Which of the following will impair the independence of a CPA in public practice?

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CEBU CPAR CENTER

Mandaue City, Cebu

AUDITING THEORY FIRST PREBOARD EXAMINATION

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE LETTER OF YOUR CHOICE WITH A VERTICLE LINE ON THE ANSWER SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.

1. The current period’s auditor who did not audit the prior period’s financial statements. a. Existing auditor c. Incoming auditor b. Continuing auditor d. Predecessor auditor

2. They are not presented as complete financial statements capable of standing alone, but are an integral part of the current period financial statements intended to be read only in relationship to the current period figures. a. Corresponding figures c. Prior period figures b. Comparative financial statements d. Comparatives

3. Comprises officers and others who also perform senior managerial functions. a. Management c. Audit committee b. Governance d. Board of directors

4. It exists when other information, not related to matters appearing in the audited financial statements, is incorrectly stated or presented. a. Material inconsistency c. Material weaknesses b. Material misstatement of fact d. Misstatement

5. A document, ordinarily issued by an entity on an annual basis, which includes its financial statements together with the audit report thereon. a. Environmental performance report c. Special purpose audit report b. Annual report d. Prospectus

6. When the professional accountant has obtained sufficient appropriate evidence to be satisfied that the subject matter is plausible in the circumstances, he or she can provide what level of assurance? a. None c. Moderate b. High d. Absolute

7. Which statement is correct regarding assurance engagements? a. The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about that subject matter. b. All engagements performed by professional accountants are assurance engagements. c. Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all the following elements - a three party relationship, a subject matter, suitable criteria and a conclusion. d. All engagements undertaken by an auditor that is similar to an agreed-upon procedures engagement does not result in the expression of a conclusion that provides a level of assurance.

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1. There are fundamental principles that the professional accountant has to observe when performing assurance engagements. The requirement of which principle is of particular importance in an assurance engagement in ensuring that the conclusion of the professional accountant has value to the intended user? a. Integrity c. Confidentiality b. Professional competence d. Objectivity

2. According to PSA 120, which of the following is an appropriate combination of procedures required in completing a review engagement? a. Inquiry and observation b. Inquiry and analytical procedures c. Analytical procedures and inspection d. Observation and analytical procedures

3. Which statement is correct regarding related services? a. Related services comprise reviews, agreed-upon procedures and consultancy. b. Audits and reviews are designed to enable the auditor to provide high level assurance. c. Engagement to undertake agreed-upon procedures is not intended to enable the auditor to express assurance. d. In a consultancy engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial information.

4. Which of the following is least likely an application of maintaining an attitude of professional skepticism? a. The auditor does not consider representations from management as substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. b. In planning and performing an audit, the auditor assumes that management is dishonest. c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or management representations. d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained.

5. The auditor’s opinion a. Guarantees the credibility of the financial statements. b. Is an assurance as to the future viability of the entity. c. Is not an assurance as to the efficiency with which management has conducted the affairs of the entity. d. Certifies the correctness of the financial statements.

6. Which of the following factors are essential to an effective internal auditing organization? I. Operating responsibility III. Objectivity II. Organizational status IV. Authority over operations a. I and II. c. II and III. b. III and IV. d. I and IV.

7. When an independent auditor decides that the work performed by internal auditors may have a bearing on the nature, timing, and extent of contemplated audit procedures, the independent auditor should plan to evaluate the objectivity of the internal auditors. Relative to objectivity, the independent auditor should a. Consider the qualifications of the internal audit staff. b. Consider the organization level to which internal auditors report the results of their work. c. Review the quality control program in effect for the internal audit staff. d. Examine the quality of the internal audit reports.

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1. Which of the following is a correct statement? a. ASPC should normally expose a proposed interpretation of statements. b. ASPC should normally expose its opinion on specific queries from a practicing CPA. c. When it is deemed necessary to expose for a comment on proposed interpretations of statements, the exposure period is understandably shorter than those of the regular drafts of standards. d. To make the statements on Philippine Standards on Auditing operative, the final statement shall be submitted to the Board of Accountancy for approval.

2. A CPA may practice under a firm name that include or indicates a. Name(s) of past partner(s) in firm name of successor partnership. b. Fictitious name. c. Specialization. d. Misleading as to the type of organization.

3. Emong and Bobads, CPAs, organized a partnership for the practice of public accounting. Which of the following is the best name for the firm? a. Emong and Bobads, CPAs. b. Emong and Bobads, Inc. c. Emong and Bobads, Auditors and Tax Consultants. d. Emong and Bobads, Members, PICPA.

4. Under this mode of billing for audit services, the client actually does not know in advance how much will be cost of audit engagement a. Retainer basis. c. Flat sum basis. b. Maximum fee basis. d. Per diem basis.

5. The objectives of the Philippine Accountancy Act of 2004 are the following, except: a. Standardization and regulation of accounting education. b. Integration of accountancy profession. c. Examination for registration of certified public accountants. d. Supervision, control and regulation of the practice of accountancy.

6. Which of the following is the least function of the Board of Accountancy? a. Determination of the minimum requirements leading to the admission of candidates to the CPA examinations. b. Regulation of the practice of accountancy. c. Supervision over the accredited professional organization of CPAs. d. Preparation of the contents of the CPA licensure examinations and rating of the examination papers.

7. A CPA certificate is evidence of a. Independence as a professional. b. Basic competence at the time of certification. c. Membership in the accredited association. d. Completion of continuing professional education program.

8. The following statements relate to RA 9298. Which statement is true? a. The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for negligence, incompetence, or any other just cause. b. Insanity is not a ground for proceeding against a CPA. c. A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge. d. After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked.

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1. Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members thereof shall register with the BOA and the PRC. If the application for registration of AB and Co., CPAs was approved on August 30, 2005, the registration will expire on a. Sept. 30, 2007 c. Dec. 31, 2007 b. Dec. 31, 2008 d. Aug. 30, 2007

2. No person shall serve the Professional Regulatory Board of Accountancy for more than a. 3 years b. 6 years c. 9 years d. 12 years

3. The following are represented both to the Financial Reporting Standards Council (FRSC) and Auditing and Assurance Standards Council (AASC), except a. Bangko Sentral ng Pilipinas c. Securities and Exchange Commission b. Bureau of Internal Revenue d. Board of Accountancy

4. Which of the following is not a requisite in applying for the CPA licensure examinations? a. Natural-born citizen of the Philippines. b. Good moral character. c. Holder of the degree of Bachelor of Science in Accountancy. d. Has not been convicted of any criminal offense involving moral turpitude.

5. Are the following CPAs required to comply with the requirements on continuing professional education? a b c d

   • CPAs in Public Accountancy Yes Yes Yes Yes
   • CPAs in Commerce and Industry Yes Yes No No
   • CPAs in Education/Academe Yes Yes Yes No
   • CPAs in Government Yes No Yes No

6. In order to maintain PICPA’s recognition as the Accredited National Professional Organization of CPAs, it must have a credible plan to enlist into active membership at least a majority of the CPAs in the practice of accountancy within how many years? a. 3 years b. 5 years c. 6 years d. 10 years

7. How many CPE credit units must be accumulated by a registered accounting professional within the 3-year period? a. 15 credit units b. 45 credit units c. 60 credit units d. 90 credit units

8. If the firm is involved in the preparation of accounting records or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm, this will most likely create a. Self-interest threat c. Intimidation threat b. Self-review threat d. Familiarity threat

9. The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may most likely create a. Self-interest threat c. Intimidation threat b. Self-review threat d. Familiarity threat

10. Jang, a CPA, has a law practice. Jang has recommended one of his clients to Geum, a CPA. Geum has agreed to pay Jang 10% of the fee for services rendered by Geum to Jang’s client. Who, if anyone, is in violation of the Code of Ethics? a. Both Jang and Geum c. Neither Jang and Geum b. Jang only d. Geum only

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d. A CPA running for public office uses the professional designation "CPA" after his name on posters employed in connection with his election campaign.

1. Which of the following will impair the independence of a CPA in public practice? a. He has his name and address listed on a one-page section of the telephone book. b. He obtained a loan from a bank under the normal lending procedures, terms and requirements of that bank. c. He holds one share of the client’s capital stock d. He failed to disclose a client’s departure from GAAP.

2. The CPA should not undertake an engagement if his fee is to be based upon a. A percentage of audited net income. b. Per diem rates plus expenses. c. The findings of a tax authority. d. The complexity of the service rendered.

3. The work of each assistant needs to be reviewed by personnel of at least equal competence. Which of the following is not one of the objectives of this requirement? a. The conclusion expressed are consistent with the result of the work performed and support the opinion. b. The work performed and the results obtained have been adequately documented. c. The objectives of the audit procedures have been achieved. d. All available evidences have been obtained, evaluate and documented.

4. The following procedures relate to Skills and Competence, except a. Identify criteria which will be considered in evaluating individual performance and expected proficiency. b. Provide procedures for maintaining the firm’s standards of quality for the work performed. c. Establish qualifications and guidelines for evaluating potential hirees at each professional level. d. Provide, to the extent necessary, programs to fill the firm’s needs for personnel with expertise in specialized and industries.

5. The term “peer review” refers to: a. The process of evaluating CPA staff members for promotion to partnership in the firm. b. The study and evaluation of a CPA firm’s quality control policies and procedures by another CPA firm or a team of qualified CPAs. c. The review of the audit working papers by the audit partner or principal to determine whether the audit was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor’s report. d. A study or appraisal by the Board of Accountancy or the duly authorized representatives of one or more aspects of the professional work of a firm or partnership engaged in the practice of public accountancy.

6. Under generally accepted auditing standards, which of the following reflects application of a general standard? a. The initial planning of the audit engagement. b. Confirmation of accounts receivable. c. Completion of an internal control questionnaire. d. Assignment of audit personnel to continuing professional education programs conducted by the firm.

7. Which of the following should the auditor likely to do when the application of planned audit procedures indicates the possible existence of fraud or error? a. The auditor should resign in order to avoid legal responsibility. b. He should discuss the matter with the person whom he believes is involved with the irregularities.

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c. He should consider the potential effect on the financial statements. d. He should refer the suspected fraud or error to the internal auditor.

1. Examples of risk factors relating to misstatements resulting from fraud least likely include a. There is mandatory vacation for employees performing key control functions. b. A significant portion of management’s compensation is represented by bonuses the value of which is contingent upon the entity achieving unduly aggressive targets for operating results, financial position or cash flow. c. A high degree of competition or market saturation, accompanied by declining margins. d. Inability to generate cash flows from operations while reporting earnings and earnings growth.

2. Specific responses to the auditor’s assessment of the risk of material misstatement resulting from fraud will vary depending upon the types or combinations of fraud risk factors or conditions identified, and the account balances, classes of transactions and assertions they may affect. Specific examples of such responses least likely include: a. Visit locations or perform certain tests on a surprise or unannounced basis. b. Request that inventories be counted at interim date. c. Alter the audit approach in the current year. d. Seeking additional audit evidence from sources outside of the entity being audited.

3. Which of the following circumstances least likely indicate the possibility of fraud or error? a. Unrealistic time deadlines for audit completion imposed by management. b. Limitation in audit scope imposed by management. c. Conservative application of accounting principles. d. Significant difficult-to-audit figures in the accounts.

4. Which statement is incorrect regarding the auditor’s consideration of laws and regulations in an audit of financial statements? a. When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should evaluate the possible effect on the financial statements. b. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion. c. The auditor may withdraw from the engagement when the entity does not take the remedial action that the auditor considers necessary in the circumstances, even when the noncompliance is not material to the financial statements. d. In order to plan the audit, the auditor should obtain a specific understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework.

5. In conducting a fraud investigation the auditor should first: a. I dentify the perpetrators b. Obtain the facts c. Obtain a confession d. Notify a law enforcement agency

6. Generally, the decision to notify parties outside the client's organization regarding an illegal act is the responsibility of the a. Independent auditor. c. Outside legal counsel. b. Management. d. Internal auditors.

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1. Which of the following is incorrect about the standard audit report? a. The opinion paragraph of an auditor’s report on financial statements refers to generally accepted accounting principles. b. The consistent application of accounting principles is implicitly represented in the standard auditor’s report on comparative financial statements. c. Examination of evidence on a test basis is explicitly represented in the standard auditor’s report. d. The auditor’s responsibility for the financial statements is explicitly represented in the opening paragraph of the auditor’s standard audit report.

2. When financial statements are audited by an accounting firm, the partner-in-charge of engagement ordinarily signs in the name of the firm because: a. The partner-in-charge of engagement should be relieved of any responsibility regarding the opinion issued. b. It is required by reporting standards. c. The firm assumes responsibility for the audit. d. The opinion becomes more credible if signed in name of the firm.

3. An auditor completed fieldwork on February 10, 2006 for a December 31, 2005 year- end client. A significant subsequent event occurred on February 22, 2006. In this case, which of the following report dates would not be appropriate? a. February 10, 2006. b. February 10, except Note 1, February 22, 2006. c. February 22, 2006. d. December 31, 2005.

4. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern. If the entity's disclosures about continued existence are adequate, the audit report should include A disclaimer of opinion A qualified opinion a. Yes Yes b. No No c. No Yes d. Yes No

5. ABC Farms, Inc. a Manila-based company has a subsidiary at Zamboanga City. A CPA has completed his examination of the consolidated financial statements prepared by the client ABC Farms. Because of his prior commitments, the CPA did not examine the financial statements of the Zamboanga subsidiary, but he did receive the unqualified opinion of another CPA on the subsidiary's statements. The procedures used by ABC Farms to prepare the consolidated statements have been reviewed and approved. The principal CPA wishes to accept full responsibility for his opinion on consolidated statements. He has made sufficient review of the work of the other accountant to justify his accepting full responsibility for the work of the other CPA. a. The principal CPA may express an unqualified opinion on the consolidated statements where there has been utilization of the report of another CPA, provided that the report of the other CPA is attached. b. The principal CPA need make no reference to the other CPA in either the scope or opinion paragraph of the report on the consolidated statements. c. The principal CPA can issue an unqualified opinion as to the unconsolidated parent whose examination he conducted, but must qualify his opinion on the consolidated statements, as stated in the GAAS concerning the scope of the examination. d. Under these circumstances, the principal CPA must refer to the other CPA in the scope or middle paragraph and state that he assumes full responsibility for the work of the other CPA. His opinion may then be unqualified.

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1. Wowie, CPA, was about to issue an unqualified opinion on the financial statements of Stampede Company when a letter was received from Stampede's independent counsel. The letter stated that the NTC has notified Stampede that its broadcasting license will not be renewed because of alleged irregularities in its broadcasting practices. Stampede cannot continue to operate without the license. Wowie has also learned that Stampede and its independent counsel plan to take all necessary legal action to retain the license. The letter from independent counsel, however, states that a favorable outcome of any legal action is highly uncertain. On the basis of this information, what action should Wowie take? a. Issue an unqualified opinion, with an explanatory paragraph that describes the matter giving rise to the uncertainty. b. Issue an adverse opinion and disclose all reasons why. c. Issue a piecemeal opinion with full disclosure made of the license dispute in a note to the financial statements. d. Issue an unqualified opinion if full disclosure is made of the matter in a note to the financial statements.

2. Identify the appropriate type of opinion to issue when the auditor is satisfied that there is a remote likelihood of a loss resulting from the resolution of an uncertainty. a. Unqualified opinion. b. Unqualified opinion with a separate explanatory paragraph. c. Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is adequately disclosed. d. Qualified opinion or disclaimer of opinion, depending upon the materiality of the loss.

3. Circumstances which make it impracticable to apply the necessary audit procedures: a. Does not have to be addressed in the standard audit report provided this is agreed upon b. Requires changes in the audit report c. Will not permit the auditor to issue any audit report d. Requires that the financial statements items not examined be included in management’s representation letter.

4. Under which of the following circumstances may a CPA agree with a departure from a Philippine Financial Reporting Standard? a. When the Standard was one formulated by the Accounting Standards Council (ASC) inasmuch as the ASC is no longer the standard-setting body. b. When the CPA can demonstrate that application of the principle in question would make the financial statements materially misleading. c. When the disputed principle is contrary to industry practice. d. When adoption of the principle would cause the financial statements to be inconsistent with prior years.

5. When a new audit report is issued on financial statements because of subsequent discovery of material misstatements on previously issued financial statements, the audit report should include a. No modification. b. Qualified opinion because of scope limitation. c. Qualified opinion because of inadequate disclosure. d. Emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements.

What does it mean for a CPA to be independent?

Which of the following activities is most likely to impair the appearance of independence of the auditor?

Which of the following corporate finance services when performed for a client would impair independence?

Which of the following actions by a CPA most likely violates the profession's ethical standards?