CPA REYIEW SCHOOL OF THE PHiLJPPINES

Manrla
AUDITING THEORY SEPTEMBER 14, 2013
FINAL PREBOARD EXAMITUATIOTU SATURDAY, 5:00PM - 7:00PM
SET A

II{STRUCTIOftIST CHOOSE Tt-tE BEST ANSWER. FOR EACH OF Ti"IE FOLLOWING. FULLY
SHADE Of',lLY ONE BOX FOR EACt-t ITEM. STRICTI-Y NC, ERASURES ALLOWED.

D 1. A requircment that working paperu be reviewed by the supervisc,r', and any deficiencies, be
discussed with the preparer is an exampie rf a qtrafie coirtrnl procedure in the area of
,q. Acceptance and continuance of clierrt relal-ionships anri specific engagenrents.
B. Human resources.
C. Relevant ethical requirennenls.
ll. Engagement performance .
C 2" Internal auditing is considered to be part of an oiganization's
/\. Accounting systern.
B. Control activities.
C. Monitoriirg.
D. External controls.
D 3. In which circumstance will the auditr:, nr;i':cnsic!:i'tl,e rrri.er! te riodi-ry the repor.t?
A. The clientt legal counsel is rr:q;its1er,i to :rov!s:c lriietncr a nt.,,:rti:r'iel aci is legal or
illegal but refuses to do so.
B. The auditor concludes thai'ihe effec;t r:f an illegai ect creates substantial doubt about
the entity's ability to contlnue as a goinq conr-ern.
C. The auditor concludes that the effect of an illegar act, l:aken alcre ol'with similar acts,
is rnaterial in amount and has not Lreen prr.rperiy accr.:untt:il f.oi' or cllsctosed ln the
financial statements.
D. AII of the circurnstances require rnorlification ci ihr;: aiiditor'si report.

C 4. During the year, the research staff of Buni Co. devoted ih: entire effai'ts tr>ward developing
a skln cancer ointment. All cosLs ihai couid he ettril'riied dire.ctiy to [he project were
accounted for as deferred charges and ciassiiied 1.\n the statement sf'financial position as
an asset. If the amounts involved are rr;lteriat, the aurl;tor slrr:ulri
A. Express an unmodified opinion with an eniphasis of nratter paraqrenh explaining the
uncertainty of cost recovery.
B. Disclaim an opinion.
C. Express an adverse oplnion.
D' Express an unmodified apinion provided li'rat i,re unc*.,rta;inry a:muL ult rnate realization
of the deferred charges ;s cisck:seo in the notes"
tr
C When an accountant is not incependent '*iith nespe* to a:, e:"ltih;, which of the following
r.ypes of compilation reports may be iss*ed?
A. The standard compilation repoil: rnay be i*csiled, rugardtess o{,in,.iepen*Jence"
B. A compilation report with negative agsurence ryla.d Be is;uec!" no assurance
C. A compilation report with sper:ial r,vareling lhat ,:rores trle accountant's lack of
independence may be issued.
D' A compilation reponi rnay be issued [f'Lhe engaglernent i; r,rpg:ad*d i,: a review. Review needs
independence
D 6. An auditor expressed a quaiified opinion on the p;!sr yeart financiel statements because
of a lack of adeqt.rate disclosure" These flnancrnl statenre,: ts ar€ pr6p6;iy restated in the
current year and presented ln comparative rr:rryr irrrili.! the current yearrs financial
statements. The auditofs updated i"€p,ig1 on t!'ie prior yssr's fir:rrnclai statements should
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 CPA REVIEII, SCHOOL OFTHE PHIUPflNES (CPAR) - lt{A'rILA rrN'rr rxEwru,
AIIDTITilG]THEORY -E,T.';;;

A. Be accompanied by the auditar's original repoft on the prior yea/s financial

statements.
B. Continue to express a qualified opinion on tiie prior year's financial statements.
c. Make no reference to'the type of opinion expressed on the prior year's financial
statements,
prior year.
D. Express an unmodified opinion on the restated financial statements of the
immediate family is not
A 7. Under the Code of Ethics, independence is mtst likely impaired when same with close family
if immediate A. An innmediate family member of a niember of the audit team is a director of the client.
B. The firm purchases goods and services from the client'
family, independence
is impaired C. The firm prepares a client's tax rcturns.
regardless of D. The firm' and the client have an insignificant business relationship involving an
materiality.. immaterial fi nancial interest.
pero kapag close family lang, material dapat yung ownership interest bago maimpair yung independence
A 8. Analytical procedures enable the auditor to predict the balance or quantity of an item
under auclit. Information to develop this estimate can be obtained from all of the
follovuing except
Tracing transactions through the system tn cletermine whether procedures are
being
A.
applied as prescribed.
B. Comparison of financial data with rlata for comparable prior periods, anticipated
results (e.E., budgets and forecasls), ancl similar data for the industry in
which the
entity operates.
C. Study of tf,. relationships of eiements eif financial data that would be expected to
conform to a predictable pattern based upan the entity's experience'
D. Study of the relationships of finarrcial data with relevant nonfinancial data'
D 9. Which of the following procedures will most iik"eiv assist an auditor
in determining whether
management has iaeitiReO all accounting csrirnates that could be material to
the financial
staternents?
A. Inqulre about the existence of related-party transactions.
E. Deienrnlne whether accounting estimates deviate frorn historical patterns.
C. Confirm inventories at locations outs;de the entity.
D. Review the lavuyer's letter for inrorrnation ahout litigation'
necessary
B 10. An auditor concludes that the omission oi a srtbstantive procedure considered
previously
at the gme of ttre iuait may impalr the aur:Jitcir's current ability to support the
expressed opinion. The auditor need noi ai:ply the omitted procedure if the
A. Risk of adverse publicity or litigation is lcw.
B. Results of other pro.eduru, t6at were applled tend to compensate for the procedure
omitted.
C. Auditor's opinion was qualified becal;se of a departure from PFRS'
D. Results of the subsequent period's tests of controls make the omitted procedure less
important.

B 11. Ariel, CPA, was engaged by a group cf r'*yi:ity recipients !o apply agreed-upon procedures
to financial data r,lpili"a Uy froaeir:a C*. regaroing Modesla's written assertion about its
agreed-
compliance with contractual requirernenrs to'pay royalties. Ariel's report on these
upon procedures should contain a (ani
A: Disclaimer of opinion about the-fair p:i'esentation sf Modesta's financial staternents.
B. List of the procedures performed and Ariel's findings'
C. Opinion about the effecti\/eness of Modesta's internal control activities concerning
royalty payments.
O. nitcnowiedgment that the suffici.rnc'i of the procedures is solely Ariel's responsibility'

B L2. A member of the Board of Accountancy (BOA) shall, at the Urne of his/her appointment,
must be a duly registered Certifted Pufrlic Accountant (CPA) with at least -.-
years of work experience in any scCIpe r:f'pra,;tlce of accountancy.
A, L2 C.B
B. 10 D,5

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 CPA REVIEW SCHOOL OF THE PHIUPPINES (CPAR) _ MA,\I:A FIiTTL PREEOAR,D EXAMNATIOT{
AUDIIIHGTIIEORY
-.sE
D 13. Any candidate who fails in two (2) complete CPA board examinations shall be disqualified
from taking another set of examinations unless he/she has compieted at least how many
units sf subjects given in the licensure exarnination?
4.4 c" :5
8.8 ;1. 24

A L4, The principle of professional ccffiFetenr;c and due care inrposes which of the following
A, To maintain pro'fessional knowledge and skill at the [evel required to ensure that
clients or employers receive comnetent pro'f,essional service,
ts. 'l"o refrain from disclosing confidential information obtained as a result of professional
and business relationships without proper and specific authority unless there is a legal
or professional riEht or duhT to disclose"
C. To comply with relevant laws and reguiatlons and avoid any situation Lhat may bring
discredit to the profession"
D. lt{ot to compromise profess;onal or i;usiness judgment because of hias, confiict of
interest or undue influenee of others.

A 15. When a practitioner examines proler:tcc finarrcial slaternents, the practitioner's repoft
slrould include a separate paragraph thut
A, Describes the limitations on the urcflllness oi the pi'es*ritation.
13. Frovides an explanation crf the differences beLween an exarnination and a review.
C. States that the accountarit is res;:cnsil:ie fcr e'rents and circumstanr:es for a period not
exceedlng one year after the report's rat*
D. Disclaims an opinion on whe'thr;r {:he a;suripticrns pi'ovide a reasonahie basis for the
projectlon.
-l-he
D 16. Code of Ethics provides a Conceptuai Franrework fcrr applying the fundamental ethical
principles. This franrework requires a professionar accountant to
1. Identify threats to compliance with thr: fundamenta! priricinles.
II. Evaluate the significance of the icienlifier,{ thi'eats.
III" Appty safeguards to eliminate the th"eais ur ie.{rrce ih:rn to an acceptahle level.
A. I and II only (:. ii and Itri only
B. I and III only D. I, il, anei [iI
C L7, Accepting an engagement tr.r examine ail riirNir-yt'$ firr*nciai ;.rroj*cEion most iikely would be
see similar appropriate if the projection were to be dlsirilrllleri t.s
question A. All empioyees who work for the ent;b;.
B. Potential stockholders wiro i'equest a p:os;r:r,tl!s or 6 iegistraticn staternent.
sa Past C. A bank with which the entity is neg'ttiafintu fo;" a lrjan.
Master AUD2 D. All stockholders of record as of the rep;rt c;ite,
Becker. Only financial forecast are suitable for general use..
C 18. Although substantive procedures may sunpi,rl tile isrcr!a.y cf r-iilderlyin6.l records, these
tests frequently provide no affirn;ative evidelrce. nf seprration sf ciutie:t l:er:ause
A. Substantive procedures rarely guararrtee the accurac.;, of tne recorcis if only a sample
of the transactions has beer: tested.
B" Many computerized procedures leav* rq; ;rrrdit tiail of who perforrned them, so
substantjve procedures may necessai"iiy he liln:i*ci ter inqui:ie:; and obseruation of
effice personnel.
C. The records may be accurate ever! thor,tgti iirel are rnai-rtained hv a person who
peforms incompatible functicr"is.
D. Substantii,e procedttres reletr: to tne *iitir,r rre.'ioi{ tr,.I*r autiit hrrt tetts of controls
j"o: ls
.ordir;arily are confined tn the perio,I ifi-iilirg ,.,,,,hiilh th;^ aud '"rn the elientt
premises.

D 19. One payroil audit objective is to iiilterriiilr; r,',th,:llioi thr: erilpiayrees received pay in
arnounts recorded in the payroil.journal. [* satiEll tiris abjective, the aut{itor should
A. Reconcile the payroll bank acccrunt.
B. R.equest that a cornpany official cllstnLrute eil pay*cliet:ks"
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 cPA REVIEW SCIpOL OFTHE PHILImNES (CPAR) - I'tA,iilt-A FIT{AL PREEOARD EH}IIIIATIOI{
AUDITITG THEORY SEPTB4BER 14. 2013 / SATURDAY / 5:00P1'{ - 7:00PM

C. Determine whether a proper seg?'egation of duties exists between recording payroll

and reconciling the payroll bank account.
D. Compare canceled payroll checks with the payrolljournal.

C 20. After considering an entity's negative trends and financial difficulties, an auditor has
substantial doubt about the enUlfs ability to conUnue as a going concem. The auditor's
considerations relating to management's plans for dealing with the adverse effects of
these conditions most likely would include rnlnagemenfs plans to
A. Increase current dividend distributions.
B. R.educe existing lines of credit"
C. Increase ownership equity.
D. Purchase assets formerly leased.
C 2L. When auditing contingent liabilities, which of the following procedures would be least
effective?
A. Reading the minutes of the board of *ilrecLors.
B, Reviewing the bank confirmation leBer"
C. Examining customer confirmation replies. => for A/R 'to NOT contingent liab
D. Examining invoices fior professional seruices.
D To which of the following matters does an auditor not apply materiality limits when
obtaining specifi c written management representations?
A. Disclosure of compensating balance an"ngements involving restrictions on cash
balances.
B. Information concerning related party transactions and related amounts receivable or
payable.
C. The absence of errors and unrecorded trarrsactions in the financial statements.
D. Fraud involving employees with sigrrificant roles in internal control.

C 23. A distinguishing characteristic of rantJom nurnber sample selection is that

A. Each item is selected from a straturn having minimum variability"
B. Each item's chance for selection is proportional to its peso value.
C. Each item in the population has a known and nonzero chance of being selected.
D. Each stratum in the population has an equal number of items selected.
B 24. An example of a Type 1 subsequent event ls
A. A very strong typhoon that destroy's a client's factory after the end of the reporting
period.
B. An event after the end of the reporting period that confirms the auditor's belief
(documented prior to the end of the client s fiscal year) that a large portion of the
client's inventory is obsolete.
C. Notification of a BIR audit after the enC of the reporting period.
D. The clienfs Board of Directors unexpectedly resigns after the end of the reporting
period.

D 25. Which of the following statements about lnternal control is true?

A. Properly maintained intemal control reasonably ensures that collusion among
employees cannot occur.
B. The establishment and maintenance of irrternal control are important responsibilities of
the intemal auditor.
C. Exceptionally effective internal control is enough for the auditor to eliminate
:ubstantive tests on a significant account balance. You cannot eliminate substantive test.
D" The cost-benefit relationship is a prirnary criterion that should be considered in
designing internal control.

B 26. In gaining an understanding of internal control, the auditor may trace several transactions
through the control process, including how the transactions inteface with any service
organizations whose services are part af the information system. The primary purpose of
this task is to
A. Replace substantive procedures.
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AUDMilGTHEORY SEPTEMBER 14, 2013 / SATURDAY / 5:@PM - 7:OOPM

B. Determine whether the controls have been implemented.

' C. Determine the effectiveness of the control procedures.
D. Detect fraud.
A 27. The purpose of analytical procedures at the completion of the audit includes all of the
following except
A. Revising the audit plan.
B. Considering overall reasonableness of the financial statements.
C. Reviewing adequary of evidence gathered to investigate unusuai fluctuations.
D. Recalculating some of the ratios exarnined during audit planning"
C 28. Subsequent events fior which the auditor has a responsibility to actively search are defined
as events which occur subsequent to the
A. Balance sheet date.
B" Date of the auditor's report.
f,. Balance sheet date but prior to the date of the auditor's report.
D. Date of the auditor's repoft and concern contingencies which are not reflected in the
financial statements.

D 29. The primary reason for preparing a reconciliation between interest-bearing obligations
outstanding during the year and interest expense presented in the firrancial statements is
to
A. Evaluate internal control over securities"
B. Determine the validity of prepaid interest exBense.
C. Ascertain the reasonableness of imputed interest.
D. Detect unrecorded liabilities.
A 30. Which of the following statements indicetes the wrong way to use an internal control
questionnaire?
A. Clariffing all answers with writteii rernarks and explanations.
B' Filling out the questionnaire during an Intennew with the person who has responsibility
for the area that is being auditecl.
C, Constructing the questionnaire so that a no response requires attention.
D. Supplementing the completed questrurrnairr-, with a narrative descrlption or flowchart.

B 31. The two broad grouplngs of information systems control activities are general controls and
applicaUon controls. General contrcis inctude controls
A. Designed to assure that only autiiorized users receive output from processing.
B. For developing, modiffing, and maintaining computer programs.
C. Relating to the correction and resubr-nission of faulty data.
D. Designed to ensure that all data sr.ibnritted for processing have been properly
authorized.

C 32. A client's program that recorded r;:ceiving report information entered directly by the
receiving department on vendor shig:ment receipt included a reasonableness or limit test.
Which of the following enors would this test likeiy detect?
A. The receipt was for a shipment fronr an unauthorized vendor.
B, The vendor shipped the wrong item"
e' The receiving department clerk entered the quantity of the product received as 0.
D. The shipment received from the uenior iruas past due by 2 weeks.
C 33. Which of the following procedures is ni:l ;lr;ed [D tests of control over purchases?
A. Examine vouchers and supporting d.;,:uments for authorization.
B. Trace vouchers to entries in the vour.i"iei*c register.
C" Confirm inventory held in public wareProuses.
D. Reperform calculations on some suppofting documentation.

D 34. Which of the following manipulationc w:Liicl underctate accounts payable on the financial
statements?
A. Overstatement of purchases.
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B. Closing the cash disbursements journal prior to year-end.

C. Leaving the cash receipts journal open after !,ear-end.
D. Overstating purchase returns,
B 35. Which of the following best describes the auditcrrs' approach to the audit of the ending
balance of propefi, plant and equiprn,snt for a continrring nonpublic client?
A. Direct audit of the ending balance"
B. Agreement of the beginning balance to r'rior year's working papers and audit of
significant changes in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.
D 36. Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the clienfs internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department.
C. Analytical procedures perforrned by the auditor on the entity's trial balance.
D. Inspection of bank statements obtained tlirectly From the clienfs financial institution.
C 37. During an investigation of unexplained inventory shrinkage, an internal auditor !s testing
inventory additions as recorded in the perpetual inventory records. Because oJ internal
control weaknesses, the inforrnation reco;'ded on receiving reports may not be reliable.
Under these circumstances, which of the following documents provides the best evidence
of additions to inventory?
A. Purchase orders.
ts. Purchase requisitions.
C. Vendors'invoices.
D. Vendors'statements
C An audit client has leased an asset and appropriately recorded a finance lease. Because
of the existence of a bargain purchase option, the audltor should determine
A. Whether the sum of minimum lease payments equals the fair value of the propefi.
B. That the leased propefi is being dep,-eciated over the life of the lease.
C. Whether the interest rate used in discounting the minimum lease payments is the
clienfls incremental borrowing rate or the lessor's implicit rate.
D. That the cost of the property to the lessor is the cost recorded by the client.

B 39. Mayor, CPA is auditing an entitfs shareholclens'equity. Tests typically include all of the
following except
A. Reviewing the bank reconciliation for the imprest dividend account.
B. Tracing individual dividend payments to tl're capital stock records.
C. Verifying the authorization of dividenris by Inspecting the directors'minutes.
D. Determining that dividend declaratiorrs comply with debt agreements.

D 40. Which of the following best describes the auciitors' typical obsenration of plant and
equipment?
A. The auditors observe a physical inventory of plant and equipment annually.
B. The auditors obserue all additions to piant and equipment made during the year.
C. The auditors obserue all major plani and equipment items in the clients'accountseach
'/ear.
D" Tlre auditors obserye major additions to plant and equipment made during the year.

A - 41. An auditor suspects that certain client employees are ordering rnerchandise for themselves
over the Internet without recording the purchase or receipt of the merchandise. When
vendors' invoices arrive, one of the ernptroyees 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.
B. Approved vouchers. => destroyed na 'to
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 cpA REVIEW SCfi@L OF THE PHIUPPINES (CPAR) - F.tAiglI FII{AL PREBOARD EXATIITATIOII I
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C. Receiving reports. => most likely, hindi nila irerecord yun as received
D. Vendors'invoices. => destroyed na rin 'to
A - 42. Which of the following would be least iikely tr: diminish the validity of evidence obtained
through confirmation of accounts receivaL'le?
A. The confirmations are sent on the client's le*erhead.
B. The confirmations are mailed to customers by the lnternal auditors.
C. The client's mailroom personnel closely monitor and inspect confirmations during
mailinE.
D. The retum address on the envehpe used to send the confirmation request is that of
the client.

D 43. The auditors expect a population deviation rate of billing errors of eight percent, and have
established a tolerable rate of five percent. The sampling approach most likely to be used
is SDR > TDR, CR is high
A. Attributes sampling. If SDR + Allowance, exceeds TR, modify
B. Stratified random sampling.
C. Variables sampling. assessed CR.
D. None, as sampling does not seem appropriate in this situation.
A - 44. The 3p00 accounts receivable of DEF Companv have a total book value of P60,000. Boboy
Baboy, CP& has selected and audited a sanrple of 100 accounts with a total book value of
P2,100. Using the difference estirnation technique, Baboy has properly estimated a
projected misstatement of a P9,000 overstatement for the entire population. The
estimated total audited value of the popuiatiort is
A. P51,000
B. P58,000
c. P60,000
D. P69,000
B 45. Smart Corporation has numerous custonlers. A customer file is kept on disk storage. Each
account in the customer file contains narne, address, oedit limit, and account balance.
The auditor wishes to test this file to deterrnine whether credit limits are being exceeded.
The best procedure for the auditor to follow would be to
A. Develop test data that would cause sCIme account balance to exceed the credit limit
and determine if the system properly detects such situations.
B. Develop a program to compare credit limits with account balances and print out the
details of any account with a baiance exceeding its credit limit.
C. Require a printout of all account balances so they can be manually checked against
the credit limits.
D. Request a printout of a sample cf account balances so they can be individually
checked against the credit limits,

D 46. An auditor may decide not to perform tests of controls related to the control activities
within the computer portion of the client's internal control, Which of the folloring would
not be a valid reason for choosing to omit such test?
A. The controls duplicate operative controls eNisting elsewhere.
B. There appear to be major weaknesses that would preclude reliance on the stated
procedure.
C. The time and costs of testing exceed the time and savings in substantive testing if the
tests show the controls to be operative.
D. The controls appear adequate.
C 47. Which of the following is true about the auditors' consideration of internal control in a
financial statement audit?
A, The auditors must assess controi risk at a trevel lower than the maximum.
B. The auditors must prepare a flowchart description of internal control for their working
papers. more on documentation 'to..
C. The auditors must obtain an understancling of the steps in processing major types of
transactions.
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D. The auditors !'nust perform tests of ccntn:rls.
B 48. Which of the following is rrot a factcr that is considered a part of ih:r cilent's overall
control envir6nment? ,

,4. The organizational,strurcture

B. The information sybtem.
C. Management philosophy and operating style.
i). Board of directors.i
D 49. \4lhich of the followingi is ieast lilr.ely to be considered an aopropriate response relating to
risks the auditors identifu a{ the finariclal staternen: levei?

B. Incorporate additional elements of unpredictability in tlre seiectiorr of aurjit procedures.

D. Ernphasize the need to remain neutral, rather than to exercise pi"ofessional skepticism.

B 50. Whlch of the following factsrs wouitJ rnosr Iil{,?ly be ronsiclei'ed an ir:herent lirnltation to an
entity's internal control?
A. -l-he complexity of the information processing system.
B. Human judgment in the decislon makinE process,
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to irnpror,e the contnrl en'rironment.
B 51. The auditors of Sundot Electn:nics lEish io llnrlt the audit risk r:f material misstatement in
the test of accounts recei'yable tn 5 perceint. They believe that lrrherent risk is 100o/o, and
there is a 4Aa/a risk that nnateriel mi.,:st*terlen,. ,:culd have bypassec the elient's system of
internal control. What is the maxinnurc detection nisk the auditorr; should speciff ln their
substantive procedures of details of accrrtints rer:eivabie:?
A. 5o/o"
{3" L2.5o/o"
c. 42.70/a.
D. 60o/s.
A 52. In auditrng an asset valued et fair vair.,i€, v{i',.:lr cf tir* fcrtlc,'..'it;,-i p,:lren:iali;" provides the
auditor with the strongc,sl €ividen:.,i
A. A price for a sirnilar asset r::iairreel fi'e'r:t r,n.?;j,,!r.a ::;11rir.,,.,
ts. An ap1:r"alsal obtained discounting frrt*i'e;*;r: i!.:.r:,
C. Managernent's judgrn*nt cf ihe ecust tc purchase an e,;r.ivaietrt aJist:t.
D. The historical cost of tlre asset.

D 53. Which of the following is true al:out analyticai pFocsillrrr--',':

A. Performing analytical procedures resulls in th,- t,r{r$* i,iLdi-.i,: ;': rff r:i'*uidenc€
B. Analytical procedures are tests of cont"i;ls us*,* ;o evalrrats ti e uuelity of a client's
internal control"
C. Analytical procedures are used for planning, but i;.lgqi r;f"'r1'd ti:'i re used to obtain
evidence as to the reasnnableness of specific secourrt balar,ce:;.
D. Analfiical procedures are used irr planninE, as a s,rbstafitive prccedure for specific
accounts, and in the final rer.iew r.f the audited flnanciai st;rfei',tents.

C 54. Which *f the following procedures sheiuld an ar:countani y.ren'errrr curing an engagement
tc cornpile pro,spective fi nancial state;nents?
if
A. Test tl're entityt irrternal controls lo de'iernrlne ideiiuate ccrntrols exist so that
firrancial projections can he reascnably i;cirievl,,--1,
B. Make inquiries prior to the eiate of the report abnul pro*ii:re fut tre transactions that
may impact the forecast once the report is issr-ied.
C" Make inquiries about the accountirrg prirrciples urued irt i.hL. preparatlon of the
prospective fi nancial statemer rts
D. Compare the prospective financial staien'lents v'rittr thr: entiry's; hls;ic,rical results for the
prior year.

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 LpA r(Evlr.w x-HUsL oF THE pHIUppINES (CPAR) _ MANII-A FIF{AL PREBOARD EXAi,tIt{ATIOil
AUDMNGTHEORY i
_€E_PTE@EB_]j, jzuJSATUB?Ay.l5:00pM - 7:00H{
ri
A 55, Which of the following is not a f:asic approach often userJ by auditcrs lo evaluate the
I

reasonableness of accounting es.fimates?

A. eonfirmation of amounts.
B. Review of management's process of development.
C. Independent development of an estimate.
events.
:

D. Review of subsequent :

C 56. In using the informatiori on the staternent of casll flows whiie obtaining an understanding
of a profitahle, qrowin.q corrrpany, u.'h!ch of the followrng wouk! ordinarily be |ea*
surprisinq to an auditori,
A. Decreases in accounrs payable.
B. Decreases in accounts receivabte.
C. Negative cash flows frorn invesiir":g.
D. Negative operating cash flcws"
A 57" Which of the following is an example c'flai-irltil*r:t {in;:irc!al rssr:i'tirrg?
A. Company n'tanagement falsifies inventcry counl Ggs tirereby' overstating ending
inventory and underctating cost ol'goods sold.
B. An employee rjivefts customer payrnents to his perccnai use, concealing hls actions by
debiting an expense acccun! thus overstating expensea.
C. An ernployee steals inventor and the "shrinkaqe" !s; recs,rded !n cost o1'goods sold.
D. An employee "borrows" tools from the comprany anc riei:leets to return tfrem; the cost
is repofted as a misceNlaneous operating expense.

D 58. Which of the tbllowing circurnsLances wouki an auclitor rnost iikei.,r c:"rnslCer a risk factor
relating to rnisstatements arisin6 fr,cm frar-ululent financi:l ;-epr:,tin,.r?
/\" Several rnembers rrf managenrent har.e rec:ntly purchas€ci :,riditional shares of the
entity's stock.
B. Several members of the board of directoi's have recertl'r' scld shares cf the entity's
stock,
C. The entity distributes finarrcial foi'ecasts tc filrar:rcrai aniiiy$ts ih;it preclict consenative
uperating resu{ts.
lJ' ManaEement is interested in maintaining the entity's eernings ti"end by using
aggressive accounting practices"

D 59. Wl-tich of the follolving is

mo;t iikely tc tre an or,,erall ri:spolrl ic r'ra rt<j ri:;*ls identified in
an audit?
A. Only use certified public accsuni.ants cn the €flgiiQefiri,,l.
B' Place increased ernphasis on the aurlit r:lf ohiective t.rarn;;aetior::; rather than subjective
transactions.
e" .Supervise nrembers of the audit team ii;ss closeiv onr.j rel1, rnore upon juciErnent.
n. Use less predictable audit procedur*s.
B 60. valuation and allocation is nrost likeiy an ic;sue f*!"long-ternr debt if
A. Bonds are sold on the open nranke.t"
B. Bonds are issued at a dlscount or prenrium.
C. The loans are frcm banks.
D. The company has many short-term leases.
A 61. For a large pc.pulatlon c" cash disbursernr,,.nt Lransar:ticn:;, .icrliman; CFA is tr,stin_q controls

Look for
by using attrihtrte sampling 'lechniques. F.nticipatir',E an :'.xpr.;ctec, c:sviat;on iate of :
percent Smith found from a table that tlie requirec! sa,nple size is auO rvlttl a tolerable
< 400. devlation rate of 5 percent and a desiree! conrtdence ievel uf 95 pe,r'cerrt. If Soliman
anticipated an expected deviation rate df onlv ? perce;rt bnt. wnnteC to maintain the same
tolerable deviation rate and confidence levei, the sarnpie $rii€ vrr*i,riiC hr, closest io
A. 200 c. 533
B. 400 D. Srr0
D 62, Which of the following is not a procedure nonnaiiy perfr:rn"red wiriie cc,inpieiing the audit?
A. Obtain a lawyer's letter.
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 cpA REVTEW Sclr@t OF THE PtTIUPPINES (CPAR) - I'IANII-A FINAL PREE{'ARD EXAMII{ATION
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B. Obtain a representations letter.

C. Ferform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.
D 63. When financial statements of a prior period are presented on a comparaUve basis with
financial statements of the current period, the continuing auditor is responsible for
A. Expressing dual dated opinions.
B. Updating the report on the prevlous financial statements only if there has not been a
change in the opinion.
C. Updating the report on the previous financial statements only if the previous report
was qualified and the reasons for the qualification no longer exist.
D. UpdaUng the repoft on the prevlous financial statements regardless of the opinion
previously issued.

B 64. For audit purposes, a corporation's afticles of incorporation are normally

A. Copied and placed on the owners'equity lead schedule.
B. Copied and placed in the permanent file.
C. Confirmed with the transfer agent.
D. Ignored since they are not normally considered to be related to the internal control
system.

D 65. Which statement is correct with respect to accounts payable confirmations?

A" The negative form is used in most circurnstances.
B" Accounts with new suppliers arc always confirined.
C. They are a required auditing prccedu:'e.
D. They are more ftequently useC in situations in which some vendors don't send
monthly statements.

B Which of the following audit procedures is ai,neC ,nost dii"ectly at testing the completeness
asseftion for accounts payable?
A. Footing the list of accounts payable.
B. Examining underlying documentation for cash disbursements in the period after year-
end.
C. Tracing shipping reports issued or! *i' bef*re year-end to related customer purchase
orders and invoices.
D. Tracing shipping reports after year-end to related customer purchase orders and
invoices.

A 67. Which of the following statements is corred regarding accounts payable and the auditor's
procedures?
A. Because it is generally more difficult to discover a transaction that has not been
recorded than to discover one that has been recorded incorrectly, the audit objective
of completeness drives many of the substantive procedures applied to these balances.
B. A judgment whether an uniecorded payable should be recorded before the financial
statements are prepared depends entirely upon the source of the payable.
C. The confirmation of accounts payabie selected from the year-end trial balance of such
accounts is most effective in discovering unrecorded liabilities.
D. Unrecorded payables are often disr:overed through examining vouchers pa)rable
entered into the voucher register pri*:r to the balance sheet date.

B 68. Which of the following is not a reason for the special significance attached by the auditors
to the verification of inventories?
A. The determination of inventory valuation directly affects net income
B. The existence of inventories is inherently difficult to substantiate.
C. Special valuation'problems often exist for inventories.
D. Inventories are often the largest current asset of an enterprise.
B 69. The use of a "blind" purchase order is designed to prevent errors by the
A. Purchase department.
B. Receiving depaftment.
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AUDITIil€ THEORY _ _ _ srflE!4Aen 14. ?013 i SATURMYI5_tr0PI"I - 7:00-PM

C. Stores department.
D. Accounting department.
B 7A. Which of the fbllowing best describes the reason thet the auditors reccrrd their inventory
test counts in the working papers?

B. For subsequent comparison with the cornpletediinventory listing.

C. To document cornpliance with pFRS. :

D. For use in subsequent audits.

B 7L. Which procedure would be of most assistance to an auditor discovering a large credit sale
that has eroneously been recorded trarice?
A. Footing the sales journa[.
B. Sending accounts receivable confirrnaticns.
C. Tracing the total sales in the sales j,ru-nat to the gro*ra, ier,lger.
D. Observation of the physlcal inventory count at '/ear-e nd.
C 72. After the CPAs have selected particular accounts receivabfe for confirmation
A. As a control measure, the CPAs shouici carefully list the audited vairrcs of all of those
accounts before turning the letters over to the ctient to type and rnail.
B. It is irnportant that every account selected that has a material balance ultinnately be
vefified by confirrnation or the applicaticn of alte,rnative procedures; imrnaterial
balances never require any follow-up tlrror.rgh alterrrative procedures.
C. All requests for confirmation should be rnailed in enveiopes bearinq ihe CPA firm's
return address and should include a return envelcpe adr.lressed totne CPAfirm,
D' All differences behq,een confirma'{:icn reniies and bcok r.,alues should be reconciled by
the CPAs, rather than the cllerrt"

B 73. Tracing recorded sales transactlons in the sales journal to the shippi,rg riocuments (bills of
Iading) provides evidence about the
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Fresentation of payables.
A 74. The auditor's primary rneans of obtainin-fl ccr-{,bs,':rtir,n r:f rtari?{'erir5nt'i jnfrrmation
concerning lltigation is a
A. Letter of audit inquiry to the client's lawyer_
B' Letter of corroboraticn'rr':rii the Errditrr's lav,rler:jpl'i', rer,.iew of the legal
document-ation.
C. Confirmation of claims and assessments frem the othei- pai'tles tc t;-re lrligation.
D. Cnnfirmation of claims and assessrnents {yorn an officer +f the ci''uri. p.esidin.q over the
litigation.

A 75. By preparing a four-column bank reconciliation ("proof r.rf cash") t*r thc lasl month of the
year{ an auditor will generally be able to detert
A. An unrecorded check written at the beginnirrg of the rnonfrr which was cashed Curing
the period covered by the reconciliation.
B. A cash sale which was not recorded pn the books and was stoleir by a hookkeeper.
C. An embezzlement of Unrecorded cash receipts on recei'rairles b,efilre they had been
deposited into the bank.
D, A credit sale which has been recorded hruice in the sal*l journai. no cash involve
A 76. Which of the foliowing is not a universal rr_llefor afihievins Inte:nal contc"el over cash?
A. Separate recordkeeping fuonr aecounilnrl for eash to the txtent pcssible"
B. Deposit each day's cash rec,:ipts intact^
C. Separate cash handling fi'orn recordkeepinq.
D. Have monthly bank reconclliations prepared by trrn;riuy€€$ rrot l'esponsible for the
issuance of checks.

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 CPA REVIEYI/ SCTIOOL OF THE PHIUPPINES (CPAR) - MAI.I:IA FINAL PREBOARD EXAI.IIT{ATIOI{
AUDITIilG T}IEORY SEPTETIIBER 14, 2013 / SATURDAY i 5:OOPT1 _ 7:OOPT,T

A 77. Which of the following would be least likely to be considered a desirable attribute of a
database management system?
A. Data redundanry.
B. Quick response to users' request for information"
C. Control of users' identification numbers anc! passwords.
D. Logging of terminal activity.
A 78. When conducting field work for a phvsical inventory, ofl auditor cannot perform which of
the following steps using a generalized audit software package?
A. Observing inventory.
B. Selecting sample items of inventcry.
C. Analyzing data resulting from invent*ry.
D. Recalculating balances in inventory repofts.
B 79. The best method of achieving internal control over advanced IT systems is through the
us;e ctf
A. Batch controls.
B. Controls written into the computer system.
C. Equipment controls.
D. Documentaton controls.

B considering the client's intemal control the auditors have concluded that it is well
80. After
designed and is functioning as anticipated. Under these circuntstances the auditors would
Hindi ka
rnost likely
pwedeng mag- A. Cease to perform further substantive procedures.
reduce ng ST,B. Reduce substantive procedures in areas yrhere the internal control was found to be
effective.
pero pwedeng C. Increase the extent of anticipated analytrcal procedures.
less detailedD. Perform all tests of controls to the exient outiined in the preplanned audit program.

C 81. The auditors who become aware of an internal control significant deficiency are required
to communicate this to the
A. Clienfs legal counsel.
B. Compensation committee.
C. Audit committee.
D. Internal auditors.
B 82. 'Ihe scope of substantive procedures as compared to the scope of tests of controls
generally vary
manner.
A. In a parallel C. Directly.
B. Invercely. D. Equally.

B 83. Which of the following is least likely to lie a factor that might indicate to an auditor that
an identified risk of misstatement r*quires s6:ecial audit consideration?
A" Complex calculations are involverj.
B. The rate of technological changc is mr:,eierai.e in the industry.
C. The potenUal for fraud seems high,
D. Various subjective methods of appl;cation of a key accounting policy exist,
D 84. Proper segregation of duties reduces the opnortunities to allow any employee to be in a
position to both
A. Journalize cash receipts and disbursemenb and prepare the financial statements.
B. Monitor internal controls and evaluate whether the controls are operating as intended.
C. Adopt new accounting pronouncements and authorize the recording of transactions.
D. Record and conceal fraudulent transacl.io,rs in the normal course of assigned tasks.
D 85. 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 per;ty transactic'ns that management claims occurred in
the ordinary course of business.
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 cPA REVTEU/ SCHOOL Of THE pHTUppINES (CPAR) - MANrri EINAL PREBOARD flAT4I}'ATIOT{
AUDITINGTHEORY SEPTEMBER 14.2Ol3 / SATURDAY / .5:00PM
- 7:ff)PM

B. Internal control activities reql,iring the segregation of duties are subject to

management override.
C. Management continues to employ an inefflcient system of information technology to
record fi nancial transactions.
D. It is unlikely that sufficient evidence is available to support an opinion on the financial
statements.

A 86, Which of the following is not one of the asseftions made by management about an
account balance?
A. Relevance. C" Valuation.
B. Existence. D- Rights and obligations.
A 87. When a company has changed auditor..,, according to the Professional Standards
A. The successor auditor has the r*sponsibility to initiate contact with the predecessor
auditor to ask about the client before th,: engagement is accepted; the predecessor
has no responsibility to initiate this contact, even when aware of matterc bearing on
the integrity of management.
B. The predecessor must respond fully to all inquiries made by the successor auditor.
C. The successor must discuss with the predecessor matters bearing on the engagement
prion to accepting the enEagernent.
D. The successor may choose not to attempt any communication with the predecessor
auditor.

D 88. The risk of a material misstatement occuning ln an accoun! assuming an absence of

internal control, is referred to as
A. Account risk. C. tretection risk.
B. Control risk. f]. Inherent risk.

A 89. Which of the following is least likeiy to be considered a financial statement auditrisk
factor?
A. Management operating and financlng decisions are dominated by top rnanagement. operations to
B. A new client with no prior audit history"
C. Rate of change in the entity's industry is rapid.
D. Profitability of the entity relative to its industry is inconsistent.
B 90. Which of the following is most likely to he considered a risk factor relating to fraudulent
financial reporting?
A. Low turnover of senior management.
B. Ertreme degree of connpetition within the industry.
C. Capital structure including various operating subsidiaries.
D. Sales goals in excess of any of the preceding three years.
B 91. During financial statement audits, ar rlitor.,: seek to restrict which type of risk?
A. Control risk. C. lnherent risk.
B. Detection risk. il.
Account risk.

C 92. Competence as a certlfied public accoirntant includes all of the following except
A. Having the technical qualifications to perfcrm an engagement.
B. Possessing the ability to supervise anci to erraluate the quality of staff work.
C. Warranting the infallibility of the v*'ork performed.
D. Consulting others if additional technical infornnaflon is needed,
C 93. A primary purpose for establishing a code of .:onduct within a professional organization is
to
A. Reduce the likelihood that mernhers of l:he profession will be sued for substandard
work.
B. Ensure that all members of the profession perform at approximately the same level of
competence.
C. Demonstrate acceptance of responsibiliry to the interests of those served by the
profession.
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 CPA RIVIEW SCfIOOL OF THE PIIIUPPINLS {CFAR) - I{AMI3 FINAL PREBOARD EHIIII?{ATIOI{
AUpmilG Tr{EORy SETTEMBER 14. 2013i SATTJRDAY / 5r00PM - 7:00Bvl

D. Require members of the profession to exhibit loyalty in all matters pertaining to the
affairs of their organization.

C - 94. Within the context of quality cont:ni, the primary purpose of continuing professional
education anci training activities is tr: enable a CPA firm to provide personnel within the
firm with
. A. Technical training that assures proficiency as an auditor.
B. Professional edr,rcation that is required in order to perform with due professional care.
C. Knowledge required to fulfill assigned responsibilities and to progress within the firm.
D. KnowledEe required in order to perform a peer review.
A 95. The first paragraph of a standard unmodified audit report is referred to as the
A. Introductory paragraph.
B. Other matter paragraph.
C, Opinion paragraph.
D. Emphasis of matter paragraph.
D 96. If the predecessor auditors fail to reissue their audlt report on comparative financial
statements the successor auditors should
A" Express a qualified opinion on the comparative financial statements audited by the
predecessor auditors.
B. Reproduce the preciecessor audltors' report and include it with the new set of financial
statements.
C. Have the client omit the comparative financial statements.
D. Refer to the report of the pre-decessor auditors.
B 97, During its fiscal year, a comFany issued, at a discount, a substantial amount of bonds.
When perforrning audit work in connection with the bond issue, the independent auditor
should
A^ Confirm the existence of the bondholders
B. Review the board of directors' minutes for authorization"
C. Trace tl're net cash received from the issuance to the bond payable account.
D. Inspect the records maintained by the bond trustee.

D 98. If recorded interest expense is higher than the auditor expectation calculated using
recorded debL all of the following are potential explanations except that
A. The client failed to record debt.

B:ff:t il;t H:l'riit:JTi**r, rate ro carcurate interest expense on

"
uono issued at
a discount.
D. The client used the face interest rate to calculate interest expense on a bond issued at
a prernium.

C Which of the foltowlng rnrould provide the best form of evidential matter pertaining to the
99.
annual valu*tion i';'a rol:g*term inv<rstment in which the independent auditor's client owns
Equity method a 45 percent voting interest?
kasi 'to A. Market quotatic,ns of the investee company's stock.
NOT FV Method
B. The cLrrrent fuir value of the investee company's assets.
C. Historica! costs .af the investee company's assets.
D. Audited financial sratements of the investee company.

B 100. A CPA firm would be reasonably assured of rneeting lts overall responsibility to provide
services that ,:onform with professional standards by
A, Adhering Lo generally accepted accounting principles'
B. Implementing an appropriate systern cf quality control.
C. Joining professional societies that enforce ethical conduct,
D. Maintaining an attitude of independence in its engagements.
--.END OF E(AMINATION*-

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