NFJPIA-Region X and CARAGA Council

RFJPIA Cup Level 2 – Auditing Theory

ELIMINATION ROUND
EASY ROUND
RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #1)
The need for assurance services arises because:
a. There is a consonance of interests of the preparer and the user of the
financial statements.
b. There is a potential bias in providing information.
c. Economic transactions are less complex than they were a decade ago.
d. Most users today have access to the system that generates the
financial statements they use.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #2)

Which of the following is explicitly included in the Auditor’s responsibility
section of the auditor's report?
a. Reason for modification of opinion.
b. “Philippine Financial Reporting Standards”.
c. “Philippines Standards on Auditing”.
d. Division of responsibility with another auditor.
e. Management representations.

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

The measure of variability of a statistical sample that serves as an estimate
of the population variability is the:
a. Basic precision.
b. Range.
c. Measures of central tendency.
d. Standard deviation.
e. Interval.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #4)

If a control total were to be computed on each of the following data items,
which would best be identified as a hash total for a payroll CBIS application?
a. Net pay
b. Department numbers.
c. Hours worked
d. Total debits.
e. Total credits.

RFJPIA CUP LEVEL 2 – Auditing Theory (EASY QUESTION #5)

When the auditor determines that detection risk regarding a financial
statement assertion for a material account balance or class of transactions cannot
be reduced to an acceptable level, the auditor should express:
 a. Qualified or adverse opinion.
b. Unqualified opinion with explanatory paragraph.
c. Qualified or disclaimer of opinion.
d. Unqualified opinion.
e. Adverse or disclaimer of opinion.

AVERAGE ROUND
RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #1)
Which of the following is not explicitly referred to in the Code of Ethics as
source of technical standards?
a. Commission on Audit.
b. Auditing and Assurance Standards Council.
c. Securities and Exchange Commission.
d. Relevant legislation.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #2)

This occurs when a firm or a member of the assurance team, promotes or
may be perceived to promote an assurance client’s position or opinion to the point
that objectivity may or may be perceived to be compromised. Such may be the
case if a firm or a member of the assurance team were to subordinate their
judgment to that of the client.
Answer: Advocacy threat.

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

An auditor who discovers that client employees have committed an illegal
act that has a material effect on the client's financial statements most likely would
withdraw from the engagement if :
a. The illegal act is violation of generally accepted accounting principles.
b. The client does not take the remedial action that the auditor
considers necessary.
c. The illegal act was committed during a prior year that was not audited.
d. The auditor has already assessed control risk at the minimum level.
e. The auditor cannot reduce the material effect of the illegal act to an
immaterial one.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #4)

A written representation from a client's management which, among other
matters, acknowledges responsibility for the fair presentation of financial
statements should normally be signed by the:
a. Chief executive officer and the chief financial officer.
b. Chief financial officer and the chairman of the BOD.
c. Chairman of the audit committee of the BOD.
d. Chief executive officer, the chairman of the BOD and the client's lawyer.
e. Chief executive officer, chief financial officer and the chairman of the
BOD.

RFJPIA CUP LEVEL 2 – Auditing Theory (AVERAGE QUESTION #5)

 CBIS controls are frequently classified as to general controls and application
controls. Which of the following is an example of an application control?
a. Programmers may access the computer only for testing and
"debugging" programs.
b. All program changes must be fully documented and approved by the
information systems manager and the user department authorizing the
change.
c. A separate data control group is responsible for distributing output, and
also compares input and output on a test basis.
d. Use of passwords and identification codes.
e. In processing sales orders, the computer compares customer
and product numbers with internally stored lists.

DIFFICULT ROUND
RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #1)
In studying a client's internal controls, an auditor must be able to
distinguish between prevention controls and detection controls. Of the following
data processing controls, which is the best detection control?
a. Policy requiring password security.
b. Backup and recovery procedure.
c. Access controls.
d. Use of data encryption techniques.
e. Review of machine utilization logs.

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

When the auditor encounters sophisticated computer-based systems, he or
she may need to modify the audit approach. Of the following conditions, which
one is not a valid reason for modifying the audit approach?
a. More advanced computer systems produce less documentation, thus
reducing the visibility of the audit trail.
b. In complex computer-based systems, computer verification of data at
the point of input replaces the manual verification found in less
sophisticated data processing systems.
c. Integrated data processing has replaced the more traditional separation
of duties that existed in manual and batch processing systems.
d. Real-time processing of transactions has enabled the auditor to
concentrate less on the completeness assertion.
e. None of the above.

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

In an application of mean per unit sampling, the following information has
been obtained:
Reported book value P600,000
Point estimate (estimated total value) 591,000
Allowance for sampling risk (precision) +- 22,000
Tolerable error +- 45,000
 The appropriate conclusion would be that the reported book value is:
a. Acceptable only if the risk of incorrect rejection is at least twice the risk
of incorrect acceptance.
b. Acceptable only if the risk of incorrect acceptance is at least twice the
risk of incorrect rejection.
c. Acceptable only if the risk of overreliance is at least twice the risk of
underreliance.
d. Acceptable.
e. Not acceptable.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #4)

Based on RA 9298, how many years can a partner who survived the death or
withdrawal of other partner/s continue to practice under the partnership name
after becoming a sole practitioner?
Answer: 2 years.

RFJPIA CUP LEVEL 2 – Auditing Theory (DIFFICULT QUESTION #5)

The following procedures may be performed by CPAs in an engagement:
1. Consideration of internal control
2. Observation
3. Inquiry and analysis
4. Inspection
5. Confirmation
6. Obtaining management representation letter
Which of the foregoing are normally performed in an agreed-upon
procedures engagement?
Answer: 2, 3, 4 and 5 only.

CLINCHER QUESTIONS
RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #1)
Which of the following is not a distinguishing feature of risk-based auditing?
a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk
of financial statement errors.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #2)

In conducting a substantive test of an account balance, an auditor
hypothesizes that no material error exists. The risk that sample results will
support the hypothesis when a material error actually does exist is the risk of:
a. Incorrect rejection.
b. Alpha error.
c. Incorrect acceptance.
d. Type I error.
e. Risk of overreliance.
RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #3)
In a distributed data base (DDB) environment, control tests for access control
administration can be designed which focus on:
a. Reconciliation of batch control totals.
b. Hash totals.
c. Examination of logged activity.
d. Prohibition of random access.
e. Analysis of system generated core dumps.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #4)

Which of the following might be detected by an auditor's review of the
client's sales cut-off?
a. Excessive goods returned for credit.
b. Unrecorded sales discounts
c. Lapping of year end accounts receivable
d. Inflated sales for the year.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CLINCHER QUESTION #5)

An auditor confirms a representative number of open accounts receivable as
of December 31, 2010, and investigates respondents' exceptions and comments.
By this procedure, the auditor would be most likely to learn of which of the
following?
a. One of the cashiers has been covering a personal
embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit
sales to family and friends
c. One of the CBIS control clerks has been removing all sales invoices
applicable to his account from the data file.
d. The credit manager has misappropriated remittances from customers
whose accounts have been written off.
e. The internal control is effective.

FINAL ROUND
EASY QUESTIONS
RFJPIA CUP LEVEL 2 – Auditing Theory (AKIC) ACE QUESTION
This exists when other information contradicts information contained in the
financial statements.
a. Material inconsistency.
b. Material difference.
c. Material deviation.
d. Material error.
e. None of the choices.

RFJPIA CUP LEVEL 2 – Auditing Theory (MTIM) JOKER QUESTION

The term "present fairly, in all material respect", means
 a. The financial statements conform to GAAP.
b. The financial statements may still be materially misstated because the
auditors may not have discovered the errors.
c. The financial statements are accurately prepared.
d. The auditor considers only those matters that are significant to
the users of the financial statements.
e. Immaterial amounts are omitted from the financial statements.

RFJPIA CUP LEVEL 2 – Auditing Theory (SIC)

This occurs when by virtue of a close relationship with an assurance client,
its directors, officers or employees, a firm or a member of the assurance team
becomes too sympathetic to the client’s interests.
Answer: Familiarity threat.

RFJPIA CUP LEVEL 2 – Auditing Theory (PCC)

Which of the following acts is/are considered fraud?
1. Alteration of records or documents.
2. Misinterpretation of facts.
3. Misappropriation of assets.
4. Recording of transactions without substance.
5. Clerical mistakes.
Answer: 1, 3 and 4 only.

RFJPIA CUP LEVEL 2 – Auditing Theory (MVC)

This refers to the communication to the public of information as to the
service or skills provided by professional accountants in public practice with a view
of procuring professional business.
Answer: Advertising.

RFJPIA CUP LEVEL 2 – Auditing Theory (CMU)

Which of the following factors is/are essential to an effective internal auditing
organization?
1. Operating responsibility.
2. Organizational status
3. Objectivity
Answer: 2 and 3 only.

RFJPIA CUP LEVEL 2 – Auditing Theory (COC)

The auditor's report should be dated as of the date on which the:
a. Field work is completed.
b. Report is delivered to the client.
c. Report is submitted to the audit committee.
d. Fiscal period under audit ends.
e. Review of the working papers is complete.

AVERAGE QUESTIONS
RFJPIA CUP LEVEL 2 – Auditing Theory (JPI) ACE QUESTION
 Which of the following auditing procedures would the auditor not apply to a
cutoff bank statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff
bank statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the
cash disbursements record.
d. Determine that the year end deposit in transit was credited by the bank
on the first working day of the following accounting period.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (BSU) JOKER QUESTION

The most effective means for the auditor to determine whether a recorded
intangible asset possesses the characteristics of an asset is to:
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent applications.
c. Register the patent at the Patent Office to test its validity and
acceptability.
d. Evaluate the future revenue-producing capacity of the
intangible asset.
e. Analyze research and development expenditures to determine that only
those expenditures possessing future economic benefit have been
capitalized.

RFJPIA CUP LEVEL 2 – Auditing Theory (SMC)

The probability of a significant idle capacity loss increases under which of the
following conditions?
a. Sales and production have increased significantly during the period
under audit.
b. Sales and production have declined materially during the
period under audit.
c. Sales have declined somewhat, but production has remained constant
in anticipation of a sales recovery in the following accounting period.
d. The client has increased its overhead absorption rate effective at the
beginning of the following accounting period.
e. Sales and production remained constant during the period under audit.

RFJPIA CUP LEVEL 2 – Auditing Theory (FSUU)

An audit report contains the following paragraph: "Because of the
inadequacies in the company's accounting records during the year ended June 30,
2003, it was not practicable to extend our auditing procedures to the extent
necessary to enable us to obtain certain evidential matter as it relates to
classification of certain items in the consolidated statements of operations." This
paragraph most likely describes
a. A material departure from GAAP requiring a qualified audit opinion.
b. An uncertainty that should not lead to a qualified opinion.
c. A matter that requires an adverse opinion.
 d. A matter that the auditor wishes to emphasize and that does not lead to
a qualified audit opinion.
e. A material scope restriction requiring a qualification of the
audit opinion.

RFJPIA CUP LEVEL 2 – Auditing Theory (XU)

Under which of the following circumstances would a disclaimer of opinion not
be appropriate?
a. The financial statements fail to contain adequate disclosure
concerning related party transactions.
b. The client refuses to permit its attorney to furnish information
requested in a letter of audit inquiry.
c. The auditor is engaged after fiscal year-end and is unable to observe
physical inventories or apply alternative procedures to verify their
balances.
d. The auditor is unable to determine the amounts associated with illegal
acts committed by the client's management.
e. Under no circumstances.

RFJPIA CUP LEVEL 2 – Auditing Theory (IIT)

Morgan, CPA, is the principal auditor for a multi-national corporation. Another
CPA has examined and reported on the financial statements of a significant
subsidiary of the corporation. Morgan is satisfied with the independence and
professional reputation of the other auditor, as well as the quality of the other
auditor's examination. With respect to Morgan's report on the consolidated
financial statements, taken as a whole, Morgan
a. Must not refer to the examination of the other auditor.
b. Must refer to the examination of the other auditor.
c. May refer to the examination of the other auditor.
d. May refer to the examination of the other auditor, in which case Morgan
must include in the auditor's report on the consolidated financial
statements a qualified opinion with respect to the examination of the
other auditor.
e. May refer only if the other auditor consents.

RFJPIA CUP LEVEL 2 – Auditing Theory (SFXC)

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

RJPIA CUP LEVEL 2 – Auditing Theory (LDCU)

 Comfort letters are ordinarily signed by the
a. Client.
b. Independent auditor.
c. Internal auditor.
d. Independent auditor and client.
e. Independent auditor and internal auditor.

DIFFICULT QUESTIONS
RFJPIA CUP LEVEL 2 – Auditing Theory (LC) ACE QUESTION
The engagement team for the 2010 audit of the financial statements of
Sarimanok Company is composed of the following:
Partner: Jose Marquez Senior associate: Asserina Tamayo
Manager: Shirley Cordova Audit associates: Cristy Espenilla,
Jona Lee
Following Philippine Standards on Auditing, who among the above would be
considered as the auditor?
a. Jose Marquez only.
b. Jose Marquez and Asserina Tamayo only.
c. Jose Marquez, Asserina Tamayo and all the audit associates only.
d. Jose Marquez, Asserina Tamayo and Shirley Cordova only.
e. All of them.

RFJPIA CUP LEVEL 2 – Auditing Theory (NFJPIA) JOKER QUESTION

The following statements relate to CPA examination ratings. Which of the
following is incorrect?
a. To pass the examination, candidates should obtain a general weighted
average of 75% and above, with no rating in any subject less than 65%.
b. Candidates who obtain a rating of 75% and above in at least four
subjects shall receive a conditional credit for the subjects passed.
c. Candidates who failed in four complete examinations shall no
longer be allowed to take the examinations the fifth time.
d. Conditioned candidates shall take an examination in the remaining
subjects within two years from the preceding examination.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (CTKC)

Which statement is incorrect regarding the nature of tests of controls?
a. As the planned level of assurance increases, the auditor seeks more
reliable audit evidence.
b. Those controls subject to testing by performing inquiry combined with
inspection or reperformance ordinarily provide more assurance than
those controls for which the audit evidence consists solely of inquiry
and observation.
c. The absence of misstatements detected by a substantive
procedure provides audit evidence that controls related to the
assertion being tested are effective.
 d. A material misstatement detected by the auditor’s procedures that was
not identified by the entity ordinarily is indicative of the existence of a
material weakness in internal control.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (SPUS)

The assessment of the risks of material misstatement at the financial
statement level is affected by the auditor’s understanding of the control
environment. Weaknesses in the control environment ordinarily will lead the
auditor to:
a. Have more confidence in internal control and the reliability of audit
evidence generated internally within the entity.
b. Conduct some audit procedures at an interim date rather than at period
end.
c. Decrease the number of locations to be included in the audit scope.
d. Withdraw from the engagement.
e. Modify the nature of audit procedures to obtain more
persuasive audit evidence.

RFJPIA CUP LEVEL 2 – Auditing Theory (LSU)

Which of the following is least likely a procedure that would be performed by
the auditor near the auditor’s report date?
a. Reading the minutes of the meetings of shareholders, the
board of directors and audit executive committees held
throughout the audit year.
b. Reading the entity’s latest available interim financial statements.
c. Inquiring of the client’s legal counsel concerning litigations and claims.
d. Reviewing the procedures that management has established to ensure
that subsequent events are identified.
e. All are performed near the auditor’s report.

RFJPIA CUP LEVEL 2 – Auditing Theory (STC)

Which of the following statements is not true regarding the competence of
audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.
e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (FCC)

Which one of the following, if present, would support a finding of constructive
fraud on the part of a CPA?
a. Privity of contract.
b. Intent to deceive.
c. Reckless disregard.
d. Ordinary negligence.
 e. None of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (SEC)

An auditor compares 2010 revenues and expenses with those of the prior
year investigating all changes exceeding 10%. By this procedure the auditor would
be most likely to learn that:
a. An increase in property tax rates has not been recognized in the client's
accrual.
b. The 2010 provision for uncollectible accounts is inadequate, because of
worsening economic conditions.
c. Fourth quarter payroll taxes were not paid.
d. The client changed its capitalization policy for small tools in
2010.
e. All of the above.

RFJPIA CUP LEVEL 2 – Auditing Theory (MSUM)

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

RFJPIA CUP LEVEL 2 – Auditing Theory (MU)

Given the increasing use of microcomputers as a means for accessing data
bases, along with on-line real-time processing, companies face a serious challenge
relating to data security. Which of the following is not an appropriate means for
meeting this challenge?
a. Institute a policy of strict identification and password controls housed in
the computer software that permit only specified individuals to access
the computer files and perform a given function.
b. Limit terminals to perform only certain transactions.
c. Program software to produce a log of transactions showing date, time,
type of transaction, and operator.
d. Prohibit the networking of microcomputers and do not permit
users to access centralized data bases.
e. All are appropriate measures for maintaining data security.