Simulated Preboards (All Topics)

Question 1

Financial statement users often receive unreliable financial information from companies for the following reasons, except:

a. Complex business transactions
b. Large amounts of data
c. Lack of firsthand knowledge about the business
d. None of the choices are exceptions.

Answer 1

d.

Question 2

The primary goal of the CPA in the attest function is to:

a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client’s assertions are fairly stated
d. Assure the consistent application of correct accounting procedures

Answer 2

c.

Question 3

The market for auditing services is driven by:

a. Regulatory authority of the SEC
b. Demand by external users
c. Pronouncements issued by the AASC
d. Congress

Answer 3

b.

Question 4

S1: Operational audits and compliance audits are similar
S2: Financial statement audits and compliance audits are similar

a. S1 - False; S2 - True
b. S1 - True; S2 - False
c. Both S1 and S2 are False
d. Both S1 & S2 are True

Answer 4

a.

Question 5

For a new audit client, knowledge and understanding about the former’s business and industry and operations are obtained:

a. from permanent file
b. from SEC
c. at the client’s premises
d. From the predecessor auditor

Answer 5

c.

Question 6

True or false: a predecessor auditor is required to attempt to initiate communication with the successor auditor prior and subsequent to the acceptance of the successor auditor’s engagement.

Answer 6

False.

Question 7

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

a. Withdraw from the engagement
b. Engage experts familiar with the nature of the business entity
c. Obtain a knowledge of matters that relate to the nature of the entity’s business
d. Inform management that an unqualified opinion cannot be issued

Answer 7

c.

Question 8

The audit engagement letter’s purpose is to _________________

Answer 8

Define the nature of engagement to avoid and resolve misunderstandings between the CPA and the client

Question 9

Which situation would most likely require special audit planning by the auditors?

a. Some items of factory and office equipment do not bear identification numbers

b. Depreciation methods used on the client’s tax return differ from those used on the books

c. Assets costing less than P5,000 are expensed even though expected life exceeds one year

d. Inventory is composed of precious stones and ores

Answer 9

d.

Question 10

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:

a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording

Answer 10

b.

Question 11

As the acceptable level of detection risk decreases, the assurance directly provided from _________ should ___________

a. Substantive; decrease
b. Test of controls; decrease
c. Substantive; increase
d. Test of controls; increase

Answer 11

c.

If detection risk increases, chances are controls are not effective to detect any misstatements. Therefore, tests of controls will be ineffective. Rather, substantive tests should be increased.

Question 12

An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing, and extent of:

a. Attribute tests
b. Compliance tests
c. Tests of controls
d. Substantive tests

Answer 12

d.

Question 13

The auditor determines that there are misstatements that remain uncorrected by the client. The materiality of these misstatements will determine the choice of the proper opinion, which could be either:

a. Adverse or Disclaimer of Opinion
b. Adverse or Qualified
c. Qualified or Disclaimer of Opinion
d. Unqualified or Qualified

Answer 13

b.

Question 14

An expert may be required in the following scenarios. Choose the exception.

a. Determination of amounts using specialized techniques
b. Application of accounting methods in computing inventory balances
c. Legal opinions concerning interpretation of engagements, statutes, and regulation
d. Validations of certain types of assets like land and building

Answer 14

b.

Question 15

Which of the following documentation is required for an audit in accordance with the standards on auditing?

a. Internal control questionnaire
b. Client engagement letter
c. Planning memorandum or checklist
d. Client representation letter

Answer 15

d.

Question 16

The auditor’s opinion on the financial statements of his clients should be dated as of the date of:

a. Submission of the report to the client
b. Completion of all important audit procedures
c. Closing of the client’s books
d. Close of the period under audit

Answer 16

b.

Question 17

The objective of understanding that internal control structure and assessing control risk in an EDP system is:

a. Aid in determining the audit evidence that should be accumulated
b. Gain an understanding of the computer hardware and software
c. Evaluate management’s efficiency in designing and using the EDP system
d. Determine if the CPA firm must have an EDP auditor on the team

Answer 17

a.

Question 18

Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client?

a. Client’s probability of achieving an unmodified opinion
b. Client’s financial ability to pay the audit fees
c. Client’s relations with its previous CPA firm
d. Client’s standing in the business community

Answer 18

a.

Question 19

The objective and scope of the audit and the extent of the auditor’s procedures to the client are best documented in a/an:

a. Management letter
b. Audit engagement letter
c. Independent auditor’s letter
d. Letter of authority

Answer 19

b.

Question 20

Detection risk represents (in a financial statement audit):

a. Risk that auditor fails to modify materially misstated FS
b. Risk that error could occur and not be prevented or detected by the internal control structure of the client
c. Risk that error could occur and not be detected by auditor’s procedures
d. Choices b & c

Answer 20

c.

Question 21

The process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.

a. Inherent risk process
b. Business risk management
c. Detection risk
d. Risk assessment process

Answer 21

d.

Question 22

An example of a financial statement fraud involves client employees ______________

a. Making mistakes in gathering or processing accounting data
b. With consent of management, alter accounting records from which FS is prepared.
c. Make mistakes in application of accounting principles
d. Intentionally overlooks or misinterprets facts, causing accounting estimates to be incorrect, allowing them to embezzle assets.

Answer 22

b.

Question 23

An audit report should be dated no earlier than:

a. Date report is delivered to the audited entity
b. Date auditee has obtained sufficient, appropriate audit evidence
c. Date of the last day of field work
d. None of the choices.

Answer 23

c.

Question 24

One of the causes of sampling error is:

a. Use of inappropriate or ineffective audit procedures
b. Failure to draw a representative sample
c. Fatigue and lack of attention to detail
d. Use of attributes sampling rather than variables sampling

Answer 24

b.

Question 25

Which of the following best illustrates the concept of non-sampling risk?

a. Auditor misapplied auditing procedures due to fatigue
b. Auditor used attributes sampling rather than variables sampling
c. Documents related to chosen sample may not be available for inspection
d. None of the choices

Answer 25

a.

Question 26

The likelihood of assessing control risk too low is the risk that the sample selected to test controls ________ auditor’s planned assessed level of control risk when the true operating effectiveness ________ such assessment

a. Supports; does not justify
b. Supports; justify
c. Does not support; does not justify
d. Does not support; justify

Answer 26

a.

Question 27

If a lawyer refuses to furnish corroborating information regarding litigations, claims, and assessments, despite the acceptance of management for its disclosure, what should the auditor do?

a. Withdraw from the engagement
b. Disclose this fact in the notes to FS
c. Seek to obtain corroborating information from management
d. Include in the emphasis of the matter paragraph of the audit report

Answer 27

d.

Question 28

Which of the following procedures should an auditor most likely perform regarding subsequent events?

a. Compare FS being reported with those of prior period

b. Investigate changes in accounting department

c. confirming a sample of material accounts receivable established after date of FS

d. Inquiring as to whether any adjustments were made after date of FS

Answer 28

d.

Question 29

When obtaining evidence regarding legal cases against a client, the External Auditor would be least interested in determining

a. Period in which underlying causes of litigation occurred

b. Estimate of when the matter will be resolved

c. Estimate of potential loss

d. Likelihood of losing the case

Answer 29

b.

Question 30

Emma, CPA, believes there is substantial doubt about the ability of Ena Co. to continue as a going concern for a reasonable period. In evaluating Ena Co.’s plans for dealing with the adverse effects of future conditions and events, Emma most likely would consider, as a mitigating factor Ena Co.’s should plan to:

a. Accumulate treasury shares at prices favorable to the entity’s historic price range

b. Postpone or cancel R&D projects related to future products

c. Purchase additional items of PPE currently being leased

d. Negotiate increases in dividends being paid on preference shares

Answer 30

b.

Question 31

Objectivity pertains to a practitioner’s ability to:

a. Identify independence with client
b. Be unyielding in all disputes
c. Remain impartial
d. None of the choices

Answer 31

c.

Question 32

Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives concerning:

a. Compliance with laws and regulations
b. Reliability of financial reporting
c. Effectiveness and efficiency of operations
d. Complete detection of fraud and error

Answer 32

d.

Question 33

Independence of the internal audit activity is achieved through:

a. Organizational status and objectivity
b. Human relations and communications
c. Staffing and supervision
d. Continuing professional development and due professional care

Answer 33

a.

Question 34

The best strategy for limiting production delays caused by equipment breakdown and repair is to:

a. Schedule production based on capacity planning
b. Establish a preventive maintenance program for all production equipment
c. Pre-authorize equipment maintenance and overtime pay
d. Choices a and b

Answer 34

b.

Question 35

In publicly held companies, management often requires the internal audit activity’s involvement with quarterly financial statements that are made public and used internally. Which of the following is generally not a reason for such involvement?

a. Management may be concerned about its reputation in the financial markets

b. Management may be concerned about potential penalties that could occur if quarterly FS are misstated

c. Standards state that internal auditors should be involved with reviewing quarterly FS

d. Management may perceive that having quarterly financial information examined by the internal auditors enhances its value for internal decision making

Answer 35

c.

Question 36

Which of the following steps would not be included in a program of selecting and developing human resources for an internal audit department?

a. Schedule periodic meetings with internal auditors
b. Establish internal review team to assess auditors’ and audit department’s compliance with standards, level of audit effectiveness, and compliance with departmental policy
c. Developing specific job positions for audit staff, audit managers, and other similar positions
d. Establishing in-house training programs and requiring continuing education for audit staff

Answer 36

b.

Question 37

Which of the following would most likely to be an appropriate addressee for an audit report?

a. Shareholders of XYZ Corporation, the company whose FS were audited
b. Yuri, a third party who requested that a copy of the audited FS be sent to him
c. Ben, the President of YZA Corp, whose FS were audited
d. Choices a and c

Answer 37

a.

Question 38

The first section of the auditor’s report shall have the heading:

a. Opinion
b. Basis for Opinion
c. Key Audit Matters
d. Auditor’s Responsibilities for the Audit of Financial Statements

Answer 38

a.

Question 39

Communication of Key Audit Matters in the auditor’s report is required whenever the auditor:

a. Issues a disclaimer of opinion
b. Expresses a qualified report
c. Audits FS of listed entities
d. Choices b and c

Answer 39

c.

Question 40

Key audit matters for audits of non-listed entities are:

a. Discouraged
b. Not required
c. Required
d. Not allowed

Answer 40

b.

Question 41

Which of the following is least likely to be considered as a “key audit matter” in an unmodified audit report?

a. Company is part of a larger enterprise
b. Unusually important significant event
c. Decision not to confirm receivables
d. Risk or uncertainty

Answer 41

c.

Question 42

What phrase should the auditor use when issuing a qualified report?

a. “Subject to”
b. “Except for”
c. Choices a or b
d. Choices a and b
e. None of the choices

Answer 42

b.

Question 43

A scope limitation will always result when, during an auditor’s examination, management:

a. engages auditor after year-end physical inventory count is completed

b. fails to correct a material internal control weakness that had been identified during the prior year’s audit

c. refuses to furnish a management representation letter to the auditor

d. Prevents auditor from reviewing working papers of the predecessor auditor

Answer 43

c.

Choice a is normal. Nothing wrong here.

Choice b is not a scope limitation, but it is a disagreement, which can lead to either a qualified or adverse opinion, depending on its impact on FS.

Choice c is a scope limitation, which can result to either a qualified or disclaimer of opinion, depending on impact on FS.

Under choice d, you can conclude management is irresponsible. This act by management was done before accepting the engagement, and auditor can withdraw due to lack of integrity by management.