Auditing Theory Review Questions, Quizzes of Auditing

Download Auditing Theory Review Questions and more Quizzes Auditing in PDF only on Docsity! AUDITING THEORY ASSURANCE SERVICES 1. Which of the following statements best describes assurance services? A. Independent professional services that are intended to enhance the credibility of information to meet the needs of an intended user. B. Services designed to express an opinion on the fairness of historical financial statements based on the results of an audit. C. The preparation of financial statements or the collection, classification, and summarization of other financial information. D. Services designed for the improvement of operations, resulting in better outcomes. Which of the following is not an assurance service? A. Examination of prospective financial information B. Audit of historical financial statements C. Review of financial statements D. Compilation of financial information Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter of an assurance engagement. Which of the following statements conceming the characteristics of suitable criteria is correct? A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations. B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. C. Neutral criteria contribute to conclusions that are free from bias. D. Criteria are sufficiently complete when they contribute to conclusions that are clear, comprehensive, and not subject to different interpretations. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against criteria is called A. Subject matter information B. Subject matter C. Assurance D. Conclusion In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to intended users. These engagements are called A. Direct reporting engagements B. Assertion-based engagements C. Non-assurance engagements D. Recurring engagements What type of assurance engagement is involved when the practitioner expresses a positive form of conclusion? A. Limited assurance engagement B. Positive assurance engagement C. Reasonable assurance engagement D. Absolute assurance engagement What type of assurance engagement is involved when the practitioner expresses a negative form of conclusion? A. Reasonable assurance engagement B. Negative assurance engagement C. Assertion-based assurance engagement D. Limited assurance engagement Which of the following statements is true concerning evidence in an assurance engagement? A. Sufficiency is the measure of the quantity of evidence. Page 1 of 37 AUDITING THEORY 9. 10. 11. 12. B. Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness. C. The reliability of evidence is influenced not by its nature but by its source. D. Obtaining more evidence may compensate for its poor quality. Assurance engagement risk is the risk A. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. B. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated. C. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on. D. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not materially misstated. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of the following factors, except A. The use of selective testing. B. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive. C. The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence. D. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence. The Philippine Framework for Assurance Engagements A. Contains basic principles, essential procedures, and related guidance for the performance of assurance engagements. B. Defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs, and PSAEs apply. C. Provides a frame of reference for CPAs in public practice when performing audits, reviews, and compilations of historical financial information. D. Establishes standards and provides procedural requirements for the performance of assurance engagements. After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a non-assurance engagement, or from a reasonable assurance engagement to a limited assurance engagement, except when there is reasonable justification for the change. Which of the following ordinarily will justify a request for a change in the engagement? |. A change in circumstances that affects the intended users’ requirements. ll. A misunderstanding concerning the nature of the engagement. A. | only C. Both | and II B. Il only D. Neither | nor II AUDITING AND RELATED SERVICES 13. 14. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February 2008, applies to A. Reviews of any historical financial information of an audit client. B. Reviews of any historical financial information by a practitioner other than the entity's auditor. C. Reviews of historical financial or other information by a practitioner other than the entity's auditor. D. Reviews of historical financial or other information of an audit client. When performing a compilation engagement, the accountant is required to Assess internal controls. Make inquiries of management to assess the reliability and completeness of the information provided. Verify matters and explanations. Obtain a general knowledge of the business and operations of the entity. Page 2 of 37 pO m@> AUDITING THEORY 30. 31. 32. 33. 34. D. Accept the engagement and perform it in accordance with Philippine Standards on Auditing (PSAs). An objective of a performance audit is to determine whether an entity's Operational information is in accordance with government auditing standards. Specific operating units are functioning economically and efficiently. Financial statements present fairly the results of operations. Internal control is adequately operating as designed. vom, Internal auditors should review the means of physically safeguarding assets from losses arising from A. Exposure to the elements. B. Underusage of physical facilities. C. Misapplication of accounting principles. D. Procedures that are not cost justified. The internal auditing department's responsibility for deterring fraud is to A. Establish an effective internal control system. B. Maintain internal control. C. Examine and evaluate the system of internal control. D. Exercise operating authority over fraud prevention activities. Internal auditors review the adequacy of the company's internal control system primarily to A. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives. B. Determine whether the internal control system provides reasonable assurance that the company's objectives and goals are met efficiently and economically. C. Ensure that material weaknesses in the system of internal control are corrected. D. Determine whether the internal control system ensures that financial statements are fairly presented. Which of the following services, if any, may a practitioner who is not independent provide? A. Compilations but not reviews. B. Reviews but not compilations. C. Reviews but not financial statement audits. D. Agreed-upon procedures but not compilations. THE ACCOUNTANCY PROFESSION 35. 36. 37. The members of the Professional Regulatory Board of Accountancy shall be appointed by the A. Philippine Institute of CPAs (PICPA). B. Professional Regulation Commission (PRC). C. President of the Philippines. D. Association of CPAs in Public Practice (ACPAPP). The following statements relate to the submission of nominations to the Board of Accountancy. Which is correct? A. The Accredited National Professional Organization of CPAs (APO) shall submit its nominations to the president of the Philippines not later than sixty (60) days prior to the expiry of the term of an incumbent chairman or member. B. The APO shall submit its nominations to the PRC not later than thirty (30) days prior to the expiry of the term of an incumbent chairman or member. C. If the APO fails to submit its own nominee(s) to the PRC within the required period, the PRC in consultation with the Board of Accountancy shall submit to the president of the Philippines a list of five (5) nominees for each position. D. There should be adequate documentation to show the qualifications and primary field of professional activity of each nominee. The following statements relate to the term of office of the chairman and members of the Board of Accountancy (BOA). Which is false? A. The chairman and members of the BOA shall hold office for a term of three (3) years. Page 5 of 37 AUDITING THEORY 38. 39. 40. 41. 42. 43. 44. B. Any vacancy occurring within the term of a member shall be filled up for the unexpired portion of the term only. C. No person who has served two successive complete terms as chairman or member shall be eligible for reappointment until the lapse of two (2) years. D. Appointment to fill up an unexpired term is not to be considered as a complete term. The Board of Accountancy has the power to conduct an oversight into the quality of audits of financial statements through a review of the quality control measures instituted by auditors in order to ensure compliance with the accounting and auditing standards and practices. This power of the BOA is called A. Quality assurance review C. Appraisal B. Peer review D. Quality control The Board of Accountancy shall submit to the PRC the ratings obtained by each candidate within days after the examination, unless extended for just cause. A. 10 Cc. 2 B. 5 D. 3 Which of the following shall be issued to examinees who pass the CPA licensure examination? A. Certificate of registration and death certificate. B. Professional identification card and warrant of arrest. C. Certificate of registration and professional identification card. D. Warrant of arrest and death certificate. Which of the following statements concerning the issuance of Certificates of Registration and Professional Identification Cards to successful examinees is correct? A. The Certificate of Registration issued to successful examinees is renewable every three (3) years. B. The Professional Identification Card issued to successful examinees shall remain in full force and effect until withdrawn, suspended or revoked in accordance with RA 9298. C. The BOA shall not register and issue a Certificate of Registration and Professional Identification Card to any successful examinee of unsound mind. D. The BOA may, after the expiration of three (3) years from the date of revocation of a Certificate of Registration, reinstate the validity of a revoked Certificate of Registration. Which of the following statements concerning ownership of working papers is incorrect? A. All working papers made by a CPA and his/her staff in the course of an examination remain the property of such CPA in the absence of a written agreement between the CPA and the client to the contrary. B. Working papers include schedules and memoranda prepared and submitted by the client of the CPA. C. Working papers include reports submitted by a CPA to hisher client. D. Working papers shall be treated confidential and privileged unless such documents are required to be produced through subpoena issued by any court, tribunal, or government regulatory or administrative body. Any person who shall violate any of the provisions of the Accountancy Act or any of its implementing rules and regulations promulgated by the Board of Accountancy subject to the approval of the PRC, shall, upon conviction, be punished by A fine of not more than P50,000. 3 Imprisonment for a period not exceeding two years. C. A fine of not less than P50,000 or by imprisonment for a period not exceeding two years or both. D. Lethal injection. Which of the following statements concerning the use of firm or partnership name is incorrect? A. Inthe case of an individual CPA, he/she shall do business under his/her registered name with the BOA and the PRC and as printed in his/her CPA certificate (for example, Juan Puruntong, CPA). B. In the case of a firm, it shall do business under its duly registered and authorized firm name appearing in the registration documents issued by the Department of Trade and Page 6 of 37 AUDITING THEORY 45. 46. 47. 48. 49. 50. Industry (DTI) and other government offices and such firm name shall include the real name of the sole proprietor as printed in his/her CPA certificate (for example, Arnulfo Gumamela and Associates). C. In the case of a registered partnership, it shall do business under its name as indicated in its current Articles of Partnership and Certificate of Registration issued by the Securities and Exchange Commission (SEC) (for example, Tanya, Sam, and Jervi, CPAs). D. ACPA shall practice only under an individual, firm, or partnership name in accordance with Philippine laws and shall not include any fictitious name but may indicate specialization. A partner surviving the death or withdrawal of all the other partners in a partnership may continue to practice under the partnership name for a period of not more than years after becoming a sole proprietor. A. 1 Cc. 3 B. 2 D. 4 The death or disability of an individual CPA and/or the dissolution and liquidation of a firm or partnership of CPAs shall be reported to the BOA not later than days from the date of such death, dissolution or liquidation. A. 15 Cc. 60 B. 30 D. 90 The following statements relate to CPE credit units. Which is incorrect? A. The total CPE credit units for registered accounting professionals shall be sixty (60) credit units for three (3) years, provided that a minimum of fifteen (15) credit units shall be earned in each year. B. Any excess credit units in one year may be carried over to the succeeding years within the three-year period. C. Excess credit units earned may be carried over to the next three-year period including credit units earned for doctoral and master's degrees. D. One credit hour of CPE program, activity or source shall be equivalent to one (1) credit unit. Which of the following statements concerning a CPA's disclosure of confidential client information is ordinarily correct? A. Disclosure may be made to any party on consent of the client. B. Disclosure should not be made even if such disclosure will protect the CPA's professional interests in legal proceedings. C. Disclosure should be made only if there is a legal or professional duty to make the disclosure. D. Disclosure may be made to any government agency without subpoena. Listed below are names of four CPA firms and pertinent facts relative to each firm. Unless otherwise indicated, the individuals named are CPAs and partners, and there are no other partners. Which is a violation of the Implementing Rules and Regulations of RA 9298? A. Tin, Ton and Tan, CPAs (Tin died about five years ago; Ton and Tan are continuing the firm.) B. Pol and Bon, CPAs (The name of Cua, a third partner, is omitted from the partnership name.) C. Joni and Jona, CPAs (Joni died about three years ago; Jona is continuing the firm as a sole proprietor.) D. Elias and Co., CPAs (The firm has ten other partners who are all CPAs). The following statements relate to some of the provisions of RA 9298. Which is correct? A. Audit working papers are generally the property of the company whose financial statements were audited. B. After three (3) years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked. C. The penal provision (Sec. 36) of RA 9298 applies only to the violation of any of the provisions of RA 9298 because its Implementing Rules and Regulations are unenforceable. Page 7 of 37 AUDITING THEORY 65. 66. 67. 68. 69. 70. A. land Il only. B. | and Ill only. C. Iland Ill only. D. I, Il, and Ill. The concept of materiality is least important to an auditor when considering the A. Effects of a direct financial interest in the client upon the auditor's independence. B. Decision whether to use positive or negative confirmations of accounts receivable. C. Adequacy of disclosure of a client's illegal act. D. Discovery of weaknesses in a client's internal control. A direct financial interest or a material indirect financial interest in the audit client of a member of the audit team or his immediate family member may create a significant self- interest threat. Which of the following safeguards would be least likely considered to eliminate the threat or reduce it to an acceptable level? A. Discuss the matter with those charged with governance of the audit client. B. Dispose of the direct financial interest prior to the individual becoming a member of the audit team. C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining interest is no longer material prior to the individual becoming a member of the audit team. D. Remove the member of the audit team from the audit engagement. Jayson, CPA, was offered the engagement to audit W Corporation for the year ended December 31, 2016. He had served as a director of W Corporation until December 31, 2014, and his spouse currently owns 6,000 of the 100,000 outstanding share capital of W Corporation. Jayson disassociated from W Corporation prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jayson's association or employment with W Corporation. Under the code of ethics, Jayson should A. Accept the engagement. B. Leta partner from the same office accept and conduct the engagement. C. Refuse the engagement because he had served as a director. D. Refuse the engagement because of his spouse’s stock ownership. A loan, or guarantee of a loan, to the firm from an audit client that is a bank or a similar institution, would not create a threat to independence provided |. The loan, or guarantee, is made under normal lending procedures, terms and requirements. Il. The loan is immaterial to both the firm receiving the loan and the audit client. A. | only B. Il only C. Neither | nor II D. Both | and Il A close business relationship between a firm or a member of the audit team, or a member of that individual's immediate family, and the audit client or its management may create A. Self-interest and intimidation threats B. Selfreview and familiarity threats C. Advocacy and self-review threats D. Selftinterest and self-review threats When an immediate family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information of the assurance engagement, or was in such a position during the period covered by the engagement, the threats to independence can only be reduced to an acceptable level by A. Where possible, structuring the responsibilities of the assurance team so that the professional does not deal with matters that are within the responsibility of the immediate family member. Withdrawing from the assurance engagement. Removing the individual from the assurance team. Discussing the issue with those charged with governance, such as the audit committee. Page 10 of 37 GN AUDITING THEORY 71. 72. 73. 74. 75. 76. Which of the following threats to independence is created when a member of the assurance team participates in the assurance engagement while knowing, or having reason to believe, that he is to, or may, join the assurance client sometime in the future? A. Intimidation threat B. Selft-interest threat C. Self-review threat D. Familiarity threat Which of the following would not generally create a threat to independence? A. The purchase of goods and services from an assurance client by the firm (or from a financial statement audit client by a network firm) or a member of the assurance team provided that the transaction is in the normal course of business and on an arm's length basis. B. A partner or employee of the firm or a network firm serves as Company Secretary for a financial statement audit client. C. Determining which recommendations of the firm should be implemented. D. Reporting, in a management role, to those charged with governance. The following forms of assistance to a financial statement audit client do not generally threaten the firm's independence, except A. Analyzing and accumulating information for regulatory reporting. B. Assisting in resolving account reconciliation problems. C. Authorizing or approving transactions. D. Assisting in the preparation of consolidated financial statements. As defined in the Code, “a valuation comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or for a business as a whole.” Which of the following threats may be created when a firm or a network firm performs valuation for an audit client that is to be incorporated in the client's financial statements? A. Advocacy threat B. Familiarity threat C. Self-review threat D. Intimidation threat The following statements relate to the provision of taxation, internal audit or IT Systems services to audit clients. Which is false? A. Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-interest threat. B. Aself-review threat may be created when a firm, or network firm, provides internal audit services to an audit client. C. The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client's financial statements may create a self- review threat. D. The provision of services in connection with the assessment, design, and implementation of internal accounting controls and risk management controls does not create a threat to independence provided that firm or network firm personnel do not perform management functions. What threat to independence is created when the litigation support services provided to an audit client include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements? A. Self-review threat B. Advocacy threat C._ Intimidation threat D. Familiarity threat Page 11 of 37 AUDITING THEORY 77. 78. 79. 80. 81. 82. 83. 84. The recruitment of senior management for an assurance client, such as those in a position to affect the subject matter of the assurance engagement, may create the following current or future threats to independence, except A. Self-interest threat B. Familiarity threat C. Intimidation threat D. Selfreview threat When the total fees generated by an assurance client represent a large proportion of a firm's total fees, the dependence on that client or client group and concern about the possibility of losing the client may create a/an A. Self-interest threat B. Self-review threat. C. Intimidation threat D. Advocacy threat What threat to independence may be created if fees due from an assurance client for professional services remain unpaid for a long time, especially if a significant part is not paid before the issue of the assurance report for the following year? A. Advocacy threat B. Selt-interest threat C. Intimidation threat D. Selfreview threat These are fees calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. A. Contingent fees B. Fixed fees C. Predetermined fees D. Commissions. Which of the following threats to independence may be created when litigation takes place, or appears likely, between the firm or a member of the assurance team the assurance client? A. Self-interest or advocacy threat B. Advocacy or intimidation threat C. Self-interest or intimidation threat D. Familiarity or self-review threat As defined in the Code of Ethics, is the communication to the public of information as to the services or skills provided by professional accountants in public practice with a view to procuring professional business. A. Advertising B. Publicity C. Solicitation D. Marketing professional services As defined in the Code of Ethics, is the communication to the public of facts about a professional accountant which are not designed for the deliberate promotion of that professional accountant. A. Advertising B. Publicity C. Solicitation D. Marketing professional services Which of the following statements concerning publicity is incorrect? A. Booklets and other documents bearing the name of a professional accountant and giving technical information for the assistance of staff or clients may be issued to such persons, other professional accountants or other interested parties. B. Professional accountants who author books or articles on professional subjects may state their name and professional qualifications; give the name of their organization; and give any information as to the services that the firm provides. C. Appropriate newspapers or magazines may be used to inform the public of the establishment of a new practice, of changes in the composition of a partnership of Page 12 of 37 AUDITING THEORY selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is operating effectively. A. Monitoring B. Inspection C. Engagement quality control review D. Supervision 97. Which element of a system 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 B. Leadership responsibilities for quality within the firm C. Human resources D. Engagement performance 98. The nature, timing, and extent of an audit firm's quality control policies and procedures depend on The Nature Appropriate The CPA of the CPA Cost-Benefit Firm's Size Firm's Practice Considerations A. Yes Yes No B. Yes Yes Yes Cc. No No No Dz. Yes No Yes 99. 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 B. Management Review C. Engagement Team Review D. Engagement Partner Review 100. Who should take responsibility for the overall quality on each audit engagement? A. Engagement quality control reviewer B. Engagement partner C. Engagement team D. CPA firm 101. The engagement partner should take responsibility for the direction, supervision, and performance of the audit engagement in compliance with professional standards and regulatory and legal requirements, and for the auditor's report that is issued to be appropriate in the circumstances. Supervision includes the following, except ._ Tracking the progress of the audit engagement. Addressing significant issues arising during the audit engagement, considering their significance, and modifying the planned approach appropriately. Informing the members of the engagement team of their responsibilities. Identifying matters for consultation or consideration by more experienced engagement team members during the audit engagement. on w> 102. PSA 220 requires the engagement partner to consider whether members of the engagement team have complied with the ethical requirements relating to audit engagements. The Code of Ethics establishes the fundamental principles of professional ethics, which include |. Integrity Il. Objectivity Ill. Professional competence and due care IV. Confidentiality V. Professional behavior A. I, Il, IV, and V only C. I, Ill, IV, and V only B. Il, Ill, IV, and V only D. 1, Il, Ill, IV, and V THE FINANCIAL STATEMENT AUDIT: CLIENT ACCEPTANCE AND PLANNING Page 15 of 37 AUDITING THEORY 103. 104. 105. 106. 107. 108. 109. 110. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? A. The anticipated sample size of the planned substantive tests. B. The entity's annualized interim financial statements. C. The results of the internal control questionnaire. D. The contents of the management representation letter. The auditor is required to determine three different levels of materiality: (1) materiality for the financial statements as a whole, (2) performance materiality, and (3) A. Overall materiality B. Planning materiality C. General materiality D. Specific materiality Which of the following statements concerning materiality is not correct? A. When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. B. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to those particular classes of transactions, account balances or disclosures. C. Determining materiality involves the exercise of professional judgment. D. The materiality level for the financial statements as a whole determined in the planning stage of the audit should not be affected by changes in the circumstances of the engagement. Analytical procedures used in planning an audit should focus on A. Reducing the scope of tests of controls and substantive tests. . Providing assurance that potential material misstatements will be identified. . Enhancing the auditor's understanding of the client's business and identifying areas of potential risk. . Assessing the adequacy of the available evidential matter. B. Cc. D Which of the following would not be considered an analytical procedure? A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. C. Computing accounts receivable turnover by dividing credit sales by the average net receivables. D. Developing the expected sales based on the sales trend of the prior five years. Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. B. Vouching accounting records for recurring transactions recorded just after the balance sheet date. C. Reviewing confirmations of loans receivable and payable for indications of guarantees. D. Performing analytical procedures for indications of possible financial difficulties. Which of the following most likely would indicate the existence of related parties? A. Writing down obsolete inventory just before year-end. B. Failing to correct previously identified internal control deficiencies. C. Depending on a single product for the success of the entity. D. Borrowing money at an interest rate significantly below the market rate. Which of the following is an incorrect statement concerning the relationship of the internal auditor and the scope of the external audit of an entity's financial statements? A. The external auditor is not required to give consideration to the internal audit function beyond obtaining a sufficient understanding to identify and assess the risks of material Page 16 of 37 AUDITING THEORY 111. 112. misstatement of the financial statements and to design and perform further audit procedures. B. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor. C. Under certain circumstances, the internal auditors may assist the external auditor in performing substantive tests and tests of controls. D. The nature, timing, and extent of the external auditor's substantive tests may be affected by the work of internal auditors. If the results of the auditor's expert's work do not provide sufficient appropriate audit evidence or are not consistent with other audit evidence, the auditor should A. Report the matter to the appropriate regulatory agency of the government. B. Resolve the matter. C. Withdraw from the engagement. D. Express an unqualified opinion with reference to the work of the expert. Which of the following matters should be considered by the auditor in developing the overall audit strategy? A. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit. Conditions requiring special attention, such as the existence of related parties. The setting of materiality levels for audit purposes. All of the above. 908 RISK ASSESSMENTS AND INTERNAL CONTROL 113. 114. 115. 116. 117. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the A. Inherent risk. B. Acceptable audit risk. C. Control risk. D. Detection risk. When inherent risk is high, there will need to be A lower More evidence assessment of audit risk. accumulated by the auditor. A. Yes Yes B. No No Cc. Yes No D. No Yes Which of the following is not one of the three primary objectives of effective internal control? A. Reliability of financial reporting. B. Efficiency and effectiveness of operations. C. Compliance with laws and regulations. D. Assurance of elimination of business risk. Which of the following are considered control environment elements? Commitment Detection Organizational to Competence Risk Structure A. No Yes No B. Yes Yes Yes c. Yes No Yes Dz. No No Yes Which of the following statements concerning the relevance of various types of controls to a financial statement audit is correct? A. All controls are ordinarily relevant to a financial statement audit. B. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. Page 17 of 37 AUDITING THEORY C. Analytical procedures and confirmation. D. Confirmation and observation. 132. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering. 133. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs A. Tests of controls and extensive tests of property and equipment balances at the end of the year. Analytical procedures for current year property and equipment transactions. Tests of controls and limited tests of current year property and equipment transactions. Analytical procedures for property and equipment balances at the end of the year. GN FRAUD AND ERROR 134. Misstatements in the financial statements can arise from fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is |. Intentional or unintentional. Il. Rational or irrational. A. lonly C. Both | and Il B. Il only D. Neither | nor Il. 135. “Error” includes A. Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements. C. An incorrect accounting estimate arising from oversight or misinterpretation of facts. D. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or disclosure. 136. Fraud involving one or more members of management or those charged with governance is referred to as A. Management fraud. C. Fraudulent financial reporting. B. Employee fraud. D. Misappropriation of assets. 137. The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from A. Management fraud. B. Employee fraud. C. Misappropriation of assets. D. Collusion within the entity or with third parties. 138. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It may be accomplished in a number of ways, including Embezzling receipts. Stealing physical assets or intellectual property. Using an entity's assets for personal use. Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared. DOm> 139. Which of the following conditions are generally present when misstatements due to fraud occur? Page 20 of 37 AUDITING THEORY 140. 141. 142. 143. 144, 145. 146. |. Incentive or pressure. Il. Perceived opportunity. Ill. Rationalization. A. land Il only. C. land Ill only. B. Il and Ill only. D. I, Il, and Ill. The primary responsibility for the prevention and detection of fraud rests with A. Those charged with governance of the entity. B. Management of the entity. C. Both those charged with governance of the entity and management. D. The auditor. Which of the following statements best describes an auditor's responsibility regarding misstatements? A. An auditor should obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. B. An auditor should obtain absolute assurance that material misstatements in the financial statements will be detected. C. An auditor is responsible to detect material errors but has no responsibility to detect material fraud that is concealed through employee collusion or management override of internal control. D. An auditor's failure to detect a material misstatement resulting from fraud is an indication of noncompliance with the requirements of the Philippine Standards on Auditing (PSAs). When obtaining an understanding of the entity and its environment, including its internal control, the auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Such events or conditions are referred to as A. Fraud conditions. C. Fraudulent activities. B. Fraud risk factors. D. Fraud environment. The following are examples of fraud risk factors relating to misstatements arising from misappropriation of assets, except A. Recurring negative cash flows from operating activities while reporting earnings and earnings growth. Inadequate physical safeguards over cash, investments, inventory, or fixed assets. Inadequate segregation of duties or independent checks. Adverse relationship between the entity and employees with access to cash or other assets susceptible to theft created by recent changes made to employee compensation or benefit plans. GOD Opportunities to misappropriate assets increase when there are A. Known or anticipated future employee layoffs. B. Promotions, compensation, or other rewards inconsistent with expectations. C. Recent or anticipated changes to employee compensation or benefit plans. D. Inventory items that are small in size, of high value, or in high demand. Which of the following conditions or events may create incentives/pressures to commit fraud? A. Inadequate system of authorization and approval of transactions. B. Lack of mandatory vacations for employees performing key control functions. C. Excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals. D. Inadequate access controls over automated records. Because of the risk of material misstatement, an audit of financial statements in accordance with PSAs should be planned and performed with an attitude of Impartial conservatism. Objective judgment. Independent integrity. Professional skepticism. DOm> Page 21 of 37 AUDITING THEORY 147. 148. When planning the audit, the auditor should make inquiries of management. Such inquiries should address the following, except A. Management's assessment of the risk that the financial statements may be misstated due to fraud. B. Management's process for identifying and responding to the risks of fraud in the entity. C. Management's consideration of how an element of unpredictability will be incorporated into the nature, timing, and extent of the audit procedures to be performed. D. Management's communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud in the entity. When the auditor identifies a misstatement in the financial statements, the auditor should consider whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor should A. Consider the implications of the misstatement in relation to other aspects of the audit. B. Withdraw from the engagement. C. Communicate the information to regulatory and enforcement authorities. D. Report the matter to the person or persons who made the audit appointment. AUDITING IN A CIS/IT ENVIRONMENT 149. 150. 151. 152. 153. The use of a computer changes the processing, storage, and communication of financial information. A CIS environment may affect the following, except The accounting and internal control systems of the entity. B. The overall objective and scope of an audit. C. The auditor's design and performance of tests of control and substantive procedures to D > satisfy the audit objectives. . The specific procedures to obtain knowledge of the entity's accounting and internal control systems. The following are benefits of using IT-based controls, except A. Ability to process large volume of transactions. B. Over-reliance on computer-generated reports. C. Ability to replace manual controls with computer-based controls. D. Reduction in misstatements due to consistent processing of transactions. Which of the following statements concerning the Internet is incorrect? A. The Internet is a shared public network that enables communication with other entities and individuals around the world. B. The Internet is a private network that only allows access to authorized persons or entities. C. The Internet is interoperable, which means that any computer connected to the Internet can communicate with any other computer connected to the Internet. D. The Internet is a worldwide network that allows entities to engage in e-commerce/e- business activities. In planning the portions of the audit which may be affected by the client's CIS environment, the auditor should obtain an understanding of the significance and complexity of the CIS activities and the availability of data for use in the audit. The following relate to the complexity of CIS activities except when A. Transactions are exchanged electronically with other organizations (for example, in electronic data interchange systems [EDI]). B. Complicated computations of financial information are performed by the computer and/or material transactions or entries are generated automatically without independent validation. C. Material financial statement assertions are affected by the computer processing. D. The volume of transactions is such that users would find it difficult to identify and correct errors in processing. The auditor shall consider the entity's CIS environment in designing audit procedures to reduce risk to an acceptably low level. Which of the following statements is incorrect? A. The auditor's specific audit objectives do not change whether financial information is processed manually or by computer. Page 22 of 37 AUDITING THEORY 167. 168. 169. 170. 171. 172. 173. In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. Cc. Asmall number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. Which of the following statements is correct concerning the use of negative confirmation requests? A. Unreturned negative confirmation requests rarely provide significant explicit evidence. B. Negative confirmation requests are effective when detection risk is low. C. Unreturned negative confirmation requests indicate that alternative procedures are necessary. D. Negative confirmation requests are effective when understatements of account balances are suspected. Which of the following most likely would give the most assurance concerning the valuation and allocation assertion of accounts receivable? A. Vouching amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios with industry statistics for reasonableness. C. Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectible accounts for reasonableness. Confirmation is “the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions.” Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation B. Valuation and rights and obligations C. Rights and obligations and existence D. Existence and completeness To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would vouch A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule. B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors’ invoices. C. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence conceming management's assertion of A. Rights and obligations C. Existence B. Completeness D. Valuation Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments? A. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and assessments indicate a going concern problem. B. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and assessments to which the lawyer has devoted substantive attention. C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. D. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements. Page 25 of 37 AUDITING THEORY 174. 175. 176. 177. Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments? A. Inquire of and discuss with management the policies and procedures adopted for litigation, claims, and assessments. B. Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. C. Obtain assurance from management that if has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. D. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements. The following are ordinarily excluded from audit documentation: A B Cc D Superseded drafts of working papers and financial statements Yes No No Yes Notes that reflect incomplete or preliminary thinking Yes Yes No No Previous copies of documents corrected for typographical or other errors Yes Yes Yes Yes Duplicates of documents Yes No Yes No Audit documentation may be recorded on paper or on electronic or other media. The following are examples of audit documentation, except A. Audit programs B. Letters of confirmation and representation C. Correspondence (including e-mail) concerning significant matters D. The entity's accounting records The completion of the assembly of the final audit file after the date of the auditor's report does not ordinarily involve A. The performance of new audit procedures or the drawing of new conclusions. B. Sorting, collating and cross-referencing working papers. C. Deleting or discarding superseded documentation. D. Signing off on completion checklists relating to the file assembly process. AUDIT SAMPLING 178. 179. 180. Audit sampling involves the A. Selection of all items over a certain amount. B. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection. C. Application of audit procedures to all items that comprise a class of transactions or an account balance. D. Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error. Population, as defined in PSA 530, means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. It is important for the auditor to ensure that the population is |. Appropriate to the objective of the audit procedure. Il. Complete. A. | only C. Both | and II B. Il only D. Neither | nor II An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods Afford greater assurance than a nonstatistical sample of equal size. B. Provide an objective basis for quantitatively evaluating sampling risks. C. Can more easily convert the sample into a dual-purpose test useful for substantive D > testing. . Eliminate the need to use judgment in determining appropriate sample sizes. Page 26 of 37 AUDITING THEORY 181. 182. 183. 184. Which of the following best illustrates the concept of sampling risk? A. Arandomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize errors in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection. Which of the following statistical selection techniques is least desirable for use by an auditor? A. Systematic selection C. Block selection B. Stratified selection D. Sequential selection Which of the following combinations results in a decrease in sample size in a sample for attributes? Risk of Expected assessing Tolerable population control risk too low rate deviation rate A. Increase Decrease Increase B. Decrease Increase Decrease c. Increase Increase Decrease Dz. Increase Increase Increase The diagram below depicts the auditor's estimated maximum deviation rate compared with the tolerable rate and also depicts the true population deviation rate compared with the tolerable rate. True State of Population Auditor's —. Estimate Deviation Rate Deviation Rate Based on Is less than Exceeds Sample Results Tolerable Rate Tolerable Rate Maximum Deviation Rate : Ill. Is Less than Tolerable Rate Maximum Deviation Rate Il. IV. Exceeds Tolerable Rate As a result of tests of controls, the auditor assesses control risk higher than necessary and thereby increases substantive testing. This is illustrated by A. | Cc. Ill B. Il D. IV COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES 185. 186. Analytical procedures used in the overall review stage of the audit generally include Retesting controls that appeared to be ineffective during the assessment of control risk. B. Considering unusual or unexpected account balances that were not previously identified. C. Gathering evidence concerning account balances that have not changed from the prior D > year. . Performing tests of transactions to corroborate management's financial statement assertions. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that A. The communication with the audit committee should be revised. Page 27 of 37 AUDITING THEORY 200. 201. 202. 203. 204. 205. 206. B. Stock dividends replace annual cash dividends. C. Significant related party transactions are pervasive. D. Research and development projects are postponed. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Restrictions on the disposal of principal assets are present. B. Usual trade credit from suppliers is denied. C. Significant related party transactions are pervasive. D. Arrearages in principal stock dividends are paid. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A. Confirmation of bank balances. B. Confirmation of accounts receivable from major customers. C. Reconciliation of interest expense with debt outstanding. D. Review of compliance with terms of debt agreements. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a going concem for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the adverse effects of future conditions and events, Harold most likely would consider, as a mitigating factor, Jersamtan’s plans to A. Postpone expenditures for research and development projects. B. Purchase production facilities currently being leased from a related party. C. Strengthen internal controls over cash disbursements. D. Discuss with lenders the terms of all debt and loan agreements. When an auditor concludes that there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. C. Report to the client's audit committee that management's accounting estimates may need to be adjusted. D. Reissue the prior year’s auditor's report and add an emphasis of matter paragraph that specifically refers to “substantial doubt” and “going concern.” The auditor is required to obtain audit evidence that management |. Acknowledges its responsibility for the fair presentation of the financial statements in accordance with applicable financial reporting framework. Il. Has approved the financial statements. A. lonly. B. Il only. C. Both | and Il. D. Neither | nor Il. When an audit is made in accordance with generally accepted auditing standards, the auditor should always Observe the taking of physical inventory on the balance sheet date. B. Obtain certain written representations from management. C. Employ analytical procedures as substantive tests to obtain evidence about specific D > assertions related to account balances. . Document the understanding of the client's internal control and the basis for all conclusions about the assessed level of control risk for financial statement assertions. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations A. Constitute sufficient appropriate audit evidence to support the assertion when considered in combination with a sufficiently low assessed level of control risk. B. Are not part of the audit evidence considered to support the assertion. Page 30 of 37 AUDITING THEORY 207. 208. 209. 210. 211. 212. 213. 214. C. Replace a low assessed level of control risk as audit evidence to support the assertion. D. Complement, but do not replace, substantive tests designed to support the assertion. A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the A. Chief financial officer and the chair of the board of directors. B. Chief executive officer and the chief financial officer. C. Chief executive officer, the chair of the board of directors, and the client's lawyer. D. Chair of the audit committee of the board of directors. The date of the management representation letter should coincide with the date of the A. Statement of Financial Position B. Latest related party transaction C. Auditor's report D. Latest interim financial information Which of the following statements concerning management representations is incorrect? A. Representations by management can be a substitute for other audit evidence that the auditor could reasonably expect to be available. B. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter, which has, or may have, a material effect on the financial statements and such audit evidence is expected to be available, this will constitute a limitation in the scope of the audit, even if a representation from management has been received on the matter. C. If arepresentation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations by management. D. The auditor's working papers would ordinarily include a summary of oral discussions with management or written representations from management. What type of opinion should be expressed if the client's management refuses to provide a representation that the auditor considers necessary? A. Qualified opinion or a disclaimer of opinion. B. Qualified opinion or an adverse opinion. C. Adverse opinion or a disclaimer of opinion. D. Unqualified opinion. The primary source of information to be reported about litigation, claims, and assessments is the A. Independent auditor B. Client's management C. Court records D. Client's lawyer The primary reason an auditor requests that letters of inquiry be sent to a client's attorneys is to provide the auditor with A. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. B. The attorneys’ opinions of the client's historical experiences in recent similar litigation. C. Corroboration of the information furnished by management about litigation, claims, and assessments. D. The probable outcome of asserted claims and pending or threatened litigation. The letter of audit inquiry should be A. Prepared and sent by the auditor. B. Prepared by management and sent by the auditor. C. Prepared and sent by management. D. Prepared by the auditor and sent by management. The refusal of a client's lawyer to provide a representation on the legality of a particular act committed by the client is ordinarily A. Proper grounds to withdraw from the engagement. Page 31 of 37 AUDITING THEORY 215. 216. 217. 218. B. Insufficient reason to modify the auditor's report because of the lawyer's obligation of confidentiality. C. Considered to be a scope limitation. D. Sufficient reason to issue a “subject to” opinion. Management's refusal to give the auditor permission to communicate with the entity's legal counsel is most likely to lead to A. An adverse opinion. B. A qualified opinion or an adverse opinion. C. An unqualified opinion. D. A qualified opinion or a disclaimer of opinion. In which of the following circumstances would an auditor most likely meet with the client's legal counsel to discuss the likely outcome of the litigation and claims? |. The auditor determines that the matter is a significant risk. ll. There is a disagreement between management and the entity's legal counsel. Ill. The subject matter of the litigation is complex. A. land Il only. B. Il and Ill only. C. land Ill only. D. I, Il, and Ill. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? A. “I believe that the action can be settled for less than the damages claimed.” B. “| believe that the company will be able to defend this action successfully.” C. “| believe that the plaintiff's case against the company is without merit.” D. “| believe that the possible liability to the company is nominal in amount.” The auditor should consider the status of legal matters up to the A. Balance sheet date. B. Date of the auditor's report. C. Date of approval of the financial statements. D. Date of issuance of the financial statements. THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS 219. 220. 221. The following statements relate to the date of the auditor's report. Which is false? A. The auditor should date the report as of the completion date of the audit. B. The date of the auditor's report should not be earlier than the date on which the financial statements are signed or approved by management. C. The date of the auditor's report should not be later than the date on which the financial statements are signed or approved by management. D. The date of the auditor's report should always be later than the date of the financial statements (i.e., the balance sheet date). In which of the following circumstances would an auditor most likely add an emphasis of matter paragraph to the auditor's report while expressing an unqualified opinion? There is a substantial doubt about the entity's ability to continue as a going concern. Management's estimates of the effects of future events are unreasonable. No depreciation has been provided in the financial statements. Certain transactions cannot be tested because of management's records retention policy. vom> An independent auditor discovers that a payroll supervisor of the company being audited has misappropriated P50,000. The company's total assets and income before tax are P70 million and P15 million, respectively. Assuming no other issues affect the report, the auditor's report will most likely contain a/an A. Unmodified opinion C. Adverse opinion. B. Disclaimer of opinion D. Scope qualification Page 32 of 37 AUDITING THEORY 235. 236. IV. Indicate the date of J's auditor's report. A. |, Il, and IV only. C. 1, Il, and Ill only. B. Il, Ill, and IV only. D. 1, Il, Ill, and IV. The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has reissued his/her auditor's report on prior year financial statements. The predecessor auditor's report should A. Refer to the work of the incoming auditor in the scope and opinion paragraphs. B. Refer to the report of the incoming auditor only in the scope paragraph. C. Refer to both the work and the report of the incoming auditor only in the opinion paragraph. D. Not refer to the report or the work of the incoming auditor. The following statements relate to unaudited prior year financial statements that are presented in comparative form with audited current year financial statements. Which is incorrect? A. The incoming auditor should state in the auditor's report that the comparative financial statements are unaudited. B. The incoming auditor need not perform audit procedures regarding opening balances of the current period. C. Clear disclosure in the financial statements that the comparative financial statements are unaudited is encouraged. D. In situations where the incoming auditor identifies that the prior year unaudited figures are materially misstated, the auditor should request management to revise the prior year’s figures or if management refuses to do so, appropriately modify the report. OTHER REPORTING RESPONSIBILITIES 237. 238. 239. 240. Financial statements of an entity that have been reviewed by an accountant should be accompanied by areport stating that a review A. Provides only limited assurance that the financial statements are fairly presented. B. Includes examining, on a test basis, information that is the representation of management. C. Consists principally of inquiries of company personnel and analytical procedures applied to financial data. D. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit. An accountant's report on a review of the financial statements of an entity should state that the accountant A. Does not express an opinion or any form of limited assurance on the financial statements. B. Conducted the review in accordance with the Philippine Standard on Review Engagements. C. Obtained reasonable assurance about whether the financial statements are free of material misstatements. D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements. Financial statements of an entity that have been reviewed by an accountant should be accompanied by areport stating that A. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted. B. The financial statements are the responsibility of the company's management. C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements. An accountant who reviews the financial statements of an entity should issue a report stating that a review A. Provides less assurance than an audit. B. Provides negative assurance that internal control is functioning as designed. Page 35 of 37 AUDITING THEORY C. Provides only limited assurance that the financial statements are fairly presented. D. Is substantially more in scope than a compilation. 241. When compiling the financial statements of an entity, an accountant should A. Review agreements with financial institutions for restrictions on cash balances. B. Understand the accounting principles and practices of the entity's industry. C. Inquire of key personnel concerning related parties and subsequent events. D. Perform ratio analyses of the financial data of comparable prior periods. 242. When compiling an entity's financial statements, an accountant would be least likely to A. Perform analytical procedures designed to identify relationships that appear to be unusual. B. Read the compiled financial statements and consider whether they appear to include adequate disclosure. C. Obtain an acknowledgment from management of its responsibility for the financial statements. D. Plan the work so that an effective engagement will be performed. 243. Which of the following should not be included in an accountant's report based upon the compilation of an entity's financial statements? A. A statement that a compilation of the company's financial statements was made in accordance with the Philippine Standard on Related Services applicable to compilation engagements. A statement that management is responsible for the financial statements. A statement that the accountant has not audited or reviewed the statements. 908 assurance on the statements. A statement that the accountant does not express an opinion but provides only negative 244. Negative assurance may be expressed when an accountant is requested to report agreed- upon procedures to specified Elements of a Accounts of a Financial Statement Financial Statement A. Yes Yes B. Yes No c. No No Dz. No Yes 245. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to express an opinion on one or more specified accounts or items of a financial statement provided that A. The accountant's report does not enumerate the procedures performed. B. The financial statements are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. C. Distribution of the accountant’s report is restricted. D. The accountant is also the entity's continuing auditor. 246. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and cash flows. Such prospective financial statements are known as A. Pro forma financial statements B. Financial projections C. Partial presentations D. Financial forecasts 247. A financial forecast consists of prospective financial statements that present an entity's expected financial position, results of operations, and cash flows. A forecast Is based on the most conservative estimates. Present estimates given one or more hypothetical assumptions. Unlike a projection, may contain a range. DOm> expected to be taken. Page 36 of 37 Is based on assumptions reflecting conditions expected to exist and courses of action AUDITING THEORY 248. 249. 250. When an accountant examines prospective financial statements, the accountant’s report should include a separate paragraph that A. Contains an opinion as to whether the prospective financial statements are properly prepared on the basis of the assumptions and are presented in accordance with generally accepted accounting principles in the Philippines. B. Provides an explanation of the differences between an examination and an audit. C. States that the accountant is responsible for events and circumstances up to 1 year after the report's date. D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective financial statements. The following statements relate to the examination of prospective financial information. Which is false? A. The auditor should express an opinion as to whether the results shown in the prospective financial information will be achieved. B. Before accepting an engagement to examine prospective financial information, the auditor should consider the intended use of the information. C. The auditor should not accept, or should withdraw from, an engagement to examine prospective financial information when the assumptions are clearly unrealistic. D. When in the auditor's judgment an appropriate level of satisfaction has been obtained, the auditor is not precluded from expressing positive assurance regarding the assumptions. Which of the following is a prospective financial information for general use upon which an accountant may appropriately report? A. Financial projection B. Partial presentation C. Pro forma financial statement D. Financial forecast -— END --- Page 37 of 37