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The Professional CPA Review School

Main: 3F C. Villaroman Bldg. 873 P. Campa St. cor Espana, Sampaloc, Manila
 (02) 735 8901 / 0917-1332365
email add: crc_ace@yahoo.com
Baguio Davao
2 Flr. #12 CURAMED Bldg. Marcos Highway, Baguio City
nd 3/F GCAM Bldg. Monteverde St. Davao City
 0906-0775156 / 09618683385  0905-4648851/0968-2209016

AUDITING (THEORY) OCT 2021 BATCH

FIRST PRE-BOARD EXAMINATION JULY 19, 2021

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer
for each item by Shading the corresponding letter of your choice on the answer sheet provided.
STRICTLY NO ERASURES ALLOWED. Use Pencil No. 2 only.

1. Which of the following statement is correct in relation to external audits?

A. External audits give absolute assurance that the financial statements are free from all
misstatement.
B. External audits give limited assurance that the financial statements are free from material
misstatement.
C. External audits give reasonable assurance that the financial statements are free from
material misstatement

2. The International Standards on Auditing are issued by which of the following bodies?
A. IAESB
B. IAASB
C. IASB
D. FRSC

3. Which TWO of the following statements are correct with regards to the International Standards
on Auditing (ISA)?
Statement 1 The ISAs aim to ensure that audits performed on different companies, in different
jurisdictions, adhere to common standards.

Statement 2 Where it is not possible to comply with one or several of the ISAs in an audit, the
auditor should explain the reason for the non-compliance in the auditor’s report.
Statement 3 The ISAs apply to the audit of smaller entities.

A. 1 and 2
B. 1 and 3
C. 2 and 3

4. To ensure transparency and sustainability of effective feedback, the internal audit team should
report to:
A. The company’s directors
B. Both the directors and the audit committee
C. The shareholders

5. Langeeze Co. is an oil and gas company mining for crude oil reserves in Southern Mindanao. In
the external audit of F Co, to which of the following might specific performance materiality
levels apply?
1) Directors’ remuneration
2) Exploration and development costs
3) The financial statements as a whole – to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole
4) The financial statements as a whole – to determine whether misstatements
identified during the audit should be accumulated and communicated to
management
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A. 1, 2 and 3
B. 1, 2 and 4
C. 1 and 2
D. 2 and 4

6. Which of the following matters would the overall audit strategy include?
A. The applicable financial reporting framework
B. The nature, timing and extend of audit procedures at the assertion level
C. The timetable of planned audit work

7. TRUE or FALSE: Existence is an assertion about account balances at the period end.
A. True
B. False

8. The audit team of which you are a member is in the process of documenting the audit client’s
system of internal controls. You wish to assess what specific errors or frauds may occur, in
order to identify the key controls that the team will then need to test during control testing.
Which of the following methods for recording control systems should you use?
A. Internal control evaluation questionnaires (ICEQ)
B. Narrative
C. Flowcharts

9. To ensure that the recorded sales transactions represent goods that have actually been
dispatched, Karga Co’s sales system only record sales if there is matching dispatch
documentation. Which of the following would be an appropriate test of control to confirm that
the control is operating effectively?
A. For a sample of sales invoices, verify that there are matching “goods dispatched”
notes.
B. For a sample of “goods dispatched” notes, verify that there are matching sales
invoices.
C. Verify that the numerical sequence of sales invoices is complete.
D. Inspect the open-order file for unfulfilled orders

10. As the external auditor of X-Ces Co, you have performed analytical procedures which have
highlighted a 40% increase in revenue compared to the previous period. Which further audit
procedures would you perform in response to this?

1) For a sample of sales invoices around the period end, inspect the dates and
compare with the dates of goods disptach and the dates recorded in the sales
and receivables’ ledger to confirm the application of correct cut-off.
2) Trace a sample of shipping documentation to sales invoices and into the sales
and receivables’ ledger.
3) For a sample of sales transactions recorded in the ledger, vouch the sales
invoice back to customer orders and shipping documentation.
4) For a sample of sales invoices, examine for proper classification into revenue
accounts.
A. 1 and 2
B. 1 and 3
C. 2 and 4
D. 3 and 4

11. Auditors have no obligations to perform procedures or make enquiries regarding the financial
statements after they have been issued. True or False?
A. True
B. False
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12. Macabenta's inventory records have been lost. The auditors performing the audit for the
twelve-month period have determined that the possible effects of undetected misstatements
could be material, but not pervasive. What form of audit opinion would the auditor give?
A. Unmodified opinion with an emphasis of matter paragraph
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion

13. What position would make a person eligible for appointment as a company auditor?
A. A person is accredited by the BOA for public practice
B. An officer or employee of the company
C. A partner or employee of such a person
D. A partnership in which such a person is a partner

14. During the course of your audit of the non-current assets of Eastern Engineering Inc at 31
March 2020, two problems have arisen.
a) The calculations of the cost of direct labor incurred on assets during construction by
the company's employees have been accidentally destroyed for the early part of the
year. The direct labor cost involved is P10,000.
b) The company incurred development expenditure of P20,000 spent on a viable new
product which will go into production next year and which is expected to last for ten
years. These costs have been expensed in full to the statement of profit or loss.

Other relevant financial information is as follows.

Profit before tax P 100,000
Non-current asset additions (excluding constructed assets) 133,000
Assets constructed by company 34,000
Non-current asset at net book value 666,667

Which of the following circumstances and corresponding modification in audit opinion would
you resort to in the case above?
A. Loss of records relating to direct labor costs for assets during construction; disclaimer of
opinion
B. Loss of records relating to direct labor costs for assets during construction; standard
opinion
C. Development cost debited to the statement of profit or loss ; adverse opinion
D. Development cost debited to the statement of profit or loss ; disclaimer opinion

15. Good governance principles strongly recommend:

A. An annual audit
B. Internal audit
C. Directors should not receive pay
D. Directors should be non-executive

16. You are a partner in EyBee Sy & Co, CPAs. You are approached by Mr. Eks, the managing
director of Eksecutib Enterprises Ltd, who asks your firm to become auditors of his company.
In return for giving you this appointment Mr. Eks says that he will expect your firm to waive 50
per cent of your normal fee for the first year's audit. The existing auditors, Nafalit, Han & Co,
CPAs have not resigned but Mr.Eks informs you that they will not be re-appointed in the future.

Which of the following actions by the CPAs involved is justifiable?

A. EyBeeSy may accept the engagement proposal of Mr. Eks as this is not a solicitation and the
fee stipulated was quoted by the client and hence, considered as fair.
B. EyBeeSy should decline the engagement proposal of Mr. Eks. The request by Mr. Eks that
half of the first year's audit fee should be waived is quite improper. If this proposal were to
be accepted it could be held that EyBeeSy & Co, CPAs had sought to procure work through
the quoting of lower fees.
C. Nafakit-Han cannot refuse to resign as the change of auditors is the prerogative of the client
D. Nafalit-Han can refuse to resign particularly when they become aware that they will be
replaced by EyBee Sy who have not requested communication with them
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17. An engagement letter is only ever sent to a client before the first audit. Is this true or false?
A. True
B. False

18. The growing recognition by management of the benefits of good internal control and the
complexities of an adequate system of internal control have led to the development of internal
auditing as a form of control over all other internal controls. The emergence of internal auditors
as experts in internal control is the result of an evolutionary process similar in many ways to the
evolution of external auditing.

Which of the following statements is true about the effectiveness of operations of the internal
audit function?
A. Internal auditors establish internal control to improve the information received by
managers.
B. Internal auditors review and test the system of internal control to run the company
smoothly.
C. It would be appropriate for internal audit to report to the chief accountant, who is in
charge of running the system of internal control on financial reporting.
D. A high level of independence is achieved by the internal auditors if they report directly to
the board or its sub-committee.

19. You are involved with the audit of Mikuleccione Co, a small company. You have been carrying
out procedures to gain an understanding of the entity. The following matters have come to your
attention:

The company offers standard credit terms to its customers of 60 days from the date of invoice.
Statements are sent to customers on a monthly basis. However, Mikuleccione does not employ a
credit controller and, other than sending the statements on a monthly basis, it does not otherwise
communicate with its customers on a systematic basis. On occasion, the sales ledger clerk may
telephone a customer if the company has not received a payment for some time. Some customers
pay regularly according to the credit terms offered to them, but others pay on a very haphazard
basis and do not provide a remittance advice. AR collections are entered onto the AR ledger but
not matched to the booked invoices (or remittance advice). The company does not produce an
aged list of balances.

From the above information, assess the risks of material misstatement arising in the financial
statements.
Which of the following would be LEAST likely be seen in the Results of Analytical Review?

A. A recommendation to further test the valuation of accounts receivable at it likely includes

irrecoverable accounts due to inadequacy of collection follow-up on customers on account.
B. A recommendation to further test the valuation of accounts receivable at it likely includes
irrecoverable accounts as the company does not age the receivables.
C. A recommendation to further test the AR for understatement at it likely includes invoices
already collected but are not closed if Mikuleccione uses an open invoice system.
D. A recommendation to further test the existence of accounts receivable as receipts were not
matched against the remitted invoices.

20. Which of the following is NOT TRUE when non-compliance is identified or suspected?
A. Obtain further information to evaluate possible effect on financial statements.
B. Discuss with stockholders and major stakeholders.
C. Consider need to obtain legal advice if sufficient information is not provided and matter is
material.
D. Evaluate implications on risk assessment and reliability of written representations.
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21. Automated working paper packages have been developed which can make the documentation
of audit work much easier. Such programs aid preparation of working papers, lead schedules,
the trial balance and the financial statements themselves. These are automatically cross-
referenced, adjusted and balanced by the computer.

The following are advantages of automated working papers, except:

A. The working papers will be neater and easier to review.
B. The time saved will be substantial as review need not be made to all working
papers, including those summarizing the key analytical information.
C. Standard forms do not have to be carried to audit locations.
D. Audit working papers can be transmitted for review via a modem or fax facilities

22. Which of the following is evidence to be obtained from the management of the client?
A. Confirmation of trade receivables or payables ,bank balances
B. Property valuations
C. Explanations of significant unusual fluctuations in results versus budget
D. Calculation of ratios and trends in order to examine unusual variations

23. Which of the following statements is NOT TRUE about internal control study as conducted in a
financial statements audit?

A. The auditors must understand the accounting system and control

environment when they intend to make use of the combined audit strategy,
otherwise this is optional.

B. The auditors shall assess the adequacy of the systems as a basis for the
financial statements and shall identify risks of material misstatements to
provide a basis for designing and performing further audit procedures.

C. The auditors must keep a record of the client's systems which must be
updated with the use of narrative notes, flowcharts, questionnaires or
checklists.

D. If the auditors believe the system of controls is strong, they may choose to test
controls to assess whether they can rely on the controls having operated
effectively.

24. Jonathan is the sole owner of Furry Lion Stores, a company which owns five stores in the west
of England. The stores sell mainly food and groceries. Each store is run by a full-time manager
and three or four part-time assistants. Jonathan spends on average ½ a day a week at each store,
and spends the rest of his time at home, dealing with his other business interests.

All sales are for cash and are recorded on till rolls which the manager retains. Shop managers'
wages are paid monthly by check by Jonathan. Wages of shop assistants are paid in cash out of
the takings.

Most purchases are made from local wholesalers and are paid for in cash out of the takings (or
receipted cash). Large purchases (over P250) must be made by checks signed by the shop
manager and countersigned by Jonathan.

Shop managers reports a bank overage of cash once a week, apart from a float in the till (or cash
register).

All accounting records including the cash book, wages and sales tax records are maintained by
the manager. Jonathan reviews the weekly bank statements when he visits the shops. He also
has a look at inventory to see if inventory levels appear to be about right. All invoices are also
kept in a drawer by a manager and marked with a cash book reference, and where appropriate a
check number when paid.
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The following statements of deficiencies in the control systems of Furry Lion Stores with
corresponding remedies are appropriately matched, except for?

A. Deficiency: The shops do not appear to have any inventory movement records to detect
whether inventory levels are too high, or too low with a risk of running out of inventory .
Remedy: Introduce inventory movement records, detailing values and volumes

B. Deficiency: The shops do not appear to have any inventory movement records to detect
whether inventory levels are too high, or too low with a risk of running out of inventory .
Remedy: Regular inventory counts should be made either by Jonathan or by staff from
another shop. All discrepancies between the inventory records and the actual inventory
counted should be investigated.

C. Deficiency: Inadequate documentation for cash transactions.

Remedy: Cash book entries should be supported by invoices and other supporting
documentation, and should be cross-referenced to the general ledger

D. Deficiency: Inadequate documentation for cash transactions.

Remedy: Paying all but the smallest payments by check and Jonathan should take a very
active part in the business