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CEBU CPAR CENTERMandaue City, CebuAUDITING THEORYPREWEEK LECTUREGlossary of Terms The series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. a. Computer information system c. Accounting system b. Internal control system d. Control en...

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CEBU CPAR CENTER Mandaue City, Cebu

AUDITING THEORY PREWEEK LECTURE Glossary of Terms 1.

The series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. a. Computer information system c. Accounting system b. Internal control system d. Control environment

2.

The measure of the quality of audit evidence and its relevance to a particular assertion and its reliability. a. Sufficiency c. Significance b. Appropriateness d. Assurance

3.

It serves as a set of instructions to assistants involved in the audit and as a means to control the proper execution of the work. a. Audit program c. Engagement letter b. Overall audit plan d. Internal control questionnaire

4.

Detection risk is a. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. c. The risk that an auditor's substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes. d. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances of classes, assuming that there were no related internal controls.

5.

Tolerable error means a. An error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population. b. An error that the auditor expects to be present in the population. c. The maximum error in a population that the auditor is willing to accept. d. The possibility that the auditor's conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure.

6.

The current period’s auditor who did not audit the prior period’s financial statements is called c. Incoming auditor. a. Predecessor auditor. b. Other auditor. d. Principal auditor

7.

Principal auditor is a. The auditor who audited and reported on the prior period's financial statements and continues as the auditor for the current period. b. A current period's auditor who did not audit the prior period's financial statements. c. The auditor who was previously the auditor of an entity and who has been replaced by an incoming auditor. d. The auditor with responsibility for reporting on the financial statements of an entity when those financial statements include financial information of one or more components audited by another auditor.

8.

They are not presented as complete financial statements capable of standing alone, but are an integral part of the current period. a. Corresponding figures c. Supplementary report b. Comparative financial statements d. Notes of financial statements

9.

The applications of auditing procedures using the computer as an audit tool refer to a. Integrated test facility c. Auditing through the computer b. Data-based management system d. Computer assisted audit techniques

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10.

A collection of files that is shared and used by a number of different users. a. Database c. Master file b. Information file d. Transaction file

11.

A report, separate from the financial statements, in which an entity provides third parties with qualitative information on the entity's commitments towards the environmental aspects of the business, its policies and targets in that field, its achievement in managing the relationship between its business processes and environmental risk, and quantitative information on its environmental performance. a. Environmental performance report c. Environmental risk b. Annual report d. Special purpose audit report

12.

Comprises officers and others who also perform senior managerial functions. a. Management c. Audit committee b. Governance d. Board of directors

13.

It exists when other information contradicts information contained in the audited financial statements. a. Material inconsistency c. Material weaknesses b. Material misstatement of fact d. Misstatement

14.

The policies and procedures adopted by a firm to provide reasonable assurance that all audits done by the firm are being carried out in accordance with the Objective and General Principles Governing an Audit of Financial Statements. a. Internal controls c. Peer review b. Quality controls d. General controls

15.

When an entity has the ability to control the other entity or exercise significant influence over the other entity in making financial and operating decisions manifest: a. Related parties c. Decentralization b. Related services d. Centralized operations

16.

Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit. a. Scope of an audit c. Audit program b. Scope of a review d. Scope limitation

17.

It relates to materiality of the financial statement assertions affected by the computer processing. a. Threshold c. Complexity d. Significance b. Relevance

18.

A report issued in connection with the independent audit of financial information other than an auditor's report on financial statements. a. Special purpose auditor's report c. Annual report b. Compilation report d. Modified auditor’s report

19.

Substantive procedures are tests performed to obtain audit evidence to detect material misstatements in the financial statements. These include a. Test of details of transactions c. Substantive analytical procedures d. All of the above. b. Test of details of balances

20.

Involves tracing a few transactions through the accounting system. a. Test of controls c. Analytical procedures b. Walk-through test d. Substantive procedures

Overview of auditing (Related PSAs : PSA 100, 120, 200 and 610) 21.

Assurance services are best described as a. Services designed for the improvement of operations, resulting in better outcomes. b. Independent professional services that improve the quality of information, or its context, for decision makers. c. The assembly of financial statements based on assumptions of a reasonable party. d. Services designed to express an opinion on historical financial statements based on the results of an audit.

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22.

Assurance services least likely involve a. Improving the quality of information for decision purposes. b. Improving the quality of the decision model used. c. Improving the relevance of information. d. Implementing a system that improves the processing of information.

23.

Which of the following statements is (are) true regarding the provision of assurance services? a. The third party who receives the assurance generally pays for the assurance received. b. Assurance services always involve a report by one person to a third party on which an independent organization provides assurance. c. Assurance services can be provided either on information or processes. d. All of the above.

24.

In performing an attestation engagement, a CPA typically a. Supplies litigation support services. b. Assesses control risk at a low level. c. Expresses a conclusion about an assertion. d. Provides management consulting advice.

25.

Which of the following services would be most likely to be structured as an attest engagement? a. Advocating a client’s position in tax matter. b. A consulting engagement to develop a new data base system for the revenue cycle. c. An engagement to issue a report addressing an entity’s compliance with requirements of specified laws. d. The compilation of a client’s forecast information.

26.

Which of the following is broadest in scope? a. Audits of financial statements. b. Assurance services.

c. Internal control audit. d. Attestation services.

27.

Independent auditing can be described as a. A branch of accounting. b. A professional activity that measures and communicates financial and business data. c. A discipline which attests to the results of accounting and other functional operations and data. d. A regulating function that prevents the issuance of erroneous or improper financial information.

28.

A financial statement audit is designed to a. Provide assurance on internal control and to identify reportable conditions. b. Detect error or fraud in the financial statements, regardless of whether or not the error or fraud is material. c. Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. d. Obtain absolute assurance on the financial statements and express an opinion on the financial statements.

29.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? a. It is difficult to prepare financial statements that fairly present a company’s financial position and changes in financial position and operations without the expertise of an independent auditor. b. It is management’s responsibility to make available independent aid in the preparation of the financial information shown in the financial statements. c. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. d. It is a customary courtesy that shareholders of a company receive an independent report on management’s status in managing the affairs of the business.

30.

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to a. Express an opinion as to the fairness of Camden's financial statements. b. Express an opinion as to the attractiveness of Camden for investment purposes. c. Certify to the correctness of Camden's financial statements. d. Critique the wisdom and legality of Camden's business decisions.

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31.

A type of audit the purpose of which is to determine whether the auditee is following specific procedures or rules set down by some higher authority a. Operational audit. c. Financial audit. b. Compliance audit. d. Management audit.

32.

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 capable of being improved c. Operations auditing. a. Financial auditing. b. Compliance tests. d. Management auditing.

33.

A detailed examination of the utilization of the resources of the company, including the organization structure to carry out objectives, to indicate areas of increased efficiency and possible cost reduction is c. Management audit. a. Internal audit. b. Audit of assets. d. Financial audit.

34.

Which of the following types of audits are most similar? a. Operational audits and compliance audits. b. Independent financial statement audits and operational audits. c. Compliance audits and independent financial statement audits. d. Internal audits and independent financial statement audits.

35.

To make the internal audit department independent, he should report directly to the a. Board of Directors. c. Stockholders. b. Audit committee. d. Controller.

36.

An independent audit a. Supports an internal audit. b. Negates an internal audit.

c. Duplicates an internal audit. d. Complements an internal audit.

37.

The members of the Commission on Audit should a. Be a member of the bidding committee of the agency. b. Hold office for nine years without reappointment. c. Be a commissioner and an associate commissioner. d. Be a CPA or member of the Bar with ten years experience.

38.

Besides expressing an opinion on the fairness of financial statement presentation, a government auditor normally includes audit of effectiveness, compliance as well as a. Internal control. c. Mathematical accuracy. b. Economy. d. Risk evaluation.

39.

Governmental effectiveness (program) auditing seeks to determine whether the desired results are being achieved and objectives are being met. The first step in the performance of such an audit would be: a. Evaluate the system used to measure results. b. Determine the sampling frame to use in studying the system. c. Collect and analyze quantifiable data. d. Identify the legislative intent of the program being audited.

Professional Accounting Practice (Related PSA : Preface to PSA and Related Services) 40.

A pervasive characteristic of a CPA’s role in a Management Consulting Services engagement is that of being a(n) a. Objective advisor. c. Computer specialist. b. Independent practitioner. d. Confidential reviewer.

41.

Which one of the following is not a logical function of a CPA in public accounting practice? a. Attest function. c. Tax practice. b. Supervision of internal audit staff. d. Management consulting services.

42.

The quality of performance of an auditor is measured by the statements emanating from the a. Accounting Standards Council b. Quality Control Standards c. Auditing Standards and Practices Council d. Interpretations of Accountants in Practice

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43.

The Philippine Standards on Auditing issued by ASPC a. Are applicable only when an independent audit involving an expression of an opinion on financial statements is carried out. b. Are the only authoritative source of auditing standards for members of the accountancy profession in the Philippines. c. Are general guidelines to help auditors. d. Require that in no circumstances would an auditor may judge it necessary to depart from a PSA, even though such a departure may result to more effective achievement of the objective of an audit.

44.

Williams & Co., a large international CPA firm, is to have an “external peer review.” The peer review will most likely be performed by a. Employees and partners of Williams & Co. who are not associated with the particular audits being reviewed. b. Audit review staff of the Securities and Exchange Commission. c. Audit review staff of the American Institute of Certified Public Accountants. d. Employees and partners of another CPA firm.

45.

One of the advantages of the fixed fee (or flat sum) basis of billing a client is that the a. CPA’s compensation is more directly related to the quality of his service rather than to time spent. b. CPA is assured of avoiding a loss on the engagement even if he underestimates his costs. c. Fixed fee method is particularly effective for measuring charges for routine engagements. d. Client pays for exactly what he gets in terms of work performed.

Philippine Accountancy Act of 2004 (RA 9298) and its IRR 46.

Which of the following is not one of the function of the Board of Accountancy as specifically provided under RA 9298? a. To determine and prescribe minimum requirements leading to the admission of candidates to the CPA examination. b. To investigate violations of the Accountancy Law and the rules and regulations promulgated thereunder. c. To perform visitorial powers or review professional work of accounting practitioners in a general or random basis. d. After due process, to suspend, revoke, or reissue certificates of registration for causes provided for by law by the rules and regulations promulgated therefor.

47.

No person shall serve the Professional Regulatory Board of Accountancy for more than d. 12 years a. 3 years b. 6 years c. 9 years

48.

The Accountancy Law provided that a CPA certificate may be suspended or revoked on grounds except a. Immoral or dishonorable conduct. b. Gross negligence or incompetence in the practice of profession. c. Refusal to accept an audit engagement with a government corporation. d. Conduct discreditable to the accounting profession.

49.

Under the IRR of RA 9298, if a partner in a two-member partnership dies, the surviving partner may continue to practice as an individual under the existing firm title which includes the deceased partner’s name a. For a period of time not to exceed five years. b. For a period of time not to exceed two years. c. Indefinitely. d. Until the partnership payout to the deceased partner’s estate is terminated.

50.

Which of the following is required for a partnership for public accountancy practice? a. At least one of the partners must be a CPA. b. All partners must be PICPA members. c. All partners must be CPAs. d. Firm name must contain names of partners only.

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Code of Ethics 51.

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. b. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. c. A distinguishing mark of a profession is its acceptance of responsibility to the public. d. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.

52.

Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a project study on the expanded food vending operations of the corporation with the corresponding staffing and compensation package for its executive staff. Dimalanta, however, has primarily auditing expertise and only in general merchandising operations. Mr. Dimalanta may properly a. Accept the engagement and carry it out consistent with GAAS. b. Accept the engagement but exercise due professional care. c. Accept the engagement and acquire the necessary competence or consult with established authorities. d. Decline the engagement for lack of experience or competence in an entirely new line of specialization.

53.

During the course of an audit engagement, the CPA needed additional studies and consultation with experts. This additional study and consultation is deemed to be a. An unusual practice which should have voided the audit engagement. b. Lack of competence on the part of the CPA. c. An appropriate part of the professional conduct of the audit engagement. d. Undertaken as a responsibility of management.

54.

After beginning an audit of a new client, Larkin, CPA, discovers that the professional competence necessary for the engagement is lacking. Larkin informs management of the situation and recommends another CPA, and management engages the other CPA. Under these circumstances a. Larkin's lack of competence should be construed to be a violation of GAAS. b. Larkin may request compensation from the client for any p...