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NATIONAL COLLEGE OF BUSINESS AND ARTS

Cubao-Fairview-Taytay
Summer SY 2015-2016

MID-TERM DEPARTMENTAL EXAMINATIONS 3 HRS


ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one
answer for each item by shading the corresponding letter of your choice on the answer sheet
provided. STRICTLY NO ERASURES ALLOWED. Use Pencil No. 2 only.

1. Which of the following best describes assurance services?


a. Independent professional services that report on the client’s financial statements.
b. Independent professional services that improve quality of information for decision
makers.
c. Independent professional services that report on specific written management assertions.
d. Independent professional services that improve the operations of the client.

2. Which of the following is the essential purpose of the audit function?


a. Detection of fraud.
b. Examination of individual transactions to certify as to their validity.
c. Determination of whether the client’s financial statement assertions are fairly stated.
d. Assurance of the consistent application of correct accounting procedures.

3. To exercise due care, an accountant should


a. Take continuing professional education class.
b. Report whether the financial statements are in accordance with the applicable financial
reporting framework.
c. Gather enough audit evidence to have complete assurance that there is enough support
for the accountant’s opinion on the financial statements.
d. Conduct the engagement in accordance with GAAS and ensure that the engagement is
completed on a timely basis.

4. CPA Krogstad is the executive in charge of the Omaha office of the audit firm. he is responsible for
the practice in all areas of audit, tax and consulting but he does not serve as a field audit partner or
a reviewer. CPA Ward is the partner in charge of the Dodger, Inc. audit (an SEC filing). The audit
firm’s independence is impaired if:

a. Krogstad’s brother owns 10 shares of Dodger common stock.


b. Ward’s sister - in law is a sales representative with a territory in California
c. Krogstad owns Dodger common stock.
d. Ward’s fellow partner CPA Felix in the Omaha office has a wife who owns Dodger stock
through a mutual fund help in her own employer’s employee benefit plan.

5. Based on the Sarbanes-Oxley, who is ultimately responsible for independence of the external
auditor?
a. The CPA firm’s engagement partner.
b. The CPA firms’ quality control partner.
c. The client’s senior management
d. The audit committee.

6. An audit team uses assessed risk of material misstatements


a. Evaluate the effectiveness of the entity’s internal control policies and activities.
b. Identify transactions and account balances where inherent risk is at the maximum.
c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently
high.
d. Determine the acceptable level of detection risk for financial assertions.

7. Auditor should design the written audit plan so that


a. All material transactions will be selected for substantive testing.
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

b. Substantive tests prior to the balance sheet date will minimize.


c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or test of transactions.

8. The risk of material misstatement differs from detection risk in that it


a. Arises from the misapplication of audit procedures.
b. May be assessed in either quantitative or non - quantitative terms.
c. Exists independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

9. Which of the following corporate finance services create advocacy or self - review threats cannot be
reduced to an acceptable level?
a. Committing the assurance client to the terms of a transaction or consummating a
transaction on behalf of the client.
b. Assisting a client in developing corporate strategies.
c. Assisting in identifying or introducing a client to possible sources of capital that meet the client
specifications or criteria.
d. Providing structuring advice and assisting a client in analyzing the accounting effects of
proposed transactions.

10. When accountants agree to perform a compilation or review of unaudited financial statements, the
best way to avoid clients misunderstanding the nature of the work is to describe it completely in
a. An Engagement Letter
b. The auditor’s opinion
c. A report to the clients’ board of directors at the close of the engagement.
d. A management letter to the board of director’s audit committee.

11. Under generally accepted auditing standards auditors are responsible for detecting
a. All manner of fraud
b. Theft and illegal acts
c. Violations of auditing standards
d. Material misstatements of financial statements

12. Generally accepted auditing standards states that analytical procedures


a. Should be applied in the planning and final review stages of the audit and as a substantive
test during the audit.
b. Should be applied in the planning and final review stages of the audit and can be used as a
substantive test during the audit.
c. Should be applied in the planning stage and can be applied as a substantive test and in the
final review stage.
d. Should be applied in the final review stage and can be applied as a substantive test and in
planning stage.

13. Prior to beginning the fieldwork on a new audit engagement in which the audit team does not
possess expertise in the industry in which the client operates, the audit team should
a. Reduce audit risk by lowering the preliminary levels of materiality.
b. Design special substantive tests to compensate for lack of industry expertise.
c. Engage financial experts familiar with the nature of the industry.
d. Obtain knowledge of matters that relate to the nature of the entity’s business.

14. When determining the inherent risk related to an account balance, an auditor theoretically does not
explicitly consider the
a. Liquidity of the account
b. Degree of management estimation involved in determining in the proper account balance.
c. Related internal control policies and procedures.
d. Complexity of calculations involved.

15. Acting for an audit client in the resolution of a dispute or litigation would most likely create
a. Self - interest threat c. Advocacy Threat
b. Intimidation threat d. Familiarity Threat

16. The Philippine Code of Ethics requires that lead engagement partners of listed entities be rotated at
least once every
a. 2 years c. 5 years
b. 3 years d. 7 years
17. The accounting profession may have contributed to the downfall of Enron and the large public
losses in all of the following ways EXCEPT:
a. Accounting became very rule - oriented and created groups of auditors that perceived value in
finding the limits of the rules.
b. Auditors were hired and fired by management
c. Audit committee were ineffective
d. The accounting firm earned more from Enron in non audit fees that it earned in audit fees.

18. Which of the following auditor concerns most likely could be so serious that the auditor concludes
that a financial statement audit cannot be conducted?
a. The entity has no formal written code of conduct.
b. The integrity of entity’s management is suspect.
c. Procedures requiring separation of duties are subject to management override.
d. Management fails to modify prescribed controls for changes in conditions.

19. In an agreed - upon procedure engagement, an accountant


a. Follows all GAAS filed work standards
b. Restricts the report to specified users
c. Includes negative assurance in the report.
d. Gives a qualified audit report.

20. For which of the following judgments may an independent auditor share responsibility with an
entity’s internal auditor who is assessed to be both competent and objectives?
Assessment of Inherent Risk Assessment of Control Risk
a. Yes No
b. Yes Yes
c. No No
d. No Yes

21. Which of the following procedures would most likely be performed during planning?
a. Surprise counts of the client’s petty cash fund.
b. Reporting Internal control deficiencies to the audit committee
c. Performing a search for unrecorded liabilities
d. Identifying related parties

22. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s accounting staff held in private.
b. Inspection of pre - numbered client shipping documents.
c. Inspection of bank statements obtained directly from the client’s financial institution.
d. Analytical procedures performed by auditors on the client’s trial balance.

23. Subject Matter is one of the five elements of an assurance engagements. Which of the following is
not included under subject matter:
a. The responsible party
b. Data entered in files and databases
c. Systems and processes within the management
d. Behavior of the management

24. All are generally accepted auditing standards for Fieldwork EXCEPT:
a. The work is to be planned and be properly supervised
b. Due professional care is to be exercised in the performance of the audit an preparation of the
report.
c. Sufficient understanding of Internal Control of the client.
d. Sufficient and appropriate evidential matter should be gathered in order to afford a reasonable
basis for an opinion regarding the financial statements.

25. Which of the following provides the best method of obtaining an understanding of a continuing
client’s business for planning an audit.
a. Performing tests of details of transactions and balances.
b. Reviewing prior year audit documentation and permanent file for the client.
c. Reading specialized industry journals.
d. Reevaluating the client’s internal control environment.
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

26. Which of the following is the least important audit reason for the auditor’s obtaining an
understanding of a company’s internal control.
a. To serve as a basis for constructive suggestions.
b. To plan subsequent substantive tests.
c. To identify types of potential misstatements.
d. To consider factors that affect the risk of material misstatement.

27. Assessing control risk at below the maximum level most likely would involve
a. Performing more extensive substantive tests.
b. Ascertain whether internal control policies and activities have been placed in operation.
c. Changing the timing of substantive tests by omitting interim - date testing and performing the
tests at year end.
d. Identify specific internal control structure policies and procedures relevant to specific
assertions.

28. Auditing standards require the auditor to obtain an understanding of the client’s internal control
structure.
a. For every audit
b. For first time audits
c. Sufficient to find any frauds which may exist.
d. Whenever it would be appropriate.

29. Which of the following most likely would not be considered an inherent limitation of the potential
effectiveness of an entity’s internal control.
a. Incompatible Duties
b. Management Override
c. Mistakes in Judgment
d. Collusion among employees
30. The most efficient means of gathering evidence about the internal control is to conduct a formal
interview with knowledgable managers and
a. Write a narrative description of each important control.
b. Prepare a flowchart illustrating the internal control.
c. Prepare a well indexed file of audit documentation.
d. Use an internal control questionnaire.

31. Which of the following audit procedures most likely would provide an auditor with the most
assurance about the effectiveness of the operation of an entity’s internal control?
a. Confirmation with outside parties
b. Inquiry of client personnel
c. Successful re-performance of the control procedure.
d. Observation of client personnel.

32. When auditing financial statements of a private company, the minimum work an auditor must
perform in connection with a company’s internal control is best described by which of the following
statements:
a. Perform exhaustive tests of accounting controls and evaluate the company’s control system
effectiveness.
b. Determine whether the company’s control policies are designed well enough to prevent
material errors.
c. Prepare auditing working papers documenting the understanding of the company’s internal
control.
d. Design procedures to search for significant deficiencies in the actual operation of the
company’s internal control.

33. Evidential matter is generally considered sufficient when


a. It is appropriate
b. There is enough of it to afford a reasonable basis for an opinion on financial statements.
c. It has qualities of being relevant, objective and free from unknown bias.
d. It has been obtained by random selection

34. Which of the following is not one of the elements of the control environment?
a. Process for recording transactions and preparing financial statements.
b. Presence of an internal auditing function.
c. A company’s organizational structure
d. Methods of assigning authority and responsibility.
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

35. In an audit of financial statements, an auditor’s primary consideration regarding an internal control
policy or activity is whether the policy or activity.
a. Reflects management’s philosophy and operating style.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision making processes.

36. Which of the following is not a characteristic of the primarily substantive approach:
a. The auditor usually gathers all or most of the evidence with substantive tests.
b. Usually little or no reliance is placed on controls.
c. The assessment of control risk is usually at or near maximum level.
d. Extensive test of controls are performed.

37. A good fraud prevention program should address employees’ motivation to steal from the
company. The best method for doing this is to:
a. Establish employee assistance programs.
b. Require a fidelity bond on all employees.
c. Require reconciliation of all accounts to bed reviewed by a supervisor.
d. Ensure audits of all accounts with high inherent risk of fraud.
38. In the preparation of the audit program, which of the following items is not essential?
a. A review of material from prior audits.
b. The preparation of budget identifying the costs of resources needed.
c. An understanding of controls established by management.
d. Assessment of inherent risk.

39. Which of the following accounts tends to be more predictable for the purposes of analytical
procedures?
a. Accounts Receivable
b. Travel and Entertainment expense
c. Interest expense
d. Income taxes payable.

40. The establishment of an overall audit strategy involves:


I. Determining the characteristics of the engagements that define its scope.
II. Ascertaining the reporting objectives of the engagement to plan the timing of the nature
of the communication’s required.
III. Considering the important factors that will determine the focus of the engagement
team’s effort.
a. I and II only
b. II and III only
c. I and III only
d. I, II, III

41. In the planning stage of an audit engagement, the auditor is required to perform audit procedures
to obtain an understanding of the entity and its environment, including its internal control. These
procedures are called:
a. Risk Assessment procedures
b. Substantive test
c. Test of controls
d. Dual purpose tests.

42. In connection with the planning phase of audit engagement, which of the following statement is
always correct?
a. Final staffing decisions must be made prior to completion the planning stage.
b. Observation of inventory count should be performed at year end.
c. A portion of audit work only after the entity’s books have been closed for the period under
audit.
d. An engagement should not be accepted after the client’s financial year - end.

43. Internal auditing can affect the scope of the external auditor’s audit of financial statements by:
a. Decreasing the external auditor’s need to perform detailed tests.
b. Eliminating the need to observe the physical inventory taking.
c. Allowing the external auditor to limit his/her audit to performance of substantive test
procedures.
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

d. Limiting direct testing by the auditor to management assertions not directly tested by internal
auditing.

44. If the external auditor decides that it is efficient to consider how the work perform by the internal
auditors may affect the nature, timing and extent of audit procedures, he/she should assess the
internal auditors.
a. Efficiency and experience
b. Independence and review skills
c. Training and supervisory skills
d. Competence and objectivity

45. When issuing an unmodified auditor’s report, the auditor


a. May refer to the work of an expert
b. Should refer to the work of an expert to indicate a division of responsibility.
c. Should include in auditor’s report the identity of the expert and the extent of the expert’s
involvement
d. Should not refer to the expert’s work.

46. The component of internal control is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure and influences the control consciousness of
employees.
a. Control activities
b. Monitoring of controls
c. Control environment
d. The entity’s risk assessment process.

47. Monitoring of controls is accomplished through on - going monitoring activities, separate


evaluations or a combination of two. An entity’s on - going monitoring activities often include.
a. Periodic reporting by the entity’s internal auditor about the functioning of internal control.
b. Reviewing of purchasing functions.
c. Periodic audit by the audit committee
d. The audit of the annual financial statements.

48. Control activities constitute one of the five components of internal control. Which of the following is
not included in this internal control component?
a. Segregation of duties
b. Performance reviews
c. An internal audit function
d. Authorization

49. Information regarding segregation of duties is best obtained by:


a. Performing tests of transactions that corroborates management’s financial statement
assertions.
b. Developing audit objectives that reduce control risk.
c. Observing employees as they apply specific controls
d. Obtaining a flowchart of activities performed by entity personnel.

50. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will
test the procedures.
a. Inquiry and analytical procedures
b. Inquiry and observation
c. Analytical procedures and confirmation
d. Confirmation and observation

51. A dual purpose test simultaneously


a. Addresses two different accounts
b. Functions as substantive test and test of controls
c. Functions as an analytical procedure and substantive tests
d. Substantiates an ending balance and the transactions making up the balance.

52. If all factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate
and decreasing the risk of assessing control risk too low would have what effect on sample size.
a. Increase
b. Remain the same
c. Decrease
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

d. Indeterminate depends upon exact change being made

53. Which of the following is not generally used for selecting samples?
a. Random number tables
b. Random number generators
c. Physical representation numbers
d. Systematic selection

54. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too
high relate to the:
a. Efficiency of audit.
b. Effectiveness of the audit.
c. Selection of the sample
d. Audit quality controls

55. A small business owner can best offset the lack of separation of duties by
a. Creating an internal audit department
b. installing the latest computer equipment and software
c. Being actively involved in the accounting process
d. Relying on the external auditor to detect errors

56. Before the impact of adjusting entries proposed by the auditors are included in the client’s
financial statements, the adjustments must be approved by the
a. Client’s management
b. Audit manager
c. Engagement partner
d. Engagement quality review partner

57. To whom should management representations be addressed?


a. Auditors
b. Board of Directors
c. Client
d. Stockholders

58. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping
documents. The procedures is related to which of the following assertions.
a. Existence
b. Completeness
c. Rights and obligations
d. Valuation or allocation

59. If auditors are appointed on January 3, 2010, the balance sheet date is December 31, 2010, the
audit completion date is February 7, 2011 and the audit report release date is March 3,2011, what
is appropriate date of management representations?
a. January 3, 2010
b. December 31, 2010
c. February 7, 2011
d. March 3, 2011

60. At the review stage of an audit, the application of analytical procedures is


a. Recommended by auditing standards
b. Not mentioned in the auditing standards
c. Not useful, since detailed substantive procedures have already been performed.
d. Required by auditing standards.

61. Which of the following parties provides a review of audit documentation for the primary purpose of
ensuring that the quality of the work and reporting is consistent with the quality standards of the
accounting firm?
a. Audit manager
b. Audit Supervisor
c. Engagement Partner
d. Engagement Quality Partner
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

62. Which of the following is not required by Generally Accepted Auditing Standards?
a. Management Representations
b. Attorney Letter
c. Management Letter
d. Engagement Letter

63. Accounting records least likely include


a. The records of initial entires and supporting records
b. The general and subsidiary ledgers
c. Work sheets and spreadsheets supporting cost allocations
d. Comparable data about competitors (benchmarking)

64. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of the meeting
b. Confirmations from third parties
c. Information obtained by the auditor from such audit procedures as inquiry, observationand
inspection
d. Adjustments to the financial statements that are not reflected in formal journal entries.

65. The following are assertions about account balances EXCEPT:


a. Existence
b. Rights and Obligations
c. Valuation and Allocation
d. Cutoff

66. Which of the following audit procedures is used extensively throughout the audit and often is
complementary to performing other audit procedures?
a. Inspection
b. Observation
c. Inquiry
d. Confirmation

67. The objective of test of details of transactions performed as substantive tests is to


a. Attain assurance about the reliability of the accounting system
b. Evaluate whether management’s policies and procedures operated effectively.
c. Detect material misstatements in financial statements.
d. Comply with generally accepted auditing standards.

68. Which of the following auditing procedures is ordinarily performed last?


a. Reading of minutes of directors’ meetings
b. Confirming accounts payable
c. Obtaining a management representation letter
d. Testing of the purchasing function

69. A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is
likely to result in:
a. Confirmation of related lawsuits with the claimants
b. Qualification of the audit report
c. An assessment that loss of the litigation is probable
d. An adverse opinion

70. Auditors must communicate internal control “significant deficiencies” to


a. The audit committee
b. The shareholders
c. The SEC
d. The BIR

71. The review of audit working papers by the audit partner is normally completed:
a. Prior to year - end
b. Immediately as each working paper is completed
c. Near the completion of field work
d. After issuance of the audit report, but prior to required subsequent event review procedures.
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

72. Auditors should perform audit procedures relating to subsequent events?


a. Through year end
b. Through issuance of audit report
c. Through the last day of field work
d. For a reasonable period after the year end

73. Which of the following is not part of Wrap - up procedures?


a. Final Analytical Procedures
b. Issuance of a new audit report upon discovery of subsequent facts and errors in the financial
statements
c. Evaluating audit findings and obtaining client’s approval for the proposed adjusting entries
d. Evaluation of the entity’s ability to continue as a going concern business.

74. Which of the following statements is not true regarding subsequent events occurring after the
report date but before the financial statements are issued:
a. The auditor should ask the management regarding the subsequent event occurring after the
date of the auditor’s report.
b. The auditor does not have any responsibility to perform subsequent events occurring after the
report date.
c. If the auditor becomes aware of the event, the auditor should take necessary actions to
ascertain whether such event has been properly accounted for and disclosed in the notes.
d. Failure of the management to make appropriate amendments will cause the auditor to issue
either qualified or adverse opinion.

75. Auditor’s working paper:


a. Support in the auditor’s opinion on Financial Statements
b. Support on the auditor’s representations as to the compliance with PSA
c. Assist the auditor in planning, performance, review and supervision of engagement
d. All of the above

**** THE END ****

GOD BLESS!