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Question 1

The assessment of the risks of material misstatement at the financial statement level is affected by the auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily will lead the auditor to

a. Conduct some audit procedures at an interim date rather than at period end
b. Modify the nature of audit procedures to obtain more persuasive audit evidence
c. Decrease the number of locations to be included in the audit scope
d. Have more confidence in internal control and the reliability of audit evidence generated internally

Answer 1

b. Modify the nature of audit procedures to obtain more persuasive audit evidence

Question 2

What is the primary means of dealing with risk in planning decisions related to audit evidence?

a. Selection of more effective tests of details of balances
b. Application of the audit risk model
c. Establishing a lower preliminary judgment about materiality
d. Allocating materiality judgment to segments

Answer 2

b. Application of the audit risk model

Question 3

If an auditor establishes a relatively high level for materiality, then the auditor will

a. Accumulate approximately the same evidence as would be the case were materiality lower
b. Accumulate more evidence than if a lower level had been set
c. Accumulate less evidence than if a lower level had been set
d. Accumulate an undetermined amount of evidence

Answer 3

c. Accumulate less evidence than if a lower level had been set

Question 4

Which of the following best describes why an independent auditor reports on financial statements?

a. Independent auditors are likely to detect fraud
b. Misstated account balances are generally corrected by an independent audit
c. Conflict of interest may exist between management and the users of the statements
d. Ineffective internal controls may exist

Answer 4

c. Conflict of interest may exist between management and the users of the statements

Question 5

An audit in accordance with PSAs is performed on the premise that management and, where appropriate, those charged with governance have responsibilities that are fundamental to the conduct of the audit. Which of the following is not one of those responsibilities?

a. To provide the auditor with all information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements
b. To provide unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence
c. To comply with all relevant PSAs in the preparation and presentation of the entity’s financial statements
d. To design, implement, and maintain internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether caused by fraud or error

Answer 5

c. To comply with all relevant PSAs in the preparation and presentation of the entity’s financial
statements

Question 6

Users of financial statements demand independent audits because

a. Management relies on the auditor to improve the entity’s internal control
b. Management may not be objective in reporting
c. Users expect auditors to correct errors of management
d. Users want assurance that fraud does not exist

Answer 6

b. Management may not be objective in reporting

Question 7

Among the possible reasons why an auditor will discontinue servicing an audit client is

a. Too many errors have to be adjusted to make the financial statements conform with GAAPs
b. The auditor is also rendering at the same time, a management advisory engagement for the same client, and the audit was the engagement contracted first
c. The auditor has to use a specialist in verifying inventory valuation
d. A change in the client management and the auditor is worried about the reputation of the new management

Answer 7

d. A change in the client management and the auditor is worried about the reputation of the new
management

Question 8

A CPA was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by ABC Co. regarding its compliance with contractual requirements to pay royalties. The report on these agreed-upon procedures should contain a(an):

a. Disclaimer of opinion about the fair presentation of ABC’s financial statements
b. List of the procedures performed (or reference thereto) and the CPA’s findings
c. Opinion about the effectiveness of ABC’s internal control activities concerning royalty payments
d. Acknowledgement that the sufficiency of the procedures is solely CPA’s responsibility

Answer 8

b. List of the procedures performed (or reference thereto) and the CPA’s findings

Question 9

In which of the following order would the auditors perform the following steps?

a. Determine audit risk; assess control risk; determine detection risk; set materiality
b. Set materiality; determine audit risk; assess control risk; determine detection risk
c. Set materiality; assess control risk; determine detection risk; determine audit risk
d. Determine audit risk; set materiality; assess control risk; determine detection risk

Answer 9

b. Set materiality; determine audit risk; assess control risk; determine detection risk

Question 10

A CPA has been engaged to perform review services for a client. Identify which of the following is a correct statement

a. The CPA must perform the basic audit procedures necessary to determine that the statements are in conformity with the applicable financial reporting framework.
b. The financial statements are primarily representations of the CPA
c. The CPA may prepare the statements from the books but may not assist in adjusting and closing the books
d. The CPA is performing a limited assurance engagement

Answer 10

d. The CPA is performing a limited assurance engagement

Question 11

Which of the following statements concerning consulting services is false?

a. The performance of consulting services for audit clients does not, in and of itself, impair the auditor’s independence
b. Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of other parties
c. Consulting services ordinarily involves external reporting
d. Most CPAs, including those who provide audit and tax services, also provide consulting services to their clients

Answer 11

c. Consulting services ordinarily involves external reporting

Question 12

When accountants are not independent, which of the following reports can nevertheless be issued?

a. Compilation report
b. Standard audit report
c. Review report
d. Examination report on a forecast

Answer 12

a. Compilation report

Question 13

Which of the following statements best describes what is meant by setting control risk at 100%?

a. Controls are effective
b. Controls are relevant
c. Controls are ineffective
d. Cannot be determined from the information given

Answer 13

c. Controls are ineffective

Question 14

Which of the following is most likely to occur at the beginning of an initial audit engagement?

a. Prepare a rough draft of the financial statements and of the auditor’s report
b. Study and evaluate the client’s system of internal control
c. Determine the client’s reason for an audit
d. Testing of the financial statement balances

Answer 14

c. Determine the client’s reason for an audit

Question 15

Of the following statements about internal controls, which one is least likely to be correct?

a. No one person should be responsible for the custodial responsibility and the recording responsibility
for an asset
b. Transactions must be properly authorized before such transactions are processed
c. Because of the cost-benefit relationship, a client may apply controls only on selected processes
d. Control procedures reasonably ensure that collusion among employees cannot occur

Answer 15

d. Control procedures reasonably ensure that collusion among employees cannot occur

Question 16

In obtaining an understanding of internal control relevant to the audit, the auditor may trace several transactions through the system, including how the transactions interface with any service organizations whose services are part of the entity’s information system. The primary objective of this procedure is to

a. Determine the effectiveness of internal control
b. Detect fraud
c. Evaluate the design of internal control and determine whether it has been implemented
d. Replace substantive tests

Answer 16

c. Evaluate the design of internal control and determine whether it has been implemented

Question 17

An audit program is created to specify which of the following?

a. The type of audit opinion to be rendered based upon procedures performed
b. The audit procedures that will be performed every year for the client
c. How an auditor should think while performing audit procedures
d. Audit objectives and procedures to be followed during the audit process

Answer 17

d. Audit objectives and procedures to be followed during the audit process

Question 18

Which of the following statements about internal control is not correct?

a. The costs of the control should not exceed the benefits
b. The auditor’s acceptable level of detection risk is inversely related to the assessment of control risk
c. Stronger internal controls result in an increase in the number of required substantive audit procedures
d. Management is responsible for the maintenance of internal control

Answer 18

c. Stronger internal controls result in an increase in the number of required substantive audit
procedures

Question 19

After obtaining an understanding of an entity’s internal controls, an auditor may assess control risk at the maximum for some assertions because the auditor

a. Determines that internal control is not well-documented
b. Performs tests of controls to restrict detection of risk to an acceptable level
c. Believes internal control activities are unlikely to be effective
d. Identifies control activities that are likely to prevent material misstatements

Answer 19

c. Believes internal control activities are unlikely to be effective

Question 20

In connection with the study of internal control, an auditor encounters the following flowcharting symbols The auditor would conclude that

a. A document has been generated by a manual operation
b. A master file has been created by a computer operation
c. A document has been generated by a computer operation
d. A master file has been created by a manual operation

Answer 20

a. A document has been generated by a manual operation

Question 21

The sets the scope, timing and direction of the audit, and guides the development of the more
detailed _____.

a. Overall audit strategy; audit plan
b. Audit plan; overall audit strategy
c. Audit risk plan; substantive tests
d. Audit plan; risk assessment procedures

Answer 21

a. Overall audit strategy; audit plan

Question 22

Which of the following statements correctly describes the objective of an auditor in an audit of financial statements?

a. To prepare the financial statements in accordance with the applicable financial reporting framework
b. To obtain reasonable assurance whether the financial statements are free from misstatements, whether due to fraud or error, in accordance with the applicable financial reporting framework
c. To express an opinion on the fairness ofthe financial statements in accordance with the PSAs
d. To provide reasonable assurance as to whether the financial statements are fairly stated in all material respects in accordance with applicable financial reporting framework such as the PFRSs

Answer 22

d. To provide reasonable assurance as to whether the financial statements are fairly stated in all
material respects in accordance with applicable financial reporting framework such as the PFRSs

Question 23

Which of the following is a step in an auditor’s decision to assess control risk at below the maximum?

a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls
b. Perform tests of details of transactions and account balances to identify potential errors and irregularities
c. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements
d. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing

Answer 23

c. Identify specific internal control policies and procedures that are likely to detect or prevent material
misstatements

Question 24

This element of system of quality management requires a CPA firm to establish policies and procedures to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or the engagement partners issue reports that are appropriate in the circumstances

a. Ethical requirements
b. Monitoring and remediation
c. Engagement performance
d. Engagement resources

Answer 24

c. Engagement performance

Question 25

Which of the following is not an appropriate implication of this decision?

a. More evidence needs to be obtained
b. Less evidence needs to be obtained
c. Special care is required in selecting audit staff
d. Review of audit documentation is performed by personnel not assigned to the engagement

Answer 25

b. Less evidence needs to be obtained

Question 26

The internal auditor recognizes that certain limitations are inherent in any internal control system. Which one of the following scenarios is the result of an inherent limitation of internal control?

a. The firm sells to customers on account, without credit approval
b. An employee, who is unable to read, is assigned custody of the firm’s computer tape library and run manuals that are used during the third shift
c. The comptroller both makes and records cash deposits
d. A security guard allows one of the warehouse employees to remove company assets from the premises without authorization

Answer 26

d. A security guard allows one of the warehouse employees to remove company assets from the
premises without authorization

Question 27

Which statement is correct relating to a potential successor auditor’s responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?

a. The successor auditors have no responsibility to contact the predecessor auditors
b. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact
c. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts
d. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors

Answer 27

d. The successor auditors should obtain permission from the prospective client to contact the
predecessor auditors

Question 28

The accounts payable department usually has the responsibility for verifying the propriety of acquisitions by comparing the details on the

a. Vendor’s invoice and the purchase requisition
b. Purchase order, receiving report, and vendor’s invoice
c. Vendor’s invoice and the receiving report
d. Purchase requisition, purchase order and receiving report

Answer 28

b. Purchase order, receiving report, and vendor’s invoice

Question 29

The risk that the audit will fail to uncover a material misstatement is eliminated .

a. If client has good internal control
b. If client follows the Philippine Financial Reporting Standards (PFRS)
c. When the auditor has complied with Standards on Auditing
d. Under no circumstances

Answer 29

d. Under no circumstances

Question 30

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

a. The prospective client has fired its prior auditor
b. The prospective client is unwilling to make financial records available to the CPA
c. The CPA lacks a thorough understanding of the prospective client’s operations and industry
d. The CPA is unable to review the predecessor auditor’s working papers

Answer 30

b. The prospective client is unwilling to make financial records available to the CPA

Question 31

Reports on compilation engagements should contain the following, except

a. A statement that the engagement was performed in accordance with the PSA applicable to compilation
b. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements
c. A statement that management is responsible for the financial information compiled by the accountant
d. Identification of the financial information noting that it is based on information from the management

Answer 31

b. A statement that the accountant does not express an opinion but expresses only limited assurance
on the financial statements

Question 32

In the purchasing/disbursement cycle, of the order of activities listed, which is in the best order of a typical sequence of activities?

a. Ordering goods, receiving vendor’s invoice, receiving goods, payment activity
b. Selecting authorized vendor, receiving vendor’s invoice, receiving goods, payment activity
c. Ordering goods, receiving vendor’s invoice, selecting authorized vendor, payment activity
d. Ordering goods, receiving goods, receiving vendor’s invoice, cash pay

Answer 32

d. Ordering goods, receiving goods, receiving vendor’s invoice, cash pay

Question 33

Which of the following procedures regarding notes payable would an accountant most likely perform during a review engagement?

a. Confirming the year-end outstanding note payable balance with the lender
b. Examining records indicating proper authorization of the notes payable
c. Making inquiries of management regarding maturities, interest rate, and collateral
d. Documenting control procedures for payment calculations of the notes’ principal and interest

Answer 33

c. Making inquiries of management regarding maturities, interest rate, and collateral

Question 34

Which of the following constitutes the most significant risk within the purchasing cycle?

a. Large quantities of relatively inexpensive parts are stored in open areas near work stations to reduce production slow-downs
b. Poor records of transfers between warehouses often result in unnecessary purchases and excess inventories
c. Receiving department personnel sign receiving documents without inspecting or counting the goods
d. Warehouse personnel do not compare quantities received to quantities shown on transfer tickets

Answer 34

c. Receiving department personnel sign receiving documents without inspecting or counting the goods

Question 35

Which of the following is a correct relationship?

a. Audit risk and detection risk have an inverse relationship
b. Control risk and detection risk have a direct relationship
c. Detection risk and inherent risk have an inverse relationship
d. All of the above are correct relationships

Answer 35

c. Detection risk and inherent risk have an inverse relationship

Question 36

Which of the following procedures is a practitioner least likely to perform during a review engagement?

a. Comparing the financial statements with anticipated results in budgets and forecasts
b. Studying the relationships of financial statement elements expected to conform to predictable patterns
c. Inquiring of management about actions taken at the board of directors’ meetings
d. Observing the safeguards over access to and use of assets and records

Answer 36

d. Observing the safeguards over access to and use of assets and records

Question 37

An auditor should design the audit plan so that

a. All material transactions will be selected forsubstantive testing
b. Substantive tests prior to the balance sheet date will be minimized
c. The audit procedures selected will achieve specific audit objectives
d. Each account balance will be tested under either tests of controls or tests of transactions

Answer 37

c. The audit procedures selected will achieve specific audit objectives

Question 38

In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is

a. Greater for management fraud because managers are inherently more deceptive than employees
b. Greater for management fraud because of management’s ability to override existing internal controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the large number of employees in the organization

Answer 38

b. Greater for management fraud because of management’s ability to override existing internal controls

Question 39

The concept of reasonable assurance implies that an auditor

a. Does not guarantee the accuracy of the financial statements
b. Is not accountable for the fairness of the financial statements
c. Is solely responsible for providing an opinion on the financial statements
d. Is in charge of identifying every misstatement

Answer 39

a. Does not guarantee the accuracy of the financial statements

Question 40

An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

a. Observation and inspection of records
b. Confirmation and reperformance
c. Inquiry and inspection of records
d. Analytical procedures and reperformance

Answer 40

c. Inquiry and inspection of records

Question 41

The four major steps in conducting an audit are:
1. Testing internal controls
2. Audit report
3. Planning
4. Testing transactions and balances
The proper sequence in applying the above steps is:

a. 1, 4, 3, 2
b. 2, 3, 4, 1
c. 3, 4, 1, 2
d. 3, 1, 4, 2

Answer 41

d. 3, 1, 4, 2

Question 42

When engaged to compile the financial statements of an entity, an accountant is required to possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of the

a. Internal control awareness of the entity’s senior management
b. Risk factorsrelating to misstatements arising from illegal acts
c. Design of the entity’s internal controls implemented
d. Nature of the entity’s business transactions, the form of its accounting records and the accounting
policies used

Answer 42

d. Nature of the entity’s business transactions, the form of its accounting records and the accounting
policies used

Question 43

The following are the benefits claimed for the practice of determining materiality in the initial planning stage of starting an audit, except

a. Avoiding the problem of doing too little work (underauditing)
b. Avoiding the problem of doing more work than necessary (overauditing)
c. Being able to decide early what kind of audit opinion to express
d. Being able to fine tune the audit work for effectiveness and efficiency

Answer 43

c. Being able to decide early what kind of audit opinion to express

Question 44

The auditor’s judgment concerning the overall fairness of the presentation of financial position and results

of operations is applied within the framework of
a. Generally accepted auditing standards
b. Generally accepted accounting principles
c. Internal control
d. Information systems control

Answer 44

b. Generally accepted accounting principles

Question 45

An entity’s management is responsible for the preparation and fair presentation of the financial statements. Its responsibility includes the following, except

a. Designing, implementing, and maintaining internal control relevant to the preparation and presentation of financial statements
b. Making accounting estimates that are reasonable in the circumstances
c. Selecting and applying appropriate accounting policies
d. Assessing the risks of material misstatement of the financial statements

Answer 45

d. Assessing the risks of material misstatement of the financial statements

Question 46

An audit of financial statement is conducted to determine if the

a. Client’s internal control is functioning as intended
b. Organization is operating efficiently and effectively
c. Overall financial statements are stated in accordance with an applicable reporting framework
d. Auditee is following specific procedures or rules set down by some higher authority

Answer 46

c. Overall financial statements are stated in accordance with an applicable reporting framework

Question 47

The following are examples of error, except

a. A mistake in gathering or processing data from which financial statements are prepared
b. An incorrect accounting estimate arising from oversight or misinterpretation of facts
c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure
d. Misrepresentation in the financial statements of events, transactions or other significant information

Answer 47

d. Misrepresentation in the financial statements of events, transactions or other significant information

Question 48

After considering internal control, an auditor might decide to .

a. Increase the extent of tests of controls and substantive tests in areas where internal control is strong
b. Reduce the extent of tests of controls in areas where internal control is strong
c. Reduce the extent of both substantive tests and tests of controls in areas where internal control is strong
d. Increase the extent of substantive tests in areas where internal control is weak

Answer 48

d. Increase the extent of substantive tests in areas where internal control is weak

Question 49

The accounts payable department receives a purchase order form to accomplish all of the following except

a. Comparing invoice price to purchase order price
b. Comparing quantity ordered to quantity purchased
c. Ensuring that the goods had been received by the party requesting the goods
d. Ensuring that the purchase had been properly authorized

Answer 49

c. Ensuring that the goods had been received by the party requesting the goods

Question 50

Which one of these is not a type of evidence that would be used for both obtaining an understanding of the control structure and testing the controls?

a. Reperformance
b. Inquiries
c. Inspection
d. Observation

Answer 50

a. Reperformance

Question 51

Which of the following best describes the responsibility of the CPA in performing compilation services for a company?

a. The CPA must understand the client’s business and accounting methods, and read the financial statements for reasonableness
b. The CPA has only to satisfy himself or herself that the financial statements were prepared in conformity with PFRS
c. The CPA should obtain an understanding of internal control and perform tests of controls
d. The CPA is relieved of any responsibility to third parties

Answer 51

a. The CPA must understand the client’s business and accounting methods, and read the financial statements for reasonableness

Question 52

The most effective control for ensuring that customers are billed only for goods shipped is to

a. Require that carriers sign properly completed bills of lading
b. Implement a policy that prevents the mailing of sales invoices to customers in the absence of a properly approved shipping order and a bill of lading signed by the carrier
c. Require that all shipments be approved by accounting
d. Prohibit goods from leaving the warehouse without being accompanied by a signed bill of lading and a properly approved shipping order

Answer 52

b. Implement a policy that prevents the mailing of sales invoices to customers in the absence of a
properly approved shipping order and a bill of lading signed by the carrier

Question 53

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would .

a. Decrease detection risk
b. Decrease substantive testing
c. Increase inherent risk
d. Increase materiality level

Answer 53

a. Decrease detection risk

Question 54

What is the meaning of the principle that requires the auditor to be independent?

a. The auditors must be without bias with respect to the client under audit
b. The auditor must adopt a critical attitude during the audit
c. The auditor’s responsibility is to third parties
d. The auditors may have a direct ownership interest in their client’s business if it is not material

Answer 54

a. The auditors must be without bias with respect to the client under audit

Question 55

Which of the following statements correctly defines the term reasonable assurance?

a. A substantial level of assurance to allow an auditor to detect a material misstatement
b. A significant level of assurance to allow an auditor to detect a material misstatement
c. An absolute level of assurance to allow an auditor to detect a material misstatement
d. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

Answer 55

d. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

Question 56

Which of the following is not typically included in initial audit planning?

a. Client acceptance
b. Sending confirmation letters to customers
c. Obtain an understanding with the client
d. Determination of the purpose of the audit

Answer 56

b. Sending confirmation letters to customers

Question 57

When inherent risk is high, there will need to be
A lower assessment of audit risk More evidence accumulated by the auditor

a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer 57

c. No Yes

Question 58

Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of the audit engagement letter is to

a. Remind management that the primary responsibility for the financial statements rests with management
b. Satisfy the requirements of the auditor’s liability insurance policy
c. Provide a starting point for the auditor’s preparation of the audit program
d. Provide a written record of the agreement with the client as to the services to be provided

Answer 58

d. Provide a written record of the agreement with the client as to the services to be provided

Question 59

The auditor looks for an indication on duplicate sales invoices to see if the invoices have been verified. This is an example of

a. A test of details of balances
b. A test of control
c. A substantive test of transactions
d. Both a test of control and a substantive test of transactions

Answer 59

b. A test of control

Question 60

Which of the following statements is not true?

a. Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls
b. Control risk is inversely related to evidence
c. Inherent risk is inversely related to detection risk
d. None of the above

Answer 60

b. Control risk is inversely related to evidence

Question 61

Which of the following is an effective internal accounting control measure that encourages receiving department personnel to count and inspect all merchandise received?

a. Quantities ordered are excluded from the receiving department copy of the purchase order
b. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports
c. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order
d. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order

Answer 61

a. Quantities ordered are excluded from the receiving department copy of the purchase order

Question 62

Which of the following statements concerning materiality thresholds is incorrect?

a. Aggregate materiality thresholds are a function of the auditor’s preliminary judgments concerning audit risk
b. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors
c. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is referred to as a “materiality threshold”
d. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold

Answer 62

d. In general, the more misstatements the auditor expects, the higher should be the aggregate
materiality threshold

Question 63

A system of internal control, regardless of how carefully designed and implemented, contains certain inherent limitations. Which of the following errors or irregularities is not caused by an inherent limitation.

a. The president and chief executive officer, with the assistance of the corporate controller, inflated earnings by recording fictitious sales at year-end
b. A newly-installed electronic data processing system failed to provide for a comparison of sales order amount with prior customer balance and credit limit. This resulted in numerous sales to customers
who had already exceeded their credit limits
c. Numerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background
d. A computer programmer and a computer operator conspired to divert funds from the company to an account controlled by the dishonest employees

Answer 63

c. Numerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background

Question 64

According to PSA 520, “analytical procedures” means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts. These procedures are used for the following purposes, except

a. As substantive procedures when their use can be more effective or efficient than tests of details in reducing detection risk for specific financial statement assertions
b. To assist the auditor in planning the nature, timing and extent of other audit procedures
c. As tests of control to determine the effectiveness of the design and operation of the entity’s accounting and internal controls
d. As an overall review of the financial statements in the final review stage of the audit

Answer 64

c. As tests of control to determine the effectiveness of the design and operation of the entity’s
accounting and internal controls

Question 65

Which of the following statements correctly describes the objective of an auditor in an audit of financial statements?

a. To prepare the financial statements in accordance with the applicable financial reporting framework
b. To obtain reasonable assurance whether the financial statements are free from misstatements, whether due to fraud or error, in accordance with the applicable financial reporting framework
c. To express an opinion on the fairness ofthe financial statements in accordance with the PSA
d. To provide reasonable assurance whether the financial statements are fairly stated in all material respects in accordance with applicable financial reporting framework such as the PFRS

Answer 65

d. To provide reasonable assurance whether the financial statements are fairly stated in all material respects in accordance with applicable financial reporting framework such as the PFRS

Question 66

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

a. It is difficult to prepare financial statements that fairly present a company’s financial position, financial performance, and cash flows without the expertise of an independent auditor
b. It is the management’s responsibility to seek available independent aid in the appraisal of the financial
information shown in its financial statements
c. The opinion of an independent party is needed because a client may not be objective with respect to its own financial statements
d. It is a customary courtesy that all shareholders o

Answer 66

c. The opinion of an independent party is needed because a client may not be objective with respect to its own financial statements

Question 67

In performing an attestation engagement, a CPA typically

a. Supplies litigation support services
b. Assesses control risk at a low level
c. Expresses a conclusion on an assertion about some type of subject matter
d. Provides management consulting advice

Answer 67

c. Expresses a conclusion on an assertion about some type of subject matter

Question 68

Which of these comes first?

a. Set the desired level of audit risk
b. Establish the terms of the engagement
c. Establish the materiality level
d. Plan the audit

Answer 68

b. Establish the terms of the engagement

Question 69

Which of the following is least likely considered by the auditor in developing the overall audit plan?

a. Relevant risk and materiality
b. The involvement of other auditors in the audit of major component of financial statements
c. Understanding of the accounting and internal control systems
d. The general level of competence of audit assistants

Answer 69

c. Understanding of the accounting and internal control systems

Question 70

Which of the following statements regarding quality management policies and procedures is incorrect?

a. Quality management policies and procedures should be implemented at both the level of the audit firm and
on an individual audits
b. The audit firm should implement quality management policies and procedures designed to ensure that all
audits are conducted in accordance with PSAs or relevant standards or practices
c. Quality management policies are objectives and goals while quality management procedures are steps to be taken to accomplish the policies adopted
d. The policies and procedures adopted by individual audit firms should not vary since there is an applicable PSA that prescribes quality management policies and procedures that must be adopted by all auditing firms

Answer 70

d. The policies and procedures adopted by individual audit firms should not vary since there is an applicable PSA that prescribes quality management policies and procedures that must be adopted by all auditing firms

Question 71

Which of the following auditor concerns most likely would be so serious that the auditor would conclude that a financial statement audit cannot be performed?

a. The CPA lacks experience in the client’s operations and industry
b. A portion of supporting evidence stored at an offsite storage facility was destroyed by a typhoon
c. Management has imposed a restriction that the auditor believes will result in a qualified opinion
d. There is a substantial risk of management intentionally manipulating accounting records

Answer 71

d. There is a substantial risk of management intentionally manipulating accounting records

Question 72

To maximize independence, the audit team should report to the

a. Chief financial officer
b. Controller
c. Internal auditor
d. Audit committee

Answer 72

d. Audit committee

Question 73

The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?

a. Internal control is found to be weak with regard to shipping and billing
b. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of selected controls will result in a major reduction in substantive testing
c. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to three major customers
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a
large number of customers

Answer 73

b. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of selected controls will result in a major reduction in substantive testing

Question 74

An auditor is required to obtain a basic understanding of the client’s internal control to plan the audit. The auditor may then decide to perform tests of controls on all internal control procedures:

a. That would aid in preventing fraud
b. Documented in the flowchart
c. Considered to be weaknesses that might allow errors to enter the accounting system
d. Considered to be strengths for which the auditor desires further reduction in the assessed level of control risk

Answer 74

d. Considered to be strengths for which the auditor desires further reduction in the assessed level of control risk

Question 75

Which of the following best describes the purpose of the engagement letter?

a. The engagement letter relieves the auditor of some responsibility for the exercise of due care
b. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits
c. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between CPA and client regarding the precise nature of the work to be performed and the type of report to be issued
d. The engagement letter conveys to management the detailed steps to be applied in the audit process

Answer 75

c. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between CPA and client regarding the precise nature of the work to be performed and the type of report to be issued

Question 76

Which of the following is not a way in which auditors use the concept of overall materiality?

a. As a guide to planning the audit
b. As a guide to the evaluation of evidence
c. As a guide for making decisions about the type of opinion to be issued
d. As a guide for assessing control risk

Answer 76

d. As a guide for assessing control risk

Question 77

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

a. Disclosing lack of segregation of duties to the external auditors during the annual review
b. Replacing personnel every three or four years
c. Requiring accountants to pass a yearly background check
d. Allowing for greater management involvement and oversight of incompatible activities

Answer 77

d. Allowing for greater management involvement and oversight of incompatible activities

Question 78

When developing the overall strategy for the audit, the auditor will

a. Decide whether to accept a new client
b. Determine if any outside experts will be needed
c. Identify why the auditor needs an audit
d. Obtain an engagement letter

Answer 78

b. Determine if any outside experts will be needed

Question 79

Which of the following is not an example of analytical evidence?

a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis
b. Compared gross profit percentages by major product classes with the prior year
c. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets
d. Examined monthly performance reports and investigated significant variances from budgeted amounts

Answer 79

c. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets

Question 80

Which of the following least likely identifies an inherent limitation to internal control?

a. Breakdowns in internal control because of employee mistakes
b. Collusion involving two or more employees
c. Cost-benefit criterion
d. An override of internal controls by a low-level employee

Answer 80

d. An override of internal controls by a low-level employee