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126.

Which of the following would an auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
a. Inquiry of management
b. Make an independent estimate for comparison with client’s estimate
c. Review subsequent events
d. Obtain knowledge about the applicable financial reporting standards related to the
accounting estimate.

127. Which of the following procedures would an auditor least likely perform when
evaluating the reasonableness of management’s estimates?
a. Make an independent estimates for comparison with management estimates
b. Read the minutes of board of director’s meeting
c. Review and test the process used by management
d. Review subsequent events which confirm the estimates made.

128. Which of the following procedures would an auditor ordinarily perform first in
evaluating management’s accounting estimates for reasonableness?
a. Develop independent expectations of management’s estimates
b. Consider the appropriateness of the key factors or assumption used in preparing the
estimates
c. Test the calculations used by the management in developing the estimates.

129. Which of the following is not ones of the primary reasons why auditors should be aware
of related parties and transactions between such parties?
a. PFRS requires disclosure of the related party transactions if they are material
b. The existence of related parties or related party transactions may affect the
financial statements and the reliability of audit evidence
c. A related party transaction may be motivated by other than ordinary business
considerations
d. PFRS requires that related party transactions be recorded in their equivalent arm’s-
length transactions

130. The primary concern of the auditor regarding related party transactions is that
a. They are reported to proper regulatory authorities because they are illegal.
b. Their form be emphasized rather than their economic substance.
c. Their existence and significance be adequately disclosed.
d. Their effects are eliminated from the financial statements.

131. The auditor determines that Jin Company occupies the 3rd floor of an office tower for
which it pays no rent. The most likely explanation is:
a. they got lucky the landlord hasn’t noticed the lack of payments.
b. landlord has weak internal controls over billings.
c. related party transaction in which major shareholder owns the office tower.
d. Jin Company is engaging in fraudulent activities.
132. Most auditors assess inherent risk as high for related parties and related party
transactions because:
a. of the unique classification of related-party transactions required on the balance
sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income
statement.
d. it is required by PFRS.

133. Which of the following would not necessarily be a related-party transaction?


a. Sales to another corporation with a similar name
b. Purchases from another corporation that is controlled by the corporation’s chief
stockholder
c. Loan from the corporation to a major stockholder
d. Sale of land to the corporation by the spouse of a director

134. Which of the following is most likely to indicate the existence of related parties?
a. Writing down obsolete inventory just before year-end
b. Failing to correct previously identified internal control deficiencies
c. Depending on a single product for the success of the entity
d. Borrowing money at an interest rate significantly below the market rate

135. Related party transactions may be indicated when another company:


a. Subsidizes certain operating expenses of the company
b. Purchases its securities at their fair value
c. Loans to company at market rate
d. Has had a distributor relationship with the company for 10 years

136. Which of the following auditing procedures is most likely to assist an auditor in
identifying related party transactions?
a. Retesting ineffective controls previously reported to the audit committee
b. Sending the second requests for unanswered positive confirmations of accounts
receivable
c. Reviewing information provided by management identifying related parties and
being alert for other material related party transactions
d. Inspecting communications with law firms for evidence of unreported contingent
liabilities

137. Which of the following auditing procedures most likely would assist and auditor in
identifying related party transactions?
a. Inspecting correspondence with lawyers for evidence of unreported contingent
liabilities.
b. Vouching accounting records for recurring transactions recorded just after the
balance sheet date.
c. Reviewing confirmations of loans receivable and payable for indications of
guarantees.
d. Performing analytical procedures for indications of possible financial difficulties.

138. After determining that a related party transaction has in fact occurred, an auditor
should
a. Add a separate paragraph to the auditor’s standard report to explain the
transactions.
b. Perform analytical procedures to verify whether similar transactions occurred, but
were not recorded
c. Obtain understanding of the business purpose of the transaction.
d. Substantiate that the transaction was consummated on terms equivalent to an
arm’s-length transaction.

139. When auditing related party transaction, an auditor places primary emphasis on
a. Ascertaining the right and obligations of the related parties.
b. Confirming the existence of the related parties.
c. Verifying the valuation of the related party transactions.
d. Evaluating the disclosure of the related party transactions.

140. A person or firm possessing special skill, knowledge and experience in a particular field
other than accounting and auditing is called a/an
a. Professional c. Expert
b. Consultant d. Assistant

141. Which of the following is not an expert upon whose work an auditor may rely?
a. Actuary c. Appraiser
b. Internal auditor d. Engineer

142. During an audit, the auditor may need the assistance of an expert in obtaining sufficient
appropriate evidence. A common example is
a. Evaluating the potential financial statement effect an employee fraud
b. Determination of the amounts using actuarial computations.
c. Evaluating the integrity of management.
d. Determining the sufficiency and appropriateness of evidential matter obtained.

143. Each of the following procedures requires the assistance of an expert except
a. Determining the physical condition or quantity of underground mineral.
b. Determining the value of works of art.
c. Interpreting major contracts.
d. Determining the adequacy of disclosure in the notes to the financial statements.

144. An expert whose expertise is used by the entity in preparing financial statements is
called a (an):
a. Finacial expert
b. Management expert