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Auditor's Responsibilities and
Procedures
Auditing Theory Reviewer
Principles Of Accounting 1 (Saint Paul College)
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Accepting a New Client
The following would not be a consideration of a CPA firm in deciding whether to accept a new client: C. The client's relations with its previous CPA firm.
Successor Auditor Inquiries
After accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding: A. The predecessor's evaluation of matters of continuing accounting significance. B. Disagreements which the predecessor had with the client concerning auditing procedures and accounting principles. D. The predecessor's assessments of inherent risk and judgments about materiality.
Audit Engagement Letter
The objective and scope of the audit and the extent of the auditor's responsibilities to the client are best documented in a(n): C. Audit engagement letter.
The following is not a valid reason why an auditor sends to his client an engagement letter: D. Assures CPA's compliance to PSAs.
The secondary purpose of the engagement letter is to: C. Provide a written record of the agreement with the client as to the services to be provided.
S1 is true, S2 is false.
Audit Planning
The following procedure is performed primarily during audit planning: A. Risk assessment procedures.
The following is not a risk assessment procedure: C. External confirmation with customers.
Materiality
S1 is true, S2 is true.
Analytical Procedures
S1 is true, S2 is false.
Audit Risk
S1 is true, S2 is false.
In a financial statement audit, detection risk represents: D. The risk that error could occur and not be detected by the auditor's procedures.
Internal Control
The following statement describes the risk assessment process component of internal control: B. The process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.
S1 is true, S2 is false.
Tests of Controls
The following would not be a method used to conduct tests of controls: D. Analytical procedures.
As the auditor plans to rely more on the client's internal control structure, tests of controls should increase.
Audit Evidence
S1 is true, S2 is false.
The following is an example of the auditor's direct knowledge: D. I, II and III.
S1 is true, S2 is false.
Fraud
The following is an example of fraud: B. Client personnel alter accounting records from which financial statements are prepared.
The following situations are applicable to fraud as well as error: A. Mistakes in gathering or processing accounting data. D. Misapplication of accounting policies.
This situation illustrates the risk of incorrect acceptance: D. The sample may indicate that the auditor's assessed level of control risk for a given control is reasonable when, in fact, the true compliance rate does not justify the "less than high" level.
The consequence of assessing control risk too high relates to the efficiency of the audit.
The likelihood of assessing control risk too low is the risk that the sample selected to test controls: D. Supports the auditor's planned assessed level of control risk when the true operating effectiveness of the control structure does not justify such an assessment.
This situation illustrates the risk of incorrect rejection: A. The sample results supported the conclusion that the recorded account balance was materially misstated when it was, in fact, not materially misstated.
A sampling method that is useful when testing controls is attributes sampling.
Non-statistical Sampling
Discovery Sampling
Discovery sampling is a type of sampling used to determine if a population contains any exceptions or errors. The key characteristic of discovery sampling is that the sample size is determined to include at least one such exception.
Attribute Estimation Sampling
Attribute estimation sampling is a type of sampling used to estimate a characteristic of a population, such as the rate of occurrence of a particular attribute.
Stratified Random Sampling
Stratified random sampling is a sampling technique where the population is divided into two or more subpopulations, called strata, and a random sample is selected from each stratum.
Audit Sampling
Sample Size Determination
If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic of discovery sampling. A decrease in the expected population deviation rate will cause the sample size to increase.
A decrease in the tolerable misstatement will cause the sample size to increase.
Sampling Terminology
Tolerable deviation rate is the deviation rate that an auditor will permit in the population and would still be willing to reduce the assessed level of control risk. Projected misstatement is the misstatement that the auditor finds in the sample, adjusted to estimate the misstatement in the population.
Systematic Sampling
When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population may occur in a systematic pattern, thus destroying the sample randomness. Systematic sampling is a method of sampling in which all items in the population are divided into two or more sub-populations.
Subsequent Events
Definition of Subsequent Events
According to PSA 560, "subsequent events" refer to events occurring between the period end and the date of the auditor's report, and facts discovered after the date of the auditor's report.
Procedures Regarding Subsequent Events
The auditor should perform procedures to identify subsequent events that may require adjustment to or disclosure in the financial statements. These procedures may include: - Comparing the financial statements being reported on with those of the prior period. - Inquiring as to whether any unusual adjustments were made after the date of the financial statements.
Auditor's Report on Subsequent Events
If the auditor becomes aware of a material subsequent event which requires adjustment in the financial statements, and management does not amend the financial statements, the audit opinion to be issued would be a qualified opinion or adverse opinion.
Going Concern
Auditor's Responsibility
The responsibility to evaluate the client's assessment of an entity's ability to continue as a going concern rests with the auditor.
Indicators of Going Concern Issues
Conditions or events that most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern include interest payable in arrears for several months.
Mitigating Factors
In evaluating an entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to negotiate increases in required dividends being paid on preference shares.
Audit Documentation
Required Documentation
The documentation required for an audit in accordance with Philippine Standards on Auditing (PSAs) includes a management representation letter.
Management Representation Letters
Management representation letters are not substitutes for substantive test procedures, and all members of the client's management are not required to sign the management representation letter.
Auditor's Responsibilities
Professional Competence and Due Care
The professional responsibilities of an auditor include independence, integrity, objectivity, confidentiality, professional behavior, technical standards, and professional competence and due care.
Assurance Services
Assurance services are independent professional services that improve the quality of information, or its context for decision makers.
Attest Engagements
An engagement to issue a report addressing an entity's compliance with requirements of specified laws would be most likely to be structured as an attest engagement.
Audit Evidence
Characteristics of Suitable Criteria
The characteristics for determining whether criteria are suitable are relevance, reliability, neutrality, and consistency.
Philippine Commission on Audit
The Constitution of the Philippines requires the Commission on Audit to keep the general accounts of the Government and preserve the vouchers pertaining thereto.
Employee Collusion and Falsified
Documentation
The original text mentions two notable fraud risk factors: employee collusion and falsified documentation. These factors indicate that the risk of fraud is high, as the presence of such factors has often been observed in circumstances where frauds have occurred.
Need for Professional Judgment and Skepticism
The text also highlights the need for the auditor to apply professional judgment in evaluating fraud risk factors, as well as the importance of maintaining professional skepticism throughout the audit process. This means that the auditor should neither assume dishonesty nor unquestioned honesty in the representations made by the client's management or personnel.
Philippine Standards on Auditing (PSAs)
The text discusses the following key points regarding the Philippine Standards on Auditing (PSAs):
PSAs must be followed on every audit, but the auditor may choose an alternative course of action if it is justifiable. PSAs are not optional for CPAs who are members of the PICPA, but they are optional for CPAs who are not members. The Auditing and Assurance Standards Council (AASC) includes representatives from various organizations, except the Bureau of Internal Revenue.
Audit Procedures and Planning
The text covers various audit procedures and planning considerations, including:
Observing the client's annual physical inventory-taking and making test counts as part of audit planning. Considering anticipated reliance on internal controls, preliminary judgments about materiality levels, and the kind of audit opinion likely to be given when planning an examination. Reviewing the predecessor auditor's working papers to reduce audit work on a first-time audit.
Assertions and Audit Evidence
The text discusses the assertions made by management in financial statements, noting that the statement "Notes payable in the balance sheet include all such obligations of the entity" is an implicit assertion.
The text also defines a review as involving the application of audit skills and techniques and the gathering of evidence, in contrast with a compilation engagement, where no assurance is expressed.
Monitoring the Accounting and Auditing
Profession
The primary task is to monitor the conditions affecting the practice of accountancy and adopt appropriate measures, including the promulgation of accounting and auditing standards, rules, regulations, and best practices, to enhance and maintain high professional, ethical, accounting, and auditing standards.
Factors Least Likely to be Discovered by an Auditor
Among the following factors or conditions, the one that an auditor is least likely to plan an audit to discover is: a. Financial pressures affecting employees.
Evaluating Staff Auditor's Work Performance
The best criterion for evaluating a staff auditor's work performance is: d. Fulfillment of objectives set forth in the audit.
Applicability of International Standards on Auditing (ISAs)
in the Public Sector
The Auditing Standards and Practices Council (ASPC) has been replaced by the Auditing and Assurance Standards Council (AASC). The understanding is that the matter of the applicability of the equivalent Philippine Standards on
Auditing (PSAs) on Philippine public sector entities will be addressed by: b. The Commission on Audit itself in due course.
Materiality Considerations in Auditing
Materiality should be considered by the auditor when: a. Determining the nature, timing and extent of audit procedures and evaluating the effect of misstatements.
The statement that is correct concerning the concept of materiality is: d. Materiality is a matter of professional judgment.
Understanding the Client's Environment and Internal
Control
In the audit of SAN MIGUEL BEEF by Pirma and Lang, CPAs, the whole team assigned to the engagement should obtain a sufficient understanding of the client and its environment, including its internal control.
Statements Relating to Councils in the Implementing
Rules and Regulations
The statement that is incorrect is: c. The Education Technical Council was created to assist the Professional Regulation Commission in carrying out its powers and functions and to further assist in the attainment of the objective of continuously upgrading the accountancy education in the Philippines.
Auditor's Understanding of the Client's Internal Controls
Auditing standards require the auditor to obtain an understanding of the client's internal controls for every audit.
Components of Internal Control
The interrelated components of internal control are: b. Control environment, risk assessment, control activities, information and communication systems, and monitoring.
Auditor's Understanding of the Client's Information System
An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the process used to prepare significant accounting estimates.
Limitations of Internal Control
Internal control cannot be designed to provide reasonable assurance regarding the elimination of all fraud.
Prospective Client's Refusal to Permit Communication with
Predecessor Auditors
A prospective client's refusal to permit communication with the predecessor auditors will bear directly on the auditor's (JM, CPA) decision concerning the integrity of management.
Auditor's Discussions with the Audit Committee
The auditors will not ordinarily initiate discussion with the audit committee concerning the details of potential problems which the auditors believe might cause a qualified opinion.
Delegation Policy Procedures
The policy on delegation states that there is to be sufficient direction, supervision and review of work at all levels to provide reasonable assurance that the work performed meets appropriate standards of quality. The procedure that is not included is: a. Provide for the approval of the scheduling and staffing of the audit by the auditor.
Quality Review Committee Representation
According to the Implementing Rules and Regulations, the number of representatives of the Quality Review Committee that will come from the accredited national professional organization of CPAs is five members.
Incorrect Statement Regarding Auditor and Quality
Control Procedures
The incorrect statement is: d. The procedures on skills and competence include those for hiring, for professional responsibilities and for advancement.
Fraud Risk Factor Unrelated to Industry Conditions
The fraud risk factor that is unrelated to industry conditions is: c. Unusually rapid growth or profitability, especially compared with that of other companies in the same industry.
Appropriate Auditor Action for Revenue Recognition Fraud
Risk
If there is a risk of material misstatement resulting from fraud that may involve or result in improper revenue recognition, the most appropriate course of action for the auditor to take is: b. Confirm with customers certain relevant contract terms and the absence of side agreements.
Factors Excluded When Evaluating the Effect of
Noncompliance
The factor that the auditor does not consider when evaluating the possible effect of noncompliance on the financial statements is: b. Whether the auditor should be held responsible for preventing such non-compliance.
Portion of RA9298 Embodying Legislative Intent
According to the Implementing Rules and Regulations, the portion of RA9298 that embodies the legislative intent in enacting the Philippine Accountancy Act of 2004 is the Declaration of policy.
Exception to the Practice of Public Accountancy
The service that does not constitute the practice of public accountancy is: d. The design, installation, review, and revision of accounting systems and controls.
Accreditation of Individual CPAs, Firms, and
Partnerships
Registration Requirements
Within 60 days of the effective date of the revised rules and regulations, individual CPAs, firms, and partnerships of CPAs who are not yet registered must register with the Board and the Commission. Renewal of registration must be made every three years on or before November 30 of the year of expiry, upon compliance with the requirements set forth in the Implementing Rules and Regulations.
Requirements for New Practitioners
Individual CPAs, firms, and partnerships of CPAs organized after the effective date of the revised rules and regulations must register with the Board and the Commission. They shall not commence the practice of public accountancy until a valid Certificate of Registration or Certificate of Commissioning has been issued. Subject to favorable recommendation, they shall be issued the corresponding certificate of registration to practice public accountancy, valid for two or three years.
The national directors shall be apportioned according to sectors in the four geographic sectors based on the ratio of latest available number of members in good standing from those areas. PICPA shall have a full-time career Executive Director who shall implement the policies promulgated by the PICPA Board of Directors and have direct supervision over the PICPA Secretariat.
Temporary and Special Permits
The cases provided illustrate valid examples of the granting of temporary and special permits to foreign CPAs, as they are essential for the advancement of accountancy or the development of the country, and there are no qualified Filipino CPAs available.
Audit Engagement Letter
The statement most likely to appear in the engagement letter is: "Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered."
Audit Planning and Materiality (Additional)
The overall audit program is first prepared, followed by the development of the overall audit plan and the establishment of an overall audit strategy.
Professional Fees
A profession is distinguished by certain characteristics, one of which is the collection of fees for services rendered, and the fee is based on written agreements with the client. Retainer fee basis is the method of billing clients whereby the billing is done on the basis of actual time spent by the staff multiplied by the hourly rates agreed upon.
