St. Vincent de Ferrer College of Camarin, Inc.

SVFC Compound,
San Vicente Ferrer St., Area D, Brgy. 178, Camarin, Caloocan City
Telephone Number: 668-25-75; Email address:
st.vincentdeferrercollegeofccc@yahoo.com
Website: www.stvfc.com

Midterm Examination
Accounting 14 – Applied Auditing

Name: Rannah Jane S. Raymundo Year: 5TH year / Accountancy

1. Explain why auditor’s reports are important to users of financial statements.

- Auditors' reports are important to users of financial statements because they inform users of
the auditor's opinion as to whether or not the financial statements are fairly stated or whether
no conclusion can be made with regard to the fairness of their presentation.

2. What purpose is served by the Philippine Standards of Auditing?

- The purpose of this Philippine Standard on Auditing (PSA) is to establish standards and
provide guidance on the independent auditor's report issued as a result of an audit of a
complete set of general purpose financial statements prepared in accordance with a financial
reporting framework that is designed to achieve fair presentation.

3. Discuss the role of risk in the audit process and how its existence is communicated to the
user in the audit report.
- Audit risk is the risk that an auditor will not detect errors or fraud while examining the
financial statements of a client. Auditors can increase the number of audit procedures in
order to reduce the level of audit risk.

4. Prior to naming Cruz and Company as its auditors, Del Pelayo of Verbatim, Inc., met with
Gracie Cruz and inquired about the auditors who would work on Verbatim’s audit. Pelayo
wants Cruz to assign only persons who graduated from his Alma Mater. Required: How
should Gracie Cruz respond?

5. Describes the conditions under which an auditor is associated with financial statements.
- The auditor's report is a disclaimer thereof, issued by either an internal auditor or an
independent external auditor as a result of an internal or external audit, as an assurance
service in order for the user to make decisions based on the results of the audit.

6. What factors should an auditor considering determining whether financial statements are
presented fairly in conformity with applicable financial reporting standards?
- An independent auditor's report contains an opinion as to whether the financial statements
present fairly, in all material respects, an entity’s financial position, results of operations, and
cash flows in conformity with generally accepted accounting principles. An identification of
 the country of origin of those generally accepted accounting principles also is required (see
section 508.08h).

- The purpose of this section is to explain the meaning of "present fairly" as used in the phrase
"present fairly . . . in conformity with generally accepted accounting principles." In applying
this section, the auditor should look to the requirements of the Securities and Exchange
Commission for the company under audit with respect to the accounting principles applicable
to that company.

7. Why must the auditor refrain from explaining why she or he is not independent?
- The Importance of Auditor Independence. The auditor should be independent from the client
company, so that the audit opinion will not be influenced by any relationship between them.
If this happens, the auditors can no longer be said to be independent and the shareholders
cannot rely on their opinion.

8. Describe the relationship between detection risk and evidence accumulation.

- Describe the relationship between detection risk and evidence accumulation. The amount of
audit evidence an auditor must gather varies inversely with allowable detection risk. As
allowable detection risk decreases, the amount of evidence required increases, and vice versa.

9. Last year you were assigned to minor parts of the audit of the sales and collections cycle for
Patrick Corporation. This year you have been assigned significant responsibility in the audit of the
sales collections cycle. You recall that last year, the credit manager, Josie Tan, treated you as if
you were one of the clerks. In fact, you had to call her “Ms. Tan” when you went to ask her several
questions. This year, she has become very friendly. Josie, as she now wants you to call her, has just
invited you to join her for dinner at a very exclusive private club in town. You were called away
before you could give Josie a reply, but she did indicate to you that last year she took your
predecessor to such a dinner.

Required:
How do you respond to Josie?
- The primary issue raised here is how friendly an auditor should be with a clientpersonnel. This
situation is especially interesting in light of the auditor’s view of therelationship prior to being assigned
significant responsibility. The issue is whetherJosie is trying to become friendly in order to try to
manipulate the auditor’sdecisions.

10. Who is the most important user of an audit’s report on a company’s financial statements:
company’s shareholders, or company’s creditors? Briefly explain your rationale and indicate how
auditors should resolve potential conflicts in the needs of the parties.
- Complexity affects the demand for auditing services because of the vast amount of transactions,
information, and processing systems it requires a high demand of very skilled auditors because
companies do not want to face lawsuits if their financial reports are misrepresented.

11. In addition to an understanding of the business and the industry, what are the
requirements for an effective audit?
- Gaining an understanding of the business of a client, and the environment in which it ... audit strategy,
and be able to design and perform effective audit procedures. ... This means having an understanding of
the industry in which the company. In addition, damage to one brand name could be easily transferred to
the other.
12. What is an “engagement letter? “Why is its use recommended prior to rendering of
professional services by CPA’s?
- An engagement letter is the agreement or understanding between the CPA and his/her client
concerning the nature of the engagement.

13. How does audit planning assist in assessing inherent risk?

- Inherent risk is one factor, along with control risk, that an auditor uses to assess the risk of material
misstatement associated with a particular financial statement line item or audit area. Usually, an auditor
assesses each audit area as either low, medium or high in inherent risk.

14. Name three sources of business and industry information?

- The primary business information formats can be divided into the following categories:
 Basic reference sources such as guides, bibliographies, dictionaries, almanacs, encyclopedias,
handbooks, yearbooks and internet resources.
 Directories.
 Periodicals and newspapers.
 Loose-leaf services.
 Government information and services.

15. Who participates in the pre-audit conference, and what topics should be covered?
- A pre-audit is the first step in the process of an audit. During a pre-audit, a company or individual's
financial documents are examined to ensure that all information is correct before the company or
individual undergoes an official audit.

16. Who participates in the pre-audit conference, and what topics should be covered?
- The nonprofit's who participated in the pre-audit conference should participate in the exit conference.

17. Why must the auditor test the information system prior to testing transactions and
balances?
- The auditor's tests of the accuracy of monetary amounts of transactions and account balances are
known as substantive testing. Substantive tests verify whether information is correct, whereas control
tests determine whether the information is managed under a system that promotes correctness.

18. Analytical procedures consist of evaluations of financial information made by a study of

plausible relationships among both financial and nonfinancial data. They are ranger from simple
comparisons to the use of complex models involving many relationships and elements of data.
They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to
expectations developed by the auditors.

Required:
a. Describe the broad purpose of analytical procedures.
- Analytical procedures are used for the following purposes: To assist the auditor in planning
the nature, timing, and extent of other auditing procedures. As a substantive test to obtain
evidential matter about particular assertions related to account balances or classes of
transactions.
b. Identify the sources of information from which an auditor develops expectations
 - Financial information for comparable prior periods giving consideration to known changes.
Anticipated results—for example, budgets, forecasts, and extrapolations.

c. Describe the factors that influence an auditor’s consideration of the reliability of data for
purposes of achieving audit objectives.
- The following factors influence the auditor's consideration of the reliability of data for
purposes of achieving audit objectives: Whether sources within the entity were independent of those
who are responsible for the amount being audited. Whether the data was developed under a reliable
system with adequate controls.

19. Define internal control over financial reporting. What is difference between internal
controls over financial reporting?
- A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.

20. What is an organization’s control environment? What are the major elements of a control
environment?
- Control Environment is the set of standards, processes, and structures that provide the basis for
carrying out internal control across the organization.

21. What is the implication of a material misstatement in the account balances at year end in
terms of providing feedback on the effectiveness of internal control over financial reporting?
Explain.
- A material misstatement is information in the financial statements that is sufficiently incorrect that it
may impact the economic decisions of someone relying on those statements.

22. What are the primary factors that should be considered in determining whether the
auditor needs to directly test year end account balances?
However, when determining whether they have enough evidence on file the auditor must consider:
- the risk of material misstatement;
- the materiality of the item;
- the nature of accounting and internal control systems;
- the auditor's knowledge and experience of the business;
- the results of controls tests.

23. What are some important controls that an auditor should address in assessing the level of
fraud risk?
- The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether caused by error or fraud.

24. To what extent can the auditor use management’s process in evaluating internal control,
including evidence gathered, to plan and execute the auditor’s integrated audit?
- In an integrated audit of internal control over financial reporting and the financial statements, the
auditor also may use this work to obtain evidence supporting the auditor's assessment of control risk for
purposes of the audit of the financial statements.
25. What evidence might the auditor gather to evaluate whether or not company has made a
commitment to appropriate levels of financial competences? How would the auditor assess
whether the company’s accountants and others in the process were competent?
- The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis
for identifying and assessing the risks of material misstatement, whether due to error or fraud, and
designing further audit procedures. If one or more material weaknesses exist, the company's internal
control over financial. When planning an integrated audit, the auditor should evaluate whether the ...
processes and financial reporting systems; more centralized accounting, those paragraphs to assess the
competence and objectivity of persons.