CRC-ACE REVIEW SCHOOL ‘The Professional CPA Review School ‘MLA (02) 735-9031 BAG (074) 422-1420 AUDITING THEORY A J.G. SALOSAGCOL PREWEEK JULY 2014 & 9. “The objective of an audit of financial statements is a. To assist an entity in the preparation of financial statements." b. To express an opinion whether the financial statements are prepared, in all matetial respects, in accordance with an identified financial reporting framework. . c. To enable an auditor to state whether, on the basis of the procedures performed, anything has come to the auditor's attention thet causes the auditor to believe that the financial statements arc not prepared, in all rantetial respects in accordance with an identified financial reporting framework. facr/ 4. To guarantee that all material misstatements in the financial statements are detected. faq x crore Which of the following best describes the reason why an independent auditor reports on financial ‘statements? Ee OR ne act ser Aes ‘a. A management feaud may exist and itis shore lifely to be detected by independent auditors. b, Different interests may exist between the company preparing the statements and the persons Goring the statoments. ¢. A misstatement of account balances may exist and is genctally corrected as the result of the independent auditor's work. 4..A poorly designed internal contzol system may be in existence. Which of the following statements does not describe a condition that creates a demand for auditing? a. Conflict between an information preparer and a user can result in biased information. | b, Information.can have substantial economic consequences for a decision-maker. c. Expertise is often required for information preparation and verification : 4. Users can dizeetly aeaess the quality of information, ‘Material misstatements may emanate from all of the following except a fenud € non-compliance with laws and regulations b. errors 4d. limitations of the audit “The primary difference between financial sistement errors and fraud is that 1. “Errore are intentional misstatements by misnagement, while fraud involves unintentional mistakes of omissions bb. Eerots ate unintentional mistakes or omissions, while fraud involves intentional misstatements. c. There is no difference as erzors and frauds have the sume meaning. G. Exrors are more likely to provide an indication that an illegal act has occuzred. Which of the following statements best identifies the two types of fraud? ‘a. Theft of assets and employee fraud. bb. Misappropriation of asset and defaleation ¢. Management fraud and fraudulent financial reposting Gi. Praudulenf financial reporting and misappropriation of assets. figleia /entestensy q onch Which of the following is not an example of fraud? ‘i. misappropsiation of assets. «. Misinterpeetation of facts b. Reenrding transactions without substance. _d. Omission of the effecte of transactions “Which of the following, if material, would be an fEregularity> feet ee ‘nistakes in the application of accounting peiaeiples clerical mistakes in the accounting data underlying the financial statements misappropriation of an astet or groups of assets misinterpretstions of facts that existed when the fisisincial statements were prepared nog? Peaudulent financial reporting is often called a. management feaud. bb, theft of assets. _. defalcation, dv employee fraud,D1. pv. ee Co. re te oF cased Cone se sage Tired Come tate) Peter fa 3 Fi cap ame Hemel Co ta i gna Dre me te bth I sek einen! Otis PB ct 3 Pavan Syp60) ——_ 4g Page 2 of 27 CRC-ACE/AT_Preweek GULY 2014 Batch) age When is the auditor responsible (or detecting fraud? 2. When dhe faud did not result from colsion. Wi ments Ef Wien thied pasties are likely to rely qn the client's financial statements. Wren the elencs system of internal control is judged by the auditor to be inadequate: 5, When the applicalon of generally accepted auditing standards would have uncovered ‘Ne fh respect to errors and itregularities, the auditor should plan to ; With erp te erovs that would have 2 material effect and for irregularities that would have cither material ‘or immaterial effect on the financial statements. : bb. Scurch for inegulasitis that would have a material effeet and for errors that would have either material or immaterial effect on the Gnancial statements. 1 : ec Souch for emors or itreglasites that would have a material effect on the financial statements. Saree eer ce inegulasties chat have either material or immaterial effect on the financi! statements, With respect to exrors and fisud, which of the following should be past of an auditor's planning’ of the audit engagement? ‘ an plonning to search for errors or fraud that would have a matesal or immaterial effect on the financial statements : planning to discover errors or fraud that ate cither material or immaterial c._ planning to discover errors or fraud that are immaterial i 4. planning to consider factors affecting the risk of material misstatement both st the financial statement and the account balance level Rete 0, seanplbth 4 be? peat, D He 7 He othe] Seep AD, be “The auditor is most likely 10 presume that a highctisk of 2 Gefaleatiopbonsts if wits 4. The client is a multinational company that does business in numerous foreign countries. ‘sida \b. The client does business with several related parties. Qos ert c. Inadequate segregation of duties places an employee in a position to pespetzate and conceal thefts; = settee d. Inadequate employee training results in leagthy EDP exception reports cach month. 9) talichy chenodhit Because an examination in accordance with generally accepted auditing standasds is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of 2 Professional responsiveness €. Objective judgment b. Conservative advocacy 4d. Professional skepticism, 3. Which of the following is a category of risk factors that should be considered in relation to misstatements atising from misapproptiation of assets? a. Industry conditions ¢. Management characteristics. b. Operating chasacteristics i . Controls. . Which of the following is a category of risk factors that should be considered in relation to misstatements ‘ising from fraudulent financial reporting? 2. Susceptibility of assets to misappropriation ¢. Industry conditions b, Assets that can be easily be converted to cash = d. Internal Controls. W ite oct DR ered EL cane Based on PSA 250, noncompliance cefei{"to” * ~~ a. intentional acts of one or more individuals which result in misstatement in financial statemé b, unintentional mistakes in the financial statements ee & personal misconduct hy the entity’s management or employees 4. cts of omission or commission by the client which are contrary to prevailing laws and regulations ‘Tn making a decision to accept of continue with a client, the auditor should consider: : a ob « 4g Its competence : YES YES YES YES Its own independence YES NO YES NO Its ability to service the client properly bi YES YES YES NO ‘The integrity of the client’s management © YES YES NO YES7 CCRC-ACE/AT.Prewek QULY 2014 Buch) pagedof7 B 10. What wil an auditor who bus been proposed for an audit engagement uualy do prior accePtng #268 lien? . eet ye fnmcinl statements ofthe clint as x mensure of goodwill | % ; De he och per he pnp chy, conte oe prdaceor stort determine With the Pa disagreements between che client andthe audit firms veik ce he former auditor and seview work papers: ( ob» et) e. Obmin the potential elent’s permission to Senin ee eee review on the potential client in aecordunce with professional standards. sm an independent aditor is sppronched to perform an audit for the Gt time, he oF she should make Dy 2 Winn nero crsr nadie, Tngues ne necesry cau che predcenor may Be le fo reid the successor with inforroaton that wil asst the successor in determining whether fh the predecessor's work should be used the company rotates auditors €._ in the predecessor's opinion, control tisk is low ithe engagement should be accepted request the © 21. When one auditor sueceeds another; the successor auditor should . voncerning the status of the prior yeat's 2. Client to instruct its atorney to send a letter of audit inquiry © ligauon, claims, and assessments. b. Predecessor auditor to submit a lst of corrected. Client to authorize the predecessor auditor to alow a review of the predecessor auditor's working papers. : 4. Predecessor auditor to update t interna) accounting control weaknesses that have not been the prior year’s report to thé date of the change of auditors. 22. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement? ‘a. Analysis of balance sheet accounts. b. Analysis of income statement accounts €. All marters of continuing accounting significance. 4. Facts that might bear on the integrity of management. 23, Before accepting an audit engagement, a successor auditor should make specific inquiries of the pting gas predecessor auditor regarding the predecessor's ‘a. Awareness of the consistency in the application of generally accepted accounting principles between periods. Evaluation of all matters of continuing accounting significance. Opinion of any subsequent events occurzing since the predecessor’ audit report was istued. ‘d._ Understanding as to the reasons for the change of auditors. B According ro PSA 210, the auditor and the lent should agree on the terms of engagement, The agreed tesms would need to be recorded in a(n) ‘4. memorandum to be placed in the permanent section of the auditing working papers b. engagement letter client representation letter d. comfort letter : D_ 25. The form and content of the engagement leters may vary for each client, but they would generally include reference to all of the following, except: 4. Objective and the scope of the audit of financial statements. on b. The fact that because of the inherent limitations of the audit, there isa risk that material misstatement may remain undiscovered. | Form of the reports to be issued. 0G Me rin bh itn =X 4. A statement that other consulting services may be made available upon request. ‘ xe e E f : 26. In wi ing situati is D fs wich of the following situations would the suditor be unlikely to send a new engagement letter to a 4. a change in terms of the engagement ». a significant change in the nature or size of the client’s business . © s recent change of client management 4. a recent change in the partner and/or staff in the audit engagement