Set-A Final PRE- Board EXAM. Auditing.docx - Google Docs PDF

Title	Set-A Final PRE- Board EXAM. Auditing.docx - Google Docs
Author	5th year Sumalbag, Sunshine Galicia
Course	Accounting
Institution	Mapua University
Pages	19
File Size	370.7 KB
File Type	PDF
Total Downloads	180
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OPENFINAL PRE-BOARD EXAMINATIONSAUDITING set-AINSTRUCTIONS: Select the best answer for each of the following quesons. ALL quesons are compulsory and MUST be aempted. Mark only one answer for each item on the answer sheet provided. Strictly NO ERASURES ALLOWED. Erasures will render your examinaon ans...

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OPEN FINAL PRE-BOARD EXAMINATIONS AUDITING set-A INSTRUCTIONS: Select the best answer for each of the following quesons. ALL quesons are compulsory and MUST be aempted. Mark only one answer for each item on the answer sheet provided. Strictly NO ERASURES ALLOWED. Erasures will render your examinaon answer sheet INVALID. Use PENCIL NO.2. GOODLUCK! ☺ PART I- AUDITING THEORY 1. Audit procedures are designed to obtain evidence about relevant asserons. Which of the following is a false statement about audit procedures? a. Audit procedures should be development in light of asserons about the ﬁnancial statement components. b. Selecon of procedures should depend upon the understanding of internal control. c. The relaonship between audit procedures and relevant asserons should be one-on-one. d. The auditor should resolve any substanal doubt about any of management’s material ﬁnancial statement asserons. 2. Which of the following condions most likely would pose the greatest risk in accepng a new audit engagement? a. Staﬀ will need to be rescheduled to cover this new client. b. The ﬁrm will have to hire a specialist in one audit area. c. The client’s ﬁnancial reporng system has been in place for 10 years. d. There will be a client-imposed scope limitaon. 3. Which of the following would an auditor most likely use in determining materiality for the statements as a whole when establishing the overall audit strategy? a. The enty’s period-to-date ﬁnancial results and posion. b. The ancipated sample size of the planned substanve tests. c. The results of the internal control quesonnaire. d. The contents of the management representaon leer. 4. To obtain an understanding of a connuing client in planning an audit, an auditor most likely would? a. Perform tests of details of transacons and balances. b. Read specialized industry journals. c. Reevaluate the risks of material misstatement. d. Read internal audit reports.

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5. Which of the following components of internal control includes development and selecon of training policies that commute prospecve roles and responsibilies to employees? c. Control acvies. a. Monitoring. d. Control environment. b. Risk assessment. 6. As part of understanding internal control, an auditor is not required to a. Obtain knowledge about the operang eﬀecveness of internal control. b. Consider factors that aﬀect the risk of material misstatement. c. Ascertain whether internal controls have been implemented. d. Idenfy the types of potenal misstatements that can occur. 7. The development of construcve suggesons to a client for improvements in its internal control is a a. Task addressed by the auditor only during a special engagement. b. Desirable by-product of an audit engagement. c. Requirement as important as assessing control risk. d. Requirement of the auditor’s consideraon of internal control. Use the following informaon for the next three quesons. Following your preliminary visit to South’s head oﬃce you are now aware of the following informaon. The company installed a new ll system in all supermarkets four months before the year end. the new ll system is linked to the accounng system at head oﬃce and automacally posts transacons to the accounng system. Previously journals were made manually based on totals on ll rolls. 8. Having reviewed this informaon you have idenﬁed several audit risks which you feel your team will need to address. The ﬁrst risk relates to the cost of the new ll system which South has capitalized as a non-current asset. You are concerned that South may have included within the capitalized costs some items which are revenue in nature, leading to the overstatement of non-current assets. Which of the following statements is a valid response to this audit risk? a. Inspect invoices capitalized within the cost of the new ll system to determine whether they are directly aributable to the cost of the new ll system. b. Obtain a copy of the training manual relang to the new ll system and discuss with directors the extent of training staﬀ has received on the new system. c. Agree the capitalized costs from the trial balance back to invoices to conﬁrm their value. d. Recalculate the depreciaon charged on the new ll system. 9. A second audit risk relates to how well the new ll system is operang. You are concerned that the system may not be reliable, and that consequently not all sales have been recorded, resulng in an understatement of revenue. You are also concerned that staﬀ may not yet be familiar with the system, leading to an increased risk of errors relang to data entry. Which of the following statements represent valid responses to this audit risk? (1) Perform analycal procedures by comparing daily/weekly sales by store with both the prior year and with expectaons, in order to determine whether any unusual paerns have occurred following the installaon of the new system. (2) Vouch the sales revenue per the system to the ll receipts to conﬁrm the accuracy of the sales. 2 | Page

(3) Obtain a copy of the training manual relang to the new ll system and discuss with directors the extent of training staﬀ has received on the new system. (4) Test the internal controls relang to the ll system and the transfer of data into the accounng system. c. 2 and 4 a. 1, 2 and 4 d. 3 and 4 b. 1, 3 and 4 10. Aer a number of people living close to one of South’s stores became seriously ill, the source of the illness was traced back to meet the customers had purchased from South. Legal proceedings were commenced against South by a number of customers during the ﬁnancial year, demanding P50m in compensaon. You plan to review the legal correspondence relang to the claims made by customers to whom South sold contaminated meat. Which of the following are valid objecves of this audit procedure? (1) To determine whether South’s reputaon will have been damaged within the local area. (2) To conﬁrm whether there are deﬁciencies in South’s internal controls relang to food hygiene. (3) To assess whether a provision for customer compensaon is required in South’s ﬁnancial statements. (4) To determine whether disclosure of the nature and ﬁnancial eﬀect of the legal claim is required in South’s ﬁnancial statements. c. 3 and 4 only. a. 2 and 3 only. d. 1, 2, 3 and 4. b. 2, 3 and 4 only. 11. As part of your audit of the procurement system, you have recommended that the goods inwards department should ensure that the goods received are valid business purchases, by matching all deliveries to an authorized order form before issuing a GRN. Which of the following would be an appropriate test control to conﬁrm that the control is operang eﬀecvely? a. For a sample of goods received notes check that there is an authorized purchase order. b. For a sample of orders, check that there is matching goods received note. c. Check that the numerical sequence of purchase orders is complete. d. Check that the numerical sequence of goods received notes is complete. 12. Cherry’s internal audit department has proved you with details of the internal controls around the non-current assets cycle. The controls include the following: ● On receipt, each asset is assigned a unique serial number and this is recorded on the asset and in the non-current assets register. Which TWO of the following describe the MOST RELIABLE audit procedure which enables the auditor to assess whether this control is operang eﬀecvely? (1) Select a sample of capital addions on site, agree that a, serial number is recorded on the asset and conﬁrm it is included in the non-current assets register. (2) Select a sample of assets recorded on the non-current assets register, conﬁrm that it includes a serial number for each asset and agree the number to the physical asset. (3) Inspect the non-current asset register and verify that there are no duplicated serial numbers. (4) Observe the receipt of assets to conﬁrm that serial numbers are assigned and recorded a. (2) and (3) c. (1) and (3) b. (1) and (4) d. (2) and (4) 3 | Page

13. Regardless of the assess risk of material misstatement, an auditor should perform some a. Tests of controls to determine their eﬀecveness. b. Substanve procedures to restrict detecon risk for signiﬁcant transacon classes. c. Analycal procedures to verify the design of controls. d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk. 14. The use of the raon esmaon sampling technique is most eﬀecve when a. A relavely small number of diﬀerences exist in the populaon. b. Esmang populaons whose records consist of quanes but not carrying amounts. c. Large overstatement diﬀerences and large understatement diﬀerences exist in the populaon. d. The calculated audit amounts are approximately proporonal to the client’s carrying amounts. 15. Which of the following situaons represents a risk factor that relates to misstatements arising from misappropriaon of assets? a. A lack of independent checks. b. A high turnover of senior management. c. A strained relaonship between management and the predecessor auditor. d. An inability to generate cash ﬂow from operaons. 16. Which of the following procedures would least likely result in the discovery of possible illegal acts? a. Reviewing an internal control quesonnaire. b. Reading the minutes of the board of director’s meengs. c. Making inquiries of the client’s management. d. Performing tests of details of transacons. 17. Which of the following is an example of closed-loop veriﬁcaon? a. Aer data for a transacon are entered, the computer sends certain data back to the terminal for comparison with data originally. b. The computer ensures that a numerical amount in a record does not exceed some predetermined amount. c. As the computer corrects errors and data are successfully resubmied to the system, the causes of the errors are printed out. d. The computer ﬂags any transmission for which the control ﬁeld value did not match that of an exisng ﬁle record. 18. Which of the following statements is not true of the test data approach to tesng an accounng system? a. The test data must consist of all possible valid and invalid condion. b. Test data are processed by the client’s computer programs under the auditor’s control. c. The test data need consist of only those valid and valid condions that interest the auditor. d. Only one transacon of each type need be tested.

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19. An internal auditor’s work would most likely aﬀect the nature, ming, and extend of an independent auditor’s auding procedures when the internal auditor’s work relates to asserons about the. a. Existences of conngencies. b. Existence of ﬁxed asset addions. c. Valuaon of intangible assets. d. Valuaon of related party transacons. 20. Which of the following statements is true about the auditor’s use of the work of a specialist? a. The auditor should obtain an understanding of the methods and assumpons used by the specialist. b. The specialist should not have an understanding of the auditor’s corroborave use of the specialist’s ﬁndings. c. The auditor is required to perform substanve procedures to verify the specialist’s assumpons and ﬁndings. d. The client should not have an understanding of the nature of the work to be performed by the specialist. 21. An auditor sis not observe a client’s taking of beginning physical inventory and was unable to become sasﬁed about the inventory by means of other auding procedures. Assuming no other scope limitaons or reporng problems, the auditor could express an unqualiﬁed opinion on the current year’s ﬁnancial statements for a. The income statement only. b. The balance sheet only. c. The income and cash ﬂows statement only. d. All of the ﬁnancial statements. 22. When reporng on comparave ﬁnancial statements, an auditor ordinarily should change the previously expressed opinion on the prior year’s ﬁnancial statements if the a. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report. b. Prior year’s opinion was unqualiﬁed and the opinion on the current year’s ﬁnancial statements is modiﬁed due to a lack of consistency. c. Prior year’s ﬁnancial statements are restated to conform with generally accepted accounng principles. d. Reporng enty has changed as a result of the sale of a subsidiary. 23. Medimade Co is an established pharmaceucal company that has for many years generated 90% of its revenue through the sale of two speciﬁc cold and ﬂu remedies. Medimade has lately seen a real growth in the level of compeon that it faces in its market and demand for its products has signiﬁcantly declined. Madimade needed to invest P2M in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore is used its overdra facility, which carried a higher interest rate. Consequently, some of Medimade’s suppliers have been paid much later than usual and hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. Which TWO of the following statements describe the most direct impact the withdrawal of supplier credit has on Medimade’s going concern assumpon? 5 | Page

I. II. III. IV. a. b.

Medimade now has to pay cash delivery and this adds further cash ﬂow strain imposed by the overdra. Medimade will have to seek alternave suppliers, who may not meet Medimade’s quality control standards. Some suppliers may end their relaonship with Medimade, prevenng the company from producing its product, thus further reducing sales. The bank may impose strict covenants on the overdra, restricng the way Medimade can conduct its future operaons. c. I and III I and II d. II and IV II and III

24. Auditors should obtain and evaluate suﬃcient appropriate evidence to support signiﬁcant accounng esmates. Diﬀerences between the esmates best supported by the evidence and those in the ﬁnancial statements. a. May be individually reasonable but collecvely indicate possible bias. b. Are peruse unreasonable and should be treated as material misstatements. c. May be individually unreasonable, but if they collecvely indicate no bias, aggregaon of the diﬀerences with other likely misstatements is not required. d. Should arouse concern only when esmates are based on hypothecal assumpons or subjecve factors. 25. Which of the following procedures should an auditor ordinarily perform regarding subsequent events? a. Send second requests to the client’s customers who failed to respond to inial accounts receivable conﬁrmaon requests. b. Communicate material weaknesses in internal control to the client’s audit commiee. c. Review the cutoﬀ bank statements for several months aer the year-end. d. Compare the latest available interim ﬁnancial statements with the ﬁnancial statements being audited. 26. Key Co. plans to present comparave ﬁnancial statements for the years ended December 31, Year 1 and Year 2, respecvely. Smith, CPA, audited Key’s ﬁnancial statements for both years ad plans to report on the comparave ﬁnancial statements on April 1, Year 3. Key’s current management team was not present unl January 1, Year 2. What period of me should be covered by Key’s management representaon leer? a. January 1, Year 1, through December 31, Year 2. b. January 1, Year 2, through December 31, Year 2. c. January 1, Year 1, through May 1, Year 3. d. January 1, Year 2, through May 1, Year 3. 27. An auditor issued an audit report that was dual-dated for a subsequent event occurring aer the date of the auditor’s report but before issuance of the related ﬁnancial statements. The auditor’s responsibility for events occurring subsequent to the original report date was a. Limited to include only events occurring before the date of the last subsequent event referenced. b. Extended to subsequent events occurring through the date of issuance of the related ﬁnancial statements. c. Extended to include all events occurring since the original report date. 6 | Page

d. Limited to the speciﬁc event referenced. 28. An auditor ﬁnds several errors in the ﬁnancial statements that the client prefers to not correct. The auditor determines that the errors are not material in the aggregate. Which of the following acons by the auditor is most appropriate? a. Document the conclusion that the errors do not the ﬁnancial statements to be misstated, but do not summarize uncorrected errors in the audit documentaon. b. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the ﬁnancial statements to be misstated. c. Summarize the uncorrected errors in the working papers, but do not document whether the errors cause the ﬁnancial statements to be misstated. d. Do not summarize the uncorrected errors in the audit documentaon, and do not document a conclusion about whether the uncorrected errors cause the ﬁnancial statements to be misstated. 29. Which of the following statements is a basic element of the auditor’s standard report? a. An audit includes assessing signiﬁcant esmates made by management. b. The disclosures provide absolute assurance that the ﬁnancial statements are free of material misstatement. c. The auditor evaluated the overall internal control. d. The ﬁnancial statements are consistent with those of prior period. 30. Which of the following procedures is usually performed by the accountant in a review engagement of ﬁnancial statements? a. Sending a leer of enquiry to the enty’s lawyer. b. Conﬁrming a signiﬁcant percentage of receivables by direct communicaon with debtors. c. Comparing the ﬁnancial statements with statements for comparable prior periods. d. Communicang control deﬁciencies discovered during the consideraon of internal control. 31. Which of the following is an element of a CPA ﬁrm’s quality control system that should be considered in establishing its quality control policies and procedures? a. Complying with laws and regulaons. b. Using stascal sampling techniques. c. Considering audit risk and materiality. d. Managing human resources. 32. A CPA is permied to disclose conﬁdenal client informaon without the consent of the client to I. Another CPA ﬁrm if the informaon concerns suspected tax return irregularies. II. Board of Accountancy (BOA) in line with its Quality Assurance Review (QAR) c. Both I and II a. I only d. Neither I and II b. II only 33. The Code of Ethics for Professional Accountants considers threats to compliance with fundamental principles and safeguards that eliminate or reduce them. Threats may involve a. Self-interest, such as advocacy for a client. b. Familiarity, such as an immediate relave’s service as a director of the client. c. Self-review, such as leadership that promotes compliance. d. Inmidaon, such as oversight by a governance body. 7 | Page

34. According to the code of Ethics for Professional Accountants on professional appointment, a. An accountant generally needs the client’s permission to communicate with the current accountant. b. The exisng accountant must discuss relevant maers with the proposed accountant. c. The fundamental principle of integrity requires the accountant to provide only the services for which (s) he has the needed experse. d. The client must not provide a second opinion to an exisng client. 35. Under the Code of Ethics for Professional Accountants, independence is least likely to be impaired when a. The ﬁrm’s overdue fees from an audit client are a small part of the ﬁrm’s total fees. b. The ﬁrm charges a client a conngent fee for an audit. c. The ﬁrm charges an audit client a conngent fee for a non- assurance service. d. The ﬁrm provides ﬁnancial services that depend for their eﬀecveness on a material, doubul accounng treatment. PART II-AUDITING PROBLEMS PROBLEM NO. 1 Presented below are relevant extracts from Tank Corporaon’s statement of ﬁnancial posion as of December 31, 2019. P12,000,000 Cash and cash equivalents 38,000,000 Trade and other receivables 16,000,000 Inventories 3,000,000 Other current assets 34,000,000 Trade and other payables 15,000,000 Short term borrowings 2,000,000 Other current liabilies During the course of yo...