MM&C CO. CPD TRAINING CENTER, INC.

RANDY S. PADERES MMC AT FPB

FINAL PREBOARD EXAMS
AUDITING THEORY

DIRECTION: Shade the letter of the most appropriate answer.

1. When the audit is properly planned and performed in accordance with PSAs
a. Misstatements may still remain undetected.
b. All misstatements will be detected by the auditor since risk assessment procedures will be effective in
identifying where misstatements could occur.
c. Test of controls will be done more efficiently and effectively.
d. Audit will be done smoothly without the need for risk assessment revisions.

2. The external auditor may use the work of internal auditors if

a. The responsiblities and activities of the function are not relevant to the audit.
b. The work of the Internal auditor is not within the scope of external audit.
c. The external auditor is satisfied of the competence of the internal auditor and of the latter’s compliance to
professional and ethical standards.
d. The Internal auditor’s work would ultimately reduce the nature, timing and extent of the external auditor’s
procedures.

3. Magiging CPA ako Co., the external auditor of Kakayanin mo yan Co. has assessed the level of control risk
(together with the assessed level of inherent risk) to determine the acceptable level of detection risk for financial
statements assertions for Kakayanin mo yan’s receivable account balances. As the acceptable level of detection
risk decreases, which of the following adjustments to the accounts receivable audit program would the audit team
normally make?
a. Change the nature of substantive tests to less efficient procedures, such as using negative rather than
positive confirmations.
b. Change the timing of the confirmation process to an interim date.
c. Increase the sample size of the accounts for confirmation.
d. Change the sampling method from random to convenience sampling.

4. As a newly hired auditor in a top audit firm Sipsip, Goreng, Velayou & Co., Mr. Masipag Determinado was assigned
to observe the physical inventory count of one of its clients, Formality na lang ang CPA Board Exams, Inc. Which
of the following assertions is satisfied when an auditor observes the client’s physical count of inventory?
a. Valuation.
b. Completeness.
c. Rights and obligations.
d. Existence.

5. Rodolfo I. Potenciano, CPA (RIP), I will Pass Inc.’s external auditor performed analytical procedures during the
audit of the latter’s financial statements as of and for the year ended December 31, 2017. Upon performing the
analytical procedures, RIP observes that the operating income has significantly declined between the preceding
year and the current year. As such, RIP should next
a. Require that the decline be disclosed in the financial statements.
b. Consider the possibility that the financial statements may be materially misstated.
c. Inform management that a qualified opinion on the financial statements will be necessary.
d. Determine management’s responsibility for the decline and discuss the issue with the audit committee.

6. Ms. Almoranas Positibo, CPA was newly appointed by Mandurugas Company for the audit of the latter’s financial
statements as of and for the year ended December 31, 2017. As part of the first phase of its audit methodology,
Ms. Positibo conducted a preliminary meeting with Mandurugas Company to obtain an understanding of the
Client’s business and operations. During the interview, Ms. Positibo inferred that the Client is more concerned with
minimizing their income tax payments than maximizing income. Based on this information, which management
assertion will the auditor be most concerned about verifying with regard to sales revenue?
a. Existence and occurrence.
b. Completeness.
c. Rights and obligations.
d. Valuation.

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 7. Britney noted that as of December 31, 2017, the Company has reported a loan balance of P50 million with the
Bank of the Philippine Islands. This loan which was obtained in 2006 will mature on March 31, 2018. Upon
further investigation, Britney noted that the cash account balance of the Company set aside for the loan
repayment was only P30 million. Per inquiry with Whitney Spears, Hollywood Chief finance Officer, Britney noted
that the deficiency of P20 million will be infused by the existing stockholders as additional capital contribution. As
such, Britney believed that there is a minimal likelihood that the resolution of an uncertainty will have a material
effect on the financial statements. In such case, Britney should issue a(n)
a. Qualified opinion.
b. Unqualified opinion.
c. Adverse opinion.
d. Disclaimer of opinion.

8. Albatross Romeo & Juliet & Co. conducts the audit of the financial statements of Birgma Inc. Birgma sells 15 to 20
units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual
sales have not materially changed over the past 5 years. Which of the following approaches would be most
effective concerning the timing of audit procedure for revenue?
a. The auditor should perform analytical procedures at an interim date and discuss any changes in the level
of sales with senior management.
b. The auditor should inspect transactions occurring in the last month of the fiscal year and review the
related sale contracts to determine that revenue was posted in the proper period.
c. The auditor should perform tests of controls at an interim date to obtain audit evidence about the
operational effectiveness of internal controls over sales.
d. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings
goals.

9. The external auditor shall not use the work of the internal audit function if the external auditor determines that:
a. The function’s organizational status and relevant policies and procedures do not adequately support the
objectivity of internal auditors.
b. The function lacks sufficient competence
c. The function does not apply a systematic and disciplined approach, including quality control.
d. All of the above.

10. Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a
satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity
exists. In this case, the auditor must
a. Issue either a qualified or an adverse opinion.
b. Issue a disclaimer of opinion.
c. Issue either a qualified opinion or a disclaimer.
d. Design other appropriate audit procedures to determine if such errors do exist.

11. Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor
begins the audit with a great deal of information about the client’s internal control structure developed in prior
years. Because systems and controls usually don’t change frequently,
a. The auditor can skip the evaluation of this area on repeat engagements.
b. This information can be updated and carried forward to the current year’s audit.
c. It eases the burden on the auditor’s requirement to do a complete study of the control this year.
d. It is sufficient for the auditor just to inquire of client whether the controls have been changed since last
year.

12. Effective internal control requires an organization independence of departments. Organizational independence
would be impaired in which of the following situations?
a. The internal auditors report to the audit committee of the board of directors.
b. The controller reports to the vice president of production.
c. The payroll accounting department reports to the chief accountant.
d. The cashier reports to the treasurer.

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 13. If the auditor were responsible for making certain that all the assertions of management in the statements were
correct
a. Bankruptcies could no longer occur.
b. Bankruptcies would be reduced to a very small number.
c. Audits would be much easier to complete.
d. Audits would not be economically feasible.

14. The factor that distinguishes an error from a fraud is

a. Materiality
b. Intent
c. Whether it is a peso amount or process
d. Whether it is a caused by the auditor or the client.

15. Which of the following statements is not correct?

a. It would be violation of the completeness assertion if management would record a sale that did not take
place.
b. The completeness assertion deals with matters opposite from those of the existence/occurrence
assertions.
c. The completeness assertion is concerned with the possibility of omitting items from the financial
statements that should have been included.
d. The existence/occurrence assertion is concerned with inclusion of amount that should not have been.

16. Which one of the following types of evidence will aid in achieving the audit objective of determining mechanical
accuracy?
a. Confirmation
b. Recomputation
c. Physical examination
d. Inquiries of client.

17. When a publicly-held company refuses to include in its audited financial statements any of the segment
information that the auditor believes is required, the auditor should issue a(an)
a. Unmodified opinion with a separate paragraph emphasizing the matter.
b. Qualified opinion because of inadequate disclosure.
c. Adverse opinion because of the lack of conformity with financial reporting standards.
d. Disclaimer of opinion because of its significant scope limitation.

18. Auditors usually evaluate the effectiveness of

a. Hardware controls first.
b. Sales cycle controls first.
c. General controls before application controls.
d. Application controls first.

19. The date of the management representation letter should coincide with the
a. Date of the auditor’s report.
b. Balance sheet date.
c. Date of the latest subsequent event referred to in the notes to the financial statements.
d. Date of the engagement agreement.

20. Which of the following is the format of compilation that would not be acceptable?
a. A compilation with full disclosure in accordance with financial reporting standards.
b. A compilation that omits substantially all disclosures, the report indicates that they are missing, and their
absence is not an intent to mislead the users.
c. A compilation with a separate paragraph warning readers that the CPA is not responsible for exercising
due care when performing this type of engagement.
d. A compilation with a separate paragraph that admits that the CPA is not independent with respect to this
client.

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 21. An auditor concludes that there is a material inconsistency in the other information in an annual report to
shareholders containing audited financial statements. If the auditor concludes that the financial statements do not
require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may
a. Issue an “except for” qualified opinion after discussing the matter with the client’s board of directors.
b. Consider the matter closed since the other information is not in the audited financial statements.
c. disclaim an opinion on the financial statements after explaining the material inconsistency in a separate
explanatory paragraph.
d. revise the auditor’s report to include a separate explanatory paragraph describing the material
inconsistency.

22. If information is for management’s use only, which of the following forms of CPA association with financial
information is most likely to result in no report being issued?
a. An agreed-upon procedures engagement.
b. An audit.
c. A compilation.
d. A review.

23. Violation of which of the following is most likely to be considered a “direct effect” illegal act?
a. Environmental protection laws.
b. Occupational safety and health law violations.
c. Securities trading laws.
d. Tax laws.

24. Which of the following statement is true when the CPA has been engaged to do an attestation engagement?
a. The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an
advocate for the client.
b. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are the
statement users.
c. Should a situation arise where there is no convincing authorizative standards available, and there is a
choice of actions which could impair client’s financial statements either positively or negatively, the CPA is
free to endorse the choice which is the best in the client’s interest.
d. As long as CPA firms are competent, it is not requried that they remain unbiased.

25. Checklists, systems development methodology, and staff hiring are examples of what type of controls?
a. Detective c. Subjective
b. Preventive d. Corrective

26. In which of the following engagement is contingent fee allowed?

a. All services performed by a CPA firm.
b. Assurance and Non assurance engagements.
c. Non assurance engagements, unless the CPA firm was also performing assurance engagements for the
same clients.
d. Assurance engagements.

27. A bank auditor is interested in estimating the average account balance of its depositors based on a sample. This
substantive test is an example of
a. Attribute sampling c. Acceptance sampling
b. Discovery sampling d. Variable sampling

28. Which of the following is a major difference between a review and an audit of the financial statements?
a. The scope of the procedures performed and the assurance provided.
b. The level of knowledge of professional standards needed to perform the procedures.
c. The type of accounting used- reviews are typically on Non-PFRS accounting, while audit are based upon
PFRS accounting.
d. The type of company involved in reviews may only be publicly-held.

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 29. Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s
permanent files most likely include
a. Schedules that support the current year’s adjusting entries.
b. Prior years’ accounts receivable confirmation that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and supervised.
d. Analyses of capital stock and other owners’ equity accounts.

30. In which of the following circumstances would an auditor be most likely to adverse opinion?
a. The statements are not in conformity with the PFRSC.
b. Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue
in existence.
c. The chief executive officer refuses the auditor access to minutes of board of directors’ meeting.
d. Test of controls show that the entity’s internal control structure is so poor that it cannot be relied upon.

31. Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?
a. An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are
material to the financial statements.
b. An auditor is responsible to detect material errors, but has no responsibility to detect fraud that is
concealed through employee collusion or management override of internal control.
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of
transactions identify conditions causing a reasonably prudent auditor to suspect that the financial
statements were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an
audit does not constitute a guarantee.

QUESTIONS 32 to 35 are based on the following information

On August 18, 2017, Masipag, Matalino Pasado & Co. (MMPC) was newly appointed by I am destined to be a CPA, Co.
to audit the latter’s financial statements as of and for the six months ended June 30, 2017. I am destined to be a CPA,
Co. signed an engagement letter with the following terms:

“As auditors of the Company, our objective is to examine the financial statements of the Company as of and for the six
months ended June 30, 2017 presented to us by management, and then to report to the Board of Directors.

As management, you are responsible for the maintenance of proper accounting records and the preparation of
financial statements that present fairly in all material respects and are prepared in accordance with Philippine Financial
Reporting Standards. These responsibilities are explained in greater detail in the enclosed terms of business.

To enable us to fulfill our audit responsibilities, you will be responsible for providing us with full access to all
accounting records, and to other relevant documents, including, but not limited to, minute books, stock registers,
statements and correspondence. We will endeavor to ensure that our work is carried out efficiently and without
undue disruption. The terms of business explain, in further detail, the procedures we may use, and other matters we
are required to consider and report on, if applicable.

We will conduct our audit in accordance with Philippine Standards on Auditing (PSA). Those standards require that we
obtain reasonable rather than absolute assurance that the financial statements are free of material misstatement
whether caused by error or fraud. As management is aware, there are inherent limitations in the audit process,
including, for example, selective testing and the possibility that collusion or forgery may preclude the detection of
material error, fraud and illegal acts. Accordingly, a material misstatement may remain undetected. Also, an audit is
not designed to detect error or fraud that is immaterial to the financial statements.”

I am destined to be a CPA Co. was incorporated on January 27, 1982 to engage in the manufacturing of scientific
calculator for Accountancy studends. The short period audit was for the purpose of a merger with another affiliate
under I am destined to be a CPA Co.’s corporate umbrella.

As of August 31, 2017, MMPC was able to finish 60% of the required audit procedures in accordance with the audit
plan. However, the auditor was not able to observe the inventory stock taking conducted by DVD on June 28, 2013.

On September 1, 2017, I am destined to be a CPA Co., informed MMPC that the merger would not push through and
that the audit of the financial statements is no longer needed. I am destined to be a CPA Co. further requested MMPC
to change the audit engagement to a “Review engagement,” for the purpose of providing an interim financial
statements of the Company to a bank for a long-term loan application.

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 32. Which of the following is true?
a. The timing of the appointment of MMPC is unacceptable because it precluded the auditor to perform
certain audit procedures;
b. The timing of MMPC’s appointment is acceptable but would require the auditor to issue an audit Opinion
with an “Other matters” paragraph that explains the scope limitation on the audit of inventory.
c. MMPC should not have accepted the engagement since a scope limitation was clearly evident at the time
of the auditor’s appointment that would serve as the auditor’s basis for issuing a disclaimer of opinion.
d. The timing of MMPC’s appointment is valid but would require the auditor to adjust the nature, timing and
extent of planned audit procedures.

33. Which of the following is true?

a. The auditor should not consent to the change in the engagement since there is no reasonable justification
of doing so.
b. The auditor should not agree to the change in the audit engagement since the provisions of the
engagement letter is binding and enforceable.
c. The auditor should agree to the change and issue a revised engagement letter.
d. JGV should not agree to the change since a substantial work has already been performed.

34. Under the following circumstances, the auditor should

a. Issue an audit report to the extent of the substantial work performed based on the audit evidences
gathered;
b. Issue a disclaimer of opinion on the basis of the scope limitation imposed by management when the
engagement was changed to convey a lower level of assurance;
c. Consult legal counsel and Withdraw from the engagement;
d. Issue a revised job engagement letter.

35. Omission of the last paragraph of the engagement terms would

a. Result to misunderstanding on the scope of the audit engagement.
b. Require the auditor to obtain an absolute assurance on the audit engagement.
c. Require the auditor to include the provisions of the terms of the audit engagement in the audit report;
d. Preclude auditor from issuing a reasonable assurance report.

END OF MMC AT-FPB

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