ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPALE  PREWEEK Summary Lecture

AUDITING THEORY J. IRENEO  M. NGINA  F. TUGAS

PREWEEK LECTURE: AUDITING THEORY

1. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements most likely would withdraw from the engagement if
A. The illegal act is a violation of generally accepted accounting principles.
B. The client does not take the remedial action that the auditor considers necessary.
C. The illegal act was committed during a prior year that was not audited.
D. The auditor has already assessed control risk at the maximum level.

2. On the basis of audit evidence related to internal control, an auditor decides to increase the assessed
level of the risk of material misstatement from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would
A. Increase the inherent risk.
B. Increase materiality levels.
C. Decrease substantive testing.
D. Decrease detection risk.

3. Which of the following statements best describes the auditor’s responsibility regarding the detection
of material errors and fraud?
A. The auditor is responsible for the failure to detect material errors and fraud only when such
failure results from the nonapplication of generally accepted accounting principles.
B. Auditing procedures may or may not need to be extended if the auditor’s analysis indicates
the existence of fraud risk factors.
C. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.
D. Extended auditing procedures are required to detect unrecorded transactions even if there
is no evidence that material errors and fraud may exist.

4. An audit client failed to maintain copies of its procedures manuals and organizational flowcharts.
What should the auditor do in an audit of financial statements?
A. Issue a qualified opinion on the basis of a scope limitation.
B. Document the auditor’s understanding of internal control.
C. Assess control risk at the maximum level.
D. Restrict the auditor’s responsibility to assess the effectiveness of controls in the audit
engagement letter.

5. Which of the following actions should the auditor take in response to discovering a deviation from
the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation.
B. Assume that the deviation is an isolated occurrence without audit significance.
C. Report the matter to the next higher level of authority within the entity.
D. Increase sample size of tests of controls.

6. When an auditor discovered that certain control activities were ineffective, the auditor
A. Level of detection risk.
B. Extent of tests of details.
C. Level of inherent risk.
D. Extent of tests of controls.
7. While testing a sample of an audit client's bank reconciliations during the year under audit, an
auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner.
The auditor suspects there may be fraud. Which of the following audit responses is most appropriate
in this situation?
A. Because the findings are not material, the auditor should project the errors to the population
and consider the materiality of the projected misstatement in the auditor's concluding
procedures.
B. The auditor should consider the implications for the integrity of management or employees
and the possible effect on other aspects of the audit.
C. The auditor should focus on material misstatements and not consider these immaterial
findings or potential errors further.
D. The auditor should report the finding to the appropriate level of management immediately.

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Batch 43 – May 2022 CPA Licensure Examination

8. 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.

9. 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.

10. 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.

11. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should not be accepted?
A. There are significant related-party transactions that management claims occurred in the
ordinary course of business.
B. Internal control activities requiring the segregation of duties are subject to management
override.
C. Management continues to employ an inefficient system of information technology to record
financial transactions.
D. It is unlikely that sufficient appropriate evidence is available to support an opinion on the
financial statements.

12. The auditor with final responsibility for an engagement and one of the assistants have a difference
of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be
disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to
A. Refer the disagreement to the IAASB's Quality Review Committee.
B. Document the details of the disagreement with the conclusion reached.
C. Discuss the disagreement with the entity's management or its audit committee.
D. Report the disagreement to an impartial peer review monitoring team.

13. Which of the following activities would be most helpful to a CPA in deciding whether to accept a new
audit client?
A. Reviewing industry benchmarking data.
B. Considering the client's compensation methods.
C. Evaluating the CPA's ability to properly service the client.
D. Evaluating the most recent peer review of the client's previous auditor.

14. One purpose of establishing quality control policies and procedures for acceptance and continuance
of client relationships and specific engagements is to
A. Undertake engagements only that the accounting firm is competent to perform.
B. Monitor significant deficiencies in the design and operation of the client’s internal control.
C. Identify noncompliance with aspects of contractual agreements that affect the financial
statements.
D. Provide reasonable assurance that personnel will be adequately trained to fulfill their
assigned responsibilities.

15. Within the context of quality control, a primary purpose of the engagement performance element is
to help ensure that
A. CPA firm personnel have adequate technical training.
B. Engagements are adequately supervised.
C. The CPA firm undertakes only those engagements it is competent to perform.
D. CPA firm personnel comply with relevant ethical requirements.

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Batch 43 – May 2022 CPA Licensure Examination

UNDERSTANDING THE ENTITY’S INTERNAL CONTROL

16. In an audit of financial statements in accordance with generally accepted auditing standards, an
auditor is required to
A. Document the auditor’s understanding of the entity’s internal control.
B. Search for significant deficiencies in the operation of internal control.
C. Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
D. Determine whether controls are suitably designed to prevent or detect material
misstatements.

17. A primary objective of procedures performed to obtain an understanding of internal control is to

provide an auditor with
A. Knowledge necessary to assess the risks of material misstatements.
B. Evidence to use in assessing inherent risk.
C. A basis for modifying tests of controls.
D. An evaluation of the consistency of application of management’s policies.

RISK ASSESSMENT AND RESPONSE TO ASSESSED RISK

18. After assessing control risk, an auditor desires to seek a further reduction in the assessed level of
control risk. At this time, the auditor would consider whether
A. It would be efficient to obtain an understanding of the entity’s information system.
B. The entity’s controls have been implemented.
C. The entity’s controls pertain to any financial statement assertions.
D. Additional audit evidence sufficient to support a further reduction is likely to be available.

19. Assessing control risk at a low level most likely would involve
A. Performing more extensive substantive tests with larger sample sizes than originally planned.
B. Reducing inherent risk for most of the assertions relevant to significant account balances.
C. Changing the timing of substantive tests by omitting interim-date testing and performing the
tests at year-end.
D. Identifying specific controls relevant to specific assertions.

TESTS OF CONTROLS

20. After obtaining an understanding of internal control and assessing the risk of material misstatement,
an auditor decided to perform tests of controls. The auditor most likely decided that
A. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.
B. Additional evidence to support a further reduction in the risk of material misstatement is not
available.
C. An increase in the assessed level of risk of material misstatement is justified for certain
financial statement assertions.
D. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.

21. Which of the following types of evidence would an auditor most likely examine to determine whether
controls are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.

22. The objective of tests of details of transactions performed as tests of controls is to

A. Monitor the design and use of entity documents such as prenumbered shipping forms.
B. Determine whether controls have been implemented.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether controls operated effectively.

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Batch 43 – May 2022 CPA Licensure Examination

FURTHER AUDIT PROCEDURES – SUBSTANTIVE TESTING

23. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditor most likely would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits are
recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.

24. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high, an auditor would probably
A. Insist that the client perform physical counts of inventory items several times during the year.
B. Apply gross profit tests to ascertain the reasonableness of the physical counts.
C. Increase the extent of tests of controls of the inventory cycle.
D. Request the client to schedule the physical inventory count at the end of the year.

25. 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.

FRAUD, ERROR, AND NON-COMPLIANCE

26. While performing their audit, the audit team uncovers fraud that is likely to have an immaterial effect
on the financial statements taken as whole. In this case the auditors should
A. Plan on additional audit procedures to determine the exact amount of the fraud.
B. Communicate with legal authorities as to the identity of the fraudsters.
C. Disclose the fraud to the appropriate level of management or to the audit committee.
D. Call the whistleblower hotline and name the suspected individuals.

27. Auditors may identify conditions during fieldwork that change or support a judgment about the initial
assessment of fraud risks. Which of the following is not a condition which should alert an auditor that
the initial assessment should be changed?
A. Preliminary assessment of control risk has been modified
B. Discrepancies in the accounting records
C. Unusual relationships between the auditor and management
D. Missing or conflicting evidence

INFORMATION TECHNOLOGY

28. Auditing by testing the input and output of a computer system instead of the computer program itself
will
A. Not detect program errors which do not show up in the output sampled.
B. Detect all program errors, regardless of the nature of the output.
C. Provide the auditor with the same type of evidence as tests of application controls.
D. Not provide the auditor with confidence in the results of the auditing procedures.

29. When an auditor tests a computerized accounting system, which of the following is true of the test
data approach?
A. Several transactions of each type must be tested.
B. Test data are processed by the client’s computer programs under the auditor’s control.
C. Test data must consist of all possible valid and invalid conditions.
D. The program tested is different from the program used throughout the year by the
client.

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Batch 43 – May 2022 CPA Licensure Examination

30. A primary advantage of using generalized audit software packages to audit the financial statements
of a client that uses a computer system is that the auditor may
A. Access information stored on computer files while having a limited understanding of the
client’s hardware and software features.
B. Consider increasing the use of substantive tests of transactions in place of analytical
procedures.
C. Substantiate the accuracy of data through self-checking digits and hash totals.
D. Reduce the level of required tests of controls to a relatively small amount.

31. Auditors who prefer statistical sampling to non-statistical sampling may do so because statistical
sampling helps the auditor
A. Measure the sufficiency of the evidential matter obtained
B. Minimize the failure to detect errors and irregularities.
C. Eliminate subjectivity in the evaluation of sampling results
D. Reduce the level of tolerable error to a relatively low amount.

32. Alpha risk in statistical sampling is

A. Related to nonsampling risk.
B. The risk that a material misstatement will occur in a financial statement assertion and the audit
will not detect it.
C. The risk of deciding a book balance is materially misstated when it is fairly stated.
D. The risk of selecting a sample that is too small.

33. To determine whether internal control effectively minimized errors of failure to bill a customer for a
shipment, the auditor would select a sample of transactions from the population represented by the
A. Customer order file
B. Shipping records file
C. Subsidiary customer accounts ledger
D. Sales invoice

34. In the auditing profession, there is a need for uniformity in reporting in order to
I. Avoid confusion
II. Promote credibility in the global marketplace
A. I only
B. II only
C. Both I and II
D. Neither I nor II
35. Tatsuki is the external auditor for Heavenly Host Enterprises. The company provided him with the
statement of cash flows, statement of financial position and statement of comprehensive income.
The company did not provide him the statement of retained earnings and statement of changes in
equity. If the omission proves to be somewhat close to the level of materiality, what should be
Tatsuki's opinion?
A. Qualified
B. Unqualified
C. Adverse
D. Disclaimer of Opinion
36. An audit report contains the following paragraph: “Since the company did not take physical
inventories and we were not able to apply auditing procedures to satisfy ourselves as to inventory
quantities and the cost of property and equipment, the scope of our work was not sufficient to enable
us to express, and we do not express, an opinion on these financial statements.” This paragraph
illustrates a (an)
A. Disclaimer of opinion due to uncertainty
B. Disclaimer of opinion due to scope restrictions
C. Adverse audit opinion
D. Audit opinion qualified for material scope restrictions.
37. An entity ordinarily issues on an annual basis a document which includes its financial statements
together with the audit report thereon. This document is frequently referred to as the
A. Annual financial statement
B. Annual report
C. Annual document
D. Audit report

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Batch 43 – May 2022 CPA Licensure Examination

38. CPA Firm A has performed most of the audit of Consolidated Company’s financial statements and
qualities as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume
full responsibility for Firm B’s work. Which of the following statements is CORRECT?
A. In such circumstances, when appropriate requirements have been met, Firm A should issue a
unqualified opinion on the financial statements.
B. In such circumstances, when appropriate requirements have been met, Firm A should issue an
unqualified opinion on the financial statements but should make appropriate reference to the Firm
B in the audit report.
C. Such assumption of responsibility violates the profession’s standards
D. CPA Firm A should normally qualify its audit report on the basis of the scope limitation involved
when another CPA firm in involved.

39. Which of the following material events occurring subsequent to the December 31, 2019, reporting
date would not ordinarily result in an adjustment to the financial statements before they are issued
on March 2, 2020?
A. Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for
the past 6 years. The debtor filed for bankruptcy on January 23, 2020.
B. Acquisition of a subsidiary on January 23, 2020. Negotiations had begun in December 2019.
C. A 3 for 5 reverse stock split consummated on January 23, 2020.
D. Settlement of extended ligation of January 23, 2020 in excess of the recorded year-end liability.

40. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk
B. Are not part of the audit evidence considered to support the assertion
C. Replace a low assessed level of control risk as audit evidence to support the assertion
D. Complement, but not replace, substantive tests designed to support the assertion

41. When obtaining evidence regarding litigation against a client, the CPA will be least interested in
determining?
A. The period in which the underlying cause of the litigation occurred
B. The probability of an unfavorable outcome
C. An estimate of when the matter will be resolved
D. An estimate of the potential loss

42. On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial
statements for the year ended January 31. On March 2, the CPA learned that on February 11, the
entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating
financial condition of the entity’s principal customer that led to the customer's bankruptcy.
Management then refused to adjust the financial statements for this subsequent event. The CPA
determined that the information is reliable and that there are creditors currently relying on the
financial statements. The CPA’s next course of action most likely would be to
A. Notify the entity’s creditors that the financial statements and the related auditor’s report should
no longer be relied on.
B. Notify each member of the entity’s board of directors about management’s refusal to adjust the
financial statements.
C. Issue revised financial statements and distribute them to each creditor known to be relying on
the financial statements.
D. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the
financial statements.

43. An auditor’s report on financial statements prepared in accordance with another comprehensive basis
of accounting should include all of the following except
A. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
B. An opinion as to whether the financial statements are presented fairly in conformity with the
comprehensive basis of accounting.
C. Reference to the note to the financial statements that describes the basis of presentation.
D. A statement that the basis of presentation is a comprehensive basis of accounting other than
generally accepted accounting principles.

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44. Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on the
statements of income, retained earnings, or cash flows. Harris will have access to all information
underlying the basic financial statements. Under these circumstances, Harris may
A. Not accept the engagement because it would constitute a violation of the profession’s ethical
standards.
B. Not accept the engagement because it would be tantamount to rendering a piecemeal opinion.
C. Accept the engagement because such engagements merely involve limited reporting objectives.
D. Accept the engagement but should disclaim an opinion because of an inability to apply the
procedures considered necessary.

45. Which of the following is a prospective financial information for general use upon which an accountant
may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

46. S1: A self-interest or intimidation threat to compliance with the principles of integrity and professional
behavior is created when a professional accountant becomes aware of non-compliance or suspected
noncompliance with laws and regulations.
S2: When encountering such non-compliance or suspected non-compliance, the accountant shall
obtain an understanding of those legal or regulatory provisions and comply with them, including any
requirement to report the matter to an appropriate authority and any prohibition on alerting the
client.
A. True, True
B. False, true
C. True, false
D. False, false

47. Independence is linked to the principles of

A. Objectivity
B. Objectivity and integrity
C. Integrity and due care
D. Objectivity, integrity and confidentiality

48. Which of the following threats is most likely created when an individual is involved in an audit
engagement over a long period of time?
A. Familiarity threat.
B. Familiarity and self-interest threats.
C. Self-interest threat.
D. Advocacy and familiar threats.

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