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AUDITING THEORY 2017-2018

CPA Board

TAKE HOME QUIZ – FOR MARCH 3. 2018 Compiled by Daisy B. Medina-Cruz. CPA. MBA

1. The third standard of fieldwork states that sufficient competent evidential matter may, in part, be obtained through inspection,
observation, inquiries, and confirmations, to afford a reasonable basis for an opinion regarding the financial statements under
examination. The evidential matter required by this standard may, in part, be obtained through
a) Analytical procedures. c) Review of the internal control.
b) Auditor working papers. d) Proper planning of the audit engagement.
2. Most of the independent auditor’s work in formulating an opinion on financial statements consists of
a) Considering internal control. c) Examining cash transactions.
b) Obtaining and examining evidential matter. d) Comparing recorded accountability with assets.
3. Management prepares accounting estimates and the auditor is responsible for evaluating the reasonableness of the estimates.
Which of the following would not be an auditor’s objective when evaluating estimates?
a) All accounting estimates which could be material to the financial statements have been developed.
b) The accounting estimates developed by management are accurate with 100% certainty.
c) The accounting estimates developed by management are reasonable.
d) The accounting estimates are presented in accordance with generally accepted accounting principles.
4. It is the responsibility of the auditor to evaluate the reasonableness of the accounting estimates made by management. Which
one of the following approaches would the auditor not use when evaluating the reasonableness of the estimate?
a) Review and test management’s process to develop the estimate.
b) Calculate an independent expectation of the estimate.
c) Confirm the estimate with independent parties.
d) Review subsequent events or transactions occurring prior to completion of fieldwork.
5. Of the following, which is the least persuasive type of audit evidence?
a) Documents mailed by outsider to the auditor. c) Copies of sales invoices inspected by the auditor.
b) Corresponding between auditor and vendors. d) Computations made by the auditor.
6. Which of the following is the least persuasive documentation in support of an auditor’s opinion?
a) Schedules of details of physical inventory counts conducted by the client.
b) Notation of inferences drawn from rations and trends.
c) Notation of appraisers’ conclusions documented in the auditor’s working papers.
d) Lists of negative confirmation requests for which no response was received by the auditor.
7. Failure to detect material peso errors in the financial statements is a risk which the auditor primarily mitigates by
a) Performing substantive tests. c) Evaluating internal control.
b) Performing tests of controls. d) Obtaining a client representation letter.
8. Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess
a) Control risk at below the maximum level. c) The difficulty in controlling the incremental audit risk.
b) Inherent risk at the maximum level. d) Materiality for the accounts tested as insignificant.
9. An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account
balances usually is determined by the
a) Availability of data aggregated at a high level. c) Timing tests performed after the balance sheet date.
b) Relative effectiveness and efficiency of the tests. d) Auditor’s familiarity with industry trends.
10. As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30%
in the preceding year to 20% in the current year. The auditor should
a) Include an explanatory paragraph in the audit report due to the inability of the client company to continue as a going concern.
b) Evaluate management’s performance in causing this decline.
c) Require footnote disclosure.
d) Consider the possibility of a misstatement in the financial statements.
11. Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of
analytical procedures?
a) Whether the data were processed in a computerized system or in manual accounting system.
b) Whether sources within the entity were independent of those who are responsible for the amount being audited.
c) Whether the data were subjected to audit testing in the current or prior year.
d) Whether the data were obtained from independent sources outside the entity from sources within the entity.
12. Which of the following is the most reliable analytical procedure to verify the year-end financial statement balances of a
wholesale business?
a) Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate.
b) Verify commission expense by multiplying sales revenue by the company’s standard commission rate.
c) Verify interest expense, which includes imputed interest, by multiplying long-term debt balances by the year-end prevailing
interest rate.
d) Verify IT tax liability by multiplying total payroll costs by the IT contribution rate in effect during the year.
13. Which of the following statements concerning analytical procedures is correct?
a) Analytical procedures may be omitted entirely for some financial statement audits.
b) Analytical procedures used in planning the audit should not use nonfinancial information.
c) Analytical procedures usually are in effective and efficient for test of controls.
d) Analytical procedures alone may provide the appropriate level of assurance for some assertions.
14. Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?
a) Time and expense summary. c) Progress flowchart.
b) Engagement letter. d) Audit program.
15. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances
to afford a reasonable basis for an opinion?
a) Auditor judgment. b) Materiality. c) Relative risk. d) Reasonable assurance.
16. Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be
interested in reviewing?
a) Analysis of noncurrent balance sheet accounts. c) Analysis of contingencies.
b) Analysis of current balance sheet accounts. d) Analysis of income statement accounts.
17. Which of the following circumstances would most likely cause an auditor to suspect that material fraud exists in a client’s
financial statements?
a) Property and equipment are usually sold at a loss before being fully depreciated.
b) Significant fewer responses to confirmation requests are received than expected.
c) Monthly bank reconciliation usually includes several in-transit items.
d) Clerical errors are listed on a computer-generated exception report.
18. Which of the following conditions would not normally cause the auditor to question whether material errors or fraud exist?
a) Bookkeeping errors are listed on an computer-generated exception report.
b) Differences exist between control accounts and supporting subsidiary records.
c) Transactions are not supported by proper documentation.
d) Differences are disclosed by confirmations.
19. On receiving the bank cutoff statement, the auditor should trace
a) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
b) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
c) Deposits listed on the cut-off statement to deposits in the cash receipts journal.
d) Checks dated subsequently to year-end to the outstanding checks listed on the year-end bank reconciliation.
20. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement
primarily in order to
a) Verify the cash balance reported on the bank confirmation inquiry form.
b) Verify reconciling items on the client’s bank reconciliation.
c) Detect lapping.
d) Detect kiting.
21. A sales cutoff test of billings complements the verification of
a) Sales returns. b) Cash. c) Account receivable. d) Sales allowance.
22. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary
ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?
a) Sales invoices represent bona fide sales.
b) All sales have been recorded.
c) All sales invoices have been properly posted to customer accounts.
d) Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
23. When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing
unrecorded liabilities?
a) Confirmation of negotiable receipts with holders. c) Inspection of receiving and issuing procedures.
b) Review of outstanding receipts. d) Observation of inventory.
24. Which of the following statements best describes the phrase “Philippine Standard on Auditing”?
a) They identify the policies and procedures for the conduct of the audit.
b) They define the nature and extent of the auditor’s responsibilities.
c) They provide guidance to the auditor with respect to planning the audit and writing the audit report.
d) They set forth a measure of the quality of the performance of audit procedures.
25. Which of the following publications does not qualify as a source of generally accepted accounting principles?
a) Accounting interpretations issued by the FASB. c) PICPA Practice Bulletins.
b) PSA Concepts Statements. d) Statements of Financial Standards issued by the FASB
26. Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and fraud?
a) The auditor is responsible for the failure to detect material errors and fraud only when such failure results from the
nonapplication of generally accepted accounting principles.
b) Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.
c) The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or
observed inventories.
d) Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and
fraud may exist.
27. Which of the following is not a procedure performed primarily for the purpose of expressing an opinion on the financial
statements, but may bring possible illegal acts to the auditor’s attention?
a) Consideration of internal control.
b) Review of policies concerning effectiveness of management decision making policies.
c) Test of transactions.
d) Test of balances.
28. An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has
a) Been forced to discontinue operations in a foreign country.
b) Been an annual donor to a local political candidate.
c) Failed to correct material weakness in internal control that were reported after the prior’s audit.
d) Disclosed several subsequent events involving foreign operations in the notes to the financial statements.
29. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor
auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the
a) Adequacy of the preplanned audit program.
b) Ability to establish consistency in application of accounting principles between years.
c) Apparent scope limitation.
d) Integrity of management.
30. The concept of materiality would be least important to an auditor when considering the
a) Effects of a direct financial interest in the client upon the CPA’s independence.
b) Decision whether to use positive confirmations of accounts receivable.
c) Adequacy of disclosure of a client’s illegal act.
d) Discovery of weakness in a client’s internal control structure.
31. While obtaining an understanding of a client’s risk assessment policies, an auditor ordinarily considers how management
a) Identifies risks.
b) Eliminates significant risks.
c) Assesses the likelihood of occurrence of subsequent events.
d) Relate risk assessment to compliance with marketing objectives.
32. 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 board of directors.
b) The controller reports to the vice president of production.
c) The payroll accounting department reports to the chief accountant.
d) The cashier reports to the treasurer.
33. An auditor would most likely be concerned with controls that provide reasonable assurance about the
a) Efficiency of management’s decision-making process.
b) Appropriate prices the entity should charge for its products.
c) Methods of assigning production tasks to employees.
d) Entity’s ability to process and summarize financial data.
34. Which of the following controls would an auditor be least likely to review?
a) Segregation of the asset-handling and recordkeeping functions.
b) Company policy regarding credit and collection efforts.
c) Cost records classified by date of product introduction.
d) Authorization of addition to plant and equipment.
35. The auditor would be least likely to be concerned about internal control as it relates to
a) Land and buildings. b) Common stock. c) Shareholder meeting. d) Minutes of board of directors’ meetings
36. Which of the following would not typically be a control relied upon during an audit?
a) Use of the double-entry system. c) Competent personnel.
b) An internal audit staff. d) A comparison-shopping staff.
37. One important reason why a CPA, during the course of an audit engagement, prepares internal control flowcharts is to
a) Reduce the need for inquiries of client personnel concerning the operations of internal control.
b) Depict the organizational structure and document flow in a single chart for review and reference purposes.
c) Assemble the internal control findings into a comprehensible format suitable for analysis.
d) Prepare documentation that would be useful in the event of a future consulting engagement.
38. When preparing a record of a client’s internal control, the independent auditor sometimes uses a flowchart, which can best be
described as a
a) Pictorial presentation of the flow of instruction in a client’s internal computer system.
b) Diagram which clearly indicates an organization’s internal reporting structure.
c) Graphic illustration of the flow of operations which is used to replace the auditor’s internal control questionnaire.
d) Symbolic representation of a system or series of sequential processes.
39. In connection with the consideration of internal control during an examination of financial statements, the independent auditor
a) Must perform tests of controls for all important controls.
b) Must issue a written communication on reportable conditions, including situations in which none have been identified.
c) Must flowchart major client transaction cycles.
d) Must perform tests of controls to assess control risk at a level lower than the maximum.
40. The auditor should perform tests of controls on
a) Those controls that the auditor plans to use to support an assessment of control risk below the maximum.
b) Those controls in which reportable condition were identified.
c) Those controls that have a material effect upon the financial statement balances.
d) A random sample of the controls that were reviewed.
41. Which of the following is ordinarily considered a test of a control?
a) Send confirmation letters to banks.
b) Count and list cash on hand.
c) Examine signatures on checks.
d) Test the clerical accuracy of inventory listings as of the balance sheet date.
42. Which of the following would be least likely to suggest to an auditor that the client’s management may have overridden
internal control?
a) There are numerous delays in preparing timely internal financial reports.
b) Management does not correct control weakness that it knows about.
c) Differences are always disclosed on a computer exception report.
d) There have been two new controllers this year.
43. Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-
off of a trade account receivable?
a) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting
evidence.
b) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.
c) Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.
d) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the
customers.
44. Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts
receivable?
a) Segregated duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
b) Segregated duties so that no employee has access to both checks from customers and currently from daily cash receipts.
c) Have customers send payments directly to the company’s depositary bank.
d) Request that customers’ payment checks be made payable to the company and addressed to the treasurer.
45. Which of the following is not a basic rule for achieving strong internal control over cash?
a) Separate the cash handling and recordkeeping functions.
b) Decentralized the receiving of cash as much as possible.
c) Deposit each day’s cash receipts by the end of the day.
d) Have bank reconciliations performed by employees independent with respect to handling cash.
46. In order to safeguard the assets through proper internal control, accounts receivable that are written off are transferred to a(n)
a) Separate ledger.
b) Attorney for evidence in collection proceedings.
c) Tax deductions files.
d) Credit manager since customers may seek to reestablish credit by paying.
47. Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson
arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at
Judd’s wholesale prices. Jackson was probably able to accomplish this because of Judd’s poor internal control over
a) Purchase orders. c) Cash receipts.
b) Purchase requisitions. d) Perpetual inventory records.
48. To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a separation of
which of the following functions?
a) Cash disbursement and invoice verification.
b) Invoice verification and merchandise ordering.
c) Physical handling of merchandise received and preparation of receiving reports.
d) Check signing and cancellation pf payment documentation.
49. Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit
most from the additional cost of maintaining an accounts payable subsidiary ledger if
a) There are usually invoices in an unmatched invoice file.
b) Vendor’s request for confirmation of receivable often go unanswered for several months until paid invoices can be reviewed.
c) Partial payments to vendors are continuously made in the ordinary course of business.
d) It is difficult to reconcile vendors’ monthly statements.
50. Which of the following is an effective control that encourages receiving department personnel to count and inspect all
merchandise received?
a) Quantities ordered are excluded from the receiving department copy of the purchase order.
b) Vouchers are prepared by accounts payable department personnel only after they match item count on the receiving report with
the purchase order.
c) Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.
d) Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.
51. Ordinarily in an attest examination report a CPA may report on
Management’s written assertion Subject matter
A Yes Yes
B Yes No
C No Yes
D No No
52. In which of the following ways may suitable criteria appropriately be made available?
Publicly available Included with subject matter Included in CPA’s report
A Yes Yes Yes
B Yes Yes No
C Yes No No
D No Yes Yes
53. Which of the following is least likely to include a reference to the use of a specialist?
a) Unqualified opinion. c) “Except for” qualified opinion.
b) Adverse opinion. d) “Subject to” qualified opinion.
54. For an entity’s financial statements to be presented fairly in conformity with generally accepted accounting principles, the
principles selected should
a) Be applied on a basis consistent with those followed in the prior year.
b) Be approved by the Auditing Standard Board or the appropriate industry subcommittee.
c) Reflect transactions in a manner that presents the financial statements within a range of acceptance limits.
d) Match the principles used by most other entities within the entity’s particular industry.
55. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified
opinion?
Conformity with GAAP Adequacy of disclosure
A Explicitly Explicitly
B Implicitly Implicitly
C Implicitly Explicitly
D Explicitly Implicitly
56. Jojo, an independent auditor, was engaged to perform an examination of the financial statements of Three-R Incorporated 1
month after its fiscal year had ended. Although the inventory count was not observed by Jojo, and accounts receivable were not
confirmed by direct communication with creditors, Jojo was able to gain satisfaction by applying alternative auditing procedures.
Jojos’ auditor’s report will probably contain
a) An “except for” qualification. c) Either qualified opinion or a disclaimer of opinion.
b) An unqualified opinion and an explanatory paragraph. d) A standard unqualified opinion.
57. A lawyer limits a response concerning a litigated claim because the lawyer is unable to determine the likelihood of an
unfavorable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of
potential loss is material in relation to the client’s financial statements considered as a whole?
a) Adverse. b) Unaudited. c) Qualified. d) Unqualified.
58. When an auditor submits a document containing audited financial statements to a client, the auditor has a responsibility to
report on
a) Only the basic financial statements included in the document.
b) The basic financial statements and only the additional information required to be presented in accordance with provision of
Financial Accounting Standards Board.
c) All of the information included in the document.
d) Only the portion of the document which was audited.
59. The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and
statement of cash flows is applied within the framework of
a) Quality control.
b) Generally accepted auditing standards which include the concept of materiality.
c) The auditor’s consideration of the auditor company’s internal control.
d) Generally accepted accounting principles.
60. The first standard of reporting requires that, “the report shall state whether the financial statements are presented in accordance
with generally accepted accounting principles.” This should be construed to require
a) A statement of fact by the auditor. c) An implied measure of fairness.
b) An opinion by the auditor. d) An objective measure of compliance.
61. The fourth reporting standard requires the auditor’s report to either contain an expression of opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard
is to prevent
a) The CPA from reporting on one basic financial statement and not the others.
b) The CPA from expressing different opinions on each of the basic financial statements.
c) Misinterpretations regarding the degree of responsibility the auditor is assuming.
d) Management from reducing its final responsibility for the basic financial statements.
62. An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by
an auditor’s unqualified report. From this the investor may conclude that
a) Any disputes over significant accounting issues have been settled to the auditor’s satisfaction.
b) The auditor is satisfied that Stankey is financially sound.
c) The auditor has ascertained that Stankey’s financial statements have been prepared accurately.
d) Informative disclosures in the financial statements but not necessarily in Stankey’s footnotes are to be regarded as reasonably
adequate.
63. Negative assurance is not permissible in
a) Letters required by security underwriters for data pertinent to SEC registration statements.
b) Reports relating to the results of agreed upon procedures to one or more specified elements, accounts, or items of a financial
statement.
c) Reports based upon a review engagement.
d) Reports based upon an audit of the interim financial statements of a closely held business entity.
64. Jovy, CPA, examined the 2005 financial statements of PPSI. and issued an unqualified opinion on March 10, 2006. On April 2,
2006, Jovy became aware of a 2005 transaction that may materially affect the 2005 financial statements. This transaction would
have been investigated had it come to Jovys’ attention during the course of the examination. Jovy should
a) Take no action because an auditor is not responsible for events subsequent to the issuance of the auditor’s report.
b) Contact PPSI’s management and request their cooperation in investigating the matter.
c) Request that PPSI’s management disclose the possible effects of the newly discovered transaction by adding an unaudited
footnote to the 2005 financial statements.
d) Contact all parties who might relies upon the financial statements and advise them that the financial statements are misleading.
65. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit client believes that
this event could have a significant direct effect on the financial statements. The auditor should
a) Advise management to disclose the event in notes to the financial statements.
b) Disclose the event in the auditor’s report.
c) Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.
d) Advise management to adjust the financial statements.
66. When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the
contingency, the auditor should
a) Insist that the client revised financial statements.
b) Inform the audit committee that the report cannot be relied upon.
c) Take no action regarding the event.
d) Inform the appropriate authorities that the report cannot be relied upon.
67. Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent event
which is labeled unaudited?
a) When the subsequent event does not require adjustment of the financial statements.
b) When the event occurs after completion of fieldwork and before issuance of the auditor’s report.
c) When audit procedures with respect to the subsequent event were not performed by the auditor.
d) When the event occurs between the date of the auditor’s original report and the date of the reissuance of the report.
68. Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under
examination because such events typically represent
a) The culmination of conditions that existed at the balance sheet date.
b) The final estimates of losses relating to casualties occurring in the subsequent events period.
c) The discovery of new conditions occurring in the subsequent events period.
d) The preliminary estimate of losses to new events that occurred subsequent to the balance sheet.
69. Which of the following material events occurring subsequent to the December 31, 2015 balance sheet would not ordinarily
result in an adjustment to the financial statements before they are issued on March 2, 2016?
a) Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for the past 6 years. The debtor
filed for bankruptcy on January 23, 2016.
b) Acquisition of a subsidiary on January 23, 2016, negotiation had begun in December 2013.
c) Settlement of extended litigation on January 23, 2016, in excess of the recorded year-end liability.
d) A 3-for-5 reserve stock spit consummated on January 23, 2016.
70. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not
require disclosure in the financial statements?
a) Sale of the bond or capital stock issue.
b) Loss of plant or inventories as result of fire or flood.
c) A major drop in the quoted market price of the stock of the corporation.
d) Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.
71. Which of the following matters is an auditor required to communicate to an entity’s audit committee?
a) The basis for assessing control risk below the maximum.
b) The process used by management in formulating sensitive accounting estimates.
c) The auditor’s preliminary judgments about materiality levels.
d) The justification for performing substantive procedures at interim dates.
72. When an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable
period of time, the auditor’s responsibility is to
a) Prepare prospective financial information to verify whether management’s plans can be effectively implemented.
b) Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements.
c) Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
d) Consider the adequacy of disclosure about the entity’s possible inability to continue going concern.
73. Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable
period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to
include an explanatory paragraph that specifically uses the phrase(s)
Possible discontinuance of operations Reasonable period of time no to exceed 1 year
A Yes Yes
B Yes No
C No Yes
D No No
74. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable
period of time. If the entity’s disclosures concerning this matter are adequate, the audit report may include a(n)
Disclaimer of opinion Except for qualified opinion
A Yes Yes
B No No
C No Yes
D Yes No
75. A material change in an accounting estimate
a) Requires a consistency modification in the auditor’s report and disclosure in the financial statements.
b) Requires a consistency modification in the auditor’s report but does not require disclosure in the financial statements.
c) Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency
modification in the auditor’s report.
d) Involves the acceptability of the generally acceptable accounting principles used.
76. The objective of the consistency standard is to provide assurance that
a) There are no violation in the formal and presentation of financial statements.
b) Substantially different transactions and events are not accounted for on identical basis.
c) The auditor is consulted before material changes are made in the application of accounting principles.
d) The comparability of financial statements between periods is not materially affected by changes in accounting principles
without disclosure
77. Which of the following narrative disclosures appearing in notes to financial statements would an auditor be most likely to
consider inappropriate?
a) The related-party transaction was consummated on terms no less favorable than those that would have been obtained if the
transaction had been with an unrelated party.
b) The accounts of subsidiaries in which the corporation has more than 50% ownership are fully consolidated.
c) Legal and other costs associated with the covenant-not-to-compete will be amortized using the straight-line method during the
next 3 years.
d) Minor fluctuations in foreign currency exchange rates are reflected in the accompanying financial statements.
78. The auditor who wishes to point out that the entity has sufficient transactions with related parties should disclose this fact in
a) An explanatory paragraph to the auditor’s report.
b) An explanatory note to the financial statements.
c) The body of the financial statements.
d) The “summary of significant accounting policies” section of the financial statements.
79. When management refuses to disclose illegal activities which were identified by the independent auditor, the independent
auditor may be charged with violating the CPA Code of Professional Conduct for
a) Withdrawing from the engagement. c) Failure to uncover the illegal activities during prior audits.
b) Issuing a disclaimer of opinion. d) Reporting these activities to the audit committee.
80. Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should
obtain written management representations acknowledging that management has
a) Identified and disclosed all laws and regulations that have a direct material effect on its financial statements.
b) Implemented internal control policies and procedures designed to detect all illegal acts.
c) Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.
d) Employed internal auditor who can report their findings, opinion, and conclusions objectively without fear of political
repercussion.