Section C

5 of 10 points
Choose the best answer

 
The auditor may refer to and identify a specialist in the auditor’s report if the auditor *
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Wishes to emphasize the thoroughness of the audit.

Expresses an unqualified opinion.
Wishes to indicate a division of responsibility.
Believes it will facilitate an understanding of the reason for modification of the report.
 
 
As defined in PSQC 1, what is a process comprising an ongoing consideration and
evaluation of the firm’s system of quality control, including a periodic inspection of a
selection of completed engagements, designed to provide the firm with reasonable
assurance that its system of quality control is operating effectively? *
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Engagement quality control review

Inspection
Monitoring
 
Supervision

 
Which element of a system of quality control is addressed by the establishment of
policies and procedures designed to provide the firm with reasonable assurance that it
has sufficient personnel with the competence, capabilities, and commitment to ethical
principles? *
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Leadership responsibilities for quality within the firm

Human resources
 
Engagement performance
Monitoring

 
For audits of financial statements of listed entities, the engagement partner should not
issue the auditor’s report until the completion of the *
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Engagement Team Review
 
Engagement Quality Control Review
Management Review
Engagement Partner Review

Correct answer
Engagement Quality Control Review

 
Which of the following statements concerning the relevance of various types of
controls to a financial statement audit is correct? *
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All controls are ordinarily relevant to a financial statement audit.

An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is
taken.
Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.
 
Controls over safeguarding of assets and liabilities are of primary importance, while controls over
the reliability of financial reporting may also be relevant.

 
An auditor should consider two key issues when obtaining an understanding of a
client’s internal controls. These issues are *
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The design and implementation of the controls.

The frequency and effectiveness of the controls.
The effectiveness and efficiency of the controls.
 
The implementation and efficiency of the controls.

Correct answer
The design and implementation of the controls.

 
Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded? *
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The billing department supervisor sends copies of approved sales orders to the credit department
for comparison to authorized credit limits and current customer account balances.
 
The accounting department supervisor independently reconciles, on a monthly basis, the
accounts receivable subsidiary ledger to the accounts receivable control account.
The accounting department supervisor controls the mailing of monthly statements to customers
and investigates any differences reported by customers.
The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.

Correct answer
The billing department supervisor matches prenumbered shipping documents with entries in the
sales journal.

 
Which of the following control activities in an entity’s revenue/receipt cycle would
provide reasonable assurance that all billed sales are correctly posted to the accounts
receivable ledger? *
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Daily sales summaries are compared to daily postings to the accounts receivable ledger.
 
Each shipment of goods on credit is supported by a prenumbered sales invoice.
Each sales invoice is supported by a prenumbered shipping document
The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control
account in the general ledger.

 
Which of the following controls is not usually performed in the accounts payable
department? *
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Accounting for unused prenumbered purchase orders and receiving reports.

Matching the vendor’s invoice with the related purchase requisition, purchase order, and
receiving report.
 
Approving vouchers for payment by having an authorized employee sign the vouchers.
Indicating on the voucher the affected asset and expense accounts to be debited.

Correct answer
Accounting for unused prenumbered purchase orders and receiving reports.

 
After gaining an understanding of internal control and assessing the risks of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely
decided that *
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There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
An increase in the assessed level of control risk is justified for certain financial statement
assertions.
 
It is not possible or practicable to reduce the risks of material misstatement at the assertion level
to an acceptably low level with audit evidence obtained only from substantive test procedures.
Additional evidence to support a further reduction in control risk is not available.

Correct answer
It is not possible or practicable to reduce the risks of material misstatement at the assertion level
to an acceptably low level with audit evidence obtained only from substantive test procedures.

Section D
5 of 10 points
 
An auditor may decide to assess control risk at the maximum level for certain
assertions because the auditor believes *
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Sufficient appropriate audit evidence to support the assertions is likely to be available.

The entity’s control components are interrelated.
More emphasis on tests of controls than substantive tests is warranted.
 
Controls are unlikely to pertain to the assertions.

Correct answer
Controls are unlikely to pertain to the assertions.

 
When there are numerous property and equipment transactions during the year, an
auditor who plans to assess control risk at a low level usually performs *
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Analytical procedures for current year property and equipment transactions.

Analytical procedures for property and equipment balances at the end of the year.
Tests of controls and extensive tests of property and equipment balances at the end of the year.
 
Tests of controls and limited tests of current year property and equipment transactions.

Correct answer
Analytical procedures for property and equipment balances at the end of the year.

 
The auditor is concerned with fraud that causes a material misstatement in the
financial statements. There are two types of intentional misstatements that are
relevant to the auditor: misstatements resulting from fraudulent financial reporting and
misstatements resulting from *
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Collusion within the entity or with third parties.

Employee fraud.
Management fraud.
Misappropriation of assets.
 
 
Fraudulent financial reporting involves intentional misstatements including omissions
of amounts or disclosures in financial statements to deceive financial statement users.
It may be accomplished in a number of ways, including *
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Using an entity’s assets for personal use.

Stealing physical assets or intellectual property.
Manipulation, falsification, or alteration of accounting records or supporting documentation from
which the financial statements are prepared.
 
Embezzling receipts.

 
The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except *
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Recurring negative cash flows from operating activities while reporting earnings and earnings
growth.
Adverse relationship between the entity and employees with access to cash or other assets
susceptible to theft created by recent changes made to employee compensation or benefit plans.
 
Inadequate segregation of duties or independent checks.
Inadequate physical safeguards over cash, investments, inventory, or fixed assets.

Correct answer
Recurring negative cash flows from operating activities while reporting earnings and earnings
growth.

 
Opportunities to misappropriate assets increase when there are *
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Inventory items that are small in size, of high value, or in high demand.
 
Recent or anticipated changes to employee compensation or benefit plans.
Known or anticipated future employee layoffs.
Promotions, compensation, or other rewards inconsistent with expectations.

 
Which of the following conditions or events may create incentives/pressures to commit
fraud? *
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Inadequate access controls over automated records

Lack of mandatory vacations for employees performing key control functions.
Inadequate system of authorization and approval of transactions.
 
Excessive pressure on management or operating personnel to meet financial targets established
by those charged with governance, including sales or profitability incentive goals.

Correct answer
Excessive pressure on management or operating personnel to meet financial targets established
by those charged with governance, including sales or profitability incentive goals.

 
When the auditor identifies a misstatement in the financial statements, the auditor
should consider whether such a misstatement may be indicative of fraud and if there is
such an indication, the auditor should *
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Consider the implications of the misstatement in relation to other aspects of the audit.
 
Withdraw from the engagement.
Communicate the information to regulatory and enforcement authorities.
Report the matter to the person or persons who made the audit appointment.

 
Governmental effectiveness (program) auditing seeks to determine whether the
desired results are being achieved and objectives are being met. The first step in the
performance of such an audit would be: *
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Identify the legislative intent of the program being audited.

 
Evaluate the system used to measure results.
Collect and analyze quantifiable data.
Determine the sampling frame to use in studying the system.

 
Which statement is incorrect regarding the pronouncements of ASPC? *
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The Interpretations will have the same authority as the PSAs.

 
PSAs issued by ASPC are not the only authoritative source of auditing standards for members of
the accountancy profession in the Philippines.
The exposure period allowed for each exposure draft of PSA and PAPS to be considered by the
organizations and persons to whom it is sent for comment is generally three months.
Each final standard, interpretation and statement shall be submitted to the PRC through the BOA
for approval after which the pronouncements become operative 6 months from publication in the
official gazette.

Correct answer
Each final standard, interpretation and statement shall be submitted to the PRC through the BOA
for approval after which the pronouncements become operative 6 months from publication in the
official gazette.

Section E
7 of 10 points
 
If the firm is involved in the preparation of accounting records or financial statements
and those financial statements are subsequently the subject matter of an audit
engagement of the firm, this will most likely create *
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Self-review threat
 
Familiarity threat
Intimidation threat
Self-interest threat

 
Which of the following will least likely create a threat to independence? *
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Deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an
assurance client that is a bank, broker or similar institution, provided the deposit or account is
held under normal commercial terms.
Family and personal relationships between a member of the assurance team and a director, an
officer or certain employees.
A member of the assurance team, partner or former partner of the firm has joined the assurance
client.
Arrangements to combine one or more services or products of the firm with one or more services
or products of the assurance client and to market the package with reference to both parties.
 
Correct answer
Deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an
assurance client that is a bank, broker or similar institution, provided the deposit or account is
held under normal commercial terms.

 
The CPA profession deemed it necessary to establish a Code of Ethics and a
mechanism to its enforcement because *
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An ethical code that stresses the CPA's responsibility to clients and colleagues is a prerequisite
to success.
 
Acceptance of responsibility to the public is a distinguishing mark of a profession.
A requirement of law provides that CPAs establish a code of ethics.
The establishment of flexible ethical standards provides self-protection for CPAs.

Correct answer
Acceptance of responsibility to the public is a distinguishing mark of a profession.

 
Which of the following is prohibited by the Code of Professional Ethics for CPAs? *
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Accepting an engagement or employment which one cannot reasonably expect to complete or

discharge with professional competence
 
Use of a firm name which includes the name of a retired partner.
Announcement in a newspaper of the opening of a public accounting office.
Engaging in civic activities during business hours.

 
Examples of risk factors relating to misstatements resulting from fraud least likely
include *
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A high degree of competition or market saturation, accompanied by declining margins.

Inability to generate cash flows from operations while reporting earnings and earnings growth.
A significant portion of management’s compensation is represented by bonuses the value of
which is contingent upon the entity achieving unduly aggressive targets for operating results,
financial position or cash flow.
 
There is mandatory vacation for employees performing key control functions.

Correct answer
There is mandatory vacation for employees performing key control functions.

 
Specific responses to the auditor’s assessment of the risk of material misstatement
resulting from fraud will vary depending upon the types or combinations of fraud risk
factors or conditions identified, and the account balances, classes of transactions and
assertions they may affect. Specific examples of such responses least likely include: *
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Alter the audit approach in the current year.

Request that inventories be counted at interim date.
 
Visit locations or perform certain tests on a surprise or unannounced basis.
Seeking additional audit evidence from sources outside of the entity being audited.

 
Which of the following circumstances least likely indicate the possibility of fraud or
error? *
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Significant difficult-to-audit figures in the accounts.

Limitation in audit scope imposed by management.
Conservative application of accounting principles.
 
Unrealistic time deadlines for audit completion imposed by management.

 
Which statement is incorrect regarding the auditor’s consideration of laws and
regulations in an audit of financial statements? *
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If the auditor concludes that the noncompliance has a material effect on the financial statements,
and has not been properly reflected in the financial statements, the auditor should express a
qualified or an adverse opinion.
The auditor may withdraw from the engagement when the entity does not take the remedial
action that the auditor considers necessary in the circumstances, even when the noncompliance
is not material to the financial statements.
In order to plan the audit, the auditor should obtain a specific understanding of the legal and
regulatory framework applicable to the entity and the industry and how the entity is complying
with that framework.
 
When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should evaluate the possible effect on the financial statements.

 
In conducting a fraud investigation the auditor should first: *
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Identify the perpetrators

Notify a law enforcement agency
Obtain the facts
 
Obtain a confession

 
Oli Manufacturing, Inc. sought a P2,000,000 loan from Local Lending Corporation.
Local Lending insisted that audited financial statements be submitted before granting
credit. Oli agreed. An audit was performed by an independent auditor who submitted
an audit report to Oli that was to be used solely for the purpose of negotiating a loan
from Local. Local, upon reading the audited financial statements, decided in good faith
not to extend the credit desired. Certain ratios, used routinely by Local in reaching
credit decisions, were judged insufficient. Oli used copies of the audited financial
statements to obtain credit elsewhere. Despite complying with Philippine Standards on
Auditing, the independent auditor failed to discover a sophisticated embezzlement
scheme perpetrated by Oli's chief financial officer. The auditor is liable to *
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Third parties who relied on the audited financial statements to extend credit.
Oli to repay the audit fee because Local did not extend credit.
Oli for any losses Oli suffered as a result of failing to discover the embezzlement.
None of the parties