(CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY JULY 28, 2018 FIRST PREBOARD EXAMINATION SATURDAY, 5:00PM — 6:00PM SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED. 1. Audit working papers are indexed by means of reference numbers. The primary purpose of Indexing is to ‘A. Support the audit report. B. Eliminate the need for follow-up reviews. (CopDetermine that working papers adequately support findings, conclusions, and reports. \6." Permit cross-referencing and simplify supervisory review. 2. ‘The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is 2 combination of three separate risks at the account-balence or class-of-transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be detected by internal control. The third risk is that ‘A. The auditor will reject @ correct account balance as incorrect. B. The auditor will apply an inappropriate aucit procedure. , The auditor will apply an inappropriate measure of aucit materiality, D) Material misstatements that occur will not be detected by the audit. 3. Which of the following is the best explanation of the difference, if any, between audit objectives and audit procedures? ‘A. Audit procedures establish broad general goals; audit objectives specify the detalled ‘work to be performed. f 8, Audit objectives are tailor-made for each assignment; audit procedures are generic in application. C.) Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit objectives. . Audit procedures and audit objectives are essentially the same. 4. An external auditor will use internal auditors to assist in the audit of accounts receivable. Of the flowin prececres, te one that wou be ‘most appropriate for the internal auditors to perform is e A. Assessment of control risk for accounts receivable. B. Determination of the number of positive confirmation. requests to be mailed to substantiate the existence of accounts recevvable. Preparation of an aged trial balance of accounts receivable. \- Establishment of the amount of accounts receivable thet Is considered material. 5, A proposed assurance engagement can be accapted when the practitioner's preliminary knowledge about the engagement circumstances indicates that relevant ethical requirements will be satisfied and 1. The subject matter of the engagement is appropriate. Tl, The criteria to be used are suitable and are available to the intended users. Ill. The practitioner has access to sufficent appropriate evidence to support the conclusion. 1V. The conclusion is to be contained in a written report. V, There is a rational purpose for the engagement. A. 1, 1, and HI only. C. 1,11, II, and IV only B. I, If, 1V, and Vonly D.)I, I, IH, IV, and V Page 1 of 12 PagesZ2Quapine YONE 40 sscvaretdouddy oy Euutiueb ay Yani MORA WEUTIS YUM “eudoxdde pu uBDILNS 3Q ISN 1) aoupNe By) 0} BuNjedwwor oq oH coL@pAS spre soy ZT “SUANQILON “Gg “sansnipy “> SANUS 3 Gupesvedwo @) 2pquos 2REYOUIAA “UONEMIS SKA UT syoWRL ADNBOYEP yu5 & 49 POOUMayN By ByEU) USI LOGURy Yse9 asjediuus @ Aq guNo=3e Used Jo LONPHDUODSY {OusIOYep O.gUCD e Say AURdMCD e JN SUINSSY -TT 40 90K yum 52 cz Jeques an o ane By JO JUSpuadspL a: “sad iepes YSe jo SurssenO.d stp ups ney PUR Siow Ife DeGEp oy Ping SSaUISHG AIRSSENAU & 5) |OQUCS jeURQUT “@ ‘aydoad omy Ag payenedied 0D Joust peaesado pue paLOSeo4EMm ¥ 3 payelado pue peubisap 2 prrcys pue uc UOIsMIICD DAI Pinoys quAWLBLY “2pURVO WeMEBeuEW Aq Paquenuunoio 2q ued sjo.que> yeu ej ays Si jOsILED JeUIS}U) Oy VON HUN JUBA UY “senMefgo wquos 2 Fe) PEUSISSP-|OMVY “y AUTISTS SUMMONS Xp 0 YUM “OT he SA SOINSUD IuEWLOIpLE jon UO? jew BuIpiedes paucs ~soupne 34) of aieeiene eeu ot) UeD VORmUBLUTIG dnyoE9 Os weanSAs jenueL © 0} wuoasts Gusscooud ucneiu iu! e.g Jo Uoa.od 8 y2nuG) JUAN SUS weLp HLeLUUIORSY “UBUISIERSIA FAI J9 98H Ot 82: 04 516.1409 40 SIseA LONIPE wHO,og quREBeGLe oun Way mZipyaMA “A ‘uoiuido ue wy2ps9 40 woRido payenb e ssarcbel “y Zucnenys 3euz uy OP Jo3/pNe a.p PRONE IeyM -yaN8| MOY ‘Amedadoe we OF waweney=sius /euegL Jo YSU Bip eer ioes Cy GuSen. aARUEIEANS yoROUD op. 0) SfqIssodu 2q HW 3} Iku PSP Sey JOYENE aug ‘e\qzitene EYED eqqIGuED OMNI] AABA SEL) ‘Auedwoo aut asneseg “AjeeeMSa Ss paUIALIEW: pus ‘posronoNd ‘PEQIUISUE Si UOHeMUOU le esey6 Wests Sursseoo.d UoTeWOWY! 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Ue IByau en apne ALY Jo adoos a ANIPOW “ Tabne @AIUEISANS AIUPLULC @ LAO, FeK DUP Ao] UMtECeLL ep Je YSU JOQUOD sSassy 2 TEPNE Bt Wioylad 40 ydas0e @ ou1j29q, ‘uisjondeys revoisseso4d PaSeaINUy UA ype Buy WOLag ~y at = a ‘A\ueurpuo pinoys ays 40 24 “Paustigeyse useq jou Sey OND 9u3 LAMM BulpUeysIspun ue yeUg sanatiag Jape UE uayM "9 00'S = Wd00'S T AVORTLIVS 7 BTOZ "SERIE —_.___ AYOTRY ONILTaNW NOLLYNINYXG Guivoamud seit \WIGIVWN = (d5) SINTdATMMd IHL JO TOOHDS MBIARY YEOCPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION AUDITINGTHEORY. JULY 28, 2018 / SATURDAY /5:00P14— 6:000I 13. 14. 15. 16; 4 A The move effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client. B, An auditor's opinion to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based cn evidence obtained that assures profits for the auditing firm, C.) Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity. D. The Independent auditor’s direct personal knowledge, obtained through inguiry, eee ‘and inspection, is generally more persuasive than information obtained indirectly. ‘Which of the following statements applies to consultation services engagements? ‘A. A practitioner should obtain an understanding of the intemal contro} to assess control risk, B. A practitioner is not permitted to compile a financial forecast. Ci A practitioner is to maintain an appearance of independence. D. A practitioner should obtain sufficient relevant data to complete the engagement. ‘An auditor has Identified the controller's review of the bank recondilation 2s a control to test. 19 connection with this test, the auditor interviews the controller to understand the specific data feviewed on the recondiliation. In addition, the auditor verifes that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by thelr Tespeckve sign-offs. Which of the following types of auait procedures do these actions ilustrate? ‘A. Observation and inspection of records. B._ Confirmation and reperformance. CC, Inquiry end inspection of records. 5, Analytical procedures and reperformance. ‘The following are control environment factors, except ‘A. Limiting cirect physical access to assets and records. B.. The function of the board of directors and its committees. CC. "Management's philosophy and operating style. D. Management's control system Including the intemal audit function, personnel policies and procedures and segregation of duties, ‘Overall allowable risk (AR) is the risk that monetary misstatements equal to tolerable misstatement may not be detactad. Control risk (CR) Is the aucitor’s assessment of the risk that internal control may not prevent or detect material misstatements. Inherent risk (IR) is the susceptibility of an assertion to material misstatement given no related controls. In the audit risk formula, AP is the auditor's assessment of the risk that analytical procedures and other relevant substantive tests will fall to detect material misstatements not detected by the relevant controls. TD Is the allowable risk of incorrect acceptance for a substantive test of Getalls given that material misstatements occur in an assertion and are not detected by internal control or by analytical procedures and other substantive tests, Which model represents the overall allowable audit risk? AD AR =IRxCR x APXTD “B, AR=IR4CR+AP + 7D C AR=IR+CR-(AP 47D) _D, AR =IR + CR-(APXTD) 0s ‘The following statements relate to the performance of tests of control and assessment of control risk, Which statement is correct? i ‘The auditor should obtain audit evidence through tests of control to support any assessment of control risk that is less than high. B. ‘The higher the assessment of control risk, the more support the auditor should obtain that accounting and internal control systems ere suitably designed and operating effectively. Page 3 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITING THEORY 8, 5:00PM — 6: 18y 19. 21. 22. 23 24. C. When obtaining evidence about the effective operation of intemal controls, the auditor Considers why they were applied, by whom they were applied, and the consistency with which they were applied during the period. D. The preliminary assessment of contro! risk for a financial statement assertion should be low unless the auditor is able to identify internal controls relevant to the assertion which are likely to prevent or detect end correct a material misstatement and plans to perform + tests of control to support the assessment. Which of the folowing statements best describes a postive request for confirmation of an accounts recaivable balance? = = A The customer will be asked to indicate to the auditor the current balance in the account. 8. The customer will be asked to respond to the confirmation request only if the balance indicated in the request is incorrect. Cy The customer will be asked to inform the auditor whether the balance indicated in the “ Tequest is correct and to respond regardless of whether such stated balance is correct. 5. ‘The customer will be asked to indicate to the auditor the balance in his/her account only if itis positive (i.e., greater than zero), Which of the following fundamental ethical principles requires a professional accountant to be straightforward and honest in all professional and business relationships? A. Objectivity By Professional behavior Professional competence and due care D. Integrity Which of the following situations will normally result to a cecrease in the extent of audit procedures? =< A. Increase in the risk of material misstatement. B. Increase in the degree of assurance the auditor plans to obtain. C. Increase in materiality level. D, Increase in control risk assessment. Tf the auditor obtained satisfaction with respect to the accounts receivable balance by alternative procedures because itis impracticable to confirm accounts receivable, the auditor's report should be unmodified and could be expected to A. Disclose that alternative procedures were used due to a client-imposed scope limitation B. Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C. Not mention the altemative procedures, D. Refer to a footnote that discloses the alternative procedures. ‘The negative form of accounts receivable confirmation request is useful except when A. Internal control surrounding accounts receivable is considered to be effective. 8, A large number of small balances are involved. © ‘The auditor has reason to believe the persons raceiving the requests are likely to give them consideration, . Individual account balances are relatively large, Early in an audit, the auditor discovered several fraud risk factors. Which of the following is the least likely response of the auditor? ‘A Substantive test procedures are moved away from the end of the dlient’s accounting period so that differences can be more easily resolved. 5. The auditor should attempt to incorporate in the audit more elements of unpredictability. C? The auditor should attempt to gather rhore audit evidence through physical inspection, "D. Analytical procedure should stl be applied but at a more disaggregated level Which of the following should an auditor do when control risk is assessed at the maximum level? A) Perform fewer substantive tests of details, 4 7 Page 401 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA, AUDITING THEORY LY 28, 201 26. 2. 30. FIRST PREBOARD EXAMINATION 18 / SATURDAY / 5:00PM — 6-000 B. Perform more tests of controls. C, Document the assessment: 1D, Document the intemal control system more extensively. ‘A procedure that involves tracing a transaction from Its origination through the company’s information systems until itis reflected in the company's financial report is referred tD as a(n) ‘A. Analytical analysis. B. Substantive procedure. G, Test of a control. D) Walkthrough. When making decisions about evidence for a given audit, the auditor’s goal is to obtain @ sufficient amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal of audit effidency is to gather and evaluate the information ‘A. No matter the cost involved in obtaining such evidence. B. Even if cost is irrelevant to the auditor, because they bill the client for costs incurred. C. At the lowest possible total cost. 'D. At the cost suggested in the engagement letter. When engaged to compile the financial statements of an entity, an accountant is repued to possess a level of knowledge of the entity's accounting principles and practices.) This requirement most likely will include obtaining a general understanding of the ‘A. Internal control awareness of the entity’s senior management. Risk factors relating to misstatements arising from illegal acts. Design of the entity's internal controis implamented, Natura of the entity's business transactions, the form of its accounting records and the ‘accounting basis on which the financial information is to be presented. oP AICPA has been engaged to perform review services for a client. Identify which of the following isa correct statement. 1. ‘The CPA must perform the basic audit procedures necessary to determine that the statements are in conformity with the applicable financial reporting framework. B, The financial statements are primarily representations of the CPA. ©. The CPA may prepare the statements from the books but may not essist in adjusting and losing the books. . The CPA is performing en assurance engagement other than an audit of the financial statements. ‘The following statements relate to the auditor's inquiry regarding litigation and claims. Which is correct? ‘A. When Iitigation or claims have been identified or when the auditor belleves they may exist, the auditor should seek direct. communication with entity's lawyers. B. The auditor considers the status of legal matters up to the balance sheet date. C._ if management refuses to give the auditor permission to communicate with the entity's lawyers, this would be a scope limitation and should ordinarily ead to @ qualified or adverse opinion. . The letter of audit inquiry, which should be prepared by the eucitor and sent by management, should request the lawyer to communicate directly with the auditor. Which of the following is usually included or shawn in the aucitor’s working papers? I. Ihe procedures used by the auditor to verify the personal finan status of members of the client’s management team. Barely that are designed to be a part of, or a substitute for, the client's accounting records. C. Bxremts from authoritative pronouncements that support the underlying accounting policies used in preparing the financial sttements. b. The manner in which excantions and unusual matters disclosed by the auditors procedures were resolved or treated Page 5 of 12 Pagesy A REVIEW SCHOOL OF THHE PHILIPPINES (CAR) ~ MANILA FIRST PRESOARD EXAMINATION 31. Which of the following statements is incorrect? A, When inventory is material to the financial statements, the auditor should obtain Sufficient appropriate audit: ‘evidence regarding its existence and condition by attendance at physical inventory ‘courting uniess impracticable, B. Where attendance at physical inventory count is impracticable, the auditor should Consider expressing a qualified opinion or a disdeimer of opinion. C. When Inventory is situated in severai locations, the auditor would consider at which lccations attendance is appropriate, taking inte account the materiality of the inventory ‘and the assessment of inherent ard Control risk at different locations. D. In Planning attendance at the physical inventory count, the auditor would consider whether an expert’s assistance is needed, 32. In performing an audit, which one of the following procedures would be considered a “substantive test’? » _& Comparing last year's interest expense with this year’s interest expense, (8. Comparing Sgnatures on checks with the signatures of authorized check signers. C.. Reviewing initials on receiving documents. ©. “Reviewing procedures, followed in receiving, depositing, and disbursing of cash. 35. The principle of professional competence and du2 care imposes which of the following Obligations on professional accountants? (A) To maintain professional knowledge and sil atthe ievel required to ensure that clients _ F employers receive competent professional service, 8. To refrain from discosing confidential infexmation obtained as a result of professional ans Pusiness relationships without proper and specific authority unless there isa legal OF professional right or duty to disclase & Te comply with relevent laws and regulotions and avold any situation that may bring discredit to the profession, D. Not to coinpromise professional or busine interest or undue influence of others, judgment because of bias, conflict of 34: Which of the feliowing relates to tights and ablications assertion? “AL The enbty holds or controls the rights t assets, and liebilties are obligations of the entity, 5. All assets, liabilities and ecuity interests that should have been recorded have been recorded C. Transactions arc events that have been cecorded have occurred and Pertain to the entity. D. Assets, ‘iabilties, and equity interests ere included tn the financial statements at appropriate amounts, 35°" A common citficulty in auditing a computerize sccounting system is A. Because of the lack of an audit tral, computer systema have weaker controls and more Substantive testing is required, 8. Because of the uniform nature of transaction precessing, computer systems have strong Controls ahd less substantive testing +s required, C Data can te erased from the computer with no visible evidence: D. The large dissemination of entry voint: he computer system leads to weak overall feliance on info™mavon generated by a computer. Following best describes thie independent auditors approach te obtaining concerning depreciation expense in the income statement? A Verify the niathematical accuracy of the amounts cherged to income as a result of depreciation expense. &. Determine the method for computing devecation expense and ascertain that iti in accordance with PERS, Reconcile the emount of ceprecistion expense to those amounts credited to accumulated depreciation accounts, By Establish the basis for depreciable assets avid veity the éeprectation expanse, 6 142 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) — MANILA FIRST PREBOARD EXAMINATION 01 28, 37: The most reliable type of audit evidence that an auditor can obtain is A. Physical examination by the auditor. 8._Caleulations by the auditor from company records. C. Confirmations received directly from third parties. ©. External documents. 38,_The company being audited has an internal auditor that is both competent and objective, ‘The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may ‘Allow the internal auditor to perform tests of intemal controls. “8. Allow the internal auditor to audit a major subsidiary of the company. . Not assign any task to the internal auditor because of the intemal auditor's lack of independence. D. Allow the internal auditor to perform analytical procedures, but not be involved with any test of details. 39, Which of the folowing procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales ata retail outlet? ‘A.) Observe the consistency of the employees’ use of cash registers and tapes, B. Inquire about employees’ access to recorded but undeposited cash. CC. Trace deposits in the cash receipts journal to the cash balance in the general ledger. 1D. Compare the cash balance in the general ledger with the bank confirmation request. 40._The auditor is concerned that a client is falling to bill customers for shipments. An audit procedure that would gather relevant evidence would be to A. Select a sample of duplicate sales invoices and trace each to related shipping documents. (8. Trace a sample of shipping documents to related duplicate sales invoices. ‘€. Trace a Sample of Sales Journal entries to the Accounts Receivable subsidiary ledger. D. Compare the total of the Schedule of Accounts Receivable with the balance of the ‘Accounts Receivable account in the general ledger. | 41. Which of the following procedures would a CPA ordinary perform whan reviewing the financial statements of an entity in accordance with Philippine Standards on Review Engagements (PSRES)? A, Document whether control risk is assessed at or below the maximum level B. Obtain an understanding of the entity’s internal control components. ‘C. Compare the financial statements with budgets or forecasts. D. Apply year-end cutoff tests for the sales and purchasing functions. 42. The purpase of an engagement letter is to ‘A. Document the CPA firm's responsibility to external users of the audited financial statements. B. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. C. Emphasize management's responsibilty for approving the audit program. D) Document the terms of the engagement. 43, If the current period's accounting policies have not been consistently applied in relation to ‘opening balances and if the change has not been properly accounted for and adequately disclosed, the auditor should express a/an ‘A, Unmodified opinion. B. Qualified opinion. C. Disclaimer of opinion. D. Qualified opinion or an adverse opinion, as appropriate. 44, In an audit of financial statements, an auditor's primary consideration regarding a control is whether it ia 'A.. Reflects management philosophy and operating style. Page 7 of 12 Pages‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION SATURDAY / 5:00PM — 6:00PM 45. 46, 47. 49. 8. Affects management's finandal statement assertions. C. Provides adequate safeguards over access to assets. D. Enhances management’s decision-making processes. Which of the following questions viould not be appropriate for an internal control Questionnaire concerning inventory? -F A,. Are goods stored in locked storage areas? B. )Are disbursement vouchers approved before payment? C. Is access to the storeroom limited to authorized personnel? D. Are there independent, periodic comparisons of inventory records with goods on hand? ‘The following statements relate to assurance engagernents. Choose the incorrect statements. 1. The objective of an assurance engagement is for a professional accountant to evaluate or mezsure a subject matter that is the responsibilty of another party against identified Suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter. 2, Assurance engagements performed by professional accountants are intended to enhance the credibility of information about a subject matter. 3. Assurance engagements involve two parties: @ professional accountant and an intended user. 4. The subject matter of an assurance engagement is limited to historical or prospective financial information. 5. The intended user in en assurance engagement is the parson or class of parsons for whom the professional accountant prepares the renort for a specific use or purpose. A, 2,3,4,and5. 8) 2,4, and 5. © 3and4, D. 4, 2,3, and 4. ‘An audit is conducted on the premise that management and, where appropriate, those charged with governance, have acknowledged and understand that they have responsibilities that are fundamerita| to the conduct of an audit in accordance with PSAs, Which of the following is nat one of tiiose responsibilities? A) The preparation of financial statements in accordance with relevent pronouncements issued by the AASC. B.) The establishment and maintenance of an adequate internal control system that is necessary Lo enable the preperation of financial statements that are free from material misstatement, whather due to fraud or error. €. To provide the auditor with accass to all inf2rmation that is relevant to the preparation of the financial statements such as records, decumantstion, and other matters. ©. To provide the auditor with unrestricted actess to persons within the entity from which the auditor determines it neces: Rain audit evidence. ‘The auditor neads to be awere of the exiscence of related parties and transactions with such Parties. Which of the following is the least likely reassn? AJ A related party transaction may be motvated by other than ordinary business consideratio B. The PFRS require disclosure in the financial statements of certain related party telationships and transactions, C. Related parties and transactions with stich parties are considered unusual features of business. D. The source of audit evidence affects the auditor's assessment of its reliability, What type of assurance engagement is involved when the practitioner expresses a negative form of conclusion? ‘A. Reasonable assurance engagement B, Negative assurence engagement C. Assertion-based assurance engegement Page of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION D. Limited assurance engagement 50. For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is A. Forwarded to the accounting department. B. Retained in the purchasing department's files. {) C Returned to the requisitioner. D. Forwarded to the receiving department. 51. Which of the following is the least persuasive documentation in support of an auditor’s /—_ opinion? : = ‘A. Schedules of details of physical inventory counts conduicted by the client. B. Notation of inferences drawn from ratios and trends. C._ Notation of appraisers’ conclusions documented in the auditor's working papers. D. Lists of negative confirmation requests for which no response wes received by the auditor. 7 52. If the objective of a test of details is to detect overstatements of sales, the auditor should trace trensactions from the A. Cash receipts journal to the sales journal, {) _ B. Sales journal to the cash receipts journal. C. Source documents to the accounting records. D. Accounting records to the source documents. 53: To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would (A) Request the senders to mail the original forms to the auditor, ‘6. Examine subsequent cash receipts for the accounts in question. C, Consider the e-mail responses to the confirmations to be exceptions: D, Mail second requests to the e-mail respondents. 54. The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when A. The predecessor auditor has poor relations with the successor auditor. 8. The client is dissatisfied with the predecessor's work. C. There are actual or potential legal problems between the client and the predecessor. D, The predecessor believes that the client lacks integrity. 55. The report on an agreed-Lipon procedures engagement should contain A, An expression of positive assurance based on the specific procedures performed, B, A:statement that the auditor is independent of the entity. C. general description of the procedures performed. D. Identification of the purpose for which the agreed-upon procedures were performed. 56, The auditor's primary purpose in auditing the client's system of interna control over financial reporting is A. To prevent fraudulent financial statements from being issued to the public. B, To evaluate the effectiveness of the company’s intemal controls over all relevant assertions in the financial statements. C. To reportto management that the internal controls are effective in preventing misstatements from appeering on the financial statements. D. To efficiently conduct the audit of financial statements. 57. According to PSA 520, Analytical Procedures, “analytical procedures” means the analysis of ‘significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevent information or deviate from predicted amounts. These procedures are used for the following purposes, except Page 9 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION 59. 61 xy A, As tests of control to determine the effectiveness of the design and operation of the entity's accounting and interna! contrals. B. As substantive procedures when their use can be more effective or efficient then tests of details in reducing detection risk for specific financial statement assertions, C) Toassist the auditor in planning the nature, timing and extent of other audit procedures. “Bi As an overall review of the financial statements in the final review stage of the audit Monitoring is an important component of internal control. Which of the following items would not be an example of monitoring? A. Management regularly compares divisional performance with budgets for the division. B. IT management regularly generates exception reports for unusual transactions or volumes of transactions and follows up with investigation as to causes. C. Tr management regularly reconciles batch control totals for items processed with batch contro's for items submitted, D,, Management has asked internal auditing to perform regular audits of the controls over cash processing. The engagement partner should be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships end specific audit engagements have been followed, and that conclusions reached in this regard are appropriate and have been documented. Acceptance and continuance of dlient relationships and specific audit engagements include considering: 1. The integrity of the principal owners, key management, and those charged with governance of the entity. Tl. Whether the engagement team is competent to perform the audit engagement and has the necessary time and resources. fl. Whether the firm and the engagement team can comply with ethical requirements. A. Lonly. B. Land It only. C. Mand If only. D, [, ll, and II. Freud refers to an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements while error refers to unintentional mistakes in financial statements. Fraud may involve Manipulation, falsification or alteration of records or documents. ~ Misappropriation of assets.. Mathematical or clerical mistakes in the underlying records and accounting data. ‘Suppression or omission of the effects of transactions from records or documents. —~ Oversight or misinterpretation of facts Recording of transactions without substance. Misapplication of accounting policies. 1,2, 4, 6, and 7. 1, 2, 3,4, 6, and, 1, 2,3, and 6. 4,2, 4,5, and 6, hich of the following should be included in the audit plan? ‘The nature, timing and extent of planned risk assessment procedures, as determined under PSA 315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment). “The nature, timing and extent of plenned further audit procedures at the assertion level, as determined under PSA 330 (The Auditor's Responses to Assessed Risks). Tonly It only Both I and I Neither I nor II re Fora sees eer 9OePr Page 10 of 12 PagesCPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANTLA FIRST PREBOARD EXAMINATION 6 62,Governmental effectiveness (program) auditing seeks to determine whether the desired ~~~ results ere being achieved and objectives are being met. The first step in the performance of such an audit would be to A, Identify the legislative intent of the program being audited. B. Evaluate the system used to measure results. CC, Determine the sampling frame to use in studying the system. D. Collect and analyze quantifiable data. 63. An Unmodified conclusion is not appropriate for either reasonable or limited assurance engagement when 1, Circumstances prevent the practitioner from obtaining evidence required to reduce assurance engagement risk to the appropriate level. Il. The responsible party or the engaging party imposes a restriction that prevents the practitioner from obtaining evidence required to reduce assurance engagement risk to ‘the appropriate level. Tonly only Either I or 11 Neither I nor Ir polp> 64, Assuming cash receipts from credit sales have been misappropriated. Which of the following is likely to conceal the misappropriztion and unlikely to be detected? ‘A. Understating the sales journal. B. Overstating the accounts receivable control account. C. Overstating the|accounts receivable subsidiary ledger. 1D. Overstating the|cash receipts journal. 65. Morales, CPA, decides to use stratified sempling. The reason for using stratified sampling rather than unrestricted random sampling is to A. Reduce as much as possible the degree of variability in the overall population. B. Give every element in the population an equal chance of being included in the sample. ) Allow the person selecting the sample to use his or her own judgment in deciding which elements should be included in the sample, D. Reduce the required sample size from a nonhomogeneous population. 66. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A, Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file, 8: Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports ‘and vendor invoices. 1 D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions. 67. AN examination of a financial forecast is a professional service that involves ‘A. Compiling or assembling @ finencial forecast that is based on management's assumptions. 8. Limiting the distribution of the accountant’s report to management and the board of directors. C. Assuming responsibility to update management on key events for one year after the D. report's date, . Evaluating the preparation of a financial forecast and the support underiying management's assumptions. Page 11 of 12 Pages‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)— MANILA FIRST PREBOARD EXAMINATION ‘AUDITING THEORY — phe 70, ‘A-compeny is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process callad “lapping.” Which of the following best describes lapping? A. Reduce the customer's account by recording a sales return. B. Write off the customer's account. C.) Reduce the customer's account by recording a sales allowance. , Apply the payment from another customer to the customer’s account. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter? A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B. Adleni-prepered letter reminding the customer that @ nonresponse will cause a second request to be sent. C.) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor. D. A client-prepared statement of account showing the details of the customer's account balance. Which of the following statements about the assessment of the risk of material misstatement in a dlient’s computer environment is true? ‘A. ‘The auditor must obtain an Understanding of interna control and test controls in computer environments. B, If the general controls are ineffective, the auditor ordinarily can assess the risk of material misstatement at 2 low level if the application controls are effective. . The auditor usually cen ignore the computer system if (s)he can obtain an understanding of the controls outside the computer system. D. The audito’s objectives with respect to the assessment of the risk of material misstatement are the same as ina manual system. ---END OF EXAMINATION--~ Page 12 of 12 Pages