III.

Definition/Discussion/Enumeration

1 define audit evidence 2%. Audit evidence is all the information used by the auditor in arriving at the
conclusions on which the audit opinion is based.

2 distinguish between sufficiency and appropriateness of evidence 6%. Sufficiency is the measure of the
quantity of audit evidence; appropriateness is the measure of the quality of audit evidence and its
relevance to a particular assertion and its reliability.

3 name at least 6 factors influencing the auditor’s judgment as to what is sufficient appropriate audit
evidence 6%.

(1) Auditor’s assessment of the nature and level of inherent risk at both the financial statement level
and the account balance or class of transactions level.

(2) Nature of accounting and internal control systems and the assessment of the control risk.

(3) Materiality of the item being examined.

(4) Experience gained during previous audit.

(5) Results of audit procedures, including fraud or error which may have been found.

(6) Source and reliability of information available.

4 what are the two aspects of accounting and internal control systems about which the auditor would
obtain audit evidence? Explain briefly. 4%

(1) Design: the accounting and internal control systems are suitably designed to prevent and/or detect
and correct material misstatements.

(2) Operation: the systems exist and have operated effectively throughput the relevant period.

5 name at least 4 factors that affect the appropriate ness or completeness of audit evidence. 4% (1)
Relevance of the evidence to the particular assertion being tested. (2) Objectivity of the evidence. (3)
Qualifications of the provider of the evidence. (4) Timeliness of the evidence.

6 define external, external-internal, and internal documentary evidence generally. 6%

External documentary evidence is evidential matter obtained from the other party to an arm’s-length
transaction or from outside independent agencies.

External-internal documentary evidence is documentary material that originates outside the bounds of
the client’s data processing system but which has been received and processed by the client.

Internal documentary evidence consists of documentary material that is produced, circulates, and is
finally stored within the client’s information system.

7 what is an arm’s-length transaction? 2% the concept of an arm's length transaction allows the market
to ensure that both parties in the deal are acting in their own self-interest and are not subject to any
pressure or duress from the other party.
8 what can an auditor do to improve the effectiveness of confirmation request? 5% Auditors can help
the effectiveness of confirmation requests by:

A. Having the confirmation letters printed on the client’s letterhead and signed by a client officer.
B. Being careful to be assured of reliable addresses for recipients; that is, being assured that the
confirmations are not misdirected (for example, to a client’s accomplices in fraud).
C. Asking confirmation of information that recipient can supply, like the amount of a balance or the
amounts of specified invoices or notes (not the balances of homeowners’ mortgages or financial
amounts, like certificates of deposit with accrued interest, for which people usually do not keep their
own accounting records).
D. Controlling the mailing and return of confirmations so the client cannot tamper with them.
E. Receiving the reply directly, so the client cannot intercept and alter them.

9 differentiate between factual and influential evidence, giving an example of each. 4% Factual evidence
is direct evidence, in that conclusions may be drawn from the evidence without further corroboration. An
example of factual audit evidence is physical observation of inventory for existence. Inferential evidence
is indirect, in that direct conclusions cannot be drawn from the evidence. The auditor typically examines
other evidence to further corroborate the inferences drawn. An oral statement by a product manager
that one or more products are fully saleable and not obsolete is an example of inferential evidence. The
auditor may perform inventory turnover tests and/or determine the date of last sale of the product to
further corroborate the product manager’s statement.

10 how does the auditor determine when sufficient evidence has been obtained? 2% Sufficiency of audit
evidence is a matter of audit judgment. Materiality and the quality of internal control are important
ingredients in determining sufficiency. If internal control produces over sales processing and cash
receipts, for example, are effective, the auditor may elect to confirm fewer customers’ accounts
receivables than under conditions of weak internal control.

11 name the primary objective served by the gathering of physical evidence. Give three examples of
physical evidence? 2% Physical evidence tests the existence assertion. Examples of physical evidence
are inventory observation, examination of securities, inspection of plant asset additions, and count of
cash on hand.

12 what is the principal factor determining the strength of documentary evidence? 2% the quality of
existing internal control is the major factor supporting the strength of documentary evidence. A voucher
produced under conditions of strong internal control over the processing of vendors’ invoices, for
example, possesses greater validity and is therefore stronger evidence than vouchers produced under
weak control conditions.

13 define accounting estimate and give five examples of accounting estimates. 7%

Auditing standards define an accounting estimate as “an approximation of a financial statement element,
item or amount.” Examples of accounting estimates include allowance for uncollectible accounts,
obsolete inventory, useful lives and residual values of fixed assets, natural resources and intangibles,
accruals for taxes on real and personal property, accruals based on actual assumptions in pension plans,
contract revenue using percentage of completion method, litigation losses, fair values in nonmonetary
exchanges, and current values in personal financial statements.
14 what factors should an auditor consider in evaluating the reasonableness of accounting estimates?
2% in evaluating the reasonableness of accounting estimates, an auditor should consider the internal
controls related to the estimates in order to reduce the likelihood of material misstatements in the
estimates, whether the accounting estimates are reasonable given the situation, and whether the
accounting estimates are presented in accordance with appropriate accounting principles.

15 explain the meaning of persuasive evidence. 2% Evidence is persuasive if the auditor considers the
evidence to be sufficient and competent enough to afford a reasonable basis for an opinion.

16 what is audit sampling? 2% Application of a compliance or substantive procedure to less than 100%
of the items within an account balance or class of transactions to enable the auditor to obtain and
evaluate evidence of some characteristics of the balance or class and to form or assist in forming a
conclusion concerning that characteristic.

17 why do auditors use audit sampling? 3% Auditors use audit sampling when (a) the nature and the
materiality of the balance or class does not demand a 100% audit; (b) a decision must be made about
the balance or class; (c) the time and cost to audit 100% of the population would be too great.

18 distinguish between sampling risk and non-sampling risk. 4% sampling risk refers to the risk that the
auditor’s conclusions based on a sample might be different from the conclusion they would reach if they
examined every item in the entire population. Non-sampling risk refers to the probability that a material
error will not be discovered by the auditor in the performance of the substantive tests.

19 why must an audit sample be representative of the population from which it is drawn? 2% Audit
conclusions can be made only about the population from which the sample was drawn, and a conclusion
can only be valid if the sample on which it is based actually shows the characteristics of the population.
Auditors can attempt to achieve representativeness, but they cannot guarantee it. Sampling risk – the
probability that the sample does not adequately reflect the population – always exists.

20 distinguish between attribute estimate procedures and variables estimation procedures. 4%

attribute estimation procedures measure qualitative characteristics, while variables estimation
procedures measure quantitative characteristics.

21 what are the factors to be considered in designing an audit sample? 6% (1) Audit objectives (2)
Population and its characteristics (3) Risk and assurance (4) Tolerable error (5) Expected error in the
population (6) Stratification

22 what is stratification in audit sampling? 2% stratification is the process of dividing a population into
subpopulation, that is, a group of sampling units which have similar characteristics.

23 what are the advantages of using stratification? 4% Stratification enables the auditor to direct his
efforts towards the items he considers would potentially contain the greater monetary error. Audit
efficiency may be improved.

24 give and explain briefly the four most commonly sample selection methods for statistical and non-
statistical sampling? 8% (a) Random sampling every item in a population has an equal chance of being
selected. (b) Systematic handling the auditor counts through the population and selects items on the
basis of a sampling interval which is determined by dividing the number of physical items in the
population by sample size. (c) Stratified random sampling the auditor groups the population into
subpopulation or strata that are similar in amount. (d) Sampling with probability proportional to size
emphasizes larger peso items within an account balance. The probability of an item being selected in
this method is directly proportional to its peso amount.

25 how can the auditor control sampling risk? 3% for control testing purposes, the auditor is more
concerned with beta risk than alpha risk, because beta risk poses the threat of under auditing and is
therefore the basis for the audit opinion. The auditor controls this risk by setting beta risk sufficiently
low as to maintain overall audit risk at a level less than or equal to 10%.

26 explain briefly the different audit sampling plans that the auditor can use. 22%

Attributes sampling plan – it is an audit sampling in which auditors look for the presence or absence of
a control condition.
Variables sampling plan – this is used whether recorded account balances are fairly stated.
Statistical Sampling plan – this iis a sampling technique

27 discuss briefly the steps involved in evaluating sample results. 3%

(1) Analysis of error in the sample – the auditor should consider the sample results, the nature and
cause of any errors identified, and their possible effect on the particular test objective and on the other
areas of the audit.

(2) Projection of errors – for substantive procedures, the auditor should project monetary errors. When
an error has been established as an anomalous error, it may be excluded when projecting sample errors
to the population. For test of controls, no explicit projection of errors is necessary.

(3) Assessing sampling risk – the auditor should evaluate the sample results to determine whether the
preliminary assessment of the relevant characteristic of the population is confirmed or needs to be
revised.

28 what are tests of control procedure in general, and what purpose do they serve? 4% A test of control
procedure is a statement of

a. Identification of a population from which sampling units are to be drawn.

b. Expression of an action taken to produce evidence about a client control procedure.

29 in tests of controls auditing, why is it necessary to define a compliance deviation in advance? Give 7
examples of compliance deviations. 16% Compliance deviations should be defined in advance so
auditors will know what to look for and will know one when they see it. Seven Examples – Based on
Seven General Control Objectives:

Objective Example

1. Validity 1. Sale recorded without supporting

shipping orders.
 2. Authorization 2. Lack of credit manager approval for a
credit sale.

3. Accuracy 3. Mathematical errors in sales invoice

calculations.

4. Classification 4. Sales classified in wrong product line

revenue account.

5. Proper Period 5. Sales recorded in month (quarter,

year) before the actual shipment.

6. Accounting 6. Sales charges fail to be posted to a

customer’s account.

7. Completeness 7. Shipments fail to be billed to

customers and recorded as sales and
receivables.

30 which judgments must an auditor make when deciding on a sample size for test of controls audit
sampling? Describe the influence of each judgment on sample size in table form. 8%

Judgment Influence on sample size

1. Acceptable risk Inverse. The greater the acceptable

of assessing control risk risk, the smaller the sample.
too low

2. Acceptable risk Inverse. The greater the acceptable

of assessing control risk risk, the smaller the sample.
too high

3. Tolerable Inverse. The higher the tolerable rate,

deviation rate the smaller the sample.

4. Expected Direct. The higher the expected rate,

population deviation the larger the sample.
rate (an estimate rather
than a judgment)

The sample size is also directly related to the population size, although the influence is generally minor.
The larger the population, the larger the sample, but not much.

31 why should auditors be more concerned in test of controls auditing with the risk of assessing the
control risk too low than with the risk of assessing the control risk too high? 4% the risk of assessing the
control risk too low has the potential of affecting audit effectiveness, thus damaging the quality of the
audit for users. Professionally, in light of responsibility to users, effectiveness is more important than
efficiency, which is affected by the risk of assessing the control risk too high.
32 write the expanded risk model. What risk is implied for “test for detail risk” when inherent risk = 1.0,
control risk = 0.49, analytical procedures risk = 0.60, audit risk 0.048, tolerable misstatement = P10,000,
and the estimated standard deviation in the population =P25? 5%

33 what is the connection between possible assessments of control risk and a judgment about tolerable
rate, both considered prior to performing test of controls audit procedures? 5% The “connection” is a
direct relationship between control risk and the tolerable deviation rate. (1) When larger values are
planned for control risk (say, 0.95, 0.90) in an audit plan, more analytical procedure and test of detail work
will be done. Auditors will not rely very much on internal controls. Therefore, not much help is expected
from the controls anyway, so the tolerable deviation rate can be larger. The direct relation is: The higher
the control risk, the higher the tolerable deviation rate can be. (2) When lower values are assigned to
control risk (say, 0.10, 0.20) in an audit plan, less analytical procedure and test of detail work will be done.
Auditors intend to rely on internal accounting controls. Therefore, effective compliance with control
policies and procedures is important, and the tolerable deviation rate ought to be low. The direct relation
is: The higher the planned control risk, the higher the tolerable deviation rate can be.

34 how does the relationship between the tolerable occurrence rate and the upper occurrence limit
(maximum deviation rate) affect the auditor’s decision concerning control risk assessment? 4% Further
reduction of the assessed level of control risk is justified only when the upper occurrence limit is <= the
tolerable occurrence rate. Recall that the tolerable occurrence rate is that rate of error beyond which
the auditor cannot justify further reduction in the assessed level of control risk. A calculated rate which
exceeds the tolerable rate, therefore, would suggest a level of error which precludes any lowering of
assessed control risk.

35 define expected occurrence rate or expected population deviation rate. 3% Expected occurrence rate
is the anticipated error rate in a population. It is set on the basis of one or a combination of: The prior
year’s audit; the auditor’s initial understanding of internal control policies and procedures relative to the
transaction cycle subset; or a pilot sample of documents. The expected occurrence rate has a positive
effect on sample size.

36 when auditing account balances, why is an incorrect acceptance decision considered more serious
than an incorrect rejection decision? 4% An incorrect acceptance decision directly impairs the
effectiveness of an audit. Auditors wrap up the work and the material misstatement appears in the
financial statements. An incorrect rejection decision impairs the efficiency of an audit. Further
investigation of the cause and amount of misstatement provides a chance to reverse the initial decision
error.
37 what are the two methods of projecting the known misstatement to the population? 2% The two
methods of projecting the known misstatement to the population are the average difference method and
the ratio method.

38 what kind of evidence evaluation consideration should an auditor give to the peso amount of
population unit that cannot be audited? 4% The important thing is to audit all the sample units. You
cannot simply discard one that is hard to audit in favor of adding to the sample a customer whose
balance is easy to audit. This action might bias the sample. If considering the entire balance to be
misstated will not alter your evaluation conclusion, then you do not need to work on it any more. Your
evaluation conclusion might be to accept the book value, as long as the account counted in error is not
big enough to change the conclusion. Your evaluation conclusion might already be to reject the book
value, and considering another account to be misstated just reinforces the decision. If considering the
entire balance to be misstated would change an acceptance evaluation to a rejection evaluation, you
need to do something about it. Since the example seems to describe a dead end, you may need to
select more accounts (expand the sample) and perform the procedures on them (excluding
confirmation) and reevaluate the results.

39 what should be the relationship between tolerable misstatement in the audit of an account balance
and the amount of monetary misstatement considered material to the overall financial statements? 4%
The tolerable misstatement (judged for the audit of a particular account balance) must be less than the
monetary misstatement considered material to the overall financial statements. Also, the aggregation
of multiple tolerable misstatement amounts for several different balances under audit must be equal to
or less than the amount of monetary misstatement considered material to the overall statements.

40 what is the influence on peso-value variables samples sizes the risk of incorrect acceptance, the risk
of incorrect rejection, the tolerable misstatement, the population variability and population size? Make
a table presentation. 12%

Predetermined Sample Size Will

Be:

High Rate or Low Rate or Sample Size

Large Amount Small Amount Relation
Sample Size
Influence

1. Risk of Smaller Larger Inverse

incorrect acceptance

2. Risk of Smaller Larger Inverse

incorrect rejection

3. Tolerable Smaller Larger Inverse

misstatement

4. Expected Larger Smaller Direct

misstatement
 5. Population Larger Smaller Direct
variability

6. Population Larger Smaller Direct

size

41 what are the three basic steps in quantitative evaluation of monetary amount evidence when auditing
an account balance? 6%

The three basic steps in quantitative evaluation are these:

1. Figure the total amount of actual misstatement found in the sample. This amount is called the known
misstatement.

2. Project the known misstatement to the population. The projected amount is called the likely
misstatement.

3. Compare the likely misstatement (also called the projected misstatement) to the tolerable
misstatement for the account, and consider the

a. Risk of incorrect acceptance that likely misstatement could be less than tolerable misstatement even
though the actual misstatement in the population is greater, or the

b. Risk of incorrect acceptance that likely misstatement could be greater than tolerable misstatement
even though the actual misstatement in the population is smaller.

42 the projected likely misstatement may be calculated, yet further misstatement might remain
undetected in the population. How can auditors take the further misstatement under consideration
when completing the quantitative evaluation of monetary evidence? 5% Non-statistical measurements
leave only one avenue for “accounting for further misstatement”: Apply experience and professional
judgment to decide if further misstatement could be large enough to prevent an acceptance decision. If
the projected likely misstatement is a great deal less than the amount considered material, an auditor
could judge that further misstatement, if known, would not affect acceptance. If projected likely
misstatement is close to the amount considered material, maybe acceptance is not warranted.

43 differentiate between classical variables sampling and probability proportional to size sampling? 4%
Classical variables sampling estimates the value of a population by calculating the mean and standard
deviation of a sample and imputing the results to the population. Probability proportional to size
sampling uses the results of sampling to calculate an estimated upper error limit and compares this with
a preset tolerable error limit. Although used for substantive testing purposes, PPS sampling is actually a
variation for attribute sampling.

44 how does detection risk affect a sample size in substantive testing? 3% Detection (or beta) risk affects
sample size inversely for substantive testing purposes. That is, the higher the acceptable detection risk,
the smaller the sample size; and the lower the acceptable detection risk, the larger the sample size.

45 define precision and reliability for variables sampling. 4% Precision is the range + – within which the
true answer most likely falls. It is set by the auditor as a function of materiality and those levels of beta
and alpha risk deemed acceptable. Reliability is the likelihood that the sample range contains the true
value. Also referred to as the confidence level, reliability is set by the auditor on the basis of overall
audit risk.

46 under what conditions may PPS sampling be used? 2% PPS sampling is restricted to populations for
which the auditor suspects few errors of overstatement only.

47 distinguish test of controls from substantive test of transactions. 4% A test of controls is an audit
procedure to test the effectiveness of a control used by a client entity to prevent or detect material
misstatements. Substantive test is an audit procedure that examines the financial statements and
supporting documentation to see if they contain errors.

48 how do different levels of control risk in the revenue and collection cycle affect the nature, timing, and
extend of accounts receivable confirmation procedures? 3% Directly. Higher levels of control risk induce
auditors to audit larger samples of receivables, with confirmation date closer to the fiscal year end date.
As for nature of the procedures: higher levels of control risk induce auditors to use positive confirmations
instead of negative confirmations, and to consider vouching subsequent payments by the customers.

49 what is the primary purpose of “reviewing” the internal controls in the revenue and collection cycle?
2% The review (obtaining an understanding) of the control structure is primarily a process of identifying
control procedures (strengths) and lack of controls (weaknesses) which will affect subsequent substantive
procedures.

50 what test of controls audit procedures might internal auditors use to ensure that the controls in the
accounts receivable system are functioning? 2% The internal auditors should, through periodic checks,
ensure that the control account is periodically reconciled to the customer subsidiary accounts, bank
statements are reconciled and that all pre-numbered documents, especially invoices, have all numbers
accounted for. Some internal auditors also confirm accounts receivable. Internal auditors also might
review and evaluate customer complaints for signs of weaknesses in the procedures leading to errors in
accounts receivable.

51 what feature(s) of cash receipts internal control system would be expected prevent (a) an employee’s
absconding with company funds and replacing the funds during an audit engagements with cash from
the employee pension fund, an (b) the cash receipts journal and recorded cash sales from reflecting
more than the amount shown on the daily deposit slip? 6% The features of a cash receipts internal
control system which would be expected to prevent an employee from absconding with company funds
and covering with funds from the employee pension fund is the prohibition against one employee
having custody of company funds and non-company funds. The auditor can detect such transfers by
controlling and counting both funds simultaneously. To prevent the cash receipts journal and recorded
cash sales from reflecting more than the amount shown on the daily deposit slip, the internal control
system should provide that receipts be recorded daily and intact. A careful bank reconciliation by an
independent person could detect such errors.

52 why is it necessary to evaluate the controls after the test of controls audit of the revenue and collection
cycle when an evaluation was already made after the understanding phase? 4% The evaluation after the
review phase was to determine which controls appeared adequate as a basis for justifying a low control
risk assessment. The final assessment after test of controls auditing is to determine if the controls are
actually operating as well as they appeared to be.
53 what are the primary functions that should be segregated in the acquisition and expenditure cycle?
6% The functions which should be separated to maintain internal control in a purchasing system include
(1) custody of the goods (receiving and stores departments), (2) authority to initiate a transaction
(purchasing department) and (3) bookkeeping (accounts payable department, inventory record-keeping
department).

54 what feature of the acquisition and expenditure control would be expected to prevent an employee’s
abstracting cash through creation of fictitious vouchers? 6%

a. Blank vouchers kept in secure location available only to authorized personnel.

b. Blank supporting documents (invoices, receiving reports, requisitions, purchase orders) kept in secure
locations available only to authorized personnel.

c. Supporting documents canceled by Cash Disbursement function when checks are prepared.

d. Separation of duties of preparers of supporting documents, preparation of vouchers, check

preparation, and check signing.

e. Vouchers and other supporting documents reviewed by check signers.

f. Checks mailed directly by signer and not returned to accounts payable.

55 the essential characteristic of the liabilities control systems is to separate the authorization and
approval to initiate a transaction from the responsibility for recordkeeping. What would constitute the
authorization for vouchers (accounts payable)? 3% Authorization for vouchers payable recording mainly
consist of an approved purchase order, a receiving report, and an accurate vendor invoice. Auditors
should look for purchase approval signatures, receiving approval signatures, and approval of the vendor
invoice – checks by client for proper quantity, price, and discount.

56 describe the purpose and give examples of audit procedures in the “search for unrecorded liabilities”.
14% The purpose of the auditor’s search for unrecorded liabilities is to gather evidence as to whether
the liability assertion is true. The same concern exists in the internal control objective “all valid
transactions are recorded and none are omitted.” From an evidence gathering perspective, it is much
more difficult to gather evidence on unrecorded transactions than to gather evidence that recorded
transactions (and account balances) are proper. The search for unrecorded liabilities includes
procedures in other audit areas such as questions on bank and insurance confirmations and vouching
the source of funds for asset additions. Specific audit procedures in the search for unrecorded liabilities
include:

1. Obtain vendor’s invoices (or accounts payable vouchers) recorded for several days after
the balance sheet date to determine if the liability relates to the balance sheet period under audit.

2. Scan cash disbursements for several days subsequent to year-end and vouch to support
to determine if cutoff was proper. Scan all cash disbursements until the end of field work for unusual
amounts and payees to determine if amounts paid represent liabilities of the balance sheet period.

3. Examine BIR tax reports and correspondence and the audit reports of tax authorities
and trace additional tax assessments to the accounts.
 4. Confirmation of accounts payable.

5. Use analytical procedures such as trend comparisons of accounts payable to sales, sales
taxes to sales, payroll taxes to gross payroll and interest expense to average notes payable.

57 why are weakness (lack of desired control procedures) not tested for compliance? Describe how
weaknesses may not be detected during the review phase but discovered during test of controls audit.
6% Weaknesses (lack of control where auditors believe one is necessary) are not audited because
auditors do not rely upon weaknesses to prevent, detect or correct material errors. Auditors must
consider the financial impact of weaknesses on financial statements and plan substantive tests
accordingly. A control strength may be identified in interviews during the review phase (or in preparing
the flowcharts or questionnaires), but during test of controls auditing, found to be nonexistent or
operating ineffectively. For example, in the conversion cycle the production management may state
that foremen approve workers’ job time tickets. However, when a sample of job time tickets are
examined by auditors for evidence of approval, none is found. Thus, a weakness is not found until the
control is tested. Therefore, control risk should not be assessed low until evidence is gathered that the
control is operating effectively.

58 why might an auditor conduct a surprise observation of a payroll distribution? What should be
observed? 4% The surprise observation enables the auditor to see how the distribution system really
works and increases his chances of detecting fraud. Such an observation involves taking control of
paychecks, then accompanying a client representative as the distribution takes place. The auditor
checks to see that each employee is identified and that only one check is given to each individual.
Unclaimed checks are controlled and examined to detect any fictitious persons on the payroll.

59 what is a cutoff bank statement? How is it used by the auditor? 4% The cutoff bank statement is a bank
statement sent by the bank directly to the auditor, and it is usually for a fifteen or twenty day period
following the reconciliation date. The basic use of the statement by the auditor is to determine whether
outstanding checks were actually mailed before the reconciliation date.

60 why should all cash fund be counted at the same time? 2% All cash funds (and negotiable investment
stock and bond certificates) should be counted at the same time (simultaneously) so that money (or
securities) cannot be shifted from one location to another to conceal a shortage. If simultaneous count
cannot be made, as each fund (or each negotiable asset) is counted, it should be locked and sealed until
all are counted.

61 what is “kiting”? What procedures do auditors use to detect kiting? 4% Kiting is the practice of
recording a deposit of an interbank transfer in one period, but delaying the recording of the disbursement
until the next period – thus double counting the amount of the transfer. It is used to cover up a cash
shortage. Auditors schedule all bank transfers around the year-end and examine the dates deposited and
disbursed per books and the dates deposited and disbursed per bank. Thus, the auditors can determine
if both sides of the transfers are recorded in the same period and the proper period.

62 distinguish between “positive and negative” confirmations. Under what conditions would you expect
each type of confirmation to be appropriate? 5% A “positive” confirmation is a request for a response
from an independent party who the auditor has reason to expect is able to reply. A “negative”
confirmation is a request for a response from the independent party only if the information is disputed.
Negative confirmations should also be sent only if the recipient can be expected to detect error and reply
accordingly.

63 from a timing standpoint, when is vouching performed on the documentation underlying receivables
balances? Explain. 4% Generally, vouching of documentation underlying receivables balances is deferred
until after confirmation. Then vouching is performed in regard to accounts for which confirmations
were mailed but no replies received. Additionally, vouching may be used to gather evidence about
account discrepancies and disputes indicated on confirmation responses.

64 how does the auditor test for sales cut-off? 2% Sales cutoff is audited by selecting sales invoices,
shipping documents, and contracts created in the period (usually 10 days to two weeks) before and after
the fiscal year-end. The transactions are traced to the sales and receivables accounts to prove whether
they were recorded in the proper period. Similarly, recorded sales in this period may be vouched to
underlying documents to determine whether recording was in the proper period.

65 describe the major types of fraud and material misstatement with regard to the revenue and
collection cycle. What procedures are generally relied on to detect such embezzlement? 8%

Skimming -is the act of withholding cash receipts without recording them.

Lapping – is the technique used to cancel the fact that cash has been abstracted; the shortage in one
customer’s account is covered with a subsequent payment made by another customer.

Kiting -is a technique used to cover cash shortage or to inflate cash balance. It involves counting the
cash twice by using the float in the banking system.

Floating - is the gap between the time the check is deposited or added to an account and the time the
check clears or is deducted from the account it was written on.

66 what features of a receivables internal control structure would be expected to prevent an employee
from embezzling cash through the creation of fictitious credit memos? 3% To prevent embezzlement
through creation of fictitious credit memos, the internal control system should provide that all credit
memos be pre-numbered, controlled, and approved by a party independent of the preparer.
Additionally, credit memos should be approved only with proper supporting documentation, e.g., a
receiving report or correspondence.

67 in substantive auditing, why is the emphasis is on the existence assertion of assets but not on the
completeness assertion of liabilities? 3% Auditors get in the most trouble by missing overstated assets
and understated liabilities. Therefore, they need to audit for the existence of assets and the completeness
of liabilities.

68 give several examples of liabilities that are substantively audited as part of the audit of another
account. 5% Notes payable audit evidence obtained from a standard bank confirmation used in the audit
cash. Sales tax liability derived partially from the audit of sales revenue (also commissions payable and
excise taxes payable). Income tax liability is derived from the net income number (audit of all revenue
and expense accounts).
69 with regard to cash disbursements, describe the major types of fraud and material misstatement of
which the auditor should be aware. What procedures are generally relied on to detect such an
embezzlement? 12%

The types of fraud and material misstatement with respect to cash disbursements include:

1. The sending of checks to a fictitious person or company to accomplices outside (coupled with internal
record alterations).

2. The increasing (altering) of amounts payable to outside accomplices.

3. The intercepting of payments to a bank (coupled with internal record alterations).

4. The drawing of checks payable to cash or bearer for one’s own use.

The procedures auditors use most frequently to detect cash disbursement embezzlement schemes
include:

1. A proof of cash – a recalculation – which reconciles cash receipts and disbursements per the bank
statement with receipts and disbursements recorded in the accounts. The auditor will satisfy himself as
to the propriety of all checks payable to “cash” or bearer, NSF checks, and checks drawn to officers and
other employees.

2. The confirmation with all bank creditors of amounts owed, terms and activity during the period.

3. The auditor’s test of purchase transactions – vouching, tracing and recalculation in regard to purchase
orders, supplier invoices, cash disbursement journal and voucher register.

4. The auditor’s obtaining satisfaction of the proper separation of functions: To establish that a proper
separation exist, the auditor will not only examine internal records purporting a proper separation, he
will also examine documents for compliance and observe personally the flow of operations and
activities.

70 in the auditor’s review of a client’s inventory taking instructions, what characteristics are the auditor
looking for? 11% The characteristics that the auditor is looking for in his review of the client’s inventory-
taking instructions include:

1. Names of client personnel responsible for the count.

2. Dates and times of inventory-taking.

3. Names of client personnel who will participate in the inventory-taking.

4. Detail instructions for recording accurate descriptions of inventory items, for count and double-count,
and for measuring or translating physical quantities.

5. Detail instructions for making notes of obsolete or worn-out items.

6. Detail instructions for the use of tags, punched cards, count sheets, or other media devices, and for
their collection and control.
7. Plans for shutting down plant operations or for taking inventory after store closing hours, and plans
for having goods in proper places.

8. Plans for counting or controlling movement of goods in receiving and shipping areas if those
operations are not shut down during the count.

9. Detail instructions for compiling the count media (e.g., tags and punched cards) into final inventory
listings or summaries.

10. Detail instructions for pricing the inventory items.

11. Detail instructions for review and approval of the inventory count, notations of obsolescence, or
other matters by supervisory personnel.

71 what evidence regarding inventories and cost of sales can the auditor typically obtain from verbal
inquiry? 4% As is true in other areas of a financial audit, verbal inquiry is a valuable tool for obtaining
preliminary evidence in the audit of inventory and cost of sales. For example, the auditor can gain
information such as the locations of inventory, dates for the physical count, inventory held by
consignees and public warehouses, the cost-flow assumption used to price cost of goods sold and
inventories, and the pledging of inventory as collateral on loans. In addition to providing preliminary
evidence, verbal inquiry frequently provides information about the status and value of slow-moving
inventory, apparently worn-out, damaged or obsolete inventory, and the existence of large inventory
stockpiles.

72 what audit procedures are relied upon most heavily in audit of cost of goods sold? Inventory
balances? 4% Cost of goods sold is generally audited through a combination of limited vouching and
extensive analytical procedures. Inventory balances are generally audited through heavy reliance on
observation, vouching and recalculation, with much less emphasis on analytical procedures.

73 in determining the existence of fixed assets, how might the auditor obtain preliminary evidence?
What procedures are used to gather corroborating evidence? 5% The auditor can obtain preliminary
evidence through physically observing plant facilities and making verbal inquiries; for example, evidence
can be obtained regarding the quantity and size of assets, their location and apparent physical
condition, the activity surrounding them, and ownership of the facilities.

Further preliminary evidence of existence may be gained by a review of internal management

reports. Examples of such reports include capital expenditure proposals, capital budgets, construction
cost or acquisition cost post analysis, maintenance and repair reports, reports of sales or retirements,
and insurance and property tax analyses.

The preliminary evidence should be corroborated by auditor tracing to the detailed records to
ascertain that existing assets are recorded. Further, new asset acquisitions should be traced to
directors’ authorizations for expenditures and to the capital budget.

74 what procedures do auditors employ in the audit of investment securities to obtain the names of the
issuers, the number of shares held, certificate numbers, maturity value, and interest and dividend rates?
8%

To obtain relevant audit data about investment securities, auditors’ procedures include:
1. Inspecting the securities in the presence of a responsible client officer.

2. Personally examining the securities while other negotiable fund sources are sealed off or are being
examined simultaneously.

3. Obtaining a written statement from the client’s representative that the securities were returned
intact.

4. Obtaining the information by confirmation from an independent party (e.g., trustee) who holds the
securities.

75 what procedures do auditors employ to obtain evidence of the cost of investments, of investment
gains and losses, and investment income? 4% Investment cost can be vouched to brokers’ advices,
monthly statements and canceled checks. The auditors can similarly vouch the price of securities sold
and investment income to this documentary evidence and then trace amounts to income, gain and loss,
and cash accounts.

76 why are auditors interested in substantial investment losses occurring early in the period following
year-end? 3% If investments are sold at substantial losses early in the period following year-end, there is
evidence that the securities were overvalued at the balance sheet date. Accordingly, the auditor will
consider whether such securities should be written down in the financial statements of the period under
audit.

77 explain why, for a long time liabilities and owners’ equity, only the current period additions and
disposals are audited, not the entire account balances? 3% The long-term liabilities (and fixed assets and
owners’ equity) are characterized by a few large transactions, unlike the current assets and liabilities
which have numerous small transactions. Except for the initial year of an audit, the entire balance is not
verified each year. Only the changes in the account that occurred in the current period need to be audited.
The results of the audit of prior year’s changes are recorded in “carry-forward” working papers for these
accounts.

78 in regard to commitments, why would auditors vouch open purchase orders? 3% By vouching open
purchase orders, inquiry of purchase personnel, and confirmation with suppliers, the auditor is seeking to
learn of commitments to purchase inventories at fixed prices. If the client faces significant losses on fixed-
price purchase commitments, appropriate provision for the losses should be made in the period’s financial
statements.

79 define and give five examples of “off balance sheet information.” Why should auditor be concerned
with such items? 12% “Off-balance sheet information” refers to information that relates to obligations
and commitments assumed by the clients that do not appear on the balance sheet as current or long-term
liabilities. Such information should be disclosed by the client in the footnotes to the financial statements.
Therefore, the auditors must be alert to these items and gather evidence that will allow the auditors to
determine if the footnote disclosure is adequate. Such information includes: 1) leases, 2) endorsements
on discounted notes or others’ obligations, 3) guarantees, 4) repurchase or remarketing agreements, 5)
commitments to purchase at fixed prices, 6) commitments to sell at fixed prices, 7) legal judgment, 8)
litigation, 9) pending litigation.
80 what topics commonly are covered during the auditor/client conference held at the close of audit
field work? 4% The following matters are usually covered during the conference with the client at audit
completion:

a. Proposed audit adjustments;

b. Material internal financial control weaknesses;

c. Recommended footnote disclosures;

d. Type of audit report to be rendered.

81 what is meant by “Documentation” in the context of the audit of financial statements? 3% Audit
documentation means the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.

82 what are the major functions of audit work papers? 4% the major function of audit work-papers is to
provide evidence of conformance with auditing standards. As a body, the work-papers are the principal
record of the evidence which the auditor has gathered and evaluated in support of the audit opinion.

83 PSA 230 (Clarified). Audit documentations, requires that the auditor should prepare working papers
which are sufficiently complete and detailed to provide an overall understanding of the audit. Give
examples of what should the working papers show that would indicate that there has been proper
documentation done. 8%

84 what are the factors that affect the form and content of working papers? 2% (1) The size and
complexity of the entity (2) the nature of the audit procedures to be performed (3) the identified risks of
material misstatements (4) the significance of the audit evidence (5) the need to document a conclusion
or the basis for a conclusion not readily determinable from the documentation of the work performed
or audit evidence obtained (6) the audit methodology and tools used.

85 distinguish between working papers contained in permanent file (14 items) and those contained in
current year file (14 items). 28% Permanent files contain information that is of a continuing interest to the
auditor. A permanent file typically contains (1) copies or abstracts of significant company documents and
(2) auditor- or client-prepared information on accounts. Current-year files contain working papers
prepared to support the assertions embodied in the financial statements.

86 explain why a client may assist in the preparation of work papers and describe the steps an auditor
follows when client assistance is provided. 5% Client personnel may prepare working papers to reduce
the time spent by the auditor on the engagement. When client personnel prepare working papers, the
auditor should give the client personnel detailed instructions. Working papers prepared by the client
should be identified as 1) PBC (prepared by client) and 2) should involve no decision making. The auditor
should test completed working papers against underlying documentation.

87 what are the purposes of lead schedules and supporting schedules? 4% the lead schedule, especially
on larger engagements, is designed to bridge the gap between the working trial balance and the general
ledger by listing all general ledger accounts that are reported as one account in the financial statements.
Supporting schedules is a term for working papers that support the amounts presented in the financial
statements by providing support for a detailed account on a lead schedule. Supporting schedules
represent the bulk of working papers.

88 what are the characteristics of properly prepared working papers? 5% In general, a properly prepared
working paper should meet firm policy, have a proper heading, clearly indicate the work performed,
clearly meet the audit objective for which it was designed, and clearly state the auditors’ conclusion. The
("PCAOB" or "Board") Board believes that the quality and integrity of an audit depends, in large part, on
the 1) existence of a complete and understandable record of the work the auditor performed, 2) the
conclusions the auditor reached, 3) and the evidence the auditor obtained that supports those
conclusions.

89 why are the prior year’s audit working papers a useful reference to staff assistants during the current
examination? 4% The prior year’s audit working papers are a useful guide to staff assistants because the
audit procedures performed in the prior year usually are similar to those of the current year. By referring
to last year’s working papers, the assistant can see how the procedures were documented and is given a
possible format for organizing the current year’s working paper. In addition, exceptions noted in last
year’s working papers may alert the assistant to possible problems in the current year. Finally, the prior
year’s working papers contain information substantiating the beginning balances for the current year.

90 list the major types of audit working papers and give a brief explanation of each. For example, one
type of audit working paper is an account analysis. This working paper shows the changes that occurred
in a given account during the period under audit. By analyzing an account, the auditors determine the
nature and content of said account. 20% The more common types of audit working papers and their
principal purposes may be summarized as follows:

(1) Audit administrative working papers – aid the auditors in planning and administration of the audit,
and include such items as the 1) audit plans and programs, 2) internal control questionnaires and 3)
flowcharts, 4) decision aids, 5) time budgets, and 6) engagement letters.

(2) Working trial balance – represents the backbone of the auditors’ working papers, 1) for it contains
the balances of the ledger accounts, 2) the adjustments and reclassifications deemed necessary by the
auditors, and 3) the adjusted amounts that appear in the financial statements. It also 4) contains
references to all supporting schedules and analyses, thus serving to control the other types of working
papers.

(3) Lead schedules – working papers that serve to combine similar general ledger accounts, the total of
which appears on the working trial balance.

(4) Adjusting journal entries – material misstatements in the accounts disclosed by the auditors’
investigation are corrected by means of adjusting journal entries. These appear on the auditors’
working trial balance, and in addition, a list of such entries is turned over to the client at the conclusion
of the audit with the request that they be approved and entered in the accounting records.

(5) Reclassification entries – entries necessary to properly reflect financial results but not representing
misstatements in the financial records of the client.

(6) Supporting schedules – although the term schedule is at times applied to various types of working
papers, the preferred usage is to designate a listing of the details or elements comprising the balance in
an account at a specified date. Preparation of such a listing is often an essential step in determining the
nature of an account.

(7) Analyses – consist of working papers showing the changes which occurred in an account during a
given period. By analyzing an account, the auditors determine its nature and contents.

(8) Reconciliations – working papers that prove the relationship between two amounts obtained from
different sources.

(9) Computational working papers – used to verify such data as interest expense, income taxes, and
earnings per share.

(10) Corroborating documents – working papers that provide support for specific representations made
in the financial statements, such as 1)letters of representations from clients, 2) lawyers’ letters, 3) audit
confirmations, and 4) copies of the contracts.

91 “audit working papers are property of the auditors, who may destroy the papers, sell them or give
them away.” Criticize this quotation. 6% Audit working papers are the property of the auditor; however,
they must not violate the confidential relationship between client and auditors by making the papers
available to outsiders or even to the client’s employees without specific permission from the client.

92 state the legal provisions on ownership of audit working papers. 3% “All working papers, schedules
and memoranda made by a certified public accountant in public practice and his staff in the course of an
examination, including those prepared and submitted by the client, incident to or in the course of an
examination, by such CPA, except reports submitted by a CPA to a client shall be treated confidential
and privileged and remain the property of such CPA in the absence of a written agreement between the
CPA and the client, to the contrary, unless such documents are required to be produced through
subpoena issued by any court, tribunal, or government regulatory or administrative body.”

93 under what conditions may confidential information be disclosed. 10%

(1) Disclosure is permitted by law and is authorized by the client or the employer

(2) Disclosure is required by law

(a) Production of documents or other provision of evidence in the course of legal proceedings or

(b) Disclosure to the appropriate public authorities of infringements of the law that come to
light

(3) There is professional duty or right to disclose, when not prohibited by law

(a) To comply with the quality review of a member body or professional body

(b) To respond to an inquiry or investigation by a member body or regulatory body

(c) To protect the professional interests of a professional accountant in legal proceedings

(d) to comply with technical standards and ethics requirements

94 in the final stage of risk based audit process, how shall the engagement partner or sole
proprietorship know that sufficient appropriate audit evidence has been obtained to support the
conclusions reached for the auditor’s report to be issued? 5% the strength of an audit depends on the
relevance and reliability of the evidence gathered. Relevance is determined by the assertions tested;
that is, some evidence will be relevant to an existence assertion but only tangentially relevant to a
valuation assertion. Reliability relates to the quality of the evidence gathered and is affected by the
independence of the control structure. The auditor uses the risk assessments to assist in determining
the potential reliance on internally generated audit evidence. An effective audit combines relevant and
persuasive audit evidence to provide reasonable assurance that the financial statements are free of
material misstatement when the auditor renders an opinion on the financial statements. It is also
important to perform each audit as efficiently as possible without jeopardizing quality. Determining the
sufficiency and appropriateness of evidence is a matter of professional judgment.

95 explain briefly the relevance of the following areas in connection with the final evaluation of the
audit evidence obtained: 12% A materiality B risk C misstatements D fraud E evidence F analytical
procedures

Materiality – the auditor shall assess whether the amounts established for overall and performance
materiality are still appropriate in the context of the entity’s actual financial results.

Risks – the auditor shall determine whether in the light of the audit findings the assessed risks of
material misstatement at the assertion level is still appropriate.

Misstatements – the auditor shall determine the effect on the audit of identified misstatements and
whether there is a need to perform additional audit procedures.

Fraud – the auditor through the performance of analytical procedures shall assess whether previously
unrecognized risks of material misstatement due to fraud are present.

Evidence – the auditor shall determine whether sufficient appropriate evidence has been obtained to
reduce the risks of material misstatements to an acceptably low level.

Analytical procedures – the auditor shall assess whether the analytical procedures performed at the
final review stage of the audit corroborate the audit findings.

96 in what instances will the auditor be required to revise the audit strategy and detailed audit plans?
4% The objective of evaluating misstatements is to determine the effect on the audit and whether there
is a need to perform additional audit procedures. Revisions to the audit strategy and detailed audit plans
may be required when:

The nature of circumstances of identified misstatements indicate that other misstatement(s) may exist
that, when aggregated with known misstatements, could exceed performance materiality; or

The aggregate of identified and uncorrected misstatements come close to or exceeds performance
materiality.

97 give and explain briefly at least 8 sources of misstatements of financial statements items. 16%

a. Omissions or Fraud – Some transactions may not be recorded, either by mistake or deliberately, the
latter of which would constitute fraud;
 b. Significant Transactions – A lack of business rationale for significant transactions (unusual or outside
the normal course of business) could be intended to manipulate the financial statements or to conceal
misappropriation of assets;

c. Journal Entries – Inappropriate or unauthorized journal entries may have occurred throughout the
period or at period end. These could be used to manipulate amounts reported in the financial
statements;

d. Errors in Estimates – Management estimates may calculate incorrectly, overlook or misinterpret

certain facts, use faulty assumptions, or contain some element of bias if the entity’s estimate falls
outside an acceptable range. Estimates could also be deliberately misstated to manipulate financial
statement results;

e. Errors in Fair Values – There may be disagreements with management’s judgments with respect to
the fair value of certain assets, liabilities, and components of equity required to be measured or
disclosed at fair values in accordance with the financial framework;

f. Selection and Application of Accounting Policies – There may be disagreements with management
with regard to the selection and use of certain accounting policies;

g. Uncorrected Misstatements in Opening Equity – Uncorrected misstatements from prior periods

would be reflected in opening equity. If not adjusted, they may also cause a misstatement in the current
period financial statements;

h. Revenue Recognition – Overstatement or understatement of revenues (e.g., premature revenue

recognition, recording fictitious revenues, or improperly shifting revenues to a later period).

98 give and explain at least 7 factors to consider in evaluating the sufficiency and appropriateness of
audit evidence: 14%

a. Materiality of Misstatements – How significant is a misstatement in the assertion being addressed,

and what is the likelihood of it having a material effect (individually or aggregated with other potential
misstatements) on the financial statements?

b. Management Responses – How responsive is management to audit findings, and how effective is the
internal control in addressing risk factors?

c. Previous Experience – What has been the previous experience in performing similar procedures, and
were any misstatements identified?

d. Results of Performed Audit Procedures – Do the results of performed audit procedures support the
objectives, and is there any indication of fraud or error?

e. Quality of Information – Are the source and reliability of the available information appropriate for
supporting the audit conclusions?

f. Persuasiveness – How persuasive or convincing is the audit evidence?

g. Understanding the Entity – Does the evidence obtained support or contradict the results of the risk
assessment procedures (which were performed to obtain an understanding of the entity and its
environment, including internal control)?
99 give examples of audit matters that should be communicated by the auditor to those charged with
governance. 9%

Under PSA 260 (Clarified) Audit matters that should be communicated by the auditor to those charged
with governance are:

1. The general approach and overall scope of the audit, including any expected limitations thereon, or
any additional requirements;

2. The selection of, or changes in, significant accounting policies and practices that have, or could have,
a material effect on the entity’s financial statements;

3.The potential effect on the financial statements of any significant risks and exposures, such as pending
litigation, that are required to be disclosed in the financial statements;

4. Audit adjustments, whether or not recorded by the entity that have, or could have, a significant effect
on the entity’s financial statements;

5. Material uncertainties related to events and conditions that may cast significant doubt on the
entity’s ability to continue as a going concern;

6. Disagreements with managements about matters that, individually or in aggregate, could be

significant to the entity’s financial statements or the auditor’s report. These communications include
consideration of whether the matter has, or has not, been resolved and the significance of the matter;

7. Expected modifications to the auditor’s report;

8. Other matters warranting attention by those charged with governance, such as material weaknesses
in internal control, questions regarding management integrity, and fraud involving management;

9. Any other matters agreed upon in the terms of the audit engagement.

100 why are many of the revenue and expense accounts only audited by analytical procedures and not
by other procedures? 3% Many of the revenue and expense accounts are not material in relation to the
financial statements and may be combined with other accounts in the financial statements. These
accounts can be audited through analytical procedures. Such procedures compare the account balance
to related statement of financial position accounts, to sales, to industry averages or to a multiple-year
trend to ascertain whether any unusual fluctuations are present. Unusual or unexpected items would
have to be investigated and material items vouched to supporting documents.

101 what is the purpose of a client representation letter? What representations would you request
management to make in a client representation letter with respect to receivables? Inventories? Minutes
of meetings? Subsequent events? 10% The primary purpose of the client representation letter is to
impress upon management its ultimate responsibility for the adequacy of the financial statements and
related disclosures. With respect to receivables, such letters typically state that all receivables are valid
and include proper amounts; also stated is the amount written off in the past year and the current
provision for un-collectibles. In connection with inventories, the client represents that the peso amount
of inventories reflects physical quantities determined by a count and priced by a stated accounting
method. The client also represents that provision has been made by the company for all obsolete and
damaged inventory. In regard to minutes, the client represents that all minutes of meetings of
stockholders, directors, and executive committees which have been transmitted to the auditor are
complete and authentic records for the period under audit (including the subsequent period). The client
letter of representation should state whether any events occurred subsequent to the date of the
financial statements that, in the client’s opinion, require adjustment or disclosure in the statements.

102 in addition to the attorney’s letter, what other procedures are used to gather evidences regarding
contingencies? 5% In addition to the attorney’s letter, other procedures that are used to gather
evidence regarding contingencies include: Standard bank confirmation. Inquiry of client management.
Reading of the minutes of the board of directors. Vouching to purchase and sales contracts. Vouching to
lease agreements, confirmation with lessor or lessee.

103 what are the two types of “subsequent event”. In which way(s) are they treated differently in the
financial statements? 4% there are two types of subsequent events: 1. The first type consists of those
events that provide additional evidence with respect to conditions that existed at the date of the
statement of financial position and affect the estimates inherent in the process of preparing financial
statements. The use of the evidence requires an adjustment to the financial statements. 2. The second
type consists of those events that provide evidence with respect to conditions that did not exist at the
date of the statement of financial position being reported on but arose subsequent to that date. These
events should not result in an adjustment of the financial statements. However, disclosure may be
required to prevent the financial statements from being misleading. In some cases, pro forma financial
statements may be required to ensure adequate disclosure. A Pro Forma Financial Statement is one
based on certain assumptions and projections. For example, a corporation might want to see the effects
of three different financing options. Therefore, it prepares projected balance sheets, comprehensive
income statements, and statements of cash flows.

104 what is the purpose of “dual dating” an audit report? 3% The purpose of dual dating is twofold: (1)
To provide a means of inserting important information in the financial statements even when learned
after field work is complete, while at the same time (2) to inform users that the auditor takes full
responsibility for subsequent events only up to the end of the field work and for the specifically
identified later event, but does not take responsibility for other events which may have occurred after
the end of field work and before the date of the specifically identified subsequent event.

105 describe proper accounting for loss contingencies? 3% Loss contingencies from litigation, claims,
and assessments can be accrued or disclosed, depending on the event’s likelihood. When a loss
contingency involves an unasserted claim or assessment, disclosure is not required if no evidence exists
that the assertion of a claim is probable. When an unasserted claim probably will be asserted and an
unfavorable outcome is a reasonable possibility, disclosure is required. When a loss contingency is likely
and the amount can be estimated, the contingency should be accrued.

106 what should an auditor do when he or she believes that substantial doubt exists as to whether an
entity is a going concern? 3% When substantial doubt exists about the ability of an entity to continue in
operation for a year following the financial statements, an auditor should add a paragraph calling
attention to the fact that the statements have been prepared assuming that the entity will continue as a
going concern. If an auditor fails to modify the report, however, and an entity ceases to exist as a going
concern within one year following the date of the audit, this does not in itself indicate inadequate
performance by the auditor.
107 what should an auditor do if a client refuses to sign the representation letter? 2% Management’s
refusal to sign a representation letter would typically result in a disclaimer of opinion because audit
evidence was restricted by management.

108 describe why and how an auditor compares misstatements to materiality and tolerable
misstatements. 5% At the completion of the audit, an auditor must reconsider materiality and
determine an amount for materiality to be used in evaluating the estimated errors in the financial
statements. Also, an auditor should reconsider the audit risk. As errors are found during the audit, the
auditor generally shares them with the client, and the client makes adjusting entries for material errors.
If the client refuses to correct a material error, the auditor must consider the materiality of the
combined known errors and likely errors. Known errors are individual errors specifically identified by an
auditor, whereas likely errors are an auditor’s best estimate of other errors based on a projection of
errors detected during sampling. An auditor should compare projected error to materiality, both on an
account level and in the aggregate.

109 compare and contrast financial statement disclosure checklist and an engagement checklist. 4% A
financial statement disclosure checklist is a checklist an auditor uses to review the financial statements
to check that all necessary disclosures have been included. In contrast, the auditor uses an engagement
checklist to determine that all auditing procedures have been performed.

110 distinguish between a “subsequent event” and a “subsequent discovery of fact existing at the report
date.” Describe the auditor’s responsibility for each. 6% “Subsequent events” are material events that
occur after the statement of financial position date but before the end of field work (and thus, before
the audit report date) that require disclosure in the financial statements and related notes. Auditors
(and management) are responsible for gathering evidence on these subsequent events and evaluating
the proposed disclosure. “Subsequent discovery of facts existing at the audit report date” is knowledge
gained after the audit report is issued about an event or condition that existed at the audit report date.
Auditors have no responsibility to search for these facts (as they do for subsequent events); however,
once brought to the auditors’ attention, their responsibility is to determine if the financial statements
(and thus their report) are misstated and take appropriate action.

111 if, subsequent to issuance of report, the audit partner discovers information which existed at the
report date and materially affects the financial statements, what actions should the partner take if the
client consents to disclose the information? What action should be taken if the client (including the
board of directors) refuses to make disclosure? 5% The actions the partner should take if the client
consents to disclose the information (which existed at the audit report date and materially impacts the
financial statements) is to determine the method and timing of disclosure. The actions the partner
should take if the client refuses to make disclosure are: Notify the client that the auditors’ report must
no longer be associated with the financial statements. Notify regulatory authorities that the auditors’
report should no longer be relied upon. Notify users known to be relying on the financial statements
that the auditors’ report should no longer be relied upon. Such notification may be to the SEC and the
stock exchanges.

112 what are the steps an auditor should take, after the report has been issued, someone discovers that
an important audit procedure was omitted? 6% Once auditors have reported on audited financial
statements, they have no responsibility to carry out a retroactive review of their work. However, post-
issuance review may be made in connection with a firm’s internal quality control monitoring program,
peer review or otherwise, and the omission of an auditing procedure may be discovered. If an omitted
procedure is found, the auditors should consult legal counsel and take the following actions: Assess the
importance of the omitted procedure to the present ability to support the previously expressed opinion.
Determine if there are persons currently relying or likely to rely on their report. If the omitted procedure
impairs present ability to support the previously expressed opinion, the omitted procedure should be
applied or alternative procedures applied that would provide a satisfactory basis for the opinion. If, as a
result of subsequent application of the omitted procedure or alternative procedures, the auditors
become aware of facts that existed at the date of their report, they should refer to Chapter 25
(Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report) for guidance.

113 describe a “cold review.” What is its purpose? 4% In a “cold review,” a partner not otherwise
associated with an engagement will take the report (in draft copy) and all working papers and review
the entire engagement with a fresh start. The purpose of the review is to obtain the unbiased view of a
professional expert who is not committed to a particular engagement or its problems. It is performed to
aid in maintaining high standards of professional practice.

114 what is a management letter? Is management letter required by auditing standards? 4% A

management letter is an extra audit service. Auditors write to the management their recommendations
about control, tax matters, operating efficiencies, and other consulting subjects to impress on managers
the benefits of audits in addition to “just an audit.” The letter also serves to promote and sell CPAs’
consulting services.

115 what steps should the auditor take upon learning of information that may have existed at the date
of the audit report, and that, if known to the auditor, would have affected the wording of the audit
report? 6%

When the auditor learns of information existing at the date of a previously issued audit report, that it, if
known, would have altered the audit opinion, the following steps are in order:

a. Determine whether the information is reliable and whether the facts existed at the date of the audit
report;

b. Request the client to make necessary disclosure to persons known to be relying on the statements;

c. If the client refuses, the auditor has a duty to notify those known to be relying on the audit report that
such reliance is no longer justified (notifying board of directors, SEC, and stock exchange usually satisfies
this requirement).

116 what responsibility does an auditor have if he or she discovers that facts may have existed at
statement of financial position date that would have affected the audit report if he or she had known
about them? 5% An auditor should investigate the new information as soon as practicable. When an
auditor determines that the information is reliable, that the facts existed at the date of the report, and
that the nature of the information and its effect on the financial statements are such that the report
would have been affected, the auditor should consider whether persons are relying on the report.
117 how does an auditor prevent persons from relying on a previously issued on report on financial
statements that have been determined to be misleading? 6%

(1) Notifying the client that the audit report must no longer be associated with the financial
statements.
(2) Notifying the appropriate regulatory agencies that the audit report should no longer be relied
on.
(3) Notifying each person known to the auditor to be relying on the financial statements that the
audit report should no longer be relied on. If such notification is impracticable, the auditor may
request a regulatory agency having jurisdiction over the client to take whatever steps it deems
appropriate.

118 what responsibility does an auditor have on discovering the omission of an audit procedure
considered necessary at the time of the engagement? 5% when an auditor concludes that an auditing
procedure considered necessary at the time of the audit was omitted, auditing standards require the
auditor to assess the importance of the omitted procedure to his or her present ability to support the
previously expressed opinion. An auditor may review the working papers and discuss the matter with
other engagement personnel to evaluate whether other applied procedures compensate for the
omitted procedure.

119 describe the so called culmination of the audit process. 3% the entire audit process culminates in
the preparation of the auditor’s report. The auditor’s report is the primary product of the audit. The
auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis
for the expression of an opinion on the financial statements. This review and assessment involves
considering whether the financial statements have been prepared in accordance with an acceptable
financial reporting framework. It may also be necessary to consider whether the financial statements
comply with statutory requirements. The auditor’s report should contain a clear written expression of
opinion on the financial statements taken as a whole.

120 what is the auditor’s primary basis for the expression of an opinion on the financial statements? 5%
In order to form that opinion, the auditor shall conclude as to whether he or she has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. That conclusion shall take into account: (a) The auditor’s
conclusion, in accordance with PSA 330 (Clarified), whether sufficient appropriate audit evidence has
been obtained; (b) The auditor’s conclusion, in accordance with PSA 450 (Clarified), whether
uncorrected misstatements are material, individually or in aggregate; and (c) The evaluations required
by paragraphs 12 to 15.

121 in forming an opinion on the financial statements, what factors should the auditor consider in
concluding whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error? 3% The auditor shall evaluate whether the financial statements are prepared, in
all material respects, in accordance with the requirements of the applicable financial reporting
framework. This evaluation shall include consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s judgments.

122 what should the auditor consider and evaluate in determining whether the financial statements are
prepared in all material respects in accordance with the applicable financial reporting framework? 6% In
particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial
reporting framework: (a) The financial statements adequately disclose the significant accounting policies
selected and applied; (b) The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate; (c) The accounting estimates made by management
are reasonable; (d) The information presented in the financial statements is relevant, reliable,
comparable and understandable; (e) The financial statements provide adequate disclosures to enable
the intended users to understand the effect of material transactions and events on the information
conveyed in the financial statements; and (f) The terminology used in the financial statements, including
the title of each financial statement, is appropriate.

123 in evaluating whether the financial statements achieve fair presentation, what should the auditor
take into consideration? 5% When the financial statements are prepared in accordance with a fair
presentation framework, the evaluation required by paragraphs 12 to 13 of PSA 700 (Clarified) shall also
include whether the financial statements achieve fair presentation. The auditor’s evaluation as to
whether the financial statements achieve fair presentation shall include consideration of: (a) The overall
presentation, structure and content of the financial statements; and (b) Whether the financial
statements, including the related notes, represent the underlying transactions and events in a manner
that achieves fair presentation. The auditor shall evaluate whether the financial statements adequately
refer to or describe the applicable financial reporting framework.

124 when should an auditor express an unmodified opinion on the financial statements? 3% The auditor
shall express an unmodified opinion when the auditor concludes that the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework.

125 what course of action should the auditor take if it is found that financial statement prepared are not
fairly presented? 5% If the auditor: (a) concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement; or (b) is unable to obtain
sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from
material misstatement. The auditor shall modify the opinion in the auditor’s report in accordance with
PSA 705 (Clarified). If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation, the auditor shall discuss the matter with
management and, depending on the requirements of the applicable financial reporting framework and
how the matter is resolved, shall determine whether it is necessary to modify the opinion in the
auditor’s report in accordance with PSA 705 (Clarified).

126 what specific information are contained in the introductory paragraph? 5% The introductory
paragraph in the auditor’s report shall: (Page 910) (a) Identify the entity whose financial statements
have been audited; (b) State that the financial statements have been audited; (c) Identify the title of
each statement that comprises the financial statements; (d) Refer to the summary of significant
accounting policies and other explanatory information; and (e)Specify the date or period covered by
each financial statement comprising the financial statements.

127 why is “management’s responsibility for the financial statements” paragraph to the audit report
important? 3% “Management’s responsibility for the financial statements” paragraph in the audit report
is important because it describes the responsibilities of those in the organization that are responsible for
the preparation of the financial statements. The auditor’s report need not refer specifically to
“management,” but shall use the term that is appropriate in the context of the legal framework in the
particular jurisdiction. In some jurisdictions, the appropriate reference may be to those charged with
governance.

128 what is the significance of the section “auditor’s responsibility in the audit report? 4% The auditor’s
report shall include a section with the heading “Auditor’s Responsibility.” The auditor’s report shall state
that the responsibility of the auditor is to express an opinion on the financial statements based on the
audit. The auditor’s report shall state that the audit was conducted in accordance with PSAs. The
auditor’s report shall also explain that those standards require that the auditor comply with ethical
requirements and that the auditor plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement.

129 how should the auditor’s report be dated? 3% The auditor’s report shall be dated no earlier than
the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the
auditor’s opinion on the financial statements, including evidence that: (a) All the statements that
comprise the financial statements, including the related notes, have been prepared; and (b) Those with
the recognized authority have asserted that they have taken responsibility for those financial
statements.

130 what are the major reasons for changing the standard unmodified report? 8% Major reasons for
departure from the standard unqualified report 1. Disagreement with management regarding the
acceptability of the accounting policies selected, the method of their application or the adequacy of
financial statement disclosure. 2. Limitation on scope of the audit (resulting in a lack of evidence). 3.
Using extra paragraph(s) to emphasize significant matters. 4. Different opinion on prior year
comparative statements. 5. Relying on the work and reports of other independent auditors. 6. Required
supplementary data omitted or departs from guidelines. 7. “Other information” inconsistent with
financial statements or contains material misstatement of fact. 8. Auditor is not independent.

131 what is the most important distinction between the auditor’s opinion on financial statements and
an auditor’s disclaimer of opinion? 5% Students may identify more than one description of the “most
important” distinction between an opinion and a disclaimer. All the following are valid, although (a) is
intended to be the “Most Important:” a. An opinion (unqualified, qualified or adverse) is an explicit
statement of the auditor’s conclusion(s), while a disclaimer is an (empty) assertion of “no conclusion.” b.
An (unqualified) opinion is the highest level of assurance, while a disclaimer is the lowest level (no
assurance). c. An opinion requires evidence as a basis, while a disclaimer results from lack of evidence.
d. Auditors must be independent to give an opinion, while a disclaimer can result from a CPA’s lack of
independence.

132 define material scope restriction. Must a material scope restriction always lead to a modification of
the audit opinion? 4% A material scope restriction occurs when the auditor is unable to gather sufficient
competent evidence to support an unqualified opinion on the financial statements. Scope restrictions
may be client-imposed or they may result from other circumstances, e.g., appointment of the auditor
after the client’s physical inventory has been taken. A material scope restriction need not result in a
modification of the auditor’s opinion provided the auditor can obtain satisfaction by alternate means.

133 is reference in an audit report to work performed by another auditor a scope qualification? Explain.
2% The principal auditor’s reference in his report to another auditor is not a qualification in scope. The
reference only shows the divided responsibility for the audit work.
134 if an auditor is not independent with respect to a client, what type of opinion must be issued? Why?
4% When an auditor is not independent with respect to a client, a disclaimer of opinion must be
rendered. The disclaimer must be issued because the statements cannot be audited in accordance with
auditing standards. (An ]’reviewed financial statements. An accountant can give a compilation –
disclaimer – report on compiled unaudited financial statements).

135 why might an auditor decide to disclaim an opinion? 3% The auditor may decide to disclaim an
opinion when confronted by a material scope limitation that precludes gathering sufficient evidence to
support an opinion as to overall fairness of financial presentation. The auditor may also disclaim an
opinion if his/her name is associated with financial statements for which an audit was not intended (e.g.,
compilations and reviews), or if the auditor is not independent.

136 does an audit opinion extend to the “other information”? 3% The audit opinion does not extend to
the other information, and therefore, the opinion is not affected by omission or inconsistency or
incorrect supplemental information.

137 what steps should the auditor follow upon learning of a change in accounting principle? 4% Upon
learning of a change in accounting principle, the auditor should first determine the materiality and
appropriateness of the change. If material and the auditor agree with the client’s justification for the
change, an explanatory paragraph should be added following the opinion paragraph. The paragraph will
refer to the footnote describing the change. If the change is not properly accounted for or is
inadequately disclosed, the auditor should consider issuing a qualified or adverse opinion.

138 what should auditors do when financial statements are presented in accordance with special
purpose framework? 8% The report simply states: “The financial statements are not intended to be
presented in conformity with financial reporting standards.” The opinion expression thereafter refers to
a description of the comprehensive basis used. Non-PFRS accounting bases include: 1. Statutory or
regulatory accounting requirements 2. Tax basis accounting 3. Cash and modified cash bases 4. General
price level-adjusted statements 5. Any other basis having “substantial support” (Auditing standards do
not explain how non-PFRS accounting can have “substantial support.” In practice, accountants will
report on any reasonable accounting basis, which explains why reports exist on diverse types of current
value financial statements.)

139 give examples of statements prepared under special purpose frameworks. 4% The following are four
comprehensive bases of accounting other than PFRS: 1. A basis of accounting to comply with the
requirements of a governmental regulatory agency (for example, insurance companies use a basis of
accounting pursuant to the rules of the insurance commission) 2. A basis of accounting used to file an
income tax return 3. The cash receipts and disbursements basis of accounting (cash basis) and
modifications to the cash basis, such as recording depreciation on fixed assets or accruing income tax. 4.
A definite set of criteria having substantial support that is applied to all material items in the financial
statements, such as the price-level basis of accounting.

140 in what circumstances might a CPA be asked to report on the application of general reporting
framework? 8% A CPA may be asked to report on the application of PFRS by another auditor’s client
who disagrees with the auditor’s view of proper accounting for the transaction. Auditing standards apply
when a CPA in public practice, either in connection with a proposal to obtain a new client or otherwise,
provides oral or written advice on the application of accounting principles to a specific transaction or the
type of opinion that may be rendered on an entity’s financial statements. In forming a judgment, the
CPA should perform the following procedures: Obtain an understanding of the form and substance of
the transaction(s). Review applicable PFRS. If appropriate, consult with other professionals or experts. If
appropriate, perform research or other procedures to ascertain and consider the existence of creditable
precedents or analogies. The reporting CPA is required to consult with an entity’s continuing CPA to
ascertain all the relevant facts. The continuing CPA can provide information about the form and
substance of the transaction, how management has applied accounting principles to similar
transactions, and whether the method of accounting recommended by the continuing CPA is disputed
by management.

141 what are some of the difficulties that arise because the auditor’s report must indicate the degree of
responsibility he or she is taking for financial statements for each of the years shown in comparative
financial statements? How does an auditor deal with each of these difficulties? 8% The following
difficulties might arise: Prior-year statements were unaudited: The auditor should label the prior-year
columns “Unaudited” and modify the report by adding a paragraph that disclaims an opinion on the
statements. Audited by another auditor: Alternative 1: Predecessor auditor reissues report. Alternative
2: If predecessor’s report is not presented, the auditor indicates in the introductory paragraph (1) that
the financial statements of the prior period were audited by another auditor (but does not name the
predecessor auditor), (2) the date of the report, (3) the type of report issued by the predecessor auditor,
and (4) if the report was not a standard unqualified report, the substantive reasons therefor. When the
predecessor auditor’s report is not presented, the audit report would have an added sentence at the
end of the first paragraph, and the opinion paragraph would refer only to the current-year statements.
Different reports on comparative statements: An auditor may issue modified reports on either of the
financial statements reported on comparatively. In this situation, the auditor must exercise care to
relate the opinion to the appropriate year’s financial statements.

142 give examples of how an auditor might assume that “what was held true in the past for the
enterprise under examination will hold true in the future.” 5% Examples of using “what has held true in
the past will hold true in the future:” (a) evaluating the collectibility of accounts receivable based on
past collection history, (b) evaluating inventory obsolescence on the basis of past usage patterns, (c)
assessing the economic usefulness and useful lives of fixed assets based upon experience with similar
assets, (d) relying on a control risk assessment for a period between the time of the original assessment
at interim and the fiscal year-end, and (e) expecting to encounter classification and evaluation errors
when management has been known to have acted without sufficient decision planning in the past.

143 what are unaudited statements? In connection with unaudited statements, which general reporting
guides should the auditor follow for public companies? 6% Financial statements are unaudited if the CPA
has not applied any auditing procedures or has not applied procedures which produced sufficient
evidence upon which to base an opinion on the financial statements as a whole. With respect to
unaudited statements, in addition to a disclaimer of opinion (public companies), the following guides
should be followed: 1. If the CPA should learn that the statements are not in conformity with financial
reporting standards (including adequate disclosures), he should explain the departures in the disclaimer.
2. If prior years’ unaudited statements are present, the disclaimer should cover them as well as the
current year statement. 3. Each page of the statements should be clearly labeled as unaudited.
144 how are prospective financial statements defined? 12% Prospective financial statements are
defined as complete financial statements in the same form as traditional income statements, statement
of financial positions and statements of changes in financial position. However, an abbreviated
presentation constitutes prospective financial statements if it contains all of these items (if applicable):
1. Sale or gross revenue 2. Gross profit 3. Unusual or infrequently occurring items 4. Provision for
income taxes 5. Discontinued operations or extraordinary items 6. Net income 7. Primary and fully
diluted earnings per share 8. Summary of significant changes in financial position 9. Summary of
significant assumptions 10.Summary of significant accounting policies Omission of any items 1–8 makes
the presentation a partial presentation. Omission of 9 or 10 makes it a deficient presentation.

145 what is the difference between a review services engagement and compilation service engagement
regarding historical financial statement? Compare both of these to an audit engagement? 10%

Examination Report on a Forecast Audit Report on Historical

Statements

a. Identification of financial a. Identification of statements

statements and what they intend audited.
to represent.

b. Warning about ultimate

attainment of prospective results.

c. Statement about review in c. Statement that audit was in

accordance with ASPC standards. accordance with PSA.

d. Opinion / assurance about d. Opinion about conformity with

presentation and reasonable PFRS.
assumptions.

e. Statement about no
responsibility to update the
report.

Compilation Report on a Forecast Compilation Report on Historical

Statements

a. Identification of financial a. Identification of statements

statements and what they compiled.
represent.

b. Warning about ultimate b. Statement / warning that

attainment of prospective results. information is the representation
of management (owners).

c. Statement about compilation in c. Same kind of statement about

accordance with ASPC standards. compilation and ASPC standards.
 d. Disclaimer of opinion / d. Disclaimer of opinion /
assurance. assurance.

e. Statement about no
responsibility to update the
report.

146 what conditions determine whether a CPA is “associated” with financial statements? 4% A state of
association exists whenever: a. The CPA’s name is used in a document containing the statements; or b.
The CPA has prepared or assisted in preparing the statements.

147 differentiate among the following. 6% A compilation B review C audit

a. Compilation: In compiling financial statements for a client, the CPA presents information that is the
representation of management without undertaking to express any assurance on the statements.

b. Review: More than a compilation, but less than an audit, a review consists mainly of performing
inquiry and analytical procedures. Such procedures provide the CPA a basis for expressing limited
assurance concerning conformance with PFRS.

c. Audit: An audit provides reasonable assurance concerning conformance of financial statements with
PFRS. In addition to inquiry and analytical procedures, an audit involves a study of the client’s internal
controls and application of such evidence gathering procedures as confirmation, observation,
inspection, vouching, and examination.

148 what are the major procedures applied in a review? In compilation? 4% The major procedures
applied in a review consist of reading the financial statements, inquiry as to accounting procedures, and
analytical procedures. A compilation, in contrast to a review, consists of obtaining an understanding of
industry accounting principles and practices and reading the financial statements.

149 what type of accounting service may be performed by a CPA who lacks independence? 2% A CPA
who lacks independence may compile financial statements; but may not perform an audit, review, or
any other form of attestation service.

150 what are the major procedures applied in compiling prospective financial statements? 6%
Procedures to be applied in compiling prospective financial statements should include the following:

a. Inquire about the accounting principles used in preparing the statements.

b. Ask how the key factors are identified and how the assumptions are developed.

c. Obtain a list of assumptions and consider whether there are any omissions or inconsistencies.

d. Test the mathematical accuracy of computations.

e. Read the statements for conformity with PSA presentation guidelines.

f. Obtain client representations concerning compliance with the guidelines.

151 what is evidence triangulation? 2% Triangulation involves employing multiple forms of
corroborating diverse types and sources of evidence and perspectives. By using multiple forms of
evidence and perspectives, a veritable portrait of the facts and conditions can be developed.

152 describe initial conference in audit? 2% The initial conference aims to discuss the plans for the
conduct of the audit as well as to obtain the client’s views and expectations for the overall framework
for the conduct of the audit.

153 explain audit engagement planning. 2% Audit engagement planning starts from an understanding of
the organizational mandate and focusing on what areas will be audited. It involves the selection of
specific financial transactions to be audited and the corresponding and existing internal controls of the
client and also focusing on the degree of compliance with existing/updated and applicable laws and
regulations, prescribed/updated and applicable policies and procedures/standards, system/process of
the client under audit; It should also be based on a sound understanding of the objectives of the audit.

154 explain audit strategic planning. 2% Strategic planning is the process of identifying the key audit
strategic direction of the audit for a three-year period. Its format and content shall be agreed upon
between the Head of Establishment or the Governing Board/Audit Committee and the Chief Auditor.

155 what is an audit annual work plan (AWP)? 2% An Annual Work Plan (AWP) contains the prioritized
audit areas from the Strategic Plan and approved by Head of Establishment or the Governing
Board/Audit Committee and the Chief Auditor which will be focused on during a one-year period, the
type and approach of the audit, and the timelines of the same.

156 explain the following (2% each): substantial evidence, relevant evidence, direct evidence,
circumstantial evidence, corroborative evidence, admissible evidence, physical evidence, testimonial
evidence, documentary evidence, analytical evidence, electronic evidence.

Relevant evidence is one having value in reason as tending to prove any matter provable in an action.

Direct evidence is that which proves the fact in dispute without the aid of any inference or presumption.

Circumstantial evidence is the proof of a fact or facts from which, taken either singly or collectively, the
existence of the particular fact in dispute may be inferred as a necessary or probable consequence.

Corroborative evidence is additional evidence of a different character to the same point.

Admissible evidence is any testimonial, documentary, or tangible evidence that may be introduced in
order to establish or bolster a point.

Physical evidence is obtained by direct observation. Examples are physical verification of cash, site visits
to projects and verification of inventory.

Testimonial evidence is obtained from others through oral or written statements in response to
inquiries or through interview.

Documentary evidence consists of files, reports, manuals and instructions.

Analytical evidence is built up by analyzing the information obtained from other sources.
Electronic Evidence There are many different types of electronic evidence and these may include:
hardware and network diagrams; operating systems software; network and communications software;
journal and activity logs; application programs; and flow diagrams.

157 explain the following (2% each): root cause analysis, “5 whys” technique, failure mode and effects
analysis, fault tree analysis, fishbone or ishikawa diagrams, pareto analysis

“5 Whys” Technique The “5 whys” technique is a simple technique done by repeatedly asking „why‟ to
peel away layers of cause and sub-causes.

Failure Mode and Effects Analysis is a technique used to identify the ways in which the components,
systems or processes can fail to fulfill their design intent.

Fault Tree Analysis is a technique for identifying and analyzing the factors that can contribute to a
specified undesired event (top event).

Fishbone or Ishikawa Diagrams Cause and effect analysis is a structured method to identify the possible
causes of an undesirable event or problem. It organizes the possible contributory factors into broad
categories so that all possible hypotheses can be considered.

Pareto Analysis is a method using statistics to discover the most important causes of an effect.

158 what are the 4Cs in auditing explain each? 8%

a. Criteria – the standards against which a condition is compared with (i.e., standards, laws, regulations,
policies).

b. Condition – a fact, backed up by substantial evidence. The condition refers to what is currently being
done or the current situation. Condition is what the auditor actually finds as a result of the review. It is a
situation that exists. The auditor may find that the actual condition of an event is not in accordance with
the criteria. The condition should be compared with the criteria to assess if the condition falls short of
the criteria or it is beyond acceptable levels.

c. Conclusion – the evaluation of the criteria and the conditions that could either result in compliance or
non-compliance of standards, laws, regulations and policies, as supported by substantial evidence;
control effectiveness; determination of adequacy or inadequacy of controls; determination of the
efficiency, effectiveness, ethicality, and economy of agency operations.

d. Cause – the immediate and proximate reason/s for the condition for which substantial evidence will
be used as basis of the audit recommendation.

159 define or explain the following (2% each): unqualified opinion, qualified opinion, disclaimer opinion,
adverse opinion.

160 what is just in time inventory (JITI)? 2%