5" FloorCMFFIBuilding 813 Cor. R. Papa and S, Loyola Sis. ‘Sampaloc, Manila 99735-9807 / 734-3989 / (0910) 439-1320 resareview@hotmail. com AUDITING THEORY Jose M, Irenéo - George R. James Elirie S. Arafias AT-PW: PRE-WEEK QUES TIONS 1. The Core Competencies of CPAs indude: ‘Assurance and information integrity Strategic and critical thinking skits Objectivity. D. Pursuit of life-long learning and excellence 2. Which of the following describes most completely how the profession defines independence? ‘A. performing an audit from the public's point of view B. avoiding the appearance f a significant interest in an audit client's interest resisting a dent's reluctance to reveal evidence accepting responsibilty to act professionally and in accordance with the professional Code of Conduct 3. What kind of treats are created by vitue ofa dose business relationship nth assurance cnt? i. Setranterest heat C. Serimerest and sl review treat © Seteiterest and inimidetion teat D._ No treats are cretes 4. Family and personal relationships between a member ofthe assurance team and @ director, an officer or certain employees, depending on their role, of the assurance cient, least likely create Self-interest threat. © Intimidation threat. Self-review threat. D. Famiiarity threat. 5. If firm, or network firm, personne providing such assistance make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Examples of such managerial decisions include the following, except A. Determining or changing journal entries, or the classifications for accounts or transactions or other * "accounting records without obtaining the approval of the audit cients. Authorizing or approving transactions. C.Preparing source documents or originating data (including decisions on evaluation assumptions), or 4. Making changes to such documents or data. ©} Assisting an audit cient in resolving account reconciliation problems. 6. The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, ‘when it is impractical for the audit dient to make other arrangements, would not be considered to pose an ‘unacceptable threat to independence. provided: ‘A. The firm or network firm, does not assume any managerial role or make any managerial decisions. 8. The audit cient accepts responsibilty for the results of the work. Personnel providing the services are not members of the assurance team. Allof the above, 7. Ifthe valuation services involves the valuation of matters material to the financial statements and the valuation involves a significant degree of subjectivity the self-review threat created. . (choose the Incorrect one) Could not be reduced to an acceptable level by the application of any safeguard. ‘Could be reduced to an acceptable level by the application of safeguards. C. Such valuation services should not be provided. 3 D. The assurance team should withdraw from the audit engagement, if the team opted to perform the valuation services. é 8. Waste Management and Enron are classic cases wherein the media was critical that auditors: ‘A. Were ignorant of the existing audit and assurance standards. B. Have failed to plan the audit engagements property. ‘Overlooked suspicions of earnings management reported in the Wall Street Journal. Received significant consulting fees relative to audit fees. 9. The Code of Professional Ethics would most likely be violated if an auditor: ‘Owns a building and leases floor space to an assurance client. {Has an insured account with a brokerage firm audit cient. CIs engaged by an audit client to identify potential acquisitions. D. Screens candidates for an audit client's vacant controllership position. 10. Peepay, CPA, is an audit manager of the Dom, Day and Jordan, CPAs, accounting firm. He has just been assigned to the audit of the Lugao Money Market Fund. Peepay has maintained 2 money market account with LMIMF since it opened in 2005. All his savings, amounting to 75% of his total assets, are in this account, which pays the highest interest available in money market funds. However, his account constitutes only 0.00001 percent of the fund's assets. Is the aucit firm's independence impaired in this situation? ‘A. Yes. Peepay is considered a member of the assurance team, since he is a manager and will provide audit services to LMF. The firm's independence is impaired since Peepay holds a material indirect financial interest. ReSA ~ The ReviewSchool of Accountancy Page 1 of 18Pe > geect (Z ReSA: The ReviewSchoo! of Accountan Cy Auating Theory: Preweek Questons AT-PW @ Yes. Peepay is considered a inember of the assurance team, since he is a manager and will provide audit services to LMF. The firm's independence is impaired since Peepay holds a direct financial interest. No. Peepay, despite being a "member of the assurance team” holds only 0.00001 percent of the fund's assets. His financial interest in CMMF is irelevant to the question on independence, D. No. Peepay, despite being a "member of the assurance team” holds only 0.00001 percent of the fund's assets. Tt is the audit partner in charge of the LMMF engagement (and not Peepay) who should be checked for any direct or material indirect financial interest in the audit dient. (Numbers 11 to 13follow) CPA Troy's/Wife owns 20 percent of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009. 11. May Troy perform the audit of Pugad Company for the calendar year ended December 31, 2009? A. Yes, since its Troy's wife who owns the shares and not Troy. ‘Yes, because the interest is less than 50 percent and therefore Troy is considered independent. ‘No, since Troy's wife's interestis attributed to him, and he would not be independent. . No, since Troy's wife's interest constitutes significant influence and gives rise to an intimidation threat. 12, Assume that Troy's wife gave her shares to their (dependent 10-year-old daughte}, Tiny, on July 1, 2009. May Troy,gow perform the audit of Pugad Company for the calendar year ended December 31, 2009? {G."No, foros long 2= Tiny isa depernient Ch. “The franca interests considered Gre. Yes, because Troy is now considered independent since it is his daughter who now owns the shares. C. No, for as long as Tiny is a dependent child. ‘The financial interest is considered indirect. D. Yes, because under the Code of Ethics, the interest in Pugad Company is no longer relevant to Troy's decision whether to accept or dedine the audit engagement. 13. Assume further that Tiny, acting through an appropriate custodian, sold the shares to her grandfather Lolo Dom on August 1, 2009. His purchase, as an accommodation, took two:third8 of his retirement savings. May Troy ‘now perform the audit of Pugad Company for the calendar year ended December 31, 2009? Yes. But only if Lolo Dom is not Troy's father (.e., Lolo Dom is Troy's father-in-law). No. The appearance of independence is impaired. Moreover, the grandfather's investment is material (66.67 percent) in relation to his net financial resources Yes, Troy may now accept the engagement since thers is no impairment of independence. Lolo Dom is ‘considered a non-dependent close relative. D. No. The independence in mental attitude is impaired. Moreover, the grandfather's investment is ‘material (66.67 percent) in relation to his net financial resources, 14, On August 20, 2009, Mar Bonafe, CPA and partner, was offered and accepted the engagement to audit the annual financial statements of ABC Corporation for the fiscal and calendar years ended December 31, 2009. ‘The audit began on September 15, 2009, and ended on March 17, 2010. ABC Corporation is regulated by the SEC. Bonafe served as controller of ABC Corporation from November 5, 2002 until January 12, 2009, at which time he teminated his employment with ABC. Mar Bonafe owned a material amount of ABC Corporation's ordinary shares from November 5, 2002 until August 15, 2009, at which time he sold the shares. Is Mar Bortafe in violation of the Code of Ethics due to impairment of independence? Yes, because Mar Bonafe owned ABC shares atthe start of the audit for December 31, 2008. tes em atria oa.ci cos Seta wee Cyt eae n petoog co © Yes, because Mar Bonafe had an employment relationship with the client during part of the. period covered by the financial statements D. Yes, because it is stil less than a year since Mar Bonafe has owned shares in ABC Corporation 15, The provision of services by a firm or network firm to an audit dient that involve the design and implementation Of financial information technology systems that are used to generate information forming part of a cient’s financial statements may most likely create ‘self-interest threat, Intimidation threat. Self-review threat. D. Familiarity threat [DD 16. Legal services are defined as ‘A. The making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination ofboth in order to compute a certain value, or range of valves, for an asset, a liability or for a business as a whole. oho Cena’ B.A broad range of services, including compliance, planning, provision of formal taxation opinions and assistance in the resolution of tax disputes. 7 ef May include such activities as acting as an expert witness, calculating estimated damages or other ‘amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation, Lt a> © fny sence for which the person providing the serves must ether be admitted to practice before the Courts of the jurisdiction in which such services are to be provided or have the required legal training to practice law. 17, The recruitment of senior management for an assurance client, such as those in a poston to affect the subject of the assurance engagernentt may least likely create >< Seif-interest threat. Intimidation threat. ‘Advocacy threat D. Familiarity threat. \9735-9807 / 734-3989 / (0910) 439-1320 b-tesareview@hotina Page 2B ‘ ReSA: The ReviewSchool of Accountanc Huatng Theory: Preweek Questions AT-PW 18, CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected ‘an honorary member of the board of directors. Ela will not be considered independent unless: a 8 D ~The position is in fact purely honorary Yes: ‘Yes @ Yes - Listings of directors show she is an honorary director, No ‘Yes Yes. No = She restricts participation strily to the use of her name. Yes. «=sdNO. Yess {She does not vote or partipate in management functions Yes —=«sYes,:«=s«sYes:—=Ss«(Yes 19. This is the date selected by the practitioner to date the report : A Dual date © ate of report B. Date of signing ‘D. Last day of field work 20. A network @ 8 c D + That is aimed at cooperation oN Yes No <._ Thats clearly aimed at profit or cost-sharing or shares commonownership, control or management, common quality contro! policies and procedures, common business: strategy, the use of a common brand name, or 2 significant part of professional resources Yes Yes No No 21. The firm shall establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm orthe engagement partner issue reports that are appropriate in the circumstances.Such Policies and procedures shall include: ‘A. Matters relevant to promoting consistency in the quality of engagement performance B. Supervision responsibilities Review responsibilities Al of the choices. 22. In reviewing the audit work performed, the engagement partner: ‘Must review all audit documentation. ‘Need not review all audit documentation, but may do so. ‘Need not review all audit documentation. D, Must ask the staff performing the audit work to sign the audit report. 23, One of the major parts of audit planning is realanming, Whit pre-planning phase? A. Deciding whether to accept or continue this cient. (8) Obtaining information about client's legal obligations. Selecting staff for the engagement. D. Obtaining an engagement letter. 24. Which of the following matters is least likely to be discussed in an engagement letter? ‘A. the fact that the financial statements are the responsibility of management. the fact that an auditor does not plan to detect material irregularities. assistance to be provided by client personnel. . timing of the performance of the examination 25, To obtain an understanding of a continuing cient’s business in planning an audit, an auditor most likely would Perform tests of details of transactions and balances. Review prior-year working papers and the permanent file for the dient. Read specialized industry journals. D. Reevaluate dient’s intemal control environment. 26. A CPA may reduce the audit work on a first time audit by reviewing the working papers of the predecessor ‘auditor. The predecessor should permit the successor to review working papers relating to matters of Continuing significance such as those that relate to (A. eRENE Of reliance On the work of specaksts, (©) analysis of contingencies B. fee arrangements and summaries of payments. _D. staff hours required to complete the engagement. 27. The following statements relate to audit programs. Which statement is true? ‘A. The FRSC publishes a standard audit program and encourages the adoption for general use. ‘The preparation of an audit program is not influenced by the state of the client's internal control system. ‘An audit program would not contain documentation of the system being reviewed. Of the following is NOT involved during the ‘The audit plan and related program should no longer be changed once the audit is started. ~ ‘ay clove 28. This means the amount or amounts set by the auditor at less than materiality for the FS as a whole to reduce to {an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materaity for the FS asa whole. ‘A. Allowance for sampling risk Standard deviation B. Planning materiality Performance materiality ReSAS 735-9807 / 734-3989 / (0910) 439-1320 fresoreview@hotmel.con Page 3ReSA: The ReviewSchoo! of A‘ Auctng Theory: Preweek Questions. AT-PW 29. Which of the following statements best describes why an auditor makes a preliminary estimate of materiality? ‘A. an estimate is required by generally accepted auditing standards the estimate provides a basis for evaluating likely misstatements the estimate helps the auditor plan the appropriate evidence to accumulate 'D. estimating materiality early helps the auditor avoid legal liability 30. Which of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk? ‘A. Management bonuses are based on 2 percentage of net income. ‘A bond indenture requires a current ratio of at least three to one. Gent makes extensive use of notes receivable and notes payable rather than buying and selling on ‘open-account basis. D. lent is a parent company with a subsidiary. 31. While performing an audit, Conrad, CPA, decides to restrict the risk of material misstatement to 3%. What. ‘must the acceptable level of detection risk be if inherent riskjs 25% and control risk és 40%? A 0.3% 30.0% B. 12.0% 0. 333% 32. Thg reliance approach (aka: systems approach) to an audit is least likely to be appropriate for: Gients with weak internal control. C. Glients in specialized industries. B. Clients that are large in size. D. Glients that are publidy listed. 33. One of the auditor's major concems is to ascertain whether the internal control structure is designed to provide reasonable assurance that ‘A. Profit margins are maximized, and operational efficiency is optimized, B. The chief accounting officer reviews all accounting transactions. Corporate morale problems are addressed immediately and effectively ‘Transactions are executed in accordance with management's general or specific authorization, 34. Which of the following would be feast likely to be considered an objective of the internal control structure? Checking the accuracy and reliability of accounting data. Detecting management fraud. C._ Encouraging adherence to managerial policies. D. Safeguarding assets. 35. Which of the following comes CLOSEST to outlining the auditor's responsibility for internal control on all financial statement audits? A. An understanding of the control environment and the accounting system is necessary; an understanding Of the contol provers is pecesony (or btes wich the ati perforin test of conto (Ger sicko ri Sean unser or each tr tu te opal conse! Seer eatin plan beaut Wve tats Gates ave bce patties tee ace acted a ed les than he ae D. An understanding of the contro! environment is necessary, but not of the accounting system or control Fae ah vee conte e's ie aoneed eta a hor te osm 36. An_objective of a walk-through is to: ‘Verify that the structure has been placed in operation. B. Replace tests of controis. .. Evaluate the major strengths and weaknesses in the client's structure. D. Identify weaknesses to be communicated to management in the management letter. 37. Which of the following is an advantage of describing internal control through the use of a standardized internal questionnaire? Questionnaires highlight weaknesses in the system. B. Questionnaires are more flexible than other methods of describing internal control Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system, D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of Gescribing internal control 38. The overall attitude and awareness of an entity's board of directors conceming the importance of the internal control structure usually is reflected in its: ‘A. Computer-based controls. © Control environment. B, System of segregation of duties. 1D. Safeguards over access to assets 39. Control procedures do not encompass: ‘A. Comparison of assets with recorded accountability B. Design and use of documents. Proper safeguards over access to assets. ‘An internal audit function. 40. This term means “to analyze identified risks to conclude on their significance”: Estimate. @ Assess. C. Measure. D. Analyze. ReSA'735-9807 / 734-3989 / (0910) 439-1320 ‘ew@hotmall.con Page 4= S D ’ ReSA: The ReviewSchoo of Accountancy Aualing Theor: Preweek Questions AT-PW 41, A dgficency in internal contro! exists when: ‘A contol is designed, implemented or operated in such a way thatit is unable to prevent, or detect and Correct, misstatements in thefinancal statements on a timely basis, B. A-control necessary to prevent, or detect and correct, misstatementsin the financial statements on a timely basis is not missing. C._ There is a deficiency or combination of deficiencies in internal control that, in the auditor's professional judoments of sufficient importance to merit the attention of those charged withgovemance. D. Allf these choices describe a deficiency in internal control. 42. The auditor shall communicate significant deficiencies in internal control identified during the audit to those charged with governance on a timelybasis. Such communication: May be done orally or in writing. Must be done orally Must be in writing . Is not required by Philippine Standards in Auditing, te TAPE Sr eicure tnd eed ncrTTAea: itr ritamaeti |S IyGicom) sochicie s8 aicaete diate nent ider the ‘A. VP-operations, «8. _—-‘Treasurer Controller D. Internal auditor 44. Transaction cycles begin and end: ‘A. Atthe beginning and end of the fiscal period. B. At the balance sheet date. At January 1 and December 31 [At the origin and final disposition of the company. 45. The authority to accept incoming goods in receiving should be based on a( ‘A. Vendor's invoice. . Bill of lading. 8. Materials requisition. ‘Approved purchase order. 46. Input documents are typically the responsibilty of the: ‘User department that transmits the documents to accounting before processing BB. Accounting department which prepares and records them. CC. Production and quality contro! department to see that they are prepared properly. D. Computer department since they will have to be responsible for inputting them, 47. "Control activites’ include procedures that pertain to physical controls over access to and use of assets and Is. A departure from the purpose of such procedures is that ‘Access to the safe-deposit box requires two officers . Only storeroom personnel and line supervisors have access to the raw materials storeroom. C., The mail clerk compiles a list of the checks received in the incoming mail D. Only salespersons and sales supervisors use sales department vehicles. 48, Effective internal contro! requires organizational independence of departments. Organizational independence ‘would be impaired in which of the following situations? The internal auditors report to the audit committee of the board of directors. 6 ‘The controller reports to the vice president for production. ‘C. The payroll accounting department reports to the chief accountant. . The cashier reports to the treasurer. 49, Which of the following statements is true? ‘A. Accounting for the sequence of pre-numbered documents is a control procedure intended to achieve specific control objectives related to validity, Incompatible functions are those that place any person in 2 postion to perpetuate errors or irregularities. If comparison reveals that the assets do not agree with the recorded accountability it provided evidence cof unrecorded or improperly recorded transactions. D. A-chart of accounts is generally prepared in detail to enable the controller to pinpoint budget variance and trace it to @ specific department or area of responsibilty 50, The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by: A. The amount of assets without reference to the cost of the comparison. ‘The nature and amount of the asset and the cost of making the comparison, ‘The cost of the comparison and whether the susceptibility to loss results from unintentional errors or intentional irregularities and/or defalcations. . The auditor in consultation with client management. 51. Which one ofthese is not @ type of evidence that would be used for both obtaining an understanding of the contro structure and testing the contvols? Angus B "inspection, -—«&.-—Obsenaton. (6) _—Reperormance. 52. An errr 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): Error of omission C. Error of principle & Error of commission D. Counterbalancing error ReSAS735-9807 / 734-3989 / (0910) 439-1320 Mirvsar tinalscom pede s| eae ie a ee ee eee rT em ey my eRe LK Pama, Pree AT Wea cs RR ReSA; The ReviéwSchool of Ac Ang Theory: Preweck Questions AT-PW 7 53. In the consideration of internai control, the effectiveness of the design of controls is tested by Flowcharts, C. Substantive tests, Tests of controls . Decision tables. 54. Tests of controls, for efficiency, are frequently done at the,sgme time as: ‘A. Analytical procedures. Substantive tests of transactions, B. Compliance tests. 1D. Substantive tests of balances. 55. To test for recorded sales for which there were no actual shipments, the auditor traces from the Bill of lading to the sales journal Sales journal to the bill of lading C. Sales journal to the accounts receivable subsidiary ledger D. Bill of lading to the supporting customer order and sales order 56. An effective procedure to test for unbilled shipments is to trace from the Sales journal to the shipping documents ‘Shipping documents to the sales journal C. Sales journal to the accounts receivable ledger . Sales journal to the general ledger slaes account 57. Tetest the possibility of a shipment to a fictitious customer, the auditor traces from the Bill of lading to the credit authorization 8. Geedit authorization to the bill of lading C. Accounts receivable ledger to the bill f lading . Sales journal to the accounts receivable ledger 58. ACPA auditing an electric utlity wishes to determine whether all customers are being billed. The CPA's best digaction of testis from the Meter department record to the billing (sales) register B. Billing (sales} register to the meter department records Accounts receivable ledger to the biling (sales) register D._Biling (sales) register to the accounts receivable ledger 59. An auditor concludes during the planning and internal control phase that the dlient is not auditable because of deficient accounting records, Under such circumstances, the auditor must NOT: ‘A. Withdraw from the engagement without issuing a report. Issue a disclaimer of opinion Issue an adverse opinion. 'D. Send the dlient a bill for services rendered. 60. {In the revenue and collection cycle, of the order of activities listed, which is in the best order of a typical ‘sequence of activities? Delivering goods, bling customers, credit granting, collection activity. : Customer ordering, delivering goods, billing customer, cash receipts, | Customer ordering, delivering goods, credit granting, collection activity. D. Credit granting, billing customers, delivering goods, cash receipts 61. The customer's request for merchandise, the customer order, would be in the form of: ‘A. Anorel request. ‘A written request on pre-printed form. 8. Avwnitten request on customer's letterhead. ‘Any of these formats. © 62. Adocument for recording the description, quantity, and related information for goods ordered by a customer is the: ‘A. Customer order Sales order © Shipping document _D.Remittance advice 663. Sales order forms and invoice blanks should be controlled in the: Sales order section of the sales department. C Credit manager in the credit department. B. _Biling clerk in the accounting department. D. Sales manager in the sales department. 164. Before goods are shipped on account, a properly authorized must: A. Prepare the sales invoice. ‘Approve credit. B,_ Approve the journal entry. D. Verify that the unit price ts accurate. 65. Which one of the following is not an auditor’s concern about a key authorization point in the revenue/receipts le? BS tre receiving room must have authorization before releasing items to inventory control. B. _Gredit must be authorized before the sale, Goods must be shipped after the authorization, D. Prices must be authorized. 166. For most firms, the function of indicating credit approval is recorded on the Customer order” (B) Sales order (C Sales invoice D, Remittance advice 67. A document prepared to initigte shipment of the goods sold is the: A Serene (5) an ot acing Sees invoice DY Chstomer oder ReSAM 735-9807 / 734-3989 / (0910) 439-1320 breo4) @hotmail, Page 6o Z ReSA:_ The ReviewSchook Iain Theory: rene Questo.” AT-PW 68. The document used to indicate to the customer the amount ofa sale and due date of the payment isthe: A. Sales order 8. Bill of lading €. Shipping document Sales invoice 69. When pasting to the sales journal, details of a journal are posted to X and journal totals are posted to Y. What fs X? What is Y? oe vi x ¥. Sales account General ledger © Sales account AR subsidiary ledger AR master file General ledger D. AR GL account Sales GL account 70. The report which typically includes information analyzed by key components as sales person, product, and temitory is the: A. Remittance advice. C._ Accounts receivable master file, Summary sales report. D. Monthly statement. 71. A file for recording individual sales, cash receipts, and sales returns and allowances for each customer is the: ‘A. Sales journal. General ledger. B. Cash receipts journal. ‘Accounts receivable subsidiary ledger. 72. A document sent to each customer showing their beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit memo issued, and the ending accounts receivable balance is the: ‘Accounts receivable subsidiary ledger. C. Remittance advice. ‘Monthly statement of account. D. Sales invoice, 73. Which one of the following would the auditor’s concem with when examining the billing function of the client? ‘A. All shipments made have been billed. 8B, No shipment has been billed more than once. Each shipment has been billed for the proper amount. All of the above are of concerni to the auditor. 74, To achieve good intemal control, which department should perform the activities of matching shipping ments with sales orders and preparing daily sales summaries? Billing B. Shipping © Credit D. Sales order 75. The document which su Juctions in accounts réceivable js the: ‘A. Remittance advice (@,)redit memo © Sales invoice D. Monthly statement 76. The document which accompanies the customer's payment is the: Remittance advice —B, Credit memo © Sales invoice D. Monthly statement ea cis i fed peas aves te ae parte eaten wise aoe Spotters dem peters ret Create al che terres by Wen OF ite uae our Goran, rue, I em roysr, (9) Recestore ele pemn Unica 78. The most difficult type of cash defalcation for the auditor to detect is that which occurs: pe ow carve reawtial Yipee eh cori Bicbtre goes ha br © Outofthe taloncs kept te cosh voter B. framounts under P100. 79. When accounts receivable is gposidered uncollectible, the person who generally authorizes the write-off is the: ‘A. Credit manager Treasurer Accountant. D. Sales manager 80. The two most important considerations the auditor should keep in mind in the verification of the write-off of ‘individual uncollectible accounts are: ‘A. Cut-off and completeness. © Validity and authorization. B. Cut-off and authorization {Validity and completeness. 81. In the purchasing/dlsbursements cycle, of the order of activities listed, which is in the best order of @ typical sequence of activities? ‘A. Ordering goods, receiving vendor's invoice, selecting authorized vendor, payment activity. ® Ordering goods, receiving goods, receiving vendor's invoice, cash payments. Ordering goods, receiving vendor's invoice, receiving goods, payment activity. D. Selecting authorized vendor, receiving vendor's invoice, receiving goods, payment activity. 82. A request by an authorized employee for goods or services is made on the: Purchase order. Debit memo. Purchase requisition D. Acquistion transaction file. 183. Proper authorization for acquisitions ensures that the client will not: ‘A. Be overbilled by the vendor. Run out of stock before the next shipment arrives. é Purchase excessive or unnecessary items. D. All three of the above. ReSA735-9807 / 734-3989 / (0910) 439-1320 Pdnesareviewa > Page 7ReSA: The ReviewSchool of Accour Auating Theory: Preweek Questons. AT-PW 84, The purchase order, usually in writing, is a legal document that is: ‘A binding agreement between client and vendor, ‘An offer to buy. C. Not enforceable if itis not in writing. D. An acceptance of a vendor's catalog offer to sell. > 85. The receipt of goods and services in the normal course of business represents the date dents normally recognize: ‘A. Income @® Tre tiabiity ©. Warranty assets D. Expenses. 85. The personne Recohng Depareent shouts Be supervised by the head of the storeroom, since i isthe storeroom personnel who are responsible forthe physical control of goods. 8. Be supervised by the Accounting Department, since it isthe accounting personnel who are responsible for the accuracy ofthe records about the goods @. ke independent of both the storeroom and accounting functions. D. Be supervised by the Shipping Department since the receiving docks and the shipping docks are in close proximity. A 87. Ay auditor usually examines receving reports to support entries in the Voucher register and sales returns journal. C. Voucher register and sales journal. B. Sales journal and sales returns journal D. Check register and sales journal. 88. The document which specifies the amount of money owes.to the vendor for an acquisition is the: ‘A. Receiving report. Purchase order. Vendor's invoice. D. AP trial balance. |) 89. Afile for recording individual acquisitions, cash disbursements and acquisition returns and allowances for each is the: ‘Accounts payable master file. C. Acquisitions transactions fle. 8. Cash disbursements transactions file, D. Summary acquisitions report. ‘90, ~The dlient’s accounts payable master file should be the same as the vendor's statement, except for the following: A. Disputed amounts 8. Timing differences (C) oth a and b D. None of the answers 91. An important control in the accounts payable and IT departments is to require that those personnel who record acquisitions do not have access to the: Lists of vendor's names and addresses. © Vendor's price lists Cash, trading securities, and other assets. D. The accounts payable master file 92. The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the: ‘A. Vendor's invoice and the purchase requisition. B. Vendor's invoice and the receiving report. Purchase requisition, purchase order and receiving report. Purchase order, receiving report, and vendor's invoice. 93. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely pertain to? ‘Completeness. C. Valuation or allocation, Existence or occurrence: D. Rights and obligations. 94. A,ocument indicating a reduction in the amount owed to a vendor because of returned goods is known as: \Vendorissued credit memo. C Receiving room report B. Purchase adjustment slip. ©, Shipping room report 95. For good internal control, the person who should sign checks is the: ‘A. Person preparing the checks. Accounts payable clerk. B. Purchasing agent. Treasurer. — 96. Bell's accounts payable clerk has a brother who is one of Bel’s vendors. The brother will often invoice Bell twice for the same delivery. The accounts payable clerk removes the receiving report for the first invoice from the paid-vouchers file and uses it for support of payment for the duplicate invoice. The most effective procedure for preventing this activity is to: ‘A. Use pre-numbered receiving reports. Mail signed checks without allowing them to be returned to the accounts payable clerk. Cancel vouchers and supporting documents when payment is made. D. Use dual signatures. ® 97. Inthe personnel and payroll cycle, of the order of activities listed, which is the best order of a typical sequence of activities? ‘Attendance and work, payroll accounting, cash disbursement, payroll distribution Personnel hiring, labor relations, attendance and work, payroll accounting, ‘C. Personnel hiring, attendance and work, payroll distribution, payroll accounting, D. Labor relations, personnel hiring, payroll distribution, payroll accounting, ReSA% 735-9807 / 734-3989 / (0910) 439-1320 otmall. cc Page 8ReSA: The ReviewSchoo! of Accountan« fuding Theory: Preweck Questions. AT-PW 98. The most common control deficiency in the personnel and payroll cycie Is the: Attitude of management towards control Inadequate segregation of duties. C. Unlimited access to the payroll system. . Little comparison of personnel and payroll records. 99. Which ofthe following best describes proper intemal contro over payroll? ‘A. The preparation of the payroll must be under the control of the personnel department. 8. The confidentiality of employee payroll data should be carefully protected to prevent fraud. ‘The duties of hiring, payroll computation, and payment to employees should be segregated. The payment of cash to employees should be replaced with payment by checks. Tia rape tm cris fo: ont cet peyrobapuk be ‘A. Deposited in a safe deposit box. Deposited in a special bank account. B. Held by the payroll custodian. D. Held by the controler. 101. Which of the following controls would be the most appropriate means to ensure that terminated employees have been removed from the payroll? ‘A. Mailing checks to employees’ residences. Bb [settles ret cxpost procedures with te employers’ bons. 2) Reconciling payroll and time-keeping records. . Establishing computerized limit checks on payroll rates. 102. The auditor's test of the adequacy of physical controls over raw materials, work-in-process, and finished goods be restricted to: Observation and inquiry. Documentation and confirmation. B. Documentation and observation. . Documentation and inquiry. 103. The objectives of the internal structure for @ production cycle are to provide assurance that transactions are ly executed and recorded, and that Custody of work in process and of finished goods is property maintained. 8. Production orders are pre-numbered and signed by @ supervisor. C Independent internal verification of activity reports is established. . Transfers to finished goods are documented by a completed production report and a quality control report. 104. Which of the following control procedures could best prevent direct labor from being charged to manufacturing, "G)corisrison &F dat Jounal enties with factory ebor summary, B. Examination of routing tickets from finished goods on delivery. C. Reconciliation of work in process inventory with cost records. D. Re-computation of direct labor based on inspection of time cards. 105. An auditor's tests of a client's cost accounting system are designed primarily to determine that: ‘A. Quantities on hand have been computed based on acceptable methods that reasonably approximate actual quantities on hand. B. Physical inventories substantially agree with book inventories, The system complies with generally accepted accounting principles and functions as planned. Costs have been assigned property to finished goods, work in process, and cost of goods sol 106. Perpetual inventory master files provide a record: ‘A. Of items on hand B. Of the use of raw materials and the sale of finished goods. “That can be used to pinpoint responsibilty for custody. For all three of the above. 4107. When perpetual inventory récords are maintained in quantities and in pesos, and internal control procedures + inventory are deficient, the auditor would probably: Wiant the dient to schedule the physical inventory count at the end of the year. BB. Insist that the client perform physical counts of inventory items several times during the year. Increase the extent of tests for unrecorded liabilities at the end of the year. D. Have to disclaim an opinion on the income statement that year 108. A useful starting point for becoming familiar with the client's inventory is for the auditor to: ‘A. Read the PICPA's Industry Audit Guide. B. Review accounting theory covering special problems such as oil and gas accounting, or accounting for Jease-purchase agreements, Read the client's accounting manual. Tour the client's feces. 109, The emphasis in auditing property and equipment is on the verification of: A. The balance carried forward in the account from the previous period (beginning balance). ‘The current period's acquisitions and retirements. “The balance in the account after the current year’s activities are recorded (ending balance. D. All three of the above. ReSA8735-9807 / 734-3989 / (0910) 439-1320 Presareview@hormall com age 9D itp na ag t ReSA: The ReviewSchoo! of Ac Adting Theory: Preweek Questions AT-PW 110. An effective internal control procedures covering fixed asset additions should require: ‘A. Cassification as investments of those fixed asset additions that are not used in the business. B. Capitalization of the cost of fixed asset addition in excess of a specific peso amount. Performance of recurring fixed asset maintenance work solely by company maintenance staff. Authorization and approval of major fixed asset additions. 1111, Which of the following is an internal contro! weakness related to the acquisition of equipment? ‘A. Advance executive approvals are required for equipment acquisitions. B. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. Depreciation policies are reviewed only once a year. ‘Acquisitions are to be made through and approved by the department in need of the equipment. 112. To_ strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic ‘A. Increase in insurance coverage 8. Verification of liens, pledges, and collateralizations. ‘Accounting for work orders. Inspection of equipment and reconciliation with accounting records. 113, A company holds bearer bonds 2s a short-term investment (Le. trading security). Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: A Chief accountant. _B. Internal auctor C. Cashier, Treasurer. 114. A company has additional funds to invest. The Board of Directors decided to purchase investment securities and assigned the future purchase and sale decisions to 2 responsible financial executive. The best person(s) to, periodic reviews of the investment activity should be BOD investment committee. . The corporate controller. ‘The chief operating officer. ©. The treasurer. 1115, Which of the following questions would an auditor most likely include on an internal control questionnaire for payable? 2 Are direct borrowings on notes payable authonzed by the board of directors? B. Are two or more authorized signatures required on checks that repay notes payable? C._Are the proceeds from notes payable used for the purchase of noncurrent assets? . Are assets that collateralize note payable critically needed for the entity's continued existence? 116. Which of the following types of owners’ equity transactions would require authorization by the board of directors of a company? ‘A. _ Issuance of share capital = Declaration of dividends, 8. Repurchase of share capital Allof the abave, 117, When no. independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should ‘A. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file. B. Be destroyed to prevent fraudulent reissuance. Be defaced and sent to the Secretary of State. Be defaced to prevent reissuance and attached to their corresponding stubs 118. These generally include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers; journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations,,computations, reconciliations and disclosures. ‘A. Accounting system. ‘Accounting records, B. Source documents. D. Audit evidence. ¢ 1119, Amounts and other disclosures relating to the current period. Notes to the financial statements CC. Existing disclosures Current period figures D. Financial statement ancillaries 120. Which one of the following statements is true? In deciding on substantive tests of transactions, Some procedures are commonly employed on every aucit regardless of the circumstances all procedures are dependent on the adequacy of the controls and the results of the tests of controls . results obtained in the prior year's aucit will nt affect the procedures used this year the materiality of the item will not influence the choice of procedures used 121, The general audit objectives of validity and completeness emphasize opposite audit concerns: Validity deals with potential overstatement and completeness deals with understatement. Validity deals with potential understatement and completeness deals with overstatement, C._ Validity and completeness may each deal with overstatements or understatements, but not in the same transaction. ©. Validity always deats with overstatements only, 122. The strongest criticism ofthe reliability of audit evidence that the auditor physically observes is that the dient may conceal items form the auditor. the auditor may not be qualified to evaluate the items which he or she is observing, ReSAR 735-9807 / 734-3989 / (0910) 439-1320 Bhoxmalico Page 10ReSA: The ReviewSchool of Accour ietbigricaroorcacuains AT-PW C. such evidence is too costly in relation to its reliability D. the observation must occur at a specific time, which is often difficult to arrange 123, According to the PSA Glossary of Terms, this means to inquire into matters arising from other procedures to resolve ther. ‘A. Confirm, B. Validate. c Verity. @ _ imvestigate 124, The most reliable form of evidence, other than test of subsequent cash receipts, concerning the validity of a rote receivable balance is a(n) Bill of lading Customer purchase order External confirmation reply. D. Sales invoice 125. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? ‘A. Review composition of authenticated deposit slips. Review subsequent bank statements, Prepare a schedule of the bank transfers. D. Prepare a year-end bank reconciliation. 126, An auditor should be able to collect and evaluate documentary evidence. When evaluating and interpreting ‘evidence, the auditor must be on guard against the possibility of drawing unwarranted conclusions. An ‘example of a valid conclusion is: . ‘Correct inventory valuation as determined from observation of the physical count. 6 Client ownership determined from third-party inquiries ebout consigned goods. Existence of a company travel vehicle determined from the examination of the paid invoice for the said vehicle, dD. Proper accounts payable cut-off at reporting date as determined by a review of raw materials requisitions. 127. To determine the sales transactions have been recorded in the proper accounting period, the auditor performs a cut-off review. Which of the following best describes the overall approach used when performing a cut-off review? ‘A. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period 8. Confitm year-end transactions with regular customers Examine cash receipts in the subsequent period (5) trates vercactone cruing win afew days before ond fr yearend 126. 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 Go Bat ie Den alt to is ery by Scanning the general journal for unusual entries. B. Performing a revenue cut-off test at year end. © Tracing a sample of journal entries to the general ledger. dD. Examining documentary evidence of sales returns and allowances recorded after year end. 129. For which of the following account balances are substantive tests of details least likely to be performed unless aggiea arcades indcate the need extend deta stn Payroll expense Research and development costs B. Marketable securities D. Legal expense 130. Which of the following income statement accounts is least likely to be verified in conjunction with the audit of a balance sheet account? ‘A. Depreciation expense Q “revel and entertainment. 8. Interest revenue. 'D. _Uncollectible accounts expense. 131. The following are purposes of analytical procedures, except: Assist the auditor in planning the nature, timing and extent of other audit procedures As @ test to obtain audit evidence about the suitability of design and effective operation of internal ‘controls C. As 2 substantive procedure when their use can be more effective or efficient than tests of details in reducing detection risk for specific financial statement assertions . As an overall review of the financial statements in the final review stage of the audit 132, In a CIS environment, which of the following is not a control objective, associated with processing controls? ‘A. transactions are authorized B. processing is complete Call. changes to computer records are accurate © access to computer files is limited to authorized personne! 133. WAch of the following statements is correct regarding the Internet as a commercially viable network? Organizations must use firewalls if they wish to maintain security over internal data. B. Companies must apply to the Internet to gain permission to create a homepage to engage in electronic ‘commerce. ReSAR735-9807 / 734-3989 / (0910) 439-1320 P-desarevew(@hotmall.com Page itReSA: The ReviewSchool of fctng Theory: Preweek Questions.” AT-PW Companies that wish to engage in electronic commerce on the Internet must meet required security ' standards established by the coalition of Intemet providers. D. All of the above 134. Which ofthe following represents a type of applications software that a large client is most likely to use? Enterprise resource planning © Central processing unit Operating system D. Value-added network 135. An auditor who audits and reports on the financial statements of a user entity ‘1 Risquested sicltor © Service auditor B. User auditor D. Practitioner 136, Which ofthe following phrases best describes a service organization? ‘A.A third-party organization (or segment of a thid-paryorganization) that provides services to user entities that ae part ofthase entities’ information systems relevant to financial reporting. 8. The polices and procedures designed,implemented and maintained by the service organization to provide userentities with the services covered by the service auditor’ report. ._Aservice organization used by another servicearganization to perform some of the services provided to User entities thatare pat of those user entities’ information systems relevant to financial reporting. (©) Anentty that uses a service organization and whosefinancial statements are being audited. t 137, Many clients now have their data processed at an independent computer service center rather than have their ‘own computer. The difficulty the independent auditor faces when a computer service center is used i ‘A. Gaining the permission of the service center to review their work. B. Finding compatible programs that will analyze the service center programs. In trying to abide by the Code of Ethics to maintain the security and confidentiality of the client’s data. © Wrong the fapocy ofthe serve cee’ neal ovo 138. The use of computer in data processing systems frequently eliminates the basic internal control of: Using vouchers for authorization of disbursements C. Information processing ‘Appropriate segregation of duties D. Cost should not exceed benefit 139. When the IT system is significant, the auditor should also obtain an understanding of the IT environment and it may influence the assessment of Inherent and controt risks. C._ Inherent and detection risks. 8, Control and detection risks. , General and application controls. f 140. This is an arrangement where two or more personal computers are linked together through the use of special software and communication lines. This may also be referred to as a distributed system. Local area network. World Wide Web. B. Wide area network. D. Unit to unit workstation. 141, $2: In a personal computer environment, it may not be practicable or cost-effective for management to implement sufficient controls to reduce the risks of undetected errors to a minimum level. ‘$2: The auditor may often assume that control risk is high in personal computer environments with insufficient internal controls re, tase 2. False, ve Te, rue D. False, tse 142. Which of the following statements is incorrect? ‘A. The purpose of CIS application controls is to establish specific control procedures. over the application systems in order to provide reasonable assurance that all transactions are authorized and recorded, and are processed accurately and on a timely basis, B. It may be more efficient to review the design of the general CIS controls before reviewing the CIS application controls. C. If general CIS controls are not effective, there may be a risk that misstatements might occur and go undetected in the application systems. zx ‘The purpose of general CIS controls is to establish 4 framework of overall control over the CIS activities ‘and to provide an absolute level of assurance that the overall objectives of internal control are achieved. 143. The following, except one, are intemal control techniques which can be used for data and program security ‘A. Employing passwords. B. Using anti-virus software programs. ‘Segregating data into files organized under separate file directories. é Disconnecting from the office network. 144. Management can contribute to the effective operation of stand-alone computers by prescribing and enforcing policies for their control and use, such as policies for ‘A. Management responsibilities B, Standards of report format and report distribution controls. Training requirements and personal usage polices. All of the answers. 7 145, These are computer systems that enable users to access data and programs directly through workstations: In-line computer systems. C..Transaction processing systems. On-line computer systems. D. Personal computer environment. ReSA®735-9807 / 734-3989 / (0910) 439-1320 ow @hotmnail com Page 12Dp ReSA: The ReviewSchool of Accountan¢ iin Try Prec Qussions AT-PW 146. se {are procedures designed to restrict access to on-line terminal devices, programs and data. ‘Access controls. €. User authentication. B. General IT controls. ©. User authorization. 147. This access control typically attempts to identify user through unique logon identifications, passwords, access cards or biometric data, Q ‘A Access controls. User authentication, B. General IT controls, D. User authorization, 148. User authorization procedures are designed to prevent or detect the following, except: ‘Unauthorized access to on-line terminal devices, programs and data, Entry of authorized transactions. C. Unauthorized changes to data files. D. The use of computer programs by unauthorized personnel and the use of computer programs that have not been authorized. 149, Internal controls in an on-line computer system include the following ‘A. Access Controls Transaction logs B. Controls over User IDs and passwords © Alor these 150. These are programmed routines that check the input data and processing results for completeness, accuracy and reasonableness ‘A Pre-processing authorization. Master file controts. 8. Cut-off procedures. Edit, reasonableness and validation controls 151, This is the process of establishing control totals over data being submitted for processing through workstations and comparing the control totals during and after processing to ensure that complete and accurate data are transferred to each processing phase. ‘A. Footing, B. Cross-casting, © satencioa. D. Posting. 152. A combination of hardware and software that protects @ WAN, LAN or PC from unauthorized access through the Tnteret and from the introduction of unauthorized or harmful software, data or other materia in electronic form ‘A. Anti-virus program —_B. Security update (0) Firewall D. Access monitor 153. The purpose of input controls is to nsure the: ‘A. huthorization of access to data files Completeness, accuracy, and validity of update. B. Authorization of access to program files. © Completeness, accuracy and validity of input. 1154. A company uses the account code 614 for maintenance expense. However, one of the company clerks often ‘codes maintenance expense as 641. The highest account code in the system is 620. What would be the best internal contro! check to build into the company’s computer system to detect this error? ‘A. Amanual re-check of the code. Sequence check, B. Valid-character test. Valid-code test. 4155. Reports that are designed to create an audit tral for each or-ine transaction. Such reports often document the source of a transaction (terminal, time and user) as well as the transaction’s details Batch processing logs Transmittal sheets 6 Transaction logs D. Embedded auait modules 156. THis is the individual responsible in preparing specifications for the systems to. guide programmer, and writes procedures and user instructions. Network administrator. C. Th control group supervisor. Systems analyst. D. None ofthese. 157. This is the individual responsible for the development and managemient of data communications system, and reviews documentation to ensure compliance with standards and provides approval of documentation when is are met ‘Network administrator. _Thcontrol group supervisor. B. Systems analyst. D. None of these. 158. A computer programmer has written 2 program for updating perpetual inventory records. Responsibility for initial testing (debugging) of the program should be assigneg to the: A. TT department control group. G Programmer. B, Internal audit control group. Machine operator. 159. More than one file may be stored on a single magnetic memory disk. Several programs may be in the core storage unit simultaneously. In both cases it is important to prevent the mixing of data. One way to do this is: to use File integrity control. ©. to use Interleaving to use Boundary protection. D. to use Paging. 160. In comparing the control environment in complex versus non-complex IT systems, the control environment in lex IT systems i More critical because there is greater potential for errors and irregularities. Less critical because the complexity ensures that controls will be built into the system, tmail.con Page 13, ReSA%735-9807 / 734-3989 / (0910) 439-1320ReSA: The ReviewSchool of Accounta Agting Theary:Preweek Questions AT-PW 163, Dies. 166. 167. py, 168, 169. a. 161. C. More critical because of the high degree of technical competence needed by the programmers and operators. D. Less critical because non-experts do not have the opportunity to interact with the system and mess it up. During one processing run, several transactions have been rejected by the IT system. Accordingly, the IT department: ‘A. Should contact the user departments and inform them of the rejection. G_ Stils re-encade the inputs previously made by computer operators and reprocess the transactions. Is responsible for ensuring that these transactions are in fact resubmitted and re-entered for processing. . Is not responsible for the resolution of rejected transactions, i refers to a coliéction of data that is shared and used by a number of different users for different purposes. Database. B. Information file. _C. Master file. D. Transaction file, ‘A gatabase management system Physically stores each element of data only once, B. Stores data on different files for different purposes, but always knows Where they are and how to retrieve them C. Allows quick retrieval of data but at a cost of inefficient use of file space. D. Allows quick retrieval of data but it needs to update files continually Which two important charactéristics distinguish database systems? ‘A. Data integrity and data independence. C. Data sharing and data interconnection, Data independence and data sharing. D. Data integrity and user integrity. User access to the various elements of a database may be controlled through the use of passwords. These restrictions apply to ‘A. Individuals but not to terminal devices and not to programs. B. Terminal devices but not to individuals and not to programs. . Programs but not to individuals and not to terminal devices. Individuals, terminal devices and programs, These controls require a database administrator to assign secunty attnbutes to data that cannot be changed by database users: ‘A. Discretionary acness controls. Password controts. © _Mendatory access controls. D. | Distributed access controts ‘These controls allow users to specify who can access data they own and what action privileges they have with respect to that data Discretionary access controls. Password controls B. Mandatory access controls. 1D. Distributed access controls. If there is fraud involving the collusion of several employees’ that includes the falsification of documents, the ‘chance that such fraud would be uncovered ina normal audit is A Zero. Unlikely, & 50-50, D. Very high. This is a kind of fraud committed by making entries of fictitious payments or failure to enter receipts. A. Misappropriation of goods. C.__Falsification of accounts. 8) Misappropriation of cash. D. Lapping, The following statements properly describe the pillars of the Fraud Triangle. Select the exception: ‘A Incentive or pressure to commit fraudulent financial reporting may exist whenmanagement is under Pressure, from sources outside or inside the entity, toachieve an expected (and perhaps unrealistic) ‘earnings target or financialoutcome ~ particularly since the consequences to management for failing to ‘meet financial goals can be significant. B.A perceived opportunity to commit fraud may exist when an individualbelieves internal control can be overridden, for example, because theindividual is in a position of trust or has knowledge of specific weaknesses ininternal control Individuals may be able to rationalize committing a fraudulent act. Someindividuals possess an attitude, ‘character or set of ethical values that allowthem knowingly and intentionally to commit a dishonest act. Events or conditions indicate an incentive or pressureto commit fraud or provide an opportunity to ‘commit fraud, but do not necessarily confirm the presence of fraud. of the following is an example of fraudulent financial reporting? A) Company management changes inventory count tags and overstates ending inventory, while Understating cost of goods sold. B, 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 D. An employee steals small tools from the company and neglects to retum them; the cost is reported as a miscellaneous operating expense ReSA8735-9807 / 734-3989 / (0910) 439-1320 hotmail Page 14A =, ReSA: The ReviewSchool has Theory Premeak Quang AT-PW 172, What is the independent auditor's responsibilty prior to completion of field work when he believes that a material fraud may have occurred? ‘A. Notiy the appropriate law enforcement authority. Tavestigate the person involved, the nature ofthe fraud, and the amounts involved. Reach an understanding with the appropriate client representatives as to the desired nature and extent of subsequent audit work. é D. Continue to perform normal audit procedures and write the audit report in such a way as to disclose adequately the suspicions of material fraud. 173. This refers to the mathematical complements of sampling risk. A. Assuranceeror B, Tolerable levels C. Expected error (8) Confidence levels 174. Which of the following statements is NOT correct? ‘A. Ttis acceptable for auditors to use statistical sampling methods, B, tis acceptable for auditors to use non-statistical sampling methods, C._The primary benefit of statistical sampling methods is the quantification of sampling risk © Madivantage of using statistical sampling is that the cost/benefit ratio is always positive, 175. Which of the following statements is a valid criticism of the use of non-statistical sampling methods? ‘A. Many audit tests, such as footing of journals, must be performed outside a statistical context. B, The cost of performing random selection of testing often exceeds the benefits (©. Non-statistical sampling does not differ substantially from statistical sampling method. (© Gonciusions may be drawn in moce precise ways when using state sampling methods 176, Which of the following statements regarding documentation of the sample selection process is NOT true? ‘A. Regardless of the method used in selecting a random sample, it is necessary to have proper documentation, © When comparing statistical sampling to judgmental sampling, it is more important that statistical sampling be properly documented because of its mathematical nature. C. Minimum documentation would include sufficient information to permit the reproduction of the sample at a later date. 1D. For documentation, it is permissible for the auditor to include in the working papers @ copy of the table sed, with the random numbers identified. 177. Uniess a precise statement of what constitutes an attribute is made in advance, the staff person who performs Hg Si DS ot hs solos: For identifying deviations. B. To determine what documents to obtain and review for the observation tests. C. To use when evaluating the results of analytical review procedures. D. For performing all three of the above. 178, When using statistical sampling, which of the following need not be known to evaluate the results of an attribute sample? ‘A. Sample size © wumber of deviations in the population B. Risk of assessing control risk too low. D. Number of deviations in the sample. 179, The auditor's failure to recognize an error in an amount oF an error in an internal control data processing procedure is described as: ‘A. Statistical error Standard error of the mean B, Sampling error Non-sampling error 180. Non-sampling errors occur when the audit tests do not uncover existing exceptions in the: ‘A. Population. C. Planning stage. Sample. D. Financial statements. 181. In auditor tested 50 transactions and found two deviations from an important control procedure, the auditor ‘could conclude from this test that the: ‘A. Tolerable rate is 0.04. Q sare tad two deviations, B. Giitical rate of occurrence is 0.04, 'D. Expected population deviation rate is 0.04 182. Which of the following is NOT a responsibility that should be assigned to a company’s internal audit department? Evaluating internal control Balancing subsidiary ledgers. Reporting on the effectiveness of operating segments, . Investigating potential merger candidates. 183. The independent aucitors might consider the procedures performed by the internal auditors because: ‘They are employees whose work must be reviewed during substantive testing @ ‘They are employees whose work might be considered. ‘Their work impacts upon the cost/benefit trade-off in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work. 184. Which of the following terms best describes component managemen? ‘A. An auditor who, at the request of the groupengagement team, performs work on financial information related to acomponent for the group audit. ReSA%735-9807 / 734-3989 / (0910) 439-1320 Fires @hotm: Page 15ReSA: The ReviewSchool of Accountancy Auditing Theory: Preweek Questions AT-PW B. An entity or business activity for which group or componentmanagement prepares financial information that should be included in thegroup financial statements C.-Management responsible for preparing thefinancial information of a component. D. The materiality level for a component determined by the group engagement team. 185. All the components whose financial information is included in the group financial statements, are collectively Group 8. Consolidation C._—Pooling D. Business Combination L186. A matter whose outcome depends on future actions or events not under the direct control ofthe entity but that mages ance ations, Uncertainty Provision Inconsistency D. Significant risk 187. The date on which those with the recognized authority assert that they have prepared the entity's complete set Of financial statements, including the related notes, and that they have taken responsibilty for them. Date of the financial statements. C. Date of the auditor's report. Date of approval of the financial statements. _D. Date the financial statements are issued. 188. The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit. Date of management approval C._Date of the audit report Date of the financial statements D. Date of financial statement issuance — 189, Subsequent events refer to events that occur after the date of the financial statements and are: ‘A. Favorable to the entity being audited Unfavorable to the entity being aucited Either favorable or unfavorable to the entity being audited . Neither favorable nor unfavorable to the entity being audited. 190. Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent ‘events that may require adjustment or disclosure essential to a fair presentation of the financial statements in formity with GAAP. Which of the following procedures \4o i be least appropriate for this purpose? “Br Conti a2 oF the completion of flower accounts recevable whch have reseed sige from the ‘year-end date. B. Read the minutes of the board of directors C.__ Inquire of management concerning events, which may have occurred. D. Obtain a lawyer's letter as of the completion of fieldwork. 191. A major customer of an audit client suffers a fire prior to completion of year-ended field work. The audit client that this event could have a significant direct effect on the financial statements. The auditor should: ‘Advise management to disclose the event in notes to the financial statements. BB. Disclose the event in the auditor's report Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known. D. Advise management to adjust the financial statements, 192. Which of the following events occurring after the issuance of an auditor's report most likely would cause the auctor to make further inquiries about the previously sued franca tatement? A. A technological development that could affect the entity's future ability to continue as a going concern. © Tre ascovery of information regarding a contingency that existed betore the franca statements were issued, C. The entity's sale of subsidiary that accounts for 30% of the entity's consolidated sales. D. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report. 193. On March 15, 2009, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2008. On May 4, 2009, Kent’s internal inspection program disclosed that ‘engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the ‘opinion, Kent should first ‘Advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied ‘opinion, Reissue the auditor’s report and add an explanation paragraph describing the departure from GAAS. Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level 194, When considering the use of management's written representations as audit evidence about the completeness jon, an auditor should understand that such representations: ‘Complement, but do nat replace, substantive test designed to support the assertion B. Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal accounting controls. C._ Are not parts of the evidential matter considered to support the assertion. . Replace reliance on internal accounting controls as evidence to support the assertion. ReSA735-9807 / 734-3989 / (0910) 439-1320 | resareview @hotmna Page 16 h on Undertake to apply atternative procedures that would provide @ satisfactory basis for the unqualified c .Ss ReSA: The ReviewSchool of Accountancy ‘Auditing Theory: Preweek Questions 195. A representation letter issued by a client ‘A. 15 essential for the preparation of the audit program: Isa substitute for testing, Does not reduce the auditors responsiblity. 1D. Reduces the auditor's responsibilty only to the extent that itis relied upon 196. To which of the following matters would materiality limits not apply in obtaining written management tations? ‘The availabilty of minutes of stockholder’s and directors meeting B. Losses from purchase commitments at prices in excess of market value. . The disclosure of compensating balance arrangements involving related parties. . Reductions of obsolete inventory to net realizable value 197. Which of the folowing expressions is least kel to be included in a cient’ representation letter? ‘A. No events have occurred subsequent to the Balance sheet date that require adjustment to or dissure in the financial statements 8. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements inthe event of noncompliance. © Management acknowledges responsiity for legal actors committed by employees. 1, Management has made available al financial statements and the related data 198, An audit committee's responsibilities normaly would not include ‘A. Discussing the meaning and significance of audited financial statements, B. Discussing problems and experience with independent actors in completing the audit of annual fnancl statements, Nominating the independent auditors. 6 Discussing the audit programs of the independent auditors. 199. An auditor is obligated to communicate a proposed audit adjustment to an entity's audit committee only if the adjustment: Has not been recorded before the end of the auditor’s field work. Has a significant effect on the entity's financial reporting process. C_Isa recurring matter that was proposed to maniagement in the prior year. . Results from correction of a prior period's departure from GAAP. 200. A document issued by an entity, ordinarily on an annual basis, which includes its financial statements together with the auditor's report thereon, ‘A. Auditor's report. Annual report. B. Statement of management's responsibility. Management assertions. 201. What is the best title for the following paragraph? "Without mocttving our option, we craw attention to Note X to the financial statements which describes the lasts of accounting. The financial statements are prepared to assbsthe partners of ABC Partnorshio in repo their individual income tax returns. As aresult, the financial statements may not be suitable for another purpose. ‘Our report isintended solely for ABC Partnership and its partners and should not be distributed toparties other than ABC Partnership or is partes" ‘A. The opinion paragraph “Without modifying our opinion” paragraph Basis of Accounting and Restriction of Use paragraph D. Basis for adverse opinion paragraph 202. Which of the following statements should not be included in a compilation report? ‘A. “We have not audited or reviewed these financial statements and accordingly express no assurence thereon * (co ae Dam tec et eR fy Ln ME al accepted auditing standards.” C._ “On the basis of information provided by management, we have compiled, in accordance with the Philippine Standard on Related Services 4410...” D. "Management is responsible for these financial statements.” 203. Hershey, CPA, is preparing @ report on intemal control. She has already discussed the internal control weaknesses with the appropriate client officials. During these discussions, the client stated that, given its Circumstances, there was no practicable corrective action which could be taken for one of the major weaknesses and therefore asked that it not be included in Hershey's report. In the final analysis, Hershey concurred that no corrective action by management is practicable. Which of the following is the MOST ‘appropriate course of action for Hershey to take? ‘She must include this weakness in her report; otherwise, she will be in violation of GAAS. She may omit this weakness from the report without further mention, ‘C.She may omit this weakness from the report but should send a confidential memo to the Board of Directors pointing out the nature of the weakness and why it was omitted from her report D. She may omit the weakness from her report but should clearly state that the report is restricted to material weaknesses for which corrective action by management may be .practicable in the Circumstances. f Page 17 ReSA% 735-9807 / 734-3989 / (0910) 439-1320ReSA: The ReviewSchool of Accountar Aadting Theory: Preweek Questions AT-PW 204. Which of the following phrases refer to forecast? prospective financial information prepared on the basis of assumptions as to future even management expects to take place and the actions management expects to take as of the information is prepared (best-estimate assumptions) B. prospective financial information prepared on the basis of hypothetical assumptions about future events ‘and management actions which are not necessarily expected to take place; and a mixture of best- estimate and hypothetical assumptions. . statements prepared in considerably less detail as compared to unabridged financial statements. D. None of these statements describe a forecast. 205. PARS 1000PH focuses on instances when: Scope limitations occur due to the inability of the dient to prepare schedules, reports or computations or the failure to reconcile differences noted in the audit due to the poor condition of the accounting records. B.A particular audit procedure is beyond the competence or area of expertise of the auditor. The scope limitation is imposed by the client or by circumstances. D. The documents or information exist but are not made available to the auditor. 206. 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 envanmental performance ‘A. Environmental assurance report. Environmental performance report 8. External environment report 1D. Environmental liability report 207. IAPS 1004, on which PAPS 1004 is based, was prepared in association with which of the following? International Accounting Standards Board. 6 Basel Committee on Banking Supervision (the Basel Committee). ‘C. Professional Regulatory Board of Accountancy D. Professional Regulation Commission. 208, Which document published in 1997 serves as a basic feference for an effective supervisory system internationally and in all countries? ‘A. Statements on Auditing Standards applicable to Banks and Quasi-Banking Institutions. APS 1004 ~ The Relationship Between BSP and the Bank’s External Auditors. Gore Principles for Effective Banking Supervision, @.k.a. Basel Core Principles. 1D. Enhancing Corporate Governance for Banking Organizations. 209. A generic term used to categorize a wide variety of financial instruments whose value depends on an underlying rate or price, such as interest rates, exchange rates, equiy prices, oF commodity prices. ‘A. -Assetiliability management: Derivatives 8. Commodity. Hedge 210. This act provides that Only licensed professionals may teach licensure subjects, and provides for the triennial renewal of the Professional identification card: ‘A. RANo. 9298, IRR of RA 9298 PRC Modernization Act D. PD 1081 send: ww THAT IN ALL THINGS, GOD WILL BE GLORIFIED.~~ ReSA®735-9807 / 734-3989 / (0910) 439-1320 6 -w@hotiial.co Page 18