PSBA Manila CPA Refresher AT - 1st Pre Board – October, 2022 Batch

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MULTIPLE CHOICE:

PART I – AUDITING THEORY

1. The auditor notices significant fluctuations in key elements of the company’s financial
statements. If management is unable to provide an acceptable explanation, the auditor
should
a. Consider the matter a scope limitation.
b. Perform additional audit procedures to investigate the matter further.
c. Intensify the audit with the expectation of detecting management fraud.
d. Withdraw from the engagement.

2. Which of the following factors most likely would cause an auditor to question the integrity
of management?
a. Management has an aggressive attitude toward financial reporting and meeting profit
goals.
b. Audit tests detect material fraud that was known to management, but not disclosed to
the auditor.
c. Managerial decisions are dominated by one person who is also a stockholder.
d. Weaknesses in internal control reported to the audit committee are not corrected by
management.

3. In developing a preliminary audit strategy, an auditor should consider

a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
b. Findings from substantive tests performed at interim dates.
c. Whether the inquiry of the client’s attorney identifies any litigation, claims, or
assessments not disclosed in the financial statements.
d. The potential risks of material misstatement.

4. In planning an audit, the auditor’s knowledge about the design of relevant internal control
policies and procedures should be used to
a. Identify the types of potential misstatements that could occur.
b. Assess the operational efficiency of the internal control structure.
c. Determine whether controls have been circumvented by collusion.
d. Document the assessed level of control risk.

5. Which of the following is the most likely first step an auditor would perform after accepting
an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Assess control risk for the assertions embodied in the financial statements.
c. Tour the client’s facilities and review the general records.
d. Consult with the review of the work of the predecessor auditor prior to discussing the
engagement with the client management.

6. I. The audit plan sets the scope, timing, and direction of the audit, and guides the
development of the more detailed audit strategy
II. The overall audit strategy is more detailed than the audit plan and includes the nature,
timing and extent of audit procedures to be performed by engagement team members
in order to obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level
a. True, True
b. True, False
c. False, False
d. False, True
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7. The general audit objectives of validity and completeness emphasize opposite audit
concerns:
a. Validity always deals with overstatements but the completeness may deal with either
over or understatements
b. Validity deals with potential overstatement and completeness deals with
understatement
c. Validity deals with potential understatement and completeness deals with
overstatement
d. Validity and completeness may each deal with overstatements or understatements, but
not in the same transaction

8. Which of the following procedures would an auditor most likely perform in planning an
audit of financial statements?
a. Inquiring of the client’s legal counsel concerning pending litigation
b. Comparing the financial statements to anticipated results
c. Examining computer generated exception reports to verify the effectiveness of internal
control.
d. Searching for unauthorized transactions that may aid in detecting unrecorded
liabilities.

9. The auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such responses most likely include
a. Assigning less experienced staff
b. Emphasizing to the audit team the need to maintain professional skepticism in
gathering and evaluating audit evidence
c. Performing predictable further audit procedures
d. Performing substantive procedures at an interim date instead of at period end

10. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
a. Substantive tests, assessments of control risk, and tests of controls.
b. Assessment of control risk, substantive tests, and tests of controls.
c. Assessment of control risk, tests of controls, and substantive tests.
d. Tests of controls, assessment of control risk, and substantive tests.

11. With respect to errors and fraud, which of the following should be a part of an auditor’s
planning of the audit engagement?
a. Planning to search for errors or fraud that would have a material or immaterial effect
on the financial statements.
b. Planning to discover errors or fraud that are either material or immaterial.
c. Planning to discover errors or fraud that are material.
d. Planning to consider factors affecting the risk of material misstatements both at the
financial statement and the account balance level.

12. Which of the following statement is an incorrect use of terminology?

a. Evidence obtained from an independent source outside the client organization is
more reliable than that obtained from within.
b. Documentary evidence is more reliable when it is received by the auditor directly
from an independent third party.
c. Documents that originate outside the company are considered more reliable than
those that originate within client’s organization.
d. External evidence, such as communications from banks is generally regarded as
more reliable than answers obtained from inquiries of client.

13. An entity’s management is responsible for the preparation and fair presentation of the
financial statements. Its responsibility includes the following except
a. Designing, implementing, and maintaining internal control relevant to the preparation
and presentation of financial statements.
b. Making accounting estimates that are reasonable in the circumstances.
c. Selecting and applying appropriate accounting policies.
d. Assessing the risks of material misstatement of the financial statements.
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14. Which of the following statements is incorrect?

a. The auditor should obtain an understanding of the entity and its environment,
including its internal control, sufficient to identify and assess the risk of material
misstatement of the financial statements, whether due to fraud or error, and
sufficient to design and perform further audit procedures.
b. The auditor uses professional judgment to determine the extent of the understanding
required of the entity and its environment, including its internal control.
c. The depth of the overall understanding that is required by the auditor in performing
the audit is more than that possessed by management in managing the entity.
d. The performance of risk assessment procedures is a continuous dynamic process of
gathering, updating, and analyzing information throughout the audit.

15. As it relates to an audit, materiality is

a. Not taken into consideration.
b. Related only to the sufficiency of procedures performed.
c. Based upon audit fees.
d. Determined based upon the importance to a user of the financial statements.

16. Which of the following is an inherent limitation of any client’s internal control?
a. The benefits expected to be derived from effective internal controls should not
exceed the costs of such control.
b. The competence and integrity of client personnel provide an environment conducive
to control and provide assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in
accordance with proper authorizations are effective against frauds perpetrated by
management.
d. Procedures whose effectiveness depends on segregation of duties can be
circumvented by collusion.

17. Which of the following is a false statement concerning fraud?

a. Fraud generally involves incentive or pressure to commit fraud, a perceived
opportunity to do so, and some rationalization of the act.
b. Two types of misstatements relevant to the auditor include material misstatements
arising from fraudulent financial reporting and material misstatements arising from
misappropriation of assets.
c. Fraud involves actions of management but excludes the actions of employees or third
parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go
undetected by the auditor.

18. In acting in the public interest, a professional accountant

a. Satisfies the needs of an individual client or employer.
b. Observes and complies with the ethical requirements for professional accountants.
c. Satisfies the needs of the greater majority excluding the individual or client.
d. Adheres to policies of good governance.

19. The conceptual framework is not applied to

a. Identify threats to compliance with the fundamental ethical principles.
b. Evaluate the significance of threats to the fundamental ethical principles.
c. Apply safeguards to eliminate all threats to the fundamental ethical principles.
d. Apply safeguards to reduce threats other than clearly insignificant to an acceptable
level.

20. Which of the following statements is correct?

a. Any candidate who fails in two (2) complete CPA board examinations who will no
longer be allowed to take another set of examinations.
b. Any candidate who fails in two (2) complete CPA board examinations shall be
disqualified from taking another set of examinations unless he/she submits evidence to
the satisfaction of the Board that he/she enrolled in and completed at least twenty-four
(24) units of subjects given in the licensure examination.
c. The examination in which the candidate was conditioned and the removal examination
on the subject in which he/she failed shall be counted as two (2) complete
examinations.
d. The refresher course should be completed within two (2) years from the preceding
examination.
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21. According to PSA 250, the term “noncompliance” as used in the standard refers to acts of
omission or commission by the entity being audited, either intentional or unintentional,
which are contrary to the prevailing laws or regulations. Such acts do not include
a. Transactions entered into by the entity
b. Transactions entered into in the name of the entity
c. Transactions entered into on the entity’s behalf by its management or employees
d. Personal misconduct (unrelated to the entity’s business activities) by the entity’s
management or employees

22. Which statement is incorrect regarding related services?

a. Related services comprise agreed-upon procedures and compilation.
b. Audits and reviews are designed to enable the auditor to provide reasonable
assurance and limited assurance, respectively.
c. Engagement to undertake agreed-upon procedures is not intended to enable the
auditor to express assurance.
d. In a consultancy engagement, the accountant is engaged to use accounting expertise
as opposed to auditing expertise to collect, classify and summarize financial
information.

23. Inherent risk is defined as the susceptibility of an account balance or class of transactions
to error that could be material assuming that there were no related internal controls. Of
the following conditions, which one does not increase inherent risk?
a. The client has entered into numerous related party transactions during the year
under audit.
b. Internal control over shipping, billing, and recording of sales revenue is weak.
c. The client has lost a major customer accounting for approximately 30% of annual
revenue.
d. The board of directors approved a substantial bonus for the president and chief
executive officer, and also approved an attractive stock option plan for themselves.

24. According to PSA 260, those matters that arise from the audit of financial statements and
in the opinion of the auditor, are both important and relevant to those charged with
governance in overseeing the financial reporting and disclosure process are called
a. Audit matters of governance interest
b. Significant audit matters
c. Auditor’s findings
d. Material misstatements in the financial statements

25. Every independent audit engagement involves both auditing standards and auditing
procedures. The relationship between the two may be illustrated by how they apply from
engagement to engagement. The best representation of this application is that, from one
audit engagement to the next
a. Both auditing standards and auditing procedures are applied uniformly.
b. Auditing standards are applied uniformly but auditing procedures may vary.
c. Auditing standards may vary but auditing procedures are applied uniformly.
d. Auditing standards are applied uniformly but auditing procedures are optional.

26. An auditor obtains knowledge about a new client's business and its industry to:
a. Make constructive suggestions concerning improvements to the client's internal
control.
b. Develop an attitude of professional skepticism concerning management's financial
statement assertions.
c. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect on the client's
financial statements.

27. An audit made in accordance with Philippine Standards on Auditing (PSA) generally
should
a. Be expected to provide assurance that noncompliance with laws and regulations will
be detected if the internal control is effective.
b. Be relied upon to disclose indirect effect noncompliance with laws and regulations.
c. Encompass a plan to search actively for noncompliance with laws and regulations
which relate to operating aspects.
d. Not be relied upon to provide reasonable assurance that all noncompliance with
laws and regulations will be detected.
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28. Three conditions are generally present in the client’s organization when fraud occurs. Those
conditions include each of the following except a/an:
a. Incentive or pressure to commit fraud
b. Professional skepticism about the likelihood of fraud.
c. Attitude or rationalization about the likelihood of fraud.
d. Opportunity to commit fraud.

29. Which of the following is most likely to be a response to the auditor’s assessment that
the risk of material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different
dates so as to allow the same auditor to be present at every count.

30. Before accepting an audit engagement, a successor auditor should make specific
inquiries of the predecessor auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures
and accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of the
client’s lawyer.
d. The predecessor’s assessments of inherent risk and judgments about materiality.

31. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either test of controls or tests of
transactions.

32. Auditors are more concerned with the occurrence assertion for revenues than
the completeness assertion because
a. Clients are more likely to overstate than understate revenues.
b. Clients are more likely to understate than overstate revenues.
c. It is difficult to determine when services have been performed.
d. The allowance for doubtful accounts often is understated.

33. Obtaining an understanding of an internal control involves evaluating the

design of the control and determining whether the control has been
a. Authorized.
b. Implemented.
c. Tested.
d. Monitored.

34. The statement that “nothing came to our attention which would indicate that
these statements are not fairly presented” expresses which of the following?
a. Disclaimer of opinion.
b. Negative assurance.
c. Negative confirmation.
d. Piecemeal opinion.

35. Which of the following is appropriate about risk assessment?

a. Detection risk is eliminated if an auditor were to examine 100 percent of the
account balance or class of transactions
b. There is an inverse relationship between detection risk and the combined level of
inherent and control risk.
c. The assessed level of inherent and control risk can be sufficiently low, thus
resulting to eliminating the need for substantive tests.
d. Audit risk may be more appropriately determined by assessing inherent and control
risk separately.

***End of Examination***