NFJPIA-Region X and CARAGA CouncilRFJPIA Cup Level 2 – Auditing Theory

ELIMINATION ROUNDEASY ROUNDRFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #1)

The need for assurance services arises because:a. There is a consonance of interests of the preparer and the user of the financial statements. b. There is a potential bias in providing information.c. Economic transactions are less complex than they were a decade ago.d. Most users today have access to the system that generates the financial statements they use.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #2)Which of the following is explicitly included in the Auditor’s responsibility section of the auditor's report?

a. Reason for modification of opinion.b. “Philippine Financial Reporting Standards”.c. “Philippines Standards on Auditing”.d. Division of responsibility with another auditor.e. Management representations.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #3)The measure of variability of a statistical sample that serves as an estimate of the population variability is

the:a. Basic precision.b. Range.c. Measures of central tendency.d. Standard deviation.e. Interval.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #4)If a control total were to be computed on each of the following data items, which would best be identified as

a hash total for a payroll CBIS application? a. Net payb. Department numbers. c. Hours workedd. Total debits.e. Total credits.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #5)When the auditor determines that detection risk regarding a financial statement assertion for a material

account balance or class of transactions cannot be reduced to an acceptable level, the auditor should express:a. Qualified or adverse opinion.b. Unqualified opinion with explanatory paragraph.c. Qualified or disclaimer of opinion.d. Unqualified opinion.e. Adverse or disclaimer of opinion.

AVERAGE ROUNDRFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #1)

Which of the following is not explicitly referred to in the Code of Ethics as source of technical standards?a. Commission on Audit.b. Auditing and Assurance Standards Council.c. Securities and Exchange Commission.d. Relevant legislation.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #2)This occurs when a firm or a member of the assurance team, promotes or may be perceived to promote an

assurance client’s position or opinion to the point that objectivity may or may be perceived to be compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgment to that of the client.

Answer: Advocacy threat.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #3)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 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 minimum level.e. The auditor cannot reduce the material effect of the illegal act to an immaterial one.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #4)A written representation from a client's management which, among other matters, acknowledges

responsibility for the fair presentation of financial statements should normally be signed by the: a. Chief executive officer and the chief financial officer.b. Chief financial officer and the chairman of the BOD.c. Chairman of the audit committee of the BOD.d. Chief executive officer, the chairman of the BOD and the client's lawyer. e. Chief executive officer, chief financial officer and the chairman of the BOD.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #5)CBIS controls are frequently classified as to general controls and application controls. Which of the

following is an example of an application control?a. Programmers may access the computer only for testing and "debugging" programs.b. All program changes must be fully documented and approved by the information systems manager

and the user department authorizing the change.c. A separate data control group is responsible for distributing output, and also compares input and

output on a test basis.d. Use of passwords and identification codes.e. In processing sales orders, the computer compares customer and product numbers with

internally stored lists.

DIFFICULT ROUNDRFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #1)

In studying a client's internal controls, an auditor must be able to distinguish between prevention controls and detection controls. Of the following data processing controls, which is the best detection control?

a. Policy requiring password security.b. Backup and recovery procedure.

c. Access controls. d. Use of data encryption techniques.e. Review of machine utilization logs.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #2)When the auditor encounters sophisticated computer-based systems, he or she may need to modify the

audit approach. Of the following conditions, which one is not a valid reason for modifying the audit approach?a. More advanced computer systems produce less documentation, thus reducing the visibility of the

audit trail.b. In complex computer-based systems, computer verification of data at the point of input replaces the

manual verification found in less sophisticated data processing systems.c. Integrated data processing has replaced the more traditional separation of duties that existed in

manual and batch processing systems.d. Real-time processing of transactions has enabled the auditor to concentrate less on the

completeness assertion.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #3)

In an application of mean per unit sampling, the following information has been obtained: Reported book value P600,000Point estimate (estimated total value) 591,000Allowance for sampling risk (precision) +- 22,000Tolerable error +- 45,000

The appropriate conclusion would be that the reported book value is: a. Acceptable only if the risk of incorrect rejection is at least twice the risk of incorrect acceptance.b. Acceptable only if the risk of incorrect acceptance is at least twice the risk of incorrect rejection. c. Acceptable only if the risk of overreliance is at least twice the risk of underreliance. d. Acceptable.e. Not acceptable.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #4)Based on RA 9298, how many years can a partner who survived the death or withdrawal of other partner/s

continue to practice under the partnership name after becoming a sole practitioner?Answer: 2 years.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #5)The following procedures may be performed by CPAs in an engagement:

1. Consideration of internal control2. Observation3. Inquiry and analysis4. Inspection5. Confirmation6. Obtaining management representation letter

Which of the foregoing are normally performed in an agreed-upon procedures engagement?Answer: 2, 3, 4 and 5 only.

CLINCHER QUESTIONSRFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #1)

Which of the following is not a distinguishing feature of risk-based auditing?a. Identifying areas posing the highest risk of financial statement errors.b. Analysis of internal control.c. Collecting and evaluating evidence.

d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #2)In conducting a substantive test of an account balance, an auditor hypothesizes that no material error

exists. The risk that sample results will support the hypothesis when a material error actually does exist is the risk of:

a. Incorrect rejection. b. Alpha error.c. Incorrect acceptance.d. Type I error. e. Risk of overreliance.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #3)In a distributed data base (DDB) environment, control tests for access control administration can be

designed which focus on:a. Reconciliation of batch control totals.b. Hash totals.c. Examination of logged activity.d. Prohibition of random access.e. Analysis of system generated core dumps.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #4)Which of the following might be detected by an auditor's review of the client's sales cut-off?

a. Excessive goods returned for credit. b. Unrecorded sales discountsc. Lapping of year end accounts receivabled. Inflated sales for the year. e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #5)An auditor confirms a representative number of open accounts receivable as of December 31, 2010, and

investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

a. One of the cashiers has been covering a personal embezzlement by lapping.b. One of the sales clerks has not been preparing charge slips for credit sales to family and friendsc. One of the CBIS control clerks has been removing all sales invoices applicable to his account from

the data file.d. The credit manager has misappropriated remittances from customers whose accounts have been

written off.e. The internal control is effective.

FINAL ROUNDEASY QUESTIONSRFJPIA CUP LEVEL 2 – Auditing Theory (AKIC) ACE QUESTION

This exists when other information contradicts information contained in the financial statements.a. Material inconsistency.b. Material difference.c. Material deviation.

d. Material error.e. None of the choices.

RFJPIA CUP LEVEL 2 – Auditing Theory (MTIM) JOKER QUESTIONThe term "present fairly, in all material respect", means

a. The financial statements conform to GAAP.b. The financial statements may still be materially misstated because the auditors may not have

discovered the errors.c. The financial statements are accurately prepared.d. The auditor considers only those matters that are significant to the users of the financial

statements.e. Immaterial amounts are omitted from the financial statements.

RFJPIA CUP LEVEL 2 – Auditing Theory (SIC)This occurs when by virtue of a close relationship with an assurance client, its directors, officers or

employees, a firm or a member of the assurance team becomes too sympathetic to the client’s interests.Answer: Familiarity threat.

RFJPIA CUP LEVEL 2 – Auditing Theory (PCC)Which of the following acts is/are considered fraud?

1. Alteration of records or documents.2. Misinterpretation of facts. 3. Misappropriation of assets. 4. Recording of transactions without substance. 5. Clerical mistakes.

Answer: 1, 3 and 4 only.

RFJPIA CUP LEVEL 2 – Auditing Theory (MVC)This refers to the communication to the public of information as to the service or skills provided by

professional accountants in public practice with a view of procuring professional business.Answer: Advertising.

RFJPIA CUP LEVEL 2 – Auditing Theory (CMU)Which of the following factors is/are essential to an effective internal auditing organization?

1. Operating responsibility.2. Organizational status3. Objectivity

Answer: 2 and 3 only.

RFJPIA CUP LEVEL 2 – Auditing Theory (COC)The auditor's report should be dated as of the date on which the:

a. Field work is completed.b. Report is delivered to the client.c. Report is submitted to the audit committee.d. Fiscal period under audit ends.e. Review of the working papers is complete.

AVERAGE QUESTIONSRFJPIA CUP LEVEL 2 – Auditing Theory (JPI) ACE QUESTION

Which of the following auditing procedures would the auditor not apply to a cutoff bank statement?a. Trace year end outstanding checks and deposits in transit to the cutoff bank statement.

b. Reconcile the bank account as of the end of the cutoff period.c. Compare dates, payees and endorsements on returned checks with the cash disbursements record.d. Determine that the year end deposit in transit was credited by the bank on the first working day of

the following accounting period.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (BSU) JOKER QUESTIONThe most effective means for the auditor to determine whether a recorded intangible asset possesses the

characteristics of an asset is to:a. Vouch the purchase by reference to underlying documentation.b. Inquire as to the status of patent applications.c. Register the patent at the Patent Office to test its validity and acceptability.d. Evaluate the future revenue-producing capacity of the intangible asset.e. Analyze research and development expenditures to determine that only those expenditures

possessing future economic benefit have been capitalized.

RFJPIA CUP LEVEL 2 – Auditing Theory (SMC)The probability of a significant idle capacity loss increases under which of the following conditions?

a. Sales and production have increased significantly during the period under audit.b. Sales and production have declined materially during the period under audit.c. Sales have declined somewhat, but production has remained constant in anticipation of a sales

recovery in the following accounting period.d. The client has increased its overhead absorption rate effective at the beginning of the following

accounting period.e. Sales and production remained constant during the period under audit.

RFJPIA CUP LEVEL 2 – Auditing Theory (FSUU)An audit report contains the following paragraph: "Because of the inadequacies in the company's

accounting records during the year ended June 30, 2003, it was not practicable to extend our auditing procedures to the extent necessary to enable us to obtain certain evidential matter as it relates to classification of certain items in the consolidated statements of operations." This paragraph most likely describes

a. A material departure from GAAP requiring a qualified audit opinion.b. An uncertainty that should not lead to a qualified opinion.c. A matter that requires an adverse opinion.d. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit opinion.e. A material scope restriction requiring a qualification of the audit opinion.

RFJPIA CUP LEVEL 2 – Auditing Theory (XU)Under which of the following circumstances would a disclaimer of opinion not be appropriate?

a. The financial statements fail to contain adequate disclosure concerning related party transactions.

b. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.c. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply

alternative procedures to verify their balances.d. The auditor is unable to determine the amounts associated with illegal acts committed by the client's

management.e. Under no circumstances.

RFJPIA CUP LEVEL 2 – Auditing Theory (IIT)Morgan, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and

reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan

a. Must not refer to the examination of the other auditor.b. Must refer to the examination of the other auditor.c. May refer to the examination of the other auditor.d. May refer to the examination of the other auditor, in which case Morgan must include in the auditor's

report on the consolidated financial statements a qualified opinion with respect to the examination of the other auditor.

e. May refer only if the other auditor consents. RFJPIA CUP LEVEL 2 – Auditing Theory (SFXC)

In which of the following reports should a CPA not express negative or limited assurance? a. A standard compilation report on financial statements of a non-public entity.b. A standard review report on financial statements of a non-public entity.c. A standard review report on interim financial statements of a public entity.d. A standard comfort letter on financial information included in a registration statement of a public

entity.e. All of the above.

RJPIA CUP LEVEL 2 – Auditing Theory (LDCU)Comfort letters are ordinarily signed by the

a. Client.b. Independent auditor.c. Internal auditor. d. Independent auditor and client.e. Independent auditor and internal auditor.

DIFFICULT QUESTIONSRFJPIA CUP LEVEL 2 – Auditing Theory (LC) ACE QUESTION

The engagement team for the 2010 audit of the financial statements of Sarimanok Company is composed of the following:

Partner: Jose Marquez Senior associate: Asserina TamayoManager: Shirley Cordova Audit associates: Cristy Espenilla, Jona Lee

Following Philippine Standards on Auditing, who among the above would be considered as the auditor?a. Jose Marquez only.b. Jose Marquez and Asserina Tamayo only.c. Jose Marquez, Asserina Tamayo and all the audit associates only.d. Jose Marquez, Asserina Tamayo and Shirley Cordova only.e. All of them.

RFJPIA CUP LEVEL 2 – Auditing Theory (NFJPIA) JOKER QUESTIONThe following statements relate to CPA examination ratings. Which of the following is incorrect?

a. To pass the examination, candidates should obtain a general weighted average of 75% and above, with no rating in any subject less than 65%.

b. Candidates who obtain a rating of 75% and above in at least four subjects shall receive a conditional credit for the subjects passed.

c. Candidates who failed in four complete examinations shall no longer be allowed to take the examinations the fifth time.

d. Conditioned candidates shall take an examination in the remaining subjects within two years from the preceding examination.

e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CTKC)Which statement is incorrect regarding the nature of tests of controls?

a. As the planned level of assurance increases, the auditor seeks more reliable audit evidence.b. 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.

c. The absence of misstatements detected by a substantive procedure provides audit evidence that controls related to the assertion being tested are effective.

d. A material misstatement detected by the auditor’s procedures that was not identified by the entity ordinarily is indicative of the existence of a material weakness in internal control.

e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (SPUS)The assessment of the risks of material misstatement at the financial statement level is affected by the

auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily will lead the auditor to:

a. Have more confidence in internal control and the reliability of audit evidence generated internally within the entity.

b. Conduct some audit procedures at an interim date rather than at period end.c. Decrease the number of locations to be included in the audit scope.d. Withdraw from the engagement.e. Modify the nature of audit procedures to obtain more persuasive audit evidence.

RFJPIA CUP LEVEL 2 – Auditing Theory (LSU)Which of the following is least likely a procedure that would be performed by the auditor near the auditor’s

report date?a. Reading the minutes of the meetings of shareholders, the board of directors and audit

executive committees held throughout the audit year.b. Reading the entity’s latest available interim financial statements.c. Inquiring of the client’s legal counsel concerning litigations and claims.d. Reviewing the procedures that management has established to ensure that subsequent events are

identified.e. All are performed near the auditor’s report.

RFJPIA CUP LEVEL 2 – Auditing Theory (STC)Which of the following statements is not true regarding the competence of audit evidence?

a. Relevance is enhanced by an effective information system.b. To be competent, evidence must be both valid and relevant.c. Validity is related to the quality of the client’s information system.d. Relevance must always relate to audit objectives.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (FCC)Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA?

a. Privity of contract.b. Intent to deceive.c. Reckless disregard.d. Ordinary negligence. e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (SEC)An auditor compares 2010 revenues and expenses with those of the prior year investigating all changes

exceeding 10%. By this procedure the auditor would be most likely to learn that:a. An increase in property tax rates has not been recognized in the client's accrual.

b. The 2010 provision for uncollectible accounts is inadequate, because of worsening economic conditions.

c. Fourth quarter payroll taxes were not paid.d. The client changed its capitalization policy for small tools in 2010.e. All of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (MSUM)Experience has shown that certain conditions in an organization are symptoms of possible management

fraud. Which of the following conditions would not be considered an indicator of possible fraud? a. Managers regularly assuming subordinates' duties.b. Managers dealing in matters outside their profit center's scope.c. Managers not complying with corporate directives and procedures.d. Managers subject to formal performance reviews on a regular basis.e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (MU)Given the increasing use of microcomputers as a means for accessing data bases, along with on-line real-

time processing, companies face a serious challenge relating to data security. Which of the following is not an appropriate means for meeting this challenge?

a. Institute a policy of strict identification and password controls housed in the computer software that permit only specified individuals to access the computer files and perform a given function.

b. Limit terminals to perform only certain transactions.c. Program software to produce a log of transactions showing date, time, type of transaction, and

operator.d. Prohibit the networking of microcomputers and do not permit users to access centralized

data bases.e. All are appropriate measures for maintaining data security.