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CEBU CPAR CENTER

Mandaue City, Cebu

AUDITING THEORY
PREWEEK LECTURE
Glossary of Terms
1.
The series of tasks and records of an entity by which transactions are processed as a means
of maintaining financial records.

a.
Computer information system
c.
Accounting system
b.
Internal control system
d.
Control environment
The measure of the quality of audit evidence and its relevance to a particular assertion and its
reliability.
a.
Sufficiency
c.
Significance
b.
Appropriateness
d.
Assurance
3.
It serves as a set of instructions to assistants involved in the audit and as a means to control
the proper execution of the work.

a.
Audit program
c.
Engagement letter
b.
Overall audit plan
d.
Internal control questionnaire
Detection risk is
The risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.
The risk that a misstatement, that could occur in an account balance or class of transactions and
that could be material individually or when aggregated with misstatements in other balances or
classes, will not be prevented or detected and corrected on a timely basis by the accounting and
internal control systems.
The risk that an auditor's substantive procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated
with misstatements in other balances or classes.
The susceptibility of an account balance or class of transactions to misstatement that could be
material, individually or when aggregated with misstatements in other balances of classes,

assuming that there were no related internal controls.

Tolerable error means
An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population.
An error that the auditor expects to be present in the population.
The maximum error in a population that the auditor is willing to accept.
The possibility that the auditor's conclusion, based on a sample may be different from the
conclusion reached if the entire population were subjected to the same audit procedure.
The current periods auditor who did not audit the prior periods financial statements is called
a.
Predecessor auditor.
c.
Incoming auditor.
b.
Other auditor.
d.
Principal auditor
Principal auditor is
The auditor who audited and reported on the prior period's financial statements and continues as
the auditor for the current period.
A current period's auditor who did not audit the prior period's financial statements.
The auditor who was previously the auditor of an entity and who has been replaced by an incoming
auditor.
The auditor with responsibility for reporting on the financial statements of an entity when those
financial statements include financial information of one or more components audited by another
auditor.
They are not presented as complete financial statements capable of standing alone, but are an
integral part of the current period.
a.
Corresponding figures
c.
Supplementary report
b.
Comparative financial statements
d.
Notes of financial statements
9.
The applications of auditing procedures using the computer as an audit tool refer to
a.
Integrated test facility
c.
Auditing through the computer
b.
Data-based management system
d.
Computer assisted audit techniques

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10. A collection of files that is shared and used by a number of different users.
a.
Database
c.
Master file
b.
Information file
d.
Transaction file
A report, separate from the financial statements, in which an entity provides third parties with
qualitative information on the entity's commitments towards the environmental aspects of the
business, its policies and targets in that field, its achievement in managing the relationship
between its business processes and environmental risk, and quantitative information on its
environmental performance.

a.
Environmental performance report
c.
Environmental risk
b.
Annual report
d.
Special purpose audit report
12. Comprises officers and others who also perform senior managerial functions.
a.
Management
c.
Audit committee
b.
Governance
d.
Board of directors
It exists when other information contradicts information contained in the audited financial
statements.
a.
Material inconsistency
c.
Material weaknesses
b.
Material misstatement of fact
d.
Misstatement
14. The policies and procedures adopted by a firm to provide reasonable assurance that all audits
done by the firm are being carried out in accordance with the Objective and General Principles
Governing an Audit of Financial Statements.
a.
Internal controls
c.
Peer review
b.
Quality controls
d.
General controls
When an entity has the ability to control the other entity or exercise significant influence over the
other entity in making financial and operating decisions manifest:
a.
Related parties

c.
Decentralization
b.
Related services
d.
Centralized operations
Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of
the audit.
a.
Scope of an audit
c.
Audit program

b.
Scope of a review
d.
Scope limitation

17.
It
relates to materiality of the
financial
statement assertions
affected
by
the
computer
processing.

a.
Threshold
c.
Complexity

b.
Relevance
d.
Significance

A report issued in connection with the independent audit of financial information other than an
auditor's report on financial statements.
a.
Special purpose auditor's report
c.
Annual report
b.
Compilation report
d.
Modified auditors report
Substantive procedures are tests performed to obtain audit evidence to detect material
misstatements in the financial statements. These include
a. Test of details of transactions
c.
Substantive analytical procedures
b. Test of details of balances
d.
All of the above.
20. Involves tracing a few transactions through the accounting system.
a.
Test of controls
c.
Analytical procedures
b.
Walk-through test
d.
Substantive procedures
Overview of auditing (Related PSAs : PSA 100, 120, 200 and 610)
Assurance services are best described as
Services designed for the improvement of operations, resulting in better outcomes.
Independent professional services that improve the quality of information, or its context, for
decision makers.
The assembly of financial statements based on assumptions of a reasonable party.
Services designed to express an opinion on historical financial statements based on the results of
an audit.

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Assurance services least likely involve

Improving the quality of information for decision purposes.
Improving the quality of the decision model used.
Improving the relevance of information.
Implementing a system that improves the processing of information.
Which of the following statements is (are) true regarding the provision of assurance services?
The third party who receives the assurance generally pays for the assurance received.
Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.
Assurance services can be provided either on information or processes.
All of the above.
In performing an attestation engagement, a CPA typically
Supplies litigation support services.
Assesses control risk at a low level.
Expresses a conclusion about an assertion.
Provides management consulting advice.
Which of the following services would be most likely to be structured as an attest engagement?
Advocating a clients position in tax matter.
A consulting engagement to develop a new data base system for the revenue cycle.
An engagement to issue a report addressing an entitys compliance with requirements of specified
laws.
The compilation of a clients forecast information.
Which of the following is broadest in scope?
a.
Audits of financial statements.
c.
Internal control audit.
b.
Assurance services.
d.
Attestation services.
Independent auditing can be described as
A branch of accounting.
A professional activity that measures and communicates financial and business data.
A discipline which attests to the results of accounting and other functional operations and data.
A regulating function that prevents the issuance of erroneous or improper financial information.
A financial statement audit is designed to
Provide assurance on internal control and to identify reportable conditions.
Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is
material.
Obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud.
Obtain absolute assurance on the financial statements and express an opinion on the financial
statements.
Which of the following best describes why an independent auditor is asked to express an opinion
on the fair presentation of financial statements?
It is difficult to prepare financial statements that fairly present a companys financial position and
changes in financial position and operations without the expertise of an independent auditor.
It is managements responsibility to make available independent aid in the preparation of the
financial information shown in the financial statements.
The opinion of an independent party is needed because a company may not be objective with
respect to its own financial statements.
It is a customary courtesy that shareholders of a company receive an independent report on
managements status in managing the affairs of the business.
An audit of the financial statements of Camden Corporation is being conducted by an external

auditor. The external auditor is expected to

Express an opinion as to the fairness of Camden's financial statements.
Express an opinion as to the attractiveness of Camden for investment purposes.
Certify to the correctness of Camden's financial statements.
Critique the wisdom and legality of Camden's business decisions.

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31. A type of audit the purpose of which is to determine whether the auditee is following specific
procedures or rules set down by some higher authority
a.
Operational audit.
c.
Financial audit.
b.
Compliance audit.
d.
Management audit.
A technique for regularly and systematically appraising a unit of function and its effectiveness
against corporate and industry standards with the objective of assuring management that its
aims are being carried out and/or identifying conditions capable of being improved
a.
Financial auditing.
c.
Operations auditing.
b.
Compliance tests.
d.
Management auditing.
33. A detailed examination of the utilization of the resources of the company, including the
organization structure to carry out objectives, to indicate areas of increased efficiency and
possible cost reduction is

a.
Internal audit.
c.
Management audit.
b.
Audit of assets.
d.
Financial audit.
Which of the following types of audits are most similar?
Operational audits and compliance audits.
Independent financial statement audits and operational audits.
Compliance audits and independent financial statement audits.
Internal audits and independent financial statement audits.
To make the internal audit department independent, he should report directly to the
Board of Directors.
Stockholders.
Audit committee.
Controller.
An independent audit
Supports an internal audit.

Duplicates an internal audit.

Complements an internal audit.

Negates an internal audit.

The members of the Commission on Audit should
Be a member of the bidding committee of the agency.
Hold office for nine years without reappointment.
Be a commissioner and an associate commissioner.
Be a CPA or member of the Bar with ten years experience.
Besides expressing an opinion on the fairness of financial statement presentation, a

government auditor normally includes audit of effectiveness, compliance as well as

a.
Internal control.

c.
Mathematical accuracy.
b.
Economy.
d.
Risk evaluation.
Governmental effectiveness (program) auditing seeks to determine whether the desired results are
being achieved and objectives are being met. The first step in the performance of such an audit
would be:
Evaluate the system used to measure results.
Determine the sampling frame to use in studying the system.
Collect and analyze quantifiable data.
Identify the legislative intent of the program being audited.
Professional Accounting Practice (Related PSA : Preface to PSA and Related Services)
A pervasive characteristic of a CPAs role in a Management Consulting Services engagement is
that of being a(n)
a.
Objective advisor.
c.
Computer specialist.
b.
Independent practitioner.
d.
Confidential reviewer.
41. Which one of the following is not a logical function of a CPA in public accounting practice?
a.
Attest function.
c.
Tax practice.
b.
Supervision of internal audit staff.
d.
Management consulting services.
The quality of performance of an auditor is measured by the statements emanating from the
Accounting Standards Council
Quality Control Standards
Auditing Standards and Practices Council
Interpretations of Accountants in Practice

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The Philippine Standards on Auditing issued by ASPC

Are applicable only when an independent audit involving an expression of an opinion on financial
statements is carried out.
Are the only authoritative source of auditing standards for members of the accountancy profession
in the Philippines.
Are general guidelines to help auditors.
Require that in no circumstances would an auditor may judge it necessary to depart from a PSA,
even though such a departure may result to more effective achievement of the objective of an
audit.
Williams & Co., a large international CPA firm, is to have an external peer review. The peer review
will most likely be performed by
Employees and partners of Williams & Co. who are not associated with the particular audits being
reviewed.
Audit review staff of the Securities and Exchange Commission.
Audit review staff of the American Institute of Certified Public Accountants.
Employees and partners of another CPA firm.
One of the advantages of the fixed fee (or flat sum) basis of billing a client is that the
CPAs compensation is more directly related to the quality of his service rather than to time spent.
CPA is assured of avoiding a loss on the engagement even if he underestimates his costs.
Fixed fee method is particularly effective for measuring charges for routine engagements.
Client pays for exactly what he gets in terms of work performed.
Philippine Accountancy Act of 2004 (RA 9298) and its IRR
Which of the following is not one of the function of the Board of Accountancy as specifically
provided under RA 9298?
To determine and prescribe minimum requirements leading to the admission of candidates to the
CPA examination.
To investigate violations of the Accountancy Law and the rules and regulations promulgated
thereunder.
To perform visitorial powers or review professional work of accounting practitioners in a general or
random basis.
After due process, to suspend, revoke, or reissue certificates of registration for causes provided for
by law by the rules and regulations promulgated therefor.
No person shall serve the Professional Regulatory Board of Accountancy for more than
a. 3 years
b. 6 years
c. 9 years
d. 12 years
The Accountancy Law provided that a CPA certificate may be suspended or revoked on grounds
except
Immoral or dishonorable conduct.
Gross negligence or incompetence in the practice of profession.
Refusal to accept an audit engagement with a government corporation.
Conduct discreditable to the accounting profession.
Under the IRR of RA 9298, if a partner in a two-member partnership dies, the surviving partner
may continue to practice as an individual under the existing firm title which includes the deceased
partners name
For a period of time not to exceed five years.
For a period of time not to exceed two years.
Indefinitely.
Until the partnership payout to the deceased partners estate is terminated.
Which of the following is required for a partnership for public accountancy practice?
At least one of the partners must be a CPA.
All partners must be PICPA members.
All partners must be CPAs.

Firm name must contain names of partners only.

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Code of Ethics
Which of the following statements best explains why the CPA profession has found it essential to
promulgate ethical standards and to establish means for ensuring their observance?

Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous
acts.
Ethical standards that emphasize excellence in performance over material rewards establish a
reputation for competence and character.
A distinguishing mark of a profession is its acceptance of responsibility to the public.
A requirement for a profession is to establish ethical standards that stress primarily a responsibility
to clients and colleagues.
Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a project study
on the expanded food vending operations of the corporation with the corresponding staffing and
compensation package for its executive staff. Dimalanta, however, has primarily auditing expertise
and only in general merchandising operations. Mr. Dimalanta may properly
Accept the engagement and carry it out consistent with GAAS.
Accept the engagement but exercise due professional care.
Accept the engagement and acquire the necessary competence or consult with established
authorities.
Decline the engagement for lack of experience or competence in an entirely new line of
specialization.
During the course of an audit engagement, the CPA needed additional studies and consultation
with experts. This additional study and consultation is deemed to be
An unusual practice which should have voided the audit engagement.
Lack of competence on the part of the CPA.
An appropriate part of the professional conduct of the audit engagement.
Undertaken as a responsibility of management.
After beginning an audit of a new client, Larkin, CPA, discovers that the professional competence
necessary for the engagement is lacking. Larkin informs management of the situation and
recommends another CPA, and management engages the other CPA. Under these circumstances
Larkin's lack of competence should be construed to be a violation of GAAS.
Larkin may request compensation from the client for any professional services rendered to it in
connection with the audit.
Larkin's request for a commission from the other CPA is permitted because a more competent audit
can now be performed.
Larkin may be indebted to the other CPA since the other CPA can collect from the client only the
amount the client originally agreed to pay Larkin.
On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of
the relevant professional accounting and auditing standards should be held by
The auditor with final responsibility for the audit.
All professionals working upon the audit.
All professional working upon the audit and the partner in charge of the CPA firm.
All professionals working in the office.
A CPA who is seeking to sell an accounting practice must
Not allow a peer review team to look at working papers and tax returns without permission from the
client prior to consummation of the sale.
Not allow a prospective purchaser to look at working papers and tax returns without permission
from the client.
Give all working papers and tax returns to the client.
Retain all working papers and tax returns for a period of time sufficient to satisfy the statute
limitations.
Smith, CPA, issued an except for opinion on the financial statements of the Wald Company for
the year ended December 31, 2005. Wald has engaged another firm of CPAs to make a second

audit. The local bank has knowledge of Smiths audit and has asked Smith to explain why the
financial statements and his opinion have not been made available.
Smith cannot provide the bank with information about Wald under any circumstances.
If Wald consents, Smith may provide the bank with information concerning Wald.

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c. If the other firm of CPAs consents, Smith may provide the bank with information concerning
Wald.
The only way the bank can obtain information concerning Smiths audit is to obtain it by subpoena.
Under the Code of Professional Ethics, which of the following may a practicing CPA do in
connection with educational seminars?
Send announcements about his appearance on a seminar program to non-clients or invite them to
attend.
Sponsor a seminar and send invitations to non-clients.
Allow himself to be listed as a tax expert on the seminar announcement.
Distribute firm literature at the seminar to non-clients on a relevant topic being discussed at the
seminar.
A CPA, wrote an article for publication in PICPA Accountants Journal. The Code of Professional
Ethics would be violated if the CPA allowed the article to state that the CPA was

Member of PICPA
Professor at a school of professional accountancy
Partner in a national CPA firm
Practitioner specializing in providing tax services.
Ethically, the auditor could
Advertise only as to his expertise in preparing income tax returns.
Base his audit fee on a percentage of the proceeds of his client's stock issue.
Own preferred stock in a corporation which is an audit client.
Perform an examination for a financially distressed client at less than his customary fees.
According to the profession's ethical standards, an auditor would be considered independent in
which of the following instances?
The auditor's checking account, which is fully insured by a PDIC, is held at a client financial
institution.
The auditor is also an attorney who advises the client as its general counsel.
An employee of the auditor donates service as treasurer of a charitable organization that is a client.
The client owes the auditor fees for two consecutive annual audits.
A CPA purchased a stock in a client corporation and placed it in a trust as an educational fund for
the CPA's minor child. The trust securities were not material to the CPA but were material to the
child's personal net worth. Would the independence of the CPA be considered to be impaired with
respect to the client?
Yes, because the stock would be considered a direct financial interest and consequently,
materiality is not a factor.
Yes, because the stock would be considered an indirect financial interest that is material to the
CPA's child.
No, because the CPA would not be considered to have a direct financial interest in the client.

No, because the CPA would not be considered to have a material indirect financial interest in the
client.
Which of the following legal situations would be considered to impair the auditor's independence?
An expressed intention by the present management to commence litigation against the auditor
alleging deficiencies in audit work for the client, although the auditor considers that there is only a
remote possibility that such a claim will be filed.
Actual litigation by the auditor against the client for an amount not material to the auditor or to the
financial statements of the client arising out of disputes as to billings for management advisory
services.
Actual litigation by the auditor against the present management alleging management fraud or
deceit
Actual litigation by the client against the auditor for an amount not material to the auditor or to the

financial statements of the client arising out of disputes as to billings for tax services.

Which of the following is not prohibited by the Code of Professional Ethics for CPAs?
Advertising and solicitation of clients.
Payment of commission to obtain a client.
Receiving a contingent fee on a tax case before the Bureau of Internal Revenue.

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Offering employment to a staff member of another CPA without first informing the CPA.
The CPA in public practice violates the Code of Professional Ethics for CPAs if he accepts a fee
which was
Fixed by a public authority.
Based on a price quotation submitted in competitive bidding.
Determined based on the results of judicial proceedings.
Payable after a specified finding was obtained.
Warner, CPA, places a 2 x 2 display advertisement in a national financial newspaper. The
advertisement reads: Wanted: Outgoing CPA with partnership potential. Must have 5 years
experience in a tax department of a CPA firm. Reply Box 14344. Under the Code of Professional
Ethics such an advertisement would
Violate the provisions dealing with advertising.
Violate the provisions dealing with specialization.
Violate the provisions dealing with encroachment.
Not be a violation.
A practicing CPA is allowed by the CPA Code of Ethics to do the following, except
Announce the change in office location in a newspaper.
List his first name in the building lobby directory in good taste and modest size.
Include his tax account number and membership in PICPA on his stationery.
List his office telephones in the PLDT directory in box or bold type.
Inclusion of which of the following in a promotional brochure published by a CPA firm would be
most likely to result in a violation of the AICPA rules of conduct?
Reprints of newspaper articles which are laudatory with respect to the firms expertise.
Services offered and fees for such services, including hourly rates and fixed fees.
Educational and professional attainments of partners.
Testimonials and endorsements.
May a CPA hire for the CPAs public accounting firm a non-CPA systems analyst who specializes in
developing computer systems?
Yes, provided the CPA is qualified to perform each of the specialists tasks.
Yes, provided the CPA is able to supervise the specialist and evaluate the specialists end product.
No, because non-CPA professionals are not permitted to be associated with CPA firms in public
practice.
No, because developing computer systems is not recognized as a service performed by public
accountants.
A violation of the profession's ethical standards would most likely occur when a CPA who
Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
Writes a newsletter on financial management also permits a publishing company to solicit
subscriptions by direct mail.
Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its
publications.
Is the sole shareholder in a professional accountancy corporation that uses the designation "and
company" in the firm title.
Which of the following acts by a CPA who is not in public practice would most likely be considered
a violation of the ethical standards of the profession?
Using the CPA designation without disclosing employment status in connection with financial
statements issued for external use by the CPA's employer.
Distributing business cards indicating the CPA designation and the CPA's title and employer.
Corresponding on the CPA's employer's letterhead, which contains the CPA designation and the
CPA's employment status.
Compiling the CPA's employer's financial statements and making reference to the CPA's lack of
independence.
Which of the following is required if the professional accountant uses experts who are not
professional accountants?
The ultimate responsibility for the professional service is assumed by the expert who is not a
professional accountant.

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The professional accountant is discouraged to engage the services of experts who are not a
professional accountant.
The professional accountant must take steps to see that such experts are aware of ethical
requirements.
Experts who are not professional accountants need not be informed of ethical requirements
because they are not members of the Accountancy profession.
The Rules of Conduct will ordinarily be considered to have been violated when the professional
accountant represents that specific consulting services will be performed for a stated fee and it is
apparent at the time of the representation that the
Actual fee would be substantially higher.
Actual fee would be substantially lower than the fees charged by other professional accountants for
comparable services
Fee was a competitive bid.
Professional accountant would not be independent.
The lead engagement partner should be rotated after a pre-defined period, normally no more
than
a. 2 years
b. 3 years
c. 5 years
d. 7 years
Professional Responsibilities (Related PSAs : PSA 240rev, 250 and 260)
75. An auditor should recognize that the application of auditing procedures may produce evidential
matter indicating the possibility of errors and irregularities and therefore should
Design audit tests to detect unrecorded transactions.
Extend the work to audit most recorded transactions and records of an entity.
Plan and perform the engagement with an attitude of professional skepticism.
Not depend on internal accounting control features that are designed to prevent or detect errors or
irregularities.
Audits of financial statements are designed to obtain assurance of detecting material
misstatements due to
a
b
c
d
Errors
Yes
Yes
Yes
No
Fraudulent financial reporting
Yes
Yes
No
Yes
Misappropriation of assets
Yes
No
Yes
No
Which of the following factors is most important concerning an auditor's responsibility to detect
errors and irregularities?
The susceptibility of the accounting records to intentional manipulations, alterations, and the
misapplication of accounting principles.
The probability that unreasonable accounting estimates result from unintentional bias or intentional
attempts to misstate the financial statements.
The possibility that management fraud, defalcations, and the misappropriation of assets may
indicate the existence of illegal acts.

The risk that mistakes, falsifications, and omissions may cause the financial statements to contain
material misstatements.
In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud
Statistical sampling techniques were not used in the audit engagement.
The auditor planned the work in a hasty and inefficient manner.
Auditors performing important parts of the work failed to discover a close relationship between the
treasurer and the cashier.
The fraud was perpetuated by one client employee who circumvented the existing internal controls.
An error in which an item is posted to the wrong personal account, or the incorrect calculation of an
amount constituting an original entry is a(n)
a.
Error of omission.
c.
Error of principle.
b.
Error of commission.
d.
Compensating error.

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The term error refers to unintentional misrepresentations of financial information. Examples of

errors are when:
Assets have been misappropriated.
Transactions without substance have been recorded.
Records and documents have been manipulated and falsified.
The effects of transactions have been omitted from records or documents.
All of the above statements are true.
Only statements (2) and (4) are true.
Only statements (1) and (3) are true.
All of the above statements are false.
Auditing standards require that auditors be aware of relevant factors relating to fraudulent
reporting. Which of the following statements is false concerning fraudulent reporting?
Fraud frequently involves a pressure or an incentive to commit fraud and a perceived opportunity
to do so.
Two types of fraud relevant to the auditor include material misstatements arising from fraudulent
financial reporting and material misstatements arising from misappropriation of assets.
Fraud involves actions of management but excludes the actions of employees or third parties.
An audit rarely involves the authentication of documentation; thus, fraud may go undetected by the
auditor.
Which of the following is an example of fraudulent financial reporting?
Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.
The treasurer diverts customer payments to his personal due, concealing his actions by debiting an
expense account, thus overstating expenses.
An employee steals inventory, and the shrinkage is recorded in cost of goods sold.
An employee steals small tools from the company and neglects to return them; the cost is reported
as a miscellaneous operating expense.
Lapping is
Making the financial statements indicate a more favorable position by giving effect to transactions
is a period other than that in which these actually occurred.
Done to inflate the cash position or cover the theft of cash by depositing at the end of the
accounting period a check drawing on one bank account in another bank account without making
the necessary deduction in the balance of the first bank.
An irregularity that conceals cash shortages by a delay in recording cash collections, retaining a
customer's payment on credit sales and covering up the shortage with subsequent cash receipts.
A kind of fraud committed by making entry of fictitious payments or failure to enter receipts.

In general, material fraud perpetrated by which of the following are most difficult to detect?
a.
Cashier.
c.
Internal auditor.
b.
Keypunch operator.
d.
Controller.
Certain management characteristics may heighten the auditor's concern about the risk of material
misstatements. The characteristic that is least likely to cause concern is that management
Operating and financing decisions are made by numerous individuals.
Commits to unduly aggressive forecasts.
Has an excessive interest in increasing the entity's stock price through use of unduly aggressive
accounting practices.
Is interested in inappropriate methods of minimizing earnings for tax purposes.
Which of the following information discovered during an audit most likely would raise a question
concerning possible illegal acts?

Related party transactions, although properly disclosed, were pervasive during the year.
The entity prepared several large checks payable to cash during the year.
Material internal control weaknesses previously reported to management were not corrected.
The entity was a campaign contributor to several local political candidates during the year.

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In a financial statement audit, the auditor should consider categories of fraud risk factors relating to
misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets.
Which of the following is a category of risk factors that should be
considered in relation to misstatements arising from misappropriation of assets?
a.
Industry conditions.
c.
Managements characteristics.
b.
Operating characteristics.
d.
Controls.
The auditor is most likely to presume that a high risk of a defalcation exists if
The client is a multinational company that does business in numerous foreign countries.
The client does business with several related parties.
Inadequate segregation of duties places an employee in a position to perpetrate and conceal
thefts.
Inadequate employee training results in lengthy EDP exception reports each month.
Which of the following characteristics most likely would heighten an auditors concern about the
risk of intentional manipulation of financial statements?
Turnover of senior accounting personnel is low.
Insiders recently purchased additional shares of the entitys stock.
Management places substantial emphasis on meeting earnings projection.
The rate of change in the entitys industry is slow.
Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entitys financial statements?
Management places little emphasis on meeting earnings projections.
The board of directors makes all major financing decisions.
Reportable conditions previously communicated to management are not corrected.
Transactions selected for testing are not supported by proper documentation.
Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entitys financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
Audit trails of computer-generated transactions exist only for a short-time.
The chief financial officer does not sign the management representation letter until the last day of
the auditors fieldwork.
Management consults with other accountants about significant accounting matters.
Which of the following inquiries are auditors required to make of management regarding fraud?
Whether management has ever intentionally violated the securities law.
Whether management has any knowledge of fraud that has been perpetrated on or within the
entity.
Managements attitudes toward its employees.
Auditors are not required to make inquiries of management relating to fraud.
When fraud has been identified, CPA responsibility consists of
Report the matter to the police.
He should have prevented it.
He is not at all responsible.

Determination of its extent.

Which of the following is correct concerning the required documentation in the working papers of
the performance of the assessment of the risk of material misstatement due to fraud?
All risk factors considered should be documented and the response to each documented.
Those risk factors identified and the auditors response to them should be documented.
The major categories of risk factors must be identified, but the particular responses to risk factors

identified need not be documented.

No specific documentation is required.
When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an
understanding of the nature of the act to
Evaluate the effect on the financial statements.
Determine the reliability of managements representation.
Consider whether other similar acts may have occurred.
Recommend remedial actions to the audit committee.

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Which of the following statements concerning illegal acts by clients is correct?

An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial
statements is the same as that for errors and irregularities.
An audit in accordance with GAAS normally includes audit procedures specifically designed to detect
illegal acts that have an indirect but material effect on the financial statements.

An auditor considers illegal acts from the perspective of the reliability of management's
representations rather than their relation to audit objectives derived form financial statement
assertions.
An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the
financial statements.
Detection of noncompliance, regardless of materiality, requires considerations of the following:
a
b
c
d
Integrity of management
Yes
Yes
Yes
No
Possible effect on other aspects of the audit.
Yes
Yes
No
Yes
Legal determination of the act of non-compliance.
Yes
No
Yes
No
If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the
engagement, then the auditor should
Notify all parties who may rely upon the companys financial statements of the companys illegal
act.
Consult with legal counsel as to what other action, if any, should be taken.
Return all incriminating evidence and working papers to the clients audit committee for follow-up.
Contact the successor auditor to make the successor aware of the possible consequences of
relying on managements representations.
The regular examination of financial statements is not primarily designed to disclose fraud and
other irregularities although their discovery may result. Normal audit procedures are more likely to
detect a fraud arising from
Forgeries on company checks.
Failure to record cash receipts for services rendered.
Theft of inventories.
Collusion on the part of several employees.
An entity's financial statements were misstated over a period of years due to large amounts of revenue
being recorded in journal entries that involved debits and credits to an illogical combination of accounts.
The auditor could most likely have been alerted to this irregularity by

Scanning the general journal for unusual entries.

Performing a revenue cut-off test at year-end.
Tracing a sample of journal entries to the general ledger.
Examining documentary evidence of sales returns and allowances recorded after year-end.

Quality Controls (Related PSA : PSA 220)

Which of the following best describes what is meant by GAAS?
Acts to be performed by the auditor.
Measures of the quality of the auditor's performance.
Procedures to be used to gather evidence to support financial statements.
Audit objectives generally determined on audit engagements.
The least important evidence of a CPA firm's evaluation of its system of quality controls would
concern the CPA firm's policies and procedures with respect to
Employment (hiring).
Confidentiality of audit engagements.
Assigning personnel to audit engagements.
Determination of audit fees.
The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
Enable the CPA firm to attest to the reliability of the client.
Satisfy the CPA firms duty to the public concerning the acceptance of clients.
Minimize the likelihood of association with clients whose management lacks integrity.

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Page 13 of 38

d. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include
Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion.
Inquiry of third parties, such as the prospective client's bankers and attorneys, about information
regarding the prospective client and its management.
Consideration of whether the internal control structure is sufficiently effective to permit a reduction
in the extent of required substantive tests.
In pursuing a CPA firms quality control objectives, a CPA firm may maintain records
indicating which partners or employees of the CPA firm were previously employed by the CPA
firms clients. Which quality control objective would this be most likely to satisfy?
a.
Professional relationship.
c.
Independence.
b.
Supervision.
d.
Advancement.
The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
Auditors system of quality control has been maintained at a high level.
Results are consistent with the conclusions to be presented in the auditors report.
Audit procedures performed are approved in the professional standards.
Audit has been performed by persons having adequate technical training and proficiency as
auditors.
Which of the following is the best criterion for evaluating a staff auditors work performance?
Quantity of deficiency findings.
Ability to get along with clients.
Working papers appearance.
Fulfillment of requirements set forth in the audit programs.
The auditor with final responsibility for an engagement and one of the assistants have a difference
of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be
disassociated from the matters resolution, the CPA firms procedures should enable the assistant
to
Refer the disagreement to the PICPAs Quality Review Committee.
Document the details of the disagreement with the conclusion reached.
Discuss the disagreement with the entitys management or its audit committee.
d. Report on the disagreement to an impartial peer monitoring team. AICPA 11/93
Pre-engagement (Related PSAs: PSA 210)
Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
An inadequate understanding of the entitys internal control.
The close proximity to the end of the entitys fiscal year.
Concluding that the entitys management probably lacks integrity.
An inability to perform preliminary analytical procedures before assessing control risk.
Before accepting an audit engagement, you as the successor auditor would least likely make
specific inquiries of the previous auditor regarding
Facts that might bear on the integrity of management.
The degree of cooperation the previous auditor received from the clients lawyer.
An inquiry regarding disagreements with management as to auditing procedures.
The predecessor auditors understanding as to the reasons for the change of auditors.

Which of the following factors most likely would influence an auditors determination of the
auditability of an entitys financial statements?
The complexity of the accounting system.
The existence of related-party transactions.
The adequacy of the accounting records.
The operating effectiveness of control procedures.

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Page 14 of 38

112.
In making a decision to accept or continue with a client, the auditor should consider:

a
b
c
d
Its own independence
Yes
No
Yes
No
Its ability to service a client properly
Yes
Yes
Yes
No
The integrity of the clients management
Yes
Yes
No
Yes
Which of the following is least likely a source of information about a potential new audit client?
The predecessor auditor.
Management.
Industry journal.
The new auditors permanent file.
Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by
the auditor. The best place to set forth these arrangements is in
A memorandum to be placed in the permanent section of the auditing working papers.
An engagement letter.
A client representation letter.
A confirmation letter attached to the constructive services letter.
When an auditor believes that an understanding with the client has not been established, he or she
should ordinarily
Perform the audit with increased professional skepticism.
Decline to accept or perform the audit.
Assess control risk at the maximum level and perform a primarily substantive audit.
Modify the scope of the audit to reflect an increased risk of material misstatements due to fraud.
Assuming a recurring audit, in which of the following situations would the auditor be unlikely to
send a new engagement letter to the client?
A recent change in partner and/or staff involved in the audit engagement.
A change in the terms of engagement.
A recent change of client management.
A significant change in the nature or size of the client's business.

Audit planning (Related PSAs: PSA 300, 310, 320, 520 and 570)
117. Adequate audit planning helps ensure that appropriate attention is devoted:

a.
b.
c.
d.
To important areas of the audit
Yes
Yes
Yes
Yes
So that potential problems are promptly identified
Yes
Yes
No
No
So that the work is completed expeditiously
No
Yes
No
Yes
In planning an examination, the auditor would consider all of the following matters, except
Anticipated reliance on internal controls.
Preliminary judgment about materiality levels for audit purposes.
Financial statement items likely to require adjustment.
The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given.
Which of the following situations would most likely require special audit planning by the auditor?
Some items of factory and office equipment do not bear identification numbers.
Depreciation methods used on the clients tax return differ from those used on the books.
Assets costing less than P5,000 are expensed even though the expected life exceeds one year.
Inventory is comprised of precious stones.
This includes distributing assignments among staff assistants and reviewing the progress of such
assignments on a periodic basis.
a. Supervision

AT-PW 5/07

b. Staff training

c. CPE

d. Planning.

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