Re SA B42 AUD Final PB Exam Questions Answers Solutions PDF

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

AUDITING Final Pre-Board Examination

25 September 2021(Saturday) 1:00 P.M. – 4:00 P.M.

MULTIPLE CHOICE 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.

B

1. Which of the following best describes assurance services? a. Independent professional services that report on the client's financial statements b. Independent professional services that improve the quality of information for decision makers c. Independent professional services that report on specific written management assertions d. Independent professional services that improve the operations of the client

2. Madrid's Bank has loaned money to Denver's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be B a. an assurance service engagement. c. a review engagement. b. an attestation engagement. d. A compilation engagement. 3. A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance? I. PSAs III. PSRSs II. PSAEs IV. PSQC 1 C

a. I and II only b. II and III only

c. II and IV only d. I and IV only

4. An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the D a. control environment factors that affect the organizational structure. b. correlation of detection risk and inherent risk. c. effectiveness of the entity's internal control activities. d. possible effects on the entity's financial statements. 5. During an audit of an entity's shareholders' equity accounts, the auditor determines whether there are restrictions on accumulated profits resulting from loans and agreements. This audit procedure most likely is intended to verify management's assertion of D a. existence or occurrence. c. valuation or allocation. b. completeness. d. presentation and disclosure.

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6. Evaluate the following cases with respect to the Code of Ethics for Professional Accountants (Code): I. Dodong Jonas, CPA (DJ), is the auditor of MCCC Wholesale, Inc. DJ received a 10% commission from Computer Systems, Inc. for hardware sold to MCCC Wholesale, Inc. The sale was made based on DJ's recommendation to MCCC Wholesale that the company needed a new accounting information system. DJ disclosed the commission to MCCC’s management. DJ also performs an annual audit for MCCC. II. Angkol, not a CPA, has a successful bookkeeping practice in Gensan. He is charging relatively low service fees which resulted in having more clients. In addition, it is his practice to give gratefulness gift for successful referrals. D a. Both Dodong and Angkol violated the Code. b. Only Dodong violated the Code. c. Only Angkol violated the Code. d. Both Dodong and Angkol did not violate the Code. 7. The following first-time candidates had these CPALE ratings: Examinees CPALE Ratings Subject Subject Subject Subject Subject Subject 1 2 3 4 5 6 Berlin 90 88 95 74 74 64 Manila 87 68 65 75 81 76 Nairobi 94 71 61 73 86 84 Rio 89 78 64 74 85 82 Tokyo 81 89 73 65 65 77 Statement Statement Statement Statement B

a. b. c. d.

1: 2: 3: 4:

Only two candidates failed. One candidate had to retake Two candidates would receive Only two candidates passed.

(True) only one subject. (False) conditional credits. (False) (True)

Only one statement is correct. Only two statements are correct. Only three statements are correct. All statements are correct.

8. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that C a. justifies the reasons for departing from generally accepted principles. b. states whether the financial statements are fairly presented in conformity with a special purpose framework. c. refers to the note to the financial statements that describes the special purpose framework. d. explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles. 9. Helsinki Corporation is making a presentation to a perspective investor. The presentation includes a projection showing that the company's sales will be between ₱25,000,000 and ₱27,000,000 within the next three years. Helsinki believes the information will be better received if its CPA provides an attestation report on the projection. The CPA should insure that proper disclosure is made to indicate that C a. the ₱27,000,000 estimate is a best case scenario. b. the range of the projection is appropriate given the circumstances. c. the range does not indicate a "best" and "worst" case scenario. d. projections are limited in their information content due to uncontrollable changes in the business environment. 10. Which of the following situations provides the greatest threat to an internal auditor's objectivity? AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 42)

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a. An auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major customer before it is implemented. b. A former purchasing assistant performs a review of bidding procedures in the purchasing department four months after being transferred to the internal auditing department. c. An auditor recommends controls and performance measures for inclusion in a new contract with an outside service organization for the processing of payroll and employee benefits. d. A warehouse employee assists an auditor in verifying the physical inventory of small motors.

11. Generally, fraud examiners are called when a fraud is already known or suspected. The term that means a reason to believe a fraud has occurred is C a. prediction. c. predication. b. suspicion. d. admonition. 12. Sierra, CPA, is conducting an audit of a theater company. She is performing a sampling application to determine the average number of patrons attending the performance of a musical on a weeknight. She randomly selects five weeknight performances during the month of September and calculates an average of 230 patrons per performance, with an associated precision of 25 patrons. This precision is determined based on a confidence level of 95 percent. Statement 1: The exposure to sampling risk is 95 percent. (False) Statement 2: The precision interval is 205 patrons to 255 patrons. (True) Statement 3: There is a 5 percent probability that the true average number of patrons attending the theater during a weeknight is between 205 patrons and 255 patrons. (False) Statement 4: Because the lower end of the precision interval is greater than 200 patrons, Sierra would conclude (with a confidence of 95 percent) that the average number of patrons attending the theater on a weeknight is greater than 200. (True) B

a. b. c. d.

Only one statement is correct. Only two statements are correct. Only three statements are correct. All statements are correct.

13. An auditor is determining the appropriate sample size for a variables sampling application. Compared to prior engagements, the auditor concludes that the population variability has increased. In addition, the partner on the engagement is requiring lower levels of the risk of incorrect acceptance than those used in previous audits. What effect will these changes have on the auditor's determination of sample size? D a. Both of these changes will decrease sample size. b. The increase in population variability will increase sample size; reducing sampling risk will have no effect on sample size. c. The increase in population variability will increase sample size; reducing sampling risk will decrease sample size. d. Both of these changes will increase sample size. B

14. Which of the following is not an example of a general control? a. The organization's use of the systems development life cycle when implementing or modifying computerized processing systems b. The organization's use of check digits to ensure accurate input of transaction data c. Periodic and preventative maintenance performed on the computer and related equipment d. The existence of appropriate separation of duties within the computer department AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 42)

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15. Which of the following would most likely be a weakness in the internal control of a client that utilizes portable computing devices rather than a larger computer system? B a. Employee collusion possibilities are increased because portable computing devices from one vendor can process the programs of a system from different vendors. b. Computer operators may be able to remove hardware and software components and modify them at an off-site location. c. Programming errors result in all similar transactions being processed incorrectly because those transactions are processed under the same conditions. d. Certain transactions may be automatically initiated by the computerized processing system and management's authorization of these transactions may be implicit in its acceptance of the system design. D

16. Tests of controls in an advanced computerized processing system a. can be performed using only actual transactions because testing simulated transactions does not provide relevant evidence. b. is impractical because many procedures within the computerized processing system leave no visible evidence of having been performed. c. is inadvisable because it may distort the evidence in real-time systems. d. can be performed using actual transactions or simulated transactions.

17. Which statement is not true with respect to the evidence that would be gathered when assessments of control risk are high? A a. Auditors would be required to perform procedures at interim periods, rather than at year end. b. Auditors would be required to rely on external (rather than internal) forms of evidence. c. Auditors would be required to confirm a larger number of customer accounts receivable balances. d. Auditors would be required to obtain more evidence through direct personal observation. 18. Which of the following would normally be considered earliest in the audit examination? A a. Determination of materiality levels for use during the audit b. Consideration of the ability of the entity's internal control to prevent or detect errors c. Preparation of a written audit plan d. Evaluation of the type of audit opinion to be issued, based on the auditor's findings 19. A primary advantage of using computer-assisted audit techniques (CAATs) packages to audit the financial statements of a client that uses computerized information systems is that the auditor may A a. access information stored on computer files even with a limited understanding of the client's hardware and software features. b. consider increasing the use of substantive tests of transactions in place of analytical procedures. c. substantiate the accuracy of data by using self-checking digits and hash totals. d. reduce the level of required tests of controls to a relatively small amount. 20. While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? D a. Move detailed analytical procedures from year end to interim. b. Increase the peso threshold of vouching customer invoices. c. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. d. Use more experienced audit team members to perform year-end testing. AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 42)

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21. If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, C a. income would be overstated. b. income would be understated. c. income would not be misstated. d. accounts receivable would be understated. 22. The existence of audit risk is recognized by the statement in the auditor's standard report that the D a. auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. b. financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. c. audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. d. auditor obtains reasonable assurance about whether the financial statements are free of material misstatement. 23. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if B a. the noncompliance is a violation of generally accepted accounting inciples. b. the client does not take the remedial action that the auditor nsiders necessary. c. the illegal act was committed during a prior year that was not dited. d. the auditor has already assessed control risk at the maximum level. 24. When auditing financial statements, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements. C a. Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness. b. Determine whether the company's control policies are designed well enough to prevent material misstatements. c. Prepare auditing working papers that document the auditor's understanding of the company's internal control. d. Design procedures to search for significant deficiencies in the actual operation of the company's internal control. 25. Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the descriptions below best expresses the minimum amount of work permitted by GAAS? B a. Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances. b. Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances. (x) c. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment. d. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances, since zero control risk means that no errors or fraud can reach the accounts.

AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 42)

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26. Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? C a. Motive c. Capability b. Opportunity d. External regulatory influence 27. The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because C a. many customers merely sign and return the confirmation without verifying its details. b. recipients usually respond only if they disagree with the information on the request. c. customers may not be inclined to report understatement errors in their accounts. d. auditors typically select many accounts with low recorded balances to be confirmed. 28. Natural Soda Company distributes beverages in the Davao Occidental area. Which of the following would be the test to determine that shipments made were actual sales? D a. Trace bills of lading to the sales journal. b. Vouch entries made in the sales journal to the bills of lading. c. Trace entries in the sales journal to accounts receivable subsidiary ledger. d. Vouch bills of lading to the customer order documents. 29. Moscow Company has an increase in purchases from specific vendors and an increase in raw materials inventory for the items purchased from these vendors. Sales for the company have not increased and are not forecast to increase. From this information an auditor might suspect C a. an increase in obsolete raw material inventory. b. theft of raw material inventory. c. kickbacks from vendors. d. poor security over raw material inventory. 30. What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest goingconcern uncertainties, they believe that substantial doubt about going concern does not exist? D a. Modify their report on the financial statements to describe management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. b. Prepare a separate report that describes management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. c. Require financial statement disclosure of management's plan to mitigate going-concern uncertainties with no modification to the auditors' report on the financial statements or no separate report on going concern. d. Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report. 31. Assume that Lisbon is auditing the financial statements of Stockholm Inc. Lisbon completes her fieldwork on February 25 and her report (along with Stockholm's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Lisbon's responsibility with respect to the effects of this hurricane on Stockholm's financial statements? D a. Because the inventory was included in the financial statements audited by Lisbon, she is required to perform additional procedures and reissue her report on the revised financial statements. AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 42)

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b. Because the hurricane occurred after the date of Lisbon's report, she has no responsibility to perform additional procedures or reissue her report. c. Because the hurricane occurred prior to the next fiscal quarter, Lisbon is required to perform additional procedures and reissue her report on the revised financial statements d. Because the hurricane occurred after the release of the financial statements and Lisbon's report, she has no responsibility to perform additional procedures or reissue her report. 32. Palermo is auditing the financial statements of Paris...