1. The following statements were lifted from PSA 240 and pertain to fraud risk factors. Which of these statements is incorrect?

A. Fraud risk factors confirm the presence of fraud, and they often have been present in circumstances where frauds have occurred.

B. Fraud risk factors cannot easily be ranked in order of importance or combined into effective predictive models.

C. The auditor exercises professional judgment when considering fraud risk factors individually or in

combination and whether there are specific controls that mitigate the risk.

D. The size, complexity and ownership characteristics of the entity have a significant influence on the consideration of relevant fraud risk factors.

2. An auditor has suspicion of occurrence of fraud. Accordingly the auditor should (select the exception):

A. The auditor should consider the implications of fraud in relation to other aspects of the audit, particularly the reliability of management's representations.

B. The auditor should communicate to management only those actual findings about fraud that brings material potential effect on financial statements.

C. Unless circumstances clearly indicate that fraud is an isolated occurrence, the auditor adjusts the nature, timing and extent of substantive procedure.

D. If the auditor believes the indicated fraud could have a material effect on the financial statements, he should perform appropriate modified procedures.

3. Communication of a misstatement resulting from fraud or a suspected fraud or error to the appropriate level of management on a timely basis is important because

A. It is a value-added service which auditors traditionally provide to management.

B. It allows the auditor to justify an increase in the audit fee.

C. It enables management to take action as necessary.

D. It gives management an incentive to strengthen internal controls in the future

4. The auditor may encounter exceptional circumstances that bring into question the auditor's ability to continue performing the audit.

Examples include circumstances where:

	A	B	C	D
i. The entity does not take the remedial action regarding fraud that the auditor considers necessary in the circumstances.	Yes	Yes	Yes	Yes
ii. The auditor's consideration of the risk of material misstatement resulting from fraud and the results of audit tests indicate a significant risk of material and pervasive fraud.	Yes	Yes	No	No
iii. The auditor has significant concern about the competence or integrity of management or those charged with governance.	No	Yes	No	Yes

5. The following are the matters to consider when communicating the affairs of a client to a proposed successor auditor:

(1) whether client's permission has been obtained

(2) relevant professional and legal responsibilities applicable in the Philippines

(3) whether the client has already settled its outstanding audit fees with the existing auditor.

A. (1) and (2).

B. (2) only

C. (2) and (3).

D. (1) only

6. Which of the following is incorrect about the auditor's responsibility of evaluating noncompliance by the entity to laws and regulations?

A. An audit cannot be expected to detect noncompliance with all laws and regulations.

B. Noncompliance refers to acts of omission or commission by the entity being audited which are contrary to prevailing laws or regulations.

C. Noncompliance includes personal misconduct of entity management or employers though they are unrelated to the entity's business activities.

D. Detection of noncompliance, regardless of materiality, requires considerations of the implications for the integrity of management or employee.

7. The mostly likely explanation why the auditor's examination cannot reasonably be expected to bring all illegal acts by the client to the auditor's attention is that

A. Illegal acts are perpetrated by management override of internal accounting controls.

B. Illegal acts by clients often relate to operating aspects rather than accounting aspects.

C. Illegal acts may be perpetrated by the only person in the client's organization with access to both assets and the accounting records.

D. The client's system of internal accounting control may be so strong that the auditor performs only minimal substantive testing.

8. When the auditor becomes aware of information concerning a possible noncompliance to laws or regulations, the auditor should appropriately:

A. Obtain an understanding of the nature of the act and the circumstances in which it has occurred, and evaluate the possible effect on the financial statements.

B. Discuss his suspicion with the management.

C. Ask management to determine whether a violation is really committed.

D. Consult with the entity's legal counsel as to what appropriate action the auditor should do

9. When the auditor believes there may be noncompliance, the auditor should document the findings and discuss them with the following parties:

I. Client management.

II. Client's legal counsel.

III. Auditor's own lawyer.

A. I and II.

B. II and III.

C. I and III.

D. I, II and III

10. An auditor who finds that the client has committed an illegal act would be

most likely to withdraw from the engagement when the

A. Illegal act affects auditor's ability to rely on management representations.

B. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.

C. Illegal act has received widespread publicity.

D. Illegal act has material financial statement implications.

11. An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the

A. Auditor is precluded from obtaining sufficient competent evidence about the illegal act.

B. Client refuses to accept the auditor's report as modified for the illegal act.

C. Illegal act has an effect on the financial statements that is both material and direct.

D. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.