(CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY APRIL 13, 2019 FINAL 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. The following statements relate to the auditor's responsibilities regarding related parties and transactions with such parties. Which is incorrect? A, Management is required to implement adequate internal control to ensure that transactions with related parties are appropriately identified in the information system and disclosed in the financial statements, ‘The auditor should have a sufficient understanding of the entaty and its environment to Identify events, transactions, and practices that may result in a risk of material ‘misstatement regarding related parties and transactions with such parties. C. A financial statement audit cannot be expected to detect all related party transactions. D. The auditor is responsible for the identification and disclosure of ralated parties and transactions witn such parties, 2. In planning an audit, the auditor considers audit risk. Audit risk is the A, Susceptibility of an assertion to material misstatement assuming there are no related controls. B. Risk that 2 material misstatement in an assertion will not be prevented or detected on a timely basis by the client's internal control. C. Risic that the auditor's procedures for verifying account balances vill not detect @ material misstatenient that in fact exists, D. Risk that the auditor may unknowingly fail financial statements that are materially misste ‘appropriately modify the opinion on 3, The auditor Is required to obtain reasonable assurance about whether the financial statements are free of materl:i misstatement, whether due to faud or error. in all cases when reasonable ascurance cannot be obtained, the auditsi’s report should contain a/an, A. Unmodified opinion B. Qualified or adverse cotnion C. Qualified or disclaimer of opinion ©. Disclaimer of opinen 4. Which of the following is the greatest advantage cf a database system? A. Data redundancy can be reduced. B. Backup and recovery procedures are minimizes C. Multiple cccurrances of data Items are useful for consistency. checking. . Conversion to 2 database system is ineypensive anc can be accomplished quicky. 5. On January 2, 2020, the TANYA CO. received a notice from tts primary suppliers that effective immediately all wholesale prices would be increased 19%. On the basis of the notice, TANYA revalued its December 31, 2019 inventory to reflect the higher costs. As resuit, the statement of financial position refiacts inventory stated at an amount higher than Its net realizable valve, The kiventcry constituted 2 material proportion of total assets; however, the effect of the revaluation was material to current assats but not to total assets (oF net income. In reporting on the company’s financaal statements for the year ended Page { of 12(28 Revie SCHOOL OF THE FLPPINES (CPAR)— MANTA AUBITING 10. FINAL PREBOARD EXAMINATION. 2039 / SATURDAY 1 5092H1= 0086 December 31,2019, n which inventory is valued atthe adjusted amount, the autor would ‘most likely ‘A. Express an unmodified opinion provided the nature of the adjustment and the amounts involved are disclosed in notes to the financial statements. B. Express a qualified opinion. C. Disclaim an opinion. D. Express an adverse opinion. Wich ofthe flowing i true of generalizes audit software programs? ‘They can be used only in auditing on-line computer systems. 8 THeyean betsed ‘any computer without modification, . They each have their own characteristics that the auditor must carefully consider before using in a given audit situation, ©. They enable the auditor to perform all manual tests of control procedures less expensively, ‘As a result of sampling procedures applied as tests of controls, an auditor Incorrectly assesses Control risk higher than appropriate. The most likely expianation for this station is that: The deviation rete in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceads the tolerable rate. 8. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate. C. ‘The deviation rates of both the auditor's sample and the population exceed the tolerable rate. D. “The deviation rates of both the auditor's sample and the population are less than the tolerable rate, A service organization's internal control may irteract with that of the client. The user auditor A. Isnot required to evaluate the service organization's controls. B. Should obtain absolute assurance that the service organization's internal control will Prevent or detect errors or fraud. . Should not consider weaknesses in the service organization's internal control to be ‘weaknesses in the clients system. D, Need not be concerned with the service organization's intemal control if the client has effective controis related to service organization processing. ‘An external auditor will use internal auditors to assist in the audit of accounts receivable. Of the following procedures, the one that would be most appropriate for the intemal ‘auditors to perform is the 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 receivable. . Preparation of an aged trial balance of accounts receivable. D. Establishment of the amount of accounts receivable that is considered material ‘An audit in accordance with PSAs is performed on the premise that management and, where appropriate, those charged with govemance have responsibilities that are fundamental to the conduct of the audit. Which of the following Is not one of those responsibilities? A. To comply with all relevant PSAs in the preparation and presentation of the entity's financial statements, B. To provide the auditor with all Information, such as records and documentation, and ‘other matters that are relevant to the preparavion and presentation of the financial statements, ©. To provide unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence. D. To design, implement, and maintain internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether ‘caused by fraud or error. Page 2 of 12(PA Rew SCHOOL OF THE PHILIFAINES (CPR ~ MANILA FINAL PREBOARD EXAMINATION AUDITING THEORY ae. 2009 Sen ene = G0 i 12, 3. 14. 15. 16. v7. ‘The auditor is required to complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’ report. The time limit within which to Complete the assembly of the aut file is ordinarily ‘A. Not more than 30 days after the date of the auditors report. B. Not more than 60 days after the date of the auditor's report. Not more than 90 days after the end of the entity's reporting period. 1D. Not more than 60 days after the date the entity's financial statements are authorized for issue. When the financial statements contain material but not pervasive misstatements because the accounting policies selected are not consistent with the applicable financial reporting framework, the auctor should ‘A. Express a qualified opinion and describe the matter giving rise to the modification in a separate paragraph. B, Express a qualified opinion and describe the matter giving rise to the modification within the opinion paragraph. . Disclaim an opinion and describe the matter giving rise to the modification in a seperate paragraph. , Disclaim an opinion and describe the matter giving rise to the modification within the opinion paragraph. ‘A CPA has been engaged to perform review services for a client. Identify which of the folowing 2 comet satement ‘A. 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. C. The CPA may prepare the statements from the books but may not assist in adjusting ‘and closing the books. D. The CPA is performing an assurance engagement other than an audit of the financial statements. ‘An auctor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating fector, the entity's plans to: ‘A. Repurchase the entity's stock ata price below its book value. B._ Issue stock options ip key executives. Lease rather than purchase operating facts. D. Accelerate the cue date of an existing mortgage. ‘A continuing accountant is one who has been engaged to audit, review, or compile and report on the financial statements of the current period and one or more consecutive periods Immediately prior to the current period. A continuing accountant who performs the same ‘or a higher level of service with respect to the financial statements of the current period should ‘A. Update his/her report on the financial statements of a prior period. B. Disciaim any assurance on the prior periods’ statements. C. Reissue the report on the financial statements of a prior period. D. Express an adverse opinion with respect to the prior period's financial statements, Documentary evidence is one of the prineipal types of corroborating information used by an ‘auditor to substantiate an opinion. Which one of the following examples of documentary evidence would be the most reliable? A. Time tickets. : B, Material requisiton slips. C. Copies of sales invoices. D. Bank statements. Which of the following statements relating to stratification is incorrect? Page 3 of 12‘CPA REVIEW SciCO. OF THE PHILIPS (CPAR)~ MANTA FINAL PREBOARD EXAMINATION aupmmneTueoay es 38. 19, a 22. 23. A. When performing tests of details of transactions and account balances, the population Is often stratified by monetary value. B. The results of audit procedures applied to a sample of items within a stratum can be projected to the entire population. C. When verifying the valuation assertion for accounts receivable, account balances may be stratified by age. D. Stratification reduces the variability of iterns within each stratum. Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or other information that is believed to contain a materially false or misleading statement? A. Inteority 8. Objectivity C. Professional competence and due care D. Confidentiality. PSA 620 (Using the Work of an Auditor's Expert) considers the following individuals as “experts”, except A. ‘An expert in taxation law. B. An individual with expertise in complex modeling for the purpose of valuing financial instruments, C. An individual with expertise in the valuation of assets acquired and liabilities assumed in business combinations, An individual with expertise in applying methods of accounting for deferred income tax. Which of the following is the least persuasive documentation in support of an auditor's opinion? 'A. Notation of inferences drawn from ratios and trends. 8. Notation of appraisers’ conclusions documented in the auditor's working papers. . Lists of negative confirmation requests for which no response was received by the auditor. D. Schedules of details of physical inventory counts conducted by the client ‘The most reliable procedure for an auditor to use to tast the existance of a clients inventory at an outside location would be to: ‘A. Observe physical counts of the inventory items, ®, Trace the total on the inventory listing to the general edger inventory account. CC. Obtain a confirmation from the client indicating inventory ownership. D. Anaiyticaly compare the current-year inventory balance to the prior-year balance. Comparative financial statements include the prior year's statements.that were audited by 2 predecessor auditor whose report is not presented. If the predecessor's report was Unmodified, the successor auditor should ‘A. Express an opinion on the current year's statements alone and make no reference to the prior year's statements, B. Indicate in the auditor's report that the predecessor auditor expressed an unmodified pinion, . Obtain a letter of representations from the predecessor conceming any matters that ‘might affect the successors opinion. D. Request the predecessor auditor to reissue the prior year’s report. ‘A™“proof of cash" used by an auditor ‘A. Proves that the client's year-end balatce of cash is fairly stated. 8. Confirms that the client has properly séparated the custody function from the recording function with respect to cash, . Validates that client’s bank did not make an error during the pericd being examined. . Determines if there were any unauthorized disbursements or unrecorded deposits for the given period. Page'4 of 12(PA REM SCHOOL OF THE PHILIPPINES (CBAR) —MAROLA FINAL PREBOAKO EXAMINATION THEORY ‘AUDITING: 24, 25, 26. 2. 28, 29. A980. 13.2018 /SATUADAY [SPM 6-008 Which of the following circumstances may create self-interest threats for a professional accountant in public practice? ‘A. A financial interest in a client or jointly holding a financial interest with a cient. B. Performing a service for a dient that directly affects the subject matter of the assurance engagement. Being threatened with litigation, D. Acting as an advocate on behalf of an assurance client initigation or disputes with third parties. The following are characteristics of “direct reporting” assurance engagements, except A. The subject matter information is in the form of an assertion by the responsible party that is made available to the intended users. 1B, The subject matter information is provided to the Intended users in the assurance report. C. The practitioner elther directly performs the evaluation or measurement of the subject matter or obtains 2 representation from the responsible party that has performed the evaluation or measurement. . The representation of the responsible party that has performed the evaluation or measurement of the subject matter is not available to the intended users, ‘The following are valid statements concerning an internal control system, except ‘A. No one person should be responsible for the custodial responsibilty and the recording responsibilty for an asset. ‘8. Transactions must be property authorized before such transections are processed. C. Because of the cost/benefit relationship, & client may apply contro! procedures on a test basis. D. Control procedures reascnably insure that collusion among employees cannot occur. \Which of the following best describes the respénsiblity ofthe CPA in performing compliation services fora company? A. The CPA must understand the client's business and accounting methods, and read the financial statements (or reasonableness, B. The CPA has only to satisfy himself or herself that the financial statements were Drepared in ccnfovnity with PFRS. ©. The CPA choute obeain en understanding of Interval control and perform tests of contiais. D. The CPA !s selteved of ar ponsiblity to third martes, ‘Which of the folowing circumstances would an suitor ricst to misctatements arising fron fraudulent financial ceport A. Several merzers of management have recently p stock. B. Several members ofthe board of directors have recortty sold shares of the entity's stock. C The entty distributes financial forecasts ¢2 financial analysts that predict conservative operating resvits. 1D. Management is interasted in maintaining the entity's earnings trend by using aggressive eccunting practices. 190d adsitional shares of the entity's The following are contra! envireniment factors, except ‘A. Limiting cirect prysicai access to assets and recorts BL The function of the bearci of aifectors ant its coxrmisteas. + C. Management's phiosophy and operating style. i D. Management's conirci system including the internal aucit function, personnel policies and procedures an segregation of autiss. Which of the following statements best cercribes 2 pcsitive cequest for confirmation of an accounts reonvabie Yatance? A. The customer wall be asker to indicate to the auditor the current balance in the account. B. The customer wil be askea to respond to the con’rmaton request only if the balance Indicates in the request 's incorrect Page Sof 12(SPA REWLEW SCHOOL OF THE HILIPINES (PAR) — MANILA FINAL PREBOAR! OXAMINATION ‘AUpITING THFORY aL. 32, 33 35. 36. 090) 15, 9 SATURDAY | Sct Gee . The customer will be asked to inform the auditor whether the balance indicated in the request is correct and to respond regardless of whether such stated balance is correct. D. The customer will be asked ta indicate to the auditor the balance in his/her account cniy if itis positive (i.., greater than zero). Which of the following is not a contingent fee? ‘A. A\fee that is dependent upen the approval of the assurance dlient's loan application. B. An audit fee that is based on 5% of the client's adjusted net income for the current year. C._Afee that is fixed by a court or other public authority. . An arrangement whereby no fee will be charged unless a specified finding or result is attained. If the fee quoted for @ professional service is so low, it may be difficult for the CPA to Perform the engagement in accordance with applicable technical and professional standards for that price. This situation may create a self-interest threat to A. Professional competence and due care B, Objectivity Integrity D. Professional behavior In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high on internal control relate to the A. Effinency of the audit 2. Effectiveness of the audit C. Selection of the sample D. Audit quality controls Which of the following best describes a CPA's engagement to report on an entity's intemal control? A. An assurance engagement to examine and report on management's written assertions ‘about the effectiveness ofits internal control 8. An audit engagement to render an opinion on the entity's internal control C. A prospective engagement to project, for a period of lime not to exceed one year, and report on the expected) benefits cf the entity's internal control, D. A consulting engagement to arovide constructive advice to the entity on its Internal conte. After testing a cents intemal contna! active deficiencies in the operation ofa dents internal most likely wouie [AL Tssue a disclaimer cf opinion about the inter! contr 2s pert of the auditor’ report. B. Increase ths assessment of control risk and increase the extent of substantive tests. CC. Issue a quatified opinion cf this finding as pet of the auditor's report. D. Withdraw from the auait necause the Interna: controls are ineffective. ah auctor discovers @ number of significant “ol, Under these circumstances the auditor ‘The preliminary entity’s accounting and intemal control eysterns ‘material mn'sstatements, ‘The auditor should ducument in tie audit working papers the understanding obtained of the entiy’s accountng and internal contrel sysiams and tha assessrrent of control risk. ‘There wall aluesys be some contro! ris and internal contro! systems, False; Trua; Trve. True; true; False. False; False; True. True; False; True. ssessment of control risk isthe process of evaluating the efficiency of an in preverting er detecting and correcting case oF the inh ri rations of any accounting poe Page 6 of 12(PA REMI SCHOOL OF THE PHILIPPINES (CBAR) —MANELA {FIWAL PREBOARD EXAMINATION AUDITING THEORY ‘3 i 7. 38. 38 4h a2. 8. = 6.0084 Which one of the following statements concerning sampling risk and nonsampling risk is correct? ‘A. Neither sampling tisk nor nonsampling risk can be reduced by the auditor. B. Sampling risk, but not nonsampling risk, can be reduced by the auditor. CC. Nonsampling risk, but not sampling risk, can be reduced by the auditor. D. Both sampling risk and nonsampling risk can be reduced by the auditor. [An entity's accounting records generally include the records of initial entries and supporting records including ‘A. Confirmations from third parties. 8. Information obtained by the auditor from such audit procedures as inquiry, observation, ‘and inspection. © C. Worksheets and spreadsheets supporting cost allocations. Other information developed by, or available to, the auditor to permit him/her to reach conclusions through valid reasoning. Assurance engagement risk is the risk ‘A. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated, B. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated. ‘C. Through loss from itgation, adverse publcty, or otter events arising in connection with a subject matter reported on. D. Of expressing an inappropriate conclusion when the subject matter information is ether ‘materially misstated or not materialy misstated, Which statement is incorrect regarding the evaluation of general CIS controls and CIS application contro's? ‘A. The general CIS controls may have a pervasive effect on the processing of transactions, in application systems. B. If general CIS controts are not effective, there may be a risk that misstatements might ‘occur and go undetected in the application systems, CC. Manuel procedures exercised by users may provide effective control at the application level D. Weaknesses in generat C1S controls cannot pr controls, 19 testing certain CIS application \When the financial statements concain materia} but rot pervasive misstatements because the accounting pelicies selectect are nt consistent with the applicable financial reporting framework, the auditor shiguid A, Express 2 guaitfied opinion and describe the matter giving rise to the modification in a separate parsgraph. B. Express a quaified oninion and desanbe the inatvsr giving rise to the modification within the opinion paragraph . Disciaim an opinion ard describe the matter giving rise to the modification in a separate Paragraph, D. Disclaien ant opinion and descrine the matier giving rise Yo the modifcation within the opinion paragraph. Which of the fellowing factcrs would most tkaly infuence an auditor's consideration of the relablty of daca vinen performing analytical procedures? ‘A. Whather the date wave developed in a computerizad or a marwai accounting system. B. Whether the data vver2 prepared oo the cach basis ci in conformity wrth PFRS. C._ Whether the daca were developed under a cyste:n with adequate contol, D. Whether the date were processed in an online system 0; = batch enary system. Substantive tests are performed to obtain evidence about the effectiveness of the 41. Design of the accounting and intemal control systems, that is, whether they are suttably esigned to prevent or detec: and correct materiai inisstatements. Pope 7 of 12(PA REMIEW SCHOOL OF THE PHILPPINES (PAR) = MANILA FINAL PREBOARD EXAMINATION aubTme THeony ee 45. 47. 48, 2. Operation of the internal controls throughout the period. A. Lonly. B. 2only. ©. Both t and 2, . Neither 1 nor 2. Al of the following are examples of substantive tests to verify the valuation of net accounts receivable except the ‘A. Recomputation of the allowance for bad debts. 8. Inspection of accounts for current versus noncurrent status in the statement of financial position. ._ Inspection of the accounts receivable aging schedule. ©. Comparison of the allowance for bad debts with past periods. hich ofthe following satementsconcering aut evidence is comet? ‘Appropriateness isthe measure of the quentity of audit evidence. e Suliseey is the measure ofthe uaty of aust evcence, that i ts relevance and lity. C. The quantity of auclt evidence needed is affected by its quality and the risk of misstatement. D. The sufficiency and appropriateness of aucit evidence are not interrelated ‘pplication controls are ‘A. Manual or automated procedures thet typically operate at a business process level and ‘apply to the processing of transactions by individual applications. 8, Policies end procedures that relate to many application. . Controls that maintain the integrity of information and security of data such as controls cover system software acquistton, change and maintenance. D. Controls that relate to many applications and support the effective functioning of general controls. Which statement is incorrect regarding the characteristics of a CIS organizational structure? ‘A. Certain data processing personnel may be the only ones with a detailed knowledge of the interrelationship between the source of data, how itis processed and the distribution and use of the output. 8. Many conventional controls based on adequate segregation of incompatible functions ‘may not exist or in the absence of access and other controls, may be less effective. CC. Transaction and master flle data are often concentrated, usually in machine-readable form. D. ‘Systems employing CIS methods do not include manual operations since the number of persons involved in the processing of financial information is significantly reduced. ‘Without affecting the CPA's willingness to express an unmodified opinion on the client's financial statements, corporate management may refuse a request to ‘A. Authorize its attorney to confirm that a list of pending or threatened litigation prepared ‘by management includes all items known to the attorney. B, Change its basis of accounting for inventories from first-n, first-out (FIFO) method to weighted average method. C. Write down to salvage value certain equipment that is no londer useful D. Allow the CPA to examine tax returns for years prior to that of the financial statements being audited. When an auditor tests the internal ff 2 computerized accounting system, which of the following is true of the test data approach: A. Test data are coded to a dummy subsidiary so they can be extracted from the system under actual operating conditions. B. Test data programs need not be tailor-made by the auditor for each client's computer applications. Page 8 of 1251 53, 55, FINAL PREBOARD EXAMINATION STURDAN./ G00 ~ 6:00 CC. Test data programs usually consist of all possible valid and invalid conditions regarding compliance with internal controls. D. Test date are processed with the client's computer and the results are compared with the. auditors predetermined resutts. Each time an auditor draws a conclusion based on evidence from a sample, an addtional sk, sampling risk, nroduoed. An example of samping Ask is . Improperly applying a proper audit procedure to sample data. 5. propery appving an improper audit procedure to sample data . Projecting the results of sampling beyond the popuiation tested, . Drawing an erroneous conciusion from sample data. In performing an audit, which one of the follewing procedures would be considered a “substantive test”? A. Comparing last year's interest expense with this year’s interest expense. . Comparing signatures on checks with the signatures of authorized check signers. . Reviewing initials on receiving documents. D. Reviewing procedures, followed in receiving, depositing, and disbursing of cash. ‘The auditor is required by the standard to consider the IT environment in designing audit procedures to reduce risk to an acceptably low level. Which of the following statements is, Incorrect? ‘A, The auditor's specific audit objectives do not change whether financial information is processed manually or by computer. 8, The methods of applying audit procedures to gather audit evidence are not influenced by the methdds of computer processing. ©. The auditor may use either manual audit procedures, computer-assisted audit techniques (CATS), or a combination of both to obtain sufficient appropriate audit evidence, D. In some IT environments, it may be difficult or impossible for the auditor to obtain ‘certain deta for inspection, inquiry, or confirmation without the aid of a computer. Control activities velate to the foilawing, except A. Segregation of duties B. Performance reviews. CC An internal audit Function D. Authorization An auditor used test data to warify the existence of contra!s in z certain computer program. Even though the program pesfonned well on the test, the auditor may sill have a concer that ‘A. The program tested is the same one used in te regular prosuction runs, B. Generalized audit sofware may have been a pete: too! tn i3e CC. Data entry procedures may change and rencer the test usciess D. ‘The test cate will not be relevant in subsequent audit periods ‘The principle of professions) competence ang dus cere imposes wach of the following blgalions on postal accountants? ‘To maintain crofecsional knowletige and sil ar the levi required to ens ‘or employers receive corrpetent professicne! 2 B. To refrain from disciasing confidential information ob uk of professional and business relationships without proper and specif authonty unless theres a legal (professional rit or duty to disclose C. To comply with relevant !aws end reguiations andi aycia any discredit to the pratassion. D. Not to compromise professional or business judgment because of bles, confict of Interest Gr undive intiuerice of others, that dents cor that may bring(PA REVIEW SCHOOL OF THE PHILIPPINES (CPR) HANA FINAL PREBOARD EXAMINATION 56. 57. 59, 61. 2. 2 At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support managements representations. Which of the following actions isthe auctor most likely to take? ‘A. Consult with the aucit committee and issue a disclaimer of opinion. 8. Consult withthe audit committee and issue a qualified opinion. C. Obtain additional evidence regarding the valuation of inventory. . Obtain a statement from management supporting thelr inventory valuation. Under which of the following circumstances is a discaimer of opinion inappropriate? ‘A. The clent refuses to permit its attorney to furnish information requested in a letter of audit inquiry. 8. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. C. The financial statements fall to contain adequate disclosure concerning related party transactions. D, ‘The auditor is unable to determine the amounts associated with fraud committed by the client's management. ‘The primary purpase of the representation letter is the A. Acceptance of the auditor's engagement letter. 5. Evaluation by management of the auditor's performance. C. Acknowledgment of management's responsibility for the financial statements. D. Agreement by management to engage the auditor for the next annual aucit. Which of the following statements relating to stratification is incorrect? ‘A. When performing tests of details of transactions and account balances, the population is often stratified by monetary value. 8. The results of audit procedures applied to a sample of items within a stratum can be. projected to the entire population C. When verifying the valuation assertion for accounts receivable, account balances may be stratified by age. D. Stratification reduces the variability of tes within each stratum. ‘The accounts payable department generally should ‘A. Cancel supporting documents after a cash payment is mailed. Approve the price and quantity of each purchase requisition. C Assure that the quantity ordered is omitted from the receiving department's copy of the purchase order. D. Agree the vendor's invoice with the receiving report and purchase order. Which statement is incerrect regarding external confirmation? ‘A. External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item affecting assertions made by management in the financial statements. External confirmation of an account receivable provides strong evidence regarding the Valuation of the account as at a certain date. C. The auditor should tallor external confirmation requests to the specific audit objective. D. The auditor may use. posttive or negative external ‘confirmation requests or ‘combination of beth. ‘Safeguards created by the profession, legislation or regulation include the following, except ‘A. Continuing professional development requirements. B. Professional standards. : CC. Firm-wide and engagement specific safeguards. D. Educational, training and experience requirements for entry into the profession. ‘An audit supervisor reviewed the work performed by the staff to determine if the audit was ‘adequately performed. The supervisor accomplished this by primarily reviewing which of the following? Page 10 of 12(PkREMW SCHOOL OF THE PMILPINES (PAR) MOLULA FINAL PREBOARD EXAMINATION 812.208 SATURDAY SH = 00M ‘aupmrine THEORY A. Checklists. B, Working papers. ©. Analytica’ procedures. D. Financial statements, 64. The existence of related parties and transactions between such parties are considered ordinary features of business. Which of the following statements conceming the need for the auditor to become aware of them Is Incorrect? ‘A. The applicable financial reporting framework may require disclosure in the financial statements of certain related party relationshins and transactions. 8. A greater degree of reliance should be placed on aucit evidence that Is obtained from or created oy related third parties. C. The existence of related parties and related party transactions may affect the financial statements, D. A relatec! party transaction may be motivated by other than ordinary business ‘considerations such as prof sharing or fraud. 65. Attribute sampling in statistical sampling is. ‘A. A method of sampling that divides the population into strata and then selects random samples from the strata. B.A procedure used to determine an estimated occurrence rate of 2 particular characteristic in a population, C. Armathod of sampling in which individual items are drawn at random from a population 50 that each sample of a given size has an equal chance of being selected. D. A procedure in wihich each cheracteristic selected permits a specified probability of locating ah cecurrence in a population. 66, Before accepting an audit engagement, a proposed (successor) auditor should make inquiries of the previous (predecessor) auiltor regarding the previous auditor's A. Evaluation of al matters of continuing accounting significance. 8, Understanding as to the reasons for the change of aucttors, C._Awareness of the censistency in the application of PERS between pericds D. Opinion of any subsaquent events occurring since issued 67. To achieve aut ef personal computer, the two crudal AL The enpropriate a: = and the appropriate software to perform the selected auc B. The eppropriat ‘» perforin J alt tasks and deta that can be accessed by personal computa Company face that can be wecessed by the audio’ personal computer and the appropriote auxit tacks for personal computer applications, D. The appronriate sample of company data to test witn the awsitor's personal computer and the appropriate software to perform the seisctsd audit tasks. 68. In evaluating the assumptions on which the estimate is based, *he auditor would néed to pay particular attention to assumptions which are A. Reasorabie in ight of actu2t results in prior periods, B, Consistent with these used for other accou © Consistent with management's pians which apoear appropriate. D. Subjective or succeptbte to material misstatement 69, The foliowiny are examples of circum ivity threats, except A> Promoting shares in a listed entity when that B. Long asscdation of senior persorinel with ths assurance client, C. Amemher of the engagenient teant having 2 close or imimecitste family relationship with 2 director or officer of the client. statement aut client. Page 11 of 12(PA REVIEW SCHOOL OF THE PHILIPPINES (CAR) = MANILA FINAL PREBOARD EXAMINATION AUDNGTHgomy ea aia Sepa / 00 = 6.00 . A former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement. 70. Which of the following matters is an auditor required to communicate to those charged with governance? ‘A. Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entty's financial reporting process. B. The auditor's consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets. C. The results of the auditor's analytical procedures performed in the review stage of the ‘engagement that indicate significant variances from expected amounts. . Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions. -—-END OF EXAMINATION Page 12 of 12