Instructions: Select the correct answer for eath of the follow item by shading the box corresponding to yo allowed, Good luck and God bless! @ L Polytechnic University of the Philippines College of Accountancy Mabioi Campus Sta, Meso Manila ACCO 4093- AUDITING THEORY Fourth Evaluation Examination Mareh 21,2016 ng questions. Mark only one answer for eels choice on the answer eet provided. Strictly tv erasures ane The flowing are Fntions uf he Hoard of Accountancy except Determination of the minimum requirements leading to the admission of candidates tn the CP: Doernade a! WW the ad candidates to the CPA, H. Regulation of the practice of sccountancy, 1M. Supervision over the accredited professional organization of CPAs IV. Appointment of members to Finaneial Reporting Standards Council (FRSC) a Land Ll and 1V b 1, Mand il and IV. ‘The following statements relate to RA 9298 and its IRRs. Which statenent( is (are) tue? 1. Those who failed to renew professional licenses for period of five (5) continuous years fom initial registration, or from last renewal shall be declared delinquent The seal of a CPA shall bein circular in form with a sinaller circle within and inthe upper portion ume of the individual CPA, firm or as the case may be, the lower portion thereof shall he engraved the letters "CPA" und the middle of the smaller circle shall be engraved the C/?A Registration Number ofthe individual CPA, proprietor of the firm and the signing partner of the partnership. ML, The PRC/PICPA-CPD Council shall be composed of a chaigperson and thee (3) members, IV. Any candidate who fails in wo (2) complete Centfied Public Accountant Board Examination shall be disqualified fiom taking another set of examinations unless he/she submits evidence to the satisfaction of the Board that he/she enrolled in and completed atleast twenty-four (24) units of subject given in the licensure examination V. Within ninety (90) days after the effectivity of RA 9298, the Board subject to the approval of PRC and in coordination with APO, shall adopt and promulyate such rules and regulations to carry out the provisions of RA 9298 and which shall take effec fifteen (15) days following its publication in the Official Gazette or in any major daily newspapers of gencral circulation, a [, Hand V only. ¢. Ill, IV and V only, 6. 1Vand Vonly, 4. 1,110, 1V and V Which of the following statemem(s) is(ore) incorrect regarding CPD requirements for renewal of rofessional license? ep The total CPD credit units required for CPAs shall be sixty (60) units for Ure (3) years, provided that a minimum of fifteen (45) ere units shall be eared in each eur. II. A registered professional who is working abroad shall be permanently exempted from compliance ‘with CPD requirement during his/her stay abroad, provided that he/she is has been ou of the country fora least two years immediately prior tothe date of renewal a. Lonly. ¢. Vand Il are correct statements b. Honly 4. Both statements are incorrect. 2004 (RA 92 son who shall violate RA 9298 According tothe Philippine Accountaney Act of 2004 (RA 9298), ay per ” or ay ofits implementing rules and regulations as promulgated by the Board of Accountancy subjet to the approval of the PRC, shall, upon conviction, be punished by a fine a not less than fily thousand pesos (P50,000), ar by imprisonment for a period not exceeding thee @) years, or both Page 10f13prisonment £08 peri ve hundred thous PESTS ¢pro0,000), orb Senet gent for a period 0 exeeaing y, ars or both - sand ps (PSN pesos (PISH0 cor by imprison™ mprisoninent fOr 9 peti yy 100), oF by wee : ‘pot less than one hundred fifty rows 4 exceed ) years or both nts of ASC? 5 c fs ner pronouncements 10 be sent is correst 7 ts of ing and ONT Pre " Te exposure period llowed ee est for comin! gener 90 days. este eric ie ite PR fre BOA fr aro alr ee ena months om publintion in the offical gazette " nats become operative 6 months 9 . Chief Executive Officer © Chief Financial Officer Chairman of the Board 45. In situations where the client provided incomplete and insufficient audit information requirements, the ‘auditor shall considec the following, except Communicate in writing the issues and concerns on the incomplete and insufficient audit informati fequirement with management andor those charged with yovemanee. b. Discuss ifthe audit information requirements can be revised to meet adequately the needs of the auditor ¢. Express a qualified or an adverse opinion. 4. Discuss with management and/or those charged with governance the possibility of outsourcing the completion of the information to third party service providers. 46. SI: The identification of Key Audit Matters (KAM) usually starts with all matters communicated with those charged with governance fer which, the auditor determines those that required significant audit attention, S3: KAM may be a source of significant risk areas identified in the audit. ‘S4: KAM may be a significant area of judgment by management. a. All of the statements above are true. b. All of the statements above are false. © Statement 1 and 2 are true, Statement 3 and 4 are false. and 4 are true. d. Statement 1 and 2 are false, Statement 47. SI: KAM should be significant events that have transpired during the year, $2: KAM should not consider the related disclosure in the financial statements. $3: KAM should not imply an opinion about the issue, S4: KAM should not pertain to specific circumstances a. All of the above statements are true. b. All of the above statements are false. tement | and 2 are true, Statement 3 and 4 are false. d. Statement | und 2 are false, Statement 3 and 4 are true. the audit client 48. It would be appropriate for the payroll department to be responsible for which of the following functions? a. Approval of employee time records. b. Maintain records of employment, firings, and raise c. Temporary retention of unclaimed employee paychecks. 4. Preparation of governmental reports as to employees’ earnings and withholding taxes.49. Whith othe following contiols mas likely would be use to maintain acura inventany peste inventry ordering syste keys inventory levels oa desired mining 2 Peto fvenory couse wed als! te ppt ivetory eer Peet invent cond ae peroily cored withthe cure cso indi ny items y ‘ Requisitions, rece , sn ingen pte se tinal mai nr ume 50, Which o Sa *eiloming a included inte KAM section fhe ew aut's mgt? and ycHeKAM How it wasaddessed Reference othe ee diskette B ver No Yes “ ¥ ks e & r Yes Yes . Yes va Sk St: ial procedures is ha! plausible relationships vist and continue in the absence of known conditions Yo the tsatements, substantive tests ae audi procedures thal may be lances of analytical rests it procedures that these procedres cannot S&: The basic premise under replace test of balances and transactions 8. Third statesnent is comet, but fi b. Altabove statements are coract © None of the: 4. First and se and second statements are not cose above statements ae core ond statements ate coret bu the third statement snot eonect. iexctoreitr wes the knowles vided bythe nde oie contol ane al aneney SE ot com! sk primarily wo determine te nein alone TA lion uses the knowledge provided by he undoing ones st a sean lof cont eis primary odeteins the nt tming erecta te oe Te Anauaitor uses the knowledge provided by te underandng oneal conclu es issued level of contol risk primarily to dtenine the nate, mina exten of teesrlnes ca Second statenient isthe core statement only, All ofthe statements are correct, 5 4 53. Whats the advantage of sing sts amplago ont sapling ett 2 The sina metho ifr eur suc thn mse eres The state methods ean move easly come te ourpleno sdl pree ewel r «Thestatsticl maths provide n objective bass fr quately evusing sae, 4 These methods limite themed tux jogemen ching pee sap tout whe theism dk Mul Misoemets Unome Mstenen Aiden tees © Pade Moons SS ei aor pig rms litem ve Fess ht ier nin al np el na ee pain sect oe sme pod 1, ceotioenigh os pone cee i Treanor ph sie bee a "somal sine tne Song ample nari 2 Sinine msn snes Page Bol 13ol Nowsanypting Manis, sani, samy What th iting ite au sang a San A Savypting isk cam ty reset by . lace by iy int somali vis! ile siee ang © Nowsamapting risk can be ia clingens mbit on supe op Wo the name o anions cone 9 he passdb tha the abet the entite ppopsatlon were sujet ‘ee lttevent fron the cone nowetare Volerabe ef ® An et that ages ivan a isolates event that ay no recurred other than on specifically (he population Miles sions ais dire ot rpnoseniative of the population sya ha the autor is wifling to aceopt wslusion, base gn a simple may be diferent trom the sailjectod tothe same aut procedure ‘An orn that the aude expt to be pres ©The wmaginvon cre i 4 The possibility th ‘sonetusion ceaelal if the eatie ypalaion the aunt's 1 items for the sample without regan! to their size, Wheat the seurve oy other astinguishing« 8 Block slostin ‘& Syatematio slection bHaphacant selection 4 Ranwlom selection or goes theo Which of the flossing is tre about alphy and beta errs? 1 The alpha cree As of geter conver to the aut th wert the avait than alpha eto of equal importance to the auditor dered by’ the ator Thebes eer is of gr The alpha err andthe beta error an eta era need he 6 4. Neither he alpha ere (tisk of under reianee) relates to contra risk t00 The ish of assessin 4 Theellivionsy ofthe ait 1b. Theeftectiveness of the audit ©. Theprekiminary estimate of 0 Tolerable error erility g control isk too hgh is the isk thatthe sample selected to fest controls sl assessed level of control risk when the true opera he liked of asses a Des sot support the aulioe's ph ture justifies such an as effectiveness of the contol st sent Contains misstatements chat could be muverial (0 the financial statements when aggregated with or transactions classes, ary errors oF deviations from presesibed internal control misstatements in other aeeount balan Contaias proportionately fewer mon structure policies or provedires than exis in the bal Does not support he tolerable eror for some or all of management's assertions Whieh ofthe folowing questions would wv auditor most likely inchude on Are assets that ¢0 ateralize notes payable critically needed forthe entity's continued existence? b. Avedirect borrowings on notes payable authorized by the board of directors? ‘Arete proceeds from notes payable used for the purchase of noncurrent asset 4 Are two or more authorized signatures required on checks tha! repay notes payable The capital acquisition and repayment cycle does wot include Payment of vend invoices bh. Payment of interest Payment of dividends «4. Acquistion of capital through interest-bearing debs Page 9 of 3opiate Pew = eres cient Case 1+ You ave the audit pariner of five clients and will have to mak ‘adit opinion that should be issued relative to their financial staternemts \ 1s follows Client No. 1 Dolee and Jordon Shoes of the inventory During the examination of Dolce and Jordan Shoes, you conchae dat there is. # POSSE bing materially overstated. The client refuses to allow you to expand the scope of yOu to verify whether the balance is wetually misstated. wn sufficiently tient No, 2~ Sister's Burgers Company « close of the Yoo were engaged to examine the Snter’s Burrs Company's financial statements afer te cls of corporation's sal yest, Hetause you were eng afterthebalance sheet date, you were not able e CTH bserve inventory, whichis highly mitral. On the completion of your aut, you ae satisfied thal ‘company’s financial statements are presented fairly, including inventory about whieh you were able to satisfy yourself by the use of alternative wudit procedures, iert No.3 ~ Cleveland Golden Boy Company 4, ‘As part of your post balance sheet dae ait procedures, you learned of heavy damoge to one of the client's ‘wo plants due to a recent fire, The loss will not be reimbursed by insurance, The newspapers described the ‘event in tal. The financial statements and appended notes as prepared by the elient did not disclose the loss caused by the fire, The damaged plat constitutes a material portion of the total assets, (Client No.4 Bene Auto Parts On January 02, 2017, the client reevived a notice ftom its primary supplier that effective immediately, all ‘wholesile prices would be inereased 10%, On the bass ofthe notice, the client revalued its December 31,2016, inventory to reflect the higher costs. The inventory constituted « material proportion of total assets. The effect however of the revaluation was material {o current assets but not to total assets or net income. The increase in valuation is adequately diselosed in the footnotes. (Client No. S~ Test Bonk Marmfacturers During 2017, the research team of Test Bank Manufacturers devoted its entire efforts toward developing a new pollution-control device. Ail eosts that could be attributed diretly tothe project were wecounted for as deferred sharges and classified on the balance sheet at December 31, 2017, as a noneurrent asset. In the course of your adit of the elient's 2017 financial statements, you found persuasive evidenee that the research conducted to date would probably result in @ marketable product. The deferred research charges ae significantly material in relation to both income and total assets, 64. The appropriate audit report on the finan ‘An unqualified opinion b. Fither an “except fo” qualified opinion or disclaimer © Anaverse opinion. 4. A disclaimer of opinion. statements of Client No, 1,3 and 4 will contain (65. The appropriate audit report on the financial statements of Client No, 2 will contain & An unqualified opinion, bh. Either an “except for” qualified opinion of disclaimer, © Amadyerse opinion. 4d. A disclaimer of opinion, 666, The appropriate audit report on the financial statements of Client No. $ will eontain a Anunqualified opinion, by. Either an “except for" qualified opinion ar disclaimer © Anadverse opinion. 4. A disclaimer of opinion, Gar 2 Te net four questions ar bse on the fc presented below, use the fllowing code to answer the A. Ineegrity B Objectivity C. Professional Competence and Due Care Page 100f 134 0. Confideng ality Ep You have been "ofan ei aod yOu ae fr finan i tector ofa g Siac ant yg) a8 he Yearend gay thing re Saag ME earn et MG ery mally hay yo 0s moving ee ou hae een eons ase anh soe ae sto at been cry vised byte ochre : 4ueston is now mor ig folland nod ws Bevouy. The sacl aa wou tet) bas told you that its ot eee to we managing distor wans the anil terns cory td a popete by ; ve buyer, The managing decor as none Milemplojeswillcopthcicjobsanlyouwiliceheeme ce the fj Me Mo Fis hich aan ® a iss wich ke ancl rsp mayb d the managing director's request? ne 68. What threat 10 independence may arise from the given situ ? 69. As 2 CPA, what could be your best possibie action? &_ Estilished the basis for valation ofthe company’s steck Discuss withthe warehouse manager the reason why the stocks were moving slow Discuss the realizable value ofthe stock with the sales director, 4. A,B, and Care coret 70. Assume that, you have considered rising the issue extemal; further assume that you have alerts the auditors to the existence of the slow-moving sicek. Ifthe situation femains unresolved, you may have to remove yourself from the conflict. The clearest way to disassociate yourself from misleading financial aecounts would be: |. Ask the auditor to disclose the information in the notes to financial statements, bb, Disclose the information to your lawyer trend and seek for its advice regarding the mater Resign! 4. Raised the problems with the hoard of dresiors and reflect the director staiements after board's approval. None of them. advice in the financial Case 3 - The manager of production line has the euthorty 10 order and receive replacement ports for all ‘machinery that require periodie maintenance. The intemal ausitr received an anonymous tip thet the manager ‘ordered substantially more parts than were necessary from a family member inthe pats supply business. The ‘unneeded parts were never delivered. Instcad, the manager processed receiving documents an charged the pats to machinery maintenance aceounts. The payments forthe undelivered parts were sent to the supplier, andthe ‘money was divided between the mansger and the family member. emal congols would have most likely prevented this fraud from occurring? 1 Exalsing predefined spending level fr al veo ding ie bg pos. . Sepregating the receiving function from the auhoriation of pars purchases. ‘comparing the hill of lading for replacement parts to the approved purchase order. 4 Using the company’s inventory system to match quanities requested with quantities received 71. Which ofthe following Which of the following tests would best assist the auditor in deciding whether to investigate this ‘anonyrnous tip further? . Comparison of the curent quarter's maintenance expense with prior period activity. bh Physical inventory testing of replacement parts for existence and valuation. «Analysis of repair puts charged to maintenance to review the reasonableness ofthe numberof items replace. 4. Review of test sample of paris invoices for proper authorization and receipt. Page 13 of 13t managers for cach produc, —» P — te produc! Producr department for major retailer assigns SCPE rotail pricing. Each product manag” Case 4 The marketing depart ering products and dekertinN8 1 central distribution center where Product managers are responsible Ber, Products are delive fores, Because FEECIPIS are recorded sx purchasing budget is set by the marketing partment Some each store. Prodvet managers are ak lines. Many products are egregated for distribution to the company’ ate ood are segregated for dite ns s ristribution enter, the company does not malt tere prod : veciuted on a combination of sales and gross profit generated from TP ved yo make space for the 5 ducts Scwonal and individual store managers can require that seasonal Pro ‘next season's products in this situation? antial performance sved, thus affecting the pote Which of following is a control deficiency The store manager can require items 10 be remo evaluation of individual managers. sisumiae The product manager negotiate the purchase price and sets the SelIPB PPT i. will Jead to Evaluating product managers by total gross profit generated by P' B, a dysfunctional behavior. d. ‘There is no receiving function located at individual stores. K anager. This 74, Requests for purchases beyond those initially budgeted must be approved by the marketing m gs provedure: i J. Should provide for the most efficient allocation of scarce organizational resources. 1, Isa defective contro! procedure. IIL, Is unnecessary because each product manager is evaluated on profit generated. 1, IL, and IIL a. Lonly. b. IT only. ¢, Hand Il only, Case 5 ~ Buy and Lease Apartments Co. completed construction and began to lease a 100-unit apartment on May 28, 2018, During June, 50 units were leased, and an additional 30 units were leased in July. During the month of May 2018, the company charged to expense P 46,000 for the cost of advertising, a grand opening party, and the advertising agency fee for planning the campaign. On December 31, 2018, the statement of ,000 of initial direct costs incurred by the company including commissions financial position reflected P 1 and legal fees paid in negotiating the lease. This initial direct cost are shown as an addition to the carrying amount of the leased asset and is being recognized as an expense over the term of the lease on the same basis as the lease income. During your audit of the company’s financial statements for the year ended December 31, 2018 (conducted in accordance with PSAs), no facts other than those described above came to your knowledge that would cause your opinion to be other than that the financial statements were presented fairly in accordance with PERSs. 75. What type of opinion should your report contain? 4 Anadverse opinion, b. An unmodified opinion. ¢. A disclaimer of opinion, dA qualified opinion ***END OF THE EXAMINATION*** #TrustTheProcess