AUDITING THEORY REVIEWER 1ST YEAR

AUDITING THEORY MIDTERM EXAM

The risk of management fraud increases in the presence of *
a) substantial increases in sales.
b) frequent changes in suppliers.
c) management incentive systems based on operating income.
d) improved internal control.
Which of the following circumstances most likely would cause an auditor to believe that
material misstatements might exist in an entity's financial statements? *
a) Accounts receivable confirmation requests yield significantly fewer responses than
expected.
b) Management consults with other accountants about significant accounting matters.
c) The chief financial officer does not sign the management representation letter until the
last day of the auditor's field work.
d) Audit trails of computer-generated transactions exist for only a short time.
The risk that an auditor's procedures will lead to the conclusion that a material error does exist
in an account balance when, in fact, such error does exist is referred to as *
a) detection risk.
b) audit risk.
c) inherent risk.
d) control risk.
Which of the following ordinarily is designed to detect possible material peso errors on the
financial statements? *
a) Computer controls.
b) Analytical procedures.
c) Post-audit working paper review.
d) Control testing.
The auditor will most likely perform extensive tests for possible understatement of. *
a) liabilities
b) capital
c) revenues.
d) assets.
Which of the following best describes the primary purpose of audit procedures? *
a) To comply with financial reporting standards.
 b) To detect errors or irregularities.
c) To gather corroborative evidence.
d) To verify the accuracy of account balances.

As a result of analytical procedures, the independent auditor determines that the gross profit
has declined from 30% in the preceding year to 20% In the current year. The auditor should *
a) evaluate management's performance in causing this decline.
b) document management's intentions with respect to plans for reversing this trend
c) require footnote disclosure.
d) consider the possibility of an error in the financial statements.
Which of the following elements ultimately determines the specific auditing procedures
necessary under the circumstances to afford reasonable basis for an opinion? *
a) Reasonable assurance
b) Materiality.
c) Auditor’s judgment.
d) Relative risk
In testing the existence assertion for an asset, an auditor ordinarily works from the *
a) potentially unrecorded items to the financial statements.
b) financial unrecorded items to the financial statements.
c) supporting evidence to the accounting records.
d) accounting records to the supporting evidence.
Inherent Fisk and control risk differ from detection risk in that they *
a) exist independently of the financial statement audit.
b) can be changed at the auditor's discretion.
c) arise from the misapplication of auditing procedures.
d) may be assessed in either quantitative or nonquantitative terms.
An internal auditor was engaged to audit a foreign manufacturing subsidiary. The
auditor noted that "consulting fees" and miscellaneous selling expenses" appeared to
be high and were not always properly documented. In evaluating the risks associated
with these facts, the auditor should consider that *
a) a foreign operation's involvement is not important in quantitative terms.
b) a foreign operation's involvement is not important in qualitative terms.
c) the risks associated with failing to detect any wrongdoing are probably not
material.
d) audit risks are increased because of cultural differences.
To determine whether accounts payable are complete, an auditor performs a test to
verify that all merchandise received is recorded. The population of documents for this
test consists of all *
a) vendors' invoices.
b) purchase orders.
c) receiving reports.
d) canceled checks.
Test of control audit procedures are required for *
a) accomplishing control over the validity of recorded transactions.
b) obtaining evidence about the financial statement assertions.
c) obtaining evidence about the operating effectiveness of client control
procedures.
d) analytical review of financial statement balances.
Proper segregation of duties reduces the opportunities in which a person could both *
a) record cash receipts and record cash disbursements.
b) perpetuate errors and irregularities and conceal them.
c) establish internal control and authorize transactions.
d) journalize entries and prepare financial statements.
An auditor uses the assessed level of control risk to *
a) evaluate the effectiveness of the entity's control activities.
b) indicate whether materiality thresholds for planning and evaluation purposes are
sufficiently high.
c) determine the acceptable level of detection risk for financial statement
assertions.
d) identify transactions and account balances where inherent risk is at maximum.
Fraud may be perpetrated with the intent to benefit a company. Which of the following is
an example of such a fraud? *
a) Acceptance of bribes or kickbacks by a purchasing agent.
b) Diversion by an employee or outsider of a transaction that would normally
generate profits for the company.
c) Sale or assignment of fictitious or misrepresented assets.
d) Claims submitted for services or goods not actually provided to the company.
An auditor plans to examine a sample of 20 checks for countersignatures as prescribed
by the client's internal control procedures. One of the checks in the chosen sample of 20
cannot be found. The auditor should consider the reasons for this limitation and *
a) choose another check to replace the missing check in the sample.
 b) treat the missing check in the same manner in which the majority of the other 19
checks are treated, that is, as countersigned or not.
c) evaluate the results as if the sample size had been 19.
d) treat the missing check as an error for the purpose of evaluating the sample.
“Overauditing” can be defined as *
a) giving an inappropriate unqualified report on financial statements
b) auditing too small a sample size
c) auditing a larger sample size than necessary
d) taking more risk than is professionally acceptable
When auditing the client’s performance of control to accomplish the completeness
objective related to ensuring that all sales are recorded, auditors should draw sample
items from: *
a) the file of customer order copies.
b) the file of receiving reports for inventory additions.
c) the file of shipping documents.
d) the sales journal list of recorded sales invoice.
In performing tests of controls over authorization of cash disbursements, which of the
following statistical sampling methods would be most appropriate? *
a) ratio.
b) attribute.
c) variables.
d) stratified.
The major reason an independent auditor gathers evidence is to *
a) Evaluate management
b) Evaluate internal control
c) Form an opinion on the financial statements
d) Detect fraud
Statistical sampling provides a technique for *
a) greatly reducing the amount of substantive testing
b) eliminating judgment in testing
c) exactly defining materiality
d) measuring the sufficiency of evidential matter=
The current file of the auditor’s working papers generally should include *
a) a flowchart of the internal controls
b) copies of bond and note indentures
c) organization charts
d) a copy of financial statements
A sampling method that can be used to estimate overstatement error of an account
balance but is not based on normal-curve mathematics is: *
a) discovery sampling
b) attributes sampling
c) probability proportional to size sampling
d) mean per unit sampling
The sufficiency and appropriateness of evidential matter ultimately is based on the *
a) Judgement of the auditor
b) Pertinence of the evidence
c) Availability of corroborating data
d) Philippine Standards on Auditing
Audit evidence obtained directly by the auditor will not be reliable if: *
a) The clients denies its veracity
b) The auditor lacks the competence to evaluate the evidence.
c) It is provided by the client’s attorney.
d) It is impossible for the auditor to obtain additional corroboratory evidence.
The current file of an auditor's working papers most like would include a copy of the *
a) Pension plan contract
b) Bank reconciliation
c) Flowchart of the internal control procedures.
d) Articles of incorporation
A primary purpose of the audit working paper is to *
a) support the auditor’s opinion
b) support the underlying concepts included in the preparation of the basic financial
statements
c) aid the auditors in adequately planning their work.
d) provide a point of reference for future audit engagements

An error that arises from an isolated event that has not recurred other than on
specifically identifiable occasions and is therefore not representative of errors in the
population. *
a) anomalous error
b) sampling error
c) tolerable error
d) non-sampling error
Which of the following courses of action would an auditor be most likely to follow in
planning a sample of cash disbursements if the auditor were aware of several unusually
large cash disbursements? *
a) Set the tolerable rate of deviation at a lower level than originally planned.
b) Stratify the cash disbursements population so that the unusually large
disbursements were selected.
c) Continue to draw new samples until all unusually large disbursements appeared
in the sample.
d) Increase the sample size to reduce the effect of the unusually large
disbursements
As audit evidence, physical examination and confirmation, may only be obtained using
which of the following tests? *
a) Tests of details of balances
b) Analytical procedure
c) Tests of controls
d) Tests of transactions
At the completion of the audit, management is asked to make a written statement that it
is not aware of any undisclosed contingent liabilities. This statement would appear in
the *
a) management letter.
b) letters testamentary.
c) letter of inquiry.
d) letter of representation.
Refusal by a client to prepare and sign the representation letter would require a(n) *
a) unqualified opinion with an explanatory paragraph.
b) qualified or an adverse opinion.
c) qualified opinion or disclaimer.
d) adverse opinion or a disclaimer.

The audit procedures for the subsequent events review can be divided into two
categories: (l) procedures normally integrated as a part of the verification of year-end
account balances, and (2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures are in category 2? *
a) Compare the subsequent period purchase price of inventory with the recorded
cost as a test of lower-of-cost-or-market valuation.
b) Correspond with attorneys.
c) Test the collectability of accounts receivable by reviewing subsequent period
cash receipts.
 d) Subsequent-period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
Which of the following tends to be most predictable for purposes of analytical
procedures applied as substantive tests? *
a) Data subject to audit testing in the prior year
b) Relationship involving income statement accounts
c) Relationships involving balance sheet accounts
d) Transactions subject to management discretion
If the auditor becomes aware after the audited financial statements have been released
that *some information included in the statements is materially misleading, he or she
has *
a) no obligation to disclose it since the he or she acted in good faith and without
negligence in arriving at the audit opinion.
b) an obligation to inform the board of directors of the misleading statements.
c) an obligation to make certain that users who are relying on the financial
statements are informed.
d) an obligation to inform all users who are relying on the financial statements.
An auditor ordinarily examines invoices from lawyers primarily in order to *
a) estimate the peso amount of contingent liabilities.
b) substantiate accruals.
c) assess the legal ramifications of litigation in progress.
d) identify possible unasserted litigation, claims, and assessments.
Auditing standard requires the auditor to evaluate whether there is a substantial doubt
about a client's ability to continue as a going concern for at least one year beyond the
statement of financial position date. one of the most important types of evidence to
assess the going concern question is *
a) analytical procedures.
b) statistical sampling procedures.
c) confirmations of creditors.
d) inquiries of client and their legal counsel.
The auditor's responsibility for "reviewing the subsequent events" of a public company
that is about to issue new securities is normally' limited to the period of time *
a) beginning with the statement of financial position date and ending with the date
of the auditor's report.
b) beginning with the start of the fiscal year under audit and ending with the
statement of financial position date.
c) beginning with the start of the fiscal year under audit and ending with the date of
the auditor's report.
 d) beginning with the statement of financial position date and ending with the date
the registration statement becomes effective.
Which of the following procedures is most likely to assist an auditor in identifying
conditions and events that may indicate substantial doubt about an entity's ability to
continue as a going concern? *
a) Reconciling the cash balance per books with the cutoff bank statement and the
bank confirmation.
b) Comparing the entity's depreciation and asset capitalization policies to those of
other entities in the industry.
c) Confirming with third parties the details of arrangements to maintain financial
support.
d) Inspecting title documents to verify whether any assets are pledged as collateral.
As audit evidence, physical examination and confirmation, may only be obtained using
which of the following tests? *
a) Tests of details of balances
b) Analytical procedure
c) Tests of controls
d) Tests of transactions
The auditor’s principal objective when using a sample of tests of details of balances is
whether the: *
a) transactions being audited are free of misstatements.
b) transactions and account balances being audited are fairly stated.
c) controls being tested are operating effectively.
d) account balance being audited is fairly stated.
Which of the following is the best example of a corroborating evidence? *
a) vendor’s invoice
b) general journal
c) worksheet cost allocations
d) cash receipts journal
In the context of an audit of financial statements substantive tests are audit procedures
that *
a) Are designed to discover significant subsequent events
b) Will increase proportionately with the auditor’s assessment of control risk
c) May be eliminated under certain conditions
d) May be either tests of transactions, direct tests of financial balances, or
analytical tests
There are often a large number of immaterial errors discovered that do not require an
adjustment at the time of they are found. *
a) Since these items are individually immaterial, the auditor would not recommend
adjusting entries to client.
b) The auditor would never combine these individually immaterial amounts because
that would mix apples and oranges.
c) Since there are a large number of these, the auditor would recommend adjusting
entries to clients
d) The auditor must combine the individually immaterial errors and evaluate
whether the combined amount is material.
A client acquired 25 percent of its outstanding capital stock after years end and prior to
completion of the auditor's field work. The auditor should *
a) advise management to adjust the statement of financial position to
b) issue pro forma financial statements giving effect to the acquisition as if it had
occurred at year-end.
c) advise management to disclose the acquisition in the notes to the financial
statements.
d) disclose the acquisition in the opinion paragraph of the auditor's report.
Refusal by a client to prepare and sign the representation letter would require a(n) *
a) qualified opinion or disclaimer.
b) qualified or an adverse opinion.
c) unqualified opinion with an explanatory paragraph.
d) adverse opinion or a disclaimer.
An auditor ordinarily examines invoices from lawyers primarily in order to *
a) estimate the peso amount of contingent liabilities.
b) identify possible unasserted litigation, claims, and assessments.
c) substantiate accruals.
d) assess the legal ramifications of litigation in progress.
Evidence is generally considered appropriate when: *
a) it consists of written statements made by managers of the enterprise under audit
b) it has been obtained by random selection
c) it has the qualities of being relevant, objective, and free from known bias
d) there is enough of it to afford a reasonable basis for an opinion on financial
statements
Auditing standard requires the auditor to evaluate whether there is a substantial doubt
about a client's ability to continue as a going concern for at least one year beyond the
statement of financial position date. one of the most important types of evidence to
assess the going concern question is *
 a) statistical sampling procedures.
b) analytical procedures.
c) confirmations of creditors.
d) inquiries of client and their legal counsel.

FINAL EXAM
Auditor's Opinion

The auditor should consider adding emphasis of matter paragraph when *

a) The auditor was prevented from completing a procedure required by PSA

b) The company adopt a new accounting standard earlier that its mandatory effective date
c) The financial statements are not free from material misstatements
d) The financial statement is failed to disclose information required by PFRS

At the end of the audit, the auditor is supposed to accumulate and evaluate the need for adjustment of

a) known uncorrected errors

b) unknown projected errors
c) carrying over of prior year errors
d) all of these

For audits of non-listed entities, the use of key audit matter section is *

a) Discouraged
b) Not required
c) Required
d) Not allowed

If the scope of the examination has been satisfactory for all items except for one of material amount,
the auditor should issue a(an) *

a) qualified opinion
b) adverse opinion
c) unqualified opinion
d) disclaimer of opinion

In which of the following situations would a decision of selecting between qualified or adverse opinions
be inappropriate? *

a) A disagreement between the auditor and the client arose because of the capitalization of
research and development costs.
b) A required disclosure that is significant is omitted from the financial statements.
c) The financial statements are materially misstated.
d) A limitation on the scope of the audit

A major purpose of the auditor's report on financial statements is to *

 a) Assure investors of the complete accuracy of the financial statements
b) Deter creditors from extending loans in high-risk situations
c) Enhance the degree of confidence of intended users in the financial statements
d) Describe the specific auditing procedures undertaken to gather evidence of the opinion

The date of the audit report is important because *

a) The date of the auditor's report informs the user of the auditor's report that the auditor has
considered the effect of events and transactions of which the auditor became aware and that
occurred up to the date
b) This date coincides with the date of the financial statements
c) PSAs require all audits to be performed on a timely basis
d) The auditor bills time to the client up to and including the audit report date, and the statement
to the client should reflect this date

The most common type of audit report contains a *

a) Qualified opinion
b) Disclaimer of opinion
c) Unmodified opinion
d) Adverse opinion

The qualified opinion report will be issued by the independent auditor when, in the auditor's judgment,
the effects or possible effects of the item under consideration are *

a) Material but not pervasive

b) Not material and not pervasive
c) Material and pervasive
d) Pervasive but not material

If an amendment to the information in a document containing audited financial statements is necessary

and the entity refuses to make the amendment, the auditor would consider issuing: *

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a) Qualified or disclaimer of opinion

b) Unmodified opinion with other information section
c) Unmodified opinion.
d) Qualified or adverse opinion

The expression of a qualified opinion means that the financial statement, taken as a whole *

a) Not presented fairly

b) Affected by uncertainties
c) Presented fairly
d) Materially misleading
A disclaimer is issued whenever the auditor *

a) Believes that the overall financial statements are not presented fairly.
b) Has determined that the financial statements are presented fairly.
c) Has been unable to satisfy himself/herself that the overall financial statements are presented
fairly.
d) Believes that some material part(s) of the financial statements are not presented fairly.

Whenever there is a scope limitation, the appropriate response is to issue *

a) A qualification of scope and opinion, or a disclaimer, depending on materiality and

pervasiveness of effect
b) A qualified opinion
c) An adverse opinion
d) A disclaimer of opinion

Both disclaimer and adverse opinions are used *

a) When the condition is material and pervasive

b) Irregardless of the auditors independence
c) Regardless of client's choice of unacceptable accounting method.
d) Whether the condition is material or not.

A purpose of a management representation letter is to reduce *

a) The possibility of misunderstanding concerning management’s responsibility for the financial

statements.
b) The scope of an auditor’s procedures concerning related party transactions and subsequent
events.
c) An auditor’s responsibility to detect material misstatements only to the extent that the letter is
relied on.
d) Audit risk to aggregate level of misstatement that could be considered material

When the audited financial statements of the prior year are presented together with those of the
current year, the continuing auditor's report should cover *

a) Both years
b) Only the current year
c) Only the current year, but the prior year's report should be referred
d) Only the current year, but the prior year's report should be presented.

If the auditor believes that a required material disclosure is omitted from the financial statements, the
auditor should decide between issuing a (n) *

a) Unmodified opinion or a qualified opinion

b) Adverse opinion or a disclaimer opinion
c) Qualified opinion or an adverse opinion
d) Disclaimer of opinion or a qualified opinion
In addition to the company’s financial statements, which of the following would be covered by the
auditor’s standard report? *

a) The company’s tax return for the year being audited

b) Comparative figures in the financial statements
c) The company’s budget for the net income for the year being audited.
d) The notes to the financial statements

The auditor's judgement as to whether the financial statements are presented fairly, in all material
respects, is made in the context of *

a) Applicable financial reporting framework

b) The professional ethical requirements
c) Philippine Standards on Auditing
d) Generally accepted auditing standards

The opinion expressed by the auditor when the auditor concludes that the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework is *

a) Qualified opinion
b) Undeniable opinion
c) Unmodified opinion
d) Denial of opinion

10 of 10 points
Which of the following best describes a CPA’s engagement to report on an entity’s internal control over
financial reporting? *

a) an attestation engagement to examine and report on management’s written assertions about

the effectiveness of its internal control.
b) a consulting engagement to provide constructive advice to the entity on its internal control.
c) an audit engagement to render an opinion on the entity’s internal control.
d) a prospective engagement to project, for a period of time not to exceed one year, and report on
the expected benefits of entity’s internal control.

William became the new auditor for Notting Corporation, succeeding Anna who audited the financial
statements last year. William needs to report on Notting’s comparative financial statements and should
write in his report an explanation about another auditor having audited the prior year: *

a) describing the audit but not revealing the type of opinion Anna gave.
b) only if Anna’s opinion last year was qualified.
c) describing the audit and the opinion and naming Anna as the predecessor auditor.
d) describing the prior audit and the opinion but not naming Anna as the predecessor auditor.

An auditor’s report on financial statements prepared in accordance with another comprehensive basis
of accounting should include all of the following except *

a) an opinion as to whether the financial statements are presented fairly in conformity with the
other comprehensive basis of accounting.
 b) a statement that the basis of presentation is a comprehensive basis of accounting other than
financial reporting standards.
c) an opinion as to whether the basis of accounting used is appropriate under the circumstances
d) reference to the note to the financial statements that describes the basis of presentation.

In connection with a proposal to obtain a new client an accountant in public practice is asked to prepare
a written report on the application of accounting principles to a specific transaction. The accountant’s
report should include a statement that *

a) the guidance provided is for management use only and may not be communicated to the prior
or continuing auditors.
b) nothing came to the accountant’s attention that caused the accountant to believe that the
accounting principles violated financial reporting standards.
c) any difference in the facts, circumstances, or assumptions presented may change the report.
d) the engagement was performed in accordance with Statements on Standards for Consulting
Services.

When reporting on comparative financial statements, an auditor should ordinarily change the previously
issued opinion on the prior year’s financial statements if the *

a) prior year statements are restated to conform with financial reporting standards.
b) prior year statements are restated following a pooling of interests in the current year.
c) auditor is a predecessor auditor who has been requested by a former client to reissue the
previously issued report.
d) prior year’s opinion was unqualified and the opinion on the current year’s financial statements is
modified due to a lack of consistency.

Which of the following best describes the auditor’s responsibility for “other information” included in the
annual report to stockholders that contains financial statements and the auditors’ report? *

a) the auditor should extend the examination to the extent necessary to verify other information.
b) the auditor has no obligation to corroborate other information but should read it to determine
whether it is materially inconsistent with the financial statements.
c) the auditor must modify the auditor’s report to state that the other information is unaudited or
not covered by the auditor’s report.
d) the auditor has no obligation to make the other information

Comparative financial statements include the financial statements of the prior year, which were audited
by a predecessor whose report is not presented. If the predecessor’s report was qualified, the successor
should *

a) issue an updated comparative audit report indicating the division of responsibility.

b) request the client to reissue the predecessor’s report on the prior year’s statements.
c) indicate the substantive reasons for the qualification in the predecessor’s opinion.
d) express an opinion only on the current year’s statements and make no reference to the prior
year’s statements.
Alpha Life Insurance Co. prepares its financial statements on an accounting basis insurance companies
use pursuant to the rules of an insurance commission. If Abad, CPA. Alpha’s auditor, discovers that the
statements are not suitably titled, Abad should *

a) explain in the notes to the financial statements the terminology used.

b) disclose any reservation in an explanatory paragraph and qualify the opinion.
c) issue a special statutory basis report that clearly disclaims any opinion.
d) apply to the insurance commission for an advisory opinion.

When reporting on financial statements prepared on the same basis of accounting used for income tax
purposes, the auditor should include in the report a paragraph that *

a) states that the income tax basis of accounting is a comprehensive basis of accounting other than
financial reporting standards.
b) refers to the authoritative pronouncements that explain the income tax basis of accounting
being used.
c) emphasizes that the financial statements are not intended to have been examined in
accordance with generally accepted auditing standards.
d) justifies the use of the income tax basis of accounting

Which of the following best describes the auditor’s reporting responsibility concerning information
accompanying the basic financial statements in an auditor-submitted document? *

a) the auditor should report on all the information included in the document.
b) the auditor should report on the information accompanying the basic financial statements only
if he or she participated in preparing the accompanying information.
c) the auditor should report on the basic financial statements but may not issue a report covering
the accompanying information.
d) the auditor should report on the information accompanying the basic financial statements only
if the document is being distributed to public shareholders.

Non-Audit Engagements
8 of 10 points
Prospective financial statements are for *

a) use by internal management only.

b) limited use only.
c) general use.
d) either general or limited use.

Professional standards prohibit one of the following types of engagements for prospective financial
statements from being undertaken. *

a) An examination
b) An agreed-upon procedures engagement.
c) A compilation
d) A review
Which of the following would not be included in a CPA’s report based upon a review of the financial
statements of a nonpublic entity? *

a) A statement that all information included in the financial statements is the representation of
management.
b) A statement that the review was in accordance financial reporting
c) A statement describing the auditor’s conclusions based upon the results of the review.
d) A statement describing the financial procedures performed.

Mickey Company, whose financial statements are unaudited, has engaged a CPA to make a special
review and report on Mickey’s internal accounting period. In general to which of the following will this
report be least useful? *

a) Present and prospective customers.

b) Mickey’s management.
c) A regulatory agency having jurisdiction over Mickey.
d) The independent auditor or Mickey, parent company.

The accountant’s report on an examination of prospective financial statements should not include *

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a) The accountant’s opinion that the prospective financial statements are presented in conformity
with PICPA presentation guidelines and that the underlying assumptions provide a reasonable
basis for the forecast, a reasonable basis for the projection given the assumptions.
b) A caveat that the prospective results may not be achieved.
c) A statement that the examination was made in accordance with financial reporting standards,
and a brief description of the nature of such examination.
d) A statement that the accountant assumes no responsibility to update the report for events and
circumstances occurring after the date of the report.

An accountant who reviews the financial statements of nonpublic entity should issue a report stating
that a review *

a) Provides negative assurance that the internal control structure is functioning as designed.
b) is substantially more in scope than a compilation.
c) Provides only limited assurance that the financial statements are fairly presented.
d) is substantially less in scope that an audit.

Which of the following procedures is not included in a review engagement of a nonpublic entity? *

a) Inquiries of management.
b) A study and evaluation of internal control.
c) Any procedures designed to identify relationships among data that appear to be unusual.
 d) Inquiries regarding events subsequent to the statement of financial position date.

When the auditor is engaged to report in the internal structure, *

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a) all areas of the structure will go on unless specifically excluded by agreement.

b) the time period covered must coincide with the fiscal period oldie annual audit.
c) Certain areas are not examined if reduced control risk in those areas is not planned.
d) all three of the above apply.

Before performing a review of a nonpublic entity’s financial statements, on accountant should *

a) obtain a sufficient level of knowledge of the accounting principles and practices of the industry
in which the entity operates.
b) Complete a series of inquiries concerning the entity’s procedures for recording, classifying, and
summarizing transactions.
c) apply analytical procedures to provide limited assurance that no material modifications should
be made to the financial statements.
d) inquire whether management has omitted substantially all of the disclosures required by
financial reporting standards.

Prospective financial statements are for general use or for limited use. General use refers to use by any
third party, whereas limited use refers to use by third parties with whom the responsible party is
negotiating directly. Which of the following statements is not correct? *

a) Forecasts can be provided for general use.

b) Projections can be provided for general use.
c) Forecasts can be provided for limited use.
d) Projections can be provided for limited use.

Prof. Standards and Quality Control

9 of 10 points
In pursuing its quality control objectives with respect to assigning personnel to engagements, a CPA firm
may use policies and procedures such as the following *

a) rotating employees from assignment to assignment on a random basis to aid in the staff training
effort.
b) assigning a number of employees to each engagement in excess of the number required so as
not to overburden the staff and interfere with the quality of the audit work performed.
c) requiring timely identification of the staff requirements of specific engagements so that enough
qualified personnel can be made available.
d) allowing staff to select the assignments of their choice to promote better client relationships.
In connection with the element of professional development, CPA firm's system of quality control should
ordinarily provide that all personnel *

a) possess judgment, motivation, and adequate experience.

b) demonstrate compliance with peer review directives.
c) have the knowledge required to enable them to fulfill responsibilities assigned.
d) seek assistance whom persons having appropriate levels of knowledge, judgment, and authority.

Which of the following is not an element of quality control that should be considered by a firm of
independent auditors? *

a) Assigning personnel to engagements

b) Supervision
c) Consultation With appropriate persons
d) Keeping records of quality control policies and procedures

The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to *

a) minimize the likelihood of association with clients whose management lacks integrity.
b) enable the CPA firm to attest to the reliability of the client.
c) satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
d) anticipate before performing any field work whether an unqualified opinion can be expressed.

A CPA establishes quality control policies and procedures for deciding whether to accept a new client or
to continue to perform services for a current client. The primary purpose for establishing such policies
and procedures is to *

a) comply with the quality control standards established by the regulatory bodies.
b) comply with standards of auditing.
c) comply with financial reporting standards.
d) minimize the likelihood of association with clients whose management, lacks integrity.

The least important element in the evaluation of a CPA firm's system of quality controls would concern
its policies and procedures with respect to *

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a) determination of audit fees.

b) employment (hiring).
c) confidentiality of audit engagements.
d) assigning personnel to audit engagements.
In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to

a) review financial statements of the proposed client.

b) make inquiries of the proposed client's legal counsel.
c) make inquiries of previous auditors.
d) review the personnel practices of the proposed client.

A basic objective of a CPA firm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through *

a) a system of peer review.

b) continuing professional education.
c) compliance with generally accepted accounting standards.
d) a system of quality control.

Quality control for a CPA firm, as referred to in auditing standards, applies to *

a) auditing and tax services.

b) auditing and management advisory services.
c) auditing services only.
d) auditing and accounting and review services.

A firm of CPAs may use policies and procedures such as notifying professional personnel as to the names
of audit clients having publicly held securities and confirming periodically with such personnel that
prohibited relations do not exist. This is done to achieve effective quality control in which of the
following areas? *

a) Acceptance and continuance of clients

b) Ethical requirements
c) Human resources
d) Leadership responsibilities for quality within the firm

Code of Ethics
9 of 10 points
When a threat to independence arises, an auditor should consider: *

a) Available safeguards to independence.

b) Global independence rules.
c) Alternative threats to a lack of independence.
d) Required lack of independence approaches.

Which of the following is not a broad category of threat to auditor independence? *

 a) Undue Influence.
b) Financial self interest.
c) Positive work relationship.
d) Familiarity.

Independence requirements suggest that a CPA should evaluate whether a particular threat to
independence would lead a reasonable person, aware of all the relevant facts, to conclude that: *

a) An unacceptable risk of non-independence exists.

b) A questioning mind reveals doubt as to independence.
c) There is substantial cause for a legal finding of non-independence.
d) The accountant is definitely not independent.

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

a) Non compliance with PFRS.

b) Independence.
c) Integrity.
d) Confidentiality

Contingency fee based pricing of accounting services is: *

a) Never restricted in public accounting practice.

b) Always strictly prohibited in public accounting practice.
c) Prohibited for clients for whom attestation services are provided.
d) Considered an act discreditable to the profession.

A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA
firm's revenues come from this client. Which statement is most likely to be true? *

a) The situation is satisfactory if the auditor exercises due to skeptical negative assurance care in
the audit.
b) The auditor should provide an “emphasis of a matter paragraph” to his/her audit report
adequately disclosing this information and then it may issue an unqualified opinion.
c) The small CPA firm does not have proficiency to perform larger audit.
d) Appearance of independence may be lacking.

Cruz & Santos CPAs has one office. Which of the following is least likely to impair independence with
respect to an audit client? *

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a) The husband of a partner in the firm has a small direct financial interest in the client.
b) A partner in the CPA firm is the son of the president of the client.
c) The client owes the firm for two prior years' audit fees.
d) A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

Which of the following forms of advertising would most likely be considered a violation of the Code of
Ethics? *
 a) Advertising including the types of services offered and the standard fees for the services.
b) Advertising including an indication that the firm has a close relationship with several tax court
judges.
c) Advertising including the percentage of the firm's staff that have CPA certifica
d) Advertising including the experience of the firm's professional staff.

If the Code of ethics does not specifically address a threat to auditor independence, the auditor should:

a) Consult the statements on Auditing Standards for guidance.

b) Conclude that the threat results in a lack of independence unless it can be shown that no
impairment of independence occurs.
c) Conclude that the threat is not significant unless proven so.
d) Consider the threat from the perspective of a reasonable and informed third party who has
knowledge of all the relevant information.

Which of the following family relationship is most likely to impair a CPA's independence with respect to
a particular audit client on which the CPA works? *

a) The CPA's spouse participates in a savings plan sponsored by the client.

b) The CPA's sister is controller of the audit client.
c) A close relative has a material investment in that client of which the CPA is not aware.
d) A cousin has an immaterial investment in the client of which CPA is aware.