Auditing Theory - Preboard # 1

An auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

The recipients of the report must form their own conclusions from the report by the auditor.

The report is restricted to those parties that have agreed to the procedures to be performed.

The report on factual findings is expressed in the form of negative assurance.

Audit

Review

Agreed-upon procedures

Compilation

When the auditor attaches a report to that information.

When the auditor consents to the use of the auditor's name in a professional connection.

Either a or b.

Neither a nor b.

Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter conforms in all material respects with suitable criteria.

All components of the engagement risk model will be significant for all assurance engagements.

The extent to which the practitioner considers the relevant components of engagement risk will be affected by the engagement circumstances.

Business risk is not part of engagement risk and does not affect the application of Philippine Standard on Assurance Engagements.

Reasonable assurance

Positive assurance

Moderate assurance

Negative assurance

The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures.

The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.

During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.

When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.

Testifying under oath about client’s financial statements.

Stating in the auditor’s management letter that the examination was made in accordance with generally accepted auditing standards.

Attaching an auditor’s opinion to the client’s financial statements.

The independent auditor.

The internal auditor.

The client's management.

The audit committee.

Four months

Three months

Two months

Six months

The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors.

PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material.

PSAs need only be applied to material matters.

The Interpretations have the same authority as the PAPSs.

Any position in any business or company in the private sector which requires supervising the recording of financial transactions.

Any position in any business or company in the private sector which requires preparation of financial statements.

Any position in any business or company in the private sector which requires coordinating with the internal auditors for the audit of financial statements.

The position of the dean that supervises the BSA program of an educational institution.

Board of Accountancy

Bangko Sentral ng Pilipinas

Bureau of Internal Revenue

Securities and Exchange Commission

Peer review

Quality review

Analytical review

Administrative review

If he is at least 65 years old.

If he is working abroad and he has been out of the country for at least two years immediately prior to the date of renewal.

Either a or b.

Under no circumstances.

The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for negligence, incompetence, or any other just cause.

Insanity is not a ground for proceeding against a CPA.

A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge.

After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked.

Credibility

Professionalism

Quality of Services

Confidence

I, II, III

II, III, I

III, II, I

II, I, III

Intimidation threat

Self-review threat

Advocacy threat

Familiarity threat

A former officer, director or employee of the assurance client serve as a member of the assurance team.

A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.

Assisting an audit client in matters such as preparing accounting records or financial statements.

A firm, or network firm, provides internal audit services to an audit client.

Direction

Supervision

Review

All of these

The size of the firm.

The type of clients that the firm serves.

The number of practice offices.

The nature of the practice.

The auditor is entitled to accept records and documents as genuine.

The auditor is may be held responsible for the prevention of fraud and error.

The auditor should consider the risk of material misstatements in the financial statements resulting from fraud or error.

The risk of not detecting a material misstatement resulting from error is lower than the risk of not detecting a material misstatement resulting from fraud.

Using the auditor’s knowledge of the business, the auditor may identify events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred.

A missing document, an out of balance general ledger, or an analytical procedure that does not make sense may be the result of circumstances other than fraud.

Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds have occurred.

The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or control risk.

Understating the sales journal.

Overstating the accounts receivable control account.

Overstating the accounts receivable subsidiary ledger.

Understating the cash receipts journal.

Payments for specified services or loans to consultants, related parties, employees or government employees.

Payments for goods or services made to the country from which the goods or services originated.

Purchasing at prices significantly above or below market price.

Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its industry or to the services actually received.

Issue an adverse opinion.

Withdraw from the engagement.

Report it to the proper government authorities.

Consider the effects on the financial statements, including the adequacy of disclosure.

The auditor’s communications of matters include all audit matters of governance interest.

An audit of financial statements is designed to identify all matters that may be relevant to those charged with governance.

The auditor’s communications with those charged with governance may be made orally or in writing.

None of the above.

The performance of substantive testing.

The commencement of the engagement.

The completion of audit.

Before the issuance of audit report.

Should not contain a separate paragraph that refers to the original engagement.

Should not refer to any procedures that may have been performed in the original engagement.

Should qualify the opinion due to scope limitation.

Omits reference to the original engagement.

Audit program

Progress flowchart

Engagement letter.

Time and Expense Summary

Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical procedures.

Consider the risk of the existence of related-party transactions.

Consider the nature of the audit reports expected to be rendered.

Identify items likely to require adjustments.

From the predecessor auditor.

From the SEC.

At the client’s premises.

From the permanent file.

Not longer than 12 months from balance date.

At least 12 months from the balance sheet date.

Not longer than 12 months from the date of audit report.

At least 12 months from the date of audit report.

The results of the internal control questionnaire.

The contents of the management representation letter

The entity’s annualized interim financial statements.

The anticipated sample size of the planned substantive tests.

Tentative.

Comprehensive.

Conclusive.

Optional.

Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of transactions

There is an inverse relationship between detection risk and the combined level of inherent and control risk.

The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for substantive tests.

Audit risk may be more appropriately determined by assessing inherent and control risk separately.

Inadequate segregation of duties

Confirmation of receivables by an auditor fails to detect a material misstatement.

ABC Company, a client company, lacks sufficient working capital to continue operations.

A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

There is a positive relationship between detection risk and the combined level of inherent and control risk.

The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing, and extent of substantive procedures required to eliminate audit risk.

Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous assessment of control risk.

The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests on some assertions.The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests on some assertions.

Analytical procedures

Confirmation

Recalculation

Reperformance

Enhance the timeliness, availability, and accuracy of information.

Enhance the ability to monitor the performance of the entity’s activities and its policies and procedures.

Eliminate the risk that controls will be circumvented.

Consistently apply predefined business rules and perform complex calculations in processing large volumes of transactions or data.

Consists of the policies and procedures that help ensure that management directives are carried out.

Includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity.

Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.

Consists of the procedures and records established to initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.

Decrease in the risk of material misstatement.

Decrease in the degree of assurance the auditor plans to obtain.

Decrease in materiality level.

None of the above.

Assigning less experienced staff.

Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.

Performing predictable further audit procedures.

Performing substantive procedures at an interim date instead of at period end.

Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation.

If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every third audit.

The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years.

The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditor’s tests of controls.

The primary objective is to provide the auditor with an evaluation of the consistency of application of management’s policies.

The primary objective is to provide the auditor with knowledge necessary for audit planning.

The primary objective is to provide the auditor with evidential matter to use in assessing inherent risk.

The primary objective is to provide the auditor with a basis for modifying tests of controls.

Credit is granted by a credit department.

Cash receipts received in the mail are received by a secretary with no recordkeeping responsibility.

Cash is deposited weekly.

Cash disbursements over P100,000 does not require two signatures on the check.

May involve comparisons of financial information with nonfinancial information.

Setting the planned assessed level of control risk at the maximum will eliminate these tests.

Often performed concurrently with obtaining an understanding of internal control.

Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in updating accounts receivable balances.

Believes internal control activities are unlikely to be effective.

Determines that internal control is not well-documented.

Performs tests of controls to restrict detection of risk to an acceptable level.

Identifies control activities that are likely to prevent material misstatements.