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SOUTHERN MINDANAO ACADEMIC REVIEW & TRAINING SERVICES

2F Ritzleen Building, Lukban Street, General Santos City, Philippines


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CPA Review
OCTOBER 2016 ARIEL C. NACION
General Santos City, Region XII Auditing Theory

PREWEEK
ASSURANCE ENGAGEMENTS AND TYPES OF AUDIT
1. Three common types of attestation services are
A. Audits, verifications, and “other” attestation services
B. Reviews, verifications, and other attestation services
C. Audits, reviews, and verifications
D. Audits, reviews, and other attestation services

2. Which of the following is not a primary category of attestation report?


A. Compilation report
B. Review report
C. Audit report
D. Special audit report based on a basis of accounting other than generally accepted accounting principles

3. Theoretically, it is possible to provide an infinite range of assurance from a very low level of assurance to an
absolute level of assurance. In practice, the professional accountants cannot provide absolute assurance
because of the following, except
A. The professional accountant employs the testing process.
B. The internal control has its inherent limitations.
C. The use of judgment in gathering evidence and drawing conclusions based on that evidence.
D. The lack of expertise of the professional accountants in doing a systematic engagement process.

4. How did the framework of PSA conceptually describe an assurance?


A. It refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use
by another party.
B. The level of assurance that may be provided is determined by the reporting objective.
C. An assurance is expressed positively in the report.
D. Because of the inherent limitation in an audit, the assurance is of limited one.

5. Assurance services involve all of the following except


A. Improving the quality of information for decision purposes
B. Improving the quality of information of the decision model used
C. Improving the relevance of information
D. Implementing a system that improves the processing of information

6. All assurance engagements contain five basic elements. Which of the following is not one of these elements?
A. A three party relationship involving a practitioner, a responsible party, and intended users
B. A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement
C. Engagement acceptance
D. Suitable criteria

7. When an accountant performs more than one level of service (for example, a compilation and a review, or a
compilation and an audit) concerning the financial statements of a private entity, the accountant generally
should issue the report that is appropriate for
A. The lowest level of service rendered C. A compilation engagement
B. The highest level of service rendered D. A review engagement

8. Certified public accounting (CPA) firms provide audit services for all, but which of the following entities?
A. Privately-held companies
B. Corporations listed on the Philippine Stock Exchange
C. Public companies
D. CPA firms provide audit services for all of these entity types

9. An audit of financial statements is conducted to determine whether the


A. Organization is operating efficiently and effectively
B. Entity is following specific procedures or rules set down by some higher authority
C. Members of the management team are fulfilling their fiduciary responsibilities to shareholders
D. None of the above

10. Which of the following can be significantly affected by an audit?

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A. Business risk C. The risk-free interest rate
B. Information risk D. All of these

11. The main way(s) to reduce information risk is to have


A. The user verify the information
B. The user share the information risk with management
C. Audited financial statements provided
D. All of these

12. The difference between what the public expects to get from the audited financial statements and what the
public is actually getting is known as
A. Credibility C. Expectation gap
B. Audit gap D. Level of assurance gap

13. Which of the following factors most likely would influence an auditor’s determination of the auditability of an
entity’s financial statements?
A. The complexity of the accounting system
B. The existence of related-party transactions
C. The adequacy of the accounting records
D. The operating effectiveness of control procedures

14. 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 a small number
C. Audits would be much easier to complete
D. Audits would not be economically feasible

15. The following are represented both to the FRSC and AASC, except
A. BSP B. SEC C. BIR D. BOA

16. The criteria for evaluating quantitative information vary. For example, in the audit of historical financial
statements by CPA firms, the criteria are usually
A. Accounting principles generally accepted in the Philippines
B. Auditing standards generally accepted in the Philippines
C. Regulations of the Bureau of Internal Revenue
D. Regulations of the Securities and Exchange Commission

17. Philippine Standards on Auditing provide auditors of privately-held companies with ________ guidance
regarding the conduct of financial statement audits
A. Fairly extensive C. Practically no
B. Some limited D. Specific and detailed

18. Generally accepted auditing standards are


A. Rules imposed by the Congress C. Rules imposed by the PICPA
B. Rules imposed by the SEC D. General guidelines to aid auditors

19. The Philippine Standards on Auditing


A. Are interpretations of generally accepted auditing standards
B. Are the equivalent of laws for audit practitioners
C. Must be followed in all situations
D. Are optional guidelines which an auditor may choose to follow or not follow when conducting an audit

20. Which of the following is not explicitly referred to in the Code of Ethics as source of technical standards?
A. Commission on Audit C. Securities and Exchange Commission
B. Auditing and Assurance Standards Council D. Relevant legislation

21. The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
A. The auditor
B. Management
C. Both management and the auditor equally
D. Management for the statements and the auditor for the notes

22. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her
name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are
unlikely to mislead
A. Investors B. Management C. A prudent user D. The reader

23. The auditor’s best defense when existing material misstatements in the financial statements are not
uncovered in the audit is that
A. The audit was conducted in accordance with generally accepted auditing standards
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B. The audit was conducted in accordance with generally accepted accounting principles
C. Client is guilty of contributory negligence
D. The financial statements are client’s responsibility

24. In connection with the audit of financial statements, an independent auditor could be responsible for failure to
detect a material fraud if
A. Statistical sampling techniques were not used on the audit engagement
B. The auditor planned the work in a hasty and inefficient manner
C. Accountants performing important parts of the work failed to discover a close relationship between the
treasurer and the cashier
D. The fraud was perpetrated by one client employee, who circumvented the existing internal controls

25. A typical objective of an operational audit is to


A. Determine whether the financial statements fairly present the entity’s operations
B. Evaluate the feasibility of attaining the entity’s operational objectives
C. Make recommendations for improving performance
D. Report on the entiy’s relative success in attaining profit maximation

26. An audit to determine whether an entity is following specific procedures or rules set down by some higher
authority is classified as a(n)
A. Compliance audit C. Audit of financial statements
B. Operational audit D. Production audit

27. Which one of the following is more difficult to evaluate objectively?


A. Presentation of financial statements in accordance with generally accepted accounting principles
B. Compliance with government regulations
C. Efficiency and effectiveness of operations
D. All three of the above are equally difficult

28. Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency, effectiveness, and
A. Internal control B. Evaluation C. Accuracy D. Compliance

29. To operate effectively, an internal auditor must be independent of


A. The line functions of the organizations
B. The entity
C. The employer-employee relationship which exists for other employees in the organization
D. All of the above

30. When considering the objectivity of internal auditors, an independent auditor should
A. Evaluate the quality control program in effect for the internal auditors
B. Examine documentary evidence of the work performed by the internal auditors
C. Test a sample of the transactions and balances that the internal auditors examined
D. Determine the organizational level to which the internal auditors report

31. When assessing the internal auditor’s competence, the independent CPA should obtain information about the
A. Organizational level to which the internal auditors report
B. Educational background and professional certification of the internal auditors
C. Policies prohibiting the internal auditors from auditing areas where relatives are employed
D. Internal auditors’ access to records and information that is considered sensitive

32. An engagement to examine internal control will generally


A. Require procedures that duplicate those already applied in assessing control risk during a financial
statement audit
B. Increase the reliability of the financial statements that have already been audited
C. Be more extensive in scope than the assessment of control risk made during a financial statement audit
D. Be more extensive in scope than the assessment of control risk made during a financial statement audit

33. The audit committee of the BOD of a company is responsible for


A. Hiring the auditor C. The audit working papers
B. Preparing the financial statements D. Independence and obtaining evidence

PRE-ENGAGEMENT, PLANNING, MATERIALITY


1. Which of the following statements best describes materiality?
A. Materiality is typically measured as a fixed percentage of assets.
B. Materiality is typically measured as a fixed percentage of net income.
C. Materiality does not depend on the company being audited, but is solely dependent on the auditor’s
discretion.
D. Materiality provides a cutoff point at which judgment, based on the financial statements, may be altered.

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2. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and
materiality?
A. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
B. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
C. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
D. Aggregate materiality thresholds should not change under conditions of changing risk levels.

3. Which of the following conditions justifies an auditor’s decision of raising the materiality level?
A. Internal control over revenue and receipts cycle is excellent.
B. Application of analytical procedures reveals significant increase in sales revenue in December, the last
month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

4. Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit risk and
materiality are established?
A. To find smaller errors C. To increase the tolerable error in the accounts
B. To find larger errors D. To decrease the risk of overreliance

5. In any case in which the CPA or the CPA’s assistants are not qualified to perform the work, a professional
obligation exists to
A. Acquire the requisite knowledge and skills
B. Suggest someone else who is qualified to perform the work
C. Decline the engagement
D. Any of the above

6. Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
A. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit
techniques
B. Management’s disregard of its responsibility to maintain an adequate internal control environment
C. The CPA’s inability to determine whether related-party transactions were consummated on terms
equivalent to arm’s-length transactions
D. Management’s refusal to permit the CPA to perform substantive tests before the year-end

7. A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by use of a(n)
A. Expert witness’ testimony C. Letter of representation
B. Engagement letter D. Confirmation letter

8. The purpose of an engagement letter is to


A. Document the CPA firm’s responsibility to external users of the audited financial statements
B. Document the terms of the engagement to writing in order to minimize misunderstandings
C. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
D. All of the above

9. Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses
B. During the course of our audit we may observe opportunities for economy in, or improved controls over,
your operations
C. Our engagement is subject to the risk that material misstatements or fraud, if they exist, will not be
detected
D. After performing our preliminary analytical procedures we will discuss with you the other procedures we
consider necessary to complete the engagement

10. Which of the following is not included in an audit engagement letter?


A. Objectives of the engagement
B. Representations that the financial statements were prepared in accordance with PFRS
C. Management’s responsibilities
D. A clear explanation of the services to be performed on the engagement

11. An extensive understanding of the client’s business and industry and knowledge about the company’s
operations are essential for doing an adequate audit. For a new client, most of this information is
obtained
A. From the predecessor auditor C. From the permanent file
B. From the Securities and Exchange Commission D. At the client’s premises

12. A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the
predecessor’s
Engagement letter Working papers
A. Yes Yes

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B. Yes No
C. No Yes
D. No No

13. Which of the following is the most likely first step an auditor would perform at the beginning of an initial
audit engagement?
A. Prepare a rough draft of the financial statements and of the auditor’s report
B. Study and evaluate the system of internal administrative control
C. Tour the client’s facilities and review the general records
D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the
client management

14. Which of the following is not a document or record that should be examined early in the engagement?
A. Management letter
B. Corporate charter and bylaws
C. Contracts
D. Minutes of board of directors’ and stockholders’ meetings

15. An auditor should recognize that the application of auditing procedures may produce evidential matter indicating
the possibility of errors or fraud and therefore should
A. Plan and perform the engagement with an attitude of professional skepticism
B. Not depend on internal accounting control features that are designed to prevent or detect errors or
irregularities
C. Design audit tests to detect unrecorded transactions
D. Extend the work to audit most recorded transactions and records of an entity

16. Misstatements must be compared with some measurement base before a decision can be made about the
materiality of the failure to follow GAAP. A commonly accepted measurement base would be
A. Net income B. Total assets C. Working capital D. All of the above

17. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about
materiality?
A. The results of the initial assessment of control risk
B. The anticipated sample size for planned substantive tests
C. The entity’s financial statements of the prior year
D. The assertions that are embodied in the financial statements

18. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment
about materiality?
A. The anticipated sample size of the planned substantive tests
B. The entity’s annualized interim financial statements
C. The results of the internal control questionnaire
D. The contents of the management representation letter

INDUSTRY, REGULATORY AND OTHER FACTORS AFFECTING AUDIT


1. How many members of the AASC are required to approve a draft for exposure?
A. Majority B. 10 C. 8 D. 12

2. How many members of the AASC are required to approve the exposed draft as PSA?
A. Majority B. 10 C. 8 D. 12

3. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is
referred to as a (n)
A. Peer review engagement C. Quality assurance engagement
B. Quality control engagement D. Attestation engagement

4. The prudent person concept establishes in law that


A. The CPA firm is not expected to be infallible
B. An audit in accordance with GAAS is subject to limitations and cannot be relied upon for complete
assurance that all errors and irregularities will be found
C. The courts do not require that the auditor become the insurer or guarantor of the accuracy of the
statements
D. All three of the above are true

5. A basic objective of a CPA firm is to provide professional services to conform to professional standards.
Reasonable assurance of achieving basic objective is provided through
A. Continuing professional education C. A system of quality control
B. Compliance with generally accepted reporting standards D. A system of peer review

6. Which of the following is one of the elements of a CPA firm’s quality control system?
A. Control activities C. Leadership responsibilities
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B. Control environment D. Computer assisted audit techniques

7. Within the context of quality control, the primary purpose of continuing professional education and training
activities is to enable a CPA firm to provide firm personnel with
A. Technical training that assures proficiency as an auditor
B. Professional education that is required in order to perform with due professional care
C. Knowledge required in order to perform a peer review
D. Knowledge required to fulfill assigned responsibilities and to progress within the firm

8. Which of the following is not an essential component of quality control?


A. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies
B. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional
standards
C. Policies to ensure that personnel maintain their independence in fact and in appearance
D. Policies that ensure that monitoring activities are effectively applied

9. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
A. Enable the CPA firm to attest to the integrity of the client management
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients
C. Anticipate before performing any field work whether an unmodified opinion can be expressed
D. Minimize the likelihood of association with clients whose management lacks integrity

10. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has already completed its physical inventory count
B. The CPA lacks an understanding of the prospective client’s operation and industry
C. The CPA is unable to review the predecessor auditor’s working papers
D. The prospective client is unwilling to make all financial records available to the CPA

11. Which of the following is a member of IFAC?


A. PICPA B. BOA C. PRC D. SEC

12. A partner rotating after a pre-defined period should not resume the lead engagement partner role until a
further period of time, normally ____ year(s), has elapsed.
A. 1 B. 2 C. 3 D. 5

13. Which of the following is not observed or required on a 3-year period basis?
A. Amendment of the CPA exams syllabi C. Term of office of BOA vice-chairman as BOA member
B. Reinstatement of a revoked COR D. “Meaningful experience”

14. Which of the following is not one of the basic duties and responsibilities of the BOA?
A. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of RA 9298
B. To conduct an oversight into the quality of audits of financial statements through a review of the quality
control measures instituted by auditors
C. To designate the dates, places and venues of the CPA licensure examinations
D. To prescribe and/or adopt a Code of Ethics for the practice of accountancy

15. A CPA certificate is an evidence of


A. Recognition of independence
B. Basic competence at the time the certificate is granted
C. Culmination of the education process
D. Membership in the PICPA

16. Which of the following is not included in the seal of a professional accountant?
A. Tax identification number C. Title of the profession
B. Name of the professional accountant D. Registration number

17. Which is correct regarding credit units earned in a continuing professional education activity?
A. CPAs who are outside the country for 2 years before renewal of license are permanently exempted from the
CPE requirements
B. Number of units to be earned by a CPA on an annual basis must not exceed 15 credit units
C. A CPA who has earned 70 units in a 3-year period from seminars and conventions cannot carry the excess
units to the next 3-year period
D. A participant in a seminar/convention earns 1 credit unit per day of the said seminar/convention

18. Which statement is correct regarding the term of office of the chairman and the members of the Board of
Accountancy (BOA)?
A. The Chairman and members of the Board shall hold office for a term of 12 years
B. No person who has served two (2) successive complete terms shall be eligible for reappointment until the
lapse of 1 year
C. A person may serve the BOA for not more than twelve terms
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D. A member of the BOA may simultaneously be a director of PICPA during his/her term

19. Which of the following exams must be taken with two years from the preceding examination?
A. Removal exams for conditioned examinees C. Both A and B
B. Exams after a refresher certificate has been granted D. Neither A nor B

20. Which of the following definitions in the Act describe a convention?


A. It refers to the inculcation, assimilation and acquisition of knowledge, skills, proficiency and ethical
values, after the initial registration of a professional that raise and enhance the professional’s technical
skills and competence
B. It refers to the gathering of professionals which shall include, among others, workshops, technical lectures
or subject matter meetings, non-degree training courses and scientific meetings.
C. It refers to the gathering of professionals which shall include, among others, conferences, symposia or
assemblies for round table discussions.
D. It refers to a graduate degree in accountancy, business or related field from a recognized school, college or
university.

21. Which of the following regarding the standards-setting councils is correct?


A. Each of the councils is composed of 15 members including the chairman.
B. The chairman of the FRSC must be a senior in the practice of public accountancy.
C. The APO shall be equally represented in the AASC.
D. The BIR has a representative in both the AASC and the FRSC.

22. Practice of accountancy in the public sector involves


A. Representing employers before government agencies
B. A requirement to obtain civil service eligibility status
C. Teaching taxation and business law subjects in accountancy schools
D. Rendering bookkeeping, auditing, system installation, etc. on a fee basis

23. The death or disability of an individual CPA and dissolution or liquidation of a firm or partnership shall be
reported to the BOA not later than _______ days following the event.
A. 15 B. 30 C. 45 D. 60

24. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat to
independence?
A. Required continuing education for all attest engagement team members
B. An effective corporate governance structure
C. Required second partner review of an attest engagement
D. Management selection of the CPA firm

25. According to the standards of the profession, which of the following circumstances will prevent a CPA performing
audit engagements from being independent?
A. Obtaining a collateralized automobile loan from a financial institution client
B. Litigation with a client relating to billing for consulting services for which the amount is immaterial
C. Employment of the CPA’s spouse as a client’s director of internal audit
D. Acting as an honorary trustee for a not-for-profit organization client

26. A member in public practice may not perform for a contingent fee any professional services for a client for
whom the member or member’s firm performs
A. Any service regardless of the specific nature of the service C. A review
B. An audit D. Either an audit or review

27. The challenge associated with the Ethical Principles stated in the Code of Professional Conduct is
A. The emphasis on positive activities
B. That they identify ideal conduct
C. The difficulty of enforcing general ideals, or principles
D. That there are too many to remember

28. The rule on confidentiality would be violated if the CPA disclosed information without the client’s consent as a
result of
A. A subpoena or summons C. Quality review by the QRC
B. A peer review D. A request by the client’s largest stockholder

29. According to the profession’s ethical standards, an auditor would be considered independent in which of the
following instances?
A. The auditor is also an attorney who advises the client as its general counsel
B. An employee of the auditor donates service as treasurer of a charitable organization that is a client
C. The client owes the auditor fees for two consecutive annual audits
D. The auditor’s checking account, which is fully insured by a national agency, is held at a client financial

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institution

30. If a nonpublic company asks an accountant to perform a review engagement, and the accountant has an
immaterial direct financial interest in the company, the accountant is
A. Independent because the financial interest is immaterial and, therefore, may issue a review report
B. Not independent and, therefore, may not issue a review report
C. Not independent and, therefore, may not be associated with the financial statements
D. Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion

31. To exercise due professional care an auditor should


A. Critically review the judgment exercised by those assisting in the audit
B. Examine all available corroborating evidence supporting managements assertions
C. Design the audit to detect all instances of illegal acts
D. Attain the proper balance of professional experience and formal education

32. In the auditing environment, failure to meet generally accepted auditing standards is often
A. An accepted practice C. Conclusive evidence of negligence
B. A suggestion of negligence D. Tantamount to criminal behavior

33. Professional skepticism dictates that when management makes a statement to the auditors, the auditors should
A. Disregard the statement because it ranks low of the evidence quality scale.
B. Corroborate the evidence with other supporting documentation.
C. Require that the statement be put to writing.
D. Believe on the statement in order to maintain professional client-auditor relationship.

34. If specific information comes to an auditor’s attention that implies the existence of possible illegal acts that
could have a material, but indirect effect on the financial statements, the auditor should next
A. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred
B. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities
C. Report the matter to an appropriate level of management at least one level above those involved
D. Discuss the evidence with the client’s audit committee, or others with equivalent authority

35. When the auditor knows that an illegal act has occurred, the auditor must
A. Report it to the proper governmental authorities
B. Consider the effects on the financial statements, including the adequacy of disclosure
C. Withdraw from the engagement
D. Issue an adverse opinion

36. Generally, the decision to notify parties outside the client’s organization regarding an illegal act is the
responsibility of the
A. Independent auditor C. Management
B. Internal auditors D. Outside legal counsel

37. Which of the following is most likely to be a direct-effect illegal act?


A. Violation of employment laws C. Violation of income tax laws
B. Violation of environment regulations D. Violation of civil rights laws

38. Which of the following statements is correct with respect to the auditor’s responsibilities relative to the
detection of indirect-effect illegal acts?
A. The auditor has no responsibility for searching for indirect-effect illegal acts
B. The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential
misstatement that may occur
C. Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect
D. None of the above is correct

39. If a client refuses to accept an audit report that is qualified due to a known existence of noncompliance to laws
and regulations, the auditor should
A. Issue an adverse opinion if management agrees to fully disclose the matter.
B. Withdraw from the engagement and communicate the reasons to the audit committee in writing.
C. Withdraw from the engagement and communicate the reasons to the SEC or other regulatory
body in writing.
D. Issue an unmodified opinion if management agrees to fully disclose the matter.

40. When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the
profession has placed the responsibility
A. More on discovering errors than employee fraud
B. More on discovering employee fraud than errors
C. Equally on discovering either one
D. On the senior auditor for detecting errors and on the manager for detecting employee fraud

41. Fraudulent financial reporting is often called


A. Management fraud C. Defalcation
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B. Theft of assets D. Employee fraud

42. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is
A. Greater for management fraud because managers are inherently smarter than employees
B. Greater for management fraud because of management’s ability to override existing internal controls
C. Greater for employee fraud because of the higher crime rate among blue collar workers
D. Greater for employee fraud because of the larger number of employees in the organization

43. Which of the following statements best describes the auditor’s responsibility to detect conditions relating to
financial stress of employees or adverse relationships between a company and its employees?
A. The auditor is required to plan the audit to detect these conditions on all audits
B. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to
detect these conditions when the client is exposed to a risk of misappropriation of assets
C. The auditor is required to plan the audit to detect these conditions whenever they may result in
misstatements
D. The auditor is not required to plan the audit to discover these conditions, but should consider them if he
or she becomes aware of them during the audit

44. Which of the following is least likely required in an audit?


A. Test appropriateness of journal entries and adjustment
B. Review accounting estimates for biases
C. Evaluate the business rationale for significantly unusual transactions
D. Make a legal determination of whether fraud has occurred

45. Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals
most likely would significantly influence an entity’s control environment when
A. External policies established by parties outside the entity affect its accounting practices
B. Management is dominated by one individual who is also a shareholder
C. Internal auditors have direct access to the board of directors and the entity’s management
D. The audit committee is active in overseeing the entity’s financial reporting policies

46. The most effective way to prevent and deter fraud is to


A. Implement programs and controls that are based on core values embraced by the company
B. Hire highly ethical employees
C. Communicate expectations to all employees on an annual basis
D. Terminate employees who are suspected of committing fraud

47. Which of the following parties is least likely to uncover fraud?


A. External auditors C. Internal controls
B. Internal auditors D. Each of the above is equally likely to uncover fraud

48. Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non-
performance of audit procedures specifically described in the engagement letter
B. The auditor must extend auditing procedures to actively search for evidence of fraud in all situations
C. The auditor must extend auditing procedures to actively search for evidence of fraud where the
examination indicates that fraud may exist
D. The auditor is responsible for the failure to detect fraud only when an unmodified opinion is issued

49. Who has primary responsibility for the performance of an audit?


A. The managing partner of the firm C. The manager assigned to the engagement
B. The senior assigned to the engagement D. The partner in charge of the engagement

50. Which of the following are renewable?


I. Certificate of Accreditation
II. Certificate of Registration
III. Professional Identification Card
A. I and II only B. II and III only C. I and III only D. I, II and III

RISKS ASSESSMENT, INTERNAL CONTROLS AND RESPONSES TO ASSESSED RISKS

1. Which of the following may give rise to a business failure?


A. An erroneous audit opinion is issued
B. Management may make a series of poor decisions
C. Auditors may fail to uncover management fraud
D. Poorly trained auditors may perform a company’s audit

2. A benefit obtained from comparing client’s data with industry averages is that it provides
A. An indication of the likelihood of financial failure
B. An indication where errors exist in the statements
C. A benchmark to be used in evaluating client’s budgets
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D. A comparison of “what is” “what should be”

3. An important benefit of industry comparisons is as


A. An aid to understanding the client’s business C. An indicator of fraud
B. An indicator of errors D. A least-cost indicator for audit procedures

4. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is
appropriate
A. More evidence is required
B. Less evidence is required
C. Special care is required in assigning experienced staff
D. Review of the audit files by personnel who were not assigned to the engagement

5. The audit risk against which the auditor requires reasonable protection is a combination of two separate
risks. The first of these is that material errors will occur in the accounting process by which the financial
statements are developed, and the second is that
A. A company’s system of internal control is not adequate to detect errors and frauds
B. Those errors that occur will not be detected in the auditor’s examination
C. Management may possess an attitude that lacks integrity
D. Evidential matter is not competent enough for the auditor to form an opinion based on reasonable
assurance

6. A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account
before considering the effectiveness of the client’s internal control is
A. Inherent risk C. Control risk
B. Acceptable audit risk D. Financial risk

7. Inherent risk and control risk differ from detection risk in that they
A. Arise from the misapplication of auditing procedures
B. May be assessed in either quantitative or nonquantitative terms
C. Exist independently of the financial statement audit
D. Can be changed at the auditor’s discretion

8. The type of transactions that have a high inherent risk because they involve management judgment or
assumptions are referred to as
A. Estimation transactions C. Routine transactions
B. Non-routine transactions D. Related-party transactions

9. Which of the following statements regarding inherent risk is correct?


A. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience with client’s
organization
B. Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that
it was incorrect
C. Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as
they gain experience, even when there is inherent risk
D. The inherent risk assigned in the audit risk model is dependent upon the strengths in client’s internal
control system

10. Auditors begin their assessments of inherent risk during the planning phase. Which of the following would
not be a topic of the planning phase that would also help to assess inherent risk?
A. Obtaining client’s agreement on the engagement letter
B. Obtaining knowledge about the client’s business and industry
C. Touring the client’s plant and offices
D. Identifying related parties

11. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
A. Inherent risk C. Statistical risk
B. Acceptable audit risk D. Financial risk

12. While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong,
consider the magnitude of risks and
A. Assess the risk of misstatements due to illegal acts
B. Consider the complexity of the transactions involved
C. Consider the likelihood that the risks could result in material misstatements
D. Determine materiality levels

13. The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of
A. Tests of controls
B. Understanding the entity’s internal control
C. Tests of transactions
D. The assessment of whether to accept the audit engagement
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14. Which of the following is not one of the subcomponents of the control environment?
A. Management’s philosophy and operating style C. Commitment to competence
B. Organizational structure D. Adequate separation of duties

15. Internal controls normally include procedures designed to provide reasonable assurance that
A. Employees act with integrity when performing their assigned tasks
B. Transactions are executed in accordance with management’s general or specific authorization
C. Decision processes leading to management’s authorization of transactions are sound
D. Collusive activities would be detected by segregation of employee duties

16. The auditor should obtain an understanding of internal control sufficient


A. To provide reasonable protection against client fraud and defalcations by client employees
B. To assess control risk
C. To provide a basis for constructive suggestions to the client for improving the accounting system
D. To provide a method for safeguarding assets, checking the accuracy and reliability of accounting data,
promoting operational efficiency, and encouraging adherence to prescribed managerial policies

17. To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including
A. Inquiry B. Analytical procedures C. Calculation D. Confirmation

18. Which of the following techniques is not useful for obtaining an understanding of internal controls?
A. Make inquiries of the client’s personnel C. Read industry trade magazines
B. Examine documents and records D. Observe client activities and operations

19. The purpose of tests of controls is to provide reasonable assurance that the
A. Accounting treatment of transactions and balances is valid and proper
B. Accounting control procedures are functioning as intended
C. Entity has complied with disclosure requirements of generally accepted accounting principles
D. Entity has complied with requirements of quality control

20. Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that
controls are in use and operating effectively. This assurance is most likely obtained in part by
A. Preparing flowcharts C. Analyzing tests of trends and ratios
B. Performing substantive tests D. Inspection of documents

21. After performing a study and evaluation of the client’s system of internal control, an auditor has
concluded that the controls are well designed and functioning as anticipated. Under these circumstances
the auditor would most likely
A. Cease to perform further substantive tests
B. Not increase the extent of predetermined substantive tests
C. Increase the extent of planned analytical review procedures
D. Perform all tests of controls to the extent outlined in the audit program

22. When planning an audit, the auditor’s assessed level of control risk is
A. Determined by using actuarial tables
B. Calculated by using the audit risk model
C. An economic issue, trading off the costs of testing controls against the cost of testing balances
D. Calculated by using the formulas provided in the auditing standards

23. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash
accounts by a competent individual otherwise independent of the cash function might make the likelihood of a
significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to
as what type of control?
A. Compensating B. Preventive C. Adjustive D. Non-routine

24. To obtain an understanding of a continuing client’s business, an auditor most likely would
A. Perform tests of details of transactions and balances.
B. Review prior year working papers and the permanent file for the client.
C. Read current issues of specialized industry journals.
D. Reevaluate the client’s internal control environment.

25. In an audit of a company, the auditors identify significant risks. These risks often
A. Involve routine, high-volume transactions C. Involve items with lower levels of inherent risk
B. Do not require special audit attention D. Involve judgmental matters

AUDIT EVIDENCE, PROCEDURES AND TECHNIQUES

1. Auditing consists of investigative and reporting processes. Thus, the audit process is
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A. A special application of the scientific method of inquiry
B. Regulated by the PICPA
C. The only service a CPA is allowed to perform by law
D. Performed only by CPAs

2. Evidence obtained directly by the auditor is more competent than information obtained indirectly. Which of the
following is not an example of the auditor’s direct knowledge?
A. Physical examination C. Computation
B. Observation D. Inquiry

3. Which of the following is an example of objective evidence?


A. A letter written by client’s attorney discussing the likely outcome of outstanding lawsuits
B. The physical count of securities and cash
C. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable
D. Observation of cobwebs on some inventory bins

4. Physical examination is the inspection or count by the auditor of items such as


A. Cash or inventory only
B. Cash, inventory, canceled checks, and sales documents
C. Cash, inventory, canceled checks, and tangible fixed assets
D. Cash, inventory, securities, notes receivable, and tangible fixed assets

5. Which of the following is not one of the four phases in the audit process?
A. Plan and design an audit approach
B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made to the financial statements
D. Complete the audit and issue the report

6. May a CPA hire for the CPA’s public accounting firm a non-CPA systems analyst who specializes in developing
computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist’s tasks
B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product
C. No, because non-CPA professionals are not permit ted to be associated with CPA firms in public practice
D. No, because developing computer systems is not recognized as a service performed by public accountants

7. Which of the following statements relating to the competence of evidential matter is always true?
A. Evidential matter gathered by an auditor from outside an enterprise is reliable
B. Accounting data developed under satisfactory conditions of internal control are more reliable than data
developed under unsatisfactory internal control conditions
C. Oral representations made by management are not acceptable evidence
D. Evidence gathered by auditors must be both acceptable and relevant to be considered competent

8. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
A. That immaterial fraud is not to be reported to the client’s audit committee
B. How the results of various auditing procedures performed by the assistants should be evaluated
C. What benefits may be attained by the assistants’ adherence to established time budgets
D. Why certain documents are being transferred from the current fi le to the permanent fi le

9. When making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient
amount of timely, reliable evidence that is relevant to the information being verified and to do so
A. No matter what the cost involved in obtaining such evidence
B. Only if the cost is reasonable
C. At the lowest possible total cost
D. At any cost because the costs are billed to the client

10. Which of the following is not a valid basis for omitting an audit test?
A. The difficulty and expense involved in testing a particular item
B. The relative risk involved
C. The degree of reliance on the relevant internal controls
D. The relationship between the cost of obtaining evidence and its usefulness

11. The primary difference between an audit of the balance sheet and an audit of the income statement lies in the
fact that the audit of the income statement deals with the verification of
A. Transactions B. Authorizations C. Costs D. Cutoffs

12. Evidence obtained directly by the auditor will not be reliable if


A. The auditor lacks the qualifications to evaluate the evidence
B. It is provided by the client’s attorney
C. The client denies its veracity
D. It is impossible for the auditor to obtain additional corroboratory evidence

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13. In testing for cut-off, the objective is to determine
A. Whether all of the current period’s transactions are recorded
B. Whether transactions are recorded in the proper period
C. That no transactions of the current period have been delayed and recorded in a future period
D. That no transactions from the prior period are included in the current period’s balances

14. Which of the following types of evidence is not available when using substantive tests of transactions?
A. Documentation C. Inquiries of the client
B. Confirmation D. Reperformance

15. Evidential matter supporting the financial statements consists of the underlying accounting data and all
corroborating information available to the auditor. Which of the following is an example of corroborating
information?
A. Minutes of meetings C. Accounting manuals
B. General and subsidiary ledgers D. Worksheets supporting cost allocations

16. Which of the following forms of documentation is required for an audit in accordance with generally
accepted auditing standards?
A. An internal control questionnaire C. A planning memorandum or checklist
B. A client engagement letter D. A written audit program

17. The audit program usually states all four of the choices below, but it always includes the
A. Audit procedures C. Particular items to select
B. Sample sizes D. Timing of the tests

18. Those procedures specifically outlined in an audit program are primarily designed to
A. Prevent litigation C. Test internal system
B. Detect errors or irregularities D. Gather evidence

19. The most important consideration in developing the audit plan and audit program is the
A. Client’s size C. Audit firm’s available personnel
B. Client’s industry D. The audit risk model used in its planning form

20. Audit documentation must contain sufficient information to allow what type of auditor to understand the
nature, timing, extent, and results of procedures performed?
A. An experienced audit team member
B. An experienced auditor having no previous connection with the engagement
C. Any certified public accountant
D. An auditor qualified as a peer review specialist

21. No deletions of audit documentation are allowed after the


A. Client’s year-end C. Last date of significant fieldwork
B. Documentation completion date D. Report release date

22. More types of evidence are obtained by using what type of test than any other?
A. Substantive tests of transactions C. Analytical procedures
B. Tests of controls D. Tests of details of balances

23. Which of the following is not a correct combination of terms and related type of audit evidence?
A. Foot – reperformance C. Vouch – documentation
B. Compare – documentation D. Trace – analytical procedures

24. What is the overall objective of audit documentation?


A. Defend against claims of a deficient audit
B. Provide a basis for reviewing the work of subordinates
C. Provide reasonable assurance that the audit was conducted in accordance with GAAS
D. None of the above

25. An auditor concludes that the omission of a substantive procedure considered necessary at the time of
the examination may impair the auditor’s present ability to support the previously expressed opinion.
The auditor need not apply the omitted procedure if
A. The results of other procedures that were applied tend to compensate for the procedure omitted
B. The results of the subsequent period’s tests of controls make the omitted procedure less important
C. The auditor’s opinion was qualified because of a departure from generally accepted accounting principles
D. The risk of adverse publicity or litigation is low

26. Which of the following is an example of inferential evidence?


A. The auditor observes the taking of the client's physical inventory and performs test counts.
B. The auditor inspects marketable securities for existence.
C. An auditor, who notes that customer accounts receivable have increased significantly in the current year

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as a percentage of sales, suspects that a larger proportion of the accounts will prove uncollectible.
D. The auditor counts cash on hand at year-end.

27. The audit work performed by each assistant should be reviewed to determine whether it was adequately
performed and to evaluate whether the
A. Auditor’s system of quality control has been maintained at a high level
B. Results are consistent with the conclusions to be presented in the auditor’s report
C. Audit procedures performed are approved in the professional standards
D. Audit has been performed by persons having adequate technical training and proficiency as
auditors

SAMPLING

1. Most auditors would consider samples to be insufficient if they contain only the
A. Largest peso items from the population
B. Largest peso items from a population, even though these items make up a large portion of the total
population
C. Items with a high likelihood of misstatement
D. Items that are representative of the population

2. Holding other planning considerations equal, a decrease in the amount of misstatement in a class of
transactions that an auditor could tolerate most likely would cause the auditor to
A. Apply the planned substantive tests prior to the balance sheet date
B. Perform the planned auditing procedures closer to the balance sheet date
C. Increase the assessed level of control risk for relevant financial statement assertions
D. Decrease the extent of auditing procedures to be applied to the class of transactions

3. An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical
methods
A. Can more easily convert the sample into a dual-purpose test useful for substantive testing
B. Eliminate the need to use judgment in determining appropriate sample sizes
C. Afford greater assurance than a nonstatistical sample of equal size
D. Provide an objective basis for quantitatively evaluating sample risk

4. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
A. Allowable risk of tolerable misstatement C. Efficiency of the audit
B. Preliminary estimates of materiality levels D. Effectiveness of the audit

5. Which of the following best illustrates the concept of sampling risk?


A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of
interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor may fail to recognize errors in the documents examined for the chosen sample.
D. The documents related to the chosen sample may not be available for inspection.

6. In estimation sampling for variables, which of the following must be known in order to estimate the appropriate
sample size required to meet the auditor’s needs in a given situation?
A. The qualitative aspects of errors
B. The total peso amount of the population
C. The acceptable level of risk
D. The estimated rate of misstatements in the population

7. An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching random
numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher
ordinarily should be replaced by another voucher in the random sample if the voucher
A. Constitutes a deviation C. Cannot be located
B. Has been properly voided D. Represents an immaterial amount

8. The size of a sample designed for dual purpose testing should be


A. The larger of the samples that would otherwise have been designed for the two separate purposes
B. The smaller of the samples that would otherwise have been designed for the two separate purposes
C. The combined total of the samples that would otherwise have been designed for the two separate
purposes
D. More than the larger of the samples that would otherwise have been designated for the two separate
purposes, but less than the combined total of the samples that would otherwise have been designed for
the two separate purposes

9. What is the primary objective of using stratification as a sampling method in auditing?


A. To increase the confidence level at which a decision will be reached from the results of the sample
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selected
B. To determine the occurrence rate for a given characteristic in the population being studied
C. To decrease the effect of variance in the total population
D. To determine the precision range of the sample selected

10. When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for
the sample. This consideration should
A. Be related to the auditor’s business risk
B. Not be adjusted for qualitative factors
C. Be related to preliminary judgments about materiality levels
D. Not be changed during the audit process

11. In estimation sampling for variables, which of the following must be known in order to estimate the appropriate
sample size required to meet the auditor’s needs in a given situation?
A. The qualitative aspects of errors
B. The total peso amount of the population
C. The acceptable level of risk
D. The estimated rate of misstatements in the population

12. In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a
random start. The primary advantage of such a systematic selection is that population items
A. Which include irregularities will not be overlooked when the auditor exercises compatible reciprocal
options
B. May occur in a systematic pattern, thus making the sample more representative
C. May occur more than once in a sample
D. Do not have to be pre-numbered in order for the auditor to use the technique

13. Which is most likely when the assessed level of control risk increases ?
A. Change from performing substantive procedures at year-end to an interim date
B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside
the entity
C. Use the maximum number of dual purpose tests
D. Use larger sample sizes for substantive procedures

14. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate
and decreasing the risk of assessing control risk too low would have what effect on sample size?
A. Increase C. Decrease
B. Remain the same D. Indeterminate

15. When performing tests of controls over authorization of cash receipts, which of the following sampling
methods would be most appropriate?
A. Attributes B. Ratio C. Stratified D. Variables

16. Which of the following may be used to reduce the risk of non-sampling errors?
A. Increasing the size of audit samples C. Adequately planning audit samples
B. Stratifying audit samples D. Using statistical sampling techniques

17. Based on the auditor’s pilot sample and prior experience with the audited entity, it has set its
preliminary levels of expected deviation rate and tolerable deviation rate at 12% and 15%, respectively.
A test of 40 documents sampled by the auditor revealed 6 deviations (included are 2 missing documents
and for which alternative procedures cannot be performed). Based on this, the auditor decides to reduce
the nature and extent of its substantive tests. Owing to this case alone,
A. The auditor properly concluded that the internal controls are reliable and effective
B. The auditor has committed the risk of incorrect acceptance
C. The auditor has assessed control risk too low
D. The missing documents should not be considered as deviations because they could be replaced

18. The auditor’s failure to recognize a misstatement in an amount or a deviation in an internal control data
processing procedure is described as a
A. Statistical error C. Standard error of the mean
B. Sampling misstatement D. Non-sampling error

AUDIT REPORT

1. In all cases, audit reports must


A. Be signed by the individual who performed the audit procedures
B. Certify as to the accuracy of the quantitative information which was audited
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C. Inform readers of the degree of correspondence between the quantitative information and the established
criteria
D. Communicate the auditor’s findings to the general public

2. The scope paragraph of the standard unmodified audit report states that the audit is designed to
A. Discover all errors and/or irregularities
B. Discover material errors and/or irregularities
C. Conform to generally accepted accounting principles
D. Obtain reasonable assurance whether the statements are free of material misstatement

3. Which section (paragraph) of the audit report includes a statement that the auditor believes that the audit
evidence obtained is sufficient?
A. Introductory C. Auditor’s responsibility
B. Opinion D. Management’s responsibility

4. A statement that the auditor has audited the financial statements followed by the titles of the financial
statements is included in the
A. Management’s responsibility section of the audit report
B. The opening paragraph of the auditor’s standard report
C. The auditor’s responsibility section of the audit report
D. The opinion paragraph of the auditor’s standard report

5. The audit report date indicates


A. The last day of the auditor’s responsibility for the review of significant events that occurred after the date
of the financial statements
B. The date on which the financial statements were filed with the Securities and Exchange Commission
C. The last date on which users may institute a lawsuit against either client or auditor
D. The last day of the fiscal period

6. As a result of management’s refusal to permit the auditor to physically examine inventory, the auditor has not
accumulated sufficient evidence to conclude whether financial statements are stated in accordance with GAAP.
The auditor must depart from the unqualified audit report because
A. The financial statements have not been prepared in accordance with GAAP
B. The scope of the audit has been restricted by circumstances beyond either the client’s or auditors control
C. The auditor has lost independence
D. The scope of the audit has been restricted

7. Under certain circumstances, the CPA may wish to emphasize specific matters regarding the financial
statements even though he or she intends to express an unqualified opinion. Normally, such explanatory
information should be
A. Included in the scope paragraph C. Included in the opinion paragraph
B. Included in a separate paragraph in the report D. Included in the introductory paragraph

8. Which of the following is not a true statement?


A. The opinion paragraph is directly related to the first and fourth reporting standards
B. The auditor is required to state a conclusion about whether the company followed generally accepted
accounting principles
C. The opinion paragraph may follow any form deemed appropriate by the auditor
D. The auditor is required to state an opinion about the financial statements taken as a whole

9. The necessity to issue a disclaimer of opinion may arise because of


A. A severe limitation on the scope of the audit examination
B. A non-independent relationship between auditor and client
C. Either A or B above
D. None of the above

10. Both disclaimers and adverse opinions are used


A. Only when the condition is highly material
B. Whether the condition is material or not
C. Regardless of the auditor’s independence
D. Regardless of client’s choice of a non-GAAP accounting period

11. An auditor concludes that extreme doubt exists about the integrity of management and the representations
obtained from management relating to the fairness of the financial statements and the completeness of the
record of transactions. If the auditor retains the client, which audit report is most likely to be appropriate?
A. Unmodified with emphasis-of-matter paragraph C. Disclaimer
B. Standard unmodified D. Adverse

12. Which of the following is not a change which affects consistency and, therefore, does not require an explanatory
paragraph?

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A. Change in accounting principle, such as a change from LIFO to FIFO
B. Change in reporting entity, such as the inclusion of an additional company in combined financial
statements
C. Change in an estimate, such as a decrease in the life of an asset for depreciation purposes
D. Correction of errors by changing from non-GAAP to GAAP

13. A company has changed its method of inventory valuation from an unacceptable one to one in conformity with
generally accounting principles. The auditor’s report on the financial statements of the year of the change
should include
A. No reference to consistency
B. A reference to a prior period adjustment in the opinion paragraph
C. An explanatory paragraph that justifies the change and explains the impact of the change on reported net
income
D. An explanatory paragraph explaining the change

14. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors?
A. Guarantee fair presentation of the financial statements
B. Acts as insurers of the accuracy of the statements
C. Certify the material presented in the statements by management
D. Base their conclusions about the statements on professional judgment

15. The least severe type of report for disclosing departures from generally accepted accounting principles is the
A. Report on unaudited financial statements C. Adverse opinion
B. Qualified opinion D. Disclaimer of opinion

16. An auditor may not issue a qualified opinion when


A. A scope limitation prevents the auditor from completing an important audit procedure
B. The auditor’s report refers to the work of a specialist
C. The auditors lacks independence with respect to the audited entity
D. An accounting principle at variance with generally accepted accounting principles is used

17. The peso amount of some misstatements cannot be accurately measured. For example, if the client were
unwilling to disclose an existing lawsuit, the auditor must estimate
A. Its likely effect on net income
B. Its likely effect on users of the financial statements
C. Its likely effect on the auditor’s exposure to lawsuits
D. Its likely effect on management’s future decisions

18. The client has presented all required financial statements with the exception of the statement of cash flows. The
auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is
presented fairly. The auditor
A. May issue either an unmodified or qualified opinion with “except for” in the opinion paragraph
B. Must issue an adverse opinion with “except for” in the opinion paragraph
C. May issue an unmodified opinion
D. Must issue a qualified opinion with “except for” in the opinion paragraph

19. When the client has not been consistent in applying GAAP from year one to year two and the auditor does not
concur with the appropriateness of the change, the auditor will issue a(n)
A. Disclaimer B. Adverse opinion C. Unmodified opinion D. Qualified opinion

20. When a company’s financial statements contain a departure from GAAP with which the auditor concurs, the
departure should be explained in
A. The scope paragraph
B. An explanatory paragraph between the scope and opinion paragraphs
C. The opinion paragraph
D. An explanatory paragraph following the opinion paragraph

21. A company has changed its method of inventory valuation from an unacceptable one to one in conformity with
generally accounting principles. The auditor’s report on the financial statements of the year of the change should
include
A. No reference to consistency
B. A reference to a prior period adjustment in the opinion paragraph
C. An explanatory paragraph that justifies the change and explains the impact of the change on reported net
income
D. An explanatory paragraph explaining the change

22. When an entity changes its method of accounting for income taxes, which has a material effect on comparability,
the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor’s report. This
paragraph should identify the nature of the change and
A. Explain why the change is justified under generally accepted accounting principles
B. Describe the cumulative effect of the change on the audited financial statements
C. State the auditor’s explicit concurrence with or opposition to the change
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D. Refer to the financial statement note that discusses the change in detail

23. An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being
reported on had significant transactions with related parties. The inclusion of this separate paragraph
A. Is considered an “except for” qualification of the opinion
B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the
financial statements
C. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation”
D. Is appropriate and would not negate the unmodified opinion

24. An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the
auditor’s willingness to
A. Extend auditing procedures
B. Accept responsibility for subsequent events
C. Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s report
D. Assume responsibility for events subsequent to the issuance of the auditor’s report

25. The most common case in which conditions beyond the client’s and auditors control cause a scope restriction is
an engagement
A. Agreed upon after the client’s balance sheet date
B. Where the client won’t allow the auditor to confirm receivables for fear of offending its customers
C. Where the auditor doesn’t have enough staff to satisfactorily audit all of the client’s foreign subsidiaries
D. Where the client is going through bankruptcy

26. When the auditor cannot perform procedures and the amounts are so material that a disclaimer of opinion
rather than a qualified opinion is required
A. The opinion paragraph will state “does not present fairly.”
B. The opinion paragraph will state “presents fairly.”
C. The scope paragraph will be unchanged from the standard unmodified opinion
D. The scope paragraph will be deleted

27. When the misstatements are so material or pervasive that an adverse opinion is required, the scope paragraph
would
A. Be qualified
B. Still be unmodified
C. Be deleted
D. Be expanded to identify the additional procedures which the auditor performed

28. When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is
the responsibility of the auditor to
A. Inform the reader that disclosure is not adequate, and to issue a qualified or an adverse opinion
B. Inform the reader that disclosure is not adequate, and to issue an unmodified or qualified opinion
C. Present the information in the audit report and issue an unmodified or qualified opinion
D. Present the information in the audit report and to issue a qualified or an adverse opinion

29. A scope limitation sufficient to preclude an unmodified opinion always will result when management
A. Prevents the auditor from reviewing the working papers of the predecessor auditor
B. Engages the auditor after the year-end physical inventory is completed
C. Requests that certain material accounts receivable not be confirmed
D. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in
conformity with GAAP

30. When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the
A. Amount of known misstatement is documented in the management representation letter
B. Estimate of the total likely misstatement is less than a material amount
C. Amount of known misstatement is acknowledged and recorded by the client
D. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client

31. In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent
application of accounting principles between the current and the prior year, as well as the amounts of assets or
liabilities at the beginning of the current year. This was due to the client’s record retention policies. If the
amounts in question could materially affect current operating results, the auditor would
A. Be unable to express an opinion on the current year’s results of operations and cash flows
B. Express a qualified opinion on the financial statements because of a client-imposed scope limitation
C. Withdraw from the engagement and refuse to be associated with the financial statements
D. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty

to extend auditing procedures to gather sufficient evidence


32. In the first audit of a new client, an auditor was able
about consistency. Under these circumstances, the auditor should
A. Not report on the client’s income statement

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B. Not refer to consistency in the auditor’s report
C. State that the consistency standard does not apply
D. State that the accounting principles have been applied consistently

33. An auditor determines that a client has not accounted for a certain material item in conformity with
generally accepted accounting principles. This fact is prominently disclosed in a footnote to the financial
statements. The CPA does not agree with this departure from GAAP and should
A. Issue a qualified the opinion because of the deviation from generally accepted accounting principles
B. Disclaim an opinion
C. Not allow the accounting treatment for this item to affect the type of opinion because the deviation from
generally accepted accounting principles was disclosed
D. Express an unmodified opinion and insert a middle paragraph emphasizing the matter by reference to the
footnote

34. An auditor should examine minutes of the board of directors meetings


A. Through the date of the financial statements C. Only at the beginning of the audit
B. Through the date of the audit report D. On a test (sample) basis

35. On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the relevant
professional accounting and auditing standards should be held by
A. The auditor with final responsibility for the audit
B. All professionals working upon the audit
C. All professionals working upon the audit and the partner in charge of the CPA firm
D. All professionals working in the office

36. When an entity presents, together with the financial statements, supplementary information that cannot be
clearly differentiated from the financial statements because of its nature and how it is presented, such
supplementary information
A. Must be specifically referred to in the introductory paragraph of the auditor’s report
B. Is covered by the auditor’s opinion
C. Is referred by adding an emphasis of matter paragraph
D. Is not covered by the auditor’s opinion

37. How are other reporting responsibilities addressed within the auditor’s report?
A. They should be addressed in a separate section that follows the opinion paragraph.
B. They should be addressed within the introductory paragraph.
C. They should be addressed within the scope paragraph.
D. They should be addressed within the scope paragraph and separately described in a separate paragraph.

38. In the auditor’s report, the principal auditor decides not to make reference to another CPA who audited a
client’s subsidiary. The principal auditor could justify this decision if, among other requirements, the principal
auditor
A. Issues an unmodified opinion on the consolidated financial statements
B. Learns that the other CPA issued an unmodified opinion on the subsidiary’s financial statements
C. Is unable to review the audit programs and working papers of the other CPA
D. Is satisfied as to the independence and professional reputation of the other CPA

OVERALL ANALYTICS, RELATED PARTIES, GOING CONCERN AND SUBSEQUENT EVENTS

1. At what stages of the audit must analytical procedures be used?


A. Planning and testing C. Planning and completion
B. Testing and completion D. Planning, testing, and completion

2. A basic premise underlying the application of analytical procedures is that


A. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
B. Statistical tests of financial information may lead to the discovery of material misstatements in the
financial statements
C. Plausible relationships among data may reasonably be expected to exist and continue in the absence of
known conditions to the contrary
D. These procedures cannot replace tests of balances and transactions

3. Analytical procedures used during risk assessment in an audit should focus on


A. Reducing the scope of tests of controls and substantive tests
B. Providing assurance that potential material misstatements will be identified
C. Enhancing the auditor’s understanding of the client’s business
D. Assessing the adequacy of the available evidence

4. Which of the following statements regarding analytical procedures is not correct?


A. The definition of analytical tests places the emphasis on the comparison of client’s recorded data to GAAP
B. Analytical procedures are required on all audits
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C. Analytical procedures are required on all review service engagements
D. For certain accounts with small balances, analytical procedures alone may be sufficient evidence

5. The primary purpose of performing analytical procedures in the testing phase of an audit is to
A. Help the auditor obtain an understanding of the client’s industry and business
B. Assess the going concern assumption
C. Indicate possible misstatements (attention directing)
D. Reduce tests of details of balances

6. If no material differences are found using analytical procedures and the auditor concludes that
misstatements are not likely to have occurred
A. Other substantive tests may be reduced
B. It will be necessary to increase the tests of details of balances
C. It will not be necessary to perform tests of details of balances
D. It will be necessary to increase the tests of transactions

7. When analytical procedures reveal no unusual fluctuations, the implication is that


A. There are no material errors or fraud
B. There are no material errors
C. There are no material fraud
D. The possibility of a material error or fraud is lessened

8. An entity’s income statements were misstated due to the recording of journal entries that involved debits and
credits to an unusual combination of expense and revenue accounts. The auditor most likely could have
detected this fraudulent financial reporting by
A. Tracing a sample of journal entries to the general ledger
B. Evaluating the effectiveness of internal control
C. Investigating the reconciliations between control ling accounts and subsidiary records
D. Performing analytical procedures designed to disclose differences from expectations

9. Which of the following would not be considered an analytical procedure?


A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and
the total hours worked
B. Projecting an error rate by comparing the results of a statistical sample with the actual population
characteristics
C. Computing accounts receivable turnover by dividing credit sales by the average net receivables
D. Developing the expected current year sales based on the sales trend of the prior five years

10. The major concern when using nonfinancial data in analytical procedures is
A. The accuracy of the nonfinancial data
B. The source of the nonfinancial data
C. The type of nonfinancial data
D. The presence of multiple sources of nonfinancial data

11. Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and
expenses?
A. The current year’s accounts receivable with the prior year’s accounts receivable
B. The current year’s payroll expense with the prior year’s payroll expense
C. The budgeted current year’s sales with the prior year’s sales
D. The budgeted current year’s warranty expense with the current year’s contingent liabilities

12. Which of the following nonfinancial information would an auditor most likely consider in performing analytical
procedures during the planning phase of an audit?
A. Turnover of personnel in the accounting department
B. Objectivity of audit committee members
C. Square footage of selling space
D. Management’s plans to repurchase stock

13. Analytical procedures used in the overall review stage of an audit generally include
A. Gathering evidence concerning account balances that have not changed from the prior year
B. Retesting control procedures that appeared to be ineffective during the assessment of control risk
C. Considering unusual or unexpected account balances that were not previously identified
D. Performing tests of transactions to corroborate management’s financial statement assertions

14. For a reporting entity that has participated in related-party transactions that are material, disclosure in
the financial statements should include
A. The nature of the relationship and the terms and manner of settlement
B. Details of the transactions within major classifications
C. A statement to the effect that a transaction was consummated on terms no less favorable than those that
would have been obtained if the transaction had been with an unrelated party
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D. A reference to deficiencies in the entity’s system of internal accounting control

15. After determining that a related-party transaction has, in fact, occurred, an auditor should
A. Add a separate paragraph to the auditor’s standard report to explain the transaction
B. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded
C. Obtain an understanding of the business purpose of the transaction
D. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction

16. Which of the following auditing procedures most likely would assist an auditor in identifying related-party
transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities
B. Vouching accounting records for recurring transactions recorded just after the balance sheet date
C. Reviewing confirmations of loans receivable and payable for indications of guarantees
D. Performing analytical procedures for indications of possible financial difficulties

17. A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure
that would make the auditor aware of the guarantee?
A. Review minutes and resolutions of the board of directors
B. Review prior year’s audit files with respect to such guarantees
C. Review the possibility of such guarantees with the chief accountant
D. Review the legal letter returned by the company’s outside legal counsel

18. When auditing related-party transactions, an auditor places primary emphasis on


A. Ascertaining the rights and obligations of the related parties
B. Confirming the existence of the related parties
C. Verifying the valuation of the related-party transactions
D. Evaluating the disclosure of the related-party transactions

19. Which of the following statements is correct concerning related-party transactions?


A. In the absence of evidence to the contrary, related-party transactions should be assumed to be outside the
ordinary course of business
B. An auditor should determine whether a particular transaction would have occurred if the parties had not
been related
C. An auditor should substantiate that related-party transactions were consummated on terms equivalent to
those that prevail in arm’s-length transactions
D. The audit procedures directed toward identifying related-party transactions should include considering
whether transactions are occurring, but are not being given proper accounting recognition

20. When there is uncertainty about a company’s ability to continue as a going concern, the auditor’s concern is the
possibility that the client may not be able to continue its operations or meet its obligations for a “reasonable
period of time. “ For this purpose, a reasonable period of time is considered at least
A. 6 months from the date of the financial statements
B. 6 months from the date of the audit report
C. One year from the date of the audit report
D. One year from the date of the financial statements

21. Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome
of which are not reasonably estimable. The auditor’s report should include a(an)
A. Unmodified opinion C. “Except for” qualified opinion
B. “Subject to” qualified opinion D. Adverse opinion

22. Which of the following audit procedures would most likely assist an auditor in identifying conditions and
events that may indicate there could be substantial doubt about an entity’s ability to continue as a going
concern?
A. Review compliance with the terms of debt agreements
B. Confirmation of accounts receivable from principal customers
C. Reconciliation of interest expense with debt outstanding
D. Confirmation of bank balances

23. In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to
the audit report while not affecting the auditor’s unmodified opinion?
A. The auditor is asked to report on the balance sheet, but not on the other basic financial statements
B. There is substantial doubt about the entity’s ability to continue as a going concern
C. Management’s estimates of the effects of future events are unreasonable
D. Certain transactions cannot be tested because of management’s records retention policy

24. Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a
reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and
events, Davis most likely would consider, as a mitigating factor, Hill’s plans to
A. Accelerate research and development projects related to future products

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B. Accumulate treasury stock at prices favorable to Hill’s historic price range
C. Purchase equipment and production facilities currently being leased
D. Negotiate reductions in required dividends being paid on preferred stock

25. Which of the following statements is true?


A. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty
B. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem
C. The auditor is required to issue a disclaimer of opinion for a material uncertainty and for a going concern
problem
D. The auditor has the option, but is not required, to issue a disclaimer of opinion for a material uncertainty
or for a going concern problem

26. The audit procedures for the subsequent events review can be divided into two categories: (1) 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 is in
category 2?
A. Correspond with attorneys
B. Test the collectibility of accounts receivable by reviewing subsequent period cash receipts
C. Subsequent period sales and purchases transactions are examined to determine whether the cutoff is
accurate
D. Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-
cost-or-NRV valuation

27. Which of the following auditing procedures is ordinarily performed last ?


A. Reading of the minutes of the director’s meetings C. Obtaining a management representation letter
B. Confirming accounts payable D. Testing of the purchasing function

28. 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 C. Letters testamentary
B. Letter of inquiry D. Letter of representation

29. Which of the following statements regarding the letter of representation is not correct?
A. It is prepared on the client’s letterhead
B. It is addressed to the CPA firm
C. It is signed by high-level corporate officials, usually the president and chief financial officer
D. It is optional, not required, that the auditor obtain such a letter from management

30. The responsibility for identifying and deciding the appropriate accounting treatment for contingent
liabilities rests with
A. A company’s auditors C. A company’s management
B. A company’s legal counsel D. A company’s management and their auditors

31. Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that
management is intentionally neglecting to disclose?
A. Inquiries (orally and in writing) of management
B. Analyzing legal expense and review invoices and statements from outside legal counsel
C. Reviewing current and previous year’s internal revenue agent reports
D. Obtaining a letter of representation from management that it is aware of no undisclosed contingent
liabilities

32. Which of the following items would ordinarily not be included in the standard letter of confirmation from
the client’s attorney?
A. A list, prepared by management, of pending threatened litigation of material amounts
B. A request that the attorney furnish information or comment about the likelihood of an unfavorable
outcome of litigation
C. A request that the attorney furnish an estimate of the amount or range of the potential loss
D. A request that the attorney confirm the amount of outstanding fees which client owes for legal services

33. Which of the following is an audit procedure that an auditor most likely would perform concerning litigation,
claims, and assessments?
A. Request the client’s lawyer to evaluate whether the client’s pending litigation, claims, and assessments
indicate a going concern problem
B. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims, and
assessments to which the lawyer has devoted substantive attention
C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation,
claims, and assessments
D. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been recorded or
disclosed in the financial statements

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34. Which of the following is not an audit procedure that the independent auditor would perform concerning
litigation, claims, and assessments?
A. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has
advised are probable of assertion and must be disclosed
B. Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements
C. Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating,
and accounting for litigation, claims, and assessments
D. Obtain from management a description and evaluation of litigation, claims, and assessments existing at
the balance sheet date

35. An auditor must obtain written client representations that normally should be signed by
A. The treasurer and the internal auditor
B. The president and the chairperson of the board
C. The chief executive officer and the chief financial officer
D. The corporate counsel and the audit committee chairperson

36. Although there is no professional requirement to do so on audit engagements, CPAs normally issue formal
“management” letter to their clients. The primary purpose of this letter is to provide
A. Evidence indicating whether the auditor is reasonably certain that internal accounting control is
operating as prescribed
B. A permanent record of the internal accounting control work performed by the auditor during the course
of the engagement
C. A written record of discussions between auditor and client concerning the auditor’s observations and
suggestions for improvements
D. A summary of the auditor’s observations that resulted from the auditor’s special study of internal control

37. As part of an audit, a CPA often requests a representation letter from the client. Which one of the
following is not a valid purpose of such a letter?
A. To provide audit evidence
B. To emphasize to the client the client’s responsibility for the correctness of the financial statements
C. To satisfy the CPA by means of other auditing procedures when certain customary auditing procedures
are not performed
D. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is
subsequently discovered to have existed in the account

AUDITING IN A CIS ENVIRONMENT

1. Which of the following presumptions is not correct?


A. The overall objective and scope of an audit do not change in a CIS environment.
B. When computers or CIS are introduced, the basic concept of evidence accumulation remains the same.
C. Most CIS rely extensively on the same type of procedures for control that are used in manual processing
system.
D. The specific methods appropriate for implementing the basic auditing concepts do not change, as systems
become more complex.

2. Which of the following is not an advantage of a computerized accounting system?


A. Computers process transactions uniformly
B. Computers help alleviate human errors
C. Computers can process many transactions quickly
D. Computers leave a thorough audit trail which can be easily followed

3. Which of the following is not a processing control?


A. Control totals C. Logic tests
B. Check digits D. Computations tests

4. Controls which apply to a specific use of the system are called


A. User controls C. General controls
B. Systems controls D. Applications controls

5. Which of the following statements related to application controls is correct?


A. Application controls relate to various aspects of the IT function including software acquisition and the
processing of transactions
B. Application controls relate to various aspects of the IT function including physical security and the
processing of transactions in various cycles
C. Application controls relate to all aspects of the IT function
D. Application controls relate to the processing of individual transactions

6. Which of the following is not a characteristic of an on-line processing system?


A. Output of the data files is available on request
B. Master files are updated at the time the entry is made
C. Display terminals are used for both input and output purposes

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D. Programming is not allowed on-line and must be done separately

7. Which of the following statements about general controls is not correct?


A. Backup and disaster recovery plans should identify alternative hardware to process company data
B. Successful IT development efforts require the involvement of IT and non-IT personnel
C. The chief information officer should report to senior management and the board
D. Programmers should have access to computer operations to aid users in resolving problems

8. Data Corporation has just completely computerized its billing and accounts receivable record keeping.
You want to make maximum use of the new computer in your audit of Data Corporation. Which of the
following audit techniques could not be performed through a computer program?
A. Tracing audited cash receipts to accounts receivable credits
B. Selecting on a random number basis accounts to be confirmed
C. Resolving differences reported by customers on confirmation requests
D. Examining sales invoices for completeness, consistency between different items, valid conditions and
reasonable amounts

9. A database management system


A. Physically stores each element of data only once
B. Stores same data on different files for different purposes, but always knows where they are and how to
retrieve them
C. Allows quick retrieval of data but at a cost of inefficient use of file space
D. Allows quick retrieval of data, but it needs to update filed continually

10. In complex IT system, which of the following factors does not increase the likelihood of material
misstatements in the financial statements?
A. Reduced human involvement C. Ease of access to data
B. Uniformity of processing D. Specialists are needed to write computer programs

11. Most auditors evaluate application and general controls in what manner?
A. Most auditors evaluate application and general controls simultaneously
B. Most auditors evaluate the effectiveness of general controls before evaluating application controls
C. Most auditors evaluate the effectiveness of application controls before evaluating general controls
D. Most auditors evaluate application and general controls only if they do not intend to rely on systems
controls

12. When the auditor considers only the non-IT controls in assessing control risk, it is commonly referred to
as?
A. The single-stage audit C. The test deck approach
B. Auditing around the computer D. Generalized audit software (GAS)

13. The audit approach in which the auditor runs his or her own program on a controlled basis in order to
verify the client’s data recorded in a machine language is
A. The test data approach C. The generalized audit software approach
B. Called auditing around the computer D. The microcomputer-aided auditing approach

14. Internal control is ineffective when computer personnel


A. Participate in computer software acquisition decisions C. Originate changes in master files
B. Design documentation for computerized systems D. Provide physical security for program files

15. An auditor’s investigation of a company’s IT control procedures has disclosed the following four
circumstances. Indicate which circumstance constitutes a weakness in internal control
A. Computer operators do not have access to the complete run manual
B. Computer operators are closely supervised by programmers
C. Programmers do not have the authorization to operate equipment
D. Only one generation of back-up files is stored in an off-premises location

16. Errors in data processed in a batch computer system may not be detected immediately because
A. Transaction trails in a batch system are available only for a limited period of time
B. There are time delays in processing transactions in a batch system
C. Errors in some transactions cause rejection of other transactions in the batch
D. Random errors are more likely in a batch system than in an on-line system

17. A company uses the account code 669 for maintenance expense. However, one of the company clerks
often codes maintenance expense as 996. The highest account code in the system is 750. What would be
the best internal control check to build into the company’s computer program to detect this error?
A. A check for this type of error would have to be made before the information was transmitted to the IT
department
B. Valid-character test
C. Sequence check
D. Valid-code test

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18. When an on-line, real-time (OLRT) system is in use, internal control can be strengthen by
A. Providing for the separation of duties between key punching and error listing operations
B. Attaching plastic file protection rings to reels of magnetic tape before new data can be entered on the file
C. Preparing batch totals to provide assurance that file updates are made for the entire input
D. Making a validity check of an identification number before a user can obtain access to the computer files

19. When auditing a computerized system, an auditor may use the test data approach as an audit tool. This
technique
A. Is more applicable to independent audits than internal audits
B. Involves introducing simulated transactions into the client’s actual application programs
C. Is a commonly used audit technique for auditing around the computer
D. Should not involve the actual application programs the client uses throughout the year, since use of the
actual programs would contaminate the client’s accounting data

20. Parallel simulation is an audit technique employed to verify processing by making use of audit test programs.
These audit test programs “simulate” the processing logic of an application program or progress under review.
Which statement indicates the use of parallel simulation?
A. Live transactions are processed using live programs
B. Live transactions are processed with test master file
C. Test transactions are processed using test programs
D. Live transactions are processed using test programs

21. Which of the following activities would most likely be performed in the CIS department?
A. Initiation of changes to master records
B. Conversion of information to machine-readable form
C. Correction of transactional errors
D. Initiation of changes to existing applications

22. An auditor would least likely use computer software to


A. Access client data files C. Assess computer control risk
B. Prepare spreadsheets D. Construct parallel simulations

23. Which of the following client electronic data processing (EDP) systems generally can be audited without
examining or directly testing the EDP computer programs of the system?
A. A system that performs relatively uncomplicated processes and produces detailed output.
B. A system that affects a number of essential master files and produces a limited output.
C. A system that updates a few essential master files and produces no printed output other than final
balances.
D. A system that performs relatively complicated processing and produces very little detailed output.

OTHER PROFESSIONAL SERVICES

1. An examination of a financial forecast is a professional service that involves


A. Compiling or assembling a financial forecast that is based on management’s assumptions
B. Limiting the distribution of the accountant’s report to management and the board of directors
C. Assuming responsibility to update management on key events for one year after the report’s date
D. Evaluating the preparation of a financial forecast and the support underlying management’s assumptions

2. The profession’s ethical standards most likely would be considered to have been violated when a CPA represents
that specific consulting services will be performed for a stated fee and it is apparent at the time of the
representation that the
A. Actual fee would be substantially higher
B. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services
C. CPA would not be independent
D. Fee was a competitive bid

3. Which of the following statements best reflects a CPA’s responsibility when undertaking a consulting services
engagement? The CPA must
A. Not seek to modify any agreement made with the client
B. Not perform any attest services for the client
C. Inform the client of significant reservations concerning the benefits of the engagement
D. Obtain a written understanding with the client concerning the time for completion of the engagement

4. When providing consulting services, the CPA acts primarily as a (n):


A. Independent accountant
B. Expert on compliance with industry standards
C. Technology specialist
D. Objective advisor on how to use the information

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5. CPAs issue several types of “special audit reports.” Which of the following circumstances would not require the
issuance of a special audit report?
A. The client’s financial statements are prepared using the cash basis
B. The client’s financial statements are prepared using the accrual basis
C. The CPA has been retained to audit only the current assets
D. The CPA has been retained to review the internal control system, not the financial statements

6. Philippine Standards on Related Services establish standards and procedures for which of the following
engagements?
A. Assisting in adjusting the books of account for a partnership.
B. Reviewing interim financial data required to be filed with the SEC.
C. Processing financial data for clients of other accounting firms.
D. Compiling an individual’s personal financial statement to be used to obtain a mortgage.

7. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements
provided that
A. Use of the report is restricted to the specified parties.
B. The prospective financial statements are also examined
C. Responsibility for the adequacy of the procedures performed is taken by the accountant.
D. Negative assurance is expressed on the prospective financial statements taken as a whole.

8. Which of the following statements is correct concerning both an engagement to compile and an engagement to
review a nonpublic entity’s financial statements?
A. The accountant does not contemplate obtaining an understanding of internal control.
B. The accountant must be independent in fact and appearance.
C. The accountant expresses no assurance on the financial statements.
D. The accountant should obtain a written management representation letter.

9. Which of the following procedures would an accountant least likely perform during an engagement to review the
financial statements of a nonpublic entity?
A. Observing the safeguards over access to and use of assets and records.
B. Comparing the financial statements with anticipated results in budgets and forecasts.
C. Inquiring of management about actions taken at the board of directors’ meetings.
D. Studying the relationships of financial statement elements expected to conform to predictable patterns.

10. Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but
the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly
stated. The inclusion of this statement is
A. Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion
B. Not appropriate because the auditor is prohibited from reporting on only one basic financial statement
C. Appropriate provided the auditor’s scope paragraph adequately describes the scope limitation
D. Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion
paragraph

11. An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed
an opinion on the financial statements taken as a whole provided the
A. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial
statements
B. Distribution of the report on the accounts receivable is restricted to internal use only
C. Auditor also reports on the current asset portion of the entity’s balance sheet
D. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial
statements

12. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and
belief, an entity’s expected financial position, results of operations, and changes in financial position. Such
prospective financial statements are known as
A. Financial projection C. Pro forma financial statement
B. Partial presentation D. Financial forecast

13. Comfort letters ordinarily are signed by the client’s


A. Independent auditor C. Audit committee
B. Underwriter of securities D. Senior management

14. Comfort letters ordinarily are addressed to


A. Creditor financial institutions C. The Securities and Exchange Commission
B. The client’s audit committee D. Underwriters of securities

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15. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been
audited, the underwriter most likely will receive
A. Negative assurance on capsule information
B. Positive assurance on supplementary disclosures
C. A limited opinion on pro forma financial statements
D. A disclaimer on prospective financial statements

TRANSACTION CYCLES

1. Tracing shipping documents to prenumbered sales invoices provides evidence that


A. No duplicate shipments or billings occurred
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped
D. All prenumbered sales invoices were accounted for

2. Which of the following most likely would not be a control designed to reduce the risk of misstatements in the
billing process?
A. Comparing control totals for shipping documents with corresponding totals for sales invoices
B. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices
C. Matching shipping documents with approved sales orders before invoice preparation
D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

3. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the
invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an
A. Understatement of revenues, receivables, and inventory
B. Overstatement of revenues and receivables, and an understatement of inventory
C. Understatement of revenues and receivables, and an overstatement of inventory
D. Overstatement of revenues, receivables, and inventory

4. A client who wishes to inflate earnings decides to hold the sales record open beyond year-end and record Year 2
sales in Year 1. Although the invoices are dated as of year-end, the shipments were made in the following
period. Moreover, the goods were included in the ending inventory of the period under audit. Which of the
following auditing procedures would not assist in detecting this form of fraudulent financial reporting?
A. The auditor confirms accounts receivable on a positive basis as of year end
B. The auditor examines shipping documents relating to sales recorded during the last few days of the year
C. The auditor examines shipping documents relating to sales recorded during the first few days of the year
following the period under audit
D. The auditor applies analytical procedures that compare gross profit rates and sales volume by month for
the current and preceding years

5. An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet
without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the
employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices
and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items
for testing from the file of all
A. Cash disbursements C. Receiving reports
B. Approved vouchers D. Vendors’ invoices

6. Which of the following statements about the existence and completeness objectives is not true?
A. The existence and completeness objectives emphasize opposite audit concerns
B. Existence deals with overstatements and completeness deals with understatements
C. Existence deals with understatements and completeness deals with overstatements
D. The completeness objective deals with unrecorded transactions

7. An example of vouching would be to


A. Trace from receiving reports to the acquisitions journal
B. Trace from the acquisitions journal to supporting vendor’s invoices
C. Trace from duplicate bank deposit slips to the cash receipts journal
D. Trace from canceled checks to the cash disbursement journal

8. An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-
up on errors reported by the customers. This test of controls most likely is performed to support management’s
financial statement assertion(s) of
Presentation and Disclosure Existence or occurrence
A. Yes Yes
B. Yes No
C. No Yes
D. No No
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9. In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences
between the recorded account balances and the confirmation replies. These differences, which were not
misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit,
the auditor most likely would choose
A. Individual overdue balances C. Small account balances
B. Individual invoices D. Large account balances

10. While observing a client’s annual physical inventory, an auditor recorded test counts for several items and
noticed that certain test counts were higher than the recorded quantities in the client’s perpetual records. This
situation could be the result of the client’s failure to record
A. Purchase discounts C. Sales
B. Purchase returns D. Sales returns

11. Which of the following accounts is the practice of “channel stuffing” for sales most likely to most directly affect,
and thereby result in additional audit procedures?
A. Accrued liabilities C. Cash
B. Allowance for sales returns D. Marketable investments

Channel stuffing = a marketing practice used to boost sales by inducing distributors to buy substantially more
inventory than they can promptly resell

12. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than
individual invoices. Which of the following most likely would be included with the client’s confirmation letter?
A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account
balance is correct
B. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be
sent
C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly
to the auditor
D. A client-prepared statement of account showing the de tails of the customer’s account balance

13. Negative confirmations of accounts receivable are less effective than positive confirmations of accounts receivable
because when using negative confirmations
A. They do not produce evidential matter that is statistically quantifiable
B. The auditor cannot infer that all nonrespondents have verified their account information
C. Some recipients may report incorrect balances that require extensive follow-up
D. A majority of recipients usually lack the willingness to respond objectively

14. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
A. No reply to a positive confirmation request is received
B. No reply to a negative confirmation request is received
C. Collectibility of the receivables is in doubt
D. Pledging of the receivables is probable

15. Which of the following procedures concerning accounts receivable would an auditor most likely perform to
obtain evidence in support of an assessed level of control risk below the maximum?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable
B. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts
receivable
C. Inspecting an entity’s analysis of accounts receivable for unusual balances
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable

16. Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s
inventory valuation?
A. Testing the entity’s computation of standard overhead rates
B. Obtaining confirmation of inventories pledged under loan agreements
C. Reviewing shipping and receiving cutoff procedures for inventories
D. Tracing test counts to the entity’s inventory listing

17. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement
procedures. Which of the following deficiencies alone should cause you the least concern?
A. Checks are signed by only one person
B. Signed checks are distributed by the controller to approved payees
C. The treasurer fails to establish bona fide names and addresses of check payees
D. Cash disbursements are made directly out of cash receipts

18. Which of the following is the best control procedure to prevent the payment of an invoice twice?
A. Review of supporting documentation by the person signing the check

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B. Requiring dual signatures on checks
C. Use of a check protector
D. Reconciliation of vendor statements to accounts payable

19. Which of the following questions would most likely be included in an internal control questionnaire concerning
the completeness assertion for purchases?
A. Is an authorized purchase order required before the receiving department can accept a shipment or the
vouchers payable department can record a voucher?
B. Are purchase requisitions prenumbered and independently matched with vendor invoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have
access to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

20. When an auditor selects a sample of items from the vouchers payable register for the last month of the period
audited and traces the items to underlying documents, the auditor is gathering evidence primarily in support of
the assertion that
A. Recorded obligations were paid
B. Incurred obligations were recorded in the correct period
C. Recorded obligations were valid
D. Cash disbursements were recorded as incurred obligations

21. An examination of the balance in the accounts payable account is ordinarily not designed to
A. Detect accounts payable that are substantially past due
B. Verify that accounts payable were properly authorized
C. Ascertain the reasonableness of recorded liabilities
D. Determine that all existing liabilities at the balance sheet date have been recorded

22. Which of the following would be the best procedure to determine whether purchases were properly authorized?
A. Discuss authorization procedures with personnel in the controller's and purchasing functions
B. Review and evaluate a flowchart of purchasing procedures
C. Determine whether a sample of entries in the purchase journal is supported by properly executed
purchase orders
D. Vouch payments for selected purchases to supporting receiving reports

23. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain
evidence that
A. All goods purchased before year end are received before the physical inventory count
B. All goods owned at year end are included in the inventory balance
C. No goods held on consignment for customers are included in the inventory balance
D. No goods observed during the physical count are pledged or sold

24. Which of the following controls most likely addresses the completeness assertion for inventory?
A. Work in process account is periodically reconciled with subsidiary records
B. Employees responsible for custody of finished goods do not perform the receiving function
C. Receiving reports are prenumbered and periodically reconciled
D. There is a separation of duties between payroll department and inventory accounting personnel

25. In order to efficiently establish the correctness of the accounts payable cutoff, the auditor will be most likely to
A. Coordinate cutoff tests with physical inventory observation
B. Compare cutoff reports with purchase orders
C. Compare vendors' invoices with vendors' statements
D. Coordinate mailing of confirmations with cutoff tests

26. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to
support management’s financial statement assertion of
A. Presentation and disclosure C. Existence or occurrence
B. Valuation or allocation D. Completeness

27. Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud
scheme?
A. There are significant unexplained variances between standard and actual labor cost
B. Payroll checks are disbursed by the same employee each payday
C. Employee time cards are approved by individual departmental supervisors
D. A separate payroll bank account is maintained on an imprest basis

28. An auditor most likely would perform substantive tests of details on payroll transactions and balances when
A. Cutoff tests indicate a substantial amount of accrued payroll expense
B. The assessed level of control risk relative to payroll transactions is low
C. Analytical procedures indicate unusual fluctuations in recurring payroll entries

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D. Accrued payroll expense consists primarily of unpaid commissions

29. Which of the following is not a control that is designed to protect investment securities?
A. Custody over securities should be limited to individuals who have recordkeeping responsibility over the
securities
B. Securities should be properly controlled physically in order to prevent unauthorized usage
C. Access to securities should be vested in more than one individual
D. Securities should be registered in the name of the owner

30. In establishing the existence and ownership of a long term investment in the form of publicly traded stock, an
auditor should inspect the securities or
A. Correspond with the investee company to verify the number of shares owned
B. Inspect the audited financial statements of the investee company
C. Confirm the number of shares owned that are held by an independent custodian
D. Determine that the investment is carried at the lower of cost or market

31. Which of the following controls would be most effective in assuring that the proper custody of assets in the
investing cycle is maintained?
A. Direct access to securities in the safe-deposit box is limited to only one corporate officer
B. Personnel who post investment transactions to the general ledger are not permitted to update the
investment subsidiary ledger
C. The purchase and sale of investments are executed on the specific authorization of the board of directors
D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of
the safe-deposit box by independent personnel

32. Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion
related to long-term investments?
A. Senior management verifies that securities in the bank safe-deposit box are registered in the entity’s name
B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments
C. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks
D. The controller compares the current market prices of recorded investments with the brokers’ advices on
file

33. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor
most likely would
A. Examine the audited financial statements of the investee company
B. Inspect the stock certificates evidencing the investment
C. Review the broker’s advice or canceled check for the investment’s acquisition
D. Obtain market quotations from financial newspapers or periodicals

34. An auditor would be least likely to use confirmations in connection with the examination of
A. Inventories C. Property, plant, and equipment
B. Long-term debts D. Stockholders’ equity

35. When a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in
the bonds payable account, the CPA might suspect that
A. Discount on bonds payable is understated C. Bonds payable are overstated
B. Bonds payable are understated D. Premium on bonds payable is overstated

36. In auditing long-term bonds payable, an auditor most likely would


A. Perform analytical procedures on the bond premium and discount accounts
B. Examine documentation of assets purchased with bond proceeds for liens
C. Compare interest expense with the bond payable amount for reasonableness
D. Confirm the existence of individual bond holders at year-end

37. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by
A. Confirmation with individual holders of retired bonds
B. Confirmation with the bond trustee
C. Recomputation of interest expense, interest payable, and amortization of bond discount or premium
D. Examination and count of the bonds retired during the year

38. If a company employs a capital stock registrar and/or a transfer agent, the registrar or agent should be requested
to confirm directly to the auditor the number of shares of each class of stock
A. Surrendered and canceled during the year
B. Authorized at the balance sheet date
C. Issued and outstanding at the balance sheet date
D. Authorized, issued, and outstanding during the year

39. Which of the following information is most important when auditing shareholders’ equity?

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A. Changes in the capital stock account are verified by an independent stock transfer agent
B. Stock dividends and/or stock splits during the year were approved by the shareholders
C. Stock dividends are capitalized at par or stated value on the dividend declaration date
D. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors'
meetings

40. When a corporate client maintains its own stock records, the auditor primarily will rely upon
A. Confirmation with the company secretary of shares outstanding at year-end
B. Review of the corporate minutes for data as to shares outstanding
C. Confirmation of the number of shares outstanding at year-end with the appropriate official
D. Inspection of the stock book at year-end and accounting for all certificate numbers

41. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the
estimates are
A. Not subject to bias C. Consistent with industry guidelines
B. Based on objective assumptions D. Reasonable in the circumstances

42. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key
factors and assumptions that are
A. Consistent with prior periods C. Objective and not susceptible to bias
B. Similar to industry guidelines D. Deviations from historical patterns

43. Which of the following is least likely to be an approach followed when auditing the fair values of assets and
liabilities?
A. Review and test management’s process of valuation
B. Confirm valuations with audit committee members
C. Independently develop an estimate of the value of the account
D. Review subsequent events relating to the account

NOTHING FOLLOWS.

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