to the financial CPA-03138 Explanation
statements. An example is new information Choice "c" is correct. When the auditor concludes
discovered about undisclosed lease transactions that an auditing procedure considered necessary
of the audited period. As a at the time of the audit was omitted, the auditor
result, the auditor should make further inquiry to should assess the importance of the procedure to
determine whether the information is reliable and the present ability to support the previously
whether the facts existed at the date of the report. issued opinion. The results of other procedures
CPA-03136 Type1 M/C A-D Corr Ans: D PM#5 that were applied may tend to compensate for the
A 1-05 one omitted or make its omission less important.
89. CPA-03136 Au May 95 #65 Page 47 CPA-03143 Type1 M/C A-D Corr Ans: A PM#7
Which of the following procedures would an A 1-05
auditor most likely perform in obtaining evidence 91. CPA-03143 Au Nov 94 #89 Page 47
about subsequent events? Subsequent to the issuance of an auditor's report,
a. Determine that changes in employee pay rates the auditor became aware of facts existing at the
after year-end were properly authorized. report date that would have affected the report
b. Recompute depreciation charges for plant had the auditor then been aware of such facts.
assets sold after year-end. After determining that the information is reliable,
c. Inquire about payroll checks that were the auditor should next:
recorded before year-end but cashed after year- a. Determine whether there are persons relying or
end. likely to rely on the financial statements who
d. Investigate changes in long-term debt would attach importance to the information.
occurring after year-end. b. Request that management disclose the newly
discovered information by issuing revised
CPA-03136 Explanation financial
Choice "d" is correct. In obtaining evidence about statements.
subsequent events, an auditor would investigate c. Issue revised pro forma financial statements
changes in long-term debt occurring after year- taking into consideration the newly discovered
end to determine if there was an unrecorded information.
liability as of the end of the year. In addition, d. Give public notice that the auditor is no longer
subsequent sales of LT debt require footnote associated with financial statements.
disclosure. CPA-03143 Explanation
Choice "a" is correct. When subsequently
discovered information is found both to be reliable
and to have existed at the date of the auditor's Choice "b" is correct. With respect to events
report, the auditor should determine whether occurring after the issuance of an auditor's report,
there are persons relying or likely to rely on the the auditor is only responsible for information that
financial statements who would attach importance existed at the audit report date.
to the information. CPA-03154 Type1 M/C A-D Corr Ans: A PM#10
CPA-03147 Type1 M/C A-D Corr Ans: B PM#8 A 1-05
A 1-05 94. CPA-03154 Au May 92 #12 (Adapted) Page
92. CPA-03147 Au May 94 #70 Page 49 47
On March 15, X4, Kent, CPA, issued an Wilson, CPA, obtained sufficient appropriate audit
unqualified opinion on a client's audited financial evidence to render an opinion on Abco's
statements for December 31, X1, financial statements on March
the year ended December 31, X3. On May 4, X4, 6, X2. A subsequent event requiring adjustment
Kent's internal inspection program disclosed that to the X1 financial statements occurred on April
engagement personnel failed to observe the 10, X2, and came to Wilson's attention on April
client's physical inventory. Omission of this 24, X2. If the adjustment is made without
procedure impairs Kent's present ability to disclosure of the event, Wilson's report ordinarily
support the unqualified opinion. If the should be dated:
stockholders are currently relying a. March 6, X2.
on the opinion, Kent should first: b. April 10, X2.
a. Advise management to disclose to the c. April 24, X2.
stockholders that Kent's unqualified opinion d. Using dual dating.
should not be relied on. CPA-03154 Explanation
b. Undertake to apply alternative procedures that Choice "a" is correct. Since the financial
would provide a satisfactory basis for the statements were adjusted without disclosure of
unqualified opinion. the event in the footnotes, Wilson's report should
c. Reissue the auditor's report and add an be dated as of March 6, X2, the date on which
explanatory paragraph describing the departure sufficient appropriate audit evidence was
from generally accepted auditing standards. obtained.
d. Compensate for the omitted procedure by CPA-03157 Type1 M/C A-D Corr Ans: B PM#11
performing tests of controls to reduce audit risk to A 1-05
a sufficiently low level. 95. CPA-03157 Au May 92 #33 Page 49
CPA-03147 Explanation An auditor concludes that a substantive auditing
Choice "b" is correct. In the event of omitted audit procedure considered necessary during the prior
procedures, the auditor should first attempt to period's audit was omitted. Which of the following
perform alternative procedures in order to factors would most likely cause the auditor
ascertain whether the original opinion can be promptly to apply the omitted procedure?
relied upon. a. There are no alternative procedures available
CPA-03151 Type1 M/C A-D Corr Ans: B PM#9 to provide the same evidence as the omitted
A 1-05 procedure.
93. CPA-03151 Au Nov 93 #59 Page 48 b. The omission of the procedure impairs the
Which of the following events occurring after the auditor's present ability to support the previously
issuance of an auditor's report most likely would expressed opinion.
Cause the auditor to make further inquiries about c. The source documents needed to perform the
the previously issued financial statements? omitted procedure are still available.
a. A technological development that could affect d. The auditor's opinion on the prior period's
the entity's future ability to continue as a going financial statements was unqualified.
concern.
b. The discovery of information regarding a
contingency that existed before the financial CPA-03157 Explanation
statements were issued. Choice "b" is correct. The factor most likely to
c. The entity's sale of a subsidiary that accounts cause the auditor to promptly apply the omitted
for 30% of the entity's consolidated sales. procedure would be if the omission impairs the
d. The final resolution of a lawsuit explained in a auditor's present ability to support the previously
separate paragraph of the auditor's report. expressed opinion.
CPA-03151 Explanation CPA-03159 Type1 M/C A-D Corr Ans: A PM#12
A 1-05
96. CPA-03159 Au Nov 91 #20 (Adapted) Which of the following events occurring after the
After issuing a report, an auditor has no issuance of an auditor's report most likely would
obligation to make continuing inquiries or perform cause the auditor to make further inquiries about
other procedures concerning the audited financial the previously issued financial statements?
statements, unless: a. A lawsuit is resolved that is explained in a
a. Information, which existed at the report date separate paragraph of the prior-year's auditor's
and may affect the report, comes to the auditor's report.
attention. b. New information is discovered concerning
b. Management of the entity requests the auditor undisclosed related party transactions of the prior
to reissue the auditor's report. year.
c. A technological development occurs that
c. Information about an event that occurred after affects the entity's ability to continue as a going
the date of the auditor's report comes to the concern.
auditor's attention. d. The entity sells a subsidiary that accounts for
d. Final determinations or resolutions are made of 35% of the entity's consolidated sales.
contingencies that had been disclosed in the CPA-04719 Explanation
financial statements. Choice "b" is correct. If an auditor becomes
CPA-03159 Explanation aware of material information that existed at the
Choice "a" is correct. After issuing a report, an date of the
auditor has no obligation to make continuing auditor's report, and which would have affected
inquiries or perform other procedures concerning that report, the auditor needs to take appropriate
the audited financial statements, unless action. Since related party transactions should be
information, which existed at the report date and disclosed in the financial statements, it is likely
may affect the report, comes to the auditor's that the auditor would need to make further
attention. In this case the auditor would perform inquiries to determine whether the lack of
procedures to determine if the information affects disclosure will affect the previously issued report.
the report and is important to the external users. CPA-04725 Type1 M/C A-D Corr Ans: D PM#17
CPA-04718 Type1 M/C A-D Corr Ans: B PM#15 A 1-05
A 1-05 99. CPA-04725 Released 2005 Page 49
97. CPA-04718 Released 2005 Page 47 On February 9, Brown, CPA, expressed an
Which of the following procedures would an unqualified opinion on the financial statements of
auditor most likely perform in obtaining evidence Web Co. On October 9, during a peer review of
About subsequent events? Brown's practice, the reviewer informed Brown
a. Examine a sample of transactions that that engagement personnel failed to perform a
occurred since the year-end to verify the search for subsequent events for the Web
effectiveness of computer controls. engagement. Brown should first:
b. Inquire of management whether there have a. Request Web's permission to perform
been significant changes in working capital since substantive procedures that would provide a
the year-end. satisfactory basis for the opinion.
c. Recompute depreciation charges for plant b. Inquire of Web whether there are persons
assets sold for substantial gains since the year- currently relying, or likely to rely, on the financial
end. statements.
d. Reperform the tests of controls that indicated c. Take no additional action because subsequent
significant deficiencies in the operation of internal events have no effect on the financial statements
control. that were reported on.
CPA-04718 Explanation d. Assess the importance of the omitted
Choice "b" is correct. In obtaining evidence about procedures to Brown's present ability to support
subsequent events, the auditor would most likely the opinion.
inquire of management whether there have been CPA-04725 Explanation
significant changes in working capital since year- Choice "d" is correct. If an omitted audit
end. Such changes could be indicative of a going procedure is discovered, the auditor should
concern problem, which would require financial assess the importance of the omitted procedure
statement disclosure. to the auditor's ability to support the opinion. It
CPA-04719 Type1 M/C A-D Corr Ans: B PM#16 might be the case that other audit procedures
A 1-05 tended to compensate for the omitted procedure,
98. CPA-04719 Released 2005 Page 48
in which case no further action would be statements of the U.S. entity without obtaining
necessary. certification in the other country.
Reporting on Other Information CPA-02757 Type1 M/C A-D Corr Ans: A PM#4
CPA-02708 Type1 M/C A-D Corr Ans: C PM#1 A 1-06
A 1-06 102. CPA-02757 Au May 94 #67 Page 55
100. CPA-02708 Au C02 #1B Page 55 In connection with a proposal to obtain a new
Which of the following is not true regarding an client, an accountant in public practice is asked to
engagement to provide a written report on the prepare a written report on the application of
application of accounting principles? accounting principles to a specific transaction.
a. An accountant is prohibited from providing a The accountant's report should include a
report on the application of accounting principles statement that:
to a transaction not involving the facts and a. Any difference in the facts, circumstances, or
circumstances of a specific entity. assumptions presented may change the report.
b. The accountant's written report on the b. The engagement was performed in accordance
application of accounting principles should with Statements on Standards for Consulting
include an identification of the specific entity Services.
involved. c. The guidance provided is for management use
c. An accountant is prohibited from providing a only and may not be communicated to the prior or
report on the application of accounting principles continuing auditors.
to a proposed future transaction involving the d. Nothing came to the accountant's attention that
facts and circumstances of a specific entity. caused the accountant to believe that the
d. The accountant's written report on the accounting principles violated GAAP.
application of accounting principles should CPA-02757 Explanation
include a paragraph Choice "a" is correct. The accountant's report on
restricting the use of the report. the application of accounting principles should
CPA-02708 Explanation include a statement that should any facts or
Choice "c" is correct. An accountant may report circumstances differ from those presented to the
on the application of accounting principles to a accountant, the accountant's conclusions may
proposed future transaction as long as the change.
transaction involves the facts and circumstances CPA-02802 Type1 M/C A-D Corr Ans: A PM#5
of a specific entity. A 1-06
CPA-02735 Type1 M/C A-D Corr Ans: A PM#3 103. CPA-02802 Au Nov 92 #50 (Adapted) Page
A 1-06 55
101. CPA-02735 Au Nov 94 #88 Page 55 Blue, CPA, has been asked to render an opinion
Before reporting on the financial statements of a on the application of accounting principles to a
U.S. entity that have been prepared in conformity specific transaction by an entity that is audited by
with another country's accounting principle, an another CPA. Blue may accept this engagement,
auditor practicing in the U.S. should: but should:
a. Understand the accounting principles generally a. Consult with the continuing CPA to obtain
accepted in the other country. information relevant to the transaction.
b. Be certified by the appropriate auditing or b. Report the engagement's findings to the
accountancy board of the other country. entity's audit committee, the continuing CPA, and
c. Notify management that the auditor is required management.
to disclaim an opinion on the financial statements. c. Disclaim any opinion that the hypothetical
d. Receive a waiver from the auditor's state board application of accounting principles conforms with
of accountancy to perform the engagement. generally accepted accounting principles.
CPA-02735 Explanation d. Notify the entity that the report is for the
Choice "a" is correct. Before reporting on the general use of all interested parties.
financial statements of a U.S. entity that have
been prepared in conformity with another CPA-02802 Explanation
country's accounting principles, the auditor Choice "a" is correct. When rendering an opinion
practicing in the U.S. should understand the on the application of accounting principles to a
accounting principles generally accepted in the specific transaction, the reporting CPA should
other country. consult with the continuing CPA to obtain
Choice "b" is incorrect. The auditor practicing in information relevant to the transaction.
the U.S. would be able to report on the financial
CPA-02812 Type1 M/C A-D Corr Ans: D PM#6 client prepared document, the report should
A 1-06 include an opinion on the information but should
104. CPA-02812 Au May 91 #49 Page 55 not describe the character of the audit work
The financial statements of KCP America, a U.S. performed.
entity, are prepared for inclusion in the CPA-03166 Explanation
consolidated financial statements of its non-U.S. Choice "c" is correct. If an auditor chooses to
parent. These financial statements are prepared report on information accompanying the basic
in conformity with the accounting principles financial statements in a client-prepared
generally accepted in the parent's country and document, the report should include a description
are for use only in that country. of both the character of the audit work performed
How may KCP America's auditor report on these and the degree of responsibility assumed.
financial statements? CPA-03168 Type1 M/C A-D Corr Ans: C PM#8
I. A U.S.-style report (unmodified). A 1-06
II. A U.S.-style report modified to report on the 106. CPA-03168 Au C03 #3 Page 51
accounting principles of the parent's country. Which of the following reporting options is least
III. The report form of the parent's country. likely with regard to supplementary information
I II III that is required by GAAP?
a. Yes No No a. The auditor's report on the financial statements
b. No Yes No makes no reference to the supplementary
c. Yes No Yes information.
d. No Yes Yes b. A disclaimer of opinion is issued on
CPA-02812 Explanation supplementary information that is not clearly
Choice "d" is correct. No - Yes - Yes. When distinguished from the financial statements and is
financial statements are prepared in conformity not marked "unaudited."
with the accounting principles generally accepted c. The auditor's report on the financial statements
in the parent's country and are for use only in that includes both an opinion on the supplementary
country, the auditor may report using either a information and a statement restricting the use of
U.S.-style report modified to report on the the report.
accounting principles of the d. The auditor's report on the financial statements
parent's country or the report form of the parent's includes an opinion regarding whether the
country. supplementary information is fairly stated in all
CPA-03166 Type1 M/C A-D Corr Ans: C PM#7 material respects in relation to the financial
A 1-06 statements taken as a whole.
105. CPA-03166 Au C03 #2 Page 50 CPA-03168 Explanation
Which of the following is true regarding the Choice "c" is correct. There is no requirement that
auditor's responsibility to report on information the auditor's report on supplementary information
accompanying the basic financial statements in a required by GAAP be restricted.
client-prepared document? Choice "a" is incorrect. An auditor is not required
a. The auditor may report on information to audit supplementary information, and in such
accompanying the basic financial statements in a cases the auditor's report on the basic financial
clientprepared statements would not generally include a
document only if he or she has been specifically reference to such information.
engaged to do so. CPA-03171 Type1 M/C A-D Corr Ans: B PM#9
b. The auditor is required to express an opinion A 1-06
on whether information accompanying the basic 107. CPA-03171 Au C03 #4 Page 53
financial statements in a client-prepared When an auditor submits a document containing
document is fairly stated in all material respects in audited financial statements to a client, and those
relation to the financial statements taken as a financial statements include supplementary
whole. information required by GAAP, the auditor may
c. If an auditor chooses to report on information choose any of the following options, except:
accompanying the basic financial statements in a a. Express an opinion on the information, if he or
client prepared document, the report should she has been engaged to examine such
include a description of the character of the audit information.
work performed. b. Express negative assurance on the
d. If an auditor chooses to report on information information, if review procedures have been
accompanying the basic financial statements in a appropriately performed.
c. Report on whether the information is fairly d. Indicate that the data are not fairly stated in all
stated in relation to the financial statements taken material respects.
as a whole, if appropriate auditing procedures CPA-03175 Explanation
have been applied. Choice "a" is correct. An auditor's report on
d. Disclaim an opinion on the information. selected information included in a client-prepared
CPA-03171 Explanation document containing audited financial statements
Choice "b" is correct. The auditor would not should be limited to data derived from audited
perform a review or express negative assurance financial statements.
on supplementary information required by GAAP CPA-03177 Type1 M/C A-D Corr Ans: C PM#13
that is included in an auditor-submitted document. A 1-06
CPA-03174 Type1 M/C A-D Corr Ans: C PM#11 110. CPA-03177 Au May 95 #87 Page 53
A 1-06 If information accompanying the basic financial
An auditor may report on condensed financial statements in an auditor-submitted document has
statements that are derived from complete Been subjected to auditing procedures, the
financial statements if the: auditor may include in the auditor's report on the
a. Condensed financial statements are distributed financial statements an opinion that the
to stockholders along with the complete financial accompanying information is fairly stated in:
statements. a. Accordance with generally accepted auditing
b. Auditor describes the additional procedures standards.
performed on the condensed financial b. Conformity with generally accepted accounting
statements. principles.
c. Auditor indicates whether the information in the c. All material respects in relation to the basic
condensed financial statements is fairly stated in financial statements taken as a whole.
all material respects in relation to the complete d. Accordance with attestation standards
financial statements from which it has been expressing a conclusion about management's
derived. assertions.
d. Condensed financial statements are presented CPA-03177 Explanation
in comparative form with the prior year's Choice "c" is correct. When an auditor submits a
condensed financial statements. document that contains information in addition to
CPA-03174 Explanation the client's basic financial statements, and this
Choice "c" is correct. An auditor may report on information was subjected to auditing procedures,
condensed financial statements that are derived the auditor may include in the auditor's report an
from financial statements that he or she has opinion that the information is fairly stated in all
audited, indicating (1) that he or she has audited material respects in relation to the basic financial
and expressed an opinion on the complete statements taken as a whole. This statement
financial statements, (2) the date of the auditor's would follow the opinion paragraph in the
report, (3) the type of opinion expressed, and (4) standard report.
that the information contained in the condensed CPA-03179 Type1 M/C A-D Corr Ans: D PM#14
financial statements is fairly stated in all material A 1-06
respects in relation to the complete financial 111. CPA-03179 Released 2006 Page 50
statements from which it has been derived. An auditor concludes that there is a material
CPA-03175 Type1 M/C A-D Corr Ans: A PM#12 inconsistency in the other information in an
A 1-06 annual report to shareholders containing audited
109. CPA-03175 Au Nov 95 #87 Page 54 financial statements.
An auditor is engaged to report on selected
financial data that are included in a client-
prepared document
containing audited financial statements. Under The auditor believes that the financial statements
these circumstances, the report on the selected do not require revision, but the client is unwilling
data should: to revise or eliminate the material inconsistency in
a. Be limited to data derived from the audited the other information. Under these
financial statements. circumstances, what action would the auditor
b. Be distributed only to senior management and most likely take?
the board of directors. a. Consider the situation closed because the
c. State that the presentation is a comprehensive other information is not in the audited financial
basis of accounting other than GAAP. statements.
b. Issue an "except for" qualified opinion after Auditor submitted document. The schedules are
discussing the matter with the client's audit not required parts of the basic financial
committee. statements, but accompany the basic financial
c. Disclaim an opinion on the financial statements statements. When reporting on such additional
after explaining the material inconsistency in a information, the measurement of materiality is
separate explanatory paragraph. the:
d. Revise the auditor's report to include a a. Same as that used in forming an opinion on the
separate explanatory paragraph describing the basic financial statements taken as a whole.
material inconsistency. b. Lesser of the individual schedule of
CPA-03179 Explanation investments or schedule of property taken by
Choice "d" is correct. If the auditor discovers a itself.
material inconsistency in other information c. Greater of the individual schedule of
accompanying the audited financial statements, investments or schedule of property taken by
the financial statements do not require revision, itself.
and the client refuses to eliminate or revise the d. Combined total of both the individual schedules
inconsistency, the auditor should consider 1) of investments and property taken as a whole.
revising the report to include a separate CPA-03184 Explanation
paragraph describing the inconsistency, 2) Choice "a" is correct. When reporting on
withholding the report, or 3) withdrawing from the additional information accompanying the audited
engagement. financial statements, the measure of materiality
CPA-03181 Type1 M/C A-D Corr Ans: B PM#15 would be the same as that used in forming an
A 1-06 opinion on the financial statements taken as a
112. CPA-03181 Au Nov 94 #87 Page 54 whole.
In the standard report on condensed financial CPA-03186 Type1 M/C A-D Corr Ans: C PM#17
statements that are derived from a public entity's A 1-06
audited financial statements, a CPA should 114. CPA-03186 Au May 94 #82 (Adapted) Page
indicate that the: 51
a. Condensed financial statements are prepared What is an auditor's responsibility for
in conformity with another comprehensive basis supplementary information which is outside the
of accounting. basic financial statements, but required by the
b. CPA has audited and expressed an opinion on FASB?
the complete financial statements. a. The auditor has no responsibility for required
c. Condensed financial statements are not fairly supplementary information as long as it is outside
presented in all material respects. the basic financial statements.
d. CPA expresses limited assurance that the b. The auditor's only responsibility for required
financial statements conform with GAAP. supplementary information is to determine that
CPA-03181 Explanation such information has not been omitted.
Choice "b" is correct. The auditor's report on c. The auditor should apply certain limited
condensed statements derived from audited procedures to the required supplementary
statements should indicate (1) that the CPA information, and report deficiencies in, or
audited and expressed an opinion on the omissions of, such information.
complete financial statements, d. The auditor should apply tests of details of
(2) the date of the auditor's report on the transactions and balances to the required
complete financial statements, (3) the type of supplementary information, and report any
opinion expressed, material misstatements in such information.
and (4) whether, in the auditor's opinion, the
information set forth in the condensed financial
statements is fairly stated in all material respects
in relation to the complete financial statements CPA-03186 Explanation
from which it was derived. Choice "c" is correct. For additional
CPA-03184 Type1 M/C A-D Corr Ans: A PM#16 supplementary information required by the FASB,
A 1-06 the auditor should apply certain limited
113. CPA-03184 Au May 94 #63 Page 53 procedures to the information, and report
Investment and property schedules are presented deficiencies in or omissions of such information.
for purposes of additional analysis in an CPA-03188 Type1 M/C A-D Corr Ans: D PM#18
A 1-06
115. CPA-03188 Au May 93 #48 Page 53 c. Condensed financial statements are
Which of the following best describes the presented in comparative form with the
auditor's reporting responsibility concerning prior year's
information accompanying the basic financial d. Condensed financial statements.
statements in an auditor-submitted document? e. Auditor describes the additional review
a. The auditor has no reporting responsibility procedures performed on the condensed
concerning information accompanying the basic financial
financial statements. f. statements.
b. The auditor should report on the information
accompanying the basic financial statements only d. Condensed financial statements are distributed
if the auditor participated in its preparation. only to management and the board of directors.
c. The auditor should report on the information CPA-03191 Explanation
accompanying the basic financial statements only Choice "a" is correct. When reporting on
if the auditor did not participate in its preparation. condensed financial statements that are derived
d. The auditor should report on all the information from complete audited financial statements, the
included in the document. auditor should indicate in his report whether the
CPA-03188 Explanation information in the condensed financial statements
Choice "d" is correct. When an auditor submits a is fairly stated in all material respects (in relation
document containing audited financial statements to the basic financial
to the client or others, the auditor has a statements taken as a whole).
responsibility to report on all the information CPA-03194 Type1 M/C A-D Corr Ans: D PM#21
included in the document. A 1-06
CPA-03189 Type1 M/C A-D Corr Ans: D PM#19 118. CPA-03194 Au May 90 #25 Page 51
A 1-06 If management (of a governmental body) declines
116. CPA-03189 Au Nov 92 #57 Page 50 to present supplementary information required by
When audited financial statements are presented the Governmental Accounting Standards Board
in a client's document containing other (GASB), the auditor should issue a(an):
information, the auditor should: a. Adverse opinion.
a. Perform inquiry and analytical procedures to b. Qualified opinion with an explanatory
ascertain whether the other information is paragraph.
reasonable. c. Unqualified opinion.
b. Add an explanatory paragraph to the auditor' s d. Unqualified opinion with an additional
report without changing the opinion on the explanatory paragraph.
financial CPA-03194 Explanation
statements. Choice "d" is correct. If management (of a
c. Perform the appropriate substantive auditing governmental body) declines to present
procedures to corroborate the other information. information required by the GASB, the auditor
d. Read the other information to determine that it should issue an unqualified opinion with an
is consistent with the audited financial additional explanatory paragraph.
statements. CPA-03195 Type1 M/C A-D Corr Ans: D PM#22
CPA-03189 Explanation A 1-06
Choice "d" is correct. The auditor should read the 119. CPA-03195 Au Nov 87 #4 (Adapted) Page
"other information" in a client's document 52
containing audited FS to determine that it is The objective of auditing procedures applied to
consistent with the audited FS. segment information is to provide the auditor with
a reasonable basis for concluding whether:
a. The information is useful for comparing a
CPA-03191 Type1 M/C A-D Corr Ans: A PM#20 segment of one enterprise with a similar segment
A 1-06 of another enterprise.
117. CPA-03191 Au Nov 91 #29 Page 54 b. Sufficient audit evidence has been obtained to
An auditor may report on condensed financial allow the auditor to be associated with the
statements that are derived from complete segment information.
audited financial statements if the: c. A separate opinion on the segment information
a. Auditor indicates whether the information in the is necessary due to inconsistent application of
condensed financial statements is fairly stated in accounting principles.
all material respects.
d. The information is presented in conformity with d. The auditor should read the management
the FASB Statement on segment information. report and consider whether it contains a material
CPA-03195 Explanation misstatement of fact.
Choice "d" is correct. The auditor's objective is to CPA-04615 Explanation
provide a reasonable basis for concluding Choice "d" is correct. The auditor should read
whether segment information is presented in other information accompanying the basic
conformity with GAAP. financial statements and consider whether it
CPA-03777 Type1 M/C A-D Corr Ans: D PM#23 contains a material inconsistency or material
A 1-06 misstatement of fact.
120. CPA-03777 Nov 88 #18 Page 55 CPA-04699 Type1 M/C A-D Corr Ans: B PM#27
Green, CPA, is requested to render an opinion on A 1-06
the application of accounting principles by an 122. CPA-04699 Released 2005 Page 54
entity that is audited by another CPA. Green may: An auditor is reporting on condensed financial
a. Not accept such an engagement because to do statements for an annual period that are derived
so would be considered unethical. from the audited financial statements of a
b. Not accept such an engagement because publicly-held entity. The auditor's opinion should
Green would lack the necessary information on indicate whether the information in the condensed
which to financial statements is fairly stated in all material
base an opinion without conducting an audit. respects:
c. Accept the engagement but should form an a. In conformity with accounting principles
independent opinion without consulting with the generally accepted in the United States of
continuing CPA. America.
d. Accept the engagement but should consult with b. In relation to the complete financial statements.
the continuing CPA to ascertain all the available c. In conformity with an other comprehensive
facts basis of accounting.
relevant to forming a professional judgment. d. In relation to supplementary filings under
CPA-03777 Explanation federal security statutes.
Choice "d" is correct. A "reporting accountant" (an CPA-04699 Explanation
accountant in public practice who is requested to Choice "b" is correct. The auditor should report
render an opinion on the application of GAAP by whether the information in the condensed
an entity audited by another CPA) may accept the financial statements is fairly stated, in all material
engagement, but should consult with the respects, in relation to the financial statements
"continuing CPA" to ascertain the available facts from which it has been derived.
relevant to forming a professional judgment. CPA-05478 Type1 M/C A-D Corr Ans: D PM#28
CPA-04615 Type1 M/C A-D Corr Ans: D PM#24 A 1-06
A 1-06 123. CPA-05478 Released 2007 Page 51
121. CPA-04615 Au R04 #16 (Adapted) Page 50 An auditor determines that the entity is presenting
In its annual report to shareholders, Lake Co. certain supplementary financial disclosures of
included a separate management report that pension information that are required by the
contained additional information. Lake's auditor is GASB. Under these circumstances, the auditor
expressing an unqualified opinion on Lake's should:
financial statements but has not been engaged to a. Add an explanatory paragraph to the auditor's
examine and report on this additional information. report that refers to the required supplementary
What is the auditor's responsibility concerning information.
such a report? b. State that the audit is not being performed in
a. The auditor should add an explanatory accordance with generally accepted auditing
paragraph to the report on the financial standards.
statements disclaiming c. Document in the working papers that the
an opinion on the additional information. required supplementary information is presented,
b. The auditor has no obligation to read the but should not apply any procedures to the
management report or to verify the accuracy or information.
appropriateness of its contents. d. Compare the required supplementary
c. The auditor should request Lake to place the information for consistency with the audited
management report in its annual report where it financial statements.
will not be misinterpreted to be the auditor's CPA-05478 Explanation
assertion.
Choice "d" is correct. The auditor should perform Choice "b" is correct. II only. If Pell is unable to
certain limited procedures on supplementary review Smith's audit documentation, but inquiries
information accompanying the financial indicate that Smith has an excellent reputation for
statements, including evaluating whether the professional competence and integrity, Pell
information is should divide responsibility by making reference
consistent with the audited financial statements. to Smith's audit.
CPA-05491 Type1 M/C A-D Corr Ans: A PM#29 CPA-03208 Type1 M/C A-D Corr Ans: C PM#2
A 1-06 A 1-99
124. CPA-05491 Released 2007 Page 50 126. CPA-03208 May 95 L #2 Page 8
An auditor reads the letter of transmittal Which of the following best describes what is
accompanying a county's comprehensive annual meant by the term generally accepted auditing
financial report and identifies a material standards?
inconsistency with the financial statements. The a. Rules acknowledged by the accounting
auditor determines that the financial statements profession because of their universal application.
do not require revision. Which of the following b. Pronouncements issued by the Auditing
actions should the auditor take? Standards Board.
a. Request that the client revise the letter of c. Measures of the quality of the auditor's
transmittal. performance.
b. Include an explanatory paragraph in the d. Procedures to be used to gather evidence to
auditor's report. support financial statements.
c. Consider withdrawing from the engagement. CPA-03208 Explanation
d. Request a client representation letter Choice "c" is correct. Generally accepted auditing
acknowledging the inconsistency. standards ("GAAS") are measures of the quality
CPA-05491 Explanation of the auditor's performance.
Choice "a" is correct. When information CPA-03210 Type1 M/C A-D Corr Ans: C PM#3
accompanies audited financial statements in a A 1-99
client-prepared document, the auditor is required 127. CPA-03210 Nov 94 L #2 Page 22
to read the information. If such information is According to the profession's ethical standards,
materially inconsistent with the financial which of the following events may justify a
statements and the financial statements do not departure from a Statement of Financial
require revision, the auditor should request that Accounting Standards?
the information (in this case the letter of Evolution of
transmittal) be revised. a new form
Supplemental Questions New of business
CPA-03204 Type1 M/C A-D Corr Ans: B PM#1 legislation transaction
A 1-99 a. No Yes
125. CPA-03204 May 97 #5 Page 20 b. Yes No
Pell, CPA, decides to serve as principal auditor in c. Yes Yes
the audit of the financial statements of Tech d. No No
Consolidated, Inc. Smith, CPA, audits one of
Tech's subsidiaries. In which situation(s) should
Pell make reference to Smith's audit?
I. Pell reviews Smith's audit documentation and
assumes responsibility for Smith's work, but
expresses a qualified opinion on Tech's financial
statements. CPA-03210 Explanation
II. Pell is unable to review Smith's audit Choice "c" is correct. Yes - Yes. Rule 203 of the
documentation; however, Pell's inquiries indicate code of professional conduct of the AICPA states
that Smith has an excellent reputation for that if the financial statements or data contain a
professional competence and integrity. GAAP departure, the departure may be justified if
a. I only. the CPA can demonstrate that due to unusual
b. II only. circumstances, such as new legislation or the
c. Both I and II. evolution of a new form of business transaction,
d. Neither I nor II. the FS would otherwise be misleading.
CPA-03204 Explanation
Under these circumstances, the auditor's report a. Compare the latest available interim financial
should describe the departure, its approximate statements with the financial statements being
effects, if audited.
practicable, and the reasons why compliance with b. Send second requests to the client's customers
the generally accepted principle would result in a who failed to respond to initial accounts
misleading statement. receivable confirmation requests.
CPA-03213 Type1 M/C A-D Corr Ans: A PM#4 c. Communicate material weaknesses in the
A 1-99 internal control structure to those charged with
128. CPA-03213 Nov 94 #71 Page 22 governance.
Which of the following conditions or events most d. Review the cut-off bank statements for several
likely would cause an auditor to have substantial months after the year-end.
doubt about an entity's ability to continue as a CPA-03223 Explanation
going concern? Choice "a" is correct. When performing
a. Cash flows from operating activities are procedures regarding subsequent events, the
negative. auditor generally will compare the latest available
b. Research and development projects are interim financial statements with the financial
postponed. statements being audited to determine if any
c. Significant related party transactions are significant subsequent event occurred that would
pervasive. need to be reflected in the statements being
d. Stock dividends replace annual cash audited.
dividends. CPA-03226 Type1 M/C A-D Corr Ans: B PM#7
CPA-03213 Explanation A 1-99
Choice "a" is correct. Negative cash flows from 131. CPA-03226 Nov 92 #59 Page 21
operating activities most likely would cause an An auditor's report contains the following
auditor to have substantial doubt about an entity's sentences: We did not audit the financial
ability to continue as a going concern. statements of JK Co., a wholly owned subsidiary,
CPA-03217 Type1 M/C A-D Corr Ans: D PM#5 which statements reflect total assets and
A 1-99 revenues constituting 17 percent and 19 percent,
129. CPA-03217 May 94 #71 Page 14 respectively, of the related consolidated totals.
For an entity that does not receive governmental Those statements were audited by other auditors
financial assistance, an auditor's standard report whose report has been furnished to us, and our
on financial statements generally would not refer opinion, insofar as it relates to the amounts
to: included for JK Co., is based solely on the report
a. Significant estimates made by management. of the other auditors.
b. An assessment of the entity's accounting These sentences:
principles. a. Are an improper form of reporting.
c. Management's responsibility for the financial b. Divide responsibility.
statements. c. Disclaim an opinion.
d. The entity's internal control. d. Qualify the opinion.
CPA-03217 Explanation CPA-03226 Explanation
Choice "d" is correct. The auditor's standard Choice "b" is correct. The report indicates a
report generally does not make reference to the division of responsibility.
entity's internal control. Note that for an entity that
does receive governmental financial assistance, a
written report on internal control is required. Also,
note that an auditor may (but is not required to)
expand his or her audit report to clarify that a CPA-03230 Type1 M/C A-D Corr Ans: D PM#8
GAAS audit does not require the level of testing A 1-99
and reporting on internal control that is required 132. CPA-03230 Nov 92 #46 Page 28
for issuers. Which of the following phrases should be
CPA-03223 Type1 M/C A-D Corr Ans: A PM#6 included in the opinion paragraph when an
A 1-99 auditor expresses a
130. CPA-03223 May 93 #45 (Adapted) Page 47 qualified opinion?
Which of the following procedures should an When read in
auditor generally perform regarding subsequent conjunction with With the foregoing
events? Note X explanation
a. Yes No statements, the auditor should apply limited
b. No Yes procedures to the information (to determine that it
c. Yes Yes is consistent with the basic audited financial
d. No No statements) and report deficiencies in or the
CPA-03230 Explanation omission of the information (via an explanatory
Choice "d" is correct. No −No. paragraph).
A qualified opinion phrase is, "in our opinion, CPA-03238 Type1 M/C A-D Corr Ans: B PM#11
except for [explanation of problem] as discussed A 1-99
in the preceding paragraph . . ." 135. CPA-03238 May 92 #11 Page 14
CPA-03232 Type1 M/C A-D Corr Ans: C PM#9 An auditor's responsibility to express an opinion
A 1-99 on the financial statements is:
133. CPA-03232 Nov 92 #41 Page 47 a. Implicitly represented in the auditor's standard
Which of the following procedures would an report.
auditor most likely perform to obtain evidence b. Explicitly represented in the opening paragraph
about the occurrence of subsequent events? of the auditor's standard report.
a. Recomputing a sample of large-dollar c. Explicitly represented in the scope paragraph
transactions occurring after year-end for of the auditor's standard report.
arithmetic accuracy. d. Explicitly represented in the opinion paragraph
b. Investigating changes in stockholders' equity of the auditor's standard report.
occurring after year-end. CPA-03238 Explanation
c. Inquiring of the entity's legal counsel Choice "b" is correct. The auditor's responsibility
concerning litigation, claims, and assessments to express an opinion on the FS is explicitly
arising after yearend. represented in the last sentence of the opening
d. Confirming bank accounts established after paragraph: "Our responsibility is to express an
year-end. opinion on these financial statements based on
CPA-03232 Explanation our audit."
Choice "c" is correct. The auditor would most CPA-03241 Type1 M/C A-D Corr Ans: D PM#12
likely inquire of the entity's legal counsel A 1-99
concerning litigation, claims and assessments 136. CPA-03241 May 92 #2 Page 39
arising after year-end in order to obtain evidence When an independent CPA assists in preparing
about the occurrence of subsequent events. the financial statements of a publicly held entity,
Claims arising after year-end might well impact but has not audited or reviewed them, the CPA
the year-end financial statements. should issue a disclaimer of opinion. In such
CPA-03236 Type1 M/C A-D Corr Ans: C PM#10 situations, the CPA has no responsibility to apply
A 1-99 any procedures beyond:
134. CPA-03236 May 92 #14 Page 51 a. Ascertaining whether the financial statements
What is an auditor's responsibility for are in conformity with generally accepted
supplementary information required by the GASB accounting
that is placed outside the basic financial principles.
statements? b. Determining whether management has elected
a. Label the information as unaudited and expand to omit substantially all required disclosures.
the auditor's report to include a disclaimer on the c. Documenting that the internal control structure
information. is not being relied on.
b. Add an explanatory paragraph to the auditor's d. Reading the financial statements for obvious
report and refer to the information as "required material misstatements.
supplementary information."
c. Apply limited procedures to the information and CPA-03241 Explanation
report deficiencies in, or the omission of, the Choice "d" is correct. When an independent CPA
information. assists in preparing the FS of a publicly held
d. Audit the required supplementary information entity, but has not "audited" or "reviewed" them,
in accordance with generally accepted the CPA should issue a disclaimer of opinion and
governmental auditing standards. has only the responsibility to read the FS for
CPA-03236 Explanation obvious material misstatements.
Choice "c" is correct. With respect to Choice "a" is incorrect. A disclaimer does not
supplementary information required by the GASB require ascertaining whether the FS are in
that is placed outside the basic financial conformity with
GAAP. d. Departure from generally accepted auditing
CPA-03243 Type1 M/C A-D Corr Ans: C PM#13 standards.
A 1-99 CPA-03309 Explanation
137. CPA-03243 Nov 91 #57 (Adapted) Page 48 Choice "b" is correct. When an auditor qualifies
An auditor issued an audit report that was dual his or her opinion because of a scope limitation,
dated for a subsequent event occurring after the such as the inability to confirm A/R, the wording
original date of the auditor's report. The auditor's in the opinion paragraph should indicate that the
responsibility for events occurring subsequent to qualification pertains to the possible effects on
the original date was: the FS and not to the scope limitation itself.
a. Extended to subsequent events occurring The opinion paragraph should not refer to the
through the date of reissuance of the report. scope limitation itself, the lack of evidence, or the
b. Extended to include all events occurring since departure from GAAS.
the original date of the auditor's report. CPA-03310 Type1 M/C A-D Corr Ans: C PM#16
c. Limited to the specific event referenced. A 1-99
d. Limited to include only events occurring up to 140. CPA-03310 May 91 #43 Page 24
the date of the last subsequent event referenced. The adverse effects of events causing an auditor
CPA-03243 Explanation to believe there is substantial doubt about an
Choice "c" is correct. When an auditor issues a entity's ability to continue as a going concern
report that is dual dated for a subsequent event would most likely be mitigated by evidence
Occurring after the original date of the auditor's relating to the:
report, the auditor's responsibility for events a. Ability to expand operations into new product
occurring subsequent to the original date of the lines in the future.
auditor's report is limited to the specific event b. Feasibility of plans to purchase leased
referenced. equipment at less than market value.
CPA-03245 Type1 M/C A-D Corr Ans: D PM#14 c. Marketability of assets that management plans
A 1-99 to sell.
138. CPA-03245 May 91 #53 Page 38 d. Committed arrangements to convert preferred
An auditor most likely would issue a disclaimer of stock to long-term debt.
opinion because of: CPA-03310 Explanation
a. Inadequate disclosure of material information. Choice "c" is correct. The adverse effects of
b. The omission of the statement of cash flows. events causing an auditor to believe there is a
c. A material departure from generally accepted substantial
accounting principles. doubt about an entity's ability to continue as a
d. Management's refusal to furnish written going concern would most likely be mitigated by
representations. evidence relating to the marketability of assets
CPA-03245 Explanation that management plans to sell. By providing
Choice "d" is correct. Management's refusal to evidence that there is a ready market for assets
furnish written representations is a significant that could be converted to cash, management
client imposed restriction on the scope of an has demonstrated that the company could remain
audit, ordinarily warranting a disclaimer of in operation for a longer period of time, thereby
opinion. mitigating the need for an
Choice "a" is incorrect. Inadequate disclosure explanatory paragraph describing the matter.
would result in a qualified or adverse opinion.
CPA-03309 Type1 M/C A-D Corr Ans: B PM#15
A 1-99
139. CPA-03309 May 91 #45 (Adapted) Page 35
When an auditor qualifies an opinion because of CPA-03311 Type1 M/C A-D Corr Ans: D PM#17
the inability to confirm accounts receivable by A 1-99
direct communication with debtors, the wording of 141. CPA-03311 May 91 #42 Page 35
the opinion paragraph of the auditor's report An auditor was unable to obtain audited financial
should indicate that the qualification pertains to statements or other evidence supporting an
the: entity's investment in a foreign subsidiary.
a. Limitation on the auditor's scope. Between which of the following opinions should
b. Possible effects on the financial statements. the entity's auditor choose?
c. Lack of sufficient appropriate audit evidence. a. Adverse and unqualified with an explanatory
paragraph added.
b. Disclaimer and unqualified with an explanatory to the auditor's ability to support the previously
paragraph added. expressed opinion.
c. Qualified and adverse. CPA-03315 Type1 M/C A-D Corr Ans: B PM#20
d. Qualified and disclaimer. A 1-99
CPA-03311 Explanation 144. CPA-03315 Nov 90 #33 (Adapted) Page 47
Choice "d" is correct. When an auditor is unable Which of the following procedures would an
to obtain audited financial statements or other auditor ordinarily perform during the review of
evidence supporting an entity's investment in a subsequent events?
subsidiary (foreign or domestic), the auditor a. Review the cut-off bank statements for the
should issue a qualified or disclaimer of opinion period after the year-end.
depending on the materiality of the investment in b. Inquire of the client's legal counsel concerning
the subsidiary. litigation.
CPA-03312 Type1 M/C A-D Corr Ans: D PM#18 c. Investigate significant deficiencies in internal
A 1-99 control previously communicated to the client.
142. CPA-03312 Nov 90 #39 Page 9 d. Analyze related party transactions to discover
Which of the following standards requires a possible irregularities.
critical review of the work done and the judgment CPA-03315 Explanation
exercised by those assisting in an audit at every Choice "b" is correct. An auditor would most likely
level of supervision? obtain a letter from the entity's legal counsel
a. Proficiency. describing any pending litigation, unasserted
b. Audit risk. claims, or loss contingencies, to obtain evidence
c. Inspection. that might
d. Due care. impact the year-end financial statements.
CPA-03312 Explanation CPA-03316 Type1 M/C A-D Corr Ans: D PM#21
Choice "d" is correct. The third general standard A 1-99
is: "The auditor must exercise due professional 145. CPA-03316 Nov 90 #15 Adapted Page 50
care in the planning and performance of the audit An annual shareholders' report includes audited
and the preparation of the report." This standard financial statements and contains supplementary
is interpreted to require a critical review of the information required by GAAP. Is it permissible
work performed and the judgment exercised at for the auditor to report on such information?
every level of supervision. a. No, because such reporting may lead to the
CPA-03313 Type1 M/C A-D Corr Ans: C PM#19 belief that the auditor is responsible for the
A 1-99 information.
143. CPA-03313 Nov 90 #35 Page 49 b. No, because the auditor has no responsibility
Six months after issuing an unqualified opinion on to read the other information in a document
audited financial statements, an auditor containing audited financial statements.
discovered that the engagement personnel failed c. Yes, provided the report provides negative
to confirm several of the client's material accounts assurance only.
receivable balances. d. Yes, provided the auditor performs sufficient
The auditor should first: audit procedures to determine whether the
a. Request the permission of the client to information is fairly stated, in all material
undertake the confirmation of accounts respects, in relation to the financial statements.
receivable.
b. Perform alternative procedures to provide a
satisfactory basis for the unqualified opinion.
c. Assess the importance of the omitted CPA-03316 Explanation
procedures to the auditor's ability to support the Choice "d" is correct. If the auditor performs
previously expressed opinion. sufficient procedures, he or she may report on
d. Inquire whether there are persons currently whether the information is fairly stated, in all
relying, or likely to rely, on the unqualified material respects, in relation to the financial
opinion. statements.
CPA-03313 Explanation CPA-03325 Type1 M/C A-D Corr Ans: A PM#22
Choice "c" is correct. When an auditor discovers A 1-99
the omission of an audit procedure related to a 146. CPA-03325 Nov 90 #5 Page 18
previously issued report, the auditor should first Tech Company has disclosed an uncertainty due
assess the importance of the omitted procedure to pending litigation. The auditor's decision to
issue a qualified opinion rather than an scheme, Morris should disclaim an opinion on the
unqualified opinion most likely would be financial statements.
determined by the: CPA-03333 Type1 M/C A-D Corr Ans: B PM#25
a. Lack of sufficient evidence. A 1-99
b. Inability to estimate the amount of loss. 149. CPA-03333 May 90 #46 Page 8
c. Entity's lack of experience with such litigation. The first general standard requires that an audit
d. Lack of insurance coverage for possible losses of financial statements is to be performed by a
from such litigation. person or persons having:
CPA-03325 Explanation a. Seasoned judgment in varying degrees of
Choice "a" is correct. Lack of sufficient evidence supervision and review.
to support management's assertions would most b. Adequate technical training and proficiency.
likely cause an auditor to issue a qualified or c. Knowledge of the standards of fieldwork and
disclaimer of opinion. reporting.
CPA-03328 Type1 M/C A-D Corr Ans: D PM#23 d. Independence with respect to the financial
A 1-99 statements and supplementary disclosures.
147. CPA-03328 Nov 90 #4 Page 25 CPA-03333 Explanation
It is not appropriate to refer a reader of an Choice "b" is correct. The "first" general standard
auditor's report to a financial statement footnote states that the auditor must have adequate
for details concerning: technical
a. Subsequent events. training and proficiency to perform the audit.
b. The pro forma effects of a business Comment: It is important to memorize the 10
combination. auditing standards.
c. Sale of a discontinued operation. CPA-03334 Type1 M/C A-D Corr Ans: D PM#26
d. The results of confirmation of receivables. A 1-99
CPA-03328 Explanation 150. CPA-03334 May 90 #15 Page 30
Choice "d" is correct. Details concerning the An auditor's report that refers to the use of an
results of audit procedures (such as the results of accounting principle at variance with generally
confirmation of receivables) generally do not accepted accounting principles contains the
appear in the footnotes. words, "In our opinion, with the foregoing
CPA-03331 Type1 M/C A-D Corr Ans: B PM#24 explanation, the financial statements referred to
A 1-99 above present fairly...." This is considered an:
148. CPA-03331 May 90 #57 Page 37 a. Adverse opinion.
Morris, CPA, suspects that a pervasive scheme b. "Except for" qualified opinion.
of illegal bribes exists throughout the operations c. Unqualified opinion with an explanatory
of Worldwide Import-Export, Inc., a new audit paragraph.
client. Morris notified the audit committee and d. Example of inappropriate reporting.
World wide’s legal counsel, but neither could CPA-03334 Explanation
assist Morris in determining whether the amounts Choice "d" is correct. "In our opinion, with the
involved were material to the financial statements foregoing explanation, the FS referred to above
or whether senior management was involved in present fairly" is an example of inappropriate
the scheme. Under these circumstances, Morris reporting.
should:
a. Express an unqualified opinion with a separate
explanatory paragraph.
b. Disclaim an opinion on the financial When an auditor's report refers to the use of an
statements. accounting principle at variance with GAAP, the
c. Express an adverse opinion on the financial words, "in our opinion, except for the effects of
statements. the matters discussed in the preceding
d. Issue a special report regarding the illegal paragraph, the FS referred to above present
bribes. fairly,…" should be used.
CPA-03331 Explanation CPA-03336 Type1 M/C A-D Corr Ans: D PM#27
Choice "b" is correct. Since the CPA could not A 1-99
determine whether the suspected illegal bribes 151. CPA-03336 Nov 89 #24 Page 22
were material to the financial statements, or Management of Hill Company has decided not to
whether senior management was involved in the account for a material transaction in accordance
with the provisions of an FASB Standard. In
setting forth its reasons in a note to the financial d. Explicitly Implicitly
statements, management has clearly CPA-03340 Explanation
demonstrated that due to unusual circumstances Choice "c" is correct. Implicitly - Explicitly.
the financial statements presented in accordance When issuing the standard auditor's report on
with the FASB Standard would be misleading. comparative FS, an auditor implicitly represents
The auditor's report should include a separate consistent application of GAAP, but explicitly
explanatory paragraph and contain a(an): states, "An audit includes examining, on a test
a. "Except for" qualified opinion. basis, evidence supporting . . ." (Again, it is
b. "Subject to" qualified opinion. essential that you memorize the "auditor's
c. Adverse opinion. standard report.")
d. Unqualified opinion. CPA-03343 Type1 M/C A-D Corr Ans: A PM#30
CPA-03336 Explanation A 1-99
Choice "d" is correct. In unusual circumstances, 154. CPA-03343 Nov 89 #10 (Adapted) Page 34
where the literal application of accounting An auditor may issue a qualified opinion under
standards would make the FS misleading (e.g., which of the following circumstances?
new legislation or new business practices), the Lack of sufficient
proper accounting treatment is that which will appropriate Restrictions on the
more fairly present the FS. In such a case, the audit evidence scope of the audit
auditor should express an unqualified opinion on a. Yes Yes
the financial statements and include a separate b. Yes No
explanatory paragraph. c. No Yes
CPA-03338 Type1 M/C A-D Corr Ans: A PM#28 d. No No
A 1-99 CPA-03343 Explanation
152. CPA-03338 Nov 89 #23 Page 45 Choice "a" is correct. Yes - Yes.
A former client requests a predecessor auditor to An auditor may issue a qualified opinion (or a
reissue an audit report on a prior period's disclaimer, depending on materiality) when there
financial statements. The financial statements are is a lack of sufficient appropriate audit evidence,
not restated and the report is not revised. What or when there are restrictions on the scope of the
date(s) should the predecessor auditor use in the audit.
reissued report? CPA-03344 Type1 M/C A-D Corr Ans: A PM#31
a. The date of the prior-period report. A 1-99
b. The date of the client's request. 155. CPA-03344 Nov 89 #8 Page 22
c. The date of reissue. Grant Company's financial statements adequately
d. The dual-dates. disclose uncertainties that concern future events,
CPA-03338 Explanation The outcome of which are not susceptible of
Choice "a" is correct. The date of the prior-period reasonable estimation. The auditor's report
report should be used as long as the FS are not should include a (an):
restated, the report is not revised, and no a. Unqualified opinion.
significant changes have occurred that would b. "Subject to" qualified opinion.
affect the prior FS. c. "Except for" qualified opinion.
d. Adverse opinion.

CPA-03340 Type1 M/C A-D Corr Ans: C PM#29 CPA-03344 Explanation

A 1-99 Choice "a" is correct. The auditor should issue an
153. CPA-03340 Nov 89 #12 Page 14 "unqualified opinion" when management
Does an auditor make the following adequately discloses future events, the outcome
representations explicitly or implicitly when of which are not susceptible of reasonable
issuing the standard auditor's report on estimation. No reference to the uncertainty need
comparative financial statements? be made in the auditor's opinion.
Consistent Examination of CPA-03351 Type1 M/C A-D Corr Ans: A PM#32
application of evidence on a A 1-99
accounting principles test basis 156. CPA-03351 Nov 89 #3 Page 14
a. Explicitly Explicitly How are management's responsibility and the
b. Implicitly Implicitly auditor's responsibility represented in the
c. Implicitly Explicitly standard auditor's report?
Management's Auditor's 159. CPA-03360 May 88 #50 Page 53
responsibility responsibility Information accompanying the basic financial
a. Explicitly Explicitly statements in an auditor-submitted document
b. Implicitly Implicitly should not include:
c. Implicitly Explicitly a. An analysis of inventory by location.
d. Explicitly Implicitly b. A statement that the allowance for doubtful
CPA-03351 Explanation accounts is adequate.
Choice "a" is correct. The responsibility of the c. A statement that the depreciable life of a new
auditor and the responsibility of management are asset is 20 years.
stated explicitly in the introductory paragraph of d. An analysis of revenue by product line.
the standard auditor's report. CPA-03360 Explanation
CPA-03354 Type1 M/C A-D Corr Ans: D PM#33 Choice "b" is correct. A statement that the
A 1-99 "allowance for doubtful accounts is adequate" is
157. CPA-03354 Nov 89 #2 Page 25 generally not included in information
When there is a significant change in accounting accompanying the basic FS in an auditor-
principle, an auditor's report should refer to the submitted document (ASD) because it expresses
lack of consistency in: an opinion rather than providing details or
a. The scope paragraph. explanations.
b. An explanatory paragraph between the second CPA-03362 Type1 M/C A-D Corr Ans: D PM#36
paragraph and the opinion paragraph. A 1-99
c. The opinion paragraph. 160. CPA-03362 May 88 #47 Page 25
d. An explanatory paragraph following the opinion For a particular entity's financial statements to be
paragraph. presented fairly in conformity with generally
CPA-03354 Explanation accepted accounting principles, it is not required
Choice "d" is correct. When there is a significant that the principles selected:
change in accounting principle, the auditor's a. Be appropriate in the circumstances for the
report should refer to the lack of consistency in an particular entity.
explanatory paragraph following the opinion b. Reflect transactions in a manner that presents
paragraph. The explanatory paragraph should the financial statements within a range of
identify the change and refer to the note in the FS acceptable limits.
that discusses the change in detail. The auditor's c. Present information in the financial statements
concurrence with the change in GAAP is implicit, that is classified and summarized in a reasonable
unless he or she takes exception. manner.
CPA-03357 Type1 M/C A-D Corr Ans: D PM#34 d. Be applied on a basis consistent with those
A 1-99 followed in the prior year.
158. CPA-03357 Nov 89 #1 Page 20 CPA-03362 Explanation
When a principal auditor decides to make Choice "d" is correct. For a particular entity's FS
reference to another auditor's examination, the to be presented fairly in conformity with GAAP, it
principal auditor's report should always indicate is not
clearly, in the introductory, scope, and opinion required that the principles selected be applied on
paragraphs, the: a basis consistent with those followed in the prior
a. Magnitude of the portion of the financial year, merely that any changes in accounting
statements examined by the other auditor. principle be properly accounted for and disclosed.
b. Disclaimer of responsibility concerning the CPA-03364 Type1 M/C A-D Corr Ans: A PM#37
portion of the financial statements examined by A 1-99
the other 161. CPA-03364 Nov 87 #1 Page 12
auditor. An auditor has been asked to report on the
c. Name of the other auditor. balance sheet of Kane Company but not on the
d. Division of responsibility. other basic financial statements. The auditor will
CPA-03357 Explanation have access to all information underlying the
Choice "d" is correct. Reference to the division of basic financial statements. Under these
responsibility should be made in the introductory, circumstances, the auditor:
scope and opinion paragraphs of the principal a. May accept the engagement because such
auditor's report. engagements merely involve limited reporting
CPA-03360 Type1 M/C A-D Corr Ans: B PM#35 objectives.
A 1-99
b. May accept the engagement but should This question presents independent factual
disclaim an opinion because of an inability to situations an auditor might encounter in
apply the procedures considered necessary. conducting an audit.
c. Should refuse the engagement because there List A represents the types of opinions the auditor
is a client-imposed scope limitation. ordinarily would issue. Select as the best answer
d. Should refuse the engagement in accordance for this item, the action the auditor normally would
with generally accepted auditing standards. take. The types of opinions in List A may be
CPA-03364 Explanation selected once, more than once, or not at all.
Choice "a" is correct. The auditor may accept the Assume:
engagement because there is no scope limitation, • The auditor is independent.
merely a limited reporting objective. It is • The auditor previously expressed an unqualified
acceptable to give an opinion on one FS and not opinion on the prior year's financial statements.
report on the other FS, if the scope is not limited. • Only single-year (not comparative) statements
CPA-03366 Type1 M/C A-D Corr Ans: B PM#38 are presented for the current year.
A 1-99 • The conditions for an unqualified opinion exist
162. CPA-03366 May 84 #52 Page 25 unless contradicted in the factual situations.
If an accounting change has no material effect on • The conditions stated in the factual situations
the financial statements in the current year, but are material.
the change is reasonably certain to have a • No report modifications are to be made except
material effect in later years, the change should in response to the factual situation.
be: Item to Be Answered
a. Treated as a consistency modification in the An entity discloses in the notes to the financial
auditor's report for the current year. statements certain lease obligations. The auditor
b. Disclosed in the notes to the financial believes that the failure to capitalize these leases
statements of the current year. is a departure from generally accepted
c. Disclosed in the notes to the financial accounting principles.
statements and referred to in the auditor's report List A
for the current year. Types of Options
d. Treated as a subsequent event. A. An "except for" qualified opinion.
CPA-03366 Explanation B. An unqualified opinion.
Choice "b" is correct. If an accounting change C. An adverse opinion.
does not have a material effect on the FS of the D. A disclaimer of opinion.
current year, it will be disclosed in the notes to E. Either an "except for" qualified opinion or an
the FS for the current year, but no modification of adverse opinion.
the auditor's report is necessary. F. Either a disclaimer of opinion or an "except for"
CPA-03367 Type1 M/C A-D Corr Ans: A PM#39 qualified opinion.
A 1-99 G. Either an adverse opinion or a disclaimer of
163. CPA-03367 Nov 94 L #3 Page 9 opinion.
To exercise due professional care an auditor CPA-04596 Explanation
should: Choice "E" is the correct opinion. This is a
a. Critically review the judgment exercised by GAAP departure. Either an "except for" qualified
those assisting in the audit. opinion (if the item is material) or an adverse
b. Examine all available corroborating evidence opinion (if the item is very material) should be
supporting management's assertions. issued.
c. Design the audit to detect all instances of CPA-04597 Type1 M/C H-Q Corr Ans: J PM#53
illegal acts. A 1-99
d. Attain the proper balance of professional 177. CPA-04597 Au May 92 #2 7B Page 3
experience and formal education. This question presents independent factual
CPA-03367 Explanation situations an auditor might encounter in
Choice "a" is correct. To exercise due conducting an audit.
professional care, an auditor should critically List B represents the report modifications (if any)
review the judgment exercised by those assisting that would be necessary. Select as the best
in the audit. answer for each item, the action the auditor
CPA-04596 Type1 M/C A-G Corr Ans: E PM#52 normally would take. The report modifications in
A 1-99 List B may be selected once, more than once, or
176. CPA-04596 Au May 92 #2 7A Page 3 not at all.
Assume: K. Describe the circumstances in an explanatory
• The auditor is independent. paragraph following the opinion paragraph and
• The auditor previously expressed an unqualified modify the opinion paragraph.
opinion on the prior year's financial statements. L. Describe the circumstances in an explanatory
• Only single-year (not comparative) statements paragraph preceding the opinion paragraph and
are presented for the current year. modify the scope and opinion paragraphs.
• The conditions for an unqualified opinion exist M. Describe the circumstances in an explanatory
unless contradicted in the factual situations. paragraph following the opinion paragraph and
• The conditions stated in the factual situations modify the scope and opinion paragraphs.
are material. N. Describe the circumstances within the scope
• No report modifications are to be made except paragraph without adding an explanatory
in response to the factual situation. paragraph.
Item to Be Answered O. Describe the circumstances within the opinion
An entity discloses in the notes to the financial paragraph without adding an explanatory
statements certain lease obligations. The auditor paragraph.
believes that the failure to capitalize these leases P. Describe the circumstances within the scope
is a departure from generally accepted and opinion paragraphs without adding an
accounting principles. explanatory
List B paragraph.
Report Modifications Q. Issue the standard auditor's report without
H. Describe the circumstances in an explanatory modification.
paragraph preceding the opinion paragraph CPA-04597 Explanation
without modifying the three standard paragraphs. Choice "J" is the correct modification. The
I. Describe the circumstances in an explanatory circumstances should be described in an
paragraph following the opinion paragraph explanatory paragraph preceding the opinion
without modifying the three standard paragraphs. paragraph and the opinion paragraph should be
J. Describe the circumstances in an explanatory modified.
paragraph preceding the opinion paragraph and
modify the opinion paragraph.
d. Inform readers of the degree of
correspondence between the quantifiable
CPA REVIEW SCHOOL OF THE information and
PHILIPPINES the established criteria.
Manila 3. The auditor communicates the results of his
AUDITING THEORY or her work through the medium of the
Overview of Auditing a. Engagement letter c. Management letter.
Related PSAs : PSA 100, 120, 200 and 610 b. Audit report d. Financial statements.
1. Certain fundamental beliefs called 4. As used in auditing, which of the following
"postulates" underlie auditing theory. Which of statements best describes "assertions"?
the a. Assertions are the representations of
following is not a postulate of auditing? management as to the reliability of the
a. No long-term conflict exists between the information
auditor and the management of the enterprise system.
under audit. b. Assertions are the auditor's findings to be
b. Economic assertions can be verified. communicated in the audit report.
c. The auditor acts exclusively as an auditor. c. Assertions are the representations of
d. An audit has a benefit only to the owners. management as to the fairness of the financial
2. In all cases, audit reports must statements.
a. Be signed by the individual who performed d. Assertions are found only in the footnotes to
the audit procedures. the financial statements.
b. Certify the accuracy of the quantitative 5. The expertise that distinguishes auditors from
information which was audited. accountants is in the
c. Communicate the auditor’s finding to the a. Ability to interpret generally accepted
general public. accounting principles.
b. Requirement to possess education beyond
the Bachelor’s degree.
c. Accumulation and interpretation of evidence. 11. According to Philippine Standard on
d. Ability to interpret ASC Statements. Auditing, the procedures employed in doing
6. The framework for auditing and related compilation
services as addressed by PSA excludes are:
a. Review c. Compilation a. Designed to enable the accountant to express
b. Tax services d. Agreed upon procedure a limited assurance.
7. It refers to the level of auditor’s satisfaction as b. Designed to enable the accountant to express
to the reliability of an assertion being made by a negative assurance.
one party for use by another party. c. Not designed to enable the accountant to
a. Confidence level c. Assurance level express any form of assurance.
b. Reasonableness level d. Tolerable level d. Less extensive than review procedures but
8. Indicate the level of assurance provided by more extensive than agreed-upon procedures.
audit and related services. 12. Any services in which the CPA firm issues a
abcd written communication that express a conclusion
• Audit High High Negative Absolute with respect to the reliability of a written
• Review Moderate None Moderate High assertion that is the responsibility of another
• Agreed-upon procedures None None None party is
Limited a (n)
• Compilation None None None None a. Accounting and bookkeeping service c.
9. Which of the following is true of the report Attestation service
based on agreed-upon-procedures? b. Management advisory service d. Tax service
a. The report is restricted to those parties who 13. The three types of attestation services are:
have agreed to the procedures to be a. Audits, review, and compilations
performed. b. Audits, compilations, and other attestation
b. The CPA provides the recipients of the report services
limited assurance as to reasonableness of c. Reviews, compilations, and other attestation
the assertion(s) presented in the financial services
information. d. Audits, reviews, and other attestation services
c. The report states that the auditor has not 14. Which of the following is not primary
recognized any basis that requires revision of category of attestation report?
financial statements. a. Compilation report
d. The report should state that the procedures b. Review report
performed are limited to analytical procedures c. Audit report
and inquiry. d. Special audit report based on a basis of
Page 2 of 8 accounting other than generally accepted
accounting principles.
AT-5901 15. The primary goal of the CPA in performing
10. Which of the following is an objective of a the attest function is to
review engagement? a. Detect fraud
a. Expressing a positive opinion that the b. Examine individual transactions so that the
financial information is presented in conformity auditor may certify as to their validity
with c. Determine whether the client's assertions are
generally accepted accounting principles. fairly stated
b. Expressing a limited assurance to users who d. Assure the consistent application of correct
have agreed as to procedures that will be accounting procedures
performed by the CPA. 16. Which of the following criteria is unique to
c. Reporting whether material modifications the independent auditor’s attest function?
should be made to such financial statements to a. General competence
make them conform with generally accepted b. Familiarity with the particular industry of each
accounting principles. client
d. Reporting that the financial statements, in all c. Due professional care
materials respects, fairly present the d. Independence
financial position and operating results of the 17. Assurance engagement
client. a. Is an engagement in which a practitioner is
engaged to issue, or does issue, a written
communication that expresses a conclusion a. Operational audit c. Financial statement audit
about the reliability of a written assertion that b. Compliance audit d. Financial audit
is the responsibility of another party. 22. An operational audit is designed to
b. Is a systematic process of objectively a. Assess the efficiency and effectiveness of
obtaining and evaluating evidence regarding management’s operating procedures
assertions about economic actions and events b. Assess the presentation of management’s
to ascertain the degree of correspondence financial statements in accordance with
between those assertions and established generally accepted accounting principles
criteria and communicating the results to c. Determine whether management has
interested users. complied with applicable laws and regulations
c. Is an engagement in which the auditor d. Determine whether the audit committee of the
provides a moderate level of assurance that the board of directors is effectively discharging
information subject to the engagement is free of its responsibility to oversee management’s
material misstatement. operations
d. Is an engagement intended to enhance the 23. A review of any part of an organization’s
credibility of information about a subject procedures and methods for the purpose of
matter by evaluating whether the subject matter evaluating efficiency and effectiveness is
conforms in all material respects with classified as a (n)
suitable criteria, thereby improving the likelihood a. Audit of financial statements c. Operational
that the information will meet the needs audit
of an intended user. b. Compliance audit d. Production audit
18. The single feature that most clearly 24. Which one of the following is more difficult to
distinguishes auditing, attestation, and evaluate objectively?
assurance is a. Efficiency and effectiveness of operations.
a. Type of service. c. Scope of services. b. Compliance with government regulations.
b. Training required to perform the service d. c. Presentation of financial statements in
CPA’s approach to the service accordance with generally accepted accounting
Page 3 of 8 principles.
AT-5901 d. All three of the above are equally difficult..
25. Independent auditing can best be described
19. Identify the following as financial audit (FA),
as a
compliance audit (CA), and operational audit
a. Branch of accounting
(OA).
b. Discipline that attests to the results of
• A supervisor is not carrying out his assigned
accounting and other operations and data
responsibilities.
c. Professional activity that measures and
• A company’s tax return does not conform to
communicates financial and business data
income tax laws and regulations.
d. Regulatory function that prevents the
• A municipality’s financial statements correctly
issuance of improper financial information
show actual cash receipts and 26. A financial statement audit:
disbursements. a. Confirms that financial statement assertion
• A company’s receiving department is are accurate.
inefficient. b. Lends credibility to the financial statements.
a. CA, CA, FA, OA c. OA, CA, FA, OA c. Guarantees that financial statements are
b. OA, CA, CA, OA d. CA, CA, FA, CA presented fairly.
20. The criteria for evaluating quantitative d. Assures that fraud had been detected.
information vary. For example, in the audit of 27. Which of the following best describes the
historical objective of an audit of financial statements?
financial statements by CPA firms, the criteria a. To express an opinion whether the financial
are usually statements are prepared in accordance with
a. Generally accepted auditing standards. prescribed criteria.
b. Generally accepted accounting principles. b. To express an assurance as to the future
c. Regulations of the Internal Revenue Service. viability of the entity whose financial statements
d. Regulations of the Securities and Exchange are being audited.
Commission. c. To express an assurance about the
21. Which of the following types of audit uses as management’s efficiency or effectiveness in
its criteria laws and regulations? conducting the operations of entity.
d. To express an opinion whether the financial b. Conservative advocacy d. Professional
statements are prepared, in all material skepticism
respect, in accordance with an identified 33. Which of the following best describes why an
financial reporting framework. independent auditor reports on financial
28. Because an external auditor is paid a fee by statements?
a client company, he or she a. Independent auditors are likely to detect fraud
a. Is absolutely independent and may conduct b. Competing interests may exist between
an audit management and the users of the statements
Page 4 of 8 c. Misstated account balances are generally
AT-5901 corrected by an independent audit.
d. Ineffective internal controls may exist.
b. May be sufficiently independent to conduct an
34. An audit can have a significant effect on
audit
a. Information Risk c. Business Risk
c. Is never considered to be independent
b. The risk-free interest rate d. All of these
d. Must receive approval of the Securities and
35. The main way(s) to reduce information risk is
Exchange Commission before conducting an
to have
audit
a. The user verify the information
29. Which of the following is responsible for an
b. The user share the information risk with
entity’s financial statements?
management
a. The entity’s management c. The entity’s audit
c. Audited financial statements provided
committee
d. All of the above
b. The entity’s internal auditors d. The entity’s
36. Which of the following is an appraisal activity
board of directors
established within an entity as a service to the
30. The best statement of the responsibility of
entity?
the auditor with respect to audited financial
a. External auditing c. Financial auditing
statement is:
b. Internal auditing d. Compliance auditing
a. The audit of the financial statements relieves
37. The scope and objectives of internal auditing
management of its responsibilities
vary widely and depend on the size and
b. The auditor’s responsibility is confined to his
structure of the entity and the requirements of its
expression of opinion about the audited
management. Ordinarily, internal auditing
financial statements.
activities include one or more of the following:
c. The responsibility over the financial
abcd
statements rests with the management and the
• Review of the accounting and internal control
auditor assumes responsibility with respect to
systems Yes Yes Yes Yes
the notes of financial statements.
• Examination of financial and operating
d. The auditor is responsible only to his
information Yes Yes Yes No
unqualified opinion but not for any other type of
• Review of the economy, efficiency and
opinion.
effectiveness of operations Yes Yes No No
31. Which of the following least likely limits the
• Review of compliance with laws, regulations
auditors ability to detect material misstatement?
a. Most audit evidences are conclusive rather and other external requirements Yes No No No
Page 5 of 8
than being persuasive.
b. The inherent limitations of any accounting and
internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in AT-5901
detecting ordinary misstatements are ineffective 38. To operate effectively, an internal auditor
in must be independent of
detecting intentional misstatements. a. The line functions of the organizations
32. Because an examination in accordance with b. The entity
generally accepted auditing standards is c. The employer-employee relationship which
influenced by the possibility of material errors, exists for other employees in the organization
the auditor should conduct the examination d. All of the above
with an attitude of 39. Internal auditors cannot be independent
a. Professional responsiveness c. Objective a. Since they do not possess the CPA license.
judgment b. Because they don’t audit financial statements.
c. Unless their immediate supervisor is a CPA. Audit shall be
d. As long as an employer-employee a. All Certified Public Accountants
relationship exists. b. All lawyers
40. To provide for the greatest degree of c. One or two lawyers and one or two CPAs for
independence in performing internal auditing a total of three
functions, d. Two lawyers and one CPA
an internal auditor most likely should report to 45. Which of the following is not one of the
a. Board of Directors. c. Corporate Controller. duties of the Commission on Audit
b. Vice-President for Finance. d. Corporate a. Define the scope of its audit and examination
Stockholders. b. Assume fiscal responsibility for the
41. Which statement is correct regarding the government and its instrumentalities
relationship between internal auditing and the c. Keep the general accounts of the government
external auditor? d. Promulgate accounting rules and regulations
a. Some judgments relating to the audit of the 46. A governmental audit may extend beyond an
financial statements are those of the internal examination leading to the expression of an
auditor. opinion on the fairness of financial presentation
b. The external audit function's objectives vary to include
according to management's requirements. Program results Compliance Economy and
c. Certain aspects of internal auditing may be efficiency
useful in determining the nature, timing and a. Yes Yes No
extent of external audit procedures. b. Yes Yes Yes
d. The external auditor is responsible for the c. No Yes Yes
audit opinion expressed, however that d. No No Yes
responsibility may be reduced by any use made Page 6 of 8
of internal auditing.
42. Which of the following statements is not a
AT-5901
47. An audit designed to determine the extent to
distinction between independent auditing and
which the desired results of an activity
internal auditing?
established by the legislative or other
a. Independent auditors represent third party
authorizing body are being achieved is a (an)
users external to the auditee entity, whereas
a. Economy audit c. Program audit
internal auditors report directly to management.
b. Efficiency audit d. Financial related audit
b. Although independent auditors strive for both
48. A government auditor evaluates a
validity and relevance of evidence, internal
disbursement to determine if it is necessary,
auditors are concerned almost exclusively with
excessive or
validity.
extravagant in accordance with existing rules
c. Internal auditors are employees of the
and regulations. What kind of audit is he
auditee, whereas independent auditors are
conducting?
independent contractors.
Compliance audit Economy audit
d. The internal auditor's span of coverage goes
a. Yes No
beyond financial auditing to encompass
b. No Yes
operational and performance auditing.
c. Yes Yes
43. Which of the following is a correct
d. No No
qualification of the Chairman and Two
QUIZZERS
Commissioners of
1. Which of the following is an incorrect phrase?
the Commission on Audit?
a. Auditing is a systematic process.
a. A citizen of the Philippines.
b. Auditing subjectively obtains and evaluates
b. At least 40 years of age upon appointment.
evidence.
c. CPA’s with no less than 5 years of auditing
c. Auditing evaluates evidence regarding
experience or members of Philippine bar who
assertions.
have been engaged in law practice for at least 5
d. Auditing communicates results to interested
years.
users.
d. Must not have been candidates for any
2. Which of the following is a correct statement
elective position preceding appointment.
relating to the theoretical framework of auditing?
44. The 1986 Constitution provides that the
a. The financial data to be audited can be
Chairman and Commissioners of the
verified.
Commission on
b. Short-term conflicts do not exist between
managers who prepare data and auditors who
AT-5901
examine data. b. It provides basic principles and essential
c. Auditors do not necessarily need procedures for engagements intended to provide
independence. a moderate level of assurance.
d. An audit has a benefit only to the owners. c. When a professional accountant is engaged
3. The essence of the attest function is to to perform an assurance engagement for
a. Detect fraud which specific standards exist, those standards
b. Examine individual transactions so that the apply.
auditor can certify as to their validity d. If no specific standards exist for an assurance
c. Determine whether the client’s financial engagement, PSAE apply.
statements are fairly stated 9. An assurance engagement should exhibit the
d. Ensure the consistent application of correct following elements except
accounting procedures a. A three party relationship c. Appropriate
4. In “auditing” accounting data, the concern is professional fee
with b. A conclusion d. A subject matter
a. Determining whether recorded information 10. Which of the following is incorrect regarding
properly reflects the economic events that the “three-party relationship” element of
occurred during the accounting period. assurance engagements?
b. Determining if fraud has occurred. a. Professional accountants as those persons
c. Determining if taxable income has been who are members of an IFAC member body,
calculated correctly. which should be in public practice.
d. Analyzing the financial information to be sure b. The responsible party and the intended user
that it complies with government will often be from separate organizations but
requirements. need not be.
5. Users of financial statements demand c. The responsible party is the person or
independent audit because persons, either as individuals or representatives
a. Users demand assurance that fraud does not of
exist an entity, responsible for the subject matter.
b. Management may not be objective in d. The intended user is the person or class of
reporting. persons for whom the professional accountant
c. Users expect auditors to correct management prepares the report for a specific use or
errors. purpose.
d. Management relies on the auditor to improve 11. The following are assurance engagements
internal control. except
6. Which of the following types of audits is a. Financial statements audit c. Review of
performed to determine whether an entity’s financial statements
financial b. Information system reliability services d. Tax
statements are fairly stated in conformity with consulting
generally accepted accounting principles? 12. Engagements frequently performed by
a. Operational audit c. Financial statement audit professional accountants that are not assurance
b. Compliance audit d. Performance audit engagements include the following except
7. Which of the following types of auditing is a. Agreed-upon procedures. c. Compilation
performed most commonly by CPAs on a b. Compliance audit d. Management consulting.
contractual basis? 13. The subject matter of an assurance
a. Internal auditing c. Government auditing engagement may take many forms, including
b. BIR auditing d. External auditing a. Data b. Systems and processes c. Behavior
PSA 100 – Assurance engagements d. All of these
8. Which of the following is incorrect regarding 14. The decision as to whether the criteria are
the Philippine Standards on Assurance suitable involves considering whether the
Engagements (PSAE)? subject
a. It provides an overall framework for matter is capable of reasonably consistent
assurance engagements intended to provide evaluation against or measurement using such
either a criteria. The characteristics for determining
high or moderate level of assurance. whether criteria are suitable include the
Page 7 of 8 following,
except c. Is to carry out those procedures of an audit
a. Relevance b. Reliability: c. Understandability: nature to which the auditor and the entity and
d. Sufficiency any appropriate third parties have agreed and to
15. When the professional accountant has report on factual findings.
obtained sufficient appropriate evidence to d. Is to use accounting expertise as opposed to
conclude auditing expertise to collect, classify and
that the subject matter conforms in all material summarize financial information.
respects with identified suitable criteria, he or 21. An auditor is associated with financial
she can provide what level of assurance? information when
a. None b. High c. Moderate d. Absolute abcd
16. Absolute assurance is generally not • the auditor attaches a report to that
attainable as a result of such factors as: information Yes No Yes No
abcd • consents to the use of the auditor’s name in a
• the use of selective testing, Yes Yes Yes No professional connection Yes Yes No No
• the inherent limitations of control systems Yes PSA 200 – Objective and general principles
Yes Yes Yes governing an audit of FS
• the fact that much of the evidence available to 22. The auditor’s opinion
the professional accountant is persuasive a. Enhances the credibility of the financial
rather than conclusive Yes Yes No Yes statements.
• the use of judgment in gathering evidence and b. Is an assurance as to the future viability of the
drawing conclusions based on that evidence entity.
Yes No No No c. Is an assurance as to the efficiency with which
PSA 120 – Framework of PSA management has conducted the affairs of
17. The Framework of PSA applies to the entity, but not effectiveness.
a. Taxation b. Consultancy c. Accounting advice d. Certifies the correctness of the financial
d. Compilation statements.
18. Agreed-upon procedures provides what level 23. Which of the following is incorrect regarding
of assurance? the general principles of an audit?
a. None b. High c. Moderate d. Absolute a. The auditor should comply with the “Code of
19. Which of the following procedures ordinarily Ethics for Professional Ethics for Certified
performed during an audit are also performed in Public Accountants” promulgated by the
review? Philippine Professional Regulation Commission.
a. Assessment of accounting and internal control b. The auditor should conduct an audit in
systems accordance with PSAs.
b. Test of controls c. The auditor should plan and perform an audit
c. Tests of records and of responses to inquiries with an attitude of professional skepticism
Page 8 of 8 recognizing that circumstances may exist that
AT-5901 cause the financial statements to be
materially misstated.
d. Inquiry and analytical procedures
d. The auditor would ordinarily expect to find
20. The objective of a review of financial
evidence to support management
statements
representations and assume they are
a. Is to enable the auditor to express an opinion
necessarily correct.
whether the financial statements are
24. It refers to the audit procedures deemed
prepared, in all material respects, in accordance
necessary in the circumstances to achieve the
with an identified financial reporting
objective of the audit.
framework.
a. Scope of an audit c. Objective of an audit
b. Is to enable an auditor to state whether, on
b. Audit program d. Reasonable assurance
the basis of procedures which do not provide
25. Which of the following are sources of
all the evidence that would be required in an
procedures to be considered by the auditor to
audit, anything has come to the auditor’s
conduct
attention that causes the auditor to believe that
an audit in accordance with PSAs?
the financial statements are not prepared,
PSA Legislation Terms of Audit Engagement
in all material respects, in accordance with an
Type of Opinion
identified financial reporting framework.
a. Yes No No No
b. No No Yes Yes
c. No Yes Yes No 5. Which of the following mostly describes the
d. Yes Yes Yes No function of ASPC?
- end of AT-5901 – a. To monitor full compliance by auditors to
PSAs.
CPA REVIEW SCHOOL OF THE b. To promulgate auditing standards, practices
and procedures that shall be generally
PHILIPPINES accepted by the accounting profession in the
Manila Philippines.
AUDITING THEORY c. To assist the Board of Accountancy in
Professional Accounting Practice conducting administrative proceedings on erring
Related PSA : Preface to PSA and Related CPAs in audit practice.
Services d. To undertake continuing research on both
1. The following statements relate to the auditing and financial accounting in order to
accounting profession: make them responsive to the needs of the
I. To merit public trust and confidence, the public.
professional person must convince the public 6. In the absence of pronouncements issued by
that the ASPC and the PICPA, published
he will place public service ahead of personal statements and guidelines issued by other
reward. authoritative bodies like AICPA, IAASB and AFA
II. A CPA certificate is evidence of basic are the bases of determining generally accepted
competence in the discipline of accounting at the auditing standards (GAAS). What effect do
time these pronouncements provide in determining
the certificate is granted. the GAAS?
III. A code of professional conduct is one of the a. Authoritative b. Persuasive c. Parallel d.
most important distinguishing characteristics of Alternative
a profession. 7. Which statement is incorrect regarding the
State whether the foregoing statements are true pronouncements of ASPC?
or false. a. The PSAs and Interpretations may also have
a. All of the statements are true. c. Only two of application, as appropriate, to other related
the statements are true. activities of auditors.
b. Only one of the statements is true. d. All of b. PSAs contain basic principles and essential
the statements are false. procedures (identified in bold type black
2. Which of the following is not normally a lettering) together with related guidance in the
service rendered by public accountants? form of explanatory and other material.
a. Management consultation service c. Internal c. PSAs need only be applied to material
auditing matters.
b. Attest function d. Taxation d. The Interpretations have the same authority
3. A CPA firm offers management advisory as the PAPSs.
services to clients. Its primary purpose is to 8. The Philippine Standards on Auditing issued
a. Furnish professional advice and assistance by ASPC
which will enable the client to improve a. Apply to independent examination of financial
operations. statements of any entity when such an
b. Keep the CPA firm competitive with other examination is conducted for the purpose of
firms. expressing an opinion thereon.
c. Establish the firm as a consultant, thus b. Must not apply to other related activities of
ensuring its future expansion and growth. auditors
d. Permit the firm’s staff members to acquire c. Need to be applied on all audit related
expertise in other areas of practice. matters.
4. The government agency tasked by law of Page 2 of 7
implementing and enforcing the regulatory
policies AT-5902
of the national government with respect to the d. Require that in no circumstances would an
regulation and licensing of the various auditor may judge it necessary to depart from
professions and occupations under its a PSA, even though such a departure may result
jurisdiction is to more effective achievement of the
a. PRC b. BOA c. COA d. SEC objective of an audit
9. These statements are issued to provide 16. Indicate whether the following functions
practical assistance to auditors in implementing would be performed by:
the P – Partner S – Senior
PSAs M – Manager AS – Audit Assistant
a. Interpretations b. SASP c. PAPS d. SPA (1) Supervises two or more concurrent audit
10. A body that is created through the Philippine engagements
Accountancy Act of 2004 and is intended to (2) Performs detailed audit procedures
replace the ASPC. (3) Overall responsibility for audit
a. Auditing and Assurance Standards Council (4) Signs audit report
(AASC) (1) (2) (3) (4)
b. Financial Reporting Standards Council a. P AS S M
(FRSC) b. M S M P
c. Education Technical Council (ETC) c. M AS P P
d. Philippine Institute of Certified Public d. P AS S M
Accountants (PICPA) 17. The amount of audit fees depend largely on
11. Which of the following government agencies the
is represented both to the Auditing Standards a. Size and capitalization of the company under
and Practices Council and the Auditing and audit.
Assurance Standards Council? b. Amount of profit for the year.
a. Bangko Sentral ng Pilipinas c. Securities and c. Availability of cash.
Exchange Commission d. Volume of audit work and degree of
b. Bureau of Internal Revenue d. Commission competence and responsibilities involved.
on Higher Education Page 3 of 7
12. Are the following government agencies
represented both to Auditing Standards and
AT-5902
18. In determining audit fees, an auditor may
Practices
take into account each of the following except
Council (ASPC) and the new Auditing and
a. Volume and intricacy of work involved. c.
Assurance Standards Council (AASC)?
Number and cost of manhours needed.
abcd
b. Degree of responsibility assumed. d. Size and
• Board of Accountancy Yes Yes Yes Yes
amount of capital of client.
• Securities and Exchange Commission Yes
19. Under this method of billing a client, the
Yes No No
external auditors charges on the basis of time
• Commission on Audit Yes Yes Yes Yes
spent
• Bangko Sentral ng Pilipinas Yes No Yes No by principals/partners, supervisors, seniors and
13. Which statement is correct regarding AASC? juniors at predetermined rates agreed upon
a. The AASC shall be composed of 15 members with the client
plus a Chairman. a. Maximum fee basis c. Flat sum basis
b. The chairman and members of the AASC b. Retainer basis d. Per diem basis
shall be appointed by the President of the RA No. 9298 – Philippine Accountancy Act of
Philippines upon the recommendation of PRC. 2004 and its IRR
c. The chairman and members of the AASC 1. Which of the following is not one of the
shall have a non-renewable term of 3 years. specified objectives of the Accountancy Act of
d. The chairman should have been or presently 2004?
a senior practitioner in public accountancy. a. Examination for registration of CPAs.
14. The following sectors represented by the b. Supervision, control, and regulation of
PICPA to the membership of AASC have one accounting practice.
representative, except c. Standardization and regulation of accounting
a. Government c. Commerce and industry education.
b. Public practice d. Academe d. Promulgation of accounting and auditing
15. Statements on financial accounting standards.
standards constituting GAAP are issued by the 2. In all of the following situations except one, a
a. Philippine Institute of CPAs. c. Audit person is deemed to be engaged in
Standards and Practices Council. professional accounting practice. Which of them
b. Securities and Exchange Commission. d. is the exception?
Accounting Standards Council.
a. Performing audits or verification of financial be occupied only by a duly registered CPA.
transactions and records for more than one Provided (choose the incorrect one)
client. a. That the business or company where the
b. Employed as the department chairman that above position exists has a paid-up capital of at
supervises the BSA program of an least P5,000,000 and/or an annual revenue of at
educational institution. least P10,000,000.
c. Employment as controller of a private b. The above provision shall apply only to
business enterprise and such employment persons to be employed after the effectivity of
requires the
that the holder thereof should be a CPA. Implementing Rules and Regulations of RA
d. Appointment in the government where first 9298.
grade civil service eligibility is a prerequisite. c. The above provision shall not result to
3. A person is not deemed to be engaged in deprivation of the employment of incumbents to
professional accounting practice if the position.
a. Her merely holds himself out as skilled in the d. None of the above.
science and practice of accounting and Page 4 of 7
qualified to render services as a CPA.
b. He merely offers to render services as a CPA
AT-5902
6. The integrated national professional
to the public, but does not actually render
organization of Certified Public Accountants
such services.
accredited
c. He offers or renders bookkeeping services to
by the BOA and the PRC per PRC accreditation
more than one client.
No. 15 dated October 2, 1975.
d. He installs and revises accounting systems
a. Auditing and Assurance Standards Council
for more than one client.
(AASC)
4. Practice in Public Accountancy shall
b. Financial Reporting Standards Council
constitute in a person
(FRSC)
a. Involved in decision making requiring
c. Education Technical Council (ETC)
professional knowledge in the science of
d. Philippine Institute of Certified Public
accounting, or when such employment or
Accountants (PICPA)
position requires that the holder thereof must be
7. As defined in the IRR of RA 9298, it is an
a certified public accountant.
organization engaged in the practice of public
b. In an educational institution which involve
accountancy, consisting of sole proprietor, either
teaching of accounting, auditing, management
alone or with one or more staff members.
advisory services, finance, business law,
a. Firm b. Individual CPA c. Partnership d.
taxation, and other technically related subjects.
Sector
c. Who holds, or is appointed to, a position in an
8. The following statements relate to the Board
accounting professional group in
of Accountancy. Which statement is correct?
government or in a government owned and/or
a. The Board consists of a Chairman and six
controlled corporation, including those
members.
performing proprietary functions, where decision
b. The chairman and members are appointed by
making requires professional knowledge
the President of the Philippines upon
in the science of accounting,
recommendation of PICPA.
d. Holding out himself/herself as one skilled in
c. The Professional Regulation Commission may
the knowledge, science and practice of
remove from the Board any member
accounting, and as a qualified person to render
whose certificate to practice has been removed
professional services as a certified public
or suspended.
accountant; or offering or rendering, or both, to
d. Majority of the board members shall as much
more than one client on a fee basis or
as possible be in public practice.
otherwise.
9. The APO shall submit its nominations with
5. Any position in any business or company in
complete documentation to the Commission not
the private sector which requires supervising the
later than _____ prior to the expiry of the term of
recording of financial transactions, preparation
an incumbent chairman or member.
of financial statements, coordinating with the
a. 30 days b. 60 days c. 90 days d. 120 days
external auditors for the audit of such financial
10. A member of the BOA shall, at the time of
statements and other related functions shall
his/her appointment, possess the following
qualifications, except enhancement and maintenance of high
a. Must be a natural-born citizen and resident of professional, ethical, accounting and auditing
the Philippines. standards.
b. Must be a duly registered CPA with more than b. To supervise the registration, licensure and
ten (10) years of work experience in any practice of accountancy in the Philippines.
scope of practice of accountancy. c. To prescribe and adopt the rules and
c. Must be of good moral character and must not regulations necessary for carrying out the
have been convicted of crimes involving provisions
moral turpitude. of RA 9298.
d. Must not be a director or officer of the APO at d. To prepare, adopt, issue or amend the syllabi
the time of his/her appointment. of the subjects for examinations.
11. Which statement is incorrect regarding the 15. A body that is created to assist the BOA in
term of office of the chairman and the members the attainment of the objective of continuously
of upgrading the accountancy education in the
the Board of Accountancy (BOA)? Philippines to make the Filipino CPAs globally
a. The Chairman and members of the Board competitive.
shall hold office for a term of three years. a. Philippine Institute of Certified Public
b. No person who has served two (2) successive Accountants (PICPA)
complete terms shall be eligible for b. Education Technical Council (ETC)
reappointment until the lapse of one (1) year. c. Financial Reporting Standards Council
c. A person may serve the BOA for not more (FRSC)
than twelve years. d. Associations of CPAs in Education (ACPAE)
d. A member of the BOA may continuously 16. Which of the following is are grounds for
serve office for more than nine years. suspension or removal of members of BOA?
12. The Board shall exercise the following I. Neglect of duty or incompetence.
specific powers, functions and responsibilities: II. Violation or tolerance of any violation of the
abcd CPA’s Code of Ethics.
• To supervise the registration, licensure and III. Final judgment of crimes involving moral
practice of accountancy Yes Yes Yes Yes turpitude.
• To issue, suspend, revoke, or reinstate the IV. Rigging of the certified public accountant’s
Certificate of Registration for the practice of licensure examination results.
the accountancy profession Yes No Yes Yes a. I, II, III and IV b. I, II and III c. III and IV d. I, III
• To monitor the conditions affecting the and IV
practice 17. The following statements relate to CPA
of accountancy Yes Yes No Yes examination ratings. Which of the following is
• To conduct an oversight into the quality of incorrect?
audits of financial statements Yes No Yes No a. To pass the examination, candidates should
• To issue a cease or desist order to any obtain a general weighted average of 75%
person, association, partnership or corporation and above, with no rating in any subject less
engaged in violation of any provision of the Act than 65%.
Yes Yes No Yes b. Candidates who obtain a rating of 75% and
13. Which of the following is not one of the above in at least four subjects shall receive a
penalties that can be imposed by the Board of conditional credit for the subjects passed.
Accountancy? c. Candidates who failed in four complete
a. Fine or imprisonment c. Reprimand examinations shall no longer be allowed to take
b. Revocation of CPA certificate d. Suspension the examinations the fifth time.
of CPA certificate d. Conditioned candidates shall take an
14. The creation of FRSC and AASC is intended examination in the remaining subjects within two
to assist the BOA in carrying out its function to years from the preceding examination.
a. To monitor the conditions affecting the 18. The Board, subject to the approval of the
practice of accountancy and adopt such Commission, may revise or exclude any of the
measures, rules and regulations and best subjects and their syllabi, and add new ones as
practices as may be deemed proper for the the need arises. Provided that the change
Page 5 of 7 shall not be more often than every
AT-5902 a. 2 years b. 3 years c. 4 years d. 5 years
19. The BOA shall submit to the PRC the ratings 25. Who is not permitted by law to practice
obtained by each candidate within how many accountancy?
calendar days after the examination? a. A corporation whose stockholders are all
a. 5 days b. 10 days c. 15 days d. 30 days CPAs
20. A Professional Identification Card bearing b. A partnership of CPAs
the registration number, date of issuance, expiry c. An individual CPA practitioner
date, duly signed by the chairperson of the d. A partnership of CPAs with some non-CPA
Commission, shall be issued to every registrant staff
renewable every 26. A certificate of accreditation shall be issued
a. Two years b. Three years c. Four years d. to certified public accountants in public practice
Five years only upon showing, in accordance with rules and
21. The certified public accountant shall be regulations promulgated by the Board and
required to indicate which of the following approved by the Commission, that such
numbers registrant has acquired how many years of
on the documents he/she signs, uses or issues meaningful experience in any of the areas of
in connection with the practice of his/her public practice?
profession? a. One b. Two c. Three d. Four
Abcd 27. A meaningful experience shall be considered
• His/her Certificate of Registration Yes Yes Yes as satisfactory compliance with the
No requirements of Section 28 of RA 9298 if it is
• Professional Identification Card Yes Yes Yes earned in (Choose the incorrect one)
Yes a. Commerce and industry and shall include
• Professional Tax Receipt Yes Yes No Yes significant involvement in general accounting,
• Telephone Yes No No No budgeting, tax administration, internal auditing,
22. The BOA shall not refuse the registration of liaison with external auditors, representing
any person who successfully passed the CPA his/her employer before government agencies
examinations if on tax and matters related to accounting or
a. Convicted by a court of competent jurisdiction any other related functions.
of a criminal offense involving moral b. Academe/education and shall include
turpitude teaching for at least three (3) trimesters or two
b. Convicted for a political offense. (2)
c. Guilty of immoral and dishonorable conduct semesters subjects in either financial
d. None of the above. accounting, business law and tax, auditing
Page 6 of 7 problems, auditing theory, financial management
and management services.
AT-5902 c. Government and shall include significant
23. Which of the following is not one of the involvement in general accounting, budgeting,
grounds for proceedings against a CPA? tax administration, internal auditing, liaison with
a. Gross negligence or incompetence in the the Commission on Audit or any other
practice of his profession. related functions.
b. Engaging in public practice while being d. Public practice and shall include at least two
employed in a private enterprise. years as audit assistant and at least one
c. Insanity. year as auditor in charge of audit engagement
d. Immoral or dishonorable conduct. covering full audit functions of significant
24. A person whose CPA certificate has been clients.
revoked 28. The Accountancy Law provides that all
a. Can no longer be reinstated as a CPA working papers made during an audit shall be
b. Is automatically reinstated as a CPA after two the
years if the has acted in an exemplary property of the auditor. These working papers
manner shall include the following, except:
c. May be reinstated as a CPA by the Board of a. Schedules and memoranda made by the CPA
Accountancy after two years if he has acted and his staff.
in an exemplary manner b. Working papers prepared and submitted by
d. May be reinstated by the PRC after two years the client.
if he has acted in an exemplary manner c. Excerpts or copies of documents furnished
the auditor.
d. Reports submitted by the CPA to the client. 33. The PICPA shall renew its Certificate of
29. Individual CPAs, Firms or Partnerships of Accreditation once every how many years after
CPAs, including partners and staff members the
thereof shall register with the BOA and the PRC. date of the Resolution granting the petition for
If the application for registration of AB and re-accreditation and the issuance of the said
Co., CPAs was approved on August 30, 2005, it certificate upon submission of the requirements?
shall file for renewal on or before a. 2 years b. 3 years c. 4 years d. 6 years
a. September 30, 2007 c. December 31, 2007 34. Below are the names of three CPA firms and
b. September 30, 2008 d. August 30, 2008 pertinent facts relative to each firm. Unless
30. Which statement is correct regarding CPE otherwise indicated, the individuals named are
requirements for renewal of professional CPAs and partners, and there are no other
license? partners. Which firm name and related facts
a. The total CPE credit units required for CPAs indicates a violation of the IRR of RA 9298?
shall be sixty (60) units for three (3) years, a. Joyce, Ara and Angela, CPAs (Joyce died
provided that a minimum of twenty (20) credit about 10 years ago, Ara and Angela are
units shall be earned in each year. continuing the firm)
b. A registered professional shall be b. Lupin and Fujico, CPAs ( the name of
permanently exempted from CPE requirements Goymon a third active partner is omitted in the
upon firm
reaching the age of 60 years old. name)
c. A registered professional who is working c. Hugo and Pugo, CPAs (Hugo died 25 months
abroad shall be temporarily exempted from ago, Pugo is continuing the firm as a sole
compliance with CPE requirement during his/her proprietor)
stay abroad, provided that he/she is has d. Bubu and Bibi, CPAs (Bibi died 3 years ago,
been out of the country for at least one year Bobot was admitted into the partnership 2
immediately prior to the date of renewal. months after Bibi’s death.)
Page 7 of 7 - end of AT-5902 –
AT-5902
d. Those who failed to renew professional CPA REVIEW SCHOOL OF THE
licenses for a period of five (5) continuous years PHILIPPINES
from initial registration, or from last renewal shall Manila
be declared delinquent. AUDITING THEORY
31. Any person who shall violate any of the CODE OF ETHICS FOR PROFESSIONAL
provisions of RA 9298 or any of its implementing ACCOUNTANTS IN THE PHILIPPINES
rules and regulations as promulgated by the PREFACE
Board subject to the approval of the 1. Which statement is incorrect regarding the
Commission, shall, upon conviction, be Code of Ethics for Professional Accountants in
punished by the
a. A fine of not less than fifty thousand pesos (P Philippines?
50,000.00) or by imprisonment for a period a. Professional accountants refer to persons
not exceeding two (2) years or both. who are Certified Public Accountants (CPA)
b. A fine of not less than one hundred thousand and who hold a valid certificate issued by the
pesos (P 100,000.00) or by imprisonment Board of Accountancy.
for a period not exceeding two (2) years or both. b. Where a national statutory requirement is in
c. A fine of not less than fifty thousand pesos (P conflict with a provision of the IFAC Code,
50,000.00) or by imprisonment for a period the IFAC Code requirement prevails.
not exceeding three (3) years or both. c. The Code of Ethics for Professional
d. A fine of not less than one hundred thousand Accountants in the Philippines is mandatory for
pesos (P 100,000.00) or by imprisonment all
for a period not exceeding three (3) years or CPAs and is applicable to professional services
both. performed in the Philippines on or after
32. The primary duty to enforce the provisions of January 1, 2004.
RA 9298 and its IRR rests with d. Professional accountants should consider the
a. The PRC c. The PRC and BOA ethical requirements as the basic principles
b. The BOA d. The AASC
which they should follow in performing their matter is plausible in the circumstances.
work. c. An engagement in accordance with the
2. Which statement is correct regarding the Philippine Standard on Assurance
Code of Ethics for Professional Accountants in Engagement(s)
the issued by the Philippine Auditing Standards and
Philippines? Practices Council as approved by the
a. Professional accountants refer to persons Board of Accountancy/Professional Regulation
who are Certified Public Accountants (CPA) in Commission.
public practice and who hold a valid certificate d. An engagement to perform agreed-upon
issued by the Board of Accountancy. procedures.
b. It is practical to establish ethical requirements 6. Close family include the following, except
which apply to all situations and a. Parent c. Non-dependent child
circumstances that professional accountants b. Sibling d. Spouse
may encounter. Page 2 of 20
c. Professional accountants should consider the
ethical requirements as the ideal principles
AT-5903
7. Assurance team include
which they should follow in performing their
abcd
work.
• All professionals participating in the assurance
d. All CPAs are expected to comply with the
engagement Yes Yes Yes Yes
ethical requirements of the Code and other
• All others within a firm who can directly
ethical requirements that may be adopted and
influence the outcome of the assurance
approved by IFAC. Apparent failure to do
engagement Yes Yes No No
so may result in an investigation into the CPA’s
• For the purposes of an audit client, all those
conduct.
Modifications to the IFAC Code within a network firm who can directly influence
3. The following definitions from the IFAC Code the outcome of the audit engagement
were modified to consider Philippine regulatory Yes No No Yes
requirements and circumstances, except 8. Financial interest means
a. Firm c. Professional accountants a. Any bank account which is used solely for the
b. Professional accountants in public practice d. banking of clients’ monies.
Lead engagement partner b. Any monies received by a professional
4. The following are modifications to the IFAC accountant in public practice to be held or paid
Code to consider Philippine regulatory out
requirements and circumstances, except on the instruction of the person from whom or on
a. The period for rotation of the lead whose behalf they are received.
engagement partner was changed from five to c. A financial interest beneficially owned through
seven a collective investment vehicle, estate,
years. trust or other intermediary over which the
b. Advertising and solicitation by individual individual or entity has no control.
professional accountants in public practice were d. An interest in an equity or other security,
not permitted in the Philippines. debenture, loan or other debt instrument of an
c. Additional examples relating to anniversaries entity, including rights and obligations to acquire
and websites wherein publicity is such an interest and derivatives directly
acceptable, as provided in BOA Resolution 19, related to such interest.
Series of 2000, were included. 9. Direct financial interest is a financial interest
d. Payment and receipt of commissions were not abcd
permitted in the Philippines. • owned directly by and under the control of an
DEFINITIONS individual or entity (including those managed on
5. Assurance engagement include the following, a discretionary basis by other) Yes Yes Yes No
except • beneficially owned through a collective
a. An engagement conducted to provide a high investment vehicle, estate, trust or other
level of assurance that the subject matter intermediary over which the individual or entity
conforms in all material respects with identified has control Yes Yes No No
suitable criteria. • beneficially owned through a collective
b. An engagement conducted to provide a investment vehicle, estate, trust or other
moderate level of assurance that the subject intermediary over which the individual or entity
has no control Yes No No Yes III. When no consolidated financial statements
10. Firm includes the following, except are prepared, the partner responsible for
a. A sole practitioner professional accountant. signing the report on the financial statements.
b. An entity that controls a partnership of a. I, II and III c. I only
professional accountants. b. I and II only d. I and III only
c. An entity controlled by a partnership of 15. A distinct sub-group, whether organized on
professional accountants. geographical or practice lines.
d. A sole practitioner, partnership or corporation a. Office c. Firm
of professional accountants. b. Practice d. Network firm
11. Which of the following is incorrect regarding 16. The Code of Ethics for Professional
independence? Accountants in the Philippines defined “practice”
a. Independence consists of independence of as
mind and independence in appearance. a. A distinct sub-group, whether organized on
b. Independence of mind is the state of mind geographical or practice lines.
that permits the provision of an opinion without b. An entity under common control, ownership or
being affected by influences that compromise management with the firm or any entity
professional judgment, allowing an that a reasonable and informed third party
individual to act with integrity, and exercise having knowledge of all relevant information
objectivity and professional skepticism. would reasonably conclude as being part of the
c. Independence in appearance is the avoidance firm nationally or internationally.
of facts and circumstances that are so c. Any service requiring accountancy or related
significant a reasonable and informed third skills performed by a professional
party, having knowledge of all relevant accountant including accounting, auditing,
information, including any safeguards applied, taxation, management consulting and financial
would reasonably conclude a firm's or a management services.
member of the assurance team’s integrity, d. A sole proprietor or a partnership of
objectivity or professional skepticism had been professional accountants which offers
compromised. professional
d. Independence is a combination of impartiality, services to the public.
intellectual honesty and a freedom from 17. The communication to the public of facts
conflicts of interest. about a professional accountant which are not
12. A financial interest beneficially owned designed for the deliberate promotion of that
through a collective investment vehicle, estate, professional accountant.
trust or a. Publicity c. Indirect promotion
other intermediary over which the individual or b. Advertising d. Solicitation
entity has no control. 18. Advertising, as defined in the Code of Ethics,
a. Indirect financial interest c. Financial means
instrument a. The communication to the public of facts
b. Direct financial interest d. Clients’ monies about a professional accountant which are not
13. A combination of impartiality, intellectual designed for the deliberate promotion of that
honesty and a freedom from conflicts of interest. professional accountant.
a. Objectivity c. Professional skepticism b. The approach to a potential client for the
b. Independence of mind d. Independence purpose of offering professional services.
Page 3 of 20 c. The communication to the public of
AT-5903 information as to the services or skills provided
by
14. Lead engagement partner is
professional accountants in public practice with
I. The partner responsible for signing the report
a view to procuring professional business.
on the consolidated financial statement of
d. Any of the above.
the audit client.
19. Existing accountant, as defined in the Code
II. Where relevant, the partner responsible for
of Ethics, means
signing the report in respect of any entity
a. A professional accountant employed in
whose financial statements form part of the
industry, commerce, the public sector or
consolidated financial statements and on
education.
which a separate stand-alone report is issued.
b. A professional accountant in public practice
currently holding an audit appointment or
carrying out accounting, taxation, consulting or provided the sister entity and the client are both
similar professional services for a client. material to the entity that controls both
c. Those persons who hold a valid certificate the client and sister entity.
issued by the Board of Accountancy. INTRODUCTION
d. A sole proprietor, or each partner or person 23. A profession is distinguished by certain
occupying a position similar to that of a characteristics including
partner and each staff in a practice providing I. Mastery of a particular intellectual skill,
professional services to a client irrespective acquired by training and education.
of their functional classification (e.g., audit, tax II. Adherence by its members to a common code
or consulting) and professional of values and conduct established by its
accountants in a practice having managerial administrating body, including maintaining an
responsibilities. outlook which is essentially objective.
20. The term professional accountant in public III. Acceptance of a duty to society as a whole
practice includes the following, except (usually in return for restrictions in use of a
a. A sole proprietor providing professional title or in the granting of a qualification).
services to a client. a. I, II and III c. III only
b. Each partner or person occupying a position b. I and II only d. II and III only
similar to that of a partner staff in a practice THE PUBLIC INTEREST
providing professional services to a client. 24. How did the Code of Ethics define public
c. Professional accountants employed in the interest?
public sector having managerial a. A distinguishing mark of a profession is
responsibilities. acceptance of its responsibility to the public.
d. A firm of professional accountants in public b. The accountancy profession's public consists
practice. of clients, credit grantors, governments,
21. The term receiving accountant includes the employers, employees, investors, the business
following, except and financial community, and others who
a. A professional accountant in public practice to rely on the objectivity and integrity of
whom the existing accountant has referred professional accountants.
tax engagement. c. The collective well-being of the community of
b. A professional accountant in public practice to people and institutions the professional
whom the client of the existing accountant accountant serves.
has referred audit engagement. d. The standards of the accountancy profession
Page 4 of 20 are heavily determined by the public
AT-5903 interest.
OBJECTIVES
c. A professional accountant in public practice
25. The Code recognizes that the objectives of
who is consulted in order to meet the needs
the accountancy profession are to work to the
of the client.
highest standards of professionalism, to attain
d. A professional accountant in public practice
the highest levels of performance and
currently holding an audit appointment or
generally to meet the public interest requirement
carrying out accounting, taxation, consulting or
set out above. These objectives require
similar professional services for a client.
four basic needs to be met including the
22. Related entity is an entity that has any of the
following, except
following relationships with the client, except
a. Credibility c. Quality of Services
a. An entity that has direct or indirect control
b. Professionalism d. Integrity
over the client provided the client is material to
FUNDAMENTAL PRINCIPLES
such entity.
26. In order to achieve the objectives of the
b. An entity with a direct financial interest in the
accountancy profession, professional
client even though such entity has no
accountants
significant influence over the client provided the
have to observe a number of prerequisites or
interest in the client is material to such
fundamental principles. The fundamental
entity.
principles include the following, except
c. An entity over which the client has direct or
a. Objectivity
indirect control.
b. Professional Competence and due Care
d. An entity which is under common control with
c. Technical Standards
the client (referred to as a “sister entity”)
d. Confidence
27. The principle of professional behavior SECTION 2 - Resolution of Ethical Conflicts
requires a professional accountant to 31. Professional accountants may encounter
a. Be straightforward and honest in performing problems in identifying unethical behavior or in
professional services. resolving an ethical conflict. When faced with
b. Be fair and should not allow prejudice or bias, significant ethical issues, professional
conflict of interest or influence of others to accountants should do the following, except
override objectivity. a. Follow the established policies of the
c. Perform professional services with due care, employing organization to seek a resolution of
competence and diligence. such
d. Act in a manner consistent with the good conflict.
reputation of the profession and refrain from any b. Review the conflict problem with the
conduct which might bring discredit to the immediate superior if the organization’s policies
profession. do
Page 5 of 20 not resolve the ethical conflict.
AT-5903 c. If the problem is not resolved with the
immediate superior and the professional
28. Which of the following is not explicitly
accountant determines to go to the next higher
referred to in the Code of Ethics as source of
managerial level, the immediate superior
technical
need not be notified of the decision.
standards?
d. Seek counseling and advice on a confidential
a. Commission on Audit (COA)
basis with an independent advisor or the
b. Auditing Standards and Practices Council
applicable professional accountancy body or
(ASPC)
regulatory body to obtain an understanding
c. Securities and Exchange Commission (SEC)
of possible courses of action.
d. Relevant legislation
SECTION 3 - Professional Competence
THE CODE
32. Which of the following is incorrect regarding
29. Which statement is incorrect regarding the
professional competence?
Code of Code of Ethics for Professional
a. Professional accountants may portray
Accountants in the Philippines?
themselves as having expertise or experience
a. The objectives as well as the fundamental
they
principles are of a general nature and are not
do not possess.
intended to be used to solve a professional
b. Professional competence may be divided into
accountant’s ethical problems in a specific
two separate phases.
case.
c. The attainment of professional competence
b. The code is divided into two parts, part A and
requires initially a high standard of general
part B.
education.
c. Part A applies to all professional accountants
d. The maintenance of professional competence
unless otherwise specified.
requires a continuing awareness of
d. Part B applies only to those professional
development in the accountancy profession.
accountants in public practice.
33. Which of the following is the least required in
PART A – APPLICABLE TO ALL
attaining professional competence?
PROFESSIONAL ACCOUNTANTS
a. High standard of general education.
SECTION 1 - Integrity and Objectivity
b. Specific education, training and examination
30. Which of the following is incorrect regarding
in professionally relevant subjects.
integrity and objectivity?
c. Period of meaningful work experience.
a. Integrity implies not merely honesty but fair
d. Continuing awareness of development in the
dealing and truthfulness.
accountancy profession.
b. The principle of objectivity imposes the Page 6 of 20
obligation on all professional accountants to be
fair, intellectually honest and free of conflicts of AT-5903
interest. SECTION 4 - Confidentiality
c. Professional accountants serve in many 34. Which of the following is incorrect regarding
different capacities and should demonstrate their confidentiality?
objectivity in varying circumstances. a. Professional accountants have an obligation
d. Professional accountants should neither to respect the confidentiality of information
accept nor offer any gifts or entertainment.
about a client’s or employer’s affairs acquired in c. Omits or obscures information required to be
the course of professional services. submitted and such omission or obscurity
b. The duty of confidentiality ceases after the would mislead the revenue authorities.
end of the relationship between the d. Uses of estimates if such use is generally
professional accountant and the client or acceptable or if it is impractical under the
employer. circumstances to obtain exact data.
c. Confidentiality should always be observed by 38. When a professional accountant learns of a
a professional accountant unless specific material error or omission in a tax return of a
authority has been given to disclose information prior year, or of the failure to file a required tax
or there is a legal or professional duty to return, the professional accountant has a
disclose. responsibility to do the following, except
d. Confidentiality requires that a professional a. Promptly advise the client or employer of the
accountant acquiring information in the course error or omission and .recommend that
of performing professional services neither uses disclosure be made to the revenue authorities.
nor appear to use that information for b. Immediately inform the revenue authorities.
personal advantage or for the advantage of a c. Take reasonable steps to ensure that the
third party. error is not repeated in subsequent tax
35. A professional accountant has a professional returns if the professional accountant concludes
duty or right to disclose confidential information that a professional relationship with the
in each of the following, except client or employer can be continued.
a. To comply with technical standards and ethics d. Inform the client or the employer that it is not
requirements. possible to act for them in connection with
b. To disclose to BIR fraudulent scheme that return or other related information submitted
committed by the client on payment of income to the authorities if the client or the
tax. employer does not correct the error.
c. To comply with the quality review of a SECTION 6 - Cross Border Activities
member body or professional body 39. When a professional accountant performs
d. To respond to an inquiry or investigation by a services in a country other than the home
member body or regulatory body. country
SECTION 5 - Tax Practice and differences on specific matters exist
36. Which of the following is incorrect regarding between ethical requirements of the two
the professional accountants’ tax practice? countries,
a. A professional accountant rendering the following provisions should be applied
professional tax services is entitled to put a. When the ethical requirements of the country
forward in which the services are being performed
the best position in favor of a client, or an are less strict than the Code of Ethics of the
employer. Philippines, then the Code of Ethics of the
b. Doubt may be resolved in favor of the client or Philippines should be applied.
the employer if there is reasonable support Page 7 of 20
for the position.
c. A professional accountant may hold out to a
AT-5903
b. When the ethical requirements of the country
client or an employer the assurance that the
in which services are being performed are
tax return prepared and the tax advice offered
stricter than the Code of Ethics of the
are beyond challenge.
Philippines, then the ethical requirements in the
d. Professional accountants should ensure that
country where services are being performed
the client or the employer are aware of the
should be applied.
limitations attaching to tax advice and services
c. When the ethical requirements of the home
so that they do not misinterpret an
country are mandatory for services performed
expression of opinion as an assertion of fact.
outside that country and are stricter, then the
37. A professional accountant may be
ethical requirements of the home country
associated with a tax return that
should be applied.
a. Contains a false or misleading statement.
d. Any of the above.
b. Contains statements or information furnished
SECTION 7 - Publicity
recklessly or without any real knowledge of
whether they are true or false.
40. In the marketing and promotion of • The members of the assurance team Yes Yes
themselves and their work, professional Yes Yes
accountants • The firm Yes Yes No No
should • Network firms Yes No No Yes
a. Not use means which brings the profession 45. For assurance engagements provided to
into disrepute. clients that are not audit clients, when the report
b. Not make exaggerated claims for the services is
they are able to offer, the qualifications not expressly restricted for use by identified
they possess, or experience they have gained. users, the following should be independent of
c. Not denigrate the work of other accountants. the
d. All of the above. client
PART B – APPLICABLE TO PROFESSIONAL abcd
ACCOUNTANTS IN PUBLIC PRACTICE • The members of the assurance team Yes Yes
SECTION 8 - Independence Yes Yes
41. Whether a particular engagement is an • The firm Yes Yes No No
assurance engagement will depend upon • Network firms Yes No No Yes
whether it Page 8 of 20
exhibits all the following elements, including:
I. A three party relationship involving a
AT-5903
professional accountant, a responsible party, 46. For assurance engagements provided to
and an clients that are not audit clients, when the
intended user assurance report is expressly restricted for use
II. A subject matter by identified users, the following should be
III. A suitable criteria independent of the client
IV. An engagement process abcd
V. A conclusion • The members of the assurance team Yes Yes
a. I, II, III, IV and V c. I, II, and III Yes Yes
b. I, II, III and V d. I, II, III and IV • The firm Yes Yes No No
42. There is a broad range of engagements to • Network firms Yes No No Yes
provide a high or moderate level of assurance. 47. The firm should be independent of the client
Such engagements may include in the following engagements
I. Engagements to report on a broad range of abcd
subject matters covering financial and • Assurance engagements provided to an audit
nonfinancial client
information Yes Yes Yes Yes
II. Attest and direct reporting engagements • Assurance engagements provided to clients
III. Engagements to report internally and that are not audit clients, when the report is not
externally expressly restricted for use by identified users
IV. Engagements in the private and public sector Yes Yes No No
a. I, II, III and IV c. II only • Assurance engagements provided to clients
b. I, II and III d. I and II only that are not audit clients, when the assurance
43. Not all engagements performed by report is expressly restricted for use by
professional accountants are assurance identified users
engagements. Yes No No Yes
Other engagements frequently performed by 48. Independence is potentially affected by
professional accountants that are not assurance I. Self-interest threat IV. Familiarity threat
engagements include the following, except II. Self-review threat V. Intimidation threat
a. Agreed-upon procedures III. Advocacy threat
b. Compilation of financial or other information a. I, II, III, IV and V c. I, II and III
c. Management consulting b. I, II, III and IV d. I only
d. Examination of prospective financial 49. Occurs when a firm or a member of the
information assurance team could benefit from a financial
44. For assurance engagements provided to an interest
audit client, the following should be independent in, or other self-interest conflict with, an
of the client assurance client.
abcd a. Self-interest threat c. Advocacy threat
b. Self-review threat d. Familiarity threat promote, an assurance client’s position or
50. Examples of circumstances that may create opinion to the point that objectivity may, or may
self-interest threat include be
a. Contingent fees relating to assurance perceived to be, compromised. Such may be the
engagements. case if a firm or a member of the assurance
b. A direct financial interest or material indirect team were to subordinate their judgment to that
financial interest in an assurance client. of the client.
c. A loan or guarantee to or from an assurance a. Self-interest threat c. Advocacy threat
client or any of its directors or officers. b. Self-review threat d. Familiarity threat
d. All of the above. 55. A CPA-lawyer, acting as a legal counsel to
51. Which of the following least likely create one of his audit client, is an example of
“self-interest threat” a. Self-interest threat c. Advocacy threat
a. Undue dependence on total fees from an b. Self-review threat d. Familiarity threat
assurance client. 56. Occurs when, by virtue of a close
b. Concern about the possibility of losing the relationship with an assurance client, its
engagement. directors, officers
c. Having a close business relationship with an or employees, a firm or a member of the
assurance client. assurance team becomes too sympathetic to the
d. Pressure to reduce inappropriately the extent client’s interests.
of work performed in order to reduce fees. a. Self-interest threat c. Advocacy threat
52. Occurs when any product or judgment of a b. Self-review threat d. Familiarity threat
previous assurance engagement or 57. Examples of circumstances that may create
nonassurance familiarity threat least likely include
engagement needs to be re-evaluated in a. A member of the assurance team having an
reaching conclusions on the assurance immediate family member or close family
engagement or when a member of the member who is a director or officer of the
assurance team was previously a director or assurance client.
officer of b. A member of the assurance team having an
the assurance client, or was an employee in a immediate family member or close family
position to exert direct and significant influence member who, as an employee of the assurance
over the subject matter of the assurance client, is in a position to exert direct and
engagement. significant influence over the subject matter of
a. Self-interest threat c. Advocacy threat the assurance engagement.
b. Self-review threat d. Familiarity threat c. A former partner of the firm being a director,
53. Examples of circumstances that may create officer of the assurance client or an
self-review threat least likely include employee in a position to exert direct and
a. Preparation of original data used to generate significant influence over the subject matter of
financial statements or preparation of other the assurance engagement.
records that are the subject matter of the d. Dealing in, or being a promoter of, share or
assurance engagement. other securities in an assurance client.
b. A member of the assurance team being, or 58. Intimidation threat
having recently been, an employee of the a. Is not a threat to independence.
assurance client in a position to exert direct and b. Occurs when a member of the assurance
significant influence over the subject team may be deterred from acting objectively
matter of the assurance engagement. and exercising professional skepticism by
c. Performing services for an assurance client threats, actual or perceived, from the directors,
that directly affect the subject matter of the officers or employees of an assurance client.
assurance engagement. c. Occurs when, by virtue of a close relationship
d. Potential employment with an assurance with an assurance client, its directors,
client. officers or employees, a firm or a member of the
Page 9 of 20 assurance team becomes too
AT-5903 sympathetic to the client’s interests.
d. Occurs when a firm, or a member of the
54. Occurs when a firm, or a member of the
assurance team, promotes, or may be perceived
assurance team, promotes, or may be perceived
to promote, an assurance client’s position or
to
opinion to the point that objectivity may, or
may be perceived to be, compromised. legislation or regulation
59. Which of the following is not likely a threat to Yes Yes Yes Yes
independence? • Safeguards within the assurance client Yes
a. Acting as an advocate on behalf of an Yes No No
assurance client in litigation or in resolving • Safeguards within the firm’s own systems and
disputes procedures
with third parties. Yes No No Yes
b. Long association of a senior member of the 63. Safeguards created by the profession,
assurance team with the assurance client. legislation or regulation, include the following,
c. Threat of replacement over a disagreement except
with the application of an accounting a. Educational, training and experience
principle. requirements for entry into the profession.
d. Owning immaterial indirect financial interest in b. Continuing education requirements.
an audit client. c. Legislation governing the independence
60. When threats to independence that are not requirements of the firm.
clearly insignificant are identified, the following d. Policies and procedures that emphasize the
are appropriate, except assurance client’s commitment to fair
a. Professional judgment is used to determine financial reporting.
the appropriate safeguards to eliminate 64. Safeguards within the assurance client,
threats to independence or to reduce them to an include the following, except
acceptable level. a. Professional standards and monitoring and
b. In situations when no safeguards are disciplinary processes.
available to reduce the threat to an acceptable b. The assurance client has competent
level, employees to make managerial decisions.
the only possible actions are to eliminate the c. Internal procedures that ensure objective
activities or interest creating the threat, or to choices in commissioning non-assurance
refuse to accept or continue the assurance engagements.
engagement. d. A corporate governance structure, such as an
c. When the firm decides to accept or continue audit committee, that provides appropriate
the assurance engagement, the decision oversight and communications regarding a firm’s
need not be documented provided the threats services.
identified were eliminated. 65. Safeguards within the firm’s own systems
d. The evaluation of the significance of any and procedures, include the following, except
threats to independence and the safeguards a. Firm leadership that stresses the importance
necessary to reduce any threats to an of independence and the expectation that
acceptable level, takes into account the public members of assurance teams will act in the
interest. public interest.
Page 10 of 20 b. External review of a firm’s quality control
AT-5903 system.
c. Policies and procedures to implement and
61. Consideration of the nature of the
monitor quality control of assurance
safeguards to be applied will be affected by
engagements.
matters such
d. Policies and procedures that will enable the
as the
identification of interests or relationships
abcd
between the firm or members of the assurance
• Significance of the threat Yes Yes Yes Yes
team and assurance clients.
• Nature of the assurance engagement Yes Yes
66. When the safeguards available are
Yes No
insufficient to eliminate the threats to
• Intended users of the assurance report Yes
independence or to
Yes No Yes
reduce them to an acceptable level, or when a
• Structure of the firm Yes No No No
firm chooses not to eliminate the activities or
62. The safeguards available to eliminate the
interest creating the threat, the only course of
threats or reduce them to an acceptable level
action available will be the
include
a. Issuance of an adverse opinion.
abcd
b. Issuance of qualified opinion or disclaimer of
• Safeguards created by the profession,
opinion.
c. Issuance of unqualified opinion with d. Limit the participation of the member of the
explanatory paragraph. assurance team.
d. Refusal to perform, or withdrawal from, the 69. If a member of the assurance team, or their
assurance engagement. immediate family member receives, by way of,
67. Which of the following is incorrect regarding for example, an inheritance, gift or, as a result of
engagement period? a merger, a direct financial interest or a
a. The period of the engagement starts when the material indirect financial interest in the
assurance team begins to perform assurance client, a self-interest threat would be
assurance services and ends when the created. The following safeguards should be
assurance report is issued, except when the applied to eliminate the threat or reduce it to an
assurance engagement is of a recurring nature. acceptable level:
b. If the assurance engagement is expected to a. Disposing of the financial interest at the
recur, the period of the assurance earliest practical date.
engagement ends with the notification by either b. Removing the member of the assurance team
party that the professional relationship from the assurance engagement.
has terminated or the issuance of the final c. Either a or b.
assurance report, whichever is earlier. d. Neither a nor b.
c. In the case of an audit engagement, the 70. When a member of the assurance team
engagement period includes the period covered knows that his or her close family member has a
by the financial statements reported on by the direct financial interest or a material indirect
firm. financial interest in the assurance client, a
d. When an entity becomes an audit client selfinterest
during or after the period covered by the threat may be created. Safeguards least likely
financial include:
statements that the firm will report on, the firm a. The close family member disposing of all or a
should consider whether any threats to sufficient portion of the financial interest at
independence may be created by previous the earliest practical date.
services provided to the audit client. b. Discussing the matter with those charged with
Page 11 of 20 governance, such as the audit committee.
AT-5903 c. Involving a professional accountant who took
part in the assurance engagement to review
Application of Principles to Specific
the work done by the member of the assurance
Situations
team with the close family relationship or
Financial Interests – Provisions applicable to all
otherwise advise as necessary.
assurance clients
d. Removing the individual from the assurance
68. If a member of the assurance team, or their
engagement.
immediate family member, has a direct financial
71. When a firm or a member of the assurance
interest, or a material indirect financial interest,
team holds a direct financial interest or a
in the assurance client, the self-interest threat
material
created would be so significant the only
indirect financial interest in the assurance client
safeguards available to eliminate the threat or
as a trustee, a self-interest threat may be
reduce
created by the possible influence of the trust
it to an acceptable level would be to (choose the
over the assurance client. Accordingly, such an
incorrect one)
interest cannot be held when:
a. Dispose of the direct financial interest prior to
a. The member of the assurance team, an
the individual becoming a member of the
immediate family member of the member of the
assurance team.
assurance team, and the firm are beneficiaries
b. Dispose of the indirect financial interest in
of the trust.
total prior to the individual becoming a member
b. The interest held by the trust in the assurance
of the assurance team.
client is not material to the trust.
c. Dispose of a sufficient amount of the indirect
c. The trust is not able to exercise significant
financial interest so that the remaining
influence over the assurance client.
interest is no longer material prior to the
d. The member of the assurance team or the
individual becoming a member of the assurance
firm does not have significant influence over
team.
any investment decision involving a financial
interest in the assurance client.
72. An inadvertent violation of the Independence Loans and Guarantees
rules as it relates to a financial interest in an 75. The following loans and guarantees would
assurance client would not impair the not create a threat to independence, except
independence of the firm, the network firm or a a. A loan from, or a guarantee thereof by, an
member assurance client that is a bank or a similar
of the assurance team when: institution, to the firm, provided the loan is made
a. The firm, and the network firm, has under normal lending procedures, terms
established policies and procedures that require and requirements and the loan is immaterial to
all both the firm and the assurance client.
professionals to report promptly to the firm any b. A loan from, or a guarantee thereof by, an
breaches resulting from the purchase, assurance client that is a bank or a similar
inheritance or other acquisition of a financial institution, to a member of the assurance team
interest in the assurance client. or their immediate family, provided the
b. The firm, and the network firm, promptly loan is made under normal lending procedures,
notifies the professional that the financial terms and requirements.
interest c. Deposits made by, or brokerage accounts of,
should be disposed of. a firm or a member of the assurance team
c. The disposal occurs at the earliest practical with an assurance client that is a bank, broker or
date after identification of the issue, or the similar institution, provided the deposit
professional is removed from the assurance or account is held under normal commercial
team. terms.
d. All of the above. d. If the firm, or a member of the assurance
Page 12 of 20 team, makes a loan to an assurance client, that
AT-5903 is not a bank or similar institution, or guarantees
such an assurance client's borrowing.
Financial Interests – Provisions applicable to
Close Business Relationship with Assurance
audit clients
Clients
73. If a firm, or a network firm, has a direct
76. Examples of close business relationships
financial interest in an audit client of the firm, the
that may create self-interest and intimidation
selfinterest
threat
threat created would be so significant no
least likely include
safeguard could reduce the threat to an
a. Having a material financial interest in a joint
acceptable level. The action appropriate to
venture with the assurance client or a
permit the firm to perform the engagement
controlling owner, director, officer or other
would
individual who performs senior managerial
be to
functions for that client.
a. Dispose of the financial interest.
b. Arrangements to combine one or more
b. Dispose of a sufficient amount of it so that the
services or products of the firm with one or more
remaining interest is no longer material.
services or products of the assurance client and
c. Either a or b.
to market the package with reference to
d. Neither a nor b.
both parties.
74. The following self-interest threat created
c. Distribution or marketing arrangements under
would be so significant no safeguard could
which the firm acts as a distributor or
reduce
marketer of the assurance client’s products or
the threat to an acceptable level, except
services, or the assurance client acts as
a. If a firm, or a network firm, has a direct
the distributor or marketer of the products or
financial interest in an audit client of the firm.
services of the firm.
b. If a firm, or a network firm, has a material
d. The purchase of goods and services from an
indirect financial interest in an audit client of the
assurance client by the firm (or from an
firm.
audit client by a network firm) or a member of
c. If a firm, or a network firm, has a material
the assurance team, provided the
financial interest in an entity that has a
transaction is in the normal course of business
controlling interest in an audit client.
and on an arm’s length basis.
d. If the retirement benefit plan of a firm, or
Family and Personal Relationships
network firm, has a financial interest in an audit
77. Family and personal relationships between a
client
member of the assurance team and a director,
an officer or certain employees, depending on assurance team. This situation will least likely
their role, of the assurance client, least likely create
create a. Self-interest threat c. Intimidation threat
a. Self-interest threat c. Intimidation threat b. Self-review threat d. Familiarity threat
b. Self-review threat d. Familiarity threat Serving as an Officer or Director on the Board of
Page 13 of 20 Assurance Clients
AT-5903 82. Which of the following will least likely impair
independence?
78. An inadvertent violation of the rules on family
a. An immediate family member of a member of
and personal relationships would not impair the
the assurance team is a director, an officer
independence of a firm or a member of the
or an employee of the assurance client in a
assurance team when:
position to exert direct and significant
a. The firm has established policies and
influence over the subject matter of the
procedures that require all professionals to
assurance engagement.
report
b. A member of the assurance team participates
promptly to the firm any breaches resulting from
in the assurance engagement while
changes in the employment status of
knowing, or having reason to believe, that he or
their immediate or close family members or
she is to, or may, join the assurance
other personal relationships that create
client some time in the future.
threats to independence.
c. A partner or employee of the firm serves as
b. Either the responsibilities of the assurance
an officer or as a director on the board of an
team are re-structured so that the professional
assurance client.
does not deal with matters that are within the
d. A partner or employee of the firm or a network
responsibility of the person with whom he or
firm serves as Company Secretary for an
she is related or has a personal relationship, or,
audit client, the duties and functions undertaken
if this is not possible, the firm promptly
are limited to those of a routine and
removes the professional from the assurance
formal administrative nature as such as the
engagement.
preparation of minutes and maintenance of
c. Additional care is given to reviewing the work
statutory returns.
of the professional.
Long Association of Senior Personnel with
d. All of the above.
Assurance Clients – General Provisions
Employment with Assurance Clients
83. Using the same senior personnel on an
79. A director, an officer or an employee of the
assurance engagement over a long period of
assurance client in a position to exert direct and
time
significant influence over the subject matter of
may create a familiarity threat. The significance
the assurance engagement has been a
of the threat will least likely depend upon
member of the assurance team or partner of the
a. The length of time that the individual has been
firm. This situation least likely create
a member of the assurance team.
a. Self-interest threat c. Intimidation threat
b. The role of the individual on the assurance
b. Advocacy threat d. Familiarity threat
team.
80. If a member of the assurance team, partner
c. The structure of the client.
or former partner of the firm has joined the
d. The nature of the assurance engagement.
assurance client, the significance of the self-
Long Association of Senior Personnel with
interest, familiarity or intimidation threats created
Assurance Clients – Audit Clients that are Listed
is least likely affected by
Entities
a. The position the individual has taken at the
84. Which statement is incorrect regarding long
assurance client.
association of senior personnel with audit clients
b. The amount of any involvement the individual
that are listed entities?
will have with the assurance team. Page 14 of 20
c. The length of time that the individual was a
member of the assurance team or firm. AT-5903
d. The former position of the individual within the a. Using the same lead engagement partner on
assurance team or firm. an audit over a prolonged period may create
Recent Service with Assurance Clients a familiarity threat.
81. A former officer, director or employee of the b. The lead engagement partner should be
assurance client serves as a member of the rotated after a pre-defined period, normally no
more than seven (7) years. the self-review threat created could not be
c. A partner rotating after a pre-defined period reduced to an acceptable level by any
should not resume the lead engagement safeguards.
partner role until a further period of time, Examples of such managerial decisions include
normally two years, has elapsed. the following, except
d. When audit client becomes a listed entity the a. Determining or changing journal entries, or
length of time the lead engagement partner the classifications for accounts or transactions
has served the audit client in that capacity or other accounting records without obtaining
should be considered in determining when the the approval of the audit clients
partner should rotated. b. Authorizing or approving transactions.
85. The partner may continue to serve as the c. Preparing source documents or originating
lead engagement partner before rotating off the data (including decisions on evaluation
engagement for how many years after audit assumptions), or making changes to such
client becomes a listed entity? documents or data.
a. One year c. Three years d. Assisting an audit client in resolving account
b. Two years d. Four years reconciliation problems.
86. While the lead engagement partner should 89. These following services are considered to
be rotated after such a pre-defined period, some be a normal part of the audit process and do not,
degree of flexibility over timing of rotation may under circumstances, threaten independence,
be necessary in certain circumstances. except
Examples of such circumstances include: a. Analyzing and accumulating information for
a. Situations when the lead engagement regulatory reporting.
partner’s continuity is especially important to the b. Assisting in the preparation of consolidated
audit client, for example, when there will be financial statements.
major changes to the audit client’s structure c. Drafting disclosure items.
that would otherwise coincide with the rotation of d. Having custody of an assurance client’s
the lead engagement partner. assets.
b. Situations when, due to the size of the firm, Preparing Accounting Records and Financial
rotation is not possible or does not constitute Statements – General Provisions
an appropriate safeguard. 90. If the firm is involved in the preparation of
c. Both a and b. accounting records or financial statements and
d. Neither a nor b. those financial statements are subsequently the
Provision of Non-Assurance Services to subject matter of an audit engagement of the
Assurance Clients firm, this will most likely create
87. The following activities would generally a. Self-interest threat c. Intimidation threat
create self-interest or self-review threats that are b. Self-review threat d. Familiarity threat
so Page 15 of 20
significant that only avoidance of the activity or
refusal to perform the assurance engagement
AT-5903
Preparing Accounting Records and Financial
would reduce the threats to an acceptable level,
Statements – Audit Clients that are not Listed
except
Entities
a. Authorizing, executing or consummating a
91. The firm, or a network firm, may provide an
transaction, or otherwise exercising authority
audit client that is not a listed entity with
on behalf of the assurance client, or having the
accounting and bookkeeping services, including
authority to do so.
payroll services, of a routine or mechanical
b. Determining which recommendation of the
nature, provided any self-review threat created
firm should be implemented.
is reduced to an acceptable level. Examples
c. Reporting, in a management role, to those
of such services least likely include:
charged with governance.
a. Recording transactions for which the audit
d. Providing technical assistance and advice on
client has determined or approved the
accounting principles for audit clients.
appropriate account classification.
Preparing Accounting Records and Financial
b. Posting coded transactions to the audit
Statements
client’s general ledger.
88. If firm, or network firm, personnel providing
c. Preparing financial statements based on
such assistance make management decisions,
information in the trial balance.
d. Determining and posting journal entries d. All of the above.
without obtaining the approval of the audit client. Valuation Services
92. The safeguards necessary to reduce the 95. If the valuation services involves the
threat, created by providing accounting and valuation of matters material to the financial
bookkeeping services to an audit client that is statements
not a listed entity, to an acceptable level might and the valuation involves a significant degree of
include the following, except subjectivity, the self-review threat created
a. Making arrangements so such services are (choose the incorrect one)
not performed by a member of the assurance a. Could not be reduced to an acceptable level
team. by the application of any safeguard.
b. Implementing policies and procedures to b. Could be reduced to an acceptable level by
prohibit the individual providing such services the application of safeguards.
from making any managerial decisions on behalf c. Such valuation services should not be
of the audit client. provided.
c. Requiring the source data for the accounting d. The assurance team should withdraw from
entries to be originated by the assurance the audit engagement, if the team opted to
team. perform the valuation services.
d. Obtaining audit client approval for any 96. The following would not generally create a
proposed journal entries or other changes significant threat to independence, except
affecting a. When a firm, or a network firm, performs a
the financial statements. valuation service for an audit client for the
Preparing Accounting Records and Financial purposes of making a filing or return to a tax
Statements – Audit Clients that are Listed authority.
Entities b. The firm provides formal taxation opinions
93. The provision of accounting and and assistance in the resolution of tax disputes
bookkeeping services of a routine or mechanical to an audit client.
nature to c. The firm renders internal services involving an
divisions or subsidiaries of listed audit clients extension of the procedures required to
would not be seen as impairing independence conduct an audit in accordance with Philippine
with respect to the audit client provided that the Standards on Auditing to an audit client.
following conditions are met, except d. When the firm, or a network firm, provides
a. The services do not involve the exercise of assistance in the performance of a client’s
judgment. internal audit activities or undertakes the
b. The divisions or subsidiaries for which the outsourcing of some of the activities.
service is provided are collectively immaterial Page 16 of 20
to the audit client.
c. The services provided are collectively
AT-5903
Provision of IT Systems Services to Audit
immaterial to the division or subsidiary.
Clients
d. The fees to the firm, or network firm, from
97. The provision of services by a firm or
such services are collectively significant.
network firm to an audit client that involve the
Preparing Accounting Records and Financial
design
Statements – Emergency Situations
and implementation of financial information
94. The provision of accounting and
technology systems that are used to generate
bookkeeping services to audit clients in
information forming part of a client's financial
emergency or other
statements may most likely create
unusual situations, when it is impractical for the
a. Self-interest threat c. Intimidation threat
audit client to make other arrangements,
b. Self-review threat d. Familiarity threat
would not be considered to pose an
98. Which of the following is least likely
unacceptable threat to independence provided:
considered to create a threat to independence?
a. The firm, or network firm, does not assume
a. The provision of services by a firm or network
any managerial role or make any managerial
firm to an audit client which involve either
decisions.
the design or the implementation of financial
b. The audit client accepts responsibility for the
information technology systems that are
results of the work.
used to generate information forming part of a
c. Personnel providing the services are not
client’s financial statements.
members of the assurance team.
b. The provision of services in connection with d. Both a and c.
the assessment, design and implementation Recruiting Senior Management
of internal accounting controls and risk 101. The recruitment of senior management for
management controls. an assurance client, such as those in a position
c. The lending of staff by a firm, or network firm, to
to an audit client when the individual is in a affect the subject of the assurance engagement
position to influence the preparation of a client’s may least likely create
accounts or financial statements. a. Self-interest threat c. Intimidation threat
d. The provision of litigation support services to b. Advocacy threat d. Familiarity threat
an audit client, which include the estimation Corporate Finance and Similar Activities
of the possible outcome and thereby affects the 102. Certain corporate finance services may
amounts or disclosures to be reflected in create advocacy or self-review threats; however,
the financial statements. safeguards may be available to reduce these
Provision of Legal Services to Audit Clients threats to an acceptable level. Examples of
99. Legal services are defined as such services include the following, except
a. The making of assumptions with regard to a. Committing the assurance client to the terms
future developments, the application of certain of a transaction or consummating a
methodologies and techniques, and the transaction on behalf of the client.
combination of both in order to compute a b. Assisting a client in developing corporate
certain strategies.
value, or range of values, for an asset, a liability c. Assisting in identifying or introducing a client
or for a business as a whole. to possible sources of capital that meet the
b. A broad range of services, including client specifications or criteria.
compliance, planning, provision of formal d. Providing structuring advice and assisting a
taxation client in analyzing the accounting effects of
opinions and assistance in the resolution of tax proposed transactions.
disputes. Page 17 of 20
c. May include such activities as acting as an
expert witness, calculating estimated
AT-5903
Fees and Pricing
damages or other amounts that might become
103. Which of the following is not likely to create
receivable or payable as the result of
a threat to independence?
litigation or other legal dispute, and assistance
a. The total fees generated by an assurance
with document management and retrieval
client represent a large proportion of a firm’s
in relation to a dispute or litigation.
total fees.
d. Any services for which the person providing
b. Fees due from an assurance client for
the services must either be admitted to
professional services remain unpaid for a long
practice before the Courts of the jurisdiction in
time.
which such services are to be provided, or
c. A firm obtains an assurance engagement at a
have the required legal training to practice law.
significantly lower fee level than that
100. Which of the following threats to
charged by the predecessor firm, or quoted by
independence can be eliminated or reduced to
other firms.
an
d. A court or other public authority established
acceptable level?
fees.
a. Acting for an audit client in the resolution of a
104. A client company has not paid its 2003
dispute or litigation in such circumstances
audit fees. According to the Code of
when the amounts involved are material in
Professional
relation to the financial statements of the audit
Conduct, for the auditor to be considered
client.
independent with respect to the 2004 audit, the
b. When a firm is asked to act in an advocacy
2003 audit fees must be paid before the
role for an audit client in the resolution of a
a. 2003 report is issued c. 2004 report is issued
dispute or litigation in circumstances when the
b. 2004 field work is started d. 2005 field work is
amounts involved are not material to the
started
financial statements of the audit client.
105. Fees calculated on a predetermined basis
c. The appointment of a partner or an employee
relating to the outcome or result of a transaction
of the firm or network firm as General
or
Counsel for legal affairs to an audit client.
the result of the work preformed. engaged in performing the professional
a. Contingent fees c. Flat sum fees services Yes Yes No No
b. Retainer fees d. Per diem fees • The degree of responsibility that performing
106. Which of the following is least likely to those services entails Yes No No No
create a threat to independence? Page 18 of 20
a. The fees generated by the assurance client
represent a large proportion of the revenue of
AT-5903
109. Which statement is incorrect regarding
an individual partner.
professional fees?
b. The firm charges a contingent fee to an
a. Professional fees should normally be
assurance client.
computed on the basis of appropriate rates per
c. Accepting gifts or hospitality, the value of
hour
which is clearly insignificant, from an assurance
or per day for the time of each person engaged
client.
in performing professional services.
d. When litigation takes place, or appears likely,
b. The appropriate rates should be based on the
between the firm or a member of the
fundamental premise that the organization
assurance team and the assurance client.
and conduct of the professional accountant in
SECTION 9 - Professional Competence and
public practice and the services provided to
Responsibilities Regarding the Use of Non-
clients are well planned, controlled and
Accountants
managed.
107. Which statement is incorrect regarding
c. It is for each professional accountant in public
Professional Competence and Responsibilities
practice to determine the appropriate rates.
Regarding the Use of Non-Accountants?
d. It is not proper for a professional accountant
a. Professional accountants in public practice
in public practice to charge a client a lower
should refrain from agreeing to perform
fee than has previously been charged for similar
professional services which they are not
services
competent to carry out.
110. The Rules of Conduct will ordinarily be
b. If a professional accountant does not have the
considered to have been violated when the
competence to perform a specific part of
professional accountant represents that specific
the professional service, technical advice may
consulting services will be performed for a
be sought from experts.
stated fee and it is apparent at the time of the
c. In situations wherein a professional
representation that the
accountant sought technical advice from
a. Actual fee would be substantially higher.
experts,
b. Actual fee would be substantially lower than
although the professional accountant is relying
the fees charged by other professional
on the technical competence of the expert,
accountants for comparable services
the knowledge of the ethical requirements
c. Fee was a competitive bid.
cannot be automatically assumed.
d. Professional accountant would not be
d. If at any time the professional accountant is
independent.
not satisfied that proper ethical behavior can
111. Which of the following fee arrangements
be respected or assured, the engagement
would violate the Code of Professional Conduct?
should not be accepted unless the
a. A fee based on the approval of a bank loan.
engagement has commenced in which case the
b. A fee based on the outcome of a bankruptcy
auditor is allowed to finish the
proceeding.
engagement.
c. A per hour fee that includes out-of-pocket
SECTION 10 - Fees and Commissions
expenses.
108. Professional fees should be a fair reflection
d. A fee based on the complexity of the
of the value of the professional services
engagement.
performed for the client, taking into account:
112. Which of the following actions by a
abcd
professional accountant in public practice will
• The skill and knowledge required for the type
not result in
of
violation of the Code of Ethics regarding
professional services involved Yes Yes Yes Yes
commissions?
• The level of training and experience of the
a. Accepting commission for referring a client to
persons necessarily engaged in performing the
a third party.
professional services Yes Yes Yes No
• The time necessarily occupied by each person
b. Accepting commission for the referral of the
products or services of others.
AT-5903
c. Receipt of referral fees by the referring SECTION 13 - Relations with Other
accountant when no services are performed by Professional Accountants in Public Practice
the referring accountant. 115. Which statement is incorrect regarding
d. Entering into an arrangement for the purchase relations with other professional accountants in
of the whole or part of an accounting public
practice requiring payments to individuals practice?
formerly engaged in the practice or payments a. Professional accountants in public practice
to their heirs or estates. should only undertake the services which they
SECTION 11 - Activities Incompatible with can expect to complete with professional
the Practice of Public Accountancy competence.
113. Which statement is incorrect regarding b. The wishes of the client should be paramount
activities incompatible with the practice of public in the choice of professional advisers,
accountancy? whether or not special skills are involved.
a. A professional accountant in public practice c. When a professional accountant in public
should not concurrently engage in any practice is asked to provide services or advice,
business, occupation or activity which impairs or inquiries should be made as to whether the
might impair integrity, objectivity or prospective client has an existing accountant.
independence, or the good reputation of the d. The receiving accountant may express any
profession. criticism of the professional services of the
b. A professional accountant in public practice existing accountant without giving the latter an
should not concurrently engage in any opportunity to provide all relevant
business, occupation or activity which would be information.
incompatible with the rendering of 116. Communication between the receiving
professional services. accountant and existing accountant is not
c. The rendering of two or more types of intended
professional services concurrently does by itself a. To protect a professional accountant in public
impair integrity, objectivity or independence. practice from accepting an appointment in
d. The simultaneous engagement in another circumstances where all the pertinent facts are
business, occupation or activity unrelated to not known.
professional services which has the effect of not b. To protect the minority proprietors of a
allowing the professional accountant in business who may not be fully informed of the
public practice properly to conduct a circumstances in which the change is proposed.
professional practice in accordance with the c. To protect the interests of the existing
fundamental ethical principles of the accountant when the proposed change arises
accountancy profession should be regarded as from,
inconsistent with the practice of public or is an attempt to interfere with, the
accountancy. conscientious exercise of the existing
SECTION 12 - Clients’ Monies accountant's
114. Which statement is incorrect regarding duty to act as an independent professional.
clients’ monies? d. To restrict the client’s freedom to choose their
a. The professional accountants in public professional advisers and to change to
practice should not hold client’s; monies if there others.
is 117. The existing accountant, on receipt of the
reason to believe that they were obtained from, communication from the proposed professional
or are to be used for, illegal activities. accountant in public practice, should not
b. A professional accountant in public practice a. Reply, preferably in writing, advising whether
should maintain one or more bank accounts there are any professional reasons why the
for clients’ monies. proposed professional accountant in public
c. Monies may only be drawn from the client practice should not accept the appointment.
account on the instructions of the client. b. Ensure that the client has given permission to
d. Fees due from a client may be drawn from give details of this information to the
client’s monies without the need of notifying proposed professional accountant in public
the client. practice.
Page 19 of 20
c. Report the fact, that the permission is not name and professional qualifications and gave
granted, to the proposed professional the name of his organization.
accountant in public practice. 121. Which of the following is acceptable?
d. Disclose all information needed by the a. A professional accountant invited a potential
proposed professional accountant in public client to attend training courses or seminars
practice to be able to decide whether or not to conducted for the assistance of staff.
accept the appointment, if permission is b. Job specification that gives some detail as to
not granted. one or more of the services provided to
SECTION 14 - Advertising and Solicitation clients by the professional accountant in public
118. Which of the following is true regarding practice was communicated to the public
advertising and solicitation? through the classified ads section of a
a. Advertising, but not solicitation, by individual newspaper.
professional accountants in public practice is c. A professional accountant in public practice
permitted in the Philippines. indicated in his stationery that he is a tax
b. It is clearly desirable that the public should be expert.
aware of the range of services available d. A professional accountant developed a
from a professional accountant. website that contains self-laudatory statements
c. Solicitation, but not advertising, by individual designed to solicit clients.
professional accountants in public practice is 122. Professional accountant who author books
permitted in the Philippines. or articles on professional subjects, may state
d. A professional accountant in public practice in abcd
the Philippines, where advertising is • His or her name Yes Yes Yes Yes
prohibited, may advertise in a newspaper or • Professional qualifications Yes Yes Yes No
magazine published in a country where • Name of organization Yes Yes No No
advertising is permitted. • Information as to the services his or her firm
119. Publicity by individual professional provide Yes No No No
accountants in public practice is acceptable 123. A professional accountant may invite the
provided: following to attend training courses or seminars
abcd conducted for the assistance of staff
• It has as its object the notification to the public abcd
or such sectors of the public as are concerned, • Clients Yes Yes No No
of matters of fact in a manner that is not false, • Staff Yes Yes Yes Yes
misleading or deceptive Yes Yes No Yes • Other professional accountants Yes Yes No
• It is in good taste Yes Yes Yes Yes No
• It is professionally dignified Yes Yes Yes No • Potential clients Yes No Yes No
• It avoids frequent repetition of, and any undue PART C- APPLICABLE TO EMPLOYED
prominence being given to the name of the PROFESSIONAL ACCOUNTANTS
professional accountant in public practice Yes 124. Which statement is incorrect regarding
No No Yes employed professional accountants?
Page 20 of 20 a. Employed professional accountants owe a
AT-5903 duty of loyalty to their employer as well as to
120. Which of the following is not acceptable? the profession, therefore there may be no time
a. An appointment of a professional accountant that the two will be in conflict.
in a matter of national importance was b. A professional accountant, particularly one
publicized. having authority over others, should give due
b. A professional accountant writes a letter to weight for the need for them to develop and hold
another professional accountant seeking their own judgment in accounting
employment or professional business. matters and should deal with difference of
c. A professional accountant is listed in a opinion in a professional way.
directory that could reasonably be regarded as a c. When undertaking significant tasks for which
promotional advertisement for those listed a professional accountant has not had
therein. sufficient specific training or experience, he or
d. A professional accountant who authored an she should not mislead the employer as to
article on professional subject, stated his the degree of expertise or experience he or she
possesses, and where appropriate,
expert advice and assistance should be sought.
d. A professional accountant is expected to a. Auditors make legal determinations of whether
present financial information fully, honestly and fraud has actually occurred.
professionally and so that it will be understood in b. Misstatement of the financial statements may
its context. not be the objective of some frauds.
- end of AT-5903 – c. Fraud involving one or more members of
management or those charged with governance
CPA REVIEW SCHOOL OF THE is
PHILIPPINES referred to as “employee fraud”.
Manila d. Fraud involving only employees of the entity is
AUDITING THEORY referred to as “management fraud”.
PROFESSIONAL AND LEGAL 5. The types of intentional misstatements that
RESPONSIBILITIES are relevant to the auditor’s consideration of
Related PSAs : PSA 240rev, 250 and 260 fraud
PSA 240(rev) – The Auditor’s Responsibility to include
Consider Fraud and Error in the Audit of FS I. Misstatements resulting from fraudulent
1. The primary responsibility for the prevention financial reporting
and detection of fraud and error rests with II. Misstatements resulting from misappropriation
a. The auditor. c. The management of an entity. of assets
a. I and II b. I only c. II only d. Neither I nor II
b. Those charged with governance. d. Both b
6. Fraudulent financial reporting involves
and c.
intentional misstatements or omissions of
2. When planning and performing audit
amounts or
procedures and evaluating and reporting the
disclosures in financial statements to deceive
results
financial statement users. Fraudulent financial
thereof, the auditor should
reporting least likely involve
a. Search for errors that would have a material
effect and for fraud that would have either a. Deception such as manipulation, falsification,
material or immaterial effect on the financial or alteration of accounting records or
statements. supporting documents from which the financial
b. Consider the risk of misstatements in the statements are prepared.
financial statements resulting from fraud or error. b. Misrepresentation in, or intentional omission
c. Search for fraud that would have a material from, the financial statements of events,
effect and for errors that would have either transactions or other significant information.
material or immaterial effect on the financial c. Intentional misapplication of accounting
statements. principles relating to measurement, recognition,
d. Consider the risk of material misstatements in classification, presentation, or disclosure.
the financial statements resulting from fraud d. Embezzling receipts, stealing physical or
or error. intangible assets, or causing an entity to pay for
3. The following are examples of error, except goods and services not received.
a. A mistake in gathering or processing data 7. Which of the following illustrates a perceived
from which financial statements are prepared. opportunity to commit fraud?
b. An incorrect accounting estimate arising from a. Individuals are living beyond their means.
oversight or misinterpretation of facts. b. Management is under pressure, from sources
c. A mistake in the application of accounting outside or inside the entity, to achieve an
principles relating to measurement, recognition, expected (and perhaps unrealistic) earnings
classification, presentation, or disclosure. target.
d. Misrepresentation in the financial statements Page 2 of 10
of events, transactions or other significant
information.
AT-5904
4. The term “fraud” refers to an intentional act by c. An individual believes internal control could be
one or more individuals among management, circumvented because the individual is in a
those charged with governance, employees, or position of trust or has knowledge of specific
third parties, involving the use of deception to weaknesses in the internal control system.
obtain an unjust or illegal advantage. Which d. All of the above.
statement is correct regarding fraud?
8. Which statement is incorrect regarding the d. The auditor did not consider factors
auditor’s responsibility to consider fraud and influencing audit risk for account balances that
error in have
an audit of financial statements? pervasive effects on the financial statements
a. The auditor is not and cannot be held taken as a whole.
responsible for the prevention of fraud and error. 11. The auditor’s ability to detect a fraud
b. In planning the audit, the auditor should depends on factors such as
discuss with other members of the audit team I. The skillfulness of the perpetrator.
the II. The frequency and extent of manipulation.
susceptibility of the entity to material III. The degree of collusion involved.
misstatements in the financial statements IV. The relative size of individual amounts
resulting from manipulated.
fraud or error. V. The seniority of those involved.
c. The auditor should design test of controls to a. All of the above b. I, III and V only c. I, II, III
reduce to an acceptably low level the risk that and V only d. III and V only
misstatements resulting from fraud and error 12. In comparing management fraud with
that are material to the financial statements employee fraud, the auditor’s risk of failing to
taken as a whole will not be detected. discover the
d. When the auditor encounters circumstances fraud is
that may indicate that there is a material a. Greater for employee fraud because of the
misstatement in the financial statements higher crime rate among blue collar workers.
resulting from fraud or error, the auditor should b. Greater for management fraud because of
perform procedures to determine whether the management’s ability to override existing
financial statements are materially misstated. internal
9. The risk of not detecting a material controls.
misstatement resulting from fraud is higher than c. Greater for employee fraud because of the
the risk of larger number of employees in the organization.
not detecting a material misstatement resulting d. Greater for management fraud because
from error because managers are inherently smarter than
employees.
a. The effect of fraudulent act is likely omitted in
13. The subsequent discovery of a material
the accounting records.
misstatement of the financial statements
b. Fraud is ordinarily accompanied by acts resulting from
specifically designed to conceal its existence. fraud or error, in and of itself, indicates:
c. Fraud is always a result of connivance abcd
between or among employees. • a failure to obtain reasonable assurance Yes
d. The auditor is responsible to detect errors but Yes Yes No
not fraud. • inadequate planning, performance or
10. Which of the following statements describes judgment Yes No No No
why a properly designed and executed audit • the absence of professional competence and
may due care Yes Yes No No
not detect a material fraud? • a failure to comply with PSAs Yes No No No
a. Audit procedures that are effective for Page 3 of 10
detecting an unintentional misstatement may be
ineffective for an intentional misstatement that is AT-5904
concealed through collusion. 14. Whether the auditor has performed an audit
b. An audit is designed to provide reasonable in accordance with PSAs is determined by
assurance of detecting material errors, but there a. The adequacy of the audit procedures
is no similar responsibility concerning material performed in the circumstances and the
fraud. suitability of
c. The factors considered in assessing control the auditor’s report based on the result of these
risk indicated an increased risk of intentional procedures.
misstatements, but only a low risk of b. The absence of material misstatements.
unintentional errors in the financial statements. c. The absence of material errors.
d. The Securities and Exchange Commission.
15. When planning the audit, which of the characteristics and influence over the control
following is least likely a purpose of the auditor’s environment?
inquiries a. There is motivation for management to
of management? engage in fraudulent financial reporting.
a. To obtain an understanding of management’s b. There is a failure by management to display
assessment of the risk that the financial and communicate an appropriate attitude
statements may be materially misstated as a regarding internal control and the financial
result of fraud. reporting process.
b. To obtain knowledge of management’s c. Non-financial management participates
understanding regarding the accounting and excessively in, or is preoccupied with, the
internal selection
control systems in place to prevent and detect of accounting principles or the determination of
error. significant estimates.
c. To determine whether management has d. New accounting, statutory or regulatory
discovered any material errors. requirements that could impair the financial
d. To determine extent of authentication of stability
documentation. or profitability of the entity.
16. Which of the following best describes what is 20. The following are examples of fraud risk
meant by the term “fraud risk factor”? factors relating to industry conditions, except
a. Factors whose presence indicates that the a. There is a high turnover of management,
risk of fraud is high. counsel or board members.
b. Factors whose presence often has been b. A high degree of competition or market
observed in circumstances where frauds have saturation, accompanied by declining margins.
occurred. c. A declining industry with increasing business
c. Factors whose presence requires failures and significant declines in customer
modifications of planned audit procedures. demand.
d. Reportable conditions identified during an d. Rapid changes in the industry, such as high
audit. vulnerability to rapidly changing technology or
17. Which of the following is least likely a rapid product obsolescence.
category of fraud risk factors that relate to Page 4 of 10
misstatements
resulting from fraudulent financial reporting? AT-5904
a. Management’s characteristics and influence 21. Which of the following is most likely an
over the control environment. example of fraud risk factor relating to
b. Industry conditions. management’s
c. Operating characteristics and financial characteristics and influence over the control
stability. environment?
d. Susceptibility of assets to misappropriation. a. There is a strained relationship between
18. Fraud risk factors relating to management’s management and the current or predecessor
characteristics and influence over the control auditor.
environment b. Inability to generate cash flows from
a. Pertain to management’s abilities, pressures, operations while reporting earnings and
style, and attitude relating to internal control earnings
and the financial reporting process. growth.
b. Involve the economic and regulatory c. Significant related party transactions which
environment in which the entity operates. are not in the ordinary course of business.
c. Pertain to the nature and complexity of the d. Significant, unusual or highly complex
entity and its transactions, the entity’s financial transactions (especially those close to year-end)
condition, and its profitability. that
pose difficult questions concerning substance
d. Involve the lack of controls designed to
over form.
prevent or detect misappropriation of assets.
22. Examples of fraud risk factors relating to
19. Which of the following is least likely an
susceptibility of assets to misappropriation
example of fraud risk factors relating to
include the
management’s
following, except
a. Large amounts of cash on hand or processed. b. Conflicting or unsatisfactory evidence
b. Inventory characteristics, such as small size provided by management or employees.
combined with high value and high demand. c. Information provided unwillingly or after
c. Easily convertible assets, such as bearer unreasonable delay.
bonds, diamonds or computer chips. d. Transactions recorded in accordance with
d. Lack of appropriate management oversight. management’s general or specific authorization.
23. Judgments about the risk of material 26. Which of the following circumstances most
misstatements resulting from fraud may affect likely indicate the possibility of fraud or error?
the audit in a. Management engages in frank communication
the following ways, except with appropriate third parties, such as
a. The application of professional skepticism regulators and bankers.
may include increased sensitivity in the selection b. Evidence of an unduly lavish lifestyle by
of the nature and extent of documentation to be officers or employees.
examined in support of material c. Conservative application of accounting
transactions. principles.
b. The knowledge, skill and ability of members of d. Minimal differences from expectations
the audit team assigned significant audit disclosed by analytical procedures.
responsibilities need to be commensurate with 27. Which of the following should the auditor
the auditor’s assessment of the level of risk likely to do when the application of planned audit
for the engagement. procedures indicates the possible existence of
c. The auditor may decide to consider further fraud or error?
management’s selection and application of a. The auditor should resign in order to avoid
significant accounting policies, particularly those legal responsibility.
related to revenue recognition, asset b. He should discuss the matter with the person
valuation or capitalizing versus expensing. whom he believes is involved with the
d. The auditor’s ability to assess control risk at irregularities.
high level may be reduced. c. He should consider the potential effect on the
24. The nature, timing and extent of procedures financial statements.
may need to be modified in the following ways d. He should refer the suspected fraud or error
as to the internal auditor.
possible responses to the auditor’s assessment Page 5 of 10
of the risk of material misstatement resulting AT-5904
from both fraudulent financial reporting and 28. If the auditor believes an indicated fraud or
misappropriation of assets. error could have a material effect on the
a. The nature of audit procedures performed financial
may need to be changed to obtain evidence that statements, the nature, timing and extent of the
is more reliable or to obtain additional procedures to be performed depends on the
corroborative information. auditor’s judgment as to
b. The timing of substantive procedures may a. The type of fraud or error.
need to be altered to be closer to, or at, year- b. The likelihood that a particular type of fraud or
end. error could have a material effect on the
c. The extent of the procedures applied will need financial statements.
to reflect the assessment of the risk of c. The likelihood of their occurrence.
material misstatement resulting from fraud. d. All of the above.
d. All of the above. 29. The auditor should document
25. The auditor may encounter circumstances a. Fraud risk factors identified as being present
that, individually or in combination, indicate the during the auditor’s assessment process.
possibility that the financial statements may b. The auditor’s response to fraud risk factors
contain a material misstatement resulting from identified.
fraud c. Both a and b.
or error. These circumstances include the d. Neither a nor b.
following, except 30. The auditor least likely obtains written
a. Unrealistic time deadlines for audit completion representations from management that the
imposed by management. management:
a. Acknowledges its responsibility for the 1. When an auditor becomes aware of a
implementation and operations of accounting possible illegal act by a client, the auditor should
and obtain an
internal control systems that are designed to understanding of the nature of the act to
prevent and detect fraud and error. a. Increase the assessed level of control risk.
b. Believes the effects of those uncorrected b. Recommend remedial actions to the audit
financial statement misstatements aggregated committee.
by c. Evaluate the effect on the financial
the auditor during the audit are material, both statements.
individually and in the aggregate, to the d. Determine the reliability of management’s
financial statements taken as a whole. representations.
c. Has disclosed to the auditor all significant Page 6 of 10
facts relating to any frauds or suspected frauds AT-5904
known to management that may have affected 2. Mac, CPA, is auditing the financial statements
the entity. of TL’s Retailing, Inc. What assurance does Mac
d. Has disclosed to the auditor the results of its provide that direct effect illegal acts that are
assessment of the risk that the financial material to TL’s financial statements, and illegal
statements may be materially misstated as a acts
result of fraud. that have a material, indirect effect on the
31. Communication of a misstatement resulting financial statements will be detected?
from fraud, or a suspected fraud, or error to the Direct effect illegal acts Indirect effect illegal acts
appropriate level of management on a timely a. Reasonable None
basis is important because it enables b. Reasonable Reasonable
management c. Limited None
to take action as necessary. Ordinarily, the d. Limited Reasonable
appropriate level of management is 3. The most likely explanation why the auditor’s
a. At least equal to the level of the persons who examination cannot reasonably be expected to
appear to be involved with the misstatement or bring all illegal acts by the client to the auditor’s
suspected fraud. attention is that
b. At least one level above the persons who a. Illegal acts are perpetrated by management
appear to be involved with the misstatement or override of internal accounting controls.
suspected fraud. b. Illegal acts by clients often relate to operating
c. The audit committee of the board of directors. aspects rather than accounting aspects.
d. The head of internal audit department. c. The client’s system of internal accounting
32. The auditor may encounter exceptional control may be so strong that the auditor
circumstances that bring into question the performs
auditor’s only minimal substantive testing.
ability to continue performing the audit, including d. Illegal acts may be perpetrated by the only
where person in the client’s organization with access to
a. The entity does not take the remedial action both assets and the accounting records.
regarding fraud that the auditor considers 4. An auditor who finds that the client has
necessary in the circumstances, even when the committed an illegal act would be most likely to
fraud is not material to the financial withdraw
statements. from the engagement when the
a. Illegal act affects auditor’s ability to rely on
b. The auditor’s consideration of the risk of
management representations.
material misstatement resulting from fraud and
b. Illegal act has material financial statement
the
implications.
results of audit tests indicate a significant risk of
c. Illegal act has received widespread publicity.
material and pervasive fraud.
d. Auditor cannot reasonably estimate the effect
c. The auditor has significant concern about the of the illegal act on the financial statements.
competence or integrity of management or 5. If an auditor believes a client may have
those charged with governance. committed illegal acts, which of the following
d. All of the above. actions
PSA 250 – Consideration of Laws and should the auditor take?
Regulations in an Audit of Financial Statements
a. Consult with the client’s counsel and the provide a basis for recognition that some acts
auditor’s counsel to determine how the coming to the auditor’s attention may
suspected constitute noncompliance with laws and
illegal acts will be communicated to regulations.
stockholders. Page 7 of 10
b. Extend auditing procedures to determine
whether the suspected illegal acts have a
AT-5904
c. The determination as to whether a particular
material
act constitutes or is likely to constitute
effect on the financial statements.
noncompliance is generally based on the
c. Make inquiries of the client’s management
understanding of the auditor but ultimately can
and obtain an understanding of the
only
circumstances underlying the acts and of other
be determined by an expert who is qualified to
evidence to determine the effects of the acts
practice law.
on the financial statements.
d. In order to plan the audit, the auditor should
d. Notify each member of the audit committee of
obtain a general understanding of the legal and
the board of directors about the nature of the
regulatory framework applicable to the entity and
acts and request that they advise an approach
the industry and how the entity is
to be taken by the auditor.
complying with the framework.
6. An audit client’s board of directors and audit
9. When the auditor becomes aware of
committee refused to take action about an
information concerning a possible
immaterial illegal act that was brought to their
noncompliance to laws
attention by the auditor. Because of their failure
or regulations, the auditor should appropriately:
to act, the auditor withdrew from the
a. Obtain an understanding of the nature of the
engagement. The auditor’s decision to withdraw
act and the circumstances in which it has
was
occurred, and evaluate the possible effect on the
primarily due to doubt concerning
financial statements.
a. Inadequate financial statement disclosures.
b. Discuss his suspicion with the management.
b. Compliance with the laws.
c. Ask management to determine whether a
c. Scope limitations resulting from the inaction.
violation is really committed.
d. Reliance on management’s representation.
d. Consult with the entity’s legal counsel as to
7. Which of the following is incorrect about the
what appropriate action the auditor should do.
auditor’s responsibility of evaluating
10. If the auditor suspects that members of
noncompliance
senior management, including members of the
by the entity to laws and regulations?
board of
a. An audit cannot be expected to detect
directors, are involved in noncompliance to laws
noncompliance with all laws and regulations.
as regulations, and he believes his report may
b. Noncompliance refers to acts of omission or
not be acted upon, he would:
commission by the entity being audited which
a. Do nothing.
are contrary to prevailing laws or regulations.
b. Issue a disclaimer of opinion.
c. Noncompliance includes personal misconduct
c. Consider seeking legal advice.
of entity management or employers though
d. Make special investigation in order to fully
they are unrelated to the entity’s business
determine the extent of client’s noncompliance.
activities.
11. Which of the following circumstances
d. Detection of noncompliance, regardless of
regarding the entity’s noncompliance to laws or
materiality, requires considerations of the
regulations
implications for the integrity of management or
may cause the auditor to resign from an
employees.
engagement?
8. What is expected of auditor in determining
a. The auditor is unable to determine whether
noncompliance by an entity to existing laws and
noncompliance has occurred.
regulations?
b. If the auditor concludes that the
a. Whether an act constitutes noncompliance is
noncompliance has a material effect on the
a legal determination that is ordinarily within
financial
the auditor’s professional competence.
statements and has not been properly reflected
b. The auditor’s training, experience and
in the financial statements.
understanding of the entity and its industry
cannot
c. When the entity does not take remedial action charged with governance in overseeing the
that he considers necessary in the financial reporting and disclosure process.
circumstances even when the noncompliance is d. Audit matters of governance interest include
not material to financial statements. only those matters that have come to the
d. When the disclosure of the effect of attention of the auditor as a result of the
noncompliance to legal authority is necessary. performance of the audit.
12. Examples of the type of information that may Page 8 of 10
come to the auditor's attention that may indicate
that noncompliance with laws or regulations has
AT-5904
3. The role of persons entrusted with the
occurred least likely include
supervision, control and direction of an entity
a. Investigation by government departments or
a. Governance c. Government
payment of fines or penalties.
b. Board of directors d. Management
b. Sales commissions or agent's fees that
4. Which statement is correct regarding “audit
appear reasonable in relation to those ordinarily
matters of governance interest”?
paid
a. These are matters that arise from the audit of
by the entity or in its industry or to the services
financial statements and, in the opinion of the
actually received.
auditor, are either important or relevant to those
c. Unusual transactions with companies
charged with governance in overseeing the
registered in tax havens.
financial reporting and disclosure process.
d. Media comment.
b. These include only those matters that have
PSA 260 – Communications of Audit Matters
come to the attention of the auditor as a result of
with Those Charged with Governance
the performance of the audit.
1. Which statement is incorrect regarding PSA
c. The auditor is required, in an audit in
260?
accordance with PSAs, to design procedures for
a. The purpose of this PSA is to establish
the
standards and provide guidance on
specific purpose of identifying these matters.
communication
d. The auditor is not required to communicate
of audit matters arising from the audit of financial
these matters with those charged with
statements between the auditor and those
governance of an entity.
charged with governance of an entity.
5. Which statement is incorrect regarding the
b. These communications relate to audit matters
auditor’s communications of audit matters with
of governance interest as defined in this PSA.
those
c. This PSA provides guidance on
charged with governance?
communications by the auditor to parties outside
a. The auditor should communicate audit
the entity,
matters of governance interest upon completion
for example, external regulatory or supervisory
of
agencies.
the engagement.
d. All the above statements are correct.
b. The auditor’s communications with those
2. Which statement is incorrect regarding the
charged with governance may be made orally or
auditor’s communications of audit matters with
in
those
writing.
charged with governance?
c. When audit matters of governance interest
a. The auditor should communicate audit
are communicated orally, the auditor documents
matters of governance interest arising from the
in the working papers the matters communicated
audit
and any responses to those matters.
of financial statements with those charged with
d. Ordinarily, the auditor initially discusses audit
governance of an entity.
matters of governance interest with
b. Those charged with governance ordinarily are
management, except where those matters relate
accountable for ensuring that the entity
to questions of management competence
achieves its objectives, financial reporting, and
or integrity.
reporting to interested parties.
Other Professional Responsibilities
c. “Audit matters of governance interest” are
1. An auditor’s overall objective in a financial
those that arise from the audit of financial
statement audit is to
statements and, in the opinion of the auditor, are
a. Determine that all individual accounts and
either important or relevant to those
footnotes are fairly presented.
b. Employ the audit risk model. 6. In performing MAS engagements, CPAs
c. Express an opinion on the fair presentation of should not take any positions that might
the financial statements in accordance with a. Constitute advice and assistance
generally accepted accounting principles. b. Provide technical assistance in
d. Detect all errors and fraud. implementation
2. The primary responsibility for the adequacy of c. Result in new organizational policies and
disclosure in the financial statements of a procedures
publicly d. Impair their objectivity
held company rests with the 7. An audit independence issue might be raised
a. Partner assigned to the audit engagement. c. by the auditor’s participation in management
Auditor in-charge of field work. advisory services engagements. Which of the
b. Management of the company. d. Securities following statements is most consistent with the
and Exchange Commission. profession’s attitude toward this issue?
3. Reasonable assurance means: a. Information obtained as a result of a
a. Gathering of all available corroborating management advisory services engagement is
evidence for the auditor to conclude that there confidential to that specific engagement and
are no should not influence performance of the attest
material misstatements in the financial function.
statements, taken as a whole. b. The decision as to loss of independence must
b. Gathering of the audit evidence necessary for be made by the client based upon the facts of
the auditor to conclude that there are no the particular case.
material misstatements in the financial c. The auditor should not make management
statements, taken as a whole. decisions for an audit client.
c. Gathering of the audit evidence necessary for d. The auditor who is asked to review
the auditor to conclude that the financial management decisions is also competent to
statements, taken as a whole, are free from any make these
misstatements. decisions and can do so without loss of
d. Gathering of the audit evidence necessary for independence.
the auditor to conclude that the financial 8. The form of communication with a client in a
statements are free of material unintentional management advisory service consultation
misstatements. should
4. Which of the following ultimately determines be
the specific audit procedures necessary to a. Either oral or written.
provide b. Oral with appropriate documentation in the
an independent auditor with a reasonable basis work papers.
for the expression of an opinion? c. Written and copies should be sent to both
a. the audit program. c. generally accepted management and the board of directors.
auditing standards. d. Written and a copy should be sent to
b. the auditor’s judgment. d. the auditor’s management alone.
working papers. Legal Responsibilities
5. Which of the following best describes a trend 1. Which one of the following, if present, would
in litigation involving CPAs? support a finding of constructive fraud on the
a. A CPA cannot render an opinion on a part of
company unless the CPA has audited all a CPA?
affiliates of a. Privity of contract. c. Intent to deceive.
that company. b. Reckless disregard. d. Ordinary negligence.
b. A CPA may successfully assert as a defense 2. The limitation of auditor liability under contract
that the CPA had no motive to be part of a law is known as
fraud. a. Privity of contract. c. Contributory liability.
c. A CPA may be exposed to criminal as well as b. Statutory liability. d. Common law liability.
civil liability. 3. The auditor's defense of contributory
Page 9 of 10 negligence is most likely to prevail when
AT-5904 a. Third party injury has been minimal.
b. The auditor fails to detect fraud resulting from
d. A CPA is primarily responsible for a client’s
management override of the control structure.
footnotes in an annual report filed with the SEC.
c. The client is privately held as contrasted with materially overstated accounts receivable
a public company. balance, Dex issued an unqualified opinion.
d. Undetected errors have resulted in materially Mead
misleading financial statements. relied on the financial statements in deciding to
4. Mix and Associates, CPAs, issued an obtain a loan from City Bank to expand its
unqualified opinion on the financial statements operations. City relied on the financial
of Glass statements in making the loan to Mead. As a
Corp. for the year ended December 31, 2005. It result of
was determined later that Glass' treasurer had the overstated accounts receivable balance,
embezzled P3,000,000 from Glass during 2005. Mead has defaulted on the loan and has
Glass sued Mix because of Mix's failure to incurred a
discover the embezzlement. Mix was unaware of substantial loss. If Mead sues Dex for
the embezzlement. Which of the following is negligence in failing to discover the
Mix's best defense? overstatement, Dex's
a. The audit was performed in accordance with best defense would be that
GAAS. a. No engagement letter had been signed by
b. The treasurer was Glass' agent and, Dex.
therefore, Glass was responsible for preventing b. The audit was performed by Dex in
the accordance with generally accepted auditing
embezzlement. standards.
c. The financial statements were presented in c. Dex was not in privity of contract with Mead.
conformity with GAAP. d. Dex did not perform the audit recklessly or
d. Mix had no actual knowledge of the with an intent to deceive.
embezzlement. 8. As a consequence of failure to adhere to
5. The factor that distinguishes constructive generally accepted auditing standards in the
fraud from actual fraud is course of
a. Materiality c. Quality of internal control. an audit of the Lamp Corp., Harrison, CPA, did
b. Type of error or irregularity d. Intent. not detect the embezzlement of a material
6. Working papers prepared by a CPA in amount of funds by the company's controller. As
connection with an audit engagement are owned a matter of common law, to what extent would
by the Harrison be liable to the Lamp Corp. for losses
CPA, subject to certain limitations. The rationale attributable to the theft?
for this rule is to a. No liability since the ordinary examination
a. Protect the working papers from being cannot be relied on to detect defalcations.
subpoenaed. b. No liability because privity of contract is
b. Provide the basis for excluding admission of lacking.
the working papers as evidence because of the c. Liable for losses attributable to her or his
privileged communication rule. negligence.
Page 10 of 10 d. Liable only if it could be proved that he or she
AT-5904 was grossly negligent.
9. Martin Corporation orally engaged Humm &
c. Provide the CPA with evidence and
Dawson to audit its year-end financial
documentation which may be helpful in the
statements.
event of a
The engagement was to be completed within
lawsuit.
two months after the close of Martin's fiscal year
d. Establish a continuity of relationship with the
for a fixed fee of P250,000. Under these
client whereby indiscriminate replacement of
circumstances, what obligation is assumed by
CPAs is discouraged.
Humm
7. Mead Corp. orally engaged Dex & Co., CPAs,
& Dawson?
to audit its financial statements. The
a. None. The contract is unenforceable since it
management of Mead informed Dex that it
is not in writing.
suspected that the accounts receivable were
b. An implied promise to exercise reasonable
materially overstated. Although the financial
standards of competence and care.
statements audited by Dex did, in fact, include a
c. An implied obligation to take extraordinary
steps to discover all defalcations.
d. The obligation of an insurer of its work, which • Individual audit level Yes No Yes No
is liable without fault. Page 3 of 7
10. In which of the following statements about a
public accounting firm's action is scienter or its
AT-5905
4. The following factors affect the nature, timing
equivalent absent?
and extent of an audit firm’s quality control
a. Reckless disregard for the truth.
policies and procedures, except
b. Actual knowledge of fraud.
abcd
c. Intent to gain monetarily by concealing fraud.
• Size and nature of practice Yes Yes No No
d. Performance of substandard auditing
• Geographic dispersion Yes Yes Yes No
procedures.
11. The leading precedent-setting auditing case • Organization Yes No Yes No
in the third party liability is • Appropriate cost/benefit considerations Yes
a. Escott et al. v. Bar Chris Construction Corp. Yes No No
b. Hochfelder v. Ernst & Ernst. 5. The firm is to be staffed by personnel who
c. Ultramares Corporation v. Touche. have attained and maintained the technical
d. United States v. Simon. standards and professional competence
12. The leading case of criminal action against required to enable them to fulfill their
CPAs is the responsibilities
a. 1136 Tenants case. with due care is the objective of what quality
b. United States v. Simon case, aka Continental control policy?
Vending. a. Professional Requirements c. Assignment
c. Escott et al. v. Bar Chris case, aka Bar Chris. b. Skills and Competence d. Delegation
d. Ultramares Corporation v. Touche case. 6. In connection with the element of professional
- end of AT-5904 – development, a CPA firm’s system of quality
control should ordinarily provide that all
personnel
CPA REVIEW SCHOOL OF THE a. Have the knowledge required to enable them
PHILIPPINES to fulfill responsibilities assigned.
Manila b. Possess judgment, motivation, and adequate
AUDITING THEORY experience.
QUALITY CONTROLS AND GENERALLY c. Seek assistance from persons having
ACCEPTED AUDITING STANDARDS appropriate levels of knowledge, judgment, and
authority.
(GAAS)
d. Demonstrate compliance with peer review
Related PSA : PSA 220
directives.
QUALITY CONTROL FOR AUDIT WORK
7. Within the context of quality control, the
MULTIPLE CHOICE QUESTIONS
primary purpose of continuing professional
1. A basic objective of a CPA firm is to provide
education
professional services that conform with
and training activities, is to enable a CPA firm to
professional standards. Reasonable assurance
provide personnel within the firm with:
of achieving this basic objective is provided
a. Technical training that assures proficiency as
through
an auditor.
a. A system of peer review.
b. Professional education that is required in
b. Continuing professional education.
order to perform with due professional care.
c. A system of quality controls.
c. Knowledge required to fulfill assigned
d. Compliance with generally accepted reporting
responsibilities and to progress within the firm.
standards.
d. Knowledge required in order to perform a
2. The examination by CPAs of a CPA firm’s
peer review.
auditing practices to ascertain compliance with
8. In pursuing its quality control objectives with
its
respect to assigning personnel to engagements,
quality control system
a public accounting firm may use policies and
a. Compliance audit c. Peer review
procedures such as
b. Examination d. Quality control audit
a. Rotating employees from assignment to
3. Quality control policies and procedures are
assignment on a random basis to aid in the staff
required to be implemented at
training effort.
abcd
• Audit firm level Yes Yes No No
b. Requiring timely identification of the staffing b. Designates individuals as specialists to serve
requirements of specific engagements so that as authoritative sources and define their
enough qualified personnel can be made authority in consultative situations.
available. c. Assigns an appropriate person or persons to
c. Allowing staff to select the assignments of be responsible for assigning personnel to
their choice to promote better client audits.
relationships. d. Specifies the extent of documentation to be
d. Assigning a number of employees to each provided for the result of consultation in those
engagement in excess of the number required areas and specialized situations where
so as not to overburden the staff and interfere consultation is required.
with the quality of the audit work 14. Monitoring, as an element of quality control
performed. policies of a firm, requires:
9. A CPA firm’s personnel partner periodically a. Providing reasonable assurance that the
studies the CPA firm’s personnel advancement firm’s other quality control policies and
experience to ascertain whether individuals procedures are effectively operating.
meeting stated criteria are assigned increased b. Designates individuals as specialists to serve
degrees of responsibility. This is evidence of the as authoritative sources and define their
CPA firm’s adherence to prescribed authority in consultative situations.
standards of c. Ensuring that personnel are sufficiently
a. Quality control. c. Supervision and review. directed, supervised and their work being
b. Due professional care. d. Fieldwork. reviewed adequately.
10. The firm’s evaluation of the performance of d. Identify the right personnel to be assigned in
its personnel and advising them of their progress an audit engagement.
is a quality control procedure that relates to 15. Which of the following quality control
a. Promotion c. Monitoring procedures is a monitoring activity?
b. Advancement d. Directing a. Evaluates the firm’s independence and its
11. Which of the following relate to skills and ability to serve the prospective client
competence as an objective of quality control b. Reviews and tests compliance with the firm’s
policies? general quality control policies and
a. Advancement c. Professional development procedures.
b. Hiring d. All of these c. Designates individuals as specialists to serve
12. Which of the following practices will promote as authoritative sources and define their
the objectives of assignment of personnel? authority in consultative situations.
A. Evaluates partners periodically by means of d. Monitors continuing professional education
senior partner or fellow partner evaluation programs and maintain appropriate records,
and counseling as to whether they continue to both on a firm and an individual audit
have the qualifications to fulfill their engagement basis.
responsibilities. 16. Which of the following objectives are
B. Identifies on a timely basis the staffing generally a component of a firm’s quality
requirements of specific audits control?
C. Periodically counsels personnel as to their A. Professional requirements E. Consultation
progress and career opportunities B. Skills and competence F. Due professional
Page 4 of 7 care
C. Assignment G. Monitoring
D. Inspection H. Delegation
AT-5905 a. A, B, C, D, E, F c. A, B, C, E, G, H
D. Prepares time budget for audit to determine b. A, B, C, F, E, G d. B, C, G, F, H
manpower requirements and to schedule 17. Which of the following is not an element of
audit work. professional requirements as prescribed by
a. A b. A C c. B D d. All of them Quality Control Policies for an audit firm?
13. Which of the following is not likely a quality a. Independence c. Confidentiality
control procedure on consultation? b. Integrity d. Prudence
a. Identifies areas and specialized situations 18. Which of the following is an element of
where consultation is required and encourage “directing an audit assistant” objective?
personnel to consult with or in use authoritative a. Identifying in advance the staffing
sources on other complex matters. requirements of a particular audit engagement.
b. Informing assistants of their responsibilities 24. Generally Accepted Auditing Standards
and the objectives of the procedures they are (GAAS) and Philippine Standards on Auditing
to perform. (PSA)
c. Resolving any differences in professional should be looked upon by practitioners as:
judgment between audit personnel. a. Ideals to work towards, but which are not
d. Resolution of differences in audit findings. achievable
19. It involves informing assistants of their b. Maximum standards which denote excellent
responsibilities and the objectives of the work.
procedures c. Minimum standards of performance which
they have to perform: must be achieved on each audit engagement.
a. Supervision b. Monitoring c. Directing d. d. Benchmark to be used on all audits, reviews,
Consultation and compilations.
20. What is the overriding reason why the 25. Which of the following best describes what is
auditor considers the professional competence meant by Generally Accepted Auditing
of Standards?
assistants whom the work will be delegated? a. Pronouncements issued by the Auditing
a. All the audit assistants assigned to an Standards and Practices Council.
engagement must be independent in b. Procedure to be used to gather evidence to
appearance. support financial statements.
b. To have reasonable assurance that such work c. Rules acknowledged by the accounting
will be performed with due care by the profession because of their universal
audit assistant. compliance.
c. To lessen the working paper preparation. d. Measures of the quality of the auditor’s
d. To eliminate audit risk. performance
Page 5 of 7 26. An auditor need not abide by an auditing
AT-5905 standard if the auditor believes that
a. The amount is immaterial
21. Which of the following is(are) quality control
b. The requirement of the standard is impractical
policies on an audit firm level?
to perform
Consultation Assignment Direction
c. The requirement of the standard is impossible
a. Yes No Yes
to perform
b. No No Yes
d. Any of the three above is correct.
c. Yes No Yes
27. A CPA should comply with applicable
d. yes Yes No
generally accepted auditing standards on every
22. Which one of the following relates to
engagement
delegation objective of quality control?
a. Without exception
a. The firms creates a group that provides
b. Except in examinations that result in a
technical training to audit staff.
qualified report
b. There is to be a sufficient direction,
c. Except in engagements where the CPA is
supervision, and review of work at all levels to
associated with unaudited financial statements.
provide
d. Except in examinations of interim financial
reasonable assurance that the work performed
statements.
meets appropriate standards of quality.
28. To exercise due professional care the
c. Assignment of work to the more qualified
auditor should examine all available
personnel.
corroborating
d. Whenever necessary, consultation within or
evidences supporting management’s assertions.
outside the firm is to occur with those who
The proper attitude of an auditor who is
have appropriate expertise.
performing an examination in accordance with
23. Which of the following is (are) helpful in
GAAS
communicating audit directions?
should be professional responsiveness.
abcd
GAAS means rules acknowledged by the
• Audit program Yes Yes Yes No
accounting profession because of their universal
• Overall audit plan Yes Yes No No
application.
• Time budgets Yes No No No
a. b. c. d.
First statement True False True True
Second statement False False True False
Third statement False False True True auditing standards?
29. A CPA is most likely to refer to one or more a. Possession by the auditor of adequate
of the three general auditing standards in technical training.
determining b. Use of analytical review on audit
a. The nature of the CPA’s auditing qualification. engagements.
b. The scope of the CPA’s auditing procedures. c. Use of statistical sampling whenever feasible
Page 6 of 7 on an audit engagement.
AT-5905 d. Confirmation by the auditor of material
accounts receivable balances.
c. Requirements for the review of internal
35. Competence as a certified public accountant
control.
includes all of the following except
d. Whether the CPA should undertake an audit
a. Having the technical qualifications to perform
engagement.
an engagement.
30. The general standards stress the importance
b. Possessing the ability to supervise and
of
evaluate the quality of staff work.
a. The personal qualities which the auditor
c. Warranting the infallibility of the work
should have
performed.
b. Evidence accumulation
d. Consulting others if additional technical
c. Communicating the auditor’s finding to the
information is needed.
reader
36. An auditor who accepts an audit
d. All of the above
engagement and does not possess the industry
31. The Audit Standard which requires
expertise of
“adequate technical training and proficiency” is
the business entity, should
normally
a. Engage financial experts familiar with the
interpreted as requiring the auditor to have
nature of the business entity.
a. Formal education in auditing and accounting
b. Obtain a knowledge of matters that relate to
b. Adequate practical experience for the work
the nature of the entity's business.
being performed
c. Refer a substantial portion of the audit to
c. Continuing professional education
another CPA who will act as the principal
d. All of the above
auditor.
32. Which of the following is not required by the
d. First inform management that an unqualified
Generally Accepted Auditing Standards that
opinion cannot be issued.
states that due professional care is to be
37. In any case in which the CPA or the CPA’s
exercised in the performance of the audit?
assistants are not qualified to perform the work,
a. Observance of the standards of field work and
a
reporting
professional obligation exists to
b. Critical review of the audit work performed at
a. Acquire the requisite knowledge and skills
every level of supervision
b. Suggest someone else who is qualified to
c. Degree of skill commonly possessed by
perform the work
others in the profession.
c. Decline the engagement
d. Responsibility for losses because of errors of
d. Any of the above
judgment
38. A CPA, while performing an audit, strives to
33. The first general standard requires that the
achieve independence in appearance in order to
audit of financial statements be performed by a
a. Reduce risk and liability.
person or persons having adequate technical
b. Comply with the generally accepted standards
training and
of field work
a. Independence with respect to the financial
c. Become independent in fact.
statements and supplementary disclosures.
d. Maintain public confidence in the profession.
b. Exercising professional care as judged by Page 7 of 7
peer reviewers.
c. Proficiency as an auditor, which likely has AT-5905
been acquired from previous experience. 39. The standard of due audit care requires the
d. Objectivity as an auditor, as verified by proper auditor to
supervision. a. Apply judgment in a conscientious manner,
34. Which of the following is mandatory if the carefully weighing the relevant factors before
auditor is to comply with generally accepted reaching a decision.
b. Ensure that the financial statements are free b. An inventory count must be observed at the
from error. balance sheet date.
c. Make perfect judgment decisions in all cases. c. The client’s audit committee should not be
d. Possess skills clearly above the average for told of the specific audit procedures that were
the profession. performed.
40. The third general standards states that due d. It is an acceptable practice to carry out part of
care is to be exercised in the performance of the the audit at interim dates.
examination. This standard should be 44. Which of the following statements is
interpreted to mean that a CPA who undertakes incorrect?
an a. The auditor’s report must state whether the
engagement assumes a duty to perform. financial statements were prepared with
a. With reasonable diligence and without fault or GAAP.
error. b. The auditor’s report must state whether GAAP
b. As a professional who will assume was consistently followed from the prior
responsibility for losses consequent upon error period to the current period.
of c. The auditor’s report must imply whether the
judgment. client has provided adequate disclosure on
c. To the satisfaction of the client and third the financial statements and in the
parties who may rely upon it. accompanying notes.
d. As a professional possessing the degree of d. The auditor’s report must express an opinion
skill commonly possessed by others in the on the financial statements taken as a
field. whole, or explain why there is no opinion
41. The third general standard states due care is provided.
to be exercised in the performance of an audit. 45. The fourth standard of reporting requires the
This standard is generally interpreted to require auditor’s report to contain either an expression
a. Objective review of the adequacy of the of opinion regarding the financial statements
technical training and proficiency of firm taken as a whole or an assertion to the effect
personnel that an opinion cannot be expressed. The
b. Critical review of work done at every level of objective of the fourth standard is to prevent
supervision a. An auditor from expressing different opinions
c. Thorough review of the existing internal on each of the basic financial statements.
control structure b. Restrictions on the scope of the examination,
d. Periodic review of a CPA firm’s quality control whether imposed by the client or by the
procedures. inability to obtain evidence.
42. The first standard of fieldwork, which states c. Misinterpretations regarding the degree of
that the work is to be adequately planned, and responsibility the auditor is assuming
assistants, if any, are to be properly supervised, d. An auditor from reporting on one basic
recognizes that financial statement and not the others.
a. Early appointment of the auditor is - end of AT-5905 –
advantageous both to the auditor and to the
client.
b. Acceptance of an audit engagement after the
close of the client's fiscal year is generally
not permissible. CPA REVIEW SCHOOL OF THE
c. Appointment of the auditor subsequent to the
physical count of inventories requires a
PHILIPPINES
Manila
disclaimer of opinion.
AUDITING THEORY
d. Performance of substantial parts of the
AUDIT REPORT
engagement is necessary at interim dates.
Related PSAs: PSA 700, 710, 720, 560, 570,
43. With respect to the auditor’s planning of a
600 and 620
year-end audit, which of the following
1. When an independent auditor expresses an
statements is
unqualified opinion he asserts that:
always true?
(1) He performed the audit in accordance with
a. An engagement should not be accepted after
generally accepted auditing standards.
the fiscal year-end.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in d. Yes No Yes
conformity with GAAP. 7. If comparative financial statements are
(4) The financial statements are accurate and presented and the present auditor has audited
free of errors. both
a. All of the above statements are true. years, the auditor should:
b. Only statements (1) and (3) are true. a. Reissue the report c. Redate the report
c. Only statements (2) and (4) are true. b. Dual date the report d. Update the report
d. All of the above statements are false. 8. In which of the following situations would the
2. An audit report should be dated as of the auditor appropriately issue a standard
a. date the report is delivered to the entity unqualified
audited. report with no explanatory paragraph concerning
b. date the financial statements were approved consistency?
by the client management. a. A change in the method of accounting for
c. balance sheet date of the latest period specific subsidiaries that comprise the group of
reported on. companies for which consolidated statements
d. date a letter of audit inquiry is received from are presented.
the entity’s attorney of record. b. A change from an accounting principle that is
3. If a company’s external auditor expresses an not generally accepted to one that is
unqualified opinion as a result of the audit of the generally accepted.
company’s financial statements, readers of the c. A change in the percentage used to calculate
audit report can assume that the provision for warranty expense.
a. The external auditor found no fraud. d. Correction of a mistake in the application of a
b. The company is financial sound and the generally accepted accounting principle.
financial statements are accurate. Page 2 of 10
c. Internal control is effective.
d. All material disagreements between the
AT-5906
9. An auditor’s report contains the following
company and external auditor about the
sentences:
application
We did not audit the financial statements of B
of accounting principles were resolved in the
Company, a consolidated subsidiary,
satisfaction of the external auditor.
whose statements reflect total assets and
4. A statement that the auditor’s responsibility is
revenues constituting 20 percent and 22
to express an opinion on the financial
percent, respectively, of the related consolidated
statements
totals. These statements were audited
is contained in the:
by other auditors, whose report has been
a. Opening paragraph c. Opening and scope
furnished to us, and our opinion, insofar as it
paragraph
relates to the amounts included for B Company,
b. Scope paragraph d. Opinion paragraph
is based solely upon the report of the
5. The description of an audit in the scope
other auditors.
paragraph of the standard audit report includes
These sentences
all of
a. disclaim an opinion c. divide responsibility
the following except:
b. qualify the opinion d. should not be part of the
a. Evaluating the overall financial statement
audit report
presentation.
10. The management of a client company
b. Assessing control risk.
believes that the statement of cash flow is not a
c. Examining, on a test basis, evidence
useful
supporting the amount and disclosures in the
document and refuses to include one in the
financial
annual report to stockholders. As a result, the
statements.
auditor’s opinion should be
d. Assessing the accounting principles used and
a. qualified due to inadequate disclosure c.
significant estimates made by management.
adverse
6. The audit report is normally addressed to the:
b. qualified due to a scope limitation d.
Board of directors Stockholders Chair of the
unqualified
Audit Committee
11. An auditor’s opinion reads as follows: “In our
a. No Yes No
opinion, except for the above-mentioned
b. Yes Yes No
c. Yes Yes Yes
limitation on the scope of our audit…” This is an b. Disclaim an opinion because of uncertainty.
example of a(n) c. Disclose the matter in a separate explanatory
a. review opinion c. qualified opinion paragraph(s) but not modify the opinion
b. emphasis on a matter d. unacceptable paragraph.
reporting practice d. Neither modify the opinion nor disclose the
12. Eagle Company’s financial statements matter because both principles are generally
contain a departure from generally accepted accepted.
accounting 16. When an auditor qualifies an opinion
principles because, due to unusual because of inadequate disclosure, the auditor
circumstances, the statements would otherwise should
be describe the nature of the omission in a
misleading. The auditor should express an separate explanatory paragraph and modify the
opinion that is Introductory paragraph Scope paragraph
a. Qualified and describe the departure in a Opinion paragraph
separate paragraph. a. Yes No No
b. Unqualified but not mention the departure in b. Yes Yes No
the auditor’s report. c. No Yes Yes
c. Qualified or adverse, depending on d. No No Yes
materiality, and describe the departure in a 17. An auditor may not express a qualified
separate opinion when
paragraph. a. A scope limitation prevents the auditor from
d. Unqualified and describe the departure in a completing an important audit procedure.
separate paragraph. b. The auditor’s report refers to the work of a
13. An auditor is unable to determine the specialist.
amounts associated with illegal acts committed c. An accounting principles at variance with
by a generally accepted accounting principles is
client. The auditor would most likely issue used.
a. Either a qualified opinion or a disclaimer of Page 3 of 10
opinion.
b. An adverse opinion.
AT-5906
d. The auditor lacks independence with respect
c. Either a qualified opinion or an adverse
to the audited entity.
opinion.
18. An auditor decides to express a qualified
d. A disclaimer of opinion.
opinion on an entity’s financial statements
14. The objective of the consistency standard is
because a
to provide assurance that
major inadequacy in its computerized
a. There are no variations in the format and
accounting records prevents the auditor from
presentation of financial statements.
applying
b. Substantially different transactions and events
necessary procedures. The opinion paragraph of
are not accounted for on an identical basis.
the auditor’s report should state that the
c. The auditor is consulted before material
qualification pertains to
changes are made in the application of
a. A client-imposed scope limitation.
accounting
b. A departure from generally accepted auditing
principles.
standards.
d. The comparability of financial statements
c. The possible effects on the financial
between periods is not materially affected by
statements.
changes in accounting principles without
d. Inadequate disclosure of necessary
disclosure.
information.
15. If management fails to provide adequate
19. Totoy, CPA, was engaged to audit the
justification for a change from one generally
financial statements of Bibo Co., a new client,
accepted
for the
accounting principle to another, the auditor
year ended December 31, 2004. Totoy obtained
should
sufficient audit evidence for all of Bibo’s
a. Add an explanatory paragraph and express a
financial statement items except Bibo’s opening
qualified or an adverse opinion for lack of
inventory. Due to inadequate financial
conformity with generally accepted accounting
principles.
records, Totoy could not verify Bibo’s January 1, explanatory paragraph.
2004 inventory balances. Totoy’s opinion on a. Reference to other auditors c. Scope
Bibo’s 2004 financial statements most likely will limitation
be b. Inconsistency d. Adverse opinion
Balance Sheet Income Statement 27. Pamela, CPA, was engaged to audit the
a. Disclaimer Disclaimer financial statements of One Co. after its fiscal
b. Unqualified Disclaimer year
c. Disclaimer Adverse had ended. The timing of Pamela’s appointment
d. Unqualified Adverse as auditor and the start of field work made
20. When management prepares financial confirmation of accounts receivable by direct
statements on the basis of a going concern and communication with the debtors ineffective.
the However, Pamela applied other procedures and
auditor believes the company may not continue was satisfied as to the reasonableness of the
as a going concern, the auditor should issue account balances. Pamela’s auditor’s report
a(n) most likely contained a(n)
a. qualified opinion a. Unqualified opinion.
b. unqualified opinion with an explanatory b. Unqualified opinion with an explanatory
paragraph paragraph.
c. disclaimer of opinion c. Qualified opinion because of a scope
d. adverse opinion limitation.
21. A dual dated report contains the dates of a d. Qualified opinion because of a departure from
subsequent event and the date the: GAAS.
a. Auditor completed work in the client’s office c. Page 4 of 10
Subsequent event was resolved
b. Financial statements were prepared d. Audit
AT-5906
28. A limitation on the scope of an audit
report was delivered
sufficient to preclude an unqualified opinion will
22. If the principal auditor decides to take
always
responsibility for the work of other auditors, the
result when management
principal
a. Engages the auditor after the year-end
auditor should:
physical inventory count is completed.
a. Modify the opening paragraph c. Modify all
b. Fails to correct a material internal control
three paragraphs
weakness that had been identified during the
b. Modify the opening and opinion paragraphs d.
prior
Issue a standard report
year’s audit.
23. An auditor who concludes that an
c. Refuses to furnish a management
uncertainty is not adequately disclosed in the
representation letter to the auditor.
financial
d. Prevents the auditor from reviewing the
statements should issue a:
working papers of the predecessor auditor.
a. Disclaimer of opinion. c. Special report.
29. When an auditor expresses an opinion other
b. Unqualified report with an explanatory
than unqualified opinion, a clear description of
paragraph. d. Qualified report.
all
24. An auditor may wish to emphasize a matter
substantive reasons for the modification of the
included in the financial statements by adding an
opinion should be included in the report. This
explanatory paragraph to the audit report. In this
explanation should be presented:
case the following paragraphs of the audit
a. As a separate paragraph that precedes the
report should be modified:
opinion paragraph of the audit report.
a. Introductory paragraph c. Opinion paragraph
b. As a separate paragraph, preferably after the
b. Scope paragraph d. None
opinion paragraph, of the audit report.
25. In the case of a client imposed scope
c. In the opinion paragraph
limitation, the auditor must consider issuing a:
d. As a separate paragraph in the notes to
a. Qualified opinion or disclaimer of opinion c.
financial statements.
Disclaimer of opinion or adverse opinion
30. Where a limitation on the scope of the
b. Qualified opinion or adverse opinion d.
auditor’s work requires modification of an
Disclaimer of opinion
unqualified
26. Which of the following modifications of the
standard auditor’s report does not require an
opinion, the auditor’s report should describe the auditor believes they need to be amended and
limitation and: the auditor’s report has not been released to the
a. Indicate that the auditor is no longer entity, the auditor should express
responsible to his opinion. a. Qualified or adverse opinion c. Unqualified
b. Indicate the possible adjustments to the opinion with explanatory paragraph
financial statements that might have been b. Qualified or disclaimer of opinion d.
determined to be necessary had the limitation Unqualified opinion.
not existed. 35. If subsequent to the issuance of the audited
c. Refer the users to the particular note to financial statements, the auditor becomes aware
financial statements that adequately discusses of
the material misstatements in the financial
limitation statements that exist prior to the date of the
d. Indicate that the auditor is not satisfied of the audit report,
results of the alternative procedures that he the auditor should
had performed. a. Notify the parties who currently relying on the
31. What is the purpose of the following financial statements.
paragraph in a particular audit report: b. Discuss the matter with management, and
“…We draw attention to note X in the financial should take the action appropriate in the
statements which discusses that the circumstances.
company incurred a net loss of P6.4 million c. Document such information in the audit plan
during the year ended December 31, 2004 for succeeding audit.
and as of that date, the Company’s liabilities d. Submit revised copies of the financial
exceeded its total assets by P2,500,000...” statements and audit report to the stockholders.
a. A standard reporting requirement. Page 5 of 10
b. Emphasis of matter about the going concern
problems of the entity.
AT-5906
QUIZZERS
c. Inadequate disclosure qualification.
1. Which of the following is not explicitly included
d. An inappropriate reporting.
in the opening paragraph of an audit report?
32. An explanatory paragraph following an
a. Identification of the financial statements that
opinion paragraph that describes an uncertainty
have been audited.
follows:
b. A statement by the auditor that the audit
As discussed in Note X to the financial
provides a reasonable basis for the opinion.
statements, the company is a defendant in a
c. Statement that the financial statements are
lawsuit alleging infringement of certain patent
the responsibility of the entity’s management.
rights and claiming damages. Discovery
d. Statement that the responsibility of the auditor
proceedings are in progress. The ultimate
is to express an opinion on the financial
outcome of the litigation cannot presently be
statements based on his audit.
determined. Accordingly, no provision for any
2. A measure of uniformity in the form and
liability that may result upon adjudication
content of the auditor’s report is desirable
has been made in the accompanying financial
because
statements.
a. It helps the auditors avoid legal liability.
What type of opinion should the auditor express
b. It helps the readers understand the report.
in this circumstance?
c. It helps the auditor identify the usual
a. unqualified b. qualified c. disclaimer d.
circumstances that are expected to occur.
adverse
d. It makes the auditors more informed of their
33. If an amendment to other information in a
responsibilities with respect to audit report.
document containing audited financial
3. The most common type of audit report
statements is
contains a(n):
necessary and the entity refuses to make the
a. Adverse opinion. c. Disclaimer of opinion.
amendment, the auditor would consider issuing:
b. Qualified opinion. d. Unqualified
a. Qualified or adverse opinion c. Unqualified
4. If an auditor is certain an illegal act has a
opinion with explanatory paragraph
material effect on financial statements and the
b. Qualified or disclaimer of opinion d.
clients
Unqualified opinion.
agrees to adjust the statements accordingly, the
34. When management does not amend the
auditor should:
financial statements in circumstances where the
a. Withdraw from the engagement. "Because of the inadequacies in the company's
b. Disclaim an opinion on the financial accounting records during the year ended June
statements taken as a whole. 30, 2005, it was not practicable to extend our
c. Issue a qualified opinion. auditing procedures to the extent necessary to
d. Issue an unqualified opinion. enable us to obtain certain evidential matter as it
5. It exists when other information contradicts relates to classification of certain items in the
information contained in the audited financial consolidated statements of operations."
statements. This paragraph most likely describes
a. Material misstatement of fact c. Material Page 6 of 10
inconsistency
b. Material error d. Material deviation
AT-5906
a. A material departure from GAAP requiring a
6. After issuing a report, a auditor has no longer
qualified audit opinion.
obligation to make continuing inquiries or
b. An uncertainty that should not lead to a
perform
qualified opinion.
other procedures concerning the audited
c. A material scope restriction requiring a
financial statements, unless
qualification of the audit opinion.
a. Management of the entity requests the auditor
d. A matter that the auditor wishes to emphasize
to reissue the auditor’s report.
and that does not lead to a qualified audit
b. Information about an event that occurred after
opinion.
the end of fieldwork comes to the auditor’s
10. The auditor issued a qualified opinion
attention.
covering the financial statements of Client A for
c. Information, which existed at the report date
the year
and may affect the report, comes to the
ended December 31, 2004. The reason for the
auditor’s attention.
qualification was a departure from GAAP. In
d. Final determinations or resolutions are made
presenting comparative statements for the years
of contingencies that had been disclosed in
ended December 31, 2004 and 2005, the
the financial statements.
client revised the 2004 financial statements to
7. Which of the following events occurring after
correct the previous departure from GAAP. The
the issuance of an auditor’s report most likely
auditor's 2005 report on the 12/31/04 and
would cause the auditor to make further inquiries
12/31/05 comparative financial statements will
about the previously issued financial
a. Express unqualified opinions on both the
statements?
2004 and 2005 financial statements.
a. A technological development that could affect
b. Express a qualified opinion on the 2004
the entity’s future ability to continue as a
financial statements and an unqualified opinion
going concern.
on
b. The entity’s sale of a subsidiary that accounts
the 2005 statements.
for 30 percent of the entity’s consolidated
c. Retain the qualified opinion covering the 2004
sales.
statements, but add an explanatory
c. The discovery of information regarding a
paragraph describing the correction of the prior
contingency that existed before the financial
departure from GAAP.
statements were issued.
d. Render qualified audit opinions for both 2004
d. The final resolution of a lawsuit explained in a
and 2005 financial statements given the 2005
separate paragraph of the auditor’s report
carryover effect of the 2004 error.
8. An auditor would issue an adverse opinion if
11. An auditor may reasonably issue an "except
a. The audit was begun by other independent
for" qualified opinion for
auditors who withdrew from the engagement.
Inadequate disclosure Scope limitation
b. The statements taken as a whole do not fairly
a. Yes Yes
present the financial condition and results of
b. Yes No
operations of the company.
c. No Yes
c. A qualified opinion cannot be given because
d. No No
the auditor lacks independence.
12. Soon after Boyd's audit report was issued,
d. The restriction on the scope of the audit was
Boyd learned of certain related party
significant.
transactions
9. An audit report contains the following
that occurred during the year under audit. These
paragraph:
transactions were not disclosed in the notes
to the financial statements. Boyd should c. The chief executive officer refuses the auditor
a. Plan to audit the transactions during the next access to minutes of board of directors'
engagement. meetings.
b. Recall all copies of the audited financial d. Control tests show that the entity's internal
statements. control is so poor that the financial records
c. Ask the client to disclose the transactions in cannot be relied upon.
subsequent interim statements. Page 7 of 10
d. Determine whether the lack of disclosure
would affect the auditor's report.
AT-5906
16. When a principal auditor decides to make
13. An auditor includes an explanatory
reference to another auditor's examination, the
paragraph in an otherwise unqualified report in
principal auditor's report should always indicate
order to
clearly, in the introductory, scope, and opinion
emphasize that the entity being reported on is a
paragraphs, the
subsidiary of another business enterprise. The
a. Magnitude of the portion of the financial
inclusion of this paragraph
statements examined by the other auditor.
a. Is appropriate and would not negate the
b. Division of responsibility.
unqualified opinion.
c. Disclaimer of responsibility concerning the
b. Is a qualification.
portion of the financial statements examined by
c. Is a violation of generally accepted reporting
the other auditor.
standards if this information is disclosed in
d. Name of the other auditor.
footnotes to the financial statements.
17. The independent auditor refers to both
d. Necessitates a revision of the opinion
GAAP and GAAS when writing the standard
paragraph to include the phrase "with the
audit report.
foregoing
These terms are mentioned as follows:
explanation."
abcd
14. Which of the following best describes the
Scope Paragraph GAAP GAAS GAAP GAAS
auditor's responsibility for "other information"
Opinion Paragraph GAAS GAAP GAAP GAAS
included
18. Which of the following best describes the
in the annual report to stockholders which
reference to the expression “taken as a whole”
contains financial statements and the auditor's
in the
report?
fourth generally accepted auditing standard of
a. The auditor has no obligation to read the
reporting?
"other information."
a. It applies equally to a complete set of financial
b. The auditor has no obligation to corroborate
statements and to an individual financial
the "other information," but should read the
statement.
"other information" to determine whether it is
b. It applies only to a complete set of financial
materially inconsistent with the financial
statements.
statements.
c. It applies equally to each item in each
c. The auditor should extend the examination to
financial statement.
the extent necessary to verify the "other
d. It applies equally to each material item in
information."
each financial statement.
d. The auditor must modify the auditor's report to
19. If an accounting change has no material
state that the "other information is
effect on the financial statements in the current
unaudited" or "not covered by the auditor's
year
report."
but the change is reasonably certain to have a
15. In which of the following circumstances
material effect in later years, the change should
would an auditor be most likely to express an
be
adverse
a. Treated as a consistency modification in the
opinion?
auditor’s report for the current year.
a. The statements are not in conformity with the
b. Disclosed in the notes to the financial
ASC Statements regarding the capitalization
statements of the current year.
of leases.
c. Disclosed in the notes to the financial
b. Information comes to the auditor's attention
statements and referred to in the auditor’s report
that raises substantial doubt about the entity's
for
ability to continue in existence.
the current year.
d. Treated as a subsequent event.
20. An auditor’s standard report expressed an
AT-5906
unqualified opinion and includes an explanatory d. qualify the opinion concerning the restated
paragraph that emphasizes a matter included in financial statements because of a change in
the notes to the financial statements. The accounting principles
auditor’s report would be deficient if the 24. A successor auditor should refer to a
explanatory paragraph states that the entity predecessor auditor’s report in the
a. Is a component of a larger business a. Opening paragraph c. Opinion paragraph
enterprise. b. Scope paragraph d. Opening and opinion
b. Has changed form the completed contract paragraph
method to the percentage of completion method 25. Because of inadequate records the auditor is
to account for long-term construction contracts. uncertain as to whether property and equipment
c. Has had a significant subsequent event. is stated at cost. The auditor should issue a (n):
d. Has accounting reclassifications that enhance a. Qualified opinion c. Adverse opinion
the comparability between years. b. Unqualified opinion d. Standard opinion
21. In which of the following circumstances 26. The auditor’s report contains a paragraph
would an adverse opinion be appropriate? explaining that the entity changed from the
a. The auditor is not independent with respect to straightline
the enterprise being audited to the declining balance method of depreciation.
b. An uncertainty prevents the issuance of an The auditor expressed an:
unqualified report a. Adverse opinion c. Qualified opinion
c. The statements are not in conformity with b. Unqualified opinion d. Disclaimer of opinion
authoritative statements regarding accounting 27. The following circumstances result in a
for modified, but unqualified report, except:
pension plans a. Inconsistent application of accounting
d. A client-imposed scope limitation prevents the principles.
auditor from complying with generally b. Emphasis of a related party transaction that is
accepted auditing standards disclosed in a footnote.
22. An auditor is confronted with an exception c. Lack of disclosure of a restriction on payment
sufficiently material to warrant departing from of dividends.
the d. Other auditors perform work for which the
standard wording of an unqualified report. If the principal auditor does not assume responsibility.
exception relates to a departure from the 28. Under which of the following sets of
generally accepted accounting principles, the circumstances might an auditor disclaim an
auditor must decide between a(n) opinion?
a. adverse opinion and an unqualified opinion a. The financial statements contain a departure
b. adverse opinion and a qualified opinion from GAAP, the effect of which is material.
c. adverse opinion and a disclaimer of opinion b. The principal auditor decides to make
d. disclaimer of opinion and a qualified opinion reference to the report of another auditor who
23. An auditor had expressed a qualified opinion audited
on the financial statements of a prior period a subsidiary.
because the client’s financial statements c. There has been a material change between
departed from generally accepted accounting periods in the method of the application of
principles. The prior period statements are accounting principles.
restated in the current period to conform with d. There were significant limitations on the
generally accepted accounting principles. The scope of the audit.
auditor’s updated report on the prior period 29. Which of the following description is not
statements should included in the scope paragraph of the auditor’s
a. express an unqualified opinion about the report?
restated financial statements a. Examining, on a test basis, evidence to
b. be accompanied by the auditor’s original support the financial statement amounts and
report on the prior period disclosures.
c. bear the same date as the auditor’s original b. Determining the accounting principles used in
report on the prior period the preparation of the financial statements.
Page 8 of 10 c. Assessing the significant estimates made by
management in the preparation of the financial
statement. 34. If the auditor concludes that the fraud or
d. Evaluating the overall financial statement error has a material effect on the financial
presentation. statements
30. Which of the following statements is best and has not been properly corrected in the
described in the scope paragraph of the financial statements, the auditor should issue a:
independent a. Unqualified opinion with explanatory
auditor’s report? paragraph. c. Qualified or disclaimer of opinion.
a. The audit was planned and performed to b. Qualified or adverse opinion. d. Adverse or
obtain reliable assurance about whether the disclaimer of opinion.
financial statements are free of material 35. If the auditor is precluded by the entity from
misstatements. obtaining evidence to evaluate whether fraud or
b. The audit was conducted in accordance with error that may be material to the financial
financial reporting framework. statements has, or is likely to have, occurred,
c. The auditor makes the significant estimates in the
the preparation of the financial statements. auditor should issue a (n):
d. A statement by the auditor that the audit a. Unqualified opinion with explanatory
provides a reasonable basis for the opinion. paragraph.
31. When there is an assessed substantial doubt b. Qualified or adverse opinion.
about the ability of the entity to continue as a c. Qualified or disclaimer of opinion.
going concern and such information is d. Adverse or disclaimer of opinion.
adequately disclosed in the notes to financial 36. In which of the following circumstances
statements, the auditor should express a(n): would an auditor usually choose between
a. Standard unqualified opinion. c. Qualified expressing a
opinion qualified opinion or disclaiming an opinion?
b. Unqualified opinion with explanatory a. Departure from generally accepted
paragraph. d. Adverse opinion accounting principles
32. If adequate disclosure is not made by the b. Inadequate disclosure of accounting policies
entity regarding substantial doubt about its c. Inability to obtain sufficient competent
ability to evidential matter
continue as a going concern, the auditor should d. Unreasonable justification for a change in
include in his report specific reference to the accounting principle
substantial doubt as to ability of the company to PSA 700 – The Auditor’s Report on Financial
continue as a going concern and should Statements
express: 37. The element of the auditor’s report that
a. Unqualified opinion with explanatory distinguishes it from reports that might be issued
paragraph by
b. A subject to qualified opinion or adverse others is
opinion. a. Title c. Auditor’s signature
c. Either an “except for” qualified opinion or an b. Addressee d. Opinion paragraph
adverse opinion. 38. The financial statements audited by the
d. A disclaimer of opinion. auditor are identified in the
33. Which of the following factors, by itself, a. Opening paragraph c. Opinion paragraph
would not cause uncertainty about the ability of b. Scope paragraph d. All of the above.
a 39. Which of the following statements can be
company to continue as a going concern? found on the scope paragraph of the standard
a. A significant net loss. audit
b. Inability to pay its obligations as they come report?
due. a. The financial statements are the responsibility
Page 9 of 10 of the Company’s management.
AT-5906 b. Our responsibility is to express an opinion on
these financial statements based on our audit.
c. The occurrence of uninsured catastrophe.
c. We believe that our audit provides a
d. Legal proceedings that might jeopardize the
reasonable basis for our opinion.
entity’s ability to operate.
d. The financial statements ‘present fairly, in all
material respects’.
40. Which statement is incorrect regarding the d. Under the comparative financial statements
date of the auditor’s report? framework, the comparative financial
a. The auditor should date the report as of the statements for the prior period(s) are considered
completion date of the audit. separate financial statements.
b. The date of the report informs the reader that 44. Which statement is incorrect regarding
the auditor has considered the effect on the corresponding figures?
financial statements and on the report of events a. The corresponding figures are not presented
and transactions of which the auditor as complete financial statements capable of
became aware and that occurred up to that date. standing alone.
c. The auditor should not date the report earlier b. The level of detail presented in the
than the date on which the financial corresponding amounts and disclosures is
statements are signed or approved by dictated
management. primarily by its relevance to the current period
d. The auditor should date the report as of date figures.
the report is delivered to the entity audited. c. The auditor’s report refers only to the financial
41. The following will usually result in a modified statements of the current period.
report but will not affect the auditor’s opinion, d. The auditor’s report refers to each period that
except financial statements are presented.
a. Existence of going concern problem. 45. When the comparatives in which the prior
b. There is a significant uncertainty (other than a audit report is unmodified, the auditor should
going concern problem), the resolution of issue
which is dependent upon future events and an audit report in which:
which may affect the financial statements. a. The comparatives are specifically identified in
c. Emphasis of a matter. the opening paragraph but not referred to in
d. There is a disagreement with management the opinion paragraph of the auditor’s report.
regarding the acceptability of the accounting b. The comparatives are specifically identified in
policies selected. the opening paragraph and are referred to in
42. In extreme cases, such as situations the opinion paragraph.
involving multiple uncertainties that are c. The comparatives are not specifically
significant to the identified in the audit report.
financial statements, the auditor may consider it d. The comparatives are described in the
appropriate to express a emphasis of matter paragraph of the auditor’s
a. Qualified or adverse opinion c. Unqualified report.
opinion with explanatory paragraph 46. In case the prior period financial statements
b. Disclaimer of opinion d. Unqualified opinion. were audited by another auditor and the
Page 10 of 10 incoming
AT-5906 auditor decides to refer to another auditor, the
incoming auditor’s report should indicate:
PSA 710 – Comparatives
a. That the financial statements of the prior
43. Which statement is incorrect regarding
period were audited by another auditor.
comparatives?
b. The type of report issued by the predecessor
a. The auditor is not required to determine
auditor and, if the report was modified, the
whether the comparatives comply in all material
reasons therefore.
respects with GAAP relevant to the financial
c. The date of that report.
statements being audited.
d. All of the above.
b. There are two broad financial reporting
47. In relation to comparatives as corresponding
frameworks for comparatives: the corresponding
figures, which of the following is incorrect?
figures and the comparative financial
a. When the prior period financial statements are
statements.
not audited, the incoming auditor should
c. Under the corresponding figures framework,
state in the auditor’s report that the
the corresponding figures for the prior
corresponding figures are unaudited.
period(s) are an integral part of the current
b. The incoming auditor must refer to the
period financial statements and have to be read
predecessor auditor’s report on the
in conjunction with the amounts and other
corresponding
disclosures relating to the current period.
figures in the incoming auditor’s report for the
current period.
c. When the financial statements of the prior permission for the contact.
period were audited by another auditor, the Page 3 of 4
incoming auditor’s report should state that the
prior period was audited by another auditor.
AT-5907
2. Before accepting an audit engagement, a
d. In situations were the incoming auditor
successor auditor should make specific inquiries
identified that the corresponding figures are
of
materially misstated, the auditor should request
the predecessor auditor regarding the
management to revise the corresponding
predecessor’s
figures or if management refuses to do so,
a. Opinion of any subsequent events occurring
appropriately modify the report.
since the predecessor’s audit report was
48. When the financial statements of the prior
issued.
period were not audited, the incoming auditor
b. Understanding as to the reasons for the
should:
change of auditors.
a. Insist that an audit of prior year’s financial
c. Awareness of the consistency in the
statements must be made.
application of GAAP between periods.
b. Not allow the inclusion of the corresponding
d. Evaluation of all matters of continuing
figures in the financial statements of the
accounting significance.
current period.
3. A successor auditor most likely would make
c. Disclaim his opinion and treat the unaudited
specific inquiries of the predecessor auditor
corresponding figures as basis of scope
regarding
limitation.
a. Specialized accounting principles of the
d. Obtain sufficient appropriate audit evidence
client’s industry.
that the corresponding figures meet the
b. The competency of the client’s internal audit
requirements of the relevant financial reporting
staff.
framework.’
c. The uncertainty inherent in applying sampling
- end of AT-5906 –
procedures.
d. Disagreements with management as to
CPA REVIEW SCHOOL OF THE auditing procedures.
PHILIPPINES 4. Which of the following should an auditor
Manila obtain from the predecessor auditor prior to
AUDITING THEORY accepting an audit engagement?
PRE-ENGAGEMENT a. Analysis of balance sheet accounts
Related PSAs: PSA 210 b. Analysis of income statement accounts
PSA 210 - Terms of Audit Engagements c. All matters of continuing accounting
MULTIPLE CHOICE QUESTIONS significance
1. Prior to the acceptance of an audit d. Facts that might bear on the integrity of
engagement with a client who has terminated management
the services 5. When an independent auditor is approached
of the predecessor auditor, the CPA should to perform an audit for the first time, he or she
a. Contact the predecessor auditor without should make inquiries of the predecessor
advising the prospective client and request a auditor. Inquiries are necessary because the
complete report of the circumstance leading to predecessor may be able to provide the
the termination with the understanding that successor with information that will assist the
all information disclosed will be kept confidential. successor in determining whether
b. Accept the engagement without contacting a. The predecessor’s work should be used.
the predecessor auditor since the CPA can b. The company rotates auditors.
include audit procedures to verify the reason c. In the predecessor’s opinion, control risk is
given by the client for the termination. low.
c. Not communicate with the predecessor d. The engagement should be accepted.
auditor because this would in effect be asking 6. If permission from client to discuss its affairs
the with the proposed auditor is denied by the client,
auditor to violate the confidential relationship the predecessor auditor should:
between auditor and client. a. Keep silent of the denial.
d. Advise the client of the intention to contact the b. Disclose the fact that the permission to
predecessor auditor and request disclose is denied by the client.
c. Disclose adequately to proposed auditor all a. A reference to the inherent limitation of an
noncompliance made by the client. audit that some material misstatements may
d. Seek legal advice before responding to the remain undiscovered.
proposed auditor b. Identification of specific audit procedures that
7. The objective and scope of the audit and the the auditor needs to undertake.
extent of the auditor’s responsibilities to the c. Description of any letters or reports that the
client are best documented in auditor expects to submit to the client.
a. Independent auditor’s report c. Client’s d. Arrangements concerning the involvement of
representation letter internal auditors and other client’s staff.
b. Audit engagement letter d. Audit program 12. Which of the following least likely requires
8. The following are valid reasons why an the auditor to send a new engagement letter?
auditor sends to his client an engagement letter: a. An indication that the client misunderstands
ABCD the objective and scope of the audit.
a. Avoid misunderstanding with respect to b. Any revised or special terms of the
engagement engagement.
Yes Yes No Yes c. A recent change in the audit firm’s
b. Confirms the auditor’s acceptance of the management.
appointment d. Legal requirements and other government
Yes Yes Yes No agencies’ pronouncements.
c. Objective and scope of the audit Yes Yes Yes 13. Which of the following least likely influence
Yes the auditor’s decision to send a separate
d. Assures CPA’s compliance to GAAS Yes No engagement letter to a component of parent
No Yes entity client?
9. Which of the following is appropriately a. Legal requirements
included in an audit engagement letter? b. Degree of ownership over a component entity
I. Because of the test nature and other inherent by parent company
limitations of an audit, together with the c. Location of the principal place of business of
inherent limitations of any accounting and the component entity
internal control system, there is an unavoidable d. Who appoints the auditor of the component
risk that even some material misstatements may 14. According to PSA 210, which of the following
remain undiscovered. statements is correct?
II. The audit will be made with the objective of a. The auditor and the client need not agree on
expressing an opinion on the financial the terms of the engagement.
statements. b. Where the terms of the engagement are
III. An audit also includes assessing the changed, the auditor and the client need not
accounting procedures used and significant agree on the new terms if they already agreed
estimates made by management. on the old terms.
a. I and II c. II and III c. The engagement letter assists in the
b. I and III d. I, II and III supervision and review of the audit work.
Page 4 of 4 d. The auditor may agree to a change of
AT-5907 engagement where there is reasonable
justification
10. Which of the following is least likely included
for doing so.
in an audit engagement letter?
15. Which of the following is a NOT valid reason
a. The objective of financial reporting.
for a change of the engagement to a lower “level
b. Management responsibility for the financial
of assurance”?
statements.
a. Change in circumstances affecting the need
c. The form of any reports or other
for the service.
communication of the results of the
b. Restriction on the scope of the engagement.
engagement.
c. Misunderstanding as to the nature of the
d. Arrangement concerning the involvement of
engagement originally requested.
other auditors or experts in some aspects of
d. The client’s need is satisfied by an
the audit.
engagement that provides lower level of
11. An audit engagement letter least likely
assurance.
includes
16. When a change in the type of engagement
from higher to lower level of assurance is
reasonably justified, the report based on the d. The work is to be adequately planned and
revised engagement assistants, if any, are to be properly supervised.
a. Should contain a separate paragraph that 3. Which of the following would a successor
refers to the original engagement. auditor normally perform after acceptance of an
b. Should always refer to any procedures that audit
may have been performed in the original client?
engagement. a. Inquiry of predecessor auditor regarding the
c. Should qualify the opinion due to scope client.
limitation. b. Review the SEC filings of the client.
d. Omits reference to the original engagement. c. Inquiry of bankers regarding the client.
17. Which of the following actions may be d. Review of predecessor auditor working
appropriate if the auditor is unable to agree to a papers.
change of the engagement and is not permitted 4. To obtain an understanding of a continuing
to continue the original engagement client’s business in planning an audit, an auditor
I. Issue a qualified opinion due to a significant most likely would
scope limitation. a. Perform tests of details of transactions and
II. Auditor should withdraw from the balances.
engagement. b. Review prior-year working papers and the
III. Consider whether there is any obligation to permanent file for the client.
report to the board of directors or c. Read specialized industry journals.
shareholders the circumstances necessitating d. Reevaluate client’s internal control
withdrawal environment.
a. I only c. II and III 5. Which of the following is required
b. I and II d. I, II and III documentation in an audit in accordance with
- end of AT-5907 – generally
accepted auditing standards?
CPA REVIEW SCHOOL OF THE a. A flowchart or narrative of the information
system describing the recording and
PHILIPPINES classification
Manila of transactions for financial reporting.
AUDITING THEORY b. An audit program setting forth in detail the
AUDIT PLANNING procedures necessary to accomplish the
Related PSAs: PSA 300, 310, 320, 520 and 570 engagement’s objectives.
MULTIPLE CHOICE QUESTIONS c. A planning memorandum establishing the
1. The development of a general strategy and a timing of the audit procedures and coordinating
detailed approach for the expected nature, the assistance of entity personnel.
timing, d. An internal control questionnaire identifying
and extent of audit refers to : policies and procedures that assure specific
a. Supervision b. Audit procedures c. Directing objectives will be achieved.
d. Planning 6. Which of the following procedures would an
2. The auditor should consider the nature, auditor most likely perform in planning a
extent, and timing of the work to be performed financial
and statement audit?
should prepare a written audit program for every a. Inquiring of the client’s legal counsel
audit. Which audit standard is most closely concerning pending litigation.
related to this requirement? b. Comparing the financial statements to
a. The audit is to be performed by a person or anticipated results.
persons having adequate technical training and c. Examining computer generated exception
proficiency as an auditor. reports to verify the effectiveness of internal
b. In all matters relating to the assignment, an controls.
independent mental attitude is to be maintained d. Searching for unauthorized transactions that
by the auditor(s). may aid in detecting unrecorded liabilities.
c. Due professional care is to be exercised in the Page 6 of 9
planning and performance of the audit and
preparation of the report. AT-5908
7. Analytical procedures used in planning an a. Including in the audit program a column for
audit should focus on estimated and actual time.
a. Reducing the scope of tests of controls and b. Performing audit work only after the client’s
substantive tests. books of account have been closed for the
b. Providing assurance that potential material period under examination.
misstatements will be identified. c. Writing a conclusion in individual working
c. Enhancing the auditor’s understanding of the papers indicating how the results of the audit will
client’s business. affect the auditor’s report.
d. Assessing the adequacy of the available d. Including in the engagement letter an
evidential matter. estimate of the minimum and maximum audit
8. Analytical procedures, which means the fee.
analysis of significant ratios and trends including 12. Which of the following is an engagement
the attribute for an audit of an entity that processes
resulting investigation of fluctuations and most
relationships that are inconsistent with other of its financial data in electronic form without any
relevant paper documentation?
information or which deviate from predicted a. Discrete phases of planning, interim, and
amounts, are not required to be applied year-end field work.
a. At the planning stage of the audit c. As b. Increased effort to search for evidence of
substantive procedures management fraud.
b. Overall review stage of the audit d. None of c. Performance of audit tests on a continuous
the above basis.
9. Which of the following statements is correct d. Increased emphasis on the completeness
concerning analytical procedures? assertion.
a. Analytical procedures usually involve 13. Which of the following statements is not
comparisons of ratios developed from recorded correct about materiality?
amounts to assertions developed by a. The concept of materiality recognizes that
management. some matters are important for fair presentation
b. Analytical procedures used in planning an of financial statements in conformity with GAAP,
audit generally use data aggregated at a high while other matters are not important.
level. b. An auditor considers materiality for planning
c. Analytical procedures can replace tests of purposes in terms of the largest aggregate
controls in gathering evidence to support the level of misstatements that could be material to
assessed level of control risk. any one of the financial statements.
d. Analytical procedures are more efficient, but c. Materiality judgments are made in light of
not more effective, than tests of details and surrounding circumstances and necessarily
transactions. involve both quantitative and qualitative
10. Which of the following is an effective audit judgments.
planning and control procedures that helps d. An auditor’s consideration of materiality is
prevent influenced by the auditor’s perception of the
misunderstandings and inefficient use of audit needs of a reasonable person who will rely on
personnel? the financial statements.
a. Make copies, for inclusion in the working 14. The risk that the assertion contains material
papers, of those client supporting documents misstatements that, when aggregated with
examined by the auditor. misstatements in other assertions, could make
b. Provide the client with copies of the audit the entire financial statements materially
programs to be used during the audit. misstated is:
c. Arrange a preliminary conference with the a. Individual audit risk b. Inherent risk c. Control
client to discuss audit objectives, fees, timing, risk d. Detection risk
and other information. Page 7 of 9
d. Arrange to have the auditor prepare and post
any necessary adjusting or reclassification
AT-5908
15. Incremental risk is the increased risk that
entries prior to final closing.
errors may not be detected at the balance sheet
11. Which of the following is an aspect of
date
scheduling and controlling the audit
because:
engagement?
a. Audit procedures were performed at an d. The size of the entity.
interim date 7. The audit program should contain the
b. Inherent risk was assessed too low. following, except:
c. Analytical procedures were not performed. a. Audit objective
d. Detection risk was set too high a level. b. Time budget for the various audit areas
QUIZZERS c. Set of planned audit procedures
PSA 300 - Planning d. The combined assessed level of inherent and
1. Adequate planning of the audit work helps the control risk
auditor of accomplishing the following PSA 310 - Knowledge of Business
objectives, 8. Which of the following will most likely help the
except: auditor to identify and understand the events,
a. Gathering of all corroborating audit evidence. transactions and practices of his audit client?
b. Ensuring that appropriate attention is devoted a. Obtaining a sufficient knowledge of the
to important areas of the audit. business of his client.
c. Identifying the areas that need a service of an b. Understanding of accounting and internal
expert. control.
d. The audit work is completed efficiently. c. Testing control policies and procedures.
2. The extent of planning will vary according to d. Obtaining a representation letter from the
any of the following, except: client management.
a. Size of the audit client. 9. The auditor should have or obtain a
b. Auditor’s experience with the entity and knowledge of the client’s business sufficient to:
knowledge of the business. a. Evaluate whether the financial statements are
c. The nature and complexity of the audit materially misstated.
engagement Page 8 of 9
d. The assessed level of control risk.
3. Which of the following is least likely
AT-5908
b. Document material weaknesses in accounting
considered by the auditor in developing the
and internal control systems.
overall audit
c. Identify and understand events, transactions
plan?
and practices that may have effect on financial
a. Understanding of the accounting and internal
statements.
control systems.
d. Have an overall evaluation of whether
b. Relevant risk and materiality.
financial assertions are fairly presented in the
c. The involvement of other auditors in the audit
financial statements.
of major component of financial statements
10. The auditor is not expected to have
d. The general level of competence of audit
a. A particular knowledge of the economy and
assistants.
the industry within which the entity operates.
4. Which of the following is not considered by
b. A particular knowledge of how the entity
the CPA when he makes an overall audit plan?
operates.
a. Identification of complex accounting areas
c. A level of knowledge of business ordinarily
including those involving accounting estimates.
less than that possessed by management.
b. The information technology used by the client.
d. A knowledge of business which is used in
c. The content of the representation letters.
assessing inherent and control risk.
d. The nature and timing of reports or other
11. The auditor obtains knowledge of client’s
communication with the entity that are expected
business
under the engagement.
ABCD
5. Audit plan should
Prior to acceptance of engagement No No Yes
ABCD
Yes
A. Precede action Yes No Yes No
Planning stage of the audit Yes Yes Yes No
B. Be fixed Yes No No Yes
Testing of transactions stage No Yes Yes Yes
C. Be cost beneficial Yes Yes Yes Yes
12. Understanding the business and using this
6. Which of the following least likely affect the
information appropriately assists the auditor in,
form and content of the overall audit plan?
except
a. Complexity of the audit engagement.
a. Deciding whether to do tests of controls.
b. Methodology and technology used by the
b. Evaluating audit evidence.
auditor.
c. The entity’s form of business organization.
c. Assessing risks and identifying potential made.
problems. 17. Which of the following may not cast
d. Planning and performing the audit effectively significant doubt about the going concern
and efficiently. assumption of
13. Which of the following is the ultimate an entity.
concern of the knowledge about the business? a. The entity heavily used equity financing for
a. Consideration of how it affects the financial investment in permanent assets.
statements taken as a whole. b. Non-compliance with capital or other statutory
b. Assists the auditor in enforcing quality control requirements.
procedures. c. Pending legal or regulatory proceeding
c. To assure that sufficient audit evidence is against the entity that may, if successful, result
obtained. in
d. It assists in determining the type of audit claims that are unlikely to be satisfied.
report to be issued. d. Changes in legislation or government policy
14. A knowledge of the business is a frame of expected to adversely affect the entity.
reference within which the auditor exercises Page 9 of 9
professional judgment. This assists the auditor
in carrying out the following objectives, except:
AT-5908
18. When events or conditions have been
a. Assessing risks and identifying problems.
identified which may cast significant doubt on
b. Evaluating audit evidence.
the entity’s
c. Determining the audit opinion to be
ability to continue as a going concern, the
expressed.
auditor should:
d. Planning and performing the audit effectively
a. Review management’s plans for future
and efficiently.
actions based on its going concern assessment.
15. Throughout the course of the audit, the
b. Gather sufficient appropriate audit evidence to
auditors make judgment about many matters
confirm or dispel whether or not a material
where
uncertainty exists through carrying out
knowledge of the business is important. These
procedures considered necessary, including
procedures do not include:
considering the effect of any plans of
a. Evaluating accounting estimates and
management and other mitigating factors.
management representations.
c. Seek written representations from
b. Identifying related parties and related party
management regarding its plans for future
transactions.
action.
c. Assessing inherent and control risks.
d. All of the above.
d. Assessing the appropriateness of using
19. Which of the following proposed actions may
statistical sampling instead of judgmental
mostly mitigate the going concern problem of an
sampling.
entity?
PSA 570 – Going Concern
a. Rescheduling of loan payments.
16. Which of the following factors is
b. More vigorous business expansion.
inappropriately relevant to the management’s
c. Acquiring asset replacement using short-term
assessment of
loans.
the going concern assumption?
d. Increasing the amount of cash dividends to be
a. The degree of uncertainty associated with the
paid.
outcome of an event or condition decreases
20. The following are related to the auditor’s
significantly the further into the future of
responsibility to assess the ability of the
judgment being made about the outcome of an
company to
event or condition.
continue as a going concern?
b. Any judgment about the future is based on
I. The auditor should consider the
information available at the time at which the
appropriateness of the management’s use of the
judgment is made.
going
c. The size and complexity of the entity, and the
concern assumption in the preparation of the
nature and conditions of its business affect
financial statements.
the judgment regarding the outcome of events or
II. The auditor is to consider whether there are
conditions.
material uncertainties about the entity’s ability
d. Subsequent events can contradict a judgment
which was reasonable at the time it was
to continue as a going concern that needs to be c. Emphasize this matter in the audit report.
disclosed in the financial statements. d. Consider a modification of the report as a
III. The absence of any reference to going result of the limitation in the scope of the
concern uncertainty in the auditor’s report is auditor’s
viewed work.
as a guarantee as to the entity’s ability to 25. The management denied the auditor’s
continue as a going concern. request that the management has to extend its
Which of the foregoing inappropriately assessment of its going concern ability.
describe(s) the auditor’s responsibility? However, the auditor’s other procedures are
a. I only b. I and II only c. II only d. III only sufficient
21. The auditor consider events and condition to assess the appropriateness of management
relating to the going concern assumption during use of the going concern assumption in the
the preparation of the financial statements. he
planning stage in order to: auditor should issue:
a. Help management do action that may mitigate a. Unqualified opinion c. Adverse opinion
its going concern problems. b. Unqualified opinion with explanatory
b. Identifying the areas of accounting and paragraph d. Disclaimer of opinion
internal control systems that need tests of - end of AT-5908 –
control.
c. To have a timely discussion with management CPA REVIEW SCHOOL OF THE
and a review of management’s plans and
resolutions of any identified going concern PHILIPPINES
issues. Manila
d. In order to shorten assessment period. AUDITING THEORY
22. If adequate disclosure is not made by the Risk Assessment and Response to
entity regarding substantial doubt about its Assessed Risks
ability to Related PSAs: PSA 400, 315 and 330
continue as a going concern, the auditor should 1. Which of the following is correct statement?
include in his report specific reference to the a. The auditor should use professional judgment
substantial doubt as to ability of the company to to assess audit risk and to design audit
continue as a going concern and should procedures to ensure it is eliminated.
express: b. The auditor is an insurer, and his or her report
a. Unqualified opinion with explanatory constitutes a guarantee.
paragraph c. The subsequent discovery that a material
b. A subject to qualified opinion or adverse misstatement exists in the financial statements
opinion. is
c. Either an “except for” qualified opinion or an evidence of inadequate planning, performance,
adverse opinion. or judgment on the part of the auditor.
d. A disclaimer of opinion. d. The auditor should obtain an understanding of
23. If the auditor believes that the entity will not the accounting and internal control systems
be able to continue as a going concern and the sufficient to plan the audit and develop an
financial statements are prepared on a going effective audit approach.
concern basis, the auditor’s report should 2. According to PSA 400 – Risk Assessments
include: and Internal Control, audit risk means
a. Unqualified opinion with explanatory a. The susceptibility of an account balance or
paragraph. c. Adverse opinion. class of transactions to misstatement that could
b. Qualified opinion. d. Disclaimer of opinion. be material, individually or when aggregated
24. If the auditor believes that management with misstatements in other balances or
should extend its assessment but the latter classes, assuming that there were no related
refuses to internal controls.
do so, the auditor should: b. The risk that a misstatement, that could occur
a. Rectify the lack of analysis by management. in an account balance or class of
b. Extend his audit procedures to obtain transactions and that could be material,
sufficiently appropriate evidence regarding the individually or when aggregated with
use of misstatements
the going concern assumption.
in other balances or classes, will not be c. The greater the inherent and control risks the
prevented or detected and corrected on a timely auditor believes exists, the less detection risk
basis by the accounting and internal control that can be accepted.
systems. d. The auditor might make separate or combined
c. The risk that an auditor’s substantive assessments of inherent risk and control
procedures will not detect a misstatement that risk.
exists 7. Why would the auditor assess control risk?
in an account balance or class of transactions a. Because it indicates where inherent risk may
that could be material, individually or when be the greatest.
aggregated with misstatements in other b. Because it determines whether sampling risk
balances or classes. is sufficiently low.
d. The risk that the auditor gives an c. Because it affects the level of detection risk
inappropriate audit opinion when the financial the auditor may accept.
statements d. Because it includes the aspects of
are materially misstated. nonsampling risk that are controllable.
3. Inherent risk and control risk differ from Page 2 of 7
detection risk in that they
a. Arise from the misapplication of auditing
AT-5909
8. The relationship between acceptable level of
procedures.
detection risk and the combined level of inherent
b. May be assessed in either quantitative or
and control risk is
nonquantitative terms.
a. Direct b. Inverse c. Parallel d. Independent
c. Exist independently of the financial statement
9. The audit risk model consists of: AR = IR x
audit.
CR x DR
d. Can be changed at the auditor’s discretion.
The detection risk is the dependent variable.
4. Inherent risk and control risk differ from
What is the acceptable level of detection risk if
detection risk in that inherent risk and control
the assessed level of Inherent risk is High and
risk are
the Control risk is Low?
a. Elements of audit risk while detection risk is
a. Highest b. Medium c. Lower d. Higher
not.
10. An auditor decides to increase the assessed
b. Changed at the auditor’s discretion while
level of control risk from that originally planned
detection risk is not.
on
c. Considered at the individual account-balance
the basis of audit evidence gathered and
level while detection risk is not.
evaluated. To achieve an overall audit risk level
d. Functions of the client and its environment
that
while detection risk is not.
is substantially the same as the planned audit
5. Which of the following is an incorrect
risk level, the auditor would
statement?
a. Decrease substantive testing. c. Increase
a. Detection risk is a function of the
inherent risk.
effectiveness of an auditing procedure and its
b. Increase materiality levels. d. Decrease
application.
detection risk.
b. Detection risk arises partly from uncertainties
11. As the acceptable level of detection risk
that exists when the auditor does not examine
decreases, the assurance directly provided from
100 percent of the population.
a. Substantive tests should increase. c.
c. Detection risk arises partly because of other
Substantive tests should decrease.
uncertainties that exist even if the auditor were
b. Tests of controls should increase. d. Tests of
to examine 100 percent of the population.
controls should decrease.
d. Detection risk exists independently of the
12. Which of the following statements is true?
audit of the financial statements.
a. If control risk is assessed at maximum, the
6. Which of the following is an incorrect
nature of related substantive tests should be
statement?
changed from more to less effective.
a. Detection risk cannot be changed at the
b. If control risk is assessed at maximum, the
auditor’s discretion.
nature of related substantive tests should be
b. If individual audit risk remains the same,
changed from less to more effective.
detection risk bears an inverse relationship to
c. If control risk is assessed at maximum, the
inherent and control risks.
timing of related substantive tests should be
changed from year-end to an interim date. a. The purpose of this PSA is to establish
d. If control risk is assessed at maximum, the standards and to provide guidance on obtaining
extent of related substantive tests should be an
changed from a larger to a smaller sample. understanding of the entity and its environment,
13. When the auditor determines that detection including its internal control, and on
risk regarding a financial statement assertion for assessing the risks of material misstatement in a
a financial statement audit.
material account balance or class of b. This PSA requires the auditor to make risk
transactions cannot be reduced to an acceptable assessments at the financial statement and
level, the assertion levels based on an appropriate
auditor should express understanding of the entity and its environment,
a. Qualified or adverse opinion c. Unqualified including its internal control.
opinion with explanatory paragraph c. The requirements and guidance of this PSA
b. Qualified or disclaimer of opinion d. are to be applied in conjunction with the
Unqualified opinion. requirements and guidance provided in other
14. Which of the following is not a distinguishing PSAs.
feature of risk-based auditing? d. This PSA discusses the auditor’s
a. Identifying areas posing the highest risk of responsibility to determine overall responses
financial statement errors. and to
b. Analysis of internal control. design and perform further audit procedures
c. Collecting and evaluating evidence. whose nature, timing, and extent are
d. Concentrating audit resources in those areas responsive to the risk assessments.
presenting the highest risk of financial 18. Which statement is incorrect regarding
statement errors. obtaining an understanding of the entity and its
15. Which of the following factors is not a good environment?
indicator of potential financial failure? a. Obtaining an understanding of the entity and
a. Client is constantly short of cash and working its environment is an essential aspect of
capital. performing an audit in accordance with PSAs.
b. Client’s retained earnings were reduced by b. That understanding establishes a frame of
half as a result of a large dividend payout. reference within which the auditor plans the
c. Client relies heavily on debt financing, audit and exercises professional judgment about
especially by financing permanent assets with assessing risks of material misstatement
short-term loans. of the financial statements and responding to
d. Client has had increasing net losses for those risks throughout the audit.
several years. c. The auditor’s primary consideration is whether
PSA 315 – Understanding the Entity and Its the understanding that has been obtained is
Environment and Assessing the Risks of sufficient to assess the risks of material
Material Misstatement misstatement of the financial statements and to
16. PSA 315 requires design and perform further audit procedures.
a. The auditor to obtain an understanding of the d. The depth of the overall understanding that is
entity and its environment, including its required by the auditor in performing the audit
internal control. is equal to that possessed by management in
b. Discussion among the engagement team managing the entity.
about the susceptibility of the entity’s financial 19. The main purpose of risk assessment
statements to material misstatement. procedures is to
c. The auditor to identify and assess the risks of a. Obtain an understanding of the entity and its
material misstatement at the financial environment, including its internal control, to
statement and assertion levels. assess the risks of material misstatement at the
d. All of the above. financial statement and assertion levels.
Page 3 of 7 b. Test the operating effectiveness of controls in
AT-5909 preventing, or detecting and correcting,
material misstatements at the assertion level.
17. Which of the following is incorrect regarding
c. Detect material misstatements at the
PSA 315?
assertion level.
d. All of the above.
20. The auditor should perform the following risk 23. Which statement is incorrect regarding the
assessment procedures to obtain an discussion among the engagement team about
understanding of the entity and its environment, the
including its internal control, except: susceptibility of the entity’s financial statements
a. Inquiries of management and others within to material misstatements?
the entity. a. The members of the engagement team
b. Inquiries of the entity’s external legal counsel should discuss the susceptibility of the entity’s
or of valuation experts that the entity has financial statements to material misstatements.
used. b. The objective of this discussion is for
c. Analytical procedures. members of the engagement team to gain a
d. Observation and inspection. better
21. Inquiries directed towards those charged understanding of the potential for material
with governance may most likely misstatements of the financial statements
a. Relate to their activities concerning the design resulting from fraud or error in the specific areas
and effectiveness of the entity’s internal assigned to them, and to understand how
control and whether management has the results of the audit procedures that they
satisfactorily responded to any findings from perform may affect other aspects of the audit.
these c. The discussion provides an opportunity for
activities. more experienced engagement team members,
b. Help the auditor understand the environment including the engagement partner, to share their
in which the financial statements are insights based on their knowledge of the
prepared. entity, and for the team members to exchange
c. Relate to changes in the entity’s marketing information about the business risks.
strategies, sales trends, or contractual d. All the team members should have a
arrangements with its customers. comprehensive knowledge of all aspects of the
d. Help the auditor in evaluating the audit.
appropriateness of the selection and application 24. The auditor’s understanding of the entity and
of certain its environment consists of an understanding of
accounting policies. the following aspects:
22. Which statement is incorrect regarding I. Industry, regulatory, and other external factors,
analytical procedures? including the applicable financial reporting
a. Analytical procedures may be helpful in framework.
identifying the existence of unusual transactions II. Nature of the entity, including the entity’s
or selection and application of accounting policies.
events, and amounts, ratios, and trends that III. Objectives and strategies and the related
might indicate matters that have financial business risks that may result in a material
statement and audit implications. misstatement of the financial statements.
b. In performing analytical procedures as risk IV. Measurement and review of the entity’s
assessment procedures, the auditor develops financial performance.
expectations about plausible relationships that V. Internal control.
are reasonably expected to exist. a. All of the above c. I, II and III
c. When comparison of those expectations with b. I, II, III and IV d. I, II, III and V
recorded amounts or ratios developed from 25. Nature of an entity refers to
recorded amounts yields unusual or unexpected a. The entity’s operations, its ownership and
relationships, the auditor considers those governance, the types of investments that it is
results in identifying risks of material making and plans to make, the way that the
misstatement. entity is structured and how it is financed.
d. When such analytical procedures use data b. The overall plans for the entity.
aggregated at a high level (which is often the c. The operational approaches by which
situation), the results of those analytical management intends to achieve its objectives.
procedures provide a clear-cut indication about d. The result of significant conditions, events,
whether a material misstatement may exist. circumstances, actions or inactions that could
Page 4 of 7 adversely affect the entity’s ability to achieve its
AT-5909 objectives and execute its strategies, or the
setting of inappropriate objectives and
strategies.
26. Which statement is correct regarding b. The auditor excludes the effect of identified
business risks? controls related to the risk to determine whether
a. The risk of material misstatement of the the nature of the risk, the likely magnitude of the
financial statements is broader than business potential misstatement including the
risk, possibility that the risk may give rise to multiple
though it includes the latter. misstatements, and the likelihood of the risk
b. The auditor should identify or assess all occurring are such that they require special audit
business risks. consideration.
c. All business risks give rise to risks of material c. Routine, non-complex transactions that are
misstatement. subject to systematic processing are more likely
d. A business risk may have an immediate to give rise to significant risks because they
consequence for the risk of misstatement for have higher inherent risks.
classes of transactions, account balances, and d. Significant risks are often derived from
disclosures at the assertion level or the business risks that may result in a material
financial statements as a whole. misstatement.
27. A potential business risk created by industry 31. Examples of situations where the auditor
developments may most likely include may find it impossible to design effective
a. Increased product liability. substantive
b. increased legal exposure procedures that by themselves provide sufficient
c. The entity does not have the personnel or appropriate audit evidence that certain
expertise to deal with the changes in the assertions are not materially misstated include
industry. the following:
d. Loss of financing due to the entity’s inability to I. An entity that conducts its business using IT to
meet financing requirements. initiate orders for the purchase and delivery
28. The following are examples of conditions of goods based on predetermined rules of what
and events that may indicate the existence of to order and in what quantities and to pay
risks of the related accounts payable based on system-
material misstatement, except generated decisions initiated upon the
a. Operations in regions that are economically confirmed receipt of goods and terms of
stable. payment. No other documentation of orders
b. Pending litigation and contingent liabilities. placed
c. Application of new accounting or goods received is produced or maintained,
pronouncements. other than through the IT system.
d. Entities or business segments likely to be II. An entity that provides services to customers
sold. via electronic media (for example, an Internet
29. Which of the following conditions and events service provider or a telecommunications
may most likely indicate the existence of risks of company) and uses IT to create a log of the
material misstatement? services provided to its customers, initiate and
a. Having personnel with appropriate accounting process its billings for the services and
and financial reporting skills. automatically record such amounts in electronic
b. Accounting measurements that involve simple accounting records that are part of the
processes. system used to produce the entity’s financial
c. Significant amount of routine or systematic statements.
transactions. a. I and II b. I only c. II only d. Neither I nor II
d. Constraints on the availability of capital and PSA 330 – The Auditor’s Procedures In
credit. Response to Assessed Risks
Page 5 of 7 32. PSA 330 requires the auditor to
AT-5909 a. Determine overall responses to address risks
of material misstatement at the financial
30. Which statement is incorrect regarding
statement level.
significant risks that require special audit
b. Design and perform further audit procedures,
consideration?
including tests of the operating effectiveness
a. The auditor should determine which of the
of controls, when relevant or required, and
risks identified are, in the auditor’s judgment,
substantive procedures, whose nature, timing,
risks that require special audit consideration.
and extent are responsive to the assessed risks
of material misstatement at the assertion
level. a. The auditor may determine that only by
c. Evaluate whether the risk assessment remain performing tests of controls may the auditor
appropriate and to conclude whether achieve
sufficient appropriate audit evidence has been an effective response to the assessed risk of
obtained. material misstatement for a particular
d. All of the above. assertion.
33. The auditor should determine overall b. The auditor may determine that performing
responses to address the risks of material only substantive procedures is appropriate for
misstatement specific assertions and, therefore, the auditor
at the financial statement level. Such responses excludes the effect of controls from the
least likely include relevant risk assessment.
a. Emphasizing to the audit team the need to c. The auditor needs to be satisfied that
maintain professional skepticism in gathering performing only substantive procedures for the
and evaluating audit evidence. relevant assertion would be effective in reducing
b. Assigning more experienced staff or those the risk of material misstatement to an
with special skills or using experts. acceptably low level.
c. Incorporating additional elements of d. The auditor designs and performs substantive
unpredictability in the selection of further audit procedures for each material class of
procedures to be performed. transactions, account balance, and disclosure
d. Performing substantive procedures at an only when the auditor uses the substantive
interim date instead of at period end. approach.
34. The assessment of the risks of material 37. Which statement is incorrect regarding the
misstatement at the financial statement level is nature of further audit procedures?
affected a. The nature of further audit procedures refers
by the auditor’s understanding of the control to their purpose and their type.
environment. Weaknesses in the control b. Certain audit procedures may be more
environment ordinarily will lead the auditor to appropriate for some assertions than others.
a. Have more confidence in internal control and c. The higher the auditor’s assessment of risk,
the reliability of audit evidence generated the less reliable and relevant is the audit
internally within the entity. evidence sought by the auditor from substantive
b. Conduct some audit procedures at an interim procedures.
date rather than at period end. d. The auditor is required to obtain audit
c. Modify the nature of audit procedures to evidence about the accuracy and completeness
obtain more persuasive audit evidence. of
d. Decrease the number of locations to be information produced by the entity’s information
included in the audit scope. system when that information is used in
35. The auditor should design and perform performing audit procedures.
further audit procedures whose nature, timing, 38. Which statement is incorrect regarding the
and timing of further audit procedures?
extent are responsive to the assessed risks of a. Timing refers to when audit procedures are
material misstatement at the assertion level. performed or the period or date to which the
Which of the following is the most important audit evidence applies.
consideration in responding to the assessed b. The auditor may perform tests of controls or
risks? substantive procedures at an interim date or at
a. The nature of the audit procedures. c. The period end.
timing of the audit procedures. c. If the auditor performs tests of controls or
b. The extent of the audit procedures. d. All of substantive procedures prior to period end, the
these are equally important. auditor considers the additional evidence
Page 6 of 7 required for the remaining period.
AT-5909 d. All audit procedures can be performed prior to
period end.
36. The auditor’s assessment of the identified
39. Which statement is incorrect regarding the
risks at the assertion level provides a basis for
extent of further audit procedures?
considering the appropriate audit approach for
a. Extent includes the quantity of a specific audit
designing and performing further audit
procedure to be performed.
procedures. Which of the following is incorrect?
b. The extent of an audit procedure is for example, when testing controls over the
determined by the judgment of the auditor after entity’s physical inventory counting at the period
considering the materiality, the assessed risk, end.
and the degree of assurance the auditor b. If the auditor plans to rely on controls that
plans to obtain. have changed since they were last tested, the
c. The auditor ordinarily decreases the extent of auditor should test the operating effectiveness of
audit procedures as the risk of material such controls in the current audit.
misstatement increases. c. If the auditor plans to rely on controls that
d. Increasing the extent of an audit procedure is have not changed since they were last tested,
effective only if the audit procedure itself is the
relevant to the specific risk. auditor should test the operating effectiveness of
40. Which statement is incorrect regarding tests such controls at least once in every
of controls? second audit.
a. Tests of controls are required under certain d. When there are a number of controls for
circumstances. which the auditor determines that it is
b. Tests of controls are required when an entity appropriate
conducts its business using IT and no to use audit evidence obtained in prior audits,
documentation of transactions is produced or the auditor should test the operating
maintained, other than through the IT system. effectiveness of some controls each audit.
c. Tests of the operating effectiveness of 43. Which statement is incorrect regarding the
controls are performed only on those controls extent of tests of controls?
that a. The auditor designs tests of controls to obtain
the auditor has determined are suitably sufficient appropriate audit evidence that the
designed to prevent, or detect and correct, a controls operated effectively throughout the
material misstatement in an assertion. period of reliance.
d. Testing the operating effectiveness of controls b. The more the auditor relies on the operating
is the same as obtaining audit evidence that effectiveness of controls in the assessment of
controls have been implemented. risk, the lesser is the extent of the auditor’s tests
41. Which statement is incorrect regarding the of controls.
nature of tests of controls? c. If the rate of expected deviation is expected to
a. As the planned level of assurance increases, be too high, the auditor may determine that
the auditor seeks more reliable audit tests of controls for a particular assertion may
evidence. not be effective.
b. Those controls subject to testing by d. Because of the inherent consistency of IT
performing inquiry combined with inspection or processing, the auditor may not need to
reperformance ordinarily provide more increase
assurance than those controls for which the the extent of testing of an automated control.
audit 44. Which statement is incorrect regarding
evidence consists solely of inquiry and substantive procedures?
observation. a. Substantive procedures are performed in
c. The absence of misstatements detected by a order to detect material misstatements at the
substantive procedure provides audit assertion level, and include tests of details of
evidence that controls related to the assertion classes of transactions, account balances,
being tested are effective. and disclosures and substantive analytical
d. A material misstatement detected by the procedures.
auditor’s procedures that was not identified by b. The auditor always performs substantive
the procedures for each class of transactions,
entity ordinarily is indicative of the existence of a account
material weakness in internal control. balance, and disclosure.
Page 7 of 7 c. When the auditor has determined that an
AT-5909 assessed risk of material misstatement at the
assertion level is a significant risk, the auditor
42. Which statement is incorrect regarding the
should perform substantive procedures that
timing of tests of controls?
are specifically responsive to that risk.
a. Audit evidence pertaining only to a point in
d. In order to obtain sufficient appropriate audit
time may be sufficient for the auditor’s purpose,
evidence, the substantive procedures related
to significant risks are most often designed to INTERNAL CONTROL
obtain audit evidence with high reliability. Page 5 of 13
45. The auditor’s substantive procedures should MULTIPLE CHOICE QUESTIONS
include the following audit procedures related to 1. According to PSA 400, which of the following
the financial statement closing process: is correct regarding internal control system?
I. Agreeing the financial statements to the a. Internal control system refers to all the
underlying accounting records. policies and procedures adopted by the auditor
II. Examining material journal entries and other to
adjustments made during the course of assist in achieving management’s objective.
preparing the financial statements. b. A strong environment, by itself, ensure the
a. I and II b. I only c. II only d. Neither I nor II effectiveness of the internal control system.
46. Which statement is incorrect regarding the c. In the audit of financial statements, the auditor
nature, timing and extent of substantive is only concerned with those policies and
procedures? procedures within the accounting and internal
a. Substantive analytical procedures are control systems that are relevant to the financial
generally more applicable to large volumes of statements.
transactions that tend to be predictable over d. The internal control system is confined to
time. those matters which relate directly to the
b. Tests of details are ordinarily more functions of
appropriate to obtain audit evidence regarding the accounting system.
certain 2. Which of the following is correct about internal
assertions about account balances, including control?
existence and valuation. a. Accounting and internal control systems
c. Substantive procedures cannot be performed provide management with conclusive evidence
at an interim date. that
d. The greater the risk of material misstatement, objectives are reached.
the greater the extent of substantive b. One of the inherent limitations of accounting
procedures. and internal control systems is the possibility
47. Which statement is incorrect regarding that
evaluation of the sufficiency and the procedures may become inadequate due to
appropriateness of changes in conditions, and compliance with
audit evidence obtained? procedures may deteriorate.
a. Based on the audit procedures performed and c. Most internal controls tend to be directed at
the audit evidence obtained, the auditor non-routine transactions.
should evaluate whether the assessments of the d. Management does not consider costs of the
risks of material misstatement at the accounting and internal control systems.
assertion level remain appropriate. 3. Corporate directors, management, external
b. As the auditor performs planned audit auditors, and internal auditors all play important
procedures, the audit evidence obtained may roles
cause in creating a proper control environment. Top
the auditor to modify the nature, timing, or extent management is primarily responsible for
of other planned audit procedures. a. Establishing a proper environment and
c. In developing an opinion, the auditor specifying overall internal control.
considers only the audit evidence which b. Reviewing the reliability and integrity of
corroborate financial information and the means used to
the assertions in the financial statements. collect
d. If the auditor is unable to obtain sufficient and report such information.
appropriate audit evidence, the auditor should c. Ensuring that external and internal auditors
express a qualified opinion or a disclaimer of adequately monitor the control environment.
opinion. d. Implementing and monitoring controls
- end of AT-5909 – designed by the board of directors.
CPA REVIEW SCHOOL OF THE 4. Which of the following best describe the
PHILIPPINES interrelated components of internal control?
Manila a. Organizational structure, management
AUDITING THEORY philosophy, and planning.
b. Control environment, risk assessment, control process. The results of the understanding
activities, information and communication a. Must be reported to the shareholders and the
systems, and monitoring. SEC.
c. Risk assessment, backup facilities, b. Bear no relationship to the extent of
responsibility accounting and natural laws. substantive testing to be performed.
d. Legal environment of the firm, management c. Are not reported to client management.
philosophy, and organizational structure. d. May be used as the basis for withdrawing
5. In an audit of financial statements, an from an audit engagement.
auditor’s primary consideration regarding a 10. An entity should consider the cost of a
control is control in relationship to the risk. Which of the
whether it following
a. Reflects management’s philosophy and controls best reflects this philosophy for a large
operating style. peso investment in heavy machine tools?
b. Affects management’s financial statement a. Conducting a weekly physical inventory.
assertions. b. Placing security guards at every entrance 24
c. Provides adequate safeguards over access to hours a day.
assets. c. Imprinting a controlled identification number
d. Enhances management’s decision-making on each tool.
processes. d. Having all dispositions approved by the vice
6. Effective internal control president of sales.
a. Eliminates risk and potential loss to the 11. Audit evidence concerning segregation of
organization. duties ordinarily is best obtained by
b. Cannot be circumvented by management. a. Performing tests of transactions that
c. Is unaffected by changing circumstances and corroborate management’s financial statement
conditions encountered by the organization. assertions
d. Reduces the need for management to review b. Observing the employees as they apply
exception reports on a day-to-day basis. specific controls.
Page 6 of 13 c. Obtaining a flowchart of activities performed
AT-5910 by available personnel.
d. Developing audit objectives that reduce
7. Which of the following statements about
control risk.
internal control is correct?
a. Properly maintained internal controls 12.Which of the following statements about
reasonably assure that collusion among preliminary assessment of control risks is
employees correct?
cannot occur. a. After obtaining an understanding of the
b. Establishing and maintaining internal control accounting and internal control systems, the
is the internal auditor’s responsibility. auditor
c. Exceptionally strong control allows the auditor should make a preliminary assessment of
to eliminate substantive tests. control risks, at the assertion level, for all
d. The cost-benefit relationship should be accounts
considered in designing internal control. or transaction classes.
8. The ultimate purpose of assessing control risk b. The preliminary assessment of control risk
is to contribute to the auditor’s evaluation of the can be done only after completing tests of
risk controls.
that c. The preliminary assessment of control risk for
a. Tests of controls may fail to identify controls a financial assertion is normally low, unless the
relevant to assertions. auditor is able to identify weaknesses that may
b. Material misstatements may exist in the indicate ineffectiveness of accounting and
financial statements. internal control system.
c. Specified controls requiring segregation of d. The auditor ordinarily assesses control risk at
duties may be circumvented by collusion. high level for some or all assertions when it is
d. Entity policies may be overridden by senior not cost efficient to do tests of controls.
management. 13. Which of the following statements
9. A proper understanding of the client’s internal concerning control risk is correct?
control is an integral part of the audit planning a. When control risk is at the maximum level, an
auditor is required to document the basis for that
assessment. a. Additional evidence to support a further
b. Control risk may be assessed sufficiently low reduction in control risk was not cost-beneficial
to eliminate substantive testing for significant to
transaction classes. obtain.
c. When assessing control risk, an auditor b. Assessed level of inherent risk exceeded the
should not consider evidence obtained in prior assessed level of control risk.
audits c. Internal control was properly designed and
about the operation of controls. justifiably may be relied on.
d. Assessing control risk and obtaining an d. Evidence obtainable through tests of controls
understanding of an entity’s internal control may would not support an increased assessment of
be control risk.
performed concurrently. 17. The objective of tests of details of
14. Based on a consideration of internal control transactions performed as tests of controls is to
completed at an interim date, the auditor a. Monitor the design and use of entity
assessed documents such as prenumbered shipping form
control risk at a low level and performed interim b. Determine whether controls have been placed
substantive tests. The records and procedures in operation.
would most likely be tested again at year-end if c. Detect material misstatements in the account
a. Tests of controls were not performed by the balances of the financial statements.
internal auditor during the remaining period. d. Evaluate whether controls operated
b. Internal control provides a basis for limiting effectively.
the extent of substantive testing. 18. An auditor wishes to perform tests of
c. The auditor used nonstatistical sampling controls on a client’s cash disbursements
during the interim period testing of controls. procedures. If the
d. Inquiries and observations lead the auditor to controls leave no audit trail of documentary
believe that conditions have changed. evidence, the auditor most likely will test the
Page 7 of 13 procedures by
AT-5910 a. Confirmation and observation. c. Analytical
procedures and confirmation.
15. Although substantive tests may support the
b. Observation and inquiry. d. Inquiry and
accuracy of underlying records, these tests
analytical procedures
frequently
19. Which of the following would not be a
provide no affirmative evidence of segregation of
method used to conduct tests of controls?
duties because
a. Inquiry b. Walkthrough c. Confirmation d.
a. Substantive tests rarely guarantee the
Observation
accuracy of the records if only a person who
20. The auditor is examining copies of sales
performs
invoices only for the initials of the person
incompatible functions.
responsible for
b. The records may be accurate even though
checking the extensions. This is an example of a
they are maintained by a person who performs
a. Test of controls c. Dual purpose test
incompatible functions.
b. Substantive test d. Test of balances
c. Substantive tests relate to the entire period
21. Which of the following types of evidence
under audit, but tests of controls ordinarily are
would an auditor most likely examine to
confined to the period during which the auditor is
determine
on the client’s premises.
whether controls are operating as designed?
d. Many computerized procedures leave no
a. Confirmations of receivables verifying account
audit trail of who performed them, so substantive
balances.
tests may necessarily be limited to inquiries and
b. Letters of representations corroborating
observation of office personnel.
inventory pricing.
16. After obtaining an understanding of internal
c. Attorneys’ responses to the auditor’s inquiries.
control and assessing control risk, an auditor
d. Client records documenting the use of
decided
computer programs.
not to perform additional tests of controls. The
22. Which of the following procedures
auditor most likely concluded that the
concerning accounts receivable is an auditor
most likely to
perform to obtain evidential matter in support of to determine whether the accounting and
an assessed level of control risk below the internal control is adequate.
maximum level? QUIZZERS
a. Sending confirmation requests to an entity’s 1. Transaction authorization within an
principal customers to verify the existence of organization may be either specific or general.
accounts receivable. An example of
b. Inspecting an entity’s analysis of accounts specific transaction authorization is the
receivable for unusual balances. a. Approval of a construction budget for a new
c. Comparing an entity’s uncollectible accounts warehouse
expense to actual uncollectible accounts b. Setting of automatic reorder points
receivable. c. Establishment of a customer’s credit limits
d. Observing an entity’s employee prepare the d. Establishment of sales prices
schedule of past due accounts receivable. 2. Internal control should provide reasonable
23. An auditor is least likely to test controls that (but not necessarily absolute) assurance which
provide for means
a. Classification of revenue and expense that:
transactions by product line a. The cost of control activities should not
b. Approval of the purchase and sale of trading exceed the benefits.
securities b. Internal control is management’s, not
c. Segregation of the functions of recording auditor’s, responsibility.
disbursements and reconciling the bank account c. An attestation engagement about
d. Comparison of receiving reports and vendors’ management’s internal control assertions may
invoices with purchase orders not
Page 8 of 13 necessarily detect all reportable conditions.
AT-5910 d. There is always a risk that reportable
conditions may result in material misstatements.
24. In a small company that doesn't employ an
3. Which of the following statements is an
adequate number of employees to permit proper
example of an inherent limitation of internal
division
control.
of responsibilities, effective internal control can
a. Errors may arise from mistakes in judgments.
be strengthened by
b. The effectiveness of control procedures
a. Direct participation by the owner of the
depends on segregation of duties.
business in the record keeping activities of the
c. Procedures are designed to assure that
business.
transactions are executed as management
b. Employment of temporary personnel to aid in
authorities.
the separation of duties.
d. Computers process large numbers of
c. Delegation of full, clear-cut responsibility to
transactions.
each employee for the functions assigned to
4. Proper segregation of functional
each.
responsibilities calls for separation of the
d. Engaging a CPA to perform monthly "write
functions of
up" work.
a. Authorization, execution, and recording. c.
25. Which of the following is true of the
Custody, execution, and reporting.
communication to management of material
b. Authorization, execution, and payment. d.
weaknesses in
Authorization, payment, and recording.
accounting and internal control?
5. Which of the following is a responsibility that
a. Communication must be in writing.
should not be assigned to only one employee?
b. Oral communication of material weaknesses,
a. Access to securities in the company’s safe
when appropriate, would be documented in the
deposit box.
audit working papers.
b. Custodianship of the cash working fund.
c. The communication should indicate that the
c. Reconciliation of bank statement.
auditor had extensively examined the
d. Custodianship of tools and small equipment.
accounting
6. Which of the following activities would be
and internal control system of the client.
least likely to strengthen a company’s internal
d. The auditors should indicate in the
control?
communication that the examination is primarily
a. Maintaining insurance for fire and theft.
designed
b. Separating accounting from other financial a. Substantive tests, documentation of control
operations. structure, and tests of controls
c. Fixing responsibility for the performance of b. Documentation of control structure, tests of
employee duties. controls, and substantive tests
d. Carefully selecting and training employees. c. Documentation of control structure,
7. As generally conceived, the “audit committee” substantive tests, and tests of controls
of a publicly held company should be made up d. Tests of controls, documentation of control
of structure, and substantive tests
a. Members of the board of directors who are 12. In obtaining an understanding of an entity’s
not officers or employees. internal control structure, an auditor is required
b. Representatives of the major equity interests to
(bonds, preferred stock, common stock). obtain knowledge about the
c. The audit partner, the chief financial officer, Operating effectiveness of Design of policies
the legal counsel, and at least one outsider. Policies and procedures and procedures
d. Representatives from the client’s a. Yes Yes
management, investors, suppliers, and b. No Yes
customers. c. Yes No
Page 9 of 13 d. No No
AT-5910 13. Which of the following audit techniques most
likely would provide an auditor with the most
8. When considering internal control, the
assurance about the effectiveness of the
auditor’s primary concern is to determine
operation on an internal control procedure?
a. The reliability of the accounting information
a. Confirmation with outside parties c.
system.
Recomputation of account balance
b. The possibility of fraud occurring.
b. Observation of client personnel d. Inquiry of
c. Compliance with policies, plans, and
client personnel
procedures.
14. Which of the following is the correct order for
d. The type of an opinion he will issue.
performing the auditing procedures A through C
9. Of the following, the best statement of the
below
CPA’s primary objective in considering internal
A = Tests of Controls
control
B = Preparation of a flowchart depicting the
is that the review is intended to provide
client’s internal control structure
a. A basis for reliance on the system and
C = Substantive tests
determining the scope of other auditing
a. ABC b. BAC c. ACB d. BCA
procedures.
15. After considering a client’s internal control,
b. Reasonable protection against client fraud
an auditor has concluded that the system is well
and defalcations by client employees.
designed and is functioning as anticipated.
c. A basis for constructive suggestions to the
Under these circumstances, the auditor would
client for improving his internal control system.
most
d. A method for ensuring that there is
likely
reasonable assurance that the financial
a. Cease to perform further substantive tests
statements are
b. Not increase the extent of planned
reliable.
substantive tests
10. When an auditor assesses control risk below
c. Increase the extent of anticipated analytical
the maximum level, the auditor is required to
procedures
document the auditor’s
d. Perform all tests of controls to the extent
Basis for concluding that control Understanding
outlined in the preplanned audit program
of the entity’s internal
16. After considering internal control, an auditor
Risk is below the maximum level control
might decide to
structure elements
a. Increase the extent of tests of controls and
a. Yes Yes
substantive tests in areas where internal control
b. No No
is
c. Yes No
strong
d. No Yes
b. Increase the extent of substantive tests in
11. The sequence of steps in gathering evidence
areas where internal control is weak
as the basis of the auditor’s opinion is
c. Reduce the extent of tests of controls in areas a. Transactions are executed in accordance with
where internal control is strong management's authorization.
Page 10 of 13 b. Access to assets is permitted only in
AT-5910 accordance with management's authorization.
c. Irregularities will be eliminated.
d. Reduce the extent of both substantive tests
d. The recorded accountability for assets is
and tests of controls in areas where internal
compared with the existing assets at reasonable
control is strong
intervals.
17. To obtain an understanding of the relevant
23. A secondary purpose of the auditor's
policies and procedures of internal control, the
consideration of internal control is to provide
auditor
a. A basis for assessing control risk.
performs all of the following except:
b. An assurance that the records and documents
a. Make inquiries c. Make observations
have been maintained in accordance with
b. Design substantive tests d. Inspect
existing company policies and procedures.
documents and records
c. A basis for constructive suggestions about
18. In an auditor’s consideration of internal
improvements in internal control structure.
control, the completion of a questionnaire is
d. A basis for the determination of the resultant
most closely
extent of the tests to which auditing procedures
associated with which of the following?
are to be restricted.
a. Separation of duties c. Flowchart accuracy
24. The auditor's review of the client's internal
b. Understanding the system d. Tests of controls
control is documented in order to substantiate
19. Before relying on the system of internal
a. Conformity of the accounting records with
control, the auditor obtains a reasonable degree
GAAP.
of
b. Adherence to requirements of management.
assurance that the internal control procedures
c. Compliance with generally accepted auditing
are in use and operating as planned. The auditor
standards.
obtains this assurance by performing planned
d. The fairness of the financial statement
a. Substantive tests c. Transaction tests
presentation.
b. Tests of controls d. Tests of trends and ratios
25. A consideration of internal control made
20. After obtaining an understanding of a client’s
during an audit is usually not sufficient to
controls, an auditor may decide to omit tests of
express an
the
opinion on an entity's controls because
controls. Which of the following in not
a. Weaknesses in the system may go unnoticed
appropriate reason to omit tests of controls?
during the audit engagement.
a. The controls duplicate other controls.
b. A consideration of internal control is not
b. The controls appear adequate.
necessarily made during an audit engagement.
c. Reportable conditions preclude assessing
c. Only those controls on which an auditor
control risk below the maximum.
intends to rely are reviewed, tested, and
d. The effort to test controls exceeds the effort
evaluated.
saved by not performing substantive tests.
d. Controls can change each year.
21. In general, a material weakness in internal Page 11 of 13
control may be defined as a condition in which
material AT-5910
errors or irregularities may occur and not be 26. The accountant's report expressing an
detected within a timely period by opinion on an entity's internal controls should
a. An independent auditor during tests of state that the
controls. a. Objectives of the client's internal controls are
b. Management when reviewing interim financial being met.
statements and reconciling account balances. b. Consideration of the internal controls was
c. Employees in the normal course of performing conducted in accordance with generally
their assigned functions. accepted
d. Outside consultants who issue a special- auditing standards.
purpose report on internal control structure. c. Establishment and maintenance of internal
22. Internal control procedures are not designed control is the responsibility of management.
to provide reasonable assurance that d. Inherent limitations of the client's internal
controls were examined.
27. The primary objective of procedures c. Observation of who applies a control
performed to obtain an understanding of internal procedure is useful as a test of control
control is to procedures when
provide an auditor with evaluating control effectiveness of both
a. Evidential matter to use in reducing detection computerized and manual system
risk. d. Ordinarily, making inquiries provides more
b. A basis from which to modify tests of controls. reliable audit evidence than doing observation
c. Knowledge necessary to plan the audit. when testing segregation of functional
d. Information necessary to prepare flowcharts. responsibilities.
PSA 400 – Risk Assessments and Internal 33. Tests of controls may include the following,
Control except:
28. Which of the following is not part of the a. Reperformance of internal control procedures
control environment? b. Inquiries about, and observation of, internal
a. Management philosophy and operating style. controls which leave no audit trail.
b. Organizational structure and methods of c. Inspection of documentary support for
assigning authority and responsibility. transactions evidencing authorization
c. Information and communication systems. d. Analytical procedures involving comparison of
d. The function of the board of directors and its operating expenses with budgeted amount.
committees. 34. Tests of controls are performed to obtain
29. When obtaining an understanding of the audit evidence about the effectiveness of the
accounting and internal control system the a. Operation of the internal controls at the time
auditor may the tests are being applied.
trace a few transactions through the accounting b. Operations of the internal controls in
system. This technique is: eliminating fraud and errors.
a. Reperformance test c. Walk-through test c. Design of the internal controls in eliminating
b. Test of transactions d. Validity test fraud and errors.
30. Which of the following least likely affects the d. Design of the accounting and internal controls
nature, timing, and extent of the procedures systems.
performed by the auditor to obtain an Page 12 of 13
understanding of the accounting and internal
control
AT-5910
35. The auditor should consider whether the
systems of an audit client?
assessment of control risk is confirmed
a. Materiality considerations
a. Upon completion of understanding of internal
b. The auditor’s assessment of inherent risk
control.
c. The level of acceptable detection risk
b. Upon completion of tests of controls
d. The size and complexity of the entity and of
c. Before the final audit program is completed.
its computer system
d. Upon the conclusion of the audit, based on
31. The evaluation of deviations that were
the results of substantive procedures and other
observed upon completing tests of controls
audit evidence obtained.
a. May require the need for doing more
PSA 402 – Audit Considerations Relating to
extensive understanding of control.
Entities Using Service Organizations
b. May require more extensive tests of controls.
36. Which of the following is least likely
c. Always requires documentation of the basis of
considered by the auditor in determining the
assessment of control risk.
significance of
d. May require modification of the nature, timing,
service organization activities to the client and
and extent of planned substantive procedures.
the relevance to the audit?
32. The following statements are true about
a. Terms of contract and relationship between
observation when used as tests of control
the client and the service organization.
procedures,
b. The material financial statement assertions
except.
that are affected by the use of the service
a. The auditor may supplement his observations
organization.
with other tests of control capable of providing
c. Client's internal controls that are applied to the
audit evidence.
transactions processed by the service
b. Audit evidence obtained by doing observation
organization.
pertains only to the point in time at which the
procedure was applied.
d. The control policies and procedures of the 39. Which of the following is the least concern of
client of requiring that all payments for goods the client auditor in reviewing the report of
and service
services be supported by receiving reports. organization auditor on suitability of internal
37. When the auditor considers that the service control design of the service organization?
organization activities are significant to the client a. The accuracy of description of the service
and organization's accounting and internal control
relevant to the audit and he concludes that it systems, ordinarily prepared by the
would be efficient to obtain audit evidence from management of the service organization.
tests b. The systems' controls have been placed in
of control to support an assessment of control operation.
risk at a lower level. Such evidence may be c. The accounting and internal control systems
obtained by, except are suitably designed to achieve their stated
a. Performing tests of the client's controls over objectives.
activities of the service organization. d. The type of documentation of the
b. Obtaining a service organization auditor's understanding of the service organization’s
report that expresses an opinion as to the control system.
operating 40. Which of the following is least likely entitled
effectiveness of the service organization's to the report of the service organization auditor
accounting and internal control systems for the on the
processing applications relevant to the audit. suitability of the design and operating
c. Visiting the service organization and effectiveness of the service organization?
performing tests of control. a. Service organization’s management c.
d. Review the service contract between the Client’s auditors
client and the service organization. b. Service organization’s customers d. Service
38. Which statement is incorrect regarding the organization’s stockholders
client auditor’s use of service organization Page 13 of 13
auditor’s
report?
a. When using a service organization auditor’s
report, the client auditor should consider the
nature of and content of that report.
b. The client auditor should consider the scope
of work performed by the service organization
auditor and should assess the usefulness and
appropriateness of reports issued by the service
organization auditor.
c. When a Type B report is to be used as
evidence to support a lower control risk
assessment, a
client auditor would consider whether the
controls tested by the service organization
auditor
are relevant to the client's transactions
(significant assertions in the client's financial
statements) and whether the service
organization auditor's tests of control and the
results are
adequate.
d. Since Type A reports may be useful to a client
auditor in gaining the required understanding of
the accounting and internal control systems, an
auditor may use such reports as a basis for
reducing the assessment of control risk.