WorksheetsMOCK PREBOARD - 1ST PART
Total questions: 150
Worksheet time: 3hrs 30mins
Select the best answer. Auditor A is testing a population of 1,000 accounts receivable balances using audit sampling. To minimize sampling risk, Auditor A decides to examine 100 customer accounts selected randomly. Auditor B, auditing a similar client, decides to examine all 50 customer accounts with balances over P1,000,000 and ignore smaller accounts. Based on PSA 530 on audit sampling, which statement is correct regarding these approaches?
Both approaches are valid audit sampling because both examine less than 100% of the population.
Only Auditor B’s approach is audit sampling, because examining all large accounts and no small accounts still leaves some items untested.
Only Auditor A’s approach qualifies as audit sampling, because each unit in the population had a chance of selection; Auditor B’s targeted testing of only large items is not audit sampling.
Neither approach is audit sampling under PSA 530, since audit sampling requires statistical selection methods in all cases.
Select the best answer. An auditor needs to test a control procedure that is performed thousands of times a month. She decides to use audit sampling to test the effectiveness of this control. Which technique best demonstrates statistical sampling for this test?
Selecting a judgmental sample of control occurrences the auditor believes are most error‑prone.
Using block sampling (examining all control occurrences for the first week of the year).
Haphazardly picking transactions throughout the year without a structured method, hoping for a representative sample.
Using a random number generator to pick control occurrences from the entire year’s population, ensuring each occurrence has an equal chance of selection.
Select the best answer. An auditor is concerned about sampling risk while testing inventory count accuracy. What does sampling risk best refer to in this context?
The risk that audit procedures might not detect a misstatement even if applied to the entire population.
The risk that a sample selected by the auditor may not be representative of the population, leading to an incorrect conclusion about the inventory.
The inherent risk that inventory may be misstated due to its nature (for example, valuation complexity), regardless of sampling.
The risk that the auditor chooses the wrong audit assertions to test for the inventory account.
Select the best answer. If an auditor wants to reduce the sampling risk for a substantive test of details, what is one effective way to do so?
Use stratified sampling and focus only on larger value items in the population.
Switch from statistical sampling to non‑statistical sampling to allow professional judgment in sample selection.
Increase the sample size, so that the sample more closely approaches the characteristics of the population.
Use discovery sampling instead of random sampling to ensure critical items are included.
Select the best answer. Auditor X is evaluating a sample of accounts payable confirmations and finds no errors, concluding the account balance is fairly stated. Auditor Y is testing the same population but finds two significant misstatements in her sample. If both auditors initially set a tolerable misstatement of P500,000 for the accounts payable balance, which statement is correct about their situations?
Auditor X has proven there are no misstatements in the population, while Auditor Y must automatically issue a qualified opinion.
Auditor X faces nonsampling risk and Auditor Y faces sampling risk.
Auditor Y may need to project the sample misstatements to the population and possibly expand testing or require adjustments, whereas Auditor X can only conclude within the limits of sampling risk that misstatements are unlikely to exceed tolerable error.
Both auditors, having followed sampling procedures, can assume the population is free of material misstatement since sampling risk addresses any differences.
Select the best answer. Which of the following audit tests is least likely to involve the use of audit sampling?
Selecting a sample of purchase transactions to test for proper authorization.
Performing a year‑end inventory test count by counting a sample of items.
Sending confirmation letters to a sample of customers for accounts receivable balances.
Analyzing trends and ratios in the financial statements as part of overall review.
Select the best answer. An auditor samples 50 sales invoices to test for proper credit approval signatures, and finds 5 invoices that lacked evidence of approval. The tolerable deviation rate for this control was set at 4%. Upon this finding, the auditor’s most appropriate action is to:
Conclude that the deviation rate in the population is 10% (5/50) and therefore the control cannot be relied upon, and immediately issue a control deficiency report.
Ignore the deviations since sampling risk can account for the difference, and continue to rely on the control as effective.
Expand the sample or perform alternative procedures to determine if the high deviation rate is isolated or pervasive, and likely increase control risk if the control is indeed not operating effectively.
Lower the tolerable deviation rate and recalculate the achieved upper deviation rate to see if the control passes.
Select the best answer. In planning a statistical sample for a test of details on accounts receivable, an auditor considers the desired level of assurance and the tolerable misstatement. These considerations directly affect the:
Qualitative characteristics of the sample, but not the size.
Risk of non‑sampling error, but not sampling error.
Selection method for sample items (for example, random versus systematic), but not the evaluation of results.
Sample size required to achieve a level of sampling risk that is acceptably low.
Select the best answer. For which of the following audit procedures would an auditor most likely use attributes sampling?
Estimating the year‑end inventory value by sampling inventory items and extrapolating an average cost per item.
Inspecting a sample of sales invoices to determine whether each has a valid shipping document and credit approval, in order to test a control.
Confirming a sample of customers’ account balances to gather evidence about accounts receivable valuation.
Selecting a sample of cash disbursements and reconciling them to bank statements to test for kiting.
Select the best answer. In monetary‑unit sampling (MUS), every P1 in an account balance or class of transactions is considered a sampling unit. This means:
Smaller‑value items have a higher chance of selection than larger‑value items in the sample.
Each individual transaction (regardless of peso amount) has an equal probability of being selected.
The chance of selecting a particular transaction is proportional to its peso amount; larger items are more likely to be selected.
The population must be stratified by peso ranges before selection can occur.
Select the best answer. An auditor is sampling a population of 5,000 accounts receivable invoices for overstatement errors. She stratifies the population into two strata: invoices above P100,000 and invoices below P100,000. How does this stratification potentially benefit the sampling process?
It typically reduces the overall sample size needed by treating high‑value items separately, focusing more audit effort where more dollars are at risk.
It ensures that smaller invoices are never selected since they are considered immaterial.
It eliminates the need for random selection because each stratum can be fully tested instead.
It allows the auditor to use attributes sampling within each stratum even for substantive tests.
Select the best answer. Discovery sampling is a type of attribute sampling most likely to be used when:
The auditor wants to estimate the rate of deviation in a population to assess control risk.
The auditor’s objective is to discover at least one instance of a critical deviation (for example, a fraud or a highly significant control failure) if it exists in the population.
The population is very prone to errors and the expected deviation rate is high.
The auditor cannot define the population precisely.
Select the best answer. A CPA decided to use block sampling to test cash disbursements. She selected all disbursements made during the month of September as the sample. What is a major downside of this sampling technique?
The results may not be representative of the entire year’s disbursements, since transactions in one month could have different characteristics (for example, seasonal fluctuations) than other months.
It is more time‑consuming and costly than random sampling for the same number of items.
Block sampling cannot be used for tests of controls, only substantive tests.
If the block selected has no deviations, the auditor can conclude with certainty that the population has no deviations.
Select the best answer. Non‑sampling risk is the risk that the auditor reaches an erroneous conclusion not due to the sample itself being non‑representative, but because of other reasons. Which of the following is an example of non‑sampling risk?
A random sample of invoices by sheer chance contained only invoices with errors, misleading the auditor to think the population error rate is high when it isn’t.
The auditor misunderstands an accounting principle and therefore misinterprets the evidence, leading to an incorrect conclusion.
A too‑small sample size is used, resulting in an unacceptably high risk that a material misstatement might go undetected.
Items in the population the auditor didn’t test (because of sampling) happen to include a misstatement that the auditor missed.
Select the best answer. An auditor is planning a test of controls over credit approvals for sales. She is willing to accept a 5% risk of over‑reliance on the control. She sets the tolerable deviation rate for the control at 5%. She expects a deviation rate of about 1% based on prior years. After testing a sample, she finds an actual sample deviation rate of 4%. Which of the following best describes how these concepts play together?
The tolerable deviation rate of 5% means the auditor could still consider the control effective if up to 5% of transactions deviate from it. Since the sample result (4%) is below 5%, and considering the allowance for sampling risk, the control might be deemed effective.
The expected deviation rate of 1% is irrelevant; only the tolerable rate matters for conclusions.
The 5% risk of over‑reliance means the auditor will automatically expand testing if the sample deviation rate exceeds 5%.
Finding a 4% sample deviation rate means the auditor has a 1% risk of over‑reliance remaining (5% minus 4%).
Select the best answer. During the final overall review of a manufacturing client’s financial statements, the auditor notices that the gross profit margin increased from 25% in the prior year to 40% in the current year, while the company’s sales volume remained consistent with industry trends. What should the auditor do next in response to this unusual fluctuation?
Conclude that the client likely improved its cost management significantly and proceed to draft the audit report, as analytical procedures are not precise.
Lower the materiality threshold for the audit, as a higher profit indicates higher risk of misstatement.
Discuss the fluctuation with management and perform additional procedures to corroborate management’s explanations (for example, looking into pricing changes, cost accounting, or potential errors in revenue or COGS), to ensure the change is justified by underlying events.
Issue a qualified opinion due to the inconsistency, since a large change in gross profit percentage is a red flag for potential misstatement.
Select the best answer. At the end of an audit engagement, the client’s CEO and CFO refuse to sign the management representation letter. They argue that all necessary information was provided during the audit and that a representation letter is a mere formality. How should the auditor respond to this situation?
Proceed with the issuance of the audit report if other evidence is sufficient, but note in the report that management declined to provide certain representations.
Seek a legal opinion on how to proceed, but issue the report on schedule if the financial statements appear fairly stated.
Issue an adverse opinion, since the refusal to sign the representation letter constitutes a departure from the financial reporting framework.
Treat the refusal as a scope limitation. If the representations cannot be obtained, the auditor should likely disclaim an opinion (or withdraw), because a representation letter is required audit evidence.
Select the best answer. An auditor discovers during the audit that the company’s controller made a large sale of inventory to a separate entity owned by the controller’s spouse, just before year‑end. This related party transaction was not disclosed in the financial statements, and the amount is material to the financial results. Management is unwilling to disclose this related party sale in the notes. What is the most appropriate course of action for the auditor?
Consider the omission of related party disclosure as a material misstatement and issue a modified audit opinion (qualified or adverse), explaining that the financial statements fail to disclose a material related party transaction.
Issue an unmodified opinion because the financial statements themselves (the numbers) are still materially correct, and the lack of disclosure doesn’t change the figures.
Add an Emphasis of Matter paragraph to the audit report highlighting the undisclosed related party transaction, but still issue a clean opinion since the transaction did occur.
Resign from the engagement immediately, without further reporting, because management’s refusal to disclose a significant matter impairs auditor independence.
Select the best answer. Which of the following events that occur after year‑end is an adjusting subsequent event that would require an adjustment to the financial statements, rather than mere disclosure?
A fire that broke out at the company’s main warehouse on January 10 (after year‑end), destroying a large portion of inventory; the loss was uninsured.
Settlement of a lawsuit on February 5, which was ongoing at year‑end. The settlement amount was materially different from the liability recorded in the year‑end financial statements for that lawsuit.
The issuance of a significant number of new shares by the company in March to raise additional capital.
A major customer, whose account was current at year‑end, declared bankruptcy suddenly in January due to an unforeseen event in their business.
Select the best answer. The financial statements of DEF Corp. for the year ended December 31, 2024 were approved by management on March 1, 2025. The auditor’s report is dated March 5, 2025. On March 3, 2025, the auditor discovered a significant event that occurred on January 20, 2025, affecting the 2024 financial statements. What is the appropriate action for the auditor regarding this event?
Since the event occurred after year‑end, it has no effect on the 2024 financial statements or the auditor’s report; the auditor should exclude any mention of it in the report.
Re‑date the auditor’s report to January 20, 2025, the date of the subsequent event, to ensure responsibility for that event is covered.
Ensure that management either adjusts the 2024 financial statements (if it’s an adjusting event) or adds adequate disclosure (if it’s non‑adjusting but significant) for the event before the auditor’s report is issued, since the auditor became aware of it before the report date.
Issue a separate “subsequent events report” to those charged with governance, describing the event, rather than modifying the financial statements or the audit report.
Select the best answer. Two months after issuing the audit report on XYZ Company’s December 31, 2024 financial statements, the auditor becomes aware of new information revealing that a material overstatement of revenue existed at the report date. This information was not known during the audit and indicates the financial statements may be materially misstated. According to PSA 560 (Subsequent Events), what should the auditor do first in this situation?
Immediately notify regulatory authorities and the shareholders that the financial statements and audit report can no longer be relied upon.
Take no action because the auditor’s responsibility for the financial statements ends on the report date.
Retrieve and destroy all distributed copies of the financial statements and the audit report to prevent reliance.
Discuss the matter with management and those charged with governance to evaluate whether the financial statements need revision. If they do, recommend that the company make the necessary adjustments and disclosures and inform users that the financial statements will be revised.
Select the best answer. An auditor’s report was originally dated March 30, 2025. On April 10, 2025, after the original report date but before the company had issued the financial statements to the public, the auditor discovered a material fact that existed at the report date and that requires revision of the financial statements. Management has made the necessary changes to the financial statements regarding this fact. How should the auditor date the new audit report on the revised financial statements?
Use dual dating by adding the phrase “except for Note X, as discussed in the subsequent events note, which is dated April 10, 2025,” while retaining the original report date of March 30, 2025.
Retain the original report date of March 30, 2025, since the fact existed at that date and the revision simply clarifies it.
Date the new report no earlier than the date of approval of the revised financial statements (for example, April 10, 2025), and perform the necessary audit procedures related to the revisions.
Change the report date to December 31, 2024, to align with the balance sheet date, since the material fact existed at that time.
After issuing the audit report, an auditor realizes that a required audit procedure for accounts payable was omitted due to an oversight. This procedure was important to obtain sufficient appropriate evidence for a material account balance. No other audit procedures compensated for this oversight. What is the best course of action for the auditor upon discovering this omission?
Note the oversight in the audit working papers and plan to perform the procedure in the next year’s audit, as it is too late to affect the current audit report.
Immediately withdraw the audit report and inform users not to rely on it, pending the outcome of the omitted procedure.
Request the client’s management to add a footnote to the financial statements acknowledging that certain audit procedures were omitted.
Perform the omitted procedure as soon as possible. If the procedure reveals facts that may have a material effect on the report (for example, a misstatement), discuss the findings with management and those charged with governance. Depending on results, take appropriate action — which could include revising the auditor’s report or financial statements if a material misstatement is confirmed.
In a post-audit review, the audit partner notes that the engagement team failed to send confirmation requests to any of the client’s banks to verify year-end bank balances — a standard audit procedure. However, the team did obtain bank statements and perform other cash audit procedures that sufficiently verified the cash balances. What is the proper way for the auditor to handle this omission after the audit report has been issued?
Treat it as a serious scope limitation and immediately perform the confirmations, even if it means reissuing the audit report.
Document in the audit file the nature of the omitted procedure and the alternative evidence obtained (e.g., bank statements, reconciliations), conclude that this evidence was sufficient to support the audit opinion, and therefore determine that no further corrective action is necessary for the issued report.
Inform management and those charged with governance that the audit was incomplete, and that additional procedures will be performed in the subsequent audit.
Recall the audit report and perform the omitted procedure regardless of the results of other tests, to maintain compliance with auditing standards.
An auditor believes there is substantial doubt about a client’s ability to continue as a going concern for the next year. Management’s going concern disclosures in the financial statements adequately describe the situation, including the principal conditions causing the doubt and management’s plans. What is the appropriate way for the auditor to reflect this in the audit report?
Issue an unmodified (unqualified) opinion, but include a separate section (or paragraph) – often titled “Material Uncertainty Related to Going Concern” – to emphasize the going concern issue and refer to the note in the financial statements that discusses it.
Issue a qualified opinion due to the existence of a material uncertainty, noting that the uncertainty “affects the financial statements.”
Issue an adverse opinion because a going concern problem means the financial statements are not fairly presented.
Disclaim an opinion on the financial statements because of the substantial doubt about the entity’s ability to continue as a going concern.
During the audit of LMN Company, the auditor identified several misstatements that management chose not to correct. Each individual misstatement was small, and even in aggregate they did not cause the financial statements to be materially misstated. The auditor documented these uncorrected misstatements and concluded that leaving them unadjusted does not affect the auditor’s opinion. How should the auditor address these uncorrected misstatements?
Issue a qualified opinion because misstatements were detected but remain uncorrected.
Since the misstatements are immaterial individually and in aggregate, no action or documentation is needed.
Issue an unmodified opinion, but communicate to those charged with governance (e.g., the audit committee or board) the details of the uncorrected misstatements and the fact that the auditor believes they are immaterial to the financial statements as a whole.
Insist that management correct at least some of the misstatements to reduce the aggregate amount, even if they are immaterial, as a condition for issuing an unmodified opinion.
Which statement correctly distinguishes a “subsequent event” from a “subsequently discovered fact” in the context of an audit of financial statements?
A “subsequent event” refers to any event occurring after the audit report date, whereas a “subsequently discovered fact” is limited to information about the client’s internal controls found after the audit.
A “subsequent event” is an event occurring between the balance sheet date (financial statement date) and the date of the auditor’s report, which may require adjustment or disclosure in the financial statements; a “subsequently discovered fact” is information that becomes known to the auditor after the date of the auditor’s report (and often after the financial statements have been issued) that may have affected the auditor’s report if it had been known at the time of issuance.
Subsequent events apply only to audits of public companies under SEC rules, whereas subsequently discovered facts apply to private companies under ISA/PSA rules.
There is no meaningful difference — both terms refer to the same requirement of auditors to keep checking for issues up until the report release.
Upon completing an audit, which of the following matters is the auditor required or expected to communicate to those charged with governance (e.g., the audit committee)?
Detailed lists of all audit procedures performed and copies of all working papers for their oversight review.
Every minor error or misclassification found during the audit, regardless of materiality.
Significant findings from the audit, such as material audit adjustments (whether recorded or not), uncorrected misstatements, significant deficiencies or material weaknesses in internal control, any significant disagreements with management, and qualitative aspects of accounting practices.
The exact audit fees, hours incurred, and a comparison of actual hours vs. budgeted hours for the audit, to demonstrate efficiency.
During the audit of XYZ Corporation, the auditor discovered that the company improperly recognized ₱10 million of revenue in 2024 for goods that were actually delivered in January 2025. This ₱10 million is material to the 2024 financial statements. Management understands the error but refuses to correct it in the 2024 statements. If this amount is not pervasive to the overall financial statements, what kind of audit opinion should the auditor issue for 2024?
A qualified opinion (“except for” opinion) due to a material misstatement, explaining that except for the effects of the improper revenue recognition, the financial statements are fairly presented.
An adverse opinion because any known material misstatement in revenue automatically makes the financial statements unreliable as a whole.
A disclaimer of opinion because management’s refusal to correct the error is a scope limitation.
An unmodified opinion with an Emphasis of Matter paragraph describing the revenue recognition issue, since the rest of the financial statements are fairly stated.
A company’s financial statements omit a required consolidation of a 85%-owned subsidiary. The subsidiary’s assets and revenues are significant to the consolidated entity (roughly 40% of consolidated assets and 35% of revenues). Management insists on keeping the subsidiary off the books due to legal disputes, and adequate disclosure is not made. This omission is deemed both material and pervasive to the financial statements. What is the appropriate auditor’s opinion?
Qualified opinion due to the material misstatement, since the issue is isolated to one part of the financial statements.
Adverse opinion, stating that the financial statements do not present fairly in conformity with the framework, because the departure from GAAP (failure to consolidate) is material and pervasive.
Disclaimer of opinion, because the scope of the audit was restricted by management’s actions regarding the subsidiary.
Unmodified opinion with an Emphasis of Matter paragraph explaining the lack of consolidation.
An auditor was unable to obtain audited financial statements or sufficient appropriate audit evidence for a company’s foreign subsidiary, which accounts for 10% of the company’s consolidated assets and 12% of revenues. The auditor could not perform alternative procedures with respect to this subsidiary. For the rest of the consolidation, the auditor obtained sufficient evidence and found no issues. What is the most appropriate audit report in this scenario?
An unmodified opinion, since the scope limitation is confined to a small portion of the financial statements and does not necessarily affect the auditor’s overall opinion.
An adverse opinion, because part of the financial statements could be materially misstated and the auditor has no evidence.
A qualified opinion due to a scope limitation, with language such as: “Except for the possible effects of the matter described in the Basis for Qualified Opinion (inability to obtain evidence for the foreign subsidiary), the financial statements are presented fairly…”
A disclaimer of opinion, because any scope limitation regarding a subsidiary requires the auditor to refrain from opining on the statements as a whole.
Due to a breakdown in the client’s accounting information system, many accounting records for the year were lost and could not be reconstructed. As a result, the auditor could not obtain evidence for numerous material transactions across multiple financial statement areas. The auditor concludes that the possible effects of the missing information could be both material and pervasive to the financial statements. What type of audit opinion is appropriate in this case?
Qualified opinion due to the scope limitation, since some evidence is missing.
Adverse opinion, because pervasive uncertainties make the financial statements unreliable.
Unmodified opinion with an Other Matter paragraph explaining the situation, since the issue is due to circumstances beyond management’s control.
Disclaimer of opinion, because the scope limitation is so significant that the auditor cannot form an overall opinion on the financial statements.
Partway through an audit, the auditors at DEF & Co. realize that they inadvertently have a direct financial interest in the client (the audit partner owns stock in the company). This situation violates the independence requirements for auditors, and it cannot be resolved before the audit report must be issued. What is the proper reporting action for DEF & Co.?
Continue the audit and issue an unmodified opinion, but disclose the lack of independence in the footnotes to the financial statements.
Perform additional audit procedures to compensate for the independence impairment, then issue a qualified opinion citing the independence issue.
Issue a disclaimer of opinion explicitly stating that the firm does not express an opinion on the financial statements because it is not independent with respect to the client.
Resign from the audit and do not issue any audit report at all; independence breaches always require withdrawal rather than reporting.
In which of the following situations would an auditor use an Other Matter paragraph, rather than an Emphasis of Matter paragraph, in the audit report?
To note that the financial statements of the prior year (presented for comparative purposes) were audited by a different auditor, and to reference the predecessor auditor’s report.
To highlight a significant uncertainty (e.g., a lawsuit outcome) that is appropriately disclosed in the financial statements.
To draw attention to a major subsequent event that occurred after year-end, which is disclosed in the notes.
To emphasize a change in accounting principle that has a material effect and is properly disclosed in the financial statements.
According to the standard unmodified auditor’s report under international and Philippine standards, where in the report does the auditor make an explicit statement about being independent and meeting ethical responsibilities?
In the Opinion paragraph.
In the Basis for Opinion section.
In the Auditor’s Responsibilities section.
In an Emphasis of Matter paragraph.
The auditor’s report includes a section titled “Responsibilities of Management for the Financial Statements.” Which of the following is acknowledged as a responsibility of management in that section of an audit report?
The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, including the design, implementation, and maintenance of internal control relevant to financial reporting.
The auditor’s responsibility for expressing an opinion on the financial statements based on the audit, and the conduct of the audit in accordance with standards.
The responsibility to provide reasonable assurance that the financial statements are free of material misstatement.
The responsibility for detecting all fraud and errors within the financial statements prior to the audit.
A company’s board of directors approved the financial statements on March 15, 2025. The auditor completed all necessary audit procedures on March 18, 2025 and obtained a signed management representation letter dated the same day. The auditor’s report was issued on March 20, 2025. According to auditing standards, what is the appropriate date to use as the auditor’s report date?
December 31, 2024 (the financial statement year-end date).
March 15, 2025 (the date the financial statements were approved by management/board).
March 20, 2025 (the date the audit report is released to the public).
March 18, 2025 (no earlier than the date when the auditor obtained sufficient appropriate audit evidence and the management representation letter, signifying audit completion).
Which of the following phrases is included in a qualified opinion but not in an adverse opinion in the auditor’s report?
“Except for the effects of the matter(s) described, the financial statements present fairly…”
“Do not present fairly” in reference to the financial statements (used in adverse opinions).
A statement that “the financial statements have been prepared in all material respects in accordance with [the framework]” (this phrase is in both unmodified and qualified opinions, but not adverse opinions).
A reference to the fact that the auditor is independent and conducted the audit in accordance with standards (appears in all reports regardless of opinion).
A company made a voluntary change in an accounting policy during the current year (for example, from straight-line to accelerated depreciation). The change has a material effect on the comparability of the financial statements, and it is properly accounted for and adequately disclosed in the notes (including the justification for the change). How should the auditor reflect this in the audit report?
Issue a qualified opinion due to lack of consistency in applying accounting principles.
Issue an adverse opinion because comparability is affected.
No modification to the report is needed because the change is properly disclosed and accounted for.
Issue an unmodified opinion, but add an Emphasis of Matter paragraph to highlight the change in accounting policy and refer readers to the disclosure note describing it.
When auditing group financial statements, the group auditor (principal auditor) decides to make reference to another audit firm that audited a significant component (subsidiary) of the group, rather than assuming full responsibility for that component. How is this typically reflected in the auditor’s report on the consolidated financial statements?
By adding an Emphasis of Matter paragraph that explicitly names the component auditor and describes the portion of the financial statements they audited.
By indicating in the auditor’s report (usually in the Opinion and/or Basis for Opinion section) that the identified portion of the financial statements was audited by the other auditor, and that the principal auditor’s opinion, insofar as it relates to the amounts and disclosures for that component, is based solely on the report of the other auditor.
By issuing a qualified opinion on the basis of a scope limitation, because part of the audit work was performed by someone else not under the principal auditor’s direct supervision.
By including the other auditor’s full report within the principal auditor’s report to provide complete transparency to users.
CPAs in public practice who perform assurance engagements are governed by the following, except:
Philippine Standards on Related Services
Philippine Framework for Assurance Engagements
Philippine Standards on Assurance Engagements
Ethical Requirements for Professional Accountants
Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
The primary objective of a review engagement is to test the completeness of the financial statements, but a compilation tests for reasonableness.
The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance.
In a review engagement, accountants provide limited assurance, whereas a compilation expresses no assurance.
In a review engagement, accountants provide reasonable (positive) assurance that the financial statements are fairly presented, but a compilation provides only limited assurance.
Which of the following statements is correct regarding assurance engagements? I. In an assurance engagement, a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users (other than the responsible party) about the outcome of the evaluation or measurement of a subject matter against criteria. II. In addition to the Framework and relevant Assurance Standards, practitioners are governed by the Code of Ethics for CPAs in the Philippines and the Philippine Standards on Quality Management when performing assurance engagements.
I only
II only
Both I and II
Neither I nor II
Which of the following statements is true concerning evidence in an assurance engagement?
Sufficiency is the measure of the quantity of evidence.
Appropriateness is the measure of the quality of evidence (its reliability and persuasiveness).
The reliability of evidence is influenced not by its nature but by its source.
Obtaining more evidence may compensate for its poor quality.
A firm should design, implement and operate a system of quality management that provides the firm with reasonable assurance that:
The firm and its personnel fulfil their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements accordingly.
Engagement reports issued by the firm or its partners are appropriate in the circumstances.
Both A and B.
Neither A nor B.
PSQM 1 (Quality Management) applies to all firms that perform:
Audits of financial statements only.
Reviews of financial statements only.
Other assurance or related services engagements only.
Audits or reviews of financial statements, or other assurance or related services engagements.
The Code of Ethics for Professional Accountants in the Philippines establishes fundamental principles of professional ethics which include the following, except:
Integrity
Objectivity
Relevance
Professional behavior
A CPA firm’s quality management policies for deciding whether to accept a new client or continue with an existing client are established to:
Enable the auditor to attest to the reliability of the client.
Satisfy the firm’s duty to the public concerning acceptance of new clients.
Provide reasonable assurance that the integrity of the client is considered.
Anticipate, before any field work, whether an unmodified opinion can be expressed.
The auditor may accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through I. Establishing whether the preconditions for an audit are present. II. Confirming that there is a common understanding of the terms of the audit engagement with management and, where appropriate, those charged with governance.
I only
II only
Both I and II
Neither I nor II
Which of the following is not correct regarding communications between a successor and predecessor auditor?
The burden of initiating the communication rests with the predecessor auditor.
The burden of initiating the communication rests with the successor auditor.
The predecessor auditor must receive the former client’s permission prior to divulging information to the successor auditor.
The predecessor auditor may choose to provide a limited response to a successor auditor.
Which of the following auditor concerns could be so serious that the auditor concludes a financial statement audit cannot be performed?
Management fails to modify prescribed internal controls for changes in information technology.
Internal control activities requiring segregation of duties are rarely monitored by management.
Management is dominated by one person who is also the majority stockholder.
There is a substantial risk of intentional misapplication of accounting principles.
Which of the following statements would least likely appear in an auditor’s engagement letter?
Fees for our services are based on standard hourly rates, plus travel and other out-of-pocket expenses.
Management is responsible for making all financial records and related information available to us.
Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected.
After performing preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.
Which of the following matters should be considered by the auditor in developing the overall audit strategy?
Important characteristics of the entity, its business, its financial performance, and its reporting requirements (including changes since the prior audit).
Conditions requiring special attention, such as the existence of related parties.
The setting of materiality levels for audit purposes.
All of the above.
An auditor should design the audit plan so that:
All material transactions will be selected for substantive testing.
Substantive tests prior to the balance sheet date will be minimized.
The audit procedures selected will achieve specific audit objectives.
Each account balance is tested under either tests of controls or tests of transactions.
The objective of performing analytical procedures as risk assessment procedures in an audit is to identify:
Unusual transactions and events.
Noncompliance with laws and regulations that went undetected due to control weaknesses.
Related-party transactions.
Transactions that were properly authorized.
Control risk should be assessed in terms of:
Specific control procedures.
Types of potential fraud.
Financial statement assertions.
Control environment factors.
After considering a client’s internal controls, an auditor concludes they are well designed and functioning as intended. Under these circumstances, the auditor would most likely:
Perform tests of controls to the extent outlined in the audit program.
Determine which control procedures should prevent or detect errors and fraud.
Not increase the extent of predetermined substantive tests.
Determine whether transactions are recorded to permit preparation of financial statements in accordance with PFRS.
The audit risk against which the auditor and those who rely on the auditor’s opinion require reasonable protection is a combination of two risks at the assertion level. The first risk is that balances, classes, or disclosures contain material misstatements. The second is that:
The auditor will reject a correct account balance as incorrect.
Material misstatements that occur will not be detected by the audit.
The auditor will apply an inappropriate audit procedure.
The auditor will apply an inappropriate measure of audit materiality.
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality for the financial statements as a whole?
The anticipated sample size of the planned substantive tests.
The entity’s year-to-date financial results and position.
The results of the internal control questionnaire.
The contents of the management representation letter.
The auditor is required to determine three different levels of materiality: (1) materiality for the financial statements as a whole, (2) performance materiality, and (3)
Overall materiality
Planning materiality
General materiality
Specific materiality
PSA 240 (Revised) presumes that there is a risk of material misstatement due to fraud related to:
Improper income recognition.
Overstated asset valuations.
Management override of controls.
Fictitious related-party transactions.
Which of the following statements about an auditor’s responses to assessed risks of material misstatement is true?
When the risks of material misstatement are high, the auditor should reduce substantive testing.
In responding to high risks, an auditor may shift substantive procedures closer to period end.
Only the extent of further audit procedures is affected by the assessed risks (not their nature or timing).
The auditor should perform tests of controls only when control risk is assessed as low or moderate.
All the information used by the auditor in arriving at the conclusions on which the audit opinion is based (including information contained in the accounting records and other information) is known as:
Audit evidence
Audit risk
Audit opinion
Audit program
Which of the following types of audit evidence provides the least assurance of reliability?
Accounts receivable confirmations received directly from customers.
Prenumbered receiving reports prepared by the client’s employees.
Prior months’ bank statements obtained from the client.
Municipal property tax bills obtained from a government website (addressed to the client).
Which of the following procedures would provide the most reliable audit evidence?
Inquiries of the client’s internal audit staff, conducted in private.
Inspection of prenumbered client purchase orders filed in the accounts payable department.
Analytical procedures performed by the auditor on the client’s trial balance.
Inspection of bank statements obtained directly from the client’s financial institution.
Which of the following conditions are generally present when misstatements due to fraud occur? I. Incentive or pressure II. Opportunity III. Rationalization
I and II only
II and III only
I and III only
I, II, and III
Which of the following statements is correct about an auditor’s responsibility regarding consideration of fraud in a financial statement audit?
The auditor should plan the audit to provide absolute assurance of detecting all material fraud.
The auditor should assess the risk of material misstatement due to fraud.
The auditor should design 100% substantive tests to catch fraud if present.
The auditor is responsible for reporting all frauds, regardless of materiality, to regulators.
As used in PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), the term “Noncompliance” refers to:
Acts of omission or commission by the entity that are contrary to prevailing laws or regulations (whether intentional or not).
Personal misconduct by a client’s employees unrelated to the entity’s business.
Non-adherence to internal control procedures by company personnel.
Violations of the company’s Code of Ethics for Professional Employees.
If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance with laws or regulations may have occurred, the auditor should express:
A qualified opinion or an adverse opinion.
A qualified opinion or a disclaimer of opinion.
An adverse opinion.
An adverse opinion or a disclaimer of opinion.
If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is characteristic of:
Discovery sampling
Variables sampling
Random sampling
PPS sampling
While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated, when in fact it was not. This situation illustrates the risk of:
Assessing control risk too high
Assessing control risk too low
Incorrect rejection
Incorrect acceptance
When an auditor has chosen a random sample and is using nonstatistical attributes sampling, the auditor:
Need not consider the risk of assessing control risk too low.
Has committed a nonsampling error.
Will have to use discovery sampling to evaluate the results.
Should compare the deviation rate of the sample to the tolerable deviation rate.
If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable deviation rate and decreasing the risk of assessing control risk too low would cause the sample size to:
Increase.
Remain the same.
Decrease.
Become indeterminate (cannot be determined from the given information).
Which of the following characteristics distinguishes computer processing from manual processing?
Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.
Errors or fraud in computer processing will be detected soon after their occurrences.
The potential for systematic error is ordinarily greater in manual processing than in computerized processing.
Most computer systems are designed so that transaction trails useful for audit purposes do not exist.
Which of the following is a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?
Random errors associated with processing large volumes of transactions are usually greater.
It is usually more difficult to compare recorded amounts with physical counts of assets.
Attention tends to be focused on the accuracy of programming rather than errors in individual transactions.
It is usually easier for unauthorized persons to access and alter the files.
What technology is needed in order to convert a paper document into a computer file?
Optical character recognition
Electronic data interchange
Bar-code scanning
File joining and merging software
Which of the following allows fictitious and real transactions to be processed together through the client’s system without the client personnel being aware of the testing process?
Integrated test facility
File interrogation and review software
File joining and merging software
E-file editing and renaming software
Which of the following methods of testing application controls utilizes a generalized audit software package prepared by the auditors?
Parallel simulation
Integrated test facility
Test data approach
Exception reporting tests
The primary source of information to be reported about litigation, claims, and assessments is the:
Independent auditor
Client’s management
Court records
Client’s lawyer
Management’s refusal to permit the auditor to communicate with the entity’s legal counsel is likely to result in:
An adverse opinion
A qualified or an adverse opinion
An unmodified opinion
A qualified opinion or a disclaimer of opinion
Which of the following best describes the auditor’s responsibility concerning the appropriateness of the going concern assumption in the preparation of the financial statements?
The auditor must make a specific assessment of the entity’s ability to continue as a going concern for a reasonable period.
The auditor is expected to predict future events or conditions that may cause the entity to cease as a going concern.
The auditor should consider the appropriateness of management’s use of the going concern assumption and whether material uncertainties are adequately disclosed.
The auditor has no responsibility for assessing going concern unless requested by management or the board.
When the auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern, the auditor’s responsibility is to:
Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.
Issue a qualified or adverse opinion, depending on materiality, due to the probable effects on the financial statements.
Inform the audit committee that management’s estimates may need adjustment.
Reissue the prior year’s report with an Emphasis of Matter paragraph regarding going concern.
As used in PSA 560 (Subsequent Events), “subsequent events” refers to: I. Events occurring between the date of the financial statements and the date of the auditor’s report. II. Facts discovered after the date of the auditor’s report.
I only
II only
Both I and II
Neither I nor II
Which of the following statements best expresses the auditor’s responsibility for events occurring after the date of the auditor’s report but before the financial statements are issued?
The auditor should amend the financial statements if any subsequent event is discovered.
If the facts are material, the auditor should issue a new report with a qualified or adverse opinion.
The auditor should discuss the matter with management, determine if the statements need revision, and take appropriate action.
The auditor should withdraw from the engagement.
When an audit is conducted in accordance with generally accepted auditing standards, the auditor should always:
Observe the counting of inventory at the balance sheet date.
Obtain certain written representations from management.
Apply analytical procedures as substantive tests for specific account balances.
Document the understanding of internal control and the basis for assessing control risk.
A major purpose of the auditor’s report on financial statements is to:
Assure investors of the complete accuracy of the financial statements.
Enhance the degree of confidence of intended users in the financial statements.
Deter creditors from extending loans in high-risk situations.
Describe in detail the specific auditing procedures performed to support the opinion.
The first section of the auditor’s report shall have the heading:
Responsibilities for the Financial Statements
Opinion
Auditor’s Responsibilities for the Audit of the Financial Statements
Basis for Opinion
Which section of the auditor’s report is placed immediately after the Opinion section?
Management’s Responsibilities for the Financial Statements
Auditor’s Responsibilities for the Audit of the Financial Statements
Basis for Opinion
Other Reporting Responsibilities
What opinion should an auditor express when the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework?
Unmodified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
PSA 705 (Revised) prohibits the auditor from communicating Key Audit Matters when the auditor expresses a/an:
Unmodified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
An independent auditor discovers that a company’s payroll supervisor has misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15 million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely contain a/an:
Unmodified opinion
Disclaimer of opinion
Adverse opinion
Qualified opinion (scope limitation)
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?
To emphasize an unusually important subsequent event.
When financial statements fail to disclose information required by PFRS.
When there is substantial doubt about the entity’s ability to continue as a going concern.
When the auditor did not observe the client’s inventory count and cannot verify it by other means.
Which phrase would an auditor most likely include in the auditor’s report when expressing a qualified opinion due to inadequate disclosure?
“Do not present fairly in all material respects…”
“Except for the omission of the information described in the Basis for Qualified Opinion paragraph…”
“With the foregoing explanation of these omitted procedures…”
“Subject to the departure from PFRS, as described above…”
In a review engagement, the practitioner obtains limited assurance that nothing has come to the practitioner’s attention causing the practitioner to believe the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework. What conclusion is appropriate?
Unmodified conclusion.
Disclaimer of conclusion.
Modified conclusion.
Qualified conclusion.
Charlie, CPA, is performing a compilation for Clean & Green Co. During the engagement, Charlie became aware that some information provided by management was incomplete, and management refuses to provide additional information. In this case, Charlie should:
Issue a qualified opinion on the compiled financial statements.
Issue an adverse opinion on the compiled financial statements.
Issue a disclaimer of opinion on the compiled financial statements.
Withdraw from the engagement.
The procedures performed in a compilation engagement are:
Designed to enable the accountant to express limited assurance.
Designed to enable the accountant to express negative assurance.
Not designed to enable the accountant to express any form of assurance.
Less extensive than review procedures but more extensive than agreed-upon procedures.
When performing a compilation engagement, the accountant is required to:
Assess the client’s internal controls.
Verify the client’s information through corroboration.
Obtain a general knowledge of the client’s business and operations.
Make inquiries of management to assess the reliability and completeness of the information provided.
Which of the following should not be included in an accountant’s report based on the compilation of an entity’s financial statements?
A statement that the compilation was performed in accordance with PSRS 4410 (Revised), Compilation Engagements.
A statement that the financial statements and the accuracy of the information used to compile them are management’s responsibility.
A statement that a compilation engagement is an assurance engagement.
A statement that the accountant does not express an audit opinion or a review conclusion.
Negative assurance may be expressed when reporting on agreed-upon procedures applied to specified elements, accounts, or items of a financial statement? (Legend: “Yes” indicates negative assurance may be expressed.)
Elements of a F/S: Yes; Accounts of a F/S: Yes
Elements of a F/S: Yes; Accounts of a F/S: No
Elements of a F/S: No; Accounts of a F/S: No
Elements of a F/S: No; Accounts of a F/S: Yes
According to PSA 720 (Other Information), if, on reading the other information, the auditor identifies a material inconsistency and the client refuses to make the necessary revision to the financial statements, the auditor should express:
A disclaimer of opinion.
A qualified opinion or a disclaimer of opinion.
An unmodified opinion with an Emphasis of Matter paragraph describing the material inconsistency.
A qualified opinion or an adverse opinion.
An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
Afford greater assurance than a nonstatistical sample of equal size.
Provide an objective basis for quantitatively evaluating sampling risks.
Can more easily convert the sample into a dual-purpose test useful for substantive testing.
Eliminate the need to use judgment in determining appropriate sample sizes.
If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic of
Discovery sampling
Variables sampling
Random sampling
PPS sampling
The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to provide the auditor with
A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.
The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
Corroboration of the information furnished by management about litigation, claims, and assessments.
The probable outcome of asserted claims and pending or threatened litigation.
If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?
Increase.
Remain the same.
Decrease.
Indeterminate, depends upon exact change being made.
Which of the following terms is used in the standard to describe the effects on the financial statements of misstatements or the possible effects on the financial statements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence?
Persuasive
Pervasive
Material
Extensive
An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the
Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.
Auditor also reports on the current asset portion of the entity’s statement of financial position.
Use of the report on the accounts receivable is restricted.
Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements.
J, CPA, audited JST Company’s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without J’s auditor’s report, which expressed a qualified opinion. In drafting the current year’s auditor’s report, S, CPA, the incoming auditor, should I. Not name J as the predecessor auditor. II. Indicate the type of report issued by J. III. Indicate the substantive reasons for J’s qualification. IV. Indicate the date of J’s auditor’s report.
I, II, and IV only.
II, III, and IV only.
I, II, and III only.
I, II, III, and IV.
In which of the following circumstances would an auditor most likely meet with the client’s legal counsel to discuss the likely outcome of the litigation and claims? I. The auditor determines that the matter is a significant risk. II. There is a disagreement between management and the entity’s legal counsel. III. The subject matter of the litigation is complex.
I and II only.
II and III only.
I and III only.
I, II, and III.
There are two broad financial reporting frameworks for comparatives: the corresponding figures and the comparative financial statements. Which of the following statements is correct concerning these reporting frameworks?
Under the corresponding figures framework, the corresponding figures for the prior period(s) are integral part of the current period financial statements.
Under the corresponding figures framework, the corresponding figures for the prior period(s) are considered separate financial statements.
Under the comparative financial statements framework, the comparative financial statements for the prior period(s) are intended to be read in conjunction with the amounts and other disclosures relating to the current period.
Under the comparative financial statements framework, the amounts and other disclosures for the prior period(s) form part of the current period financial statements.
The following are special purpose audit engagements, except:
Compilation of financial statements.
Audits involving statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles in the Philippines.
Audits of specified accounts, elements of accounts, or items in a financial statement.
Audits of compliance with contractual agreements.
Which of the following best illustrates the concept of sampling risk?
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
An auditor may select audit procedures that are not appropriate to achieve the specific objective.
An auditor may fail to recognize errors in the documents examined for the chosen sample.
The documents related to the chosen sample may not be available for inspection.
Which of the following management’s responsibilities shall be described in the Responsibilities for the Financial Statements section of the auditor’s report?
Responsibility for preparing the financial statements in accordance with the applicable financial reporting framework.
Responsibility for obtaining reasonable assurance about whether the financial statements as a whole are free from material misstatement.
Responsibility to exercise professional judgment and maintain professional skepticism throughout the audit.
Responsibility to identify and assess the risks of material misstatement of the financial statements.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
Cash flows from operating activities are negative.
Stock dividends replace annual cash dividends.
Significant related party transactions are pervasive.
Research and development projects are postponed.
A major purpose of the auditor’s report on financial statements is to
Assure investors of the complete accuracy of the financial statements.
Enhance the degree of confidence of intended users in the financial statements.
Deter creditors from extending loans in high-risk situations.
Describe the specific auditing procedures undertaken to gather evidence for the opinion.
The letter of audit inquiry should be
Prepared and sent by the auditor.
Prepared by management and sent by the auditor.
Prepared and sent by management.
Prepared by the auditor and sent by management.
As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to I. Events occurring between the date of the financial statements and the date of the auditor’s report. II. Facts discovered after the date of the auditor’s report.
I only.
II only.
Both I and II.
Neither I nor II.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Inquiring as to whether any unusual adjustments were made after the date of the financial statements.
Confirming a sample of material accounts receivable established after the date of the financial statements.
Comparing the financial statements being reported on with those of the prior period.
Investigating personnel changes in the accounting department occurring after the date of the financial statements.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls
Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.
Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.
Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole.
Does not support the tolerable misstatement for some or all of management’s assertions.
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
Effectiveness of the audit.
Efficiency of the audit.
Preliminary estimates of materiality levels.
Tolerable misstatement.
According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the corresponding figures in the incoming auditor’s report for the current period. The incoming auditor’s report should indicate I. That the financial statements of the prior period were audited by another auditor. II. The type of report issued by the predecessor auditor. III. The date of the predecessor auditor’s report.
I and II only.
II and III only.
I and III only.
I, II, and III.
Which of the following sections in the auditor’s report shall be placed immediately after the Opinion section?
Management’s Responsibilities for the Financial Statements.
Auditor’s Responsibilities for the Audit of the Financial Statements.
Basis for Opinion.
Other Reporting Responsibilities.
Which of the following statements best describes the auditor’s responsibility concerning the appropriateness of the going concern assumption in the preparation of the financial statements?
The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue as a going concern.
The auditor’s responsibility is to predict future events or conditions that may cause the entity to cease to continue as a going concern.
The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern assumption and consider whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements.
The auditor’s responsibility is to give a guarantee in the audit report that the entity has the ability to continue as a going concern.
An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client’s internal control procedures. One of the purchase orders in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase was properly approved. The auditor should
Choose another purchase order to replace the missing purchase order in the sample.
Consider this test of control invalid and proceed with substantive tests since internal control cannot be relied upon.
Treat the missing purchase order as a deviation for the purpose of evaluating the sample.
Select a completely new set of 20 purchase orders.
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?
Confirmation of bank balances.
Confirmation of accounts receivable from major customers.
Reconciliation of interest expense with debt outstanding.
Review of compliance with terms of debt agreements.
The primary source of information to be reported about litigation, claims, and assessments is the
Independent auditor
Client’s management
Court records
Client’s lawyer
An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
Constitutes a deviation.
Has been properly voided.
Cannot be located.
Represents an immaterial peso amount.
Which of the following should be included in the Qualified Opinion section when an auditor expresses a qualified opinion because of inadequate disclosure? (When read in conjunction with Note X ... / With the foregoing explanation ...)
When read in conjunction with Note X – Yes; With the foregoing explanation – No
When read in conjunction with Note X – No; With the foregoing explanation – Yes
When read in conjunction with Note X – No; With the foregoing explanation – No
When read in conjunction with Note X – Yes; With the foregoing explanation – Yes
PSA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report, prohibits the auditor from communicating key audit matters when the auditor expresses a/an
Unmodified opinion.
Qualified opinion.
Adverse opinion.
Disclaimer of opinion.
Which of the following statistical sampling plans does not use a fixed sample size for tests of controls?
Attributes sampling
Sequential sampling
PPS sampling
Variables sampling
For which of the following audit tests would an auditor most likely use attribute sampling?
Making an independent estimate of the amount of FIFO inventory.
Examining invoices in support of the valuation of fixed asset additions.
The auditor should consider the status of legal matters up to the
Balance sheet date.
Date of the auditor’s report.
Date of approval of the financial statements.
Date of issuance of the financial statements.
The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has reissued his/her auditor’s report on prior year financial statements. The predecessor auditor’s report should
Refer to the work of the incoming auditor in the scope and opinion paragraphs.
Refer to the report of the incoming auditor only in the scope paragraphs.
Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
Not refer to the report or the work of the incoming auditor.
Audit sampling involves the
Selection of all items over a certain amount.
Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection.
Application of audit procedures to all items that comprise a class of transactions or an account balance.
Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error.
An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because
This may permit the audit of intercompany account balances to be performed as of concurrent dates.
This may reveal whether particular transactions would have taken place if the parties had not been related.
The business structure may be deliberately designed to obscure related party transactions.
Intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions.
An auditor should disclose the substantive reasons for expressing an adverse opinion in the Basis for Adverse Opinion section
Following the opinion section.
Preceding the opinion section.
Following the Auditor’s Responsibility section.
Within the notes to the financial statements.
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
“I believe that the action can be settled for less than the damages claimed.”
“I believe that the company will be able to defend this action successfully.”
“I believe that the plaintiff’s case against the company is without merit.”
“I believe that the possible liability to the company is nominal in amount.”
An auditor’s report on financial statements prepared in accordance with the financial reporting provisions of a contract (that is, a special purpose framework) to comply with the provisions of that contract should include all of the following, except:
An opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with the financial reporting provisions of the contract.
A statement that indicates the basis of accounting used.
An opinion as to whether the basis of accounting used is appropriate under the circumstances.
Reference to the note to the financial statements that describes the basis of presentation.
Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a going concern for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the adverse effects of future conditions and events, Harold most likely would consider, as a mitigating factor, Jersamtan’s plans to
Postpone expenditures for research and development projects.
Purchase production facilities currently being leased from a related party.
Strengthen internal controls over cash disbursements.
Discuss with lenders the terms of all debt and loan agreements.
An underlying feature of random-based selection of items is that each
Stratum of the accounting population be given equal representation in the sample.
Item in the accounting population be randomly ordered.
Item in the accounting population should have an opportunity to be selected.
Item must be systematically selected using replacement.
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was
The only deviation discovered in the sample.
Identical to a deviation discovered during the prior year’s audit.
Caused by an employee’s misunderstanding of instructions.
Initially concealed by a forged document.
CPAs in public practice who perform assurance engagements are governed by the following, except:
Philippine Standards on Related Services
Philippine Framework for Assurance Engagements
Code of Ethics for Professional Accountants in the Philippines
Philippine Standards on Quality Management
Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
The primary objective of a review engagement is to test the completeness of the financial statements, but a compilation tests for reasonableness.
The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance.
In a review engagement, accountants provide limited assurance, whereas a compilation expresses no assurance.
In a review engagement, accountants provide reasonable (positive) assurance that the financial statements are fairly presented, but a compilation provides only limited assurance.
Which of the following statements is correct regarding assurance engagements?
In an assurance engagement, a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users (other than the responsible party) about the outcome of the evaluation or measurement of a subject matter against criteria.
In addition to the Framework and relevant Assurance Standards, practitioners are governed by the Code of Ethics for CPAs in the Philippines and the Philippine Standards on Quality Management when performing assurance engagements.
Both I and II
Neither I nor II
Which of the following statements is true concerning evidence in an assurance engagement?
Sufficiency is the measure of the quantity of evidence.
Appropriateness is the measure of the quality of evidence (its reliability and persuasiveness).
The reliability of evidence is influenced not by its nature but by its source.
Obtaining more evidence may compensate for its poor quality.
A firm should design, implement and operate a system of quality management that provides the firm with reasonable assurance that:
The firm and its personnel fulfill their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements accordingly.
Engagement reports issued by the firm or its partners are appropriate in the circumstances.
Both A and B.
Neither A nor B.
PSQM 1 (Quality Management) applies to all firms that perform:
Audits of financial statements only.
Reviews of financial statements only.
Other assurance or related services engagements only.
Audits or reviews of financial statements, or other assurance or related services engagements.
The Code of Ethics for Professional Accountants in the Philippines establishes fundamental principles of professional ethics which include the following, except:
Integrity
Objectivity
Relevance
Professional behavior
A CPA firm’s quality management policies for deciding whether to accept a new client or continue with an existing client are established to:
Enable the auditor to attest to the reliability of the client.
Satisfy the firm’s duty to the public concerning acceptance of new clients.
Provide reasonable assurance that the integrity of the client is considered.
Anticipate, before any field work, whether an unmodified opinion can be expressed.
The auditor may accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through
I only
II only
Both I and II
Neither I nor II
Which of the following is not correct regarding communications between a successor and predecessor auditor?
The burden of initiating the communication rests with the predecessor auditor.
The burden of initiating the communication rests with the successor auditor.
The predecessor auditor must receive the former client’s permission prior to divulging information to the successor auditor.
The predecessor auditor may choose to provide a limited response to a successor auditor.
