AUDITOR’S PROFESSIONAL AND LEGAL RESPONSIBILITIES AND QUALITY ON AUDIT

Question 1

Which of the following statements best describes why the CPA profession has deemed it essential to promulgate ethical standards and to establish means for ensuring their observance?
a. A requirement for a profession is the establishment of ethical standards that stress primarily a responsibility to clients and colleagues
b. A requirement of most state laws calls for the profession to establish a code of ethics
c. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession
d. A distinguishing mark of a profession is its acceptance of responsibility to the public

Question 2

A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
a. A system of peer review
b. Continuing professional education
c. A system of quality control
d. Compliance with generally accepted reporting standards

Question 3

The objective of quality control mandates that a public accounting firm should establish policies and procedures for professional development which provide reasonable assurance that all entry-level personnel
a. Prepare working papers which are standardized in form and content
b. Have the knowledge required to enable them to fulfill responsibilities assigned
c. Will advance within the organization
d. Develop specialties in specific areas of accounting

Question 4

The Philippine Standards on Quality Control (PSQCs) are to be applied to
a. Assurance engagements only
b. Review Assurance engagements only
c. Compilation and review engagements only
d. All services that fall under the AASC’s engagement standards

Question 5

Who should take responsibility for the overall quality on each audit engagement?
a. Engagement quality control reviewer c. Engagement team
b. Engagement partner d. CPA firm

Question 6

For audits of financial statements of listed entities, the partner should
a. Determine that an engagement quality control reviewer has been appointed
b. Discuss significant matters arising during the audit engagement, including those identified during the engagement quality control review, with the engagement quality control reviewer
c. Not issue the auditor’s report until the completion of the engagement quality control review
d. All of the above

Question 7

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients
c. Minimize the likelihood of association with clients whose management lacks integrity
d. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed

Question 8

The firm should establish policies and procedures designed to promote an internal culture based on the recognition that quality is essential in performing engagements. Such policies and procedures should require the firm’s chief executive officer or, if appropriate, the firm’s managing board of partners, to assume ultimate responsibility for the firm’s system of quality control
a. Ethical requirements
b. Monitoring
c. Human resources
d. Leadership responsibilities for quality within the firm

Question 9

In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control objective would this be most likely to satisfy?
a. Acceptance and continuance of clients and engagements c. Personnel management
b. Engagement performance d. Relevant ethical requirements

Question 10

Which element of quality control is addressed by the establishment of policies and procedures designed to provide the firm with reasonable assurance that it has sufficient personnel with the competence, capabilities and commitment to ethical principles?
a. Monitoring c. Human resources
b. Leadership responsibilities for quality within the firm d. Engagement performance

Question 11

This quality control element 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 c. Monitoring
b. Engagement performance d. Human resources

Question 12

A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element?
a. Engagement performance c. Leadership responsibilities for
quality with the firm
b. Human resources d. Monitoring

Question 13

In compliance with the element of human resources, the firm should address issues relating to
a. Engagement performance c. Consultation
b. Assignment of engagement teams d. Differences of opinion

Question 14

Which of the following quality control policies and procedures does not relate to human resources and assignment?
a. Emphasize independence of mental attitude in training programs and in supervision and review of the audits
b. Monitor the effectiveness of recruiting programs
c. Identify criteria which will be considered in evaluating individual performance and expected proficiency
d. Identify on a timely basis the staffing requirements of specific audits

Question 15

In connection with the element of assignment, a CPA firm’s system of quality control should ordinarily establish procedures that
a. Provide adequate supervision at all levels, considering the training, ability and experience of the personnel assigned
b. Encourage personnel to use authoritative sources on complex or unusual matter
c. Require preparation of time budgets for audits to determine manpower requirements and to schedule the audit work
d. Establish qualifications deemed necessary for various levels of responsibility within the firm

Question 16

In connection with the element of engagement performance, a CPA firm’s quality control should ordinarily provide that all personnel
a. Have the knowledge required to enable them to fulfill responsibilities assigned
b. Review and test compliance with the firm’s quality control policies and procedures
c. Seek assistance from persons having appropriate levels of knowledge, judgment and authority
d. Appropriately maintain independence when providing assurance services

Question 17

For audits of financial statements of listed entities, the engagement partner should not issue the auditor’s report until the completion of the
a. Engagement Quality Control Review c. Engagement Team Review
b. Management Review d. Engagement Partner Review

Question 18

An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should
a. Withdraw and consider whether there is any obligation to report to other parties the circumstances necessitating the withdrawal
b. Issue a report that includes reference to the original engagement and any procedures that may have been performed in the original engagement
c. Not agree to a change of engagement where there is no reasonable justification for doing so
d. Consider the change reasonable if it relates to information that is correct, incomplete or otherwise unsatisfactory

Question 19

Which of the following quality control objectives would be least important to the auditor?
a. Engagement performance c. Determination of audit fee
b. Human resources d. Independence

Question 20

As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards Board
b. Generally Accepted Auditing Standards
c. Interpretations of the Statements on Auditing Standards
d. Statements on Quality Control Standards

Question 21

A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability
b. Comply with the generally accepted standards of field work
c. Become independent in fact
d. Maintain public confidence in the profession

Question 22

Which of the following best describes a portion of the auditors’ responsibility regarding illegal acts by clients?
a. The auditors have a responsibility to discover all material illegal acts
b. If audit procedures reveal illegal acts, the auditors should take appropriate actions
c. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the company
d. The auditors’ responsibility for the detection of all illegal acts is the same as their responsibility regarding material misstatements due to errors and fraud

Question 23

The auditors who find that the client has committed an illegal act would be most likely to withdraw from the engagement when the
a. Management fails to take appropriate corrective action
b. Illegal act has material financial statement implications
c. Illegal act has received widespread publicity
d. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements

Question 24

If an illegal act is discovered during the audit of a publicly held company, the auditors should first
a. Notify the regulatory authorities
b. Determine who was responsible for the illegal act
c. Intensify the examination to identify all illegal acts
d. Report the act to high level personnel within the client’s organization and to the audit committee

Question 25

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

Question 26

The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding fraud?
a. Auditors make legal determinations of whether fraud has actually occurred
b. Misstatement of the financial statements may not be the objective of some frauds
c. Fraud involving one or more members of management or those charged with governance is referred to as “employee fraud”
d. Fraud involving only employees of the entity is referred to as “management fraud”

Question 27

The types of intentional misstatements that are relevant to the auditor’s consideration of fraud include
I. Misstatements resulting from fraudulent financial reporting
II. Misstatements resulting from misappropriation of assets
a. I and II c. II only
b. I only d. Neither I nor II

Question 28

Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involve
a. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which the financial statements are prepared
b. Misrepresentation in, or intentional omission from, the financial statements of events, transactions or other significant information
c. Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or disclosure
d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received

Question 29

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence
c. Fraud is always a result of connivance between or among employees
d. The auditor is responsible to detect errors but not fraud

Question 30

Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high
b. Factors whose presence often has been observed in circumstances where frauds have occurred
c. Factors whose presence requires modifications of planned audit procedures
d. Reportable conditions identified during an audit

Question 31

Fraud risk factors relating to management’s characteristics and influence over the control environment
a. Pertain to management’s abilities, pressures, style, and attitude relating to internal control and the financial reporting process
b. Involve the economic and regulatory environment in which the entity operates
c. Pertain to the nature and complexity of the entity and its transactions, the entity’s financial condition, and its profitability
d. Involve the lack of controls designed to prevent or detect misappropriation of assets

Question 32

Which of the following is least likely a category of fraud risk factors that relate to misstatements resulting from fraudulent financial reporting?
a. Management’s characteristics and influence over the control environment
b. Industry conditions
c. Operating characteristics and financial stability
d. Susceptibility of assets to misappropriation

Question 33

Which of the following circumstances most likely indicate the possibility of fraud or error?
a. Management engages in frank communication with appropriate third parties, such as regulators and bankers
b. Evidence of an unduly lavish lifestyle by officers or employees
c. Conservative application of accounting principles
d. Minimal differences from expectations disclosed by analytical procedures

Question 34

If the auditor believes an indicated fraud or error could have a material effect on the financial statements, the nature, timing and extent of the procedures to be performed depends on the auditor’s judgment as to
a. The type of fraud or error
b. The likelihood that a particular type of fraud or error could have a material effect on the financial statements
c. The likelihood of their occurrence
d. All of the above

Question 35

If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take?
a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected illegal acts will be communicated to stockholders
b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on the financial statements
c. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements
d. Notify each member of the audit committee of the board of directors about the nature of the acts and request that they advise an approach to be taken by the auditor

Question 36

When the auditor becomes aware of information concerning a possible noncompliance to laws or regulations, the auditor should appropriately
a. Obtain an understanding of the nature of the act and the circumstances in which it has occurred, and evaluate the possible effect on the financial statements
b. Discuss his suspicion with the management
c. Ask management to determine whether a violation is really committed
d. Consult with the entity’s legal counsel as to what appropriate action the auditor should do

Question 37

Which of the following circumstances regarding the entity’s noncompliance to laws or regulations may cause the auditor to resign from an engagement?
a. The auditor is unable to determine whether noncompliance has occurred
b. If the auditor concludes that the noncompliance has a material effect on the financial statements and has not been properly reflected in the financial statements
c. When the entity does not take remedial action that he considers necessary in the circumstances even when the noncompliance is not material to financial statements
d. When the disclosure of the effect of noncompliance to legal authority is necessary