Sample/practice exam Autumn 2021, questions PDF

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FEU - MakatiAuditing Theory AT – Quizzer 5 Prof. Francis H.Villamin===============================================================================Consideration of Fraud in an Audit of FS Fraud include all of the following except: a. recording of transactions without substance b. suppression or omiss...

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FEU - Makati Auditing Theory

AT – Quizzer 5 Prof. Francis H.

Villamin ===============================================================================

Consideration of Fraud in an Audit of FS 1. Fraud include all of the following except: a. recording of transactions without substance b. suppression or omission of the effects of transactions from records or documents c. mathematical or clerical mistakes in the underlying records and accounting data. d. misappropriation of assets 2. Error include all of the following except: a. misapplication of accounting policies b. manipulation, falsification or alteration of records and documents. c. mathematical or clerical mistakes in the underlying records and accounting data d. oversight of accounting policies 3. 1st statement – The responsibility for the prevention and detection of fraud and error rests with the auditor through implementation of accounting and internal control systems. 2nd statement – The accounting and internal control systems eliminate the possibility of fraud and error. a. 1st statement is True ; 2nd statement is False b. 1st statement is False ; 2nd statement is True c. Both statements are True d. Both statements are False 4. 1st statement – The auditor is not and cannot be held responsible for the prevention of fraud and error. 2nd statement – Annual audits may be carried out which may not; however, act as deterrent. a. 1st statement is True ; 2nd statement is False b. 1st statement is False ; 2nd statement is True c. Both statements are True d. Both statements are False 5. Under PSA 240, which of the following would be classified as an error? a. Misappropriation of assets for the benefit of management. b. Misinterpretation by management of facts that existed when the financial statements were prepared. c. Preparation of records by employees to cover a fraudulent scheme. d. Intentional omission of the recording of a transaction to benefit a third party. 6. The types of intentional misstatements that are relevant to the auditor’s consideration of fraud include I. Misstatements resulting from fraudulent financial reporting II. Misstatements resulting from misappropriation of assets. a. I and II b. I only c. II only d. Neither I nor II 7. The primary responsibility for the prevention and diction of fraud and error rests with a. the auditor b. those charged with governance c. the management of the entity d. both b and c 8. According to PSA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, the following are indications that noncompliance may have occurred, except a. Investigation by government departments or payment of fines or penalties.

b. Management is dominated by one person or a small group and there is no effective oversight board or committee. c. Unauthorized transactions or improperly recorded transactions. d. Purchasing at prices significantly above or below market price.

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9. This refers to acts of omission or commission by the entity being audited, either intentional or unintentional which are contrary to the prevailing laws and regulations. a. Error b. Fraud c. Noncompliance d. Defalcation 10. 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 a. The illegal act is a violation of generally accepted accounting principles. b. The client does not take the remedial action that the auditor considers necessary. c. The illegal act was committed during a prior year that was not audited. d. The auditor has already assessed control risk at the maximum level. 11. Which of the following statements concerning illegal acts by clients is correct? a. An auditor’s responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and irregularities. b. An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements. c. An auditor considers illegal acts from the perspective of the reliability of management’s representation rather than their relation to audit objectives derived from financial statement assertions. d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements. 12. Which of the following is least likely a category of fraud risk factors that relate to misstatements, resulting from fraudulent financial reporting? a. Management’s characteristics and influence over the control environment. b. Industry conditions c. Operating characteristics and financial stability d. Susceptibility of assets to misappropriation 13. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is a. Greater for employee fraud because of the higher crime rate among blue collar workers. b. Greater for management fraud because of management’s ability to override existing internal controls. c. Greater for employee fraud because of the larger number of employees in the organization. d. Greater for management fraud because managers are inherently smarter than employees. 14. Whether the auditor has performed an audit in accordance with PSA is determined by a. The adequacy of the audit procedures performed in the circumstances and the suitability of the auditor’s report based on the result of these procedures. b. The absence of material misstatements c. The absence of material errors d. The Securities and Exchange Commission 15. 1st Statement – The auditor should communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an entity. 2nd statement – The auditor should determine the relevant persons who are charged with governance and with whom audit matters of governance interest are not communicated. a. 1st statement is True ; 2nd statement is False b. 1st statement is False ; 2nd statement is True c. Both statements are True d. Both statements are False 16. Under PSA 260, “Communications of Audit Matters With Those Charged with Governance”, the effectiveness of communications is enhanced by developing a constructive working relationship between the auditor and those charged with governance. This relationship is developed while maintaining an attitude of

a. professional independence and objectivity b. loyalty and objectivity c. professional independence and confidentiality

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d. objectivity and confidentiality

17. The auditor’s communication with those charged with governance may be made orally or in writing. The auditor’s decision whether to communicate orally or in writing is affected by factors except: a. The nature, sensitivity and significance of the audit matters of governance interest to be communicated. b. The arrangements made with respect to periodic meetings or reporting of audit matters of governance interest. c. The size, operating structure, legal structure and communications processes of the entity being audited. d. The amount of past contact and dialogue the auditor has with those charged with governance. Other References 18. Which of the following best describes what is meant by the term “fraud risk factor”? a. Factors whose presence indicates that the risk of fraud is high. b. Factors whose presence often has been observed in circumstances where frauds have occurred. c. Factors whose presence requires modifications of planned audit procedures. d. Reportable conditions identified during audit. 19. When conducting an audit, errors that arouse suspicion of fraud should be given greater attention than other errors. This is an example of applying the criterion of a. reliability of evidence b. materiality c. risk d. dual-purpose testing 20. Which of the following is correct concerning the required documentation in the working papers of the performance of the assessment of the risk of material misstatements due to fraud? a. All risk factors considered should be documented and the response to each documented. b. Those risk factors identified and the auditor’s response to them should be documented. c. The major categories of risk factors must be identified, but the particular responses to risk factors identified need not be documented. d. No specific documentation is required. 21. If there is fraud involving the collusion of several employees that includes the falsification of documents, the chance that such a fraud would be uncovered in a normal audit is a. zero b. unlikely c. 50 – 50 d. very high 22. When the auditor’s regular examination leading to an opinion on the financial statement discloses specific circumstances that make him suspect that fraud may exist and he concludes that the results of such fraud, if any, could not be so material as to affect his opinion, he should a. make a note in his working papers of the possibility of a fraud of immaterial amount so as to pursue the matter next year. b. reach an understanding with the client as to whether the auditor or the client, subject to auditor’s review, is to make the investigation necessary to determine whether fraud has occurred and, if so, the amount thereof. c. refer the matter to the appropriate representatives of the clients with the recommendations that is to be pursued to a conclusion. d. immediately extend his audit procedures to determine if fraud has occurred and, if so, the amount thereof. 23. In the regular audit of ABC Company, Mr. X, CPA, discovered a material fraud being perpetrated by the cashier. What do you expect most of Mr. X to do? a. Report the incident to the Securities and Exchange Commission. b. Communicate the existence and details of the fraud to the audit committee of the board of directors and to at least one managerial level higher than the position occupied by the fraudster. c. Advise the shareholders of the client enterprise regarding the fraud.

d. Make an extensive investigation as well as examination in order to account the extent of the fraud.

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24. What differentiates fraud from an error? a. Materiality b. Intent c. Effect on financial statements d. Frequency of occurrence 25. Which of the following acts are considered fraud? I. Changing of records and documents II. Misinterpretation of facts. III. Misappropriation of assets IV. Recording of transactions without documentation V. Clerical mistakes a. III only b. I and II only c. I, III and IV only d. I, II, III, IV and V 26. While performing tax services for a new client, the CPA discovered a material error in a previously filed tax return prepared by another CPA. In such case, he should: a. Prepare an affidavit with respect to the error. b. Recommend compensating for the prior year’s error in the current year’s tax return where such action will mitigate the client’s cost and inconvenience. c. Advise the client to file a corrected return regardless of whether or not the error resulted in an overstatement of tax. d. Inform the BIR of the error. 27. Which of the following characteristics most likely would heighten an auditor’s concern about risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity’s stock. c. Management places substantial emphasis on meeting earnings projections. d. The rate of change in the entity’s industry is slow. 28. The regular examination of financial statements is not primarily designed to disclose fraud and other irregularities although their discovery may result. Normal audit procedures are more likely to detect a fraud arising from: a. Forgeries on company checks. b. Failure to record cash receipts for services rendered. c. Theft of inventories d. Collusion on the part of several employees. 29. The auditor, in his plan for an examination in accordance with generally accepted auditing standards, being influenced by the possibility of material errors will therefore conduct the examination with an attitude of a. professional skepticism b. subjective mistrust c. objective indifference d. professional responsiveness 30. An error in which an item is posted to the wrong personal account, or the incorrect calculation of an amount constituting an original entry is an a. error of omission b. error of commission c. error of principle d. counter-balancing error 31. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts is a. misappropriation of goods b. misappropriation of cash c. falsification of accounts d. lapping 32. The practice of withholding receipts from customer(s) of one date and giving the customer(s) credit at a later date out of cash received from customer is known as: a. lapping b. kiting c. payroll padding d. window dressing 33. Coverage of shortage in one bank account by means of an unrecorded check drawn on another

bank account is known as: a. lapping b. kiting

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c. reconciling d. adjusting 34. It is any illegal misappropriation of bank accounts. Thus, a teller who pockets a portion of his receipts with intent to defraud the bank for the day is guilty of a. kiting on bank funds b. embezzlement c. abstraction of bank funds d. lapping of bank funds 35. When an independent auditor’s examination of financial statements discloses special circumstances that make the auditor suspect that material errors and irregularities may exist, the auditor’s initial course of action should be to a. Recommend that the client pursue the suspected fraud to a conclusion that is agreeable to the auditor. b. Extend normal audit procedures in an attempt to detect the full extent of the suspected fraud. c. Reach an understanding with the proper client representative as to whether the auditor or client is to make the investigation necessary to determine if a fraud has in fact occurred. d. Decide whether the fraud, if in fact it should exist, might be of such a magnitude as to affect the auditor’s report on the financial statements. 36. Which of the following most accurately summarizes what is meant by the term “material misstatement”? a. Fraud and direct-effect illegal acts b. Fraud involving senior management and material fraud. c. Material error, material fraud and certain illegal acts. d. Material error and material illegal acts. 37. Which of the following illegal acts should an audit be designed to obtain reasonable assurance for detecting? a. Securities purchased by relatives of management based on knowledge of inside information. b. Accrual and billing of an improper amount of revenue under government contracts. c. Violations of anti trust laws. d. Price fixing 38. The most likely explanation why the auditor’s examination cannot reasonably be expected to bring all illegal acts by the client to the auditor’s attention is that a. Illegal acts are perpetrated by management override of internal control. b. Illegal acts by clients often relate to operating aspects rather than accounting aspects. c. The client’s internal control may be so strong that the auditor performs only minimal substantive testing. d. Illegal acts may be perpetrated by the only person in the client’s organization with access to both assets and the accounting records. 39. What assurance does the auditor provide that errors, irregularities and direct effect illegal acts that are material to the financial statements will be detected?

a. b. c. d.

Errors Limited

Direct Effect Illegal Irregularities Acts Negative Limited Limited Limited Reasonable Reasonable Limited Limited Reasonable Reasonable Reasonable

40. Which of the following is not an example of fraud? a. Entity personnel falsify accounting records. b. Entity personnel make mistakes in the application of accounting principles. c. Entity personnel intentionally omit transactions. d. Entity personnel intentionally misapply accounting principles. 41. Which of the following statements is true? a. The auditor’s responsibilities to detect errors and fraud in client’s financial statements are basically the same. b. The auditor has a greater responsibility to detect errors in client’s financial statements than to detect fraud in client’s financial statements.

c.

The auditor has responsibility to detect errors in client’s financial statements but no responsibility to detect fraud....