The CPA Standards

1. If a CPA recklessly departs from the standards of due care when conducting an audit, she or he will be liable to unknown third parties based on a. strict liabilityc. negligence
b. gross negligenced. breach of contract

2. Under the common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client’s financial statements? c. The CPA is liable only to third parties in privity of contract with the CPA. d. The CPA is liable only to known users of the financial statements. e. The CPA probably is liable to any person who suffered a loss as a result of the fraud. f. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

3. An example of breach of contract would be
g. a bank’s claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan h. an auditor’s refusal to return client’s general ledger book until client paid last year’s audit fees i. a CPA firm’s failure to deliver a tax return on the agreed-upon date because the firm had a backlog of other work which was more lucrative j. an auditor’s failure to complete the audit by the agreed-upon date because client’s financial records had been confiscated by the BIR

4. Performing the preliminary engagement activities helps to ensure that the auditor plans an audit engagement, which is not? k. The auditor maintains the necessary independence and ability to perform the engagement. l. There are no issues with management integrity that may affect the auditor’s willingness to continue the engagement. m. The auditor evaluates compliance with ethical requirements as required by PSA 220 (Redrafted) n. There is no misunderstanding with the client as to the terms of the engagement.

5. Which of the following is the most likely first step an auditor would perform at the beginning of an initial audit engagement? o. Prepare a
rough draft of the financial statements and of the auditor’s report. p. Study and evaluate the system of internal administrative control. q. Tour the client’s facilities and review the general records. r. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

6. The use of an engagement letter is the best method of documenting I. The required communication of significant deficiencies in internal control structure II. Significantly lower materiality levels than those used in the prior audit III. The description of any letters or reports that the auditor expects to issue IV. Notification of any changes in the original arrangements of the audit a. I and IIc. II and III

b. I and IVd. III and IV

7. The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct statements. I. Due to the inherent limitations of the audit, there is a possibility that material misstatements in the financial statements may not be detected II. The subsequent discovery of material misstatement of the financial information resulting from fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles and essential procedures of an audit a. I onlyc. II only

b. Both statements are trued. Both statements are false

8. The term “error” refers to unintentional misrepresentation of financial information. Examples of errors are when I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified IV. The effects of the transactions have been omitted from the records a. All of the above statements are true
b. Only statements I and III are true
c. All of the above statements are false
d. Only the statements II and IV are true

9. What information should an incoming auditor obtain during the inquiry of the predecessor auditor prior to the acceptance of the audit? I. Facts that bear on the integrity of management
II. Whether statistical or non-statistical sampling was used to gather evidence III. Disagreement with management concerning auditing procedures IV. The effect of the client’s internal audit function on the scope of the independent auditor’s examination a. I and IIc. I and IV

b. I and IIId. III and IV

10. Which of the following is the correct order of steps in the audit process? A. Perform tests of control
B. Develop an overall strategy for the expected conduct and scope of the audit C. Obtain client’s written representation
D. Prepare engagement letter
E. Perform substantive tests
a. D, A, B, E, Cc. D, B, C, A, E
b. D, B, A, E, Cd. D, B, E, A, C