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WorksheetsMOCK PREBOARD - 2nd PART
Total questions: 115
Worksheet time: 2hrs 55mins
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 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
Input controls matrix
Parallel simulation
Data entry monitor
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? Accounts of a F/S?
Yes; Yes
Yes; No
No; No
No; 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.
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? 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 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. 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.
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 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
Input controls matrix
Parallel simulation
Data entry monitor
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.
Increase the rate of return expected by shareholders.
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 ₱50,000. The company’s total assets and income before tax are ₱70 million and ₱15 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? Accounts of a F/S? A. Yes Yes B. Yes No C. No No D. No Yes
A
B
C
D
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.
The main purpose of an independent financial statement audit is to:
Detect all instances of fraud and error in the financial statements.
Provide an objective opinion on the fairness of the financial statements.
Prepare the financial statements on behalf of management.
Guarantee that the company is financially sound.
Which of the following services is considered an assurance engagement?
An independent audit of a company's financial statements.
Preparing and filing a client's income tax return.
Consulting on the implementation of a new accounting software system.
Providing bookkeeping services for a small business.
In an assurance engagement, which of the following is not one of the three essential parties involved?
The practitioner (e.g., the independent auditor or CPA).
The intended users of the report.
The responsible party (e.g., management of the company whose information is being assured).
The internal audit department of the firm being audited.
In an assurance engagement, suitable criteria are required. For a financial statement audit, which of the following would be considered the suitable criteria?
The applicable financial reporting framework (e.g., IFRS or U.S. GAAP) that the company uses to prepare its financial statements.
The company’s internal budget figures for the year.
Generally Accepted Auditing Standards (GAAS).
The auditor’s personal judgment, in the absence of any standard.
Which statement correctly distinguishes a reasonable assurance engagement from a limited assurance engagement?
In a reasonable assurance engagement (like a financial statement audit), the practitioner gathers sufficient evidence to achieve a high level of assurance and expresses a positive opinion. In a limited assurance engagement (like a review of financial statements), the practitioner does less extensive work, achieving a moderate level of assurance and expresses a negative conclusion.
There is no difference – both mean the CPA gives absolute certainty.
Reasonable assurance engagements do not require evidence gathering, whereas limited assurance engagements do.
Reasonable assurance results in a disclaimer of opinion, and limited assurance results in an unmodified opinion.
Why can an audit only provide reasonable assurance rather than absolute assurance that the financial statements are free of material misstatement?
Because of inherent limitations in the audit process – auditors use sampling , accounting often involves estimates and judgment, collusion or management fraud may circumvent controls, and audits are conducted within a limited timeframe.
Because auditors are not allowed to spend enough time on an audit to be certain.
Because auditors intentionally leave some areas unaudited.
Because the audit standards are low and don’t require thorough work.
Which of the following engagements does a CPA not provide any assurance (neither reasonable nor limited) on the subject matter?
Compilation of a client’s financial statements (the CPA assists in assembling data into financial statement format but does not provide an opinion or assurance on those statements).
Audit of a company’s financial statements.
Review of a company’s financial statements.
Examination (attestation) of a client’s forecast or projection.
Which statement best describes a key difference between external auditors and internal auditors?
External auditors are independent of the company and provide assurance to outside users that the financial statements are fairly presented, whereas internal auditors are employees of the company who provide analyses, reviews, and evaluations of the company’s processes and controls for management’s own purposes.
External auditors primarily assist management in improving the business, while internal auditors primarily detect fraud for shareholders.
Internal auditors must be CPAs, whereas external auditors do not have to be.
There is no real difference; they perform the same work but with different titles.
What is the primary role of government auditors (such as those in a national Audit Office or Commission on Audit)?
To audit government agencies and programs to ensure public funds are used and reported in compliance with laws and regulations, and to evaluate whether government operations are carried out economically and effectively.
To perform audits of private companies on behalf of the government.
Which of the following statements correctly describes the division of responsibility between management and the external auditor in a financial statement audit?
Management is responsible for the preparation and fair presentation of the financial statements (including designing, implementing, and maintaining internal control to ensure the statements are free of material misstatement), whereas the external auditor’s responsibility is to conduct the audit in accordance with auditing standards and to express an opinion on whether the financial statements are fairly presented.
The external auditor is responsible for preparing the financial statements since they have expertise, while management’s responsibility is to verify the audit evidence.
Management only provides the data; the auditor takes full responsibility for the financial statements’ accuracy once the audit is complete.
The auditor and management share equal responsibility for any misstatements in the financial statements.
Which of the following situations would impair the independence of an external auditor?
The auditor’s spouse is the chief financial officer (CFO) of the client company.
The audit firm receives a fixed audit fee not contingent on results.
The auditor has no direct financial interest in the client.
The client’s accounting policies are complex.
What is professional skepticism in the context of an audit?
An attitude of questioning mind and a critical assessment of audit evidence. It means the auditor neither blindly trusts management’s assertions nor assumes management is dishonest without cause, but remains alert to conditions that may indicate possible misstatement and critically evaluates all evidence.
A requirement that the auditor assume management is engaged in fraud unless proven otherwise.
A mindset of doubt that requires the auditor to be antagonistic towards client personnel at all times.
A one-time procedure performed at the end of the audit.
Which of the following statements about the auditor’s responsibility regarding fraud is true?
The auditor must obtain reasonable assurance that the financial statements are free of material misstatement due to fraud (as well as error).
The auditor is responsible for preventing fraud within the client.
Auditors only need to concern themselves with errors, not fraud, during an audit.
If any fraud (no matter how small) is found, the auditor must automatically issue an adverse opinion.
The key benefit of an independent audit of financial statements is that it:
Lends credibility to the financial statements by providing an independent opinion on whether they are fairly presented. This increases the confidence of users (shareholders, lenders, etc.) in the financial information provided by management.
Guarantees the company will be profitable.
Ensures that management will achieve its business objectives.
Transfers the responsibility for financial statements from management to the auditor.
The main difference between an operational (performance) audit and a financial statement audit is that in an operational audit:
The auditor is evaluating the effectiveness and efficiency of any aspect of an organization’s operating procedures and methods (or compliance with internal policies), rather than focusing on whether financial statements are fairly stated. For example, an operational auditor might examine if a company’s purchasing function is minimizing cost and following best practices. In contrast, a financial statement audit is concerned with verifying figures and disclosures in the financial reports against an established framework (GAAP). The operational audit’s primary audience is usually management (and the board), and its goal is to provide recommendations for improvement, whereas the financial audit’s audience is external users and its goal is assurance on financial reporting.
The operational auditor provides an opinion on the financial statements as well.
A financial audit is done annually, but an operational audit can only be done once every ten years.
Financial audits are performed only by external auditors, while operational audits are performed only by internal staff.
An independent audit primarily helps to reduce which type of risk for financial statement users?
Information risk – the risk that the financial information disclosed by a company may be materially false or misleading. An audit provides reasonable assurance that the financial statements are reliable, thus reducing the likelihood that users will make decisions based on incorrect data.
Business risk – the risk the company’s business will fail or not meet its objectives.
Inherent risk – the susceptibility of an assertion to misstatement (this is a component of audit risk assessed by auditors; an audit doesn’t reduce inherent risk, it identifies and responds to it).
The risk-free interest rate – an audit has no impact on macroeconomic factors like interest rates.
