Baliuag University

CBAA 141-0111

1)With well-developed internal control, employees in the same department most likely would approve purchase orders, and also

1. 1. Reconcile the open invoice file.                             c. Authorize requisition of goods.
   2. Inspect goods upon receipts.                                 d. Negotiate terms with vendors.

2. To strengthen the system of internal accounting control over the purchase of merchandise, a company’s receiving department should
   1. Accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.
   2. Accept and count all merchandise received from the usual company vendors.
   3. Rely on shipping documents for the preparation of receiving reports.
   4. Be responsible for the physical handling of merchandise but not for the preparation of receiving reports.

3. For effective internal control, the accounts payable department generally should
   1. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
   2. Ascertain that  each requisition is approved as to price, quantity, and  quality by an authorized employee.
   3. Obliterate the quantity ordered on the receiving department copy of the purchase order.
   4. Establish the agreement of the vendor’s invoice with the receiving report and purchase order.

4. Which of the following controls is not usually performed in the vouchers payable department?
   1. Matching the vendor’s invoice with the related receiving report.
   2. Approving vouchers for payment by having an authorized employee sign the vouchers.
   3. Indicating the asset and expense accounts to be debited.
   4. Accounting for unused prenumbered purchase orders and receiving reports.

5. In a properly designed internal accounting control system, the same employee may be permitted to
   1. Receive and deposit checks, and also approve write-offs of customer accounts.
   2. Approve vouchers for payment, and also sign checks.
   3. Reconcile the bank statements, and also receive and deposit cash.
   4. Sign checks, and also cancel supporting documents.

6. In an audit of a purchasing department, which of the following ordinarily would be considered a risk factor?
   1. Purchase specifications are developed by the department requesting the material.
   2. Purchases are made against blanket or open purchase orders for certain types of items.
   3. Purchases are made from parties related to buyers or other company officials.
   4. There is a failure to rotate purchases among suppliers included on an approved vendor list.

7. Which of the following constitutes the most significant risk within the purchasing cycle?
   1. Receiving department personnel sign receiving documents without inspecting or counting the goods.
   2. Large quantities of relatively inexpensive parts are stored in open areas near work stations to reduce production slow-downs.
   3. Poor records of transfers between warehouses often result in unnecessary purchases and excess inventories.

1. 4. Warehouse personnel do not compare quantities received to quantities shown on transfer tickets.

8. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
   1. Completeness.                                                             c. Valuation or allocation.
   2. Existence or occurrence.                                          d. Rights and obligations.

9. An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbred purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
   1. Purchase orders.                                                          c. Receiving reports.
   2. Canceled checks.                                                         d. Approved vouchers.

10. From the point of view of good procedural control, distributing payroll checks to employees is best handled by the
    1. Treasurer's department.                       c. Employee's department supervisor.
    2. Personnel department.                                             d. Accounting department.

11. Which of the following procedures most likely would be considered a weakness in an entity’s internal controls over payroll?
    1. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll summary.
    2. Payroll checks are prepared by the payroll department and signed by the treasurer.
    3. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
    4. The personnel department sends employees’ termination notices to the payroll department.

12. During the audit the independent auditor identified the existence of a weakness in the client’s internal control and orally communicated this finding to the client’s senior management and audit committee. The auditor should
    1. Consider the matter a scope limitation and therefore disclaim an opinion.
    2. Document the matter in the working papers and consider the effects of the conditions on the audit.
    3. Suspend all audit activities pending directions from the client’s audit committee.
    4. Withdraw from the engagement.

13. During the planning phase of an audit, an auditor is identifying matters for communication to the entity’s audit committee. The auditor most likely would ask management whether
    1. There was significant turnover in the accounting department.
    2. It consulted with another CPA firm about installing a new computer system.
    3. There were changes in the application of significant accounting policies.
    4. It agreed with the auditor’s selection of fraud detection procedures.

14. Which of the following statements is correct concerning an auditor’s required communication with an entity’s audit committee?
    1. This communication is required to occur before the auditor’s report on the financial statements is issued.
    2. This communication should include discussion of any significant disagreements with management concerning the financial assertions.
    3. Any     significant      matter    communicated      to    the    audit     committee     also      should     be communicated to management.
    4. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to the audit committee.

15. How do the scope, procedures, and purpose of an examination of management’s written assertion on internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?

a                                 b                                c                                d

Scope                                         Similar                    Different                Different               Different Procedures                            Different                  Similar                    Different                 Similar Purpose                                                     Similar                      Similar                    Different               Different

16. Which of the following statements is incorrect concerning a client who outsources a portion of its IT function?
    1. Auditors need not be concerned with outsourced IT functions because those functions are reviewed by other auditors.
    2. The extent to which an auditor obtains an understanding of the service center’s internal controls should be based upon the same criteria used to determine the understanding obtained for a client’s internal controls.
    3. It is common for a single independent auditor to obtain an understanding and test internal controls of a service center for use by all its customers and their auditors.
    4. None of the above is correct.

Evidence , procedures and working papers (Related PSAs: PSA 500(rev) PSA 501, 505, 510, 520, 540, 545, 550, 620, 560 ,580 and 230, PAPS 1000, 1005 and 1000Ph)

17. Assertions are representations of management that are embodied in financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation?
    1. Property is recorded at historical cost.
    2. Trade accounts receivable in the balance sheet are stated at net realizable value.
    3. Notes payable in the balance sheet include all such obligations of the entity.
    4. Property cost is systematically allocated to appropriate accounting period.
18. Which of the following relates to rights and obligations assertion?
    1. All assets, liabilities and equity interests that should have been recorded have been recorded.
    2. Transactions and events that have been recorded have occurred and pertain to the entity.
    3. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts
    4. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

19. Most of the independent auditor’s work in formulating an opinion on financial statements consists of
    1. Studying and evaluating internal control.
    2. Obtaining and examining evidential matter.
    3. Examining cash transactions.
    4. Comparing recorded accountability with assets.

20. The principal reason for an independent auditor to gather and evaluate audit evidence is to
    1. Form an opinion on the financial statements.
    2. Detect fraud.
    3. Evaluate management.
    4. Evaluate internal control.

21. Which of the following statements concerning evidential matter is correct?
    1. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.
    2. An effective internal control structure contributes little to the reliability of the evidence created within the entity.
    3. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
    4. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

22. Which of the following statements relating to the competence of evidential matter is always true?
    1. Evidential matter gather by an auditor from outside an enterprise is reliable.
    2. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
    3. Oral representations made by management are not valid evidence.
    4. Evidence gathered by auditors must be both valid and relevant to be considered competent.

23. Audit information is usually considered relevant when it is
    1. Derived through valid statistical sampling.
    2. Objective and unbiased.
    3. Factual, adequate, and convincing.
    4. Consistent with the audit objectives.

24. Several types of documentary evidence were received by the auditor, but of these only one is considered most reliable:
    1. Working papers prepared by the chief accountant and reviewed personally by the VP for finance.
    2. A check issued by the treasurer with the payee’s endorsement, included with the statement mailed by the bank directly to the auditor.
    3. A delivery receipt issued by the shipping department, signed by the customer, with an accompanying copy of the sale invoice.
    4. Confirmation of the balance of an accounts payable mailed by and returned directly to the auditor.

25. Which of the following types of audit evidence is the least persuasive?
    1. Prenumbered purchase order forms.
    2. Bank statements obtained from the client.
    3. Test counts of inventory performed by the auditor.
    4. Correspondence from the client’s attorney about litigation.

26. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor?
    1. The type of opinion to be issued.
    2. The auditor’s evaluation of internal control.
    3. The types of audit evidence available to the auditor.
    4. Whether or not the client reports to the Securities and Exchange Commission.

27. Describe substantive audit tests in the context of an audit of financial statements.
    1. Substantive tests are audit procedures that may be either tests of transactions, direct tests of financial balances, or analytical tests.
    2. Substantive tests are audit procedures that may be eliminated under certain conditions.
    3. Substantive tests are audit procedures that are designed to discover significant subsequent events.
    4. Substantive tests are audit procedures that will increase proportionately with the auditor’s reliance on internal control.

28. In performing an audit, which one of the following procedures would be considered a “substantive” test”?
    1. Comparing last year’s interest expense with this year’s interest expense.
    2. Comparing signatures on checks with the signatures of authorized check signers.
    3. Reviewing initials on received documents.
    4. Reviewing procedures followed in receiving, depositing, and disbursing cash.

29. A basic premise underlying the application of analytical procedures is that
    1. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
    2. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements.
    3. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

1. 4. These procedures cannot replace tests of balances and transactions.

30. The auditor will most likely perform extensive tests for possible understatement of
    1. Revenues.                      b. Liabilities.                     c.        Assets.                                     d.       Capital.

31. Karl, an auditor with extensive experience in the retail industry, is assigned to audit the reasonableness of accounting estimates in the year 1 financial statements of Haas Company. Haas Company, which was formed in year 1, markets fishing nets. Which of the following is the least important consideration for Karl in his audit of the reasonableness of accounting estimates?
    1. An inexperienced employee at Haas prepared the financial statements and was entirely responsible for the accounting estimates.
    2. Karl has never been involved in an audit of a company that sells fishing nets.
    3. The accounting estimates in the financial statements of Haas Company are based on numerous significant assumptions.
    4. The accounting estimates in the financial estimates are susceptible to bias.

32. Which of the following statements is true about related party transactions?
    1. In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business.
    2. An auditor should determine whether a particular transaction would have occurred if the parties had not been related.
    3. An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm’s length transactions.
    4. The audit procedures directed toward identifying related party transactions should include considering whether transactions are occurring but are not being given proper accounting recognition.

33. During the course of an audit engagement an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to
    1. Aid the auditor planning his work.
    2. Provide a point of reference for future audit engagements.
    3. Support the underlying concepts included in the preparation of the basic financial statements.
    4. Support the auditor's opinion.
34. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
    1. Notes receivable and interest income.
    2. Accrued interest receivable and accrued interest payable.
    3. Notes payable and notes receivable.
    4. Interest income and interest expense.

35. Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of the auditor’s working papers?
    1. The assessed level of control risk.
    2. The likelihood of a review by a concurring (second) partner.
    3. The number of personnel assigned to the audit.
    4. The content of the management representation letter.

36. The permanent (continuing) file of an auditor’s working papers most likely would include copies of the
    1. Lead schedules.                                                            c. Bank statements.
    2. Attorney’s letters.                                                       d. Debt agreements.

Sampling (Related PSA: PSA 530)

37. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high (risk of under-reliance) on internal accounting control relate to the
    1. Efficiency of the audit.                                               c. Selection of the sample.
    2. Effectiveness of the audit.                                      d. Audit quality controls.

38. Statistical sampling provides a technique for
    1. Exactly defining materiality.

1. 2. Greatly reducing the amount of substantive testing.
   3. Eliminating judgment in testing.
   4. Measuring the sufficiency of evidential matter.

39. At times a sample may indicate that the auditor's planned degree of reliance on a given control is reasonable when, in fact, the true compliance rate does not justify such reliance. This situation illustrates the risk of
    1. Over-reliance.                                                               c. Incorrect precision.
    2. Under-reliance.                                                            d. Incorrect rejection.

40. When assessing the tolerable rate, the auditor should consider that, while deviations from control procedures increase the risk of material errors, such deviations do not necessarily result in errors. This explains why
    1. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.
    2. Deviations would result in errors in the accounting records only if the deviations and the errors occurred on different transactions.
    3. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in errors at a higher rate.
    4. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material error.

41. In audit sampling contexts, precision is
    1. A characteristic of the population at hand and is not under the direct control of the auditor.
    2. A measure of the accuracy with which one has generated sample estimates. Desired precision must be established before the sample is obtained and evaluated.
    3. Evaluated independently of reliability in a given sample.
    4. Important for evaluating variables samples, but not attributes samples.
42. Conditions leading to smaller sample size in compliance testing:

• Reliance on internal control
  1. lower reliance
  2. higher reliance
• Acceptance rate of deviation from planned reliance on internal control
  1. lower acceptable rate
  2. higher acceptable rate
• Allowance risk of over reliance
  1. lower risk
  2. higher risk
• Likely rate or population deviation
  1. lower expected rate
  2. higher expected rate

a. Combination of 1.1, 2.1, 3.1, 4.1                             c. Combination of 1.1, 2.2, 3.2, 4.1

b.     Combination of 1.2, 2.1, 3.1, 4.2                           d. Combination of 1.2, 2.2, 3.2, 4.2

43. In testing payroll transactions, an auditor discovers that four out of a statistical sample of one hundred selected time cards were not signed by the appropriate supervisor. To evaluate the materiality or significance of this control deficiency, the auditor should
    1. Compare the tolerable deviation rate with the expected deviation rate.
    2. Compute an upper precision limit and compare with the tolerable rate.
    3. Evaluate the dollar amount of the four time cards in relation to the financial statements.
    4. Report the deviations and let management assess the significance because they are in the best position to know.

The next two questions are based on the following:

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%.

44. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the
    1. Tolerable rate (7%) was less than the achieved upper precision limit.
    2. Expected deviation rate (7%) was more than the percentage of errors in the sample (3½

%)

1. 3. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3½%).
   4. Expected deviation rate (2½%) was less than the tolerable rate (7%).

45. The allowance for sampling risk was

a. 5½%                                   b. 3½%                               c. 4½%                                d. 1 %

46. Statistical sampling techniques may be used to sample “attributes” as well as “variables”. An example of a “variable” that can be tested using statistical sampling technique would be:
    1. The number of errors in the client-prepared aging schedule of accounts receivable.
    2. The balance in the accounts receivable account.
    3. Compliance with the requirement that each voucher be initialed by the treasurer before a check is prepared for payment of the voucher.
    4. The number of entries improperly posted to a job order cost card.

47. Some conditions leading to a larger sample size in substantive testing:

• Reliance on internal control
  1. higher reliance
  2. lower reliance
• Reliance on other substantive tests related or same audit objectives as class of transactions
  1. higher reliance
  2. lower reliance
• Measure of tolerable errors for a specific audit objective
  1. larger measure
  2. smaller measure
• Expected size and frequency of errors
  1. larger errors or higher frequency
  2. smaller errors or lower frequency

a. Combination of 1.2, 2.2, 3.2, 4.1                                             c. Combination of 1.2, 2.2, 3.1, 4.2

b. Combination of 1.1, 2.1, 3.2, 4.1                                             d. Combination of 1.1, 2.1, 3.1, 4.2

48. Which of the following statements is correct concerning the auditor’s use of statistical sampling?
    1. An auditor needs to estimate the peso amount of the standard deviation of the population to use classical variables sampling.
    2. An assumption of PPS sampling is that the underlying accounting population is normally distributed.
    3. A classical variables sample needs to be designed with special considerations to include negative balances in the sample.
    4. The selection of zero balances usually does not require special sample design considerations when using PPS sampling.

49. An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The sample statistics generate an arithmetic mean of P60, a standard deviation of P6 and a standard error of the mean of P.60. If the sample was adequate for the auditor's purposes and the auditor's desired precision was plus or minus P1,000, the minimum acceptable peso value of the population would be

a.                    P61,000                            b. P59,000                         c. P60,000                          d. P58,800

50. The statistical sampling drawn from a population of invoices indicates a mean value of P150 and sampling precision of + P30 at a 95% confidence level. What is the correct interpretation of this sample data?
    1. In repeated sampling, the point estimates of the true population mean will be P150 about 95% of the time.
    2. In repeated sampling, the true population mean will fall in the precision range of P120 to P180 about 95% of the time.
    3. There is a 95% probability that the true population mean falls in the range of P135 and P165.

1. 4. There is a 95% probability that the true population mean is P150.

Completing the Audit and Post-Audit Responsibilities

51. The primary objective of analytical procedures used in the final review stage of an audit is to
    1. Obtain evidence from details tested to corroborate particular assertions.
    2. Identify areas that represent specific risks relevant to the audit.
    3. Assist the auditor in assessing the validity of the conclusions reached.
    4. Satisfy doubts when questions arise about a client's ability to continue in existence.

52. An auditor is concerned with completing various phases of the examination after the balance- sheet date. This "subsequent period" extends to the date of the
    1. Auditor's report.
    2. Final review of the audit working papers.
    3. Public issuance of the financial statements
    4. Delivery of the auditor's report to the client.

53. Which of the following procedures would most likely be performed in connection with a review of subsequent events?
    1. Test of shipping cut-offs.
    2. Review of cut-of bank statements.
    3. Vouching of subsequent payments of accounts payable
    4. Reading of minutes of meetings of stockholders and board of directors up to the date of the audit report.

54. Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they are issued?
    1. Sale of long-term debt or capital stock.
    2. Loss of a plant as a result of a flood.
    3. Major purchase of a business which is expected to double sales volume.
    4. Settlement of litigation, in excess of the recorded liability.

55. The auditor's primary means of obtaining corroboration of management's information concerning litigation is a
    1. Letter of audit inquiry to the client's lawyer.
    2. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
    3. Confirmation of claims and assessments from the other parties to the litigation.
    4. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

56. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
    1. Cash flows from operating activities are negative.
    2. Research and development projects are postponed.
    3. Significant related party transactions are pervasive.
    4. Stock dividends replace annual cash dividends.

57. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero’s plans to
    1. Discuss with lenders the terms of all debt and loan agreements.
    2. Strengthen internal controls over cash disbursements.
    3. Purchase production facilities currently being leased from a related party.
    4. Postpone expenditures for research and development projects.

58. When an auditor concludes there is a substantial doubt a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
    1. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

1. 2. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.
   3. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.
   4. Reissue the prior year’s auditor’s report and add an explanatory paragraph that specifically refers to “substantial doubt” and “going concern”.

59. It is an accepted practice for external auditors to request letter of representation from their clients. A principal purpose of a letter of representation form the client is to
    1. Discharge the auditor from legal liability of his examination.
    2. Confirm in writing management’s approval of limitations on the scope of audit.
    3. Serve as an introduction to company’s personnel and authorization to examine the records.
    4. Remind management for its primary responsibility for financial statements.

60. Items for inclusion in management representation letter are normally:
    1. Determined by management.
    2. Covering all the accounts in the financial statements
    3. Determined by auditors based on the circumstances of the engagement.
    4. Based on ASPC’s standard list.

61. Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
    1. An uninsured natural disaster occurs that may affect the entity’s ability to continue as a going concern.
    2. A contingency is resolved that had been disclosed in the audited financial statements.
    3. New information is discovered concerning undisclosed lease transactions of the audited period.
    4. A subsidiary is sold that accounts for 25% of the entity’s consolidated net income.

Audit report (Related PSAs: PSA 700, 710, 720, 560, 570, 600 and 620)

62. The fist standard of reporting requires that, “the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.” This should be construed to require
    1. A statement of fact by the auditor.                      c. An opinion by the auditor.
    2. An implied measure of fairness.                            d. An objective of compliance.

63. When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the
    1. Amount of known misstatement is documented in the management representation letter.
    2. Estimate of the total likely misstatement is less than a material amount.
    3. Amount of known misstatement is acknowledged and recorded by the client.
    4. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

64. How are management's responsibility and the auditor's responsibility represented in the standard auditor's report?
    1. b.                           c.                              d. Management’s responsibility                      Explicitly                Implicitly             Implicitly               Explicitly Auditor’s responsibility                                  Explicitly                Implicitly             Explicitly                Implicitly

65. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion?

66. The existence of audit risk is recognized by the statements in the auditor’s standard report that the
    1. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

1. 2. Financial statements are presented fairly, in all material respects, in conformity with GAAP.
   3. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
   4. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.

67. Which of the following accounting changes does not affect consistency?
    1. Change in accounting principle.                              c. Change in accounting estimates
    2. Change in the reporting entity.            d. Correction of an error in principle.

68. In which of the following circumstances may the auditor issue an unqualified standard audit report?
    1. There has been a departure from GAAP.
    2. There has been a lack of consistency of applying GAAP.
    3. The auditor relies on the report of another auditor.
    4. There are questions about the continued existence of the entity.

69. When audited financial statements are presented in a client’s document containing other information, the auditor should
    1. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
    2. Add an explanatory paragraph to the auditor’s report without changing the opinion on the financial statements.
    3. Perform the appropriate substantive auditing procedures to corroborate the other information.
    4. Read the other information to determine that it is consistent with the audited financial statements.

70. An auditor’s report on comparative financial statements should be dated as of the date of the
    1. Issuance of the report.
    2. Completion of the auditor’s recent field work.
    3. Latest financial statements
    4. Last subsequent event disclosed in the statements.

71. In determining the type of opinion to express, an auditor assesses the nature of the reporting qualification and the materiality of their effects. Materiality will be the primary factor considered in the choice between
    1. An “except for” opinion and an adverse opinion.
    2. An “except for” opinion and a “subject to” opinion.
    3. An adverse opinion and a disclaimer of opinion.
    4. A “subject to” opinion and a piecemeal opinion.

72. In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion?
    1. Departure from GAAP.
    2. Inadequate disclosure of accounting policies.
    3. Inability to obtain sufficient competent evidential matter.
    4. Unreasonable justification for a change in accounting principle.

73. A client is presenting comparative (2-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor?
    1. The auditor should issue one audit report which is on both presented years.
    2. The auditor should issue two audit reports, one on each year.
    3. The auditor should issue one audit report, but only on the most recent year.
    4. The auditor may issue either one audit report on both presented years, or two audit reports, one on each year.

74. When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for
    1. Expressing dual dated opinions.
    2. Updating the report on the previous financial statements only if there has not been a change in the opinion.

1. 3. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.
   4. Updating the report on the previous financial statements regardless of the opinion previously issued.

75. Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited financial statements for the year ended June 30, 2005. That doubt has been removed in 2006. What is Mead’s reporting responsibility if Tech is presenting it’s financial statements for the year ended June 30, 2006, on a comparative basis with those of 2005?
    1. The explanatory paragraph included in the 2005 auditor’s report should not be repeated.
    2. The explanatory paragraph included in the 2005 auditor’s report should be repeated in its entirety.
    3. A different explanatory paragraph describing Mead’s reasons for the removal of doubt should be included.
    4. A different explanatory paragraph describing Tech’s plans for financial recovery should be included.

76. If an amendment to other information in a document containing audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider issuing:
    1. Qualified or adverse opinion                   c. Unqualified opinion with explanatory paragraph
    2. Qualified or disclaimer of opinion d. Unqualified opinion.

Auditing in a CIS environment (Related PSAs/PAPSs: PSA 401; PAPS 1001, 1002, 1003, 1008 and 1009)

77. A common difficulty in auditing a computerized accounting system is:
    1. Data can be erased from the computer with no visible evidence.
    2. Because of the lack of an audit trail, computer systems have weaker controls and more substantive testing is required.
    3. Because of the uniform nature of transaction processing, computer systems have strong controls and less substantive testing is required.
    4. The large dissemination of entry points into the computer system leads to weak overall reliance on information generated by a computer.

78. Which of the following would not be an appropriate procedure for testing the general control activities of an information system?
    1. Inquiries of client personnel.
    2. Inspecting computer logs.
    3. Testing for the serial sequence of source documents.
    4. Examination of the organizational chart to determine the segregation of duties.

79. If an auditor is using test data in a client's computer system to test the integrity of the systems output, which of the following types of controls is the auditor testing?
    1. General controls.                                                         c. User controls.
    2. Quantitative test controls.                                       d. Application controls.

80. When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. This error report should be reviewed and followed up by the
    1. Computer operator.                                                   c. EDP control group.
    2. Systems analyst.                                                          d. Computer programmer.

81. The computer is sometimes blamed for making errors. In reality, computers make very few mechanical errors. The most likely source of errors in a fully operational computer-based system is due to
    1. Systems analysis.                                                         c. Input.
    2. Programming.                                                               d. Processing.

82. The characteristics that distinguish computer processing from manual processing include the following:

1. Computer processing uniformly subjects like transactions to the same instructions.

2. Computer systems always ensure that complete transaction trails useful for audit purposes are preserved for indefinite period
3. Computer processing virtually eliminates the occurrence of clerical errors normally associated with manual processing.
4. Control procedures as to segregation of functions may no longer be necessary in a computer environment.

1. All of the above statements are true.                 c. Only statements (2) and (4) are true.
2. Only statements (1) and (3) are true.                  d. All of the above statements are false.

83. The increased use of database processing systems makes managing data and information a major information service function. Because the databases of an organization are used for many different applications, they are coordinated and controlled by a database administrator.

The functions of a database administrator are

1. 1. Data input preparation, database design, and database operations.
   2. Database design, database operation, and database security.
   3. Database design, database operation, and equipment operations.
   4. Database design, software support, and database security.

84. When a new application is being created for widespread use in a large organization, the principal liaison between the Information Systems (IS) department and the rest of an organization is normally a(n)
    1. End user.                                                                         c. Maintenance programmer.
    2. Application programmer.                                          d. Systems analyst.

85. Which of the following procedures would enhance the control structure of a computer operations department?

1. Periodic rotation of operators.
2. Mandatory vacations.
3. Controlled access to the facility.
4. Segregation of personnel who are responsible for controlling input and output.
   1. I, II.                                    b. III, IV.                             c. I, II, III.                           d. I, II, III, IV.

86. The most critical aspect of the separation of duties within a mainframe information systems environment is between
    1. Programmers and project leaders.                       c. Programmers and users.
    2. Programmers and systems analysts.                   d. Programmers and computer operators.

87. Which of the following best describes the primary reason that organizations develop contingency plans for their EDP operations?
    1. To ensure that they will be able to process vital transactions in the event of any type of disaster.
    2. To ensure the safety of important records.
    3. To help hold down the cost of insurance.
    4. To plan for sources of capital for recovery from any type of disaster.

88. A critical aspect of a disaster recovery plan is to be able to regain operational capability as soon as possible. In order to accomplish this, an organization can have an arrangement with its computer hardware vendor to have a fully operational facility available that is configured to the user's specific needs. This is best known as a(n)
    1. Uninterruptible power system.                             c. Cold site.
    2. Parallel system.                                                            d. Hot site.

89. Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project?
    1. Grandfather-father-son record retention.        c. Systems documentation.
    2. Input and output validation routines.                 d. Check digit verification.

90. Program documentation is a control designed primarily to ensure that
    1. Programmers have access to the tape library or information on disk files.
    2. Programs do not make mathematical errors.
    3. Programs are kept up to date and perform as intended.
    4. Data have been entered and processed.

91. A company's labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?
    1. Completeness test.                                                    c. Limit test.
    2. Validity test.                                                                   d. Control total.

92. Bank tellers and their supervisors sign on to an online deposit system with their employee numbers, which are readily available to all tellers. The bank wants to prevent teller access to certain approval functions, such as withdrawals over a specified dollar limit. The best control for implementing this restriction would be
    1. Tagging.                           b. Passwords.                                 c.       Callback.        d.        Logs.

93. Which of the following tasks could not be performed when using a generalized audit software package?
    1. Selecting inventory items for observation.
    2. Physical count of inventories.
    3. Comparison of inventory test counts with perpetual records.
    4. Summarizing inventory turnover statistics for obsolescence analysis.

94. Parallel simulation is an audit technique employed to verify processing logic by making use of audit test programs. These audit test programs “simulate” the processing logic of an application program or programs under review. Which statement indicates the use of parallel simulation audit technique?
    1. Live transactions are processed using live programs.
    2. Live transactions are processed using test master file.
    3. Test transactions are processed using test programs.
    4. Live transactions are processed using test programs.

95. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?
    1. Parallel simulation                                                       c. Test data approach
    2. Integrated test facility approach                           d. Exception report tests

96. Which of the following statement is not true about test data?
    1. Test data should consist only of conditions that interest the auditor.
    2. Only one transaction of each type need be tested.
    3. Test data must consist of all possible valid and invalid conditions.
    4. Test data are processed by the client’s software under the auditor’s control.

97. Which of the following is an incorrect statement regarding testing strategies related to auditing through the computer?
    1. The test data approach involves processing the client’s data on a test basis to determine the integrity of the system.
    2. The test data approach involves processing the auditor’s test data on the client’s computer system to determine whether computer-performed controls are working properly.
    3. Test data should include all relevant data conditions that the auditor is interested in testing.
    4. When the auditor uses the embedded audit module approach, an audit module is inserted in the client’s system to capture transactions with certain characteristics.

98. Auditing by testing the input and output of a computer system--i.e., auditing "around" the computer--instead of the computer software itself will
    1. Not detect program errors that do not appear in the output sampled.
    2. Detect all program errors, regardless of the nature of the output.
    3. Provide the auditor with the same type of evidence.
    4. Not provide the auditor with confidence in the results of the auditing procedures.

Other services (Related PSAs: PSA 910, 920, 930, 800, 810)

99. A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain:
    1. A statement of limitations on the use of the report.

1. 2. An opinion about whether management's assertion is fairly stated.
   3. Negative assurance that control risk has not been assessed.
   4. An acknowledgment of responsibility for the sufficiency of the procedures.

100. Which of the following procedures does an accountant in a compilation engagement of a nonpublic entity ordinarily perform?
     1. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.
     2. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.
     3. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors.
     4. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

101. The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:
     1. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.
     2. Material modifications should be made to conform with generally accepted accounting principles.
     3. The financial statements are presented fairly in accordance with standards of interim reporting.
     4. The financial statements are presented fairly in accordance with generally accepted accounting principles.

102. The objective of an agreed upon-procedures engagement is for the auditor to:
     1. Carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.
     2. Carry out procedures of a review nature to which the auditor and the entity and any appropriate third parries have agreed and to report on factual findings.
     3. Carry out procedures of a review nature and to express limited assurance based on those agreed procedures.
     4. Carry out procedures of an audit nature and is express limited assurance.

103. Which of the following is incorrect about agreed-upon procedures engagement?
     1. An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures concerning individual items of financial data.
     2. Users of the agreed-upon procedures report assess for themselves the procedures and findings reported by the auditor and draw their conclusion from the auditor’s work.
     3. The auditor should be independent of the financial data or financial statements where agreed procedures have to be applied.
     4. The report is restricted to those parties that have agreed to the procedures to be preformed.

104. Which of the following should the auditor perform in a review engagement ?
     1. Understand matters that are relevant to the financial statements.
     2. Understand the entity’s internal control system.
     3. Observe the physical count of inventory.
     4. Inquire of legal counsel of pending litigations.

105. Matters to be agreed in an agreed-upon procedures engagement include the following, except:
     1. Stated purpose of the engagement
     2. Limitations on distribution of the report of factual findings.
     3. Anticipated form of the report and the level of assurance to be provided
     4. Nature, timing and extent of the specific procedures to be applied.

106. Which of the following is least likely done by the auditor in conducting a review of financial statements.
     1. Study of the relationships of the elements of the financial statements.
     2. Comparison of the financial statements with statements for prior period.
     3. Comparison of the financial statements with anticipated results and financial position.
     4. Comparison of inventory listing with physical inventory count.

107. The Review Report include the following:

Reference to Philippine Standard on Auditing

a                     b                    c                     d