21. Management's responsibility in a computer system would not include a. Ensuring the documentation of the system is complete and up to date b. Maintaining a system of transaction processing that includes an audit trail c. Assessment of the control risk d. Making computer resources and knowledge personnel available 22. Which of the following events most likely would indicate the existence of related parties?

a. Granting stock options to key executives at favorable prices. b. High turnover of senior management and members of the board of directors. c. Failure to correct internal control weaknesses on a timely basis. d. Selling real estate at a price significantly different from appraised value.

23. To which of the following matters would materiality limits not apply in obtaining written management representations? A. Reductions of obsolete inventory to net realizable value B. The disclosure of compensating balance arrangements involving related parties C. Losses from purchase commitments at prices in excess of market value D. The availability of minutes of stockholders' and directors' meetings 24. An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor would most likely issue: a. Either a qualified opinion or a disclaimer of opinion b. An adverse opinion c. Either a qualified opinion or an adverse opinion d. A disclaimer of opinion 25. According to RA 9298, if a partner dies, the surviving partners may continue to practice under the existing from title which includes the decreased partner's name a. Indefinitely b. For a period of time not to exceed two years. c. For a period of time not to exceed five years. d. Until the partnership pay-out to the deceased partner's estate is terminated. 26. After gaining an understanding of internal control, the auditor may attempt to assess control risk at less than the maximum. For this purpose, the auditor should (1) identify specific controls that are likely

to prevent or detect material misstatement in the relevant financial statement assertions and (2) perform tests controls. The purpose of these tests is to

A. Assure that the auditor has an adequate understanding of internal control. B. Evaluate the effectiveness of such controls. C. Provide recommendations to management to improve internal control. D. Evaluate inherent risk.

27. In most audits of large companies, internal control risk assessment contributes to audit efficiency which means A. the cost of year-end audit work will exceed the cost of control evaluation work B. auditors will be able to reduce the cost of year-end audit work by an amount more than the control evaluation costs C. the cost of control evaluation work will exceed the cost of year-end audit work D. auditors will be able to reduce the cost of year-end audit work by an amount less than the control evaluation costs 28. Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to

A. Permit cross-referencing and simplify supervisory review. B. Support the audit report. C. Eliminate the need for follow-up reviews. D. Determine that working papers adequately support findings, conclusions, and reports. 29. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

a. It is difficult to prepare financial statements that fairly present a company's financial position, financial performance, and cash flows without the expertise of an independent auditor. b. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. c. It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship of the affairs of the business. d. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.

30. A CPA shall not practice under a practice name that includes or indicates the following except a. Fictitious name b. Specialization c. Misleading as to the type of the organization d. Name(s) of past partner(s) in the firm name of successor partnership 31. An assurance engagement that provides a high level of assurance that the financial statements are free of material misstatements is known as a. Review b. Compilation c. Agreed-upon procedures d. Independent financial statements audit 32. When accountants are not independent, which of the following reports can nevertheless be issued? a. Compilation report

b. Standard unmodified audit report c. Examination report on a forecast d. Examination of internal control over financial reporting 33. A CPA has been engaged to perform review services for a client. Identify which of the following is a correct statement. a. The CPA must perform the basic audit procedures necessary to determine that the statement are in conformity with the applicable financial reporting framework. b. The financial statements are primarily representations of the CPA. c. The CPA may prepare the statements from the books but may not assis in adjusting and closing the books. d. The CPA is performing an assurance engagement other than an audit of the financial statements.

34. Certain management characteristics may heighten the auditor's concern about the risks of material misstatements. The characteristic that is least likely to cause concern is that management. A. Operating and financing decisions are made by numerous individuals. B. Commits to unduly aggressive forecasts. C. Has an excessive interest in increasing the entity's stock price through use of unduly aggressive accounting practices. D. Is interested in inappropriate methods of minimizing earnings for tax purposes. 35. Which of the following procedures would an auditor least likely perform while obtaining an understanding of a client in a financial statement audit?

a. Coordinating the assistance of entity personnel in date preparation. b. Discussing matters that may affect the audit firm personnel responsible for nonaudit services to the entity. c. Selecting a sample of vendor's invoices for comparison to receiving reports. d. Reading the current year's interim financial statements.

36. The auditor's risk assessment procedures should always include the following, except.

a. Inquiries of management and of others within the entity. b. Analytical procedures. c. Observation and inspection. d. Substantive test procedures and test of controls.

37. An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent's internal controls? a. Review reports on internal control placed in operation and its operating

effectiveness produced by the agent's own auditor.

b. Review prior year workpapers to determine whether the number of transactions

processed by the agent has materially increased.

c. Perform an audit on the internal control function of the agent. d. Perform tests of controls on a sample of the audited firm's

transactions through the agent.

38. The following matters are generally included in an auditor's engagement letter, except A. The factors to be considered in setting preliminary judgments about materiality.

B. The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that even some material misstatements may remain undiscovered. C. The scope of the audit. D. Management's responsibility for the financial statements.

39. The Code of Ethics for Professional Accountants in the Philippines provides the categories of threats that could compromise or could be perceived to compromise a professional accountant's compliance with the fundamental principles. The threat that the professional accountant will not appropriately evaluate the results of a previous judgment made or service performed on which the accountant will rely when forming a judgment as part of providing a current service is called A. advocacy threat B. familiarity threat C. self-review threat D. intimidation threat 40. Which of the following need not be documented in the working papers as required by PSA 230? a. Audit evidence obtained, the audit procedures applied and the testing performed have provided sufficient competent evidential matter to afford a reasonable basis for an opinion. b. The work has been adequately planned and supervised. c. A sufficient understanding of the internal control structure had been obtained to plan the audit and to determine the nature, timing and extent of tests to be performed. d. Basis in choosing the members of the audit engagement team.