University of the East, Caloocan

CBA REVIEW

1)The auditor communicates the results of his or her work through the medium of the

1. 1. Engagement letter.
   2. Management letter.
   3. Audit report.
   4. Financial statements.

2. The four major steps in conducting an audit are:
   1. Testing internal controls
   2. Audit report
   3. Planning
   4. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb                                        b. cdab                                                c. bcda

d. adcb

3.  Which of the following best describes the purpose of the engagement letter?

1. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
2. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between CPA and client regarding the precise nature of the work to be performed and the type of report to be issued.
3. The engagement letter conveys to management the detailed steps to be applied in the audit process.

4. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits.

4. Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?
   1. Possession by the auditor of adequate technical training.
   2. Use of analytical review on audit engagements.

1. 3.                 Use of statistical sampling whenever feasible on an audit engagement.
   4. Confirmation by the auditor of material accounts receivable balances.

5. Which of the following statements best describes why the CPA profession has deemed it essential to promulgate ethical standards and to establish means for ensuring their observance?
   1.         A requirement for a profession is the establishment of ethical standards that stress primarily a responsibility to clients and colleagues.
   2.         A requirement of most state laws calls for the profession to establish a code of ethics.
   3.         An essential means of self-protection for the profession is the establishment of flexible ethical        standards by the profession.
   4.                 A distinguishing mark of a profession is its acceptance of responsibility to the public.

6. Pursuant to the AICPA rules of conduct, the auditor's responsibility to the profession is defined by
   1. The AICPA Code of Professional Conduct.
   2. Federal laws governing licensed professionals who are involved in interstate commerce.
   3. Statements on Auditing Standards.
   4. The Bylaws of the AICPA.

7. The exercise of due professional care requires that an auditor
   1. Examine all available corroborating evidence.

1. 2. Critically review the judgment exercised at every level of supervision.

1. 3. Reduce control risk below the maximum.
   4. Attain the proper balance of professional experience and formal education.

8. In determining estimates of fees, an auditor may take into account each of the following, except the
   1. Value of the service to the client.

1.         Degree           of      responsibility              assumed            by       undertaking             the engagement.
2. Skills required to perform the service.
3. Attainment of specific findings.

Choose the following actions with the Code of Conduct rule violated by the action. No rule is used more than once. Briefly explain why the action is a violation of the rule cited.

1. 1. Independence
   2. Integrity and objectivity
   3. General standards
   4. Compliance with standards

9. Brianna Lopez, CPA, agreed to review loan applications for First Charter Bank, an audit client. The bank granted or denied the loans on the basis of Lopez’ recommendations.            A

10. In defense of a lawsuit alleging negligence, Melissa Franklin, CPA, explained that she was not an expert in commodities trading and therefore did not detect the accounting fraud perpetrated by her client, a commodities broker.

C

11. In reviewing the corporate tax return for Eager Turnstiles, Inc., Abba Shah, CPA, discovered that Eager’s controller had incorrectly reported a P500,000 purchase of painting equipment as repairs expense. When Shah informed the controller of the tax code violation, she refused to correct the return. Shah signed the return as preparer.

D

12. Ben Williams, CPA, issued an unqualified opinion on a set of financial statements, even though he felt uncomfortable about an accounting practice applied by the client. Although the practice in question was in accordance with GAAP, it increased net income significantly above a level that Williams considered reasonable.

B

Choose the following actions with the Code of Conduct rule violated by the action. No rule is used more than once. Briefly explain why the action is a violation of the rule cited.

1. 1. Accounting principles
   2. Confidential client information
   3. Contingent fees
   4. Acts discreditable

13. Juanita Garcia, CPA, refused to be associated with a client’s financial statements after the client declined to correct a material misstatement. Garcia later contacted James Jordan, CPA, retained by the client to replace Garcia, and informed Jordan of the misstatement.

B

14. Rudy Boesch, CPA, accepted an audit engagement for a fixed fee of P27,000 plus 1% of audited net assets. C

15. Jones Transfer Company wishes to defer charging certain research and development expenditures to current income on the basis that the expenditures are virtually certain to benefit future operations. For this reason, Jack Risher, CPA and Jones’ auditor, agrees with the proposed accounting treatment.

A

16. The following are examples of the type of information that may come to the auditor’s attention which might indicate that noncompliance with laws or regulations has occurred. One of them is not. Identify the exception:
    1. Media comment
    2. Industry is regulated by various government agencies

1. 3. Unusual payments in cash, purchases in the form of cashier’s checks payable to bearer or transfers to numbered bank accounts
   4. Payments without proper exchange control documentation

17. As used in PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), this term refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to prevailing laws or regulations.
    1. Noncompliance                                                                                c. Erotic acts
    2. Illegal acts                                                                           d. Unforgivable acts

18. According to PSA 250, the term “noncompliance” as used in the standards 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
    1. Transactions entered into by the entity.
    2. Transaction entered into in the name of the entity.

1. 3. Transaction entered into on the entity’s behalf by its management or employees.
   4. Personal misconduct (unrelated to the entity’s business activities) by the entity’s management or employees.

19. The responsibility for the prevention and detection of noncompliance rest with
    1. The auditor.                                                                                       c.                  The           auditor’s lawyer.
    2. Management                                                                                    d. The client’s lawyer.

20. PSA 250 states that in order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework. To obtain this understanding, the following procedures would ordinarily be considered by the auditor, except
    1. Use the existing understanding of the entity’s industry, regulatory, and other external factors.

1. 2. Inquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulations.
   3. Inquire of management as to the laws and regulations that may be expected to have a fundamental effect on the operation of the entity.
   4. Inspect correspondence with relevant licensing or regulatory authorities.

21. Which of the following statements is incorrect concerning reporting of noncompliance?
    1. The auditors, as soon as practicable, either communicate with those charged with governance, or obtain evidence that they are appropriately informed, regarding noncompliance that comes to the auditor’s attention.
    2. If the auditor suspects that members of senior management, including members of the board of directors, are involved in noncompliance, the auditor should report the matter to the next higher level of authority at the entity, if it exists, such as an audit committee or a supervisory board.
    3. The auditor should, as soon as practicable, communicate with those charged with governance regarding noncompliance, including matters that are clearly inconsequential or trivial.
    4. If in the auditor’s judgment, the noncompliance is believed to be intentional and material, the auditor should communicate the finding without delay.

22. 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
    1. A qualified or an adverse opinion.                                            c. A disclaimer of opinion.
    2. A qualified opinion or a disclaimer of opinion. d. A qualified opinion.

23. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that may be material to the financial statements, ha, or is likely to have, the auditor should express
    1. A qualified or an adverse opinion.                                            c. An adverse opinion.

1. 2. A qualified opinion or a disclaimer of opinion. d. An adverse opinion or a disclaimer of opinion.

24. Under which of the circumstances below would the auditor conclude that withdrawal from the engagement is necessary?
    1. The auditor concludes that the noncompliance has a material effect on the financial statements and has not been properly reflected in the financial statements.
    2. The auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that may be material to the financial statements, has, or is likely to have, occurred.
    3. The auditor is unable to determine whether noncompliance has occurred because of limitations imposed by the circumstances rather than by the entity.
    4. The entity does not take the remedial action that the auditor consider necessary in the circumstances.

25. Detection of noncompliance, regardless of materiality requires considerations of the following
    1. b.                              c. d.

Integrity of management     Yes                                                                         Yes Yes                       No

Possible effect on other aspects of the audit                                                                              Yes Yes                No                                     Yes

Legal determination of the act of non-compliance                                                    Yes No Yes         No

26. The auditor-in-charge of engagement assesses risk of fraud higher than the average. The prudent auditor is expected to
    1. Assign more experienced auditors to the engagement
    2. Assign a more members to the engagement
    3. Make a more extensive test of controls
    4. Raise the materiality level

27. A type of fraud in which an employee takes assets from an organization for personal gain.
    1. Fraudulent financial reporting

1. 2. Defalcation
   3. Window dressing
   4. Secret reserve

28. Which of the following is least likely a factor that increases potential for fraud?
    1. Operating, financing and investing decisions are dominated by a single person.
    2. Operating results are highly sensitive to outside economic conditions.
    3. Audit client has been in the business and the leader of the industry for more than a decade.
    4. Organization is decentralized without adequate monitoring

29. In assessing potential for fraud, the following are either likely or unlikely to increase risk of misstatements of financial statements. Which of the following combinations best describes the likelihood of potential for fraud?

A             B                                    C

D

Many contentious or difficult accounting issues

are present                                                                                        LikelyLikely                         Likely Unlikely

Significant and unusual related-party transactions

are present                                                                                        LikelyUnlikely

Unlikely Unlikely

Direction of change in entity’s industry is declining

with many businesses                                                                                   LikelyLikely Unlikely Likely

30. Which of the following is an incorrect statement?
    1. The amount of audit work should vary inversely with the likelihood of material misstatements existing in the accounting records.
    2. The better the organization’s control structure, the less likely it is that material misstatements will be present
    3. Complex or unusual transactions are more likely to be recorded in error than recurring or routine transactions are
    4. If misstatements are likely to occur in the recording process, the auditor should develop procedures to detect misstatements.

31. In the regular audit of X Company, B, CPA, discovered a material fraud being perpetrated by the cashier. What do you expect most of B, CPA to do?
    1. Report the incident to the SEC
    2. Communicate the existence and details of the fraud to the audit committee of the board of directors and to management at least one level above that where the fraud has occurred.
    3. Advice the shareholders of the client company regarding the fraud.
    4. Make an extensive investigation in order to account for the extent of the fraud.

32. How                       do            auditing                      standards            consider           the      auditor’s responsibilities for detecting fraud and errors?
    1. Auditing standards make no distinction between the auditor’s responsibilities for searching for errors and fraud.
    2. The         difficulty           of       detecting            fraud         changes             the        auditor’s responsibility from reasonable to limited assurance.
    3. The auditor should plan to discover material errors and all forms of fraud
    4. Auditing standards provide an implicit responsibility for the auditor to discover material misstatement due to fraud.

33. What should the auditor do first when in an audit of a client entity, an illegal act has been identified?
    1. Consider            the       effects         of      the       illegal          act        on       the       financial statements
    2. Communicate the matter with the audit committee of the board of directors
    3. Submit a confidential report to the SEC
    4. Consult the client’s legal counsel about the matter

34. Lapping is
    1. Making the financial statements indicate a more favorable position by giving effect to tr5ansactions is a period other than that in which these actually occurred
    2. Done to inflate the cash position or cover the theft of cash by depositing at the end of the accounting period a check drawing

on one bank account in another bank account without making the necessary deduction in the balance of the first bank

1. 3. An irregularity that conceals cash shortages by a delay in recording cash collections, retaining a customer’s payment on credit sales and covering up the shortage with subsequent cash receipts
   4. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts

35. In general, material fraud perpetrated by which of the following are most difficult to detect
    1. Cashier                                                                                                 c. Internal auditor
    2. Keypunch operator                                                                         d. Controller

36. Certain management characteristics may heighten the auditor’s concern about the risk of material misstatements. The characteristic that is least likely to cause concern is that management
    1. Operating and financing decisions are made by numerous individuals
    2. Commits to unduly aggressive forecasts
    3. Has an excessive interest in increasing the entity’s stock price through use of unduly aggressive accounting practices
    4. In interested in inappropriate methods of minimizing earnings for tax purposes

37. In a financial statements audit, the auditor should consider categories of fraud risk factors. The auditor is most likely to presume that a high risk of a declaration exists if
    1. The client is a multinational company that does business in numerous foreign countries
    2. The client does business with several related parties
    3. Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts
    4. Inadequate employee training results in lengthy EDP exception reports each month

38. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?

1. 1. Turnover of senior accounting personnel is low
   2. Insiders recently purchased additional shares of the entity’s stock
   3. Management places substantial emphasis on meeting earnings projection
   4. The rate of change in the entity’s industry is slow

39. Under Section 2 of RA 9298, the State recognizes the importance of accountants in nation building and development. Hence, it shall develop and nurture competent, virtuous, productive and well rounded professional accountants whose standards of practice and service shall be excellent, qualitative, world class and globally competitive through
    1. Inviolable, honest, effective and credible licensure examinations
    2. Regulatory measures, programs and activities that foster their professional growth and development

a. I only                               b. II only      c. I and II                                       d. Neither I nor II

40. The objectives of the Philippine Accountancy Act of 2004 are the following, except:
    1. Standardization and regulation of accounting education.
    2. Integration of accountancy profession.
    3. Examination for registration of certified public accountants.
    4. Supervision,               control           and         regulation             of       the        practice            of accountancy.

41. Practice of Public Accountancy shall constitute in a person:
    1. When involved in decision making requiring professional knowledge in the science of accounting, as well as the accounting aspects of finance and taxation.
    2. When he/she is appointed in an accounting professional group in government or in a government-owned and/or controlled corporation, including those performing proprietary functions, where decision-making requires professional knowledge in the science of accounting.

1. 3. When he or she is involved in teaching of accounting, auditing, management advisory services, accounting aspect of finance, business law, taxation and other technically related subjects.
   4. When a person is skilled in the knowledge, science and practice of accounting and as a qualified person to render professional services as a CPA.

42. Any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial statements, coordinating with the external auditors for the audit of such financial statements and other related functions shall be occupied only by a duly registered CPA. Provided
    1. That the business or company where the above position exists has a paid-up capital of at least P10,000,000 and/or annual revenue of at least P5,000,000.
    2. The above provision shall apply only to persons to be employed after the effectivity of the Implementing Rules and Regulations of RA 9298.
    3. The above provision shall not result to deprivation of the employment of incumbents to the position.

1. I, II, and III                                                                           c. II and III
2. I and II                                                                                                  d. I and III

43. The following statements relate to the Board of Accountancy. Which statement is incorrect?
    1. The Board consists of a Chairman and six members
    2. The Chairman and members are appointed by the President of the Philippines upon recommendation of PRC
    3. No person shall be appointed a member of the Board unless he is natural-born citizen of the Philippines, a duly registered CPA and has been in the practice of accountancy for at least ten years
    4. The Professional Regulation Commission may remove from the Board any member whose certificate to practice has been removed or suspended

44. The APO shall submit its nominations with complete documentation to the Commission not later than    prior to the expiry of the term of an incumbent chairman or member.

1. 1. 30 days                                                 b. 60 days                          c. 90 days                           d. 120 days

45. Which of the following is incorrect regarding the qualifications of members of the Board of Accountancy?
    1. Must be a natural-born citizen and resident of the Philippines
    2. Must be a duly registered Certified Public Accountant with at least fifteen (15) years of work experience in any scope of practice of accountancy
    3. Must be a good moral character and must not have been convicted of crimes involving moral turpitude
    4. Must not have any pecuniary interest, directly or indirectly, in any school, college, university where review classes in preparation for the licensure examination are being offered or conducted

46. Which of the following statements is incorrect according to Section 7 of the Philippine Accountancy Act of 2004 (RA 9298)?
    1. The Chairman and the members of the Professional Regulatory Board of Accountancy (PRBOA) shall hold office for a term of three (3) years.
    2. No person who has served two(2) successive terms shall be eligible for reappointment until the lapse of one (1) year.
    3. Any vacancy occurring within the term of a member shall be filled up for the unexpired portion of the term only.
    4. Appointment to fill up an unexpired term is considered as a complete term.

47. The following statements relate to CPA examination ratings. Which statement is incorrect?
    1. To pass the examination, candidates should obtain a general weighted average of 75% and above, with no rating in any subject less than 65%.
    2. Candidates who obtain a rating of 75% and above in at least four subjects shall receive a conditional credit for the subjects passed.
    3. Conditioned candidates shall take an examination in the remaining subject within three years from the preceding examination.

1. 4. Candidates who fail in two (2) complete CPA examinations may be allowed to take examinations a third time provided he or she will comply with Sec. 18 of this Act.

48. The Board shall submit to the Commission the ratings obtained by each candidate within ten (10) calendar days after the examination, unless extended for just cause

Any candidate who fails in two (2) complete Certified Public Accountant Board Examination 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 subject given in the licensure examination.

1. 1. True, True   b. True, False                                          c. False, False                                   d. False, True

49. Which statement is(are) correct regarding CPE requirements for renewal of professional license?
    1. The total CPE credit units required for CPAs shall be sixty

(60) units for three (3) years, provided that a minimum of fifteen (15) credit units shall be earned in each year.

0. 2. Any excess credit units in one year may be carried over to the succeeding years within the three-year period.
   3. Excess credit units earned shall not be carried over to the next three-year period without exception.
   4. A registered professional who is working abroad shall be temporarily exempted from compliance with CPE requirement during his/her stay abroad, provided that he/she is has been out of the country for at least one year immediately prior to the date of renewal.
1. I, II and III only                                                                                  c. I , II and IV only
2. I and II only                                                                                         d. I , II, III and IV

50. Which statement is incorrect regarding CPE requirements for renewal of professional license?
    1. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years, provided that a minimum of fifteen (15) credit units shall be earned in each year.

1. 2. A registered professional shall be permanently exempted from CPE requirements upon reaching the age of 65 years old.
   3. A registered professional who is working abroad shall be temporarily exempted from compliance with CPE requirement during his/her stay abroad, provided that he/she is has been out of the country for at least one year immediately prior to the date of renewal.
   4. Those who failed to renew professional licenses for a period of five (5) continuous years from initial registration, or from at last renewal shall be declared delinquent.

51. How many credit units per hour is (are) earned by a CPA who serves as a resource speaker at a CPE seminar?
    1. 1 CU per hour                                                                                    c. 3 CU per hour
    2. 5 CU per hour                                                                                    d. 2 Cu per hour

52. Generally, the decision to notify parties outside the client’s organization of an illegal act is the responsibility of the
    1. Independent auditor                                                                     c.                  Outside              legal counsel
    2. Management                                                                                    d. Internal auditors

53. An audit should be designed to achieve reasonable assurance of detecting material
    1. Errors
    2. Errors          and        irregularities             with       a      direct        effect        on       financial statement amounts
    3. Errors, irregularities and those illegal acts with a direct effect on financial statement amounts and presentation
    4. Errors, irregularities and illegal acts

54. Which of the following statements reflects an auditor’s responsibility for detection fraud and error?
    1. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override
    2. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP
    3. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection

1. 4. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements

55. Which of the following is not an example of an error?
    1. Client personnel make mistakes in gathering or processing accounting data from which financial statements are prepared
    2. Client personnel after accounting records from which financial statements are prepared
    3. Client          personnel            overlook           or       misinterpret             facts,          causing accounting estimates to be incorrect
    4. Client personnel make mistakes in the application of accounting principles

56. Under PSA 260, this term is used to describe the role of persons entrusted with the supervision, control, and direction of an entity.

1. Oversight                                                                            C. Direction
2. Governance                                                                                       D. Control

57. 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

1. Audit matters of governance interest.                                                   C. Auditor’s findings.
2. Significant audit matters.                                                                              D.                     Material misstatements in the financial statements.

58. Which of the following statements relating to communication of audit matter of governance interest is incorrect?

1. Audit matters of governance interest include only those matters that have come to the attention of the auditor as a result of the performance of the audit.
2. In an audit in accordance with PSAs, the auditors should design audit procedures for the specific purpose of identifying matters of governance interest.

3. The auditor should identify relevant persons who are charged with governance and with whom audit matters of governance interest are to be communicated.
4. The auditor’s communications with those charged with governance may be made orally or in writing.

59. While performing professional services for their clients, CPAs have always had a duty to exercise a level of care which is best described as:
    1. Greater than average                                                                    c. Infallible
    2. Superior                                                                               d. Reasonable

60. S1: Integrity is attribute that most clearly differentiates a CPA who audits management’s financial statements as contrasted to management.

S2. Not all engagements require integrity

1. 1. True, True                                                                           c. False, true
   2. True, false                                                                           d. False, false

61. Karen Corporation has engaged Gelai, CPA, to issue a report on the accuracy of product quality specifications included in trade sales agreements. This is an example of a(n):
    1. Attestation service.                                                                        c. Compliance audit.
    2. Financial statement audit.                                                            d. Operational audit.

62. One of the general principles of an audit is compliance with Philippine Standards on Auditing (PSAs). As a consequence of his failure to adhere to PSAs in the course of his examination of the Mariz Combined Machinery, Inc., Eric, CPA, did not detect the embezzlement of a material amount of funds by Ubebe Gandarita, the company’s controller. As a matter of common law, to what extent would Eric be liable to Mariz Combined Machinery, Inc., for losses attributable to the theft?
    1. Eric would be liable for losses attributable to his negligence.
    2. Eric would be liable only if it could be proven that he committed gross negligence.
    3. Eric would have no liability because privity of contract is lacking.
    4. Eric would have no liability, since the ordinary examination cannot be relied upon to detect embezzlement.

63. The following,                            except          one,        is       always           present          in       attest engagements. Select the exception:
    1. The issuance of a written report.
    2. The consideration of internal control.
    3. The presence of written assertions which is the responsibility of another party.
    4. Independence of mind and in appearance on part of the auditor.

64. A technique for regularly and systematically appraising a unit of function and its effectiveness against corporate and industry standards with the objective of assuring management that its aims are being carried out and/or identifying conditions that provide an opportunity for improvement:
    1. Financial audit                                                                                   c. Compliance audit
    2. Operational audit                                                             d. management audit

65. Lotlot, CPA, has issued a report with the following wordings: “In our opinion, the schedule presents, in all material respects…”. In this situation, Lotlot’s report is likely to be:
    1. A standard audit report.
    2. An audit report with a qualified opinion.
    3. An attestation with a qualified opinion.
    4. An attestation report.

66. An audit should be designed to achieve reasonable assurance of detecting material:
    1. Errors.
    2. Errors and irregularities.
    3. Errors, irregularities, and those illegal acts with a direct effect on financial statement amounts.
    4. Errors, irregularities and illegal acts, regardless of whether it has a direct or indirect effect on financial statement amounts.

67. Evidence gathering in a scientific experiment is most similar to which phase of the audit?
    1. Planning and supervising an engagement.
    2. Hypothesizing that financial statements are present fairly.
    3. Evaluating               whether           the        financial             statements              are         fairly presented.

1. 4. Assessing risks and designing audit procedures to address these risks.

68. The review of a company’s financial statements by a CPA firm:
    1. Culminates in issuance of a report expressing the CPA’s opinion as to the fairness of the statements.
    2. Is substantially less in scope of procedures than an audit.
    3. Is of similar scope as an audit and adds similar credibility to the statements.
    4. Requires detailed analysis of the major accounts.

69. Berto, CPA, discovered an illegal act during the audit of UBE Corporation, a publicly held company. Accordingly, which of the following would be the best response by Berto?
    1. Berto shall notify the Securities and Exchange Commission regarding the illegal act.
    2. Berto should determine who was responsible for the illegal act.
    3. Berto shall report the act to the audit committee and high level personnel within Ube Corporation.
    4. Berto shall intensity the examination to identify all illegal acts.

70. In determining estimates of fees, an auditor may take account each of the following, except the:
    1. Value of the service to the client.
    2. Degree            of        responsibility                assumed              by        undertaking               the engagement.
    3. Skills required to perform the service.
    4. Attainment of specific findings.

71. Cruz, Del Rosario, CPAs, was hired by Ariel Rivera Company to give an opinion on recently prepared, but still unaudited, financial statements. The statement that best describes this engagement is:
    1. The        CPA          is       performing            an       examination             of      the       financial statements rather than an accounting service.
    2. The          financial             statements              are         representations                 of        both management and the CPA.
    3. The CPA is performing and accounting service rather than an examination of the financial statements.

1. 4. The CPA may prepare the statements from the books, but may not assist in adjusting and closing the books.

72. During planning, one of the auditor’s considerations is the presence of fraud risk factors. Which of the following factors would most likely heighten an auditor’s concern about the risk of fraudulent financial reporting?
    1. Presence of large amounts of liquid assets that are readily convertible into cash.
    2. Low growth and profitability ratios as compared to other entities within the same industry.
    3. An overly complex organizational structure involving unusual lines of authority.
    4. Top          management’s                 admission              of       responsibility                for        the establishment and maintenance of internal controls.

73. The following are required audit procedures in every audit engagement:

74. Which of the following statements is not correct?
    1. Objectively requires that internal auditors have an independent mental attitude.
    2. Internal auditors should be independent of the activities they audit.
    3. It is acceptable for internal auditors to recommend changes in operations and to install and implement the operating systems, as long as they do not have the responsibility for operating them throughout the year.
    4. The internal auditor should not be responsible for correcting deficiencies when ineffective or inefficient operations are found.

75. Which of the following phrases is generally included in an audit engagement letter?
    1. “The following are factors considered in setting a preliminary judgment about materiality…”

1. 2. “These are the procedures that the audit team intends to undertake…”
   3. “The         auditors           are        responsible              to       search           for       significant deficiencies in internal control…”
   4. “Company              management               is        responsible               for        the        entity’s compliance with applicable laws, rules and regulations…"

76. The financial reporting framework adopted by management in preparing the financial statements that the auditor has determined is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulations.
    1. Applicable financial reporting framework.
    2. Generally accepted accounting principles.
    3. Philippine standards on auditing.
    4. Other comprehensive basis of accounting.

77. Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
    1. The adequacy of the underlying accounting records.
    2. The existence of related parties and related party transactions.
    3. The complexity of the accounting system.
    4. The operating effectiveness of control procedures and the control environment.

78. Which of the following factors is least likely considered when an auditor is performing acceptance/continuance procedures?
    1. The auditor’s independence of mind and in appearance.
    2. Professional competence and ability to provide services to the client.
    3. Ability of the client to achieve an unqualified opinion.
    4. Integrity of the client’s management and those charged with governance.

79. In an audit in accordance with generally accepted auditing standards, the auditor’s must test compliance with those laws and regulations that have:
    1. A direct and material effect on the financial statements.
    2. A direct and material effect on major government programs.
    3. A material direct or indirect effect on the financial statements.

1. 4. A material effect on major or non-major audit programs.

80. Professional experience is an important aspect of the training and proficiency of the junior assistant just entering upon an auditing career. Professional experience should be obtained:
    1. Through a thorough study of the generally accepted auditing standards.
    2. With       proper         supervision             and        review         of      work        by      a      more experienced supervisor.
    3. By completing a number of continuing professional education courses each year.
    4. By taking appropriate professional certification exams.

81. The following matters, would be considered by the auditor in planning for an audit of financial statements (select the exception):
    1. Preliminary              judgment            about          materiality             levels           for        audit purposes.
    2. Anticipated reliance in internal controls.
    3. Financial statement items that possess great risk of material misstatement.
    4. The kind of opinion (unqualified, qualified, or adverse) or disclaimer of opinion, likely to be given.

82. An audit program is usually prepared after establishing the audit strategy and developing the audit plan. The procedures specifically outlined in an audit program are primarily designed to:
    1. Test all material transactions.
    2. Gather corroborating evidence.
    3. Serve as protection of the auditor in case of litigation regarding negligence.
    4. Detect errors or irregularities.

83. Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?
    1. ABC Company told its auditor that “audit trails of computer- generated transactions exist only for a short time”.
    2. Jeff Hong, chief financial officer of DEF Manufacturing, does not want to sign the management representation letter until the last day of the auditor’s field work.

1. 3. The management of XYZ Enterprises consults with other accountants about significant accounting matters.
   4. The accounts receivable of Jess Inc. were circularized, and the procedure yielded significantly fewer responses than expected.

84. By common agreement, the audit team assigned to Irah Mae Company decided to set the preliminary judgment about materiality at P100,000 or 10% of total assets. In addition, the team decided to allocate the P100,000 to the balance sheet accounts. How will the allocation be implemented?
    1. Allocate the P100,000 based on the relative carrying values of each balance sheet account.
    2. Allocate the P100,000 based on professional judgment.
    3. Allocate the P100,000 according to the specific formula required in PSA 320, Audit materiality.
    4. 10% of the account or P100,000, whichever is lower.

85. An  item   is              considered                      material          to      a      company’s             financial statements if the item:
    1. Exceeds 5% of reported income from operations before interest and income taxes, or P10,000, whichever is lower.
    2. Causes the company’s statement of comprehensive income to fall short of the expectations of external financial analysis.
    3. In substance reflects a new class of transactions or events during the period under audit.
    4. Alters the total mix of information significantly.

86. Considering the work of experts is one of the factors of audit planning. Which of the following statements is incorrect concerning the use of the work of experts?
    1. An expert under employ by the client cannot be used for purposes of the auditor’s work because doing so would the rules on objectivity and independence.
    2. An auditor may use an expert in the determination of physical characteristics relating to inventories.
    3. In the context of PSAs, an expert is a person possessing a high degree of skill or knowledge in fields outside auditing and accounting.
    4. Professional competence and reputation are some of the major considerations in selecting an expert.

87. The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on:
    1. Substantive tests.                                                            c. Internal control.
    2. Tests of controls.                                             d. Statistical analysis.

88. Early appointment of the independent auditor will enable:
    1. A more thorough examination to be performed.
    2. A      proper         study        and        evaluation            of      internal         control         to      be performed.
    3. Sufficient, appropriate evidential matter to be obtained.
    4. A more efficient examination to be planned.

89. In an audit situation, communication between the successor and predecessor auditors should be:
    1. Authorized in an engagement letter.
    2. Acknowledged in a representation letter.
    3. Either written or oral.
    4. Written and included in the working papers.

90. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement should be prepared to:
    1. Explain to the Board of Accountancy tribunal why the practice statement was not complied with.
    2. Bear the consequences of such non-compliance, such as suspension of revocation of license, plus imprisonment of not more than two (2) years.
    3. Face the shareholders of the entity, and explain in the meeting why such practice statement was not complied with, provided that the explanation is also put in writing, and signed in the presence of the Chairperson of the Auditing and Assurance Council.
    4. Explain how the basic principles and essential procedures in the Engagement Standards addressed by the Practice Statements have been complied with.

91. Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

1. 1. An internal control questionnaire.
   2. A client engagement letter.
   3. A planning memorandum or checklist.
   4. A client representation letter.

92. Which statement is correct relating to a potential successor auditor’s responsibility for communicating with the predecessor auditors in connection with a prospective new audit client?
    1. The successor auditors have no responsibility to contact the predecessor auditors.
    2. The predecessor auditors should obtain permission from the prospective client to contact the successor auditors.
    3. The successor auditors should contact the predecessor regardless of whether the prospective client authorizes contact.
    4. Refusal by the prospective client to authorize communication between successor auditor and predecessor auditor may lead the successor auditor to question the integrity of the prospective client’s management.

93. An external auditor is determining how the client’s internal auditor could provide direct assistance in the engagement. Accordingly, the internal auditor may provide direct assistance to the external auditor in:
    1. Obtaining an understanding of internal control systems
    2. Performing tests of controls
    3. Performing substantive controls
    4. All of the answers

94. An engagement in which an auditor is engaged to carry out those 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.
    1. Special audit engagement.
    2. Agreed-upon procedures engagement.
    3. Examination of prospective information.
    4. Engagement to compile information.

95. An increase in the reliance on substantive tests usually mean that the reliance placed on internal controls:
    1. Also increases                                                                                   c. Remains the same