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Flashcards in RESA Preweek Deck (53)
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1
Q

The Core Competencies of CPAs include:
A. Assurance and information integrity
B. Objectivity
C. Strategic and critical thinking skills
D. Pursuit of life-long learning and excellence

A

B. Objectivity

2
Q

Which of the following describes most completely how the profession defines independence?
A. Performing an audit from the public’s POV
B. Avoiding the appearance of a significant interest in an audit client
C. Resisting a client’s reluctance to reveal evidence
D. Accepting responsibility to act professionally and in accordance with the professional Code of Conduct

A

D. Accepting responsibility to act professionally and in accordance with the professional Code of Conduct

3
Q
What kind of threats are created by virtue of a close business relationship with assurance clients?
A. Self-interest threat
B. Self-interest and intimidation threat
C. Self-interest and self-review threat
D. No threats are created
A

B. Self-interest and intimidation threat

4
Q
Family and personal relationships between a member of the assurance team and a director, officer, or employee of the assurance client, LEAST LIKELY create:
A. Self-interest threat
B. Self-review threat
C. Intimidation threat
D. Familiarity threat
A

B. Self-review threat

5
Q

If the firm personnel make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Examples of such managerial decisions include the ff., EXCEPT

A. Determining or changing J/E, or the classifications for accounts or transactions or other accounting records without obtaining approval of the audit clients.

B. Authorizing or approving transactions

C. Preparing source documents or originating data (including decisions on evaluation assumptions), or making changes to such documents or data

D. Assisting an audit client in resolving account reconciliation problems

A

D. Assisting an audit client in resolving account reconciliation problems

6
Q

The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, when it is impractical for the audit client to make other arrangements, would not be considered to pose an unacceptable threat to independence, provided:

A. The firm or network firm does not assume any managerial role or make any managerial decisions

B. The audit client accepts responsibility for the results of the work

C. Personnel providing the services are not members of the assurance team

D. All of the above

A

D. All of the above

7
Q

If the valuation services involve the valuation of matters material to the F/S and the valuation involves a significant degree of subjectivity, which is INCORRECT? The self-review threat…

A. Could not be reduced to an acceptable level by any safeguard
B. Could be reduced to an acceptable level by the application of safeguards
C. Such valuation services should not be provided
D. The assurance team should withdraw from the audit engagement, if the team opted to perform the valuation services.

A

B. Could be reduced to an acceptable level by the application of safeguards

8
Q

Waste Management and Enron are classic cases wherein the media was critical that auditors:

A. Were ignorant of the existing audit and assurance standards

B. Have failed to plan the audit engagements properly

C. Overlooked suspicions of earnings management reported in the Wall Street Journal

D. Received significant consulting fees relative to audit fees

A

D. Received significant consulting fees relative to audit fees

9
Q

The Code of Professional Ethics would most likely be violated if an auditor:

A. Owns a building and leases floor space to an assurance client

B. Has an insured account with a brokerage firm audit client

C. Is engaged by an audit client to identify potential acquisitions

D. Screens candidates for an audit client’s vacant controllership position

A

A. Owns a building and leases floor space to an assurance client

10
Q

Peepay, CPA, is an audit manager of the Dom, Day, and Jordan, CPAs, accounting firm. He has just been assigned to the audit of the Lugao Money Market Fund. Peepay has maintained a money market account with LMMF since it opened in 2005. All his savings, amounting to 75% of his total assets, are in this account, which pays the highest interest available in money market funds. However, his account constitutes only 0.00001% of the fund’s assets. Is the audit firm’s independence impaired in this situation?

A

Yes. Peepay is considered a member of the assurance team, since he is a manager and will provide audit services to LMMF. The firm’s independence is impaired since Peepay holds a direct financial interest.

11
Q

CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009.

May Troy perform the audit of Pugad Company for the calendar year ended December 31, 2009?

A

No, since Troy’s wife’s interest is attributed to him, and he would not be independent.

12
Q

CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009. Troy’s wife gave her shares to their dependent 10-year-old daughter, Tiny, on July 1, 2009.

May Troy perform the audit of Pugad Company for the calendar year ended December 31, 2009?

A

No, for as long as Tiny is a dependent child. The financial interest is considered direct.

13
Q

CPA Troy’s wife owns 20% of the ordinary shares of Pugad Company, which wants Troy to perform the audit for the calendar year ended December 31, 2009. Troy’s wife gave her shares to their dependent 10-year-old daughter, Tiny, on July 1, 2009. Tiny, acting through a custodian, sold the shares to her grandfather Lolo Dom on August 1, 2009. His purchase, as an accommodation, took two-thirds of his retirement savings.

May Troy now perform the audit of Pugad Company for the calendar year ended December 31, 2009?

A

No. The appearance of independence is impaired. Moreover, the grandfather’s investment is material (66.67%) in relation to his net financial resources.

14
Q

On August 20, 2009, Mar Bonafe, CPA and partner, was offered and accepted the engagement to audit the annual F/S of ABC Co. for the fiscal and calendar years ended December 31, 2009. The audit began on Sep. 15, 2009 and ended on March 17, 2010. ABC Co. is regulated by the SEC. Bonafe served as controller of ABC from November 5, 2002 until Jan. 12, 2009, at which time he terminated his employment with ABC.

Mar Bonafe owned a material amount of ABC Corporation’s ordinary shares from November 5, 2002 until August 15, 2009, at which time he sold the said shares.

Is Mar Bonafe in violation of the Code of Ethics due to impairment of independence?

A

Yes, because Mar Bonafe had an employment relationship with the client during part of the period covered by the financial statements.

15
Q

The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client’s F/S may most likely create:

A. Self-interest threat
B. Self-review threat
C. intimidation threat
D. Familiarity threat

A

B. Self-review threat

16
Q

The making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, liability, or for a business as a whole

A

Valuation services

17
Q

A broad range of services, including compliance, planning, provision of formal taxation opinions, and assistance in the resolution of tax disputes

A

Tax services

18
Q

May include such activities as acting as an expert witness, calculating estimated damages, or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation

A

Litigation support services

19
Q

Any service for which the person providing the services must either be admitted to practice before the Courts of the jurisdiction in which such services are to be provided, or have the required legal training to practice law

A

Legal services

20
Q

The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the assurance engagement may LEAST LIKELY create

A. Self-interest threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat

A

Executive search services

B. Advocacy threat

21
Q

CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the baord of directors. Ela will not be considered indepdendent, unless:

I. The position is in fact purely honorary
II. Listings of directors show she is an honorary director
III. She restricts participation strictly to the use of her name
IV. She does not vote or participate in management functions

A

[Notes]

22
Q
This is the date selected by the practitioner to date the report
A. Dual date
B. Date of signing
C. Date of report
D. Last day of field work
A

C. Date of report

23
Q

A network is:

  • Aimed at cooperation
  • Aimed at profit or cost-sharing, or shares common ownership, control, management, common quality control policies and procedures, common business strategy, common brand name, or a significant part of professional resources.
A

[Notes]

24
Q

The firm shall establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or the engagement partner issue reports that are appropriate in the circumstances. Such policies and procedures shall include

A. Matters relevant to promoting consistency in the quality of engagement performance

B. Supervision responsibilities

C. Review responsibilities

D. All of the choices

A

D. All of the choices

25
Q

In reviewing the audit work performed, the engagement partner:

A. Must review all audit documentation
B. Need not review all audit documentation, but may do so
C. Need not review all audit documentation
D. Must ask the staff performing the audit work to sign the audit report

A

B. Need not review all audit documentation, but may do so

26
Q

One of the major parts of audit planning is pre-planning. Which of the following is NOT involved during the pre-planning phase?

A. Deciding whether to accept or continue this client
B. Obtaining information about client’s legal obligations
C. Selecting staff for the engagement
D. Obtaining an engagement letter

A

B. Obtaining information about client’s legal obligations

27
Q

Which of the following matters is least likely to be discussed in an engagement letter?
A. The fact that the F/S are responsibility of management
B. The fact that an auditor does not plan to detect material irregularities
C. Assistance to be provided by client personnel
D. Timing of the performance of the examination

A

B. The fact that an auditor does not plan to detect material irregularities

28
Q

To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would

A. Perform tests of details of transactions and balances
B. Review prior-year working papers and the permanent file for the client.
C. Read specialized industry journals
D. Reevaluate client’s internal control environment.

A

B. Review prior-year working papers and the permanent file for the client.

29
Q

A CPA may reduce the audit work on a first time audit by reviewing the working papers of the predecessor auditor. The predecessor should permit the successor to review working papers relating to matters of continuing significance such as those that relate to

A. Extent of reliance on the work of specialists
B. Fee arrangement and summaries of payments
C. Analysis of contingencies
D. Staff hours required to complete the engagement

A

C. Analysis of contingencies

30
Q

The following statements relate to audit programs. Which statement is true?

A. The FRSC publishes a standard audit program and encourages the adoption for general use.

B. The preparation of an audit program is not influenced by the state of the client’s internal control system.

C. An audit program would not contain documentation of the system being reviewed.

D. The audit plan and related program should no longer be changed once started.

A

C. An audit program would not contain documentation of the system being reviewed.

31
Q

The amount or amounts set by the auditor at less than materiality for the FS as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the FS as a whole.

A

Performance materiality.

32
Q

Which best describes why an auditor makes a preliminary estimate of materiality?

A. An estimate is required by GAAS.
B. The estimate provides a basis for evaluating likely misstatements
C. The estimate helps the auditor plan the appropriate evidence to accumulate
D. Estimaing materiality early helps the auditor avoid legal liability.

A

C. The estimate helps the auditor plan the appropriate evidence to accumulate

33
Q

Which of the ff. discoveries would NOT raise the red flag of increased inherent risk?

A. Management bonuses are based on a % of net income.
B. A bond indenture requires a current ratio of at least 3:1
C. Client makes extensive use of notes receivable and notes payable rather than buying and selling on open-account basis.
D. Client is a parent company with a subsidiary.

A

C. Client makes extensive use of notes receivable and notes payable rather than buying and selling on open-account basis

Mas safe yun kasi written document.

34
Q

While performing an audit, Conrad, CPA, decides to restrict the audit risk to 3%. What must be the acceptable level of detection risk, if the inherent risk is 25%, and control risk is 40%?

A

30%

35
Q

The reliance approach (aka systems approach) to an audit is least likely to be appropriate for:

A. Clients with weak internal control
B. Clients that are large in size
C. Clients in specialized industries
D. Clients that are publicly-listed.

A

A. Clients with weak internal control

36
Q

One of the auditor’s major concerns is to ascertain whether the internal control structure is designed to provide reasonable assurance that

A. Profit margins are maximized, and operational efficiency is optimized
B. The chief accounting officer reviews all accounting transactions
C. Corporate morale problems are addressed immediately and effectively
D. Transactions are executed in accordance with management’s general or specific authorization

A

D. Transactions are executed in accordance with management’s general or specific authorization

37
Q

Which of the following would least likely be considered an objective of the internal control structure?

A. Checking the accuracy and reliability of accounting data
B. Detecting management fraud
C. Encouraging adherence to managerial policies
D. Safeguarding assets

A

B. Detecting management fraud

38
Q

Which of the following comes CLOSEST to outlining the auditor’s responsibility for internal control on all financial statement audits?

A. An understanding of the control environment and the accounting system is necessary; an understanding of the control procedures is necessary for areas in which the auditor is performing tests of controls.

B. The auditor must obtain an understanding of each of the five internal control elements sufficient to plan the audit.

C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum.

D. An understanding of the control environment is necessary, but not of the accounting system or control procedures unless control risk is to be assessed at a level less than maximum.

A

B. The auditor must obtain an understanding of each of the five internal control elements sufficient to plan the audit.

39
Q

An objective of a walk-through is to:
A. Verify that the structure has been placed in operation.
B. Replace tests of controls
C. Evaluate major strengths and weaknesses in the client’s structure.
D. Identify weaknesses to be communicated to management in the management letter.

A

A. Verify that the structure has been placed in operation.

40
Q

Which of the ff. is an advantage of describing internal control through the use of a standardized internal control questionnaire?

A. Questionnaires highlight weaknesses in the system.
B. Questionnaires are more flexible than other methods of describing internal control
C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system.
D. Questionnaires provide a clearer and more specific portrayal of a client’s system than other methods of describing internal control.

A

A. Questionnaires highlight weaknesses in the system.

41
Q
The overall attitude and awareness of an entity's BoD concerning the importance of the internal control structure is usually reflected in its:
A. Computer-based controls
B. System of segregation of duties
C. Control environment
D. Safeguards over access to ssets
A

C. Control environment

42
Q

Control procedures do not encompass:
A. Comparison of assets with recorded accountability
B. Design and use of documents
C. Proper safeguards over access to assets
D. An internal audit function

A

D. An internal audit function

43
Q
This term means "to analyze identified risks to conclude on their significance".
A. Estimate
B. Assess
C. Measure
D. Analyze
A

B. Assess

44
Q

A deficiency in internal control exists when:

A. A control is designed, implemented, or operated in such a way that it is unable to prevent, detect, and correct misstatements in the F/S on a timely basis

B. A control necessary to prevent, or detect and correct, misstatements in the F/S on a timely basis is NOT missing.

C. There is a deficiency or combination of deficiencies in internal control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of those charged with governance.

D. All of these choices describe a deficiency in internal control.

A

A. A control is designed, implemented, or operated in such a way that it is unable to prevent, detect, and correct misstatements in the F/S on a timely basis

45
Q

The auditor shall communicate significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis. Such communication:

A. May be done orally or in writing
B. Must be done orally.
C. Must be in writing.
D. Is not required by PSA.

A

C. Must be in writing.

46
Q

In order to ensure unbiased information, record-keeping is typically included in a separate department under the:

A. VP-Operations
B. Treasurer
C. Controller
D. Internal auditor

A

C. Controller

47
Q

Transaction cycles begin and end:
A. At the beginning and end of the fiscal period
B. At the B/S date
C. At Jan. 1 and Dec. 31
D. At the origin and final disposition of the company

A

D. At the origin and final disposition of the company

48
Q

The authority to accept incoming goods in receiving should be based on a

A. Vendor’s invoice
B. Materials requisition
C. Bill of lading
D. Approved purchase order

A

D. Approved purchase order

49
Q

Input documents are typically the responsibility of the:

A. user department that transmits the documents to accounting before processing

B. Accounting department which prepares and records them

C. Production and QC department to see that they are prepared properly.

D. Computer department since they will have to be responsible for inputting them

A

A. User department that transmits the documents to accounting before processing

50
Q

“Control activities” include procedures that pertain to physical controls over access to and use of assets and records. A departure from the purpose of such procedures is that:

A. Access to the safe-deposit box requires two officers.
B. Only storeroom personnel and line supervisors have access to the raw materials storeroom
C. The mail clerk compiles a list of the checks received in the incoming mail
D. Only salespersons and sales supervisors use sales department vehicles.

A

A. Access to the safe-deposit box requires two officers.

51
Q

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations?

A. The internal auditors report to the audit committee of the BoD.

B. The controller reports to the VP for production.

C. The payroll accounting department reports to the chief accountant.

D. The cashier reports to the treasurer.

A

B. The controller reports to the VP for production. It appears that the controller and production department are interdependent.

52
Q

Which of the following statements is true?
A. Accounting for the sequence of pre-numbered documents is a control procedure intended to achieve specific control objectives related to validity

B. Incompatible functions are those that place any person in a position to perpetuate errors or irregularities.

C. If comparison reveals that the assets do not agree with the recorded accountability, it provided evidence of unrecorded or improperly recorded transactions.

D. A chart of accounts is generally prepared in detail to enable the controller to pinpoint budget variance and trace it to a specific department or area of responsibility.

A

C. If comparison reveals that the assets do not agree with the recorded accountability, it provided evidence of unrecorded or improperly recorded transactions.

53
Q

The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by:

A. The amount of assets without reference to the cost of comparison.

B. The nature and amount of the asset and the cost of making the comparison.

C. The cost of the comparison and whether the susceptibility to loss results from unintentional errors or intentional irregularities and/or defalcations.

D. The auditor in consultation with client management.

A

B. The nature and amount of the asset and the cost of making the comparison.