University of Mindanao - Main Campus (Matina, Davao City)

AUDIT 411

1)Financial statements of an entity that have been reviewed by an accountant should be accompanied by a report stating that a review

1. 1. Provides only limited assurance that the financial statements are fairly presented.
   2. Includes examining, on a test basis, information that is the representation of management.
   3. Consists principally of inquiries of company personnel and analytical procedures applied to financial data.
   4. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

2. An accountant’s report on a review of the financial statements of an entity should state that the accountant
   1. Does not express an opinion or any form of limited assurance on the financial statements.
   2. Conducted the review in accordance with the Philippine Standard on Review Engagements.
   3. Obtained reasonable assurance about whether the financial statements are free of material misstatements.
   4. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

3. Financial statements of an entity that have been reviewed by an accountant should be accompanied by a report stating that
   1. The scope of the inquiry and analytical procedures performed by an accountant has not been restricted.
   2. The financial statements are the responsibility of the company’s management.
   3. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
   4. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

4. An accountant who reviews the financial statements of an entity should issue a report stating that a review
   1. Provides less assurance that an audit.

1. 2. Provides negative assurance that internal control is functioning as designed.
   3. Provides only limited assurance that the financial statements are fairly presented.
   4. Is substantially more in scope than a compilation.

5. When compiling the financial statements of an entity, an accountant should
   1. Review agreements with financial institutions for restrictions on cash balances.
   2. Understand the accounting principles and practices of the entity’s industry.
   3. Inquire of key personnel concerning related parties and subsequent events.
   4. Perform ration analyses of the financial data of comparable prior periods.

6. When compiling an entity’s financial statements, an accountant would be least likely to
   1. Perform analytical procedures designed to identify relationships that appear to be unusual.
   2. Read the compiled financial statements and consider whether they appear to include adequate disclosure.
   3. Obtain an acknowledgment from management of its responsibility for the financial statements.
   4. Plan the work so that an effective engagement will be performed.

7. Which of the following should not be included in an accountant’s report based upon the compilation of an entity’s financial statements?
   1. A statement that a compilation of the company’s financial statements was made in accordance with the Philippine Standard on Related Services applicable to compilation engagements.
   2. A statement that management is responsible for the financial statements.
   3. A statement that the accountant has not audited or reviewed the statements.
   4. A statement that the accountant does not express an opinion but provides only negative assurance on the statements.

8. Negative assurance may be expressed when an accountant is requested to report agreed-upon procedures to specified

Elements of a                                    Accounts of a Financial Statement                                          Financial Statement

1. 1. Yes                                                         Yes
   2. Yes                                                         No
   3. No                                                          No
   4. No                                                          Yes

9. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to express an opinion on one or more specified accounts or items of a financial statement provided that
   1. The accountant’s report does not enumerate the procedures performed.
   2. The financial statements are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.
   3. Distribution of the accountant’s report is restricted.
   4. The accountant is also the entity’s continuing auditor.

10. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. Such prospective financial statements are known as
    1. Pro forma financial statements

1. 2. Financial projections
   3. Partial presentations
   4. Financial forecasts

11. A financial forecast consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. A forecast
    1. Is based on the most conservative estimates.
    2. Present estimates given one or more hypothetical assumptions.
    3. Unlike a projection, may contain a range.
    4. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.

12. When an accountant examines prospective financial statements, the accountant’s report should include a separate paragraph that
    1. Contains an opinion as to whether the prospective financial statements are properly prepared on the basis of the assumptions and are presented in accordance with generally accepted accounting principles in the Philippines.
    2. Provides an explanation of the differences between an examination and an audit.
    3. States that the accountant is responsible for events and circumstances up to 1 year after the report’s date.
    4. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective financial statements.

13. A prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared (best-estimate assumptions) is known as
    1. Forecast
    2. Hypothetical financial information
    3. Projection
    4. Best-estimate projection

14. The following statements relate to the examination of prospective financial information. Which is false?
    1. The auditor should express an opinion as to whether the results shown in the prospective financial information will be achieved.
    2. Before accepting an engagement to examine prospective financial information, the auditor should consider the intended use of the information.
    3. The auditor should not accept, or should withdraw from, an engagement to examine prospective financial information when the assumptions are clearly unrealistic.
    4. When in the auditor’s judgment an appropriate level of satisfaction has been obtained, the auditor is not precluded from expressing positive assurance regarding the assumptions.

15. Which of the following is a prospective financial information for general use upon which an accountant may appropriately report?
    1. Financial projection
    2. Partial presentation
    3. Pro forma financial statement

1. 4. Financial forecast

16. A CPA in public practice must be independent in fact and appearance when providing which of the following services?

17. An accountant should not submit unaudited financial statements to the management of a non-public company unless, at a minimum, the accountant

1. Assists in adjusting the books of account and prepares the trial balance.
2. Types or reproduces the financial statements on plain paper.
3. Complies with the standards applicable to compilation engagements.
4. Applies analytical procedures to the financial statements.

18. Which of the following procedures would most likely be included in a review engagement of a non- public entity?

1. Preparing a bank transfer schedule.

2. Inquiring about related party transactions.
3. Assessing the internal control structure.
4. Performing cutoff tests on sales and purchases transactions.

19. When an independent accountant issues a comfort letter to an underwriter containing comments on data that have not been audited, the underwriter most likely will receive

1. A disclaimer on prospective financial statements.
2. A limited opinion on "pro forma" financial statements.
3. Positive assurance on supplementary disclosures.
4. Negative assurance on capsule information.

20. Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to

1. A bank with which the entity is negotiating for a loan.
2. A labor union with which the entity is negotiating a contract.
3. The principal stockholder, to the exclusion of the other stockholders.
4. All stockholders of record as of the report date.

21. Engagements for the purpose of expressing an opinion on internal control differ from the CPA's evaluation of internal control as part of a financial audit in that

1. In an engagement to express an opinion, the CPA is examining and reporting on controls as of a specified date, whereas in conducting a financial audit, the CPA frequently tests controls for effectiveness over the period covered by the financial statements.

2. In conducting a financial statement audit, the CPA expresses an opinion as to the operating effectiveness of the client's internal control system, whereas in an engagement to express an opinion on internal control, the CPA addresses design and implementation of control structure.
3. In conducting a financial statement audit, the CPA is concerned with general controls only, whereas in an engagement to express an opinion on internal control, the CPA tests both general and application controls.
4. Scope limitations that affect a financial audit are irrelevant in an engagement to express an opinion on internal control.

22. Which of the following should be included in an accountant's standard report based upon the review of a non-public entity's financial statements?

1.   A statement that the review was performed in accordance with generally accepted review standards.
2. A statement that a review consists principally of inquiries and analytical procedures.
3. A statement that the accountant is independent with respect to the entity.
4. A statement that a review is substantially greater in scope than a compilation.

23. Which of the following procedures is not necessary in conducting a review of interim financial information?

1. Inquiry concerning the accounting system and any changes in internal control.
2. Application of analytical procedures to the interim information.
3. Inquiry of and obtaining written representations from management concerning its responsibility for the financial information and other matters.
4. Confirmation of significant customer accounts receivable as of the interim balance sheet date.

24. The objective of a review of interim financial information is to provide the 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.

25. Before performing a review of a non-public entity's financial statements, an accountant should

1. Complete a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions.
2. Apply analytical procedures to provide limited assurance that no material modifications should be            made to the financial statements.
3. Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
4. Inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.

26. Which of the following should not be included in an accountant's standard report based upon the compilation of an entity's financial statements?

1. A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management.
2. A statement that the compilation was performed in accordance with standards established by the American Institute of CPAs.
3. A statement that the accountant has not audited or reviewed the financial statements.
4. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

27. If an accountant concludes that unaudited financial statements on which the accountant is disclaiming an    opinion also lack adequate disclosure, the accountant should suggest appropriate revision. If the client does not accept the accountant's suggestion, the accountant should

1. Issue an adverse opinion and describe the appropriate revision in the report.
2. Make reference to the appropriate revision and issue a modified report expressing limited assurance.
3. Describe the appropriate revision to the financial statements in the accountant's disclaimer of opinion.
4. Accept the client's inaction because the statements are unaudited and the accountant has disclaimed an opinion.

28. Which of the following statements best distinguishes a forecast from a projection?

1. A forecast contains one or more hypothetical

assumptions, whereas a projection reflects conditions expected to exist.

2. A projection is appropriate for general distribution to third parties, whereas a forecast is more tentative and should be restricted to those parties with whom the client is negotiating directly.

3. The CPA may review a financial forecast, but may only compile a projection.
4. A forecast reflects conditions expected to exist, whereas a projection presents financial position, results of operations, and cash flows given one or more hypothetical assumptions.

29. Which of the following is not a distinction between a compilation and a review?

1. The CPA must be independent as a prerequisite to performing a review engagement, but need not be independent to perform a compilation.
2. In conducting a review, the CPA must obtain an understanding of the client's internal control system; but this is not necessary for a compilation engagement.
3. Analytical procedures are applied in a review engagement, but are not required in a compilation.
4. A compilation offers no assurance, whereas a review provides limited assurance.

30. The statement that "nothing came to our attention which would indicate that these statements are not fairly presented" expresses which of the following?

1. Disclaimer of an opinion.
2. Negative assurance.
3. Negative confirmation.
4. Piecemeal opinion.

31. A CPA may accept an engagement to apply agreed-upon procedures to prospective financial statements provided

1. All parties have agreed on the procedures to be applied.

2. The CPA has previously audited the entity for which the agreed-upon procedures are to be applied.
3. Users have participated in establishing the nature and scope of the engagement, distribution of the report is limited to the users involved, and the prospective statements include a summary of significant assumptions.
4. The set of agreed-upon procedures include, at a minimum, a study and evaluation of the existing internal control.

32. Of the following statements, which one does not describe a distinction   between     the      auditing standards and the attestation standards?

1. Unlike the auditing standards, the attestation standards do not require the auditor to obtain an understanding of the client's internal control system
2. The attestation standards are broader in coverage than the auditing standards.
3. In performing an attest engagement, the CPA need not be independent.
4. In an attest engagement, unlike an audit, generally accepted accounting principles are not the standard used to measure the reasonableness of assertions.

33. Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report?

1. The specified party takes responsibility for the sufficiency of procedures.
2. Use of the report is restricted.
3. Limited assurance on the information presented.
4. A summary of procedures performed.

34. Which of the following engagements is most likely to consider availability, security, integrity, and maintainability of a company's computer systems?

1. Internal control over financial reporting.
2. WebTrust Services.
3. Website Asssociate.
4. Financial statement audit.

35. Which of the following is not necessarily an attest engagement?

1. An elder care engagement.
2. A WebTrust engagement.
3. An examination of internal control over financial reporting for a nonpublic company.
4. A review of management's discussion and analysis.

36. When a practitioner examines projected financial statements, the practitioner's report should include a separate paragraph that:

1. Describes the limitations on the usefulness of the presentation.
2. Provides an explanation of the differences between an examination and a review.
3. States that the accountant is responsible for events and circumstances for a period not exceeding one

year after the report's date.

4. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.

37. Which of the following is correct relating to an engagement to apply agreed-upon procedures to prospective financial statements?

1. Use of the report is restricted to the specified users.
2. Such engagements are permissible for forecasts but not for projections.
3. Responsibility for the adequacy of the procedures performed is taken by the practitioner.
4. Such engagements are not permissible under the professional standards.

38. Accepting an engagement to examine an entity's financial projection most likely would be appropriate if         the                    projection   were                           to                       be                distributed to:

1. All     employees                                  who                    work                    for                    the                    entity.
2. Potential     stockholders     who     request     a     prospectus     or     a     registration     statement.
3. A       bank            with         which          the         entity         is          negotiating         for          a          loan.
4. All stockholders of record as of the report date.

39. In which type of report would you read the following statement: “We believe that our examination provides a reasonable basis for our opinion.”?

1. Review
2. Audit
3. Examination
4. Agreed-upon procedures

40. Reports on debt compliance and similar engagements may be issued as a separate report or as part of a report that expresses the auditor’s opinion on the financial statements. When they are issued as a part of the report on the financial statements, it is done by:

1. adding a middle paragraph before the opinion paragraph.
2. adding a paragraph after the opinion paragraph.
3. adding an additional phrase or sentence within the opinion paragraph.
4. adding a paragraph between the introductory and scope paragraphs.

41. When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonpublic entity, the accountant generally should issue the report that is appropriate for:

1. a review engagement.
2. a compilation engagement.
3. the lowest level of service rendered.
4. the highest level of service rendered.

42. You are a CPA retained by the manager of a cooperative retirement village to do “write-up work.” You are expected to prepare unaudited financial statements with each page marked “unaudited” and accompanied by a disclaimer of opinion stating no audit was performed. In performing the work, you discover that there are no invoices to support a claim for a $25,000 disbursement. The manager informs you that all the disbursements are proper. What should you do?

1. Submit the expected statements but omit $25,000 of unsupported disbursements.
2. Include the unsupported disbursements in the statements since you are not expected to make an audit.

3. Obtain from the manager a written statement that you informed him of the missing invoices and include his assurance that the disbursements are proper.
4. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

43. Which of the following is not an element of examining a forecast?

1. Evaluating the preparation of the prospective financial statements.
2. Understanding internal controls.

c . Evaluating the support underlying the assumptions.

d. Issuing an examination report.

44. A CPA who has been engaged to audit financial statements that were prepared on a cash basis:

1. must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of such omissions.
2. may not be associated with such statements which are not in accordance with generally accepted accounting principles.
3. must render a qualified report explaining the departure from generally accepted accounting principles in the opinion paragraph.
4. must restate the financial statements on an accrual basis and then render the standard (short- form) report.

45. One example of a “special report,” as defined by Statements on Auditing Standards, is a report issued in connection with:

1. a feasibility study.

2. price-level basis financial statements.
3. a limited review of interim financial information.
4. compliance with a contractual agreement not related to the financial statements.

46. Prospective financial statements are for general use or for limited use. General use refers to use by any third party, whereas limited use refers to use by third parties with which the responsible party is negotiating directly. Which of the following statements is not correct?

1. Forecasts can be provided for general use.
2. Forecasts can be provided for limited use.
3. Projections can be provided for general use.
4. Projections can be provided for limited use.

47. Negative assurance is not permissible in:

1. reports based upon a review engagement.
2. letters required by security underwriters for data pertinent to SEC registration statements.
3. reports based on an audit of interim financial statements of a closely held business entity.
4. reports relating to the results of agreed-upon procedures to one or more specified elements, accounts, or items of financial statement.

48. The auditor’s best course of action with respect to “other financial information” included in an annual report containing the auditor’s report is to:

1. read and consider the manner of presentation of the “other financial information.”
2. indicate in the auditor’s report that the “other financial information” is unaudited.
3. consider whether the “other financial information” is accurate by performing a limited review.

4. obtain written representations from management as to the accuracy of the “other financial information.”

49. The objective of a review of financial statements is

1. To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with generally accepted accounting principles in the Philippines.
2. For the auditor to 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.
3. For the accountant to use accounting expertise, as opposed to auditing expertise, to collect, classify and summarize financial information.
4. To enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with generally accepted accounting principles in the Philippines (negative assurance).

50. Which statement is incorrect regarding the general principles of a review engagement?

1. The auditor is not required to comply with the “Code of Professional Ethics for Certified Public Accountants” promulgated by the Board of Accountancy.
2. The auditor should conduct a review in accordance with PSRE 2400.

3. The auditor should plan and perform the review with an attitude of professional skepticism recognizing that circumstances may exist which cause the financial statements to be materially misstated.
4. For the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be able to draw conclusions.

51. Which of the following is required to be performed in an audit but not in review engagement?

1. Complying with the “Code of Professional Ethics for Certified Public Accountants” promulgated by the Board of Accountancy.
2. Planning the engagement.
3. Agreeing on the terms of engagement.
4. Studying and evaluating internal control structure.

52. Engagement letter for a review of financial statements least likely includes

1. The objective of the service being performed.
2. The fact that the engagement cannot be relied upon to disclose errors, illegal acts or other irregularities, for example, fraud or defalcations that may exist.
3. A statement that an audit is not being performed and that an audit opinion will not be expressed.

4. The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovere

53. Which statement is incorrect regarding procedures and evidence obtained in a review engagement?

1. The auditor should apply judgment in determining the specific nature, timing and extent of review procedures.
2. The auditor should apply the same materiality considerations as would be applied if an audit opinion on the financial statements were being given.
3. There is a greater risk that misstatements will not be detected in an audit than in a review.
4. The judgment as to what is material is made by reference to the information on which the auditor is reporting and the needs of those relying on that information, not to the level of assurance provide

54. Which of the following procedures is not included in a review engagement on a nonpublic entity?

1. Inquiries of management.
2. Inquiries regarding events subsequent to the balance sheet date.
3. Any procedures designed to identify relationships among data that appear to be unusual.
4. Communicating any material weaknesses discovered during the study and evaluation of internal accounting control.

55. In a review engagement, the independent accountant’s procedures include:

1. Examining bank reconciliation.
2. Confirming accounts receivable with debtors.
3. Reading the financial statements to consider whether they appear to conform with GAAP.
4. Obtaining a letter of audit inquiry from all attorneys of recor

56. An auditor’s standard report on a review of the financial statements of a nonpublic entity should state that

1. The auditor does not express an opinion or any form of limited assurance on the financial statements
2. Nothing has come to the auditor's attention based on the review that causes the auditor to believe the financial statements are not presented fairly, in all material respects in accordance with generally accepted accounting principles in the Philippines.
3. The auditor obtained reasonable assurance about whether the financial statements are free of material misstatement
4. The auditor examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements

57. Which of the following is not a basic element of a review report?

1. Title of the report                                                               c. Introductory paragraph
2. Client’s address                                                                   d. Auditor’s address

58. The scope paragraph of the review report least likely includes

1. A reference to Philippine Standard on Auditing applicable to review engagements.
2. A statement that a review is limited primarily to inquiries and analytical procedures.
3. A statement that an audit has not been performed, that the procedures undertaken provide less assurance than an audit and that an audit opinion is not expressed.
4. A statement of the responsibility of the entity's management and the responsibility of the auditor.

59. If matters have come to the auditor's attention, the auditor should describe those matters that impair a fair presentation, in all material respects in accordance with GAAP in the Philippines, including, unless impracticable, a quantification of the possible effect(s) on the financial statements, and

1. Express a qualification of the negative assurance provided.
2. When the effect of the matter is so material and pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement.
3. Not provide any assurance.
4. Either a or b.

60. A review report should be dated as of the

1. Date the report is delivered to the entity reviewed.
2. Date the review is completed.

3. Balance sheet date of the latest period reported on.
4. Date a letter of audit inquiry is received from the entity’s attorney of recor

61. Which statement is incorrect regarding agreed-upon procedures?

1. Users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work.
2. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.
3. The auditor should conduct an agreed-upon procedures engagement in accordance with PSRS 4400 and the terms of the engagement.
4. Where the auditor is not independent, a statement to that effect need not be made in the report of factual findings.

62. Which of the following would not be appropriate to a report on an engagement to apply agreed-upon procedures to specified financial statement items?

1. Indicate the intended distribution of the report.
2. Provide an opinion on the specified elements, accounts, or items.
3. Enumerate the procedures performed.
4. State that the report relates only to the elements, accounts, or items specifie