PSA CHALLENGE #7

NAME:____________________________________________ SCORE:_________________

1. The series of tasks and records of an entity by which transactions are processed as a
means of maintaining financial records.
a. Computer information system c. Accounting system
b. Internal control system d. Control environment
2. The measure of the quality of audit evidence and its relevance to a particular assertion and
its reliability.
a. Sufficiency c. Significance
b. Appropriateness d. Assurance
3. It serves as a set of instructions to assistants involved in the audit and as a means to control
the proper execution of the work.
a. Audit program c. Engagement letter
b. Overall audit plan d. Internal control questionnaire
4. Detection risk is
a. The risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated.
b. The risk that a misstatement, that could occur in an account balance or class of
transactions and that could be material individually or when aggregated with
misstatements in other balances or classes, will not be prevented or detected and
corrected on a timely basis by the accounting and internal control systems.
c. The risk that an auditor's substantive procedures will not detect a misstatement that
exists in an account balance or class of transactions that could be material, individually
or when aggregated with misstatements in other balances or classes.
d. The susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated with misstatements in other
balances of classes, assuming that there were no related internal controls.
5. Tolerable error means
a. An error that arises from an isolated event that has not recurred other than on
specifically identifiable occasions and is therefore not representative of errors in the
population.
b. An error that the auditor expects to be present in the population.
c. The maximum error in a population that the auditor is willing to accept.
d. The possibility that the auditor's conclusion, based on a sample may be different from
the conclusion reached if the entire population were subjected to the same audit
procedure.
6. The current period’s auditor who did not audit the prior period’s financial statements is called
a. Predecessor auditor. c. Incoming auditor.
b. Other auditor. d. Principal auditor
7. Principal auditor is
a. The auditor who audited and reported on the prior period's financial statements and
continues as the auditor for the current period.
b. A current period's auditor who did not audit the prior period's financial statements.
 c. The auditor who was previously the auditor of an entity and who has been replaced by
an incoming auditor.
d. The auditor with responsibility for reporting on the financial statements of an entity
when those financial statements include financial information of one or more
components audited by another auditor.
8. They are not presented as complete financial statements capable of standing alone, but are
an integral part of the current period.
a. Corresponding figures c. Supplementary report
b. Comparative financial statements d. Notes of financial statements
9. The applications of auditing procedures using the computer as an audit tool refer to
a. Integrated test facility c. Auditing through the computer
b. Data-based management system d. Computer assisted audit techniques
10. A collection of files that is shared and used by a number of different users.
a. Database c. Master file
b. Information file d. Transaction file
11. A report, separate from the financial statements, in which an entity provides third parties
with qualitative information on the entity's commitments towards the environmental
aspects of the business, its policies and targets in that field, its achievement in managing
the relationship between its business processes and environmental risk, and quantitative
information on its environmental performance.
a. Environmental performance report c. Environmental risk
b. Annual report d. Special purpose audit report
12. Comprises officers and others who also perform senior managerial functions.
a. Management c. Audit committee
b. Governance d. Board of directors
13. It exists when other information contradicts information contained in the audited financial
statements.
a. Material inconsistency c. Material weaknesses
b. Material misstatement of fact d. Misstatement
14. The policies and procedures adopted by a firm to provide reasonable assurance that all
audits done by the firm are being carried out in accordance with the Objective and General
Principles Governing an Audit of Financial Statements.
a. Internal controls c. Peer review
b. Quality controls d. General controls
15. When an entity has the ability to control the other entity or exercise significant influence over
the other entity in making financial and operating decisions manifest:
a. Related parties c. Decentralization
b. Related services d. Centralized operations
16. Refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit.
a. Scope of an audit c. Audit program
b. Scope of a review d. Scope limitation
17. It relates to materiality of the financial statement assertions affected by the computer
processing.
 a. Threshold c. Complexity
b. Relevance d. Significance
18. A report issued in connection with the independent audit of financial information other than
an auditor's report on financial statements.
a. Special purpose auditor's report c. Annual report
b. Compilation report d. Modified auditor’s report
19. Substantive procedures are tests performed to obtain audit evidence to detect material
misstatements in the financial statements. These include
a. Test of details of transactions c. Substantive analytical procedures
b. Test of details of balances d. All of the above.
20. Involves tracing a few transactions through the accounting system.
a. Test of controls c. Analytical procedures
b. Walk-through test d. Substantive procedures
21. Assurance services are best described as
a. Services designed for the improvement of operations, resulting in better outcomes.
b. Independent professional services that improve the quality of information, or its
context, for decision makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on
the results of an audit.

22. Assurance services least likely involve

a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.
23. Which of the following statements is (are) true regarding the provision of assurance
services?
a. The third party who receives the assurance generally pays for the assurance received.
b. Assurance services always involve a report by one person to a third party on which an
independent organization provides assurance.
c. Assurance services can be provided either on information or processes.
d. All of the above.
24. In performing an attestation engagement, a CPA typically
a. Supplies litigation support services.
b. Assesses control risk at a low level.
c. Expresses a conclusion about an assertion.
d. Provides management consulting advice.
25. Which of the following services would be most likely to be structured as an attest
engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data base system for the revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements
of specified laws.
d. The compilation of a client’s forecast information.
26. Which of the following is broadest in scope?
a. Audits of financial statements. c. Internal control audit.
b. Assurance services. d. Attestation services.
27. Independent auditing can be described as
a. A branch of accounting.
b. A professional activity that measures and communicates financial and business data.
c. A discipline which attests to the results of accounting and other functional operations
and data.
d. A regulating function that prevents the issuance of erroneous or improper financial
information.
28. A financial statement audit is designed to
a. Provide assurance on internal control and to identify reportable conditions.
b. Detect error or fraud in the financial statements, regardless of whether or not the error
or fraud is material.
c. Obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether caused by error or fraud.
d. Obtain absolute assurance on the financial statements and express an opinion on the
financial statements.
29. Which of the following best describes why an independent auditor is asked to express an
opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a company’s financial
position and changes in financial position and operations without the expertise of an
independent auditor.
b. It is management’s responsibility to make available independent aid in the preparation
of the financial information shown in the financial statements.
c. The opinion of an independent party is needed because a company may not be
objective with respect to its own financial statements.
d. It is a customary courtesy that shareholders of a company receive an independent
report on management’s status in managing the affairs of the business.
30. An audit of the financial statements of Camden Corporation is being conducted by an
external auditor. The external auditor is expected to
a. Express an opinion as to the fairness of Camden's financial statements.
b. Express an opinion as to the attractiveness of Camden for investment purposes.
c. Certify to the correctness of Camden's financial statements.
d. Critique the wisdom and legality of Camden's business decisions.
31. A type of audit the purpose of which is to determine whether the auditee is following specific
procedures or rules set down by some higher authority
a. Operational audit. c. Financial
audit.
b. Compliance audit. d.
Management audit.
32. A technique for regularly and systematically appraising a unit of function and its effectiveness
against corporate and industry standards with the objective of assuring management that its
aims are being carried out and/or identifying conditions capable of being improved
a. Financial auditing. c. Operations
auditing.
 b. Compliance tests. d.
Management auditing.
33. A detailed examination of the utilization of the resources of the company, including the
organization structure to carry out objectives, to indicate areas of increased efficiency and
possible cost reduction is
a. Internal audit. c. Management audit.
b. Audit of assets. d. Financial
audit.
34. Which of the following types of audits are most similar?
a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. Internal audits and independent financial statement audits.
35. To make the internal audit department independent, he should report directly to the
a. Board of Directors. c.
Stockholders.
b. Audit committee. d. Controller.
36. An independent audit
a. Supports an internal audit.
c. Duplicates an internal audit.
b. Negates an internal audit.
d. Complements an internal audit.
37. The members of the Commission on Audit should
a. Be a member of the bidding committee of the agency.
b. Hold office for nine years without reappointment.
c. Be a commissioner and an associate commissioner.
d. Be a CPA or member of the Bar with ten years experience.
38. Besides expressing an opinion on the fairness of financial statement presentation, a
government auditor normally includes audit of effectiveness, compliance as well as
a. Internal control. c. Mathematical accuracy.
b. Economy. d. Risk evaluation.
39. Governmental effectiveness (program) auditing seeks to determine whether the desired
results are being achieved and objectives are being met. The first step in the performance
of such an audit would be:
a. Evaluate the system used to measure results.
b. Determine the sampling frame to use in studying the system.
c. Collect and analyze quantifiable data.
d. Identify the legislative intent of the program being audited.
40. A pervasive characteristic of a CPA’s role in a Management Consulting Services
engagement is that of being a(n)
a. Objective advisor. c. Computer specialist.
b. Independent practitioner. d. Confidential reviewer.
41. Which one of the following is not a logical function of a CPA in public accounting practice?
a. Attest function. c. Tax practice.
 b. Supervision of internal audit staff. d. Management consulting services.

[42.] The quality of performance of an auditor is measured by the statements emanating from
the:
a. Accounting Standards Council
b. Quality Control Standards
c. Auditing Standards and Practices Council
d. Interpretations of Accountants in Practice

42.[43.] The Philippine Standards on Auditing issued by ASPC

a. Are applicable only when an independent audit involving an expression of an opinion on
financial statements is carried out.
b. Are the only authoritative source of auditing standards for members of the accountancy
profession in the Philippines.
c. Are general guidelines to help auditors.
d. Require that in no circumstances would an auditor may judge it necessary to depart
from a PSA, even though such a departure may result to more effective achievement
of the objective of an audit.
43.[44.] Williams & Co., a large international CPA firm, is to have an “external peer review.” The
peer review will most likely be performed by
a. Employees and partners of Williams & Co. who are not associated with the particular
audits being reviewed.
b. Audit review staff of the Securities and Exchange Commission.
c. Audit review staff of the American Institute of Certified Public Accountants.
d. Employees and partners of another CPA firm.
44.[45.] One of the advantages of the fixed fee (or flat sum) basis of billing a client is that the
a. CPA’s compensation is more directly related to the quality of his service rather than to
time spent.
b. CPA is assured of avoiding a loss on the engagement even if he underestimates his
costs.
c. Fixed fee method is particularly effective for measuring charges for routine
engagements.
d. Client pays for exactly what he gets in terms of work performed.
45.[46.] Which of the following is not one of the function of the Board of Accountancy as
specifically provided under RA 9298?
a. To determine and prescribe minimum requirements leading to the admission of
candidates to the CPA examination.
b. To investigate violations of the Accountancy Law and the rules and regulations
promulgated thereunder.
c. To perform visitorial powers or review professional work of accounting practitioners in
a general or random basis.
d. After due process, to suspend, revoke, or reissue certificates of registration for causes
provided for by law by the rules and regulations promulgated therefor.
46.[47.] No person shall serve the Professional Regulatory Board of Accountancy for more than
a. 3 years b. 6 years c. 9 years d. 12 years
47.[48.] The Accountancy Law provided that a CPA certificate may be suspended or revoked on
grounds except
a. Immoral or dishonorable conduct.
b. Gross negligence or incompetence in the practice of profession.
c. Refusal to accept an audit engagement with a government corporation.
d. Conduct discreditable to the accounting profession.
48.[49.] Under the IRR of RA 9298, if a partner in a two-member partnership dies, the surviving
partner may continue to practice as an individual under the existing firm title which
includes the deceased partner’s name
a. For a period of time not to exceed five years.
b. For a period of time not to exceed two years.
c. Indefinitely.
d. Until the partnership payout to the deceased partner’s estate is terminated.
49.[50.] Which of the following is required for a partnership for public accountancy practice?
a. At least one of the partners must be a CPA.
b. All partners must be PICPA members.
c. All partners must be CPAs.
d. Firm name must contain names of partners only.
50.[51.] Which of the following statements best explains why the CPA profession has found it
essential to promulgate ethical standards and to establish means for ensuring their
observance?
a. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
b. Ethical standards that emphasize excellence in performance over material rewards
establish a reputation for competence and character.
c. A distinguishing mark of a profession is its acceptance of responsibility to the public.
d. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.
51.[52.] Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a
project study on the expanded food vending operations of the corporation with the
corresponding staffing and compensation package for its executive staff. Dimalanta,
however, has primarily auditing expertise and only in general merchandising operations.
Mr. Dimalanta may properly
a. Accept the engagement and carry it out consistent with GAAS.
b. Accept the engagement but exercise due professional care.
c. Accept the engagement and acquire the necessary competence or consult with
established authorities.
d. Decline the engagement for lack of experience or competence in an entirely new line
of specialization.
52.[53.] During the course of an audit engagement, the CPA needed additional studies and
consultation with experts. This additional study and consultation is deemed to be
a. An unusual practice which should have voided the audit engagement.
b. Lack of competence on the part of the CPA.
c. An appropriate part of the professional conduct of the audit engagement.
d. Undertaken as a responsibility of management.
53.[54.] After beginning an audit of a new client, Larkin, CPA, discovers that the professional
competence necessary for the engagement is lacking. Larkin informs management of the
situation and recommends another CPA, and management engages the other CPA. Under
these circumstances
a. Larkin's lack of competence should be construed to be a violation of GAAS.
b. Larkin may request compensation from the client for any professional services rendered
to it in connection with the audit.
c. Larkin's request for a commission from the other CPA is permitted because a more
competent audit can now be performed.
d. Larkin may be indebted to the other CPA since the other CPA can collect from the client
only the amount the client originally agreed to pay Larkin.
54.[55.] On an audit engagement performed by a CPA firm with one office, at the minimum,
knowledge of the relevant professional accounting and auditing standards should be held
by
a. The auditor with final responsibility for the audit.
b. All professionals working upon the audit.
c. All professional working upon the audit and the partner in charge of the CPA firm.
d. All professionals working in the office.
55.[56.] A CPA who is seeking to sell an accounting practice must
a. Not allow a peer review team to look at working papers and tax returns without
permission from the client prior to consummation of the sale.
b. Not allow a prospective purchaser to look at working papers and tax returns without
permission from the client.
c. Give all working papers and tax returns to the client.
d. Retain all working papers and tax returns for a period of time sufficient to satisfy the
statute limitations.
56.[57.] Smith, CPA, issued an “except for” opinion on the financial statements of the Wald
Company for the year ended December 31, 2005. Wald has engaged another firm of
CPAs to make a second audit. The local bank has knowledge of Smith’s audit and has
asked Smith to explain why the financial statements and his opinion have not been made
available.
a. Smith cannot provide the bank with information about Wald under any circumstances.
b. If Wald consents, Smith may provide the bank with information concerning Wald.
c. If the other firm of CPAs consents, Smith may provide the bank with information
concerning Wald.
d. The only way the bank can obtain information concerning Smith’s audit is to obtain it
by subpoena.
57.[58.] Under the Code of Professional Ethics, which of the following may a practicing CPA do
in connection with educational seminars?
a. Send announcements about his appearance on a seminar program to non-clients or
invite them to attend.
b. Sponsor a seminar and send invitations to non-clients.
c. Allow himself to be listed as a tax expert on the seminar announcement.
d. Distribute firm literature at the seminar to non-clients on a relevant topic being
discussed at the seminar.
58.[59.] A CPA, wrote an article for publication in PICPA Accountants Journal. The Code of
Professional Ethics would be violated if the CPA allowed the article to state that the CPA
was a
a. Member of PICPA
b. Professor at a school of professional accountancy
c. Partner in a national CPA firm
d. Practitioner specializing in providing tax services.
59.[60.] Ethically, the auditor could
a. Advertise only as to his expertise in preparing income tax returns.
b. Base his audit fee on a percentage of the proceeds of his client's stock issue.
c. Own preferred stock in a corporation which is an audit client.
d. Perform an examination for a financially distressed client at less than his customary
fees.
60.[61.] According to the profession's ethical standards, an auditor would be considered
independent in which of the following instances?
a. The auditor's checking account, which is fully insured by a PDIC, is held at a client
financial institution.
b. The auditor is also an attorney who advises the client as its general counsel.
c. An employee of the auditor donates service as treasurer of a charitable organization that
is a client.
d. The client owes the auditor fees for two consecutive annual audits.
61.[62.] A CPA purchased a stock in a client corporation and placed it in a trust as an educational
fund for the CPA's minor child. The trust securities were not material to the CPA but were
material to the child's personal net worth. Would the independence of the CPA be
considered to be impaired with respect to the client?
a. Yes, because the stock would be considered a direct financial interest and consequently,
materiality is not a factor.
b. Yes, because the stock would be considered an indirect financial interest that is material
to the CPA's child.
c. No, because the CPA would not be considered to have a direct financial interest in the
client.
d. No, because the CPA would not be considered to have a material indirect financial
interest in the client.
62.[63.] Which of the following legal situations would be considered to impair the auditor's
independence?
a. An expressed intention by the present management to commence litigation against the
auditor alleging deficiencies in audit work for the client, although the auditor considers
that there is only a remote possibility that such a claim will be filed.
b. Actual litigation by the auditor against the client for an amount not material to the auditor
or to the financial statements of the client arising out of disputes as to billings for
management advisory services.
c. Actual litigation by the auditor against the present management alleging management
fraud or deceit
d. Actual litigation by the client against the auditor for an amount not material to the auditor
or to the financial statements of the client arising out of disputes as to billings for tax
services.
63.[64.] Which of the following is not prohibited by the Code of Professional Ethics for CPAs?
 a. Advertising and solicitation of clients.
b. Payment of commission to obtain a client.
c. Receiving a contingent fee on a tax case before the Bureau of Internal Revenue.
d. Offering employment to a staff member of another CPA without first informing the CPA.
64.[65.] The CPA in public practice violates the Code of Professional Ethics for CPAs if he
accepts a fee which was
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Determined based on the results of judicial proceedings.
d. Payable after a specified finding was obtained.
65.[66.] Warner, CPA, places a 2” x 2” display advertisement in a national financial newspaper.
The advertisement reads: “Wanted: Outgoing CPA with partnership potential. Must have
5 years experience in a tax department of a CPA firm. Reply Box 14344.” Under the
Code of Professional Ethics such an advertisement would
a. Violate the provisions dealing with advertising.
b. Violate the provisions dealing with specialization.
c. Violate the provisions dealing with encroachment.
d. Not be a violation.
66.[67.] A practicing CPA is allowed by the CPA Code of Ethics to do the following, except
a. Announce the change in office location in a newspaper.
b. List his first name in the building lobby directory in good taste and modest size.
c. Include his tax account number and membership in PICPA on his stationery.
d. List his office telephones in the PLDT directory in box or bold type.

67.[68.] Inclusion of which of the following in a promotional brochure published by a CPA firm
would be most likely to result in a violation of the AICPA rules of conduct?
a. Reprints of newspaper articles which are laudatory with respect to the firms expertise.
b. Services offered and fees for such services, including hourly rates and fixed fees.
c. Educational and professional attainments of partners.
d. Testimonials and endorsements.

68.[69.] May a CPA hire for the CPA’s public accounting firm a non-CPA systems analyst who
specializes in developing computer systems?
a. Yes, provided the CPA is qualified to perform each of the specialist’s tasks.
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s
end product.
c. No, because non-CPA professionals are not permitted to be associated with CPA firms
in public practice.
d. No, because developing computer systems is not recognized as a service performed
by public accountants.

69.[70.] A violation of the profession's ethical standards would most likely occur when a CPA who
a. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
b. Writes a newsletter on financial management also permits a publishing company to solicit
subscriptions by direct mail.
c. Is controller of a bank permits the bank to use the controller's CPA title in the listing of
officers in its publications.
d. Is the sole shareholder in a professional accountancy corporation that uses the
designation "and company" in the firm title.
70.[71.] Which of the following acts by a CPA who is not in public practice would most likely be
considered a violation of the ethical standards of the profession?
a. Using the CPA designation without disclosing employment status in connection with
financial statements issued for external use by the CPA's employer.
b. Distributing business cards indicating the CPA designation and the CPA's title and
employer.
c. Corresponding on the CPA's employer's letterhead, which contains the CPA designation
and the CPA's employment status.
d. Compiling the CPA's employer's financial statements and making reference to the CPA's
lack of independence.

71.[72.] Which of the following is required if the professional accountant uses experts who are
not professional accountants?
a. The ultimate responsibility for the professional service is assumed by the expert who is
not a professional accountant.
b. The professional accountant is discouraged to engage the services of experts who are
not a professional accountant.
c. The professional accountant must take steps to see that such experts are aware of
ethical requirements.
d. Experts who are not professional accountants need not be informed of ethical
requirements because they are not members of the Accountancy profession.

72.[73.] The Rules of Conduct will ordinarily be considered to have been violated when the
professional accountant represents that specific consulting services will be performed for a
stated fee and it is apparent at the time of the representation that the
a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than the fees charged by other professional
accountants for comparable services
c.Fee was a competitive bid.
d. Professional accountant would not be independent.

73.[74.] The lead engagement partner should be rotated after a pre-defined period, normally no
more than
a. 2 years b. 3 years c. 5 years d. 7 years

74.[75.] An auditor should recognize that the application of auditing procedures may produce
evidential matter indicating the possibility of errors and irregularities and therefore should
a. Design audit tests to detect unrecorded transactions.
b. Extend the work to audit most recorded transactions and records of an entity.
c. Plan and perform the engagement with an attitude of professional skepticism.
d. Not depend on internal accounting control features that are designed to prevent or
detect errors or irregularities.

75.[76.] Audits of financial statements are designed to obtain assurance of detecting material
misstatements due to
a b c d
Errors Yes Yes Yes No
Fraudulent financial reporting Yes Yes No Yes
Misappropriation of assets Yes No Yes No
76.[77.] Which of the following factors is most important concerning an auditor's responsibility to
detect errors and irregularities?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and
the misapplication of accounting principles.
b. The probability that unreasonable accounting estimates result from unintentional bias or
intentional attempts to misstate the financial statements.
c. The possibility that management fraud, defalcations, and the misappropriation of assets
may indicate the existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions may cause the financial statements
to contain material misstatements.

77.[78.] In connection with the examination of financial statements, an independent auditor

could be responsible for failure to detect a material fraud
a. Statistical sampling techniques were not used in the audit engagement.
b. The auditor planned the work in a hasty and inefficient manner.
c. Auditors performing important parts of the work failed to discover a close relationship
between the treasurer and the cashier.
d. The fraud was perpetuated by one client employee who circumvented the existing
internal controls.

78.[79.] An error in which an item is posted to the wrong personal account, or the incorrect
calculation of an amount constituting an original entry is a(n)
a. Error of omission. c. Error of
principle.
b. Error of commission. d.
Compensating error.

79.[80.] The term “error” refers to unintentional misrepresentations of financial information.

Examples of errors are when:
(1) Assets have been misappropriated.
(2) Transactions without substance have been recorded.
(3) Records and documents have been manipulated and falsified.
(4) The effects of transactions have been omitted from records or documents.
a. All of the above statements are true.
b. Only statements (2) and (4) are true.
c. Only statements (1) and (3) are true.
d. All of the above statements are false.

80.[81.] Auditing standards require that auditors be aware of relevant factors relating to
fraudulent reporting. Which of the following statements is false concerning fraudulent
reporting?
a. Fraud frequently involves a pressure or an incentive to commit fraud and a perceived
opportunity to do so.
b. Two types of fraud relevant to the auditor include material misstatements arising from
fraudulent financial reporting and material misstatements arising from misappropriation
of assets.
c. Fraud involves actions of management but excludes the actions of employees or third
parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go
undetected by the auditor.
81.[82.] Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory,
while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions
by debiting an expense account, thus overstating expenses.
c. An employee steals inventory, and the “shrinkage” is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the
cost is reported as a miscellaneous operating expense.

82.[83.] Lapping is
a. Making the financial statements indicate a more favorable position by giving effect to
transactions is a period other than that in which these actually occurred.
b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the
accounting period a check drawing on one bank account in another bank account
without making the necessary deduction in the balance of the first bank.
c. An irregularity that conceals cash shortages by a delay in recording cash collections,
retaining a customer's payment on credit sales and covering up the shortage with
subsequent cash receipts.
d. A kind of fraud committed by making entry of fictitious payments or failure to enter
receipts.

83.[84.] In general, material fraud perpetrated by which of the following are most difficult to
detect?
a. Cashier. c. Internal auditor.
b. Keypunch operator. d. Controller.

84.[85.] Certain management characteristics may heighten the auditor's concern about the risk
of material misstatements. The characteristic that is least likely to cause concern is that
management
a. Operating and financing decisions are made by numerous individuals.
b. Commits to unduly aggressive forecasts.
c. Has an excessive interest in increasing the entity's stock price through use of unduly
aggressive accounting practices.
d. Is interested in inappropriate methods of minimizing earnings for tax purposes.

85.[86.] Which of the following information discovered during an audit most likely would raise a
question concerning possible illegal acts?
a. Related party transactions, although properly disclosed, were pervasive during the
year.
b. The entity prepared several large checks payable to cash during the year.
c. Material internal control weaknesses previously reported to management were not
corrected.
d. The entity was a campaign contributor to several local political candidates during the
year.

86.[87.] In a financial statement audit, the auditor should consider categories of fraud risk
factors relating to misstatements arising from (1) fraudulent financial reporting and (2)
misappropriation of assets. Which of the following is a category of risk factors that should
be considered in relation to misstatements arising from misappropriation of assets?
a. Industry conditions. c. Management’s characteristics.
 b. Operating characteristics. d. Controls.

87.[88.] The auditor is most likely to presume that a high risk of a defalcation exists if
a. The client is a multinational company that does business in numerous foreign
countries.
b. The client does business with several related parties.
c. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
d. Inadequate employee training results in lengthy EDP exception reports each month.

88.[89.] Which of the following characteristics most likely would heighten an auditor’s concern
about the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity’s stock.
c. Management places substantial emphasis on meeting earnings projection.
d. The rate of change in the entity’s industry is slow.

89.[90.] Which of the following circumstances most likely would cause an auditor to consider
whether material misstatements exist in an entity’s financial statements?
a. Management places little emphasis on meeting earnings projections.
b. The board of directors makes all major financing decisions.
c. Reportable conditions previously communicated to management are not corrected.
d. Transactions selected for testing are not supported by proper documentation.

90.[91.] Which of the following circumstances most likely would cause an auditor to believe that
material misstatements may exist in an entity’s financial statements?
a. Accounts receivable confirmation requests yield significantly fewer responses than
expected.
b. Audit trails of computer-generated transactions exist only for a short-time.
c. The chief financial officer does not sign the management representation letter until the
last day of the auditor’s fieldwork.
d. Management consults with other accountants about significant accounting matters.

91.[92.] Which of the following inquiries are auditors required to make of management regarding
fraud?
a. Whether management has ever intentionally violated the securities law.
b. Whether management has any knowledge of fraud that has been perpetrated on or
within the entity.
c. Management’s attitudes toward its employees.
d. Auditors are not required to make inquiries of management relating to fraud.

92.[93.] When fraud has been identified, CPA responsibility consists of

a. Report the matter to the police. c. He
should have prevented it.
b. He is not at all responsible.
d. Determination of its extent.

93.[94.] Which of the following is correct concerning the required documentation in the working
papers of the performance of the assessment of the risk of material misstatement due to
fraud?
 a. All risk factors considered should be documented and the response to each
documented.
b. Those risk factors identified and the auditor’s response to them should be
documented.
c. The major categories of risk factors must be identified, but the particular responses to
risk factors identified need not be documented.
d. No specific documentation is required.
94.[95.] When an auditor becomes aware of a possible illegal act by a client, the auditor should
obtain an understanding of the nature of the act to
a. Evaluate the effect on the financial statements.
b. Determine the reliability of management’s representation.
c. Consider whether other similar acts may have occurred.
d. Recommend remedial actions to the audit committee.

95.[96.] Which of the following statements concerning illegal acts by clients is correct?
a. An auditor's responsibility to detect illegal acts that have a direct and material effect on
the financial statements is the same as that for errors and irregularities.
b. An audit in accordance with GAAS normally includes audit procedures specifically
designed to detect illegal acts that have an indirect but material effect on the financial
statements.
c. An auditor considers illegal acts from the perspective of the reliability of management's
representations rather than their relation to audit objectives derived form financial
statement assertions.
d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect
on the financial statements.

96.[97.] Detection of noncompliance, regardless of materiality, requires considerations of the following:

a b c d
Integrity of management Yes Yes Yes No
Possible effect on other aspects of the audit. Yes Yes No Yes
Legal determination of the act of non- Yes No Yes No
compliance.

97.[98.] If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing
from the engagement, then the auditor should
a. Notify all parties who may rely upon the company’s financial statements of the
company’s illegal act.
b. Consult with legal counsel as to what other action, if any, should be taken.
c. Return all incriminating evidence and working papers to the client’s audit committee for
follow-up.
d. Contact the successor auditor to make the successor aware of the possible
consequences of relying on management’s representations.

98.[99.] The regular examination of financial statements is not primarily designed to disclose
fraud and other irregularities although their discovery may result. Normal audit procedures
are more likely to detect a fraud arising from
a. Forgeries on company checks.
b. Failure to record cash receipts for services rendered.
c. Theft of inventories.
d. Collusion on the part of several employees.
99.[100.] An entity's financial statements were misstated over a period of years due to large
amounts of revenue being recorded in journal entries that involved debits and credits to an
illogical combination of accounts. The auditor could most likely have been alerted to this
irregularity by
a. Scanning the general journal for unusual entries.
b. Performing a revenue cut-off test at year-end.
c. Tracing a sample of journal entries to the general ledger.
d. Examining documentary evidence of sales returns and allowances recorded after year-
end.