Overview of the Audit Process

1. A listing of all the things which the auditor will use to gather sufficient,
competent evidence is the
a. audit procedure
b. audit plan
c. audit program
d. audit risk model

2. Tests of controls are directed towards the control’s

a. efficiency
b. effectiveness
c. efficiency and effectiveness
d. cost benefit ratio

3. Which one of these is not a type of evidence that would be used for
both obtaining an understanding of the control structure and testing
the controls?
a. Inquiries
b. Inspection
c. Observation
d. Reperformance

4. A procedure designed to test for peso errors or irregularities directly

affecting the correctness of financial statement balances is a
a. substantive test
b. compliance test
c. test of controls
d. definition of peso-unit sampling

5. Test to whether the accounting transaction have been properly

authorized, correctly recorded and summarized in the journals, and
correctly posted to subsidiary ledgers and the general ledger are
a. test of controls
b. substantive tests of transactions
c. substantive tests of balances
d. analytical procedures

6. Tests of controls, for efficiency, are frequently done at the same time
as
a. analytical procedures
b. compliance tests
c. substantive tests of transactions
d. substantive tests of balances

7. The primary emphasis in most tests of details of balances is on the

a. balance sheet accounts
b. income statement accounts

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 c. cash flow statement account
d. three statements above

8. Analytical procedures are defined in the Statements on Auditing

Standards as
a. compliance tests
b. substantive tests
c. test of controls
d. helpful procedures not possessing the validity of other tests
available to the auditor

9. More types of evidence are obtained by using this test than by using
any other type of test
a. Test of controls
b. Test of transactions
c. Test of balances
d. Analytical procedures

10. This type of evidence can be gathered with every type of audit
test.
a. Inquiries of client personnel
b. Inspection of documents and records
c. Observation of application of policies and procedures
d. Reperformance of procedures

11. Which of the following audit tests is usually the most costly to
perform?
a. Analytical procedures
b. Test of controls
c. Test of balances
d. Substantive tests of transactions

12. Which of the following audit tests is usually the least costly to
perform?
a. Analytical procedures
b. Test of controls
c. Test of balances
d. Substantive tests of transactions

13. At what stage in the audit are the analytical procedures

performed?
a. In the planning stage
b. In conjunction with tests of transactions and test of details of
balances
c. Near the end
d. During all three stages

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14. When planning test of details of balances, the auditor forecasts
the results of tests of controls, substantive test of transactions, and
analytical procedures. The prediction for these three areas is usually
that there will be
a. no exceptions
b. few or no exceptions
c. an average number of exceptions
d. many exceptions

15. Which of the following statements is not true?

a. Tests of transactions are often performed several months prior
to the balance sheet date.
b. It is common to use analytical procedures at any time during
the audit
c. When controls are not considered effective, or when control
deviations are discovered, substantive tests will be eliminated
and replaced with the tests of details of balances
d. Tests of details of balances are normally done last

16. Auditors should request that an audit client send a letter of

inquiry to those attorneys who have been consulted concerning
litigation, claims, or assessments. The primary reason for this request
is to provide
a. information concerning the progress of cases to date
b. corroborative evidential matter
c. an estimate of the peso amount of the probable loss
d. an expert opinion as to whether a loss is possible, probably or
remote

17. A written client representation letter most likely would be an

auditor’s best source of corroborative information of a client’s plans to
a. terminate an employee pension plan
b. make a public offering of its common stock
c. settle an outstanding lawsuit for an amount less than the
accrued loss contingency
d. discontinue a line of business

18. An auditor concludes that the omission of a substantive

procedure considered necessary at the time of examination may impair
the auditor’s present ability to support the previously expressed
opinion. The auditor need not apply the omitted procedure if
a. the risk of adverse publicity litigation is low
b. the results of other procedures that were applied tend to
compensate for the procedure omitted
c. the auditor’s opinion was qualified because of a departure from
generally accepted accounting principles

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 d. the results of the subsequent period’s test of controls make the
omitted procedure less important

19. Which of the following documentation is required for an audit in

accordance with generally accepted auditing standards?
a. An internal control questionnaire
b. A client engagement letter
c. A planning memorandum or checklist
d. A client representation letter

20. The purpose of tests of compliance is to provide reasonable

assurance that the
a. accounting treatment of transactions and balances is valid and
proper
b. accounting control procedures are functioning as intended
c. entity has complied with disclosure requirements of generally
accepted accounting principles
d. entity has complied with requirements of quality control

21. The reliance placed on substantive tests in relation to the

reliance placed on internal control varies in a relationship that is
ordinarily
a. parallel
b. inverse
c. direct
d. equal

22. Which of the following ultimately determines the specific audit

procedures necessary to provide an independent auditor with a
reasonable basis for the expression of an opinion?
a. The audit program
b. The auditor’s judgment
c. Generally accepted auditing standards
d. The auditor’s working papers

23. After performing a study and evaluation of the client’s system of

internal control an auditor has concluded that the system is well
designed and is functioning as anticipated. Under these circumstances
the auditor would most likely
a. cease to perform further substantive tests
b. not increase the extent of predetermined substantive tests
c. increase the extent of anticipated analytical review procedures
d. perform all compliance tests to the extent outlined in the
preplanned audit program

24. Tests of compliance are concerned primarily with each of the

following questions except
a. How were the procedures performed?

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 b. Why were the procedures performed?
c. Were the necessary procedures performed?
d. By whom were the procedures performed?

25. With respect to the auditor’s planning of a year-end

examination, which of the following statements is always true?
a. An engagement should not be accepted after the fiscal year
ends
b. An inventory count must be observed at balance sheet date
c. The client’s audit committee should not be told of the specific
audit procedures which will be performed
d. It is an acceptable practice to carry out substantial parts of the
examination at interim dates

26. The actual operation of an internal control system may be most

objectively evaluated by
a. completing a questionnaire and flow chart related to the
accounting system in the year under audit
b. review of the previous year’s audit work papers to update the
report of internal control evaluation
c. selection of items processed by the system and the
determination of the presence or absence of errors and
compliance deviations
d. substantive tests of accounts balances based on the auditor’s
assessment of internal control strength

27. At interim dates an auditor evaluates a client’s internal

accounting control procedures and finds them to be effective. The
auditor then performs a substantial part of the audit engagement on a
continuous basis throughout the year. At a minimum, the auditor’s
year-end audit procedures must include
a. determination that the client’s internal accounting control
procedures are still effective at year end
b. confirmation of those year end accounts that were examined at
interim dates
c. tests of compliance with internal control in the same manner as
those tests made at the interim dates
d. comparison of the responses to the auditor’s internal control
questionnaire
e. with a detailed flow chart at year end

28. In the context of an audit of financial statements, substantive

tests are audit procedures that
a. may be eliminated under certain conditions
b. are designed to discover significant subsequent events
c. may be either tests of transactions, direct tests of financial
balances or analytical tests

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 d. will increase proportionately with the auditor’s reliance on
internal control

29. Each of the following, might, in itself form a valid basis for an
auditor to decide to omit a test except the
a. relative risk involved
b. relationship between the cost of obtaining evidence and its
usefulness
c. difficulty and expense involved in testing a particular item
d. degree of reliance on the relevant internal controls

30. Which of the following is ordinarily designed to detect possible

material peso errors on the financial statements
a. Compliance testing
b. Analytical review
c. Computer controls
d. Post audit working paper review

31. Audit programs are modified to suit the circumstances on

particular engagements. A complete audit program for an engagement
generally should be developed
a. prior to beginning the actual audit work
b. after the auditor has completed an evaluation of the existing
internal accounting records and procedures
c. after reviewing the client’s accounting records and procedures
d. when the audit engagement letter is prepared

32. Which of the following audit tests would be regarded as a test of

“compliance”?
a. Tests of the specific items making up the balance in a given
general ledger account
b. Test of inventory pricing to vendor’s invoices
c. Test of the signature on canceled checks to board of director’s
authorization
d. Test of the additions to property, plant, and equipment by
physical inspection

33. An auditor evaluates the existing system of internal control in

order to
a. determine the extent of substantive tests which must be
performed
b. determine the extent of compliance which must be performed
c. ascertain whether irregularities are probable
d. ascertain whether any employees have incompatible functions
34. After finishing the review phase of the study and evaluation of
internal control in an audit engagement, the auditor should perform
compliance tests on

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 a. those controls that the auditor plans to rely on
b. those controls in which material weaknesses were identified
c. those controls that have a material effect upon the financial
statement balances
d. a random sample of the controls that were reviewed
35. Reasons to evaluate internal control would not include
a. basis for planning the audit
b. determining the nature, timing and extent of audit procedures
c. basis for type of opinion to be rendered
d. formulating constructive suggestions for improvements

36. An audit team’s responsibility would not include

a. designing an effective control structure
b. documentation of understanding of internal control structure
c. communicating reportable conditions on internal control
structure
d. an evaluation of existing internal control structure

37. The functional responsibilities that should be performed by

different people would not include
a. authorization to execute transactions
b. recording of transactions
c. custody of assets involved in the transactions
d. reporting of recorded amounts

38. A set of characteristics that defines good control working

relationship in a company is referred to as
a. control objectives
b. control environment
c. control risk assessment
d. functional responsibilities

39. Controls intended to ensure that transactions are recorded in

the right accounts are designed to achieve the objective of
a. validity
b. accuracy
c. classification
d. accounting

40. The financial statement assertion of existence and occurrence

would not be related to internal control objective
a. validity
b. completeness
c. authorization
d. proper period

41. The “obtaining-an-understanding” work phase of internal control

evaluation would not give auditors an overall acquaintance with the

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 a. control environment
b. flow of transactions
c. effectiveness of control procedures
d. control risk assessment

42. The basic standard flowchart symbol would not include

a. display
b. input/output
c. process
d. flowline

43. Control strengths and weaknesses should be documented in

work papers, sometimes called
a. questionnaires, narratives, flowcharts
b. bridge working papers
c. communications of reportable conditions
d. internal control letters

44. The internal control in small business is highly dependent on the

a. segregation of functional responsibilities
b. complexity of internal control structure
c. owner-manager’s competence and integrity
d. bonding of employees

45. PSA 300 (Revised), Planning an Audit of Financial Statements,

which states that the work is to be adequately planned, and assistants,
if any, are to be properly supervised, recognizes that
a. early appointment of the auditors is advantageous to the
auditors and the client
b. acceptance of an audit engagement after the close of the client’s
fiscal year is generally not permissible
c. acceptance of an audit engagement after the close of the client’s
fiscal year requires a disclaimer of opinion
d. performance of the substantial parts of the examination is
necessary at interim dates

46. Which of the following is an effective audit planning and control

procedure that helps prevent misunderstandings and inefficient use of
audit personnel?
a. Arrange to make copies, for inclusion in the working papers, of
those client supporting documents examined by the auditors
b. Arrange to provide the client with copies of the audit programs
to be used during the audit
c. Arrange a preliminary conference with the client to discuss audit
objectives, fees, timing, and other information
d. Arrange to have the auditors prepare and post any necessary
adjusting or reclassification entries prior to final closing

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47. Senior auditors typically perform all of the following tasks,
except
a. supervise staff assistants
b. draft the audit report
c. sign the audit report
d. review the working papers prepared by staff assistants

48. In planning an audit engagement, which of the following is a

factor that affects the independent auditor’s judgment as to the
quantity, type and content of working papers?
a. The estimated occurrence rate of attributes
b. The preliminary evaluation based upon initial substantive
testings
c. The content of the client’s representation letter
d. The anticipated nature of the auditor’s report

49. Audit programs are modified to suit the circumstances of a

particular engagement. A final audit program for an engagement
generally should be developed
a. prior to beginning the actual audit work
b. after the auditors have completed their consideration of the
existing internal control
c. after reviewing the client’s accounting records and procedures
d. when the audit engagement letter is prepared

50. An audit committee’s responsibilities normally would not include

a. discussing the meaning and significance of audited financial
statements
b. discussing problems and experience with independent auditors
in completing the audit of annual financial statements
c. nominating the independent auditors
d. discussing the audit programs of the independent auditors

51. If during an audit examination, the successor auditor becomes

aware of information that may indicate that financial statements
reported on by the predecessor auditor may require revision, the
successor auditor should
a. ask the client to arrange a meeting among the three parties to
discuss the information and attempt to resolve the matter
b. notify the client and the predecessor auditor of the matter and
ask them to attempt to revise the statements
c. notify the predecessor auditor who may be required to revise
the previously issued financial statements and auditor’s report
d. ask the predecessor auditor to arrange a meeting with the client
to discuss and resolve the matter

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52. Wald, CPA, is preparing unaudited financial statements for
Zaikin Company. During the engagement, Wald becomes aware that
the statements are misleading. Wald should
a. disclaim an opinion
b. insist that the statements be corrected
c. issue an adverse opinion
d. insist that the statements be audited

53. When management refuses to disclose illegal activities which are

identified by the independent auditor, the independent auditor may be
charged with violating the Code of Professional Ethics for
a. withdrawing from the engagement
b. issuing a disclaimer of opinion
c. failure to uncover the illegal activities during prior audits
d. reporting these activities to the audit committee

54. CPAs may send a formal “management letter” to clients in order

that such a letter may provide
a. a summary of the CPA’s observation arising out of his study of
the client’s internal control system
b. a written record of discussions between the auditor and the
client concerning the former’s observations and suggestions for
improvements in financial management
c. a permanent record of the review of the internal control work
accomplished by the auditor during the course of his
engagement
d. evidence as to the adequacy or inadequacy of the operating
internal control system

55. It is an accepted practice for external auditors to request letter

of representation from their clients. A principal purpose of a letter of
representation from the client is to
a. discharge the auditor from legal liability of his examination
b. confirm in writing management’s approval of limitations on the
scope of audit
c. serve as an introduction to company’s personnel and
authorization to examine the records
d. remind management for its primary responsibility for financial
statements

56. The auditor’s opinion on the financial statements of his clients

should be dated as of the date of
a. submittal of the report to the client
b. receipt of client’s letter of representation
c. completion of all important audit procedures
d. closing of the client’s books
e. close of the period under audit

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57. The primary difference between an audit of balance sheet and
an audit of the income statement lies in the fact that the audit of
income statement deals with the verification of
a. transactions
b. authorizations
c. costs
d. cut-off

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 58. In planning an examination, the auditor would consider
all of the following matters, except
a. Preliminary judgment about materiality levels for audit
purposes.
b. Anticipated reliance on internal controls.
c. Financial statement items likely to require adjustment.
d. The kind of opinion (unlikely, qualified, disclaimer, or
adverse), likely to be given.
59. An audit program provides proof that
a. There was compliance with GAAS of reporting.
b. There was a proper study and evaluation of internal control.
c. The work was adequately planned.
d. Sufficient competent evidential matter was obtained.
60. A basic tool used by the auditor to control the audit work and review
the progress of the audit.
a. Audit Program
b. Progress Flowchart
c. Time and Expense Summary
d. Engagement Letter
61. Which item would not be contained in an audit program?
a. Staff assigned to the audit.
b. List of specific tasks to be performed.
c. Documentation of system being reviewed.
d. Estimated time required to perform each task.
62. The audit program usually cannot be finalized until the
a. Reportable conditions have been communicated to the audit
committee of the board of directors.
b. Engagement letter has been signed by the auditor and the
client.
c. Consideration of the entity’s internal control has been
completed.
d. Search for unrecorded liabilities has been performed and
documented.
63. In developing the overall audit plan for a new client, factor not to be
considered is
a. The client’s business, including the structure of the organization
and accounting system used.
b. The terms of the engagements and any statutory
responsibilities.
c. The audit risk and procedures to be performed to achieve audit
objectives.
d. The amount of estimated audit fees.
64. Which of the following procedures would an auditor most likely
perform in planning a financial statement audit?
a. Performing analytical procedures to identify areas that
may represent specific risks.
b. Reviewing investment transactions of the audit period to
determine whether related parties were credited.

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 c. Obtaining a written representation letter from the client to
emphasize management’s responsibilities.
d. Reading the minutes of stockholder and director meetings to
discover whether any unusual transactions have occurred.
65. Those procedures specifically outlined in an audit program are
primarily designed to
a. Protect the auditor in the event of litigation.
b. Gather evidence.
c. Test internal systems.
d. Detect errors or irregularities.

66. Set the following phases of the audit process in proper order:
A. pre-engagement C. evidence-gathering E.post-audit responsibilities
B. internal controls D. planning F. reporting

A. ABCDEF B. ADCBEF C. ADBCFE D. ADBCEF

67. The firm should obtain such acceptance and continuance information
as its considers necessary in the circumstance such as when:
a. Accepting an engagement with a new client
b. Deciding whether to continue an existing engagement
c. Accepting new engagement with an existing client
d. All of these

68. The following are considered by a CPA firm in deciding whether to

accept a new client, except:
a. the client’s financial ability
b. the client’s relation with its previous CPA
c. the client’s probability of achieving an unqualified opinion
d. the client’s standing in the business community

69. With regard to independence, which of the following statement is

incorrect?
a. a person exercising professional judgment ought to be free from all
economic, financial, and other relationship
b. audit engagements provide assurance to a wide range of potential
users; consequently, both independence in mind and independence in
appearance are of particular importance
c. it is in the public interest, and, therefore required by the Code of
Ethics, that members of assurance teams, firms, or when applicable,
network firms be independent of assurance client
d. in the case of audits, the Code of Ethics requires the members of
assurance team, firms and network firms to be independent of client.

70. The expertise that distinguishes audits from accountants is in the:

a.Ability to interpret generally accepted principles.
b. Requirements to possess education beyond the Bachelor’s degree.
c.Accumulation and interpretation of evidence.

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d. Ability to interpret Philippine Financial Reporting Standards.

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