[ATAP] Re SA 41 - First Pre-Bo a rd Ex a ms (Questions, Answers & Solutions) PDF

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ReSAThe ReviewSchool of AccountancyTel. No. 735-9807 & 734- 3989nullAUDITING 11 February 2021( Thursday)First Pre-Board Examination 6:00 P .M. – 9:00 P .M.MMUULLTTIIPPLLEE CCHHOOIICCEE####### INSTRUCTIONS : Select the correct answer for each of the following####### questions. Mark only one answ...

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ReSA The ReviewSchool of Accountancy Tel. No. 735-9807 & 734-3989

AUDITING First Pre-Board Examination

11 February 2021(Thursday) 6:00 P.M. – 9:00 P.M.

MUL TIP LE CH OI CE INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by shading the box corresponding to the letter of your choice on the sheet provided. STRICTLY NO ERASURES ARE ALLOWED. Use pencil no. 2 only. 1.

Laura is covered member in an audit engagement. Which of the following cannot work in any capacity for a company being audited the Laura? I. II. a. b.

2.

II. a. b.

Both I and II Neither I nor II

2, 3, 4, and 5. 2, 4 and 5.

c. d.

3 and 4. 1, 2, 3, and 4.

disagreements with management as to accounting principles and auditing procedures the integrity of management I only II only

c. d.

Both I and II Neither I nor II

A CPA should not decide NOT to accept a new client for an audit engagement if: I. II. a. b.

5.

c. d.

Inquiries of the predecessor auditor prior to acceptance of the engagement should include specific questions regarding: I.

4.

I only II only

The following statements relate to assurance engagements. Choose the incorrect statements. 1) The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter. 2) Assurance engagements performed by professional accountants are intended to enhance the credibility of information about a subject matter. 3) Assurance engagements involve two parties: a professional accountant and an intended user. 4) The subject matter of an assurance engagement is limited to historical or prospective financial information. 5) The intended user in an assurance engagement is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose. a. b.

3.

Laura’s spouse Laura’s dependent daughter

the CPA lacks an understanding of the client’s industry and accounting principles prior to acceptance the client’s management has unusually high turnover I only II only

c. d.

Both I and II Neither I nor II

Which statement is incorrect regarding an engagement to perform agreedupon procedures? a. 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. b. The recipients of the report must form their own conclusions from the report by the auditor. c. The report is restricted to those parties that have agreed

ReSA: The Review School of Accountancy d. 6.

to the procedures to be performed. The report on factual findings is expressed in the form of negative assurance.

Which of the following procedures would an auditor likely perform in the planning stage of a financial statement audit? I. II.

a. b. 7.

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Obtaining a signed engagement letter from the client’s management Examining documents to detect violations of laws and regulations having a material effect on the financial statements. I only II only

c. d.

Both I and II Neither I nor II

Which of the following procedures is likely to be performed in the planning stage of the audit? I. II. a. b.

Determining the extent of involvement of specialists and internal auditors External confirmation of client accounts receivables I only II only

c. d.

Both I and II Neither I nor II

8.

Internal auditing is considered to be part of an organization's: a. c. Control activities. Accounting system. b. Monitoring. d. External controls.

9.

All of the following are correct regarding an auditor’s understanding with a potential client prior to beginning an audit EXCEPT: a. the understanding should cover the responsibilities of the independent auditor. b. the understanding should cover the limitations of the engagement. c. the understanding should be in the form of an engagement letter in order to be in conformity with auditing standards. d. the understanding should list the audit fees and frequency of billing.

10. Which of the following will cause the auditor to assess inherent risk as high? I. II. III. a. b.

Complex transactions with third parties are discovered. No related-party transactions are discovered. Management relies heavily on estimates in the financial statements. I and II only I, II and III

c. d.

I and III only III only

11. Which of the following is correct? I. II. a. b.

Control risk is not part of overall audit risk, although it is assessed by the auditor. Detection risk is part of overall audit risk, but it is not assessed by the auditor. I only II only

c. d.

Both I and II Neither I nor II

12. The need for independent audits of financial statements can attributed to all of the following conditions except: Remoteness a. c. Complexity of subject matter b. Consequence d. Validity 13.

be

Control risk is: I. influenced by the amount of work or other testing performed by the independent auditor II. mitigated by good internal controls a. b.

I only II only

c. d.

Both I and II Neither I nor II

AUDITING - FIRST PRE-BOARD EXAMINATION (BATCH 41)

ReSA: The Review School of Accountancy 14.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is substantially the same as planned audit risk level, the auditor would: a. b.

15.

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decrease detection risk decrease substantive testing

c. increase inherent risk d. increase materiality levels.

If a company incorrectly applies an accounting principle to a significant transaction, and the misstatement was other than intentional, which of the following could describe the misstatement? I. II. a. b.

Error Fraud I only II only

c. d.

Both I and II Neither I nor II

16.

An audit is conducted on the premise that management and, where appropriate, those charged with governance, have acknowledged and understand that they have responsibilities that are fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not one of those responsibilities? a. The preparation of financial statements in accordance with relevant pronouncements issued by the AASC b. The establishment and maintenance of an adequate internal control system that is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error c. To provide the auditor with access to all information that is relevant to the preparation of the financial statements such as records, documentation, and other matters d. To provide the auditor with unrestricted access to persons within the entity from which the auditor determines it necessary to obtain evidence

17.

Management’s ability to foresee problems and take steps in advance to prevent problems is known as: I. II. a. b.

18.

a. b.

c. d.

Both I and II Neither I nor II

control environment risk assessment control activities I and II only I and III only

c. d.

III only I, II and III

In the internal control stage, an independent auditor searches for control activities to: I. determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized II. determine whether procedures and records concerning the safeguarding of assets are reliable a. b.

20.

I only II only

The component of internal control that refers to adequate physical safeguards and segregation of duties is known as: I. II. III.

19.

control environment control activities

I only II only

c. d.

Both I and II Neither I nor II

An auditor gains an understanding of the client’s attempt to keep internal controls up to date. This ongoing process of keeping controls effective: I. II. a. b.

refers to the monitoring component of internal control is often performed by the internal audit function c. Both I and II I only II only d. Neither I nor II

AUDITING - FIRST PRE-BOARD EXAMINATION (BATCH 41)

ReSA: The Review School of Accountancy 21.

After gaining and documenting an understanding of the components of internal control, the auditor should make a preliminary assessment of control risk. If the auditor’s investigation indicates that internal control is weak, the auditor should: I. II. a. b.

22.

II. a. b.

I only II only

c. d.

Both I and II Neither I nor II

seek to identify specific control activities within that system that would reduce control risk if they are operating effectively and efficiently, as intended analyze and confirm I only II only

c. d.

Both I and II Neither I nor II

The reporting company records sales revenue and accounts receivable near the end of the year because a sales order has been received. However, the earnings process will not be complete until next period. Which assertion is affected in the current year? I. II. a. b.

24.

use the combined (or reliance) approach for further audit procedures emphasize substantive testing rather than test of controls

An auditor is performing tests of controls in hopes of assessing control risk to be less than high in order to reduce overall audit testing. After obtaining an understanding of the design of an individual system, the auditor should: I.

23.

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Occurrence Existence I only II only

c. d.

Both I and II Neither I nor II

Prior to shipping, a copy of the sales order is: I. II. a. b.

sent to the billings department to verify that the shipment is going to an approved customer who is not over any credit limit sent to the billings department to enable the billings department to prepare a bill of lading I only II only

c. d.

Both I and II Neither I nor II

25. If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the: a. sales invoices to the shipping documents b. cash receipts journal to the sales journal c. shipping documents to the sales invoice d. sales journal to the cash receipts journal 26. Which assertion is being most directly addressed when an auditor selects a sample of sales invoices and compares it to the subsequent journal entries recorded in the sales journal? a. c. Accuracy Occurrence b. Classification d. Completeness 27.

Which of the following requires a CPA firm providing audit and attest services to adopt a system of quality control? I. II. a. b.

28.

PICPA BIR I only II only

c. d.

Both I and II Neither I nor II

Which of the following elements of quality control encompasses criteria for recruitment and hiring compensation and advancement? a. Leadership responsibilities c. Risk assessment b. Human resources d. Monitoring

AUDITING - FIRST PRE-BOARD EXAMINATION (BATCH 41)

ReSA: The Review School of Accountancy 29.

Who normally performs the following functions?

I. II.

30.

Associate, Partner

c.

b.

Manager, Associate

d.

Certificate of Registration Certificate of Accreditation to Practice Public Accounting PRC ID I and II only I and III only

c. d.

I, II and III II only

With regard to the elements of quality control at the firm, the category known as leadership responsibilities is essential because: I. II. a. b.

the firm’s leadership bears the ultimate responsibility for the firm’s quality control systems the firm must be able to perform the engagement within the reporting deadlines I only II only

c. d.

Both I and II Neither I nor II

A CPA firm that fails to maintain quality control standards: I. II. a. b.

33.

Partner, associate Partner, Manager

Which is/are normally first granted to the professional accountant after obtaining a minimum of three years meaningful experience?

a. b.

32.

Sends the cash confirmation requests to the bank Concludes that the audit engagement team is independent from the client?

a.

I. II. III.

31.

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has not necessarily violated PSAs may still be incompliance with professional standards with respect to individual audit engagements. I only II only

c. d.

Both I and II Neither I nor II

Which is the appropriate confirmation type for each situation? I. II. a. b.

The risk of material misstatement for the existence of receivables is high The account is composed of a small number of subsidiary accounts with high monetary values Both Negative Both Positive

c. d.

Negative, Positive Positive, Negative

34. Would an auditor normally confirm the accounts payables? a. No, unless there is a high risk of material misstatement for completeness b. No, unless there is a high risk of material misstatement for existence c. Yes, unless there is a high risk of material misstatement for existence d. Yes, unless there is a high risk of material misstatement for rights 35.

Which assertion is directly related to the auditor selecting an inventory item from the accounting records and searching for it in the warehouse during count observation? a. Completeness c. Obligations b. Existence d. Valuation

PROBLEM 1: ERROR CORRECTION You were assigned to audit the financial statements of Freya Corp. as of and for the period ended December 31, 20 20. This is the first time Freya Corp.’s financial statements are being audited since it started operations in 2018. The following summarizes your audit findings:

AUDITING - FIRST PRE-BOARD EXAMINATION (BATCH 41)

ReSA: The Review School of Accountancy

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a. The following is an analysis of the company’s accumulated profits account: Date Particulars Debit Credit Balance 12/31/18 2018 Net loss 200,000 (200,000) 12/31/19 2019 Net Income 1,500,000 1,300,000 1/31/20 Payment of dividends 300,000 1,000,000 12/31/20 2020 Net Income 800,000 1,800,000 b. No dividends were declared in 2018. Dividends declared in December 2019 and 2020 were paid on January of the following years. The 2020 dividends were at P500,000. c. The following items were omitted at each year end: 2018 2019 2020 Accrued salaries P25,000 P45,000 P60,000 Unused supplies 15,000 20,000 Unearned rent 10,000 18,000 income d. The following year-end deliveries to customers were recorded as sales only upon collection the following year. The related inventories were excluded from the physical count at each year end. All sales were delivered under FOB shipping point terms. 2018 2019 2020 Sales price P12,000 P15,000 P10,000 Cost of inventory 6,000 7,000 5,000 e. An equipment with a cost of P240,000 was fully expensed in May 1, 2019. Based on your discussions with the management, the cost should have been capitalized and depreciated using straight-line method over its five-year useful life. Requirements: 36. What is the adjusted net income in 2018? a. 218,000 c. 208,000 b. 228,000 d. 220,000 37. What is the adjusted net income in 2020? a. 768,000 c. 770,000 b. 792,000 d. 830,000 38. What is the retroactive adjustment to the retained earnings beginning 2020? a. 140,000 debit c. 160,000 debit b. 140,000 credit d. 160,000 credit 39. What is the effect of all errors to the 2020 total assets? a. 190,000 understatement c. 142,000 understatement b. 130,000 understatement d. 160,000 understatement PROBLEM 2: ERROR CORRECTION You were assigned to audit for the first the time the financial statements of Martis Inc. as of and for the year ended December 31, 2019. Martis Inc. is a merchandiser of baking equipment and supplies and has started operations in early 2018. No audit has been made on its financi al statements from its inception. The following was as a result of your audit investigations: a. The following were omitted at each year end: 2018 Advances from customers: P30,000 (recorded as sales upon collection) Advances to suppliers (recorded as purchases upon payment) Accounts payable 24,000 (goods received at each year-end were recorded as purchases upon payment the following year, the related goods were appropriately included in the year-end physical count) AUDITING - FIRST PRE-BOARD EXAMINATION (BATCH 41)

2019 -

2020 P28,000

15,000

19,000

19,000

35,000

ReSA: The Review School of Accountancy

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b. The following errors in inventories were also discovered at each year end: 2018 2019 2020 Overstatement P8,000 P4,000 Understatement 6,000 c. The following routinary repairs to the building were erroneously charged to building account each year and depreciated using the straight-line method over the building’s remaining useful life from date of incurrence of cost . The company’s policy is to record full years depreciation the year of PPE additions and none on the year of disposal. 2019 2020 Repairs and maintenance charged to building P90,000 P96,000 account *Additional information about the Building Original useful life: 10 years Acquisition date: January 1, 2018 d. The following information were also ascertained: 2018 2019 Net income, unadjusted P210,000 P257,000

2020 P125,000

Requirements: 40. What is the correct net income in 2019? a. 231,000 c. 240,000 b. 230,000 d. 241,000 41. What is the correct net income in 2020? a. (2,400) c. 2,000 b. 1,000 d. (1,000) 42. What is the effect of errors to the 2020 working capital? a. 48,000 overstated c. 48,000 understated b. 202,000 overstated d. 202,000 understated PROBLEM 3: CASH/ACCRUAL; SINGLE ENTRY Leslie Company keeps its records under the cash basis of accounting. You were asked to prepare its financial statements under the accrual basis as a requirement of a loan application with a bank. The following information were made available to you based on cash records: Total collections from customers, including recoveries P1,600,000 of previous write-off amounting to P20,000 Total payments to suppliers of merchandise 840,000 Total payments to employees for salaries 400,000 Total payments for rentals 280,000 Cash refund for customer returns 60,000 Cash refund for purchase returns 40,000 Audit notes: a. Total customer and purchase returns and discounts are as follows: Total customer returns including a P60,000 180,000 cash refund Total purchase returns including a P40,000 200,000 cash refund Discounts taken on purchases 80,000 Discounts taken by customers on sales 140,000 a. Outstanding customer and supplier invoices at the beginning and at the end of the year are as follows: Beg. End Outstanding custome...