MODULE 1

AUDITING CONCEPTS

PSA BASED QUESTIONS

1. The primary purpose of an independent audit of financial statements is

to

A. provide a basis for assessing management‘s performance.

B. comply with laws and regulations.
C. assure management that the financial statements are unbiased and
free from material misstatements.
D. provide users with an unbiased opinion about the fairness of
information presented in the financial statements.

2. Which of the following statements best describes a review service?

A. A review engagement focuses on providing assurance on the

assertions contained in the financial statements of a public
company.
B. A review engagement focuses on providing assurance on the
internal controls of a public company.
C. A review engagement focuses on providing limited assurance on
financial statements of a private company.
D. A review engagement focuses on providing advice in a three-party
contract.

3. Professional skepticism dictates that when management makes a

statement to the auditor, the auditors should

A. disregard the statement because it ranks low of the evidence quality

scale.
B. corroborate the evidence with other supporting documentation
whenever possible.
C. require that the statement be put in writing.
D. believe on the statement in order to maintain the professional
client-auditor relationship.

4. In performing a financial statement audit, which of the following would

an auditor least likely consider?

A. Internal control
B. Compliance with GAAP
C. Quality of managements‘ business decisions
D. Fairness of the financial statement amounts

5. The level of assurance provided by an audit of detecting a material

misstatement is referred to as:
 A. Absolute assurance.
B. High assurance.
C. Negative assurance
D. Reasonable assurance.

6. An audit involves ascertaining the degree of correspondence between

assertions and established criteria. In the case of financial statement
audit, which of the following is not a valid criterion?

A. Accounting standards generally accepted in the Philippines.

B. International Accounting Standards.
C. Authoritative financial reporting framework.
D. Philippine Standards on Auditing.

7. Which of the following statements is (are) true regarding the provision

of assurance services?

I. The third party who receives the assurance generally pays for
the assurance received.
II. Assurance services always involve a report by one person to a
third party on which an independent organization provides
assurance.
III. Assurance services can be provided either on information or
processes.

A. I and II.
B. I and III.
C. III only.
D. I, II, and III.

8. Which of the following is least likely an objective of an assurance

engagement?

A. The engagement is intended to prevent the issuance of materially

misleading information.
B. The engagement is intended to enhance the credibility of
information about a subject matter.
C. An assurance engagement is intended for a professional accountant
to express a conclusion that provides the intended users with a
level of assurance about the subject matter.
D. The engagement is intended to provide a level of assurance to be
issued by a professional accountant about the information of being
in conformity, in all material respects, with suitable criteria.

9. The broad range of assurance engagements includes all, but which of

the following?

1.) Engagements intended to provide high or moderate levels of

assurance. 2.) Preparation of tax returns, though no conclusion is
expressed.
 3.) Attest and direct reporting engagements.
4.) Engagements to report externally, but not
internally. 5.) Engagements in the private and
public sector.
6.) Agreed-upon procedure engagement.

A. 2, 4, 5
B. 2, 4, 6
C. 2, 5, 6
D. 4, 6

10. Which statement does not accurately describe an assurance

engagement?

A. The objective of an assurance engagement is for a professional

accountant to evaluate or measure a subject matter that is the
responsibility of another party against identified suitable criteria,
and to express a conclusion that provides the intended user with a
level of assurance about that subject matter.
B. Not all engagements performed by professional accountants are
assurance engagements.
C. A particular engagement, to be an assurance engagement, depends
upon whether it exhibits all the following elements: a two-party
relationship, a subject matter, suitable criteria, and a conclusion.
D. An engagement in form of agreed-upon procedures result in the
expressions of factual findings.

11. Which of the following is not an element of an assurance engagement?

A. A subject matter.
B. Suitable criteria.
C. A conclusion.
D. A two-party relationship.

12. A draft of statement, studies or standards should be discussed by the

Council en banc. How many members of AASC are required to approve
the draft for exposure?

A. Majority
B. Ten
C. Eight
D. Twelve

13. Theoretically, it is possible to provide an infinite range of assurance

from a very low level of assurance to an absolute level of assurance in
practice, the professional accountants cannot provide absolute
assurance because of the following, except:

A. The professional accountants employ testing process.

 B. The internal control has its inherent limitations.
C. The use of judgments in gathering evidence and drawing
conclusions based on that evidence.
D. The lack of expertise of the professional accountants in doing a
systematic engagement process.

14. Which is not true of the intended user?

A. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.
B. The intended user(s) is (are) always limited to the addressee of
the professional accountant‘s report.
C. The responsible party may also be the one of the intended users.
D. The intended user(s) may not be the addressee of the professional
accountant‘s report.

15. Which of the following is least likely a subject matter of an

assurance engagement?

A. Data.
B. System and processes.
C. Compliance and regulations.
D. Degree of loyalty of employees to their employer.

16. The practitioner‘s report on an assurance engagement should

always include the following, except:

A. A description of the engagement and identification of the subject

matter.
B. Identification of the standards under which the engagement was
conducted.
C. Reference to the work of an expert.
D. Identification of the criteria.

17. Some or all of the following are planning considerations:

I. Criteria to be used.
II. Nature and extent of involvement of the experts.
III. Possible sources of evidence.
IV. Type of conclusion to be issued.
V. Preliminary judgment about materiality and engagement risk.
VI. Content of the management letter.

Which of the following are matters that need to be considered in

planning an assurance engagement?

A. All of them.
B. I, II, III, V
 C. II, III, IV, VI
D. I, III, V, VI

18. How many members of the AASC are needed to approve the
exposed draft as Philippine Standards on Auditing?

A. Majority of the regular members.

B. At least eight.
C. At least ten
D. At least twelve.

19. Which of the following is required if the professional accountant

uses experts who are not professional accountants?

A. The ultimate responsibility or the professional service is assumed by

the expert who is not a professional accountant.
B. The professional accountant is discouraged to engage the services
of experts who are not a professional accountant.
C. The professional accountant must take steps to see that such
experts are aware of the ethical requirements of the profession.
D. Experts who are not professional accountants need not be informed
of ethical requirements because they are not members of the
Accountancy profession.

20. Which of the following is expected of AASC to do?

A. AASC should normally expose a proposed interpretation of

statements.
B. AASC should normally expose its opinion on specific queries from a
practicing CPA.
C. When it is deemed necessary to expose its statement for a
comment on proposed interpretations of statements, the exposure
period is understandably shorter than those of the regular drafts of
standards.
D. To make the statements on Philippine Standards on Auditing
operative, the final statement shall be submitted to the Board of
Accountancy for approval.

21. Which one of the following is not a key attribute that is essential to
perform an assurance service?

A. Subject matter knowledge

B. Independence
C. Established suitable criteria
D. Accounting skills

22. As it relates to an audit, materiality is

A. not taken into consideration.

B. related party to the sufficiency of procedures performed.
 C. based upon audit fees.
D. determined based upon the importance to a user of the financial
statement.

23. The suitability of the criteria to which the professional accountant

will base his evaluation of the subject matter partly depends on:

A B C D
Relevance YESYESYES NO
Reliability YESYESYESYES
Understandability YES NOYES
NO Neutrality NONOYES YES

24. How did the framework of Philippine Standards on Auditing

conceptually describe assurance?

A. It refers to the auditor‘s satisfaction as to the reliability of an

assertion being made by one party for use by another party.
B. The level of assurance that may be provided is determined by the
reporting objective.
C. An assurance is expressed positively in the report.
D. Because of the inherent limitation in an audit, the assurance is of
limited one.

25. It provides a threshold or cutof point rather than being a primary

qualitative characteristic which information must have if it is to be
useful.

A. Materiality
B. Reliability
C. Relevance
D. Misstatement
QUIZZERS

1. The diference between what the public expects to get from the
audited financial statements and what the public is actually getting is
known as:

A. Credibility gap
B. Audit gap
C. Expectation gap
D. Level of assurance gap

2. Which of the following statements does not properly describe an

element of the theoretical framework of auditing?

A. The data to be audited can be verified.

B. Short-term conflicts may exist between the managers who
prepare the data and the auditors who examine them.
C. Auditors act on behalf of management.
D. An audit benefits the public.

3. An audit of financial statements is conducted in order to determine if the

A. organization is operation efficiently and efectively.

B. auditee is following specific procedures or rules set down by
some higher authority.
C. overall financial statements are stated in accordance with specified
criteria.
D. client entity prescribes a good internal control system.

4. Which of the following does not describe a condition that creates a

demand for auditing?

A. Conflict between an information provider and a user can result

in biased information.
B. Information can have substantial economic consequences for a
decision maker.
C. Expertise is often required for information preparation and
verification.
D. Users can directly assess the quality of information.

5. Why does a company choose to have an independent auditor report

on its financial statements?

A. Independent auditors will always detect management fraud.

B. The company‘s management preparing the statements may have
a vested interest in reporting certain results.
C. Independent auditors guarantee the accuracy of the financial
statements.
D. An independent audit is designed to search for deficiencies in the
company‘s internal control.
6. Which of the following criteria is unique to the independent auditor‘s
attest function?

A. General competence
B. Familiarity with the particular industry in which each client operates
C. Due professional care
D. Independence

7. Which of the following best describes the main reason why the
independent auditor‘s report on an entity‘s financial statements?

A. A management fraud may exist, and it is likely to be detected by

independent auditors.
B. The management that prepares the statements and the persons
who use the statements may have conflicting interests.
C. Misstated account balances may be corrected as a result of an
independent audit work.
D. The management that prepares the statements may have
overlooked a poorly designed system of internal control.

8. Information risk refers to the risk that

A. the client‘s financial statements may be materially false and

misleading.
B. the auditor may express an unqualified opinion on financial
statements that are materially misstated.
C. the client entity may not be able to remain in business.
D. errors and frauds would not be detected by the auditor‘s procedures.

9. Which of the following is responsible for an entity‘s financial

statements?

A. The entity‘s management

B. The entity‘s audit committee
C. The entity‘s internal auditors
D. The entity‘s board of directors

10. A typical objective of an operational audit for the auditor to

A. determine whether the financial statements fairly present the

client entity‘s operations.
B. evaluate the feasibility of attaining the client entity‘s operational
objectives.
C. make recommendations to client for improving its performance.
D. report on the entity‘s relative success in maximizing its profits.

11. Which of the following types of audit is performed in order to

determine whether an entity‘s financial statements are fairly stated, in
all material respects in conformity with the generally accepted
accounting principles?
 A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Performance audit

12. An independent audit is important to the readers of financial

statements because it

A. provides a measure of management‘s stewardship function.

B. measures and communicates the financial data included in the
financial statements.
C. objectively examines and reports on management‘s financial
statements.
D. reports on the accuracy of information in the financial statements.

13. Which of the following types of audit uses laws and regulations as its
criteria?

A. Operational audit
B. Financial statements audit
C. Compliance audit
D. Financial audit

14. Which of the following types of auditing is performed most

commonly by CPAs on a contractual basis?

A. Internal auditing
B. Government auditing
C. BSP bank audit
D. External auditing

15. The primary goal of the CPA in performing the attest function is to

A. detect fraud.
B. examine individual transactions that the auditor may certify as to
their validity.
C. determine whether the client‘s assertions as embodied in the
financial statements are fairly stated.
D. assure the consistent application of correct accounting procedures.

16. An independent audit goal aids in the communication of economic

data because the audit

A. confirms the accuracy of management‘s financial representation.

B. lends credibility to financial statements.
C. guarantees that financial data are fairly presented.
 D. assures the readers of financial statements that any fraudulent
activity has been detected and its efect has been corrected.

17. Which of the following best describes the attest process?

A. Providing accuracy of the books and records.

B. Gathering sufficient evidence about specific and known assertions.
C. Assisting management in the successful operations of the company.
D. Assembling and filing tax returns and related supplemental
information.

18. The assumption underlying an audit of financial statements is that

they will be used by

A. the regulatory agencies to verify information that is relevant to

their supervisory functions.
B. the board of directors as basis of detecting cash dividends.
C. the general public in making investment decisions.
D. diferent groups for diferent purposes.

19. Which of the following is an example of an assertion made by the

management in an entity‘s financial statements?

A. The financial statements are prepared in an unbiased manner.

B. The reported inventory balances reflect all related transactions for
the period.
C. The reported accounts receivable do not include any uncollectible
accounts.
D. The scope of the auditor‘s investigation is not limited in any way
by management.

20. A CPA certificate is an evidence of

A. recognition of independence.
B. basic competence at the time the certificate is granted.
C. culmination of the education process.
D. membership in the PICPA.

21. An audit can have a significant efect on

A. information risk.
B. business risk.
C. the risk-free interest rate.
D. all of these.

22. Which of the following is a cause of information risk?

A. voluminous data.
B. biases and motives of the provider of information.
 C. remoteness of the provider of the information.
D. each of these is a cause of information risk.

23. The main way(s) to reduce information risk is to have

A. the user verify the information.

B. the user share the information risk with management.
C. audited financial statements provided.
D. all of these.

24. The predominant type of attestation service performed by CPAs is

A. audit.
B. review.
C. compilation.
D. management consulting.

25. Upon completion of a typical audit, the auditor has

A. total assurance that all material errors and irregularities have been
found.
B. high level of assurance that all material errors and irregularities
have been found.
C. a low level of assurance that all material errors and irregularities
have been found.
D. no assurance that all material errors and irregularities have been
found.

26. The single feature that most clearly distinguishes auditing,

attestation, and assurance is the

A. type of service being rendered.

B. training required to perform the service.
C. scope of services.
D. CPA‘s approach to the service.

27. Which of the following attributes is more closely associated with

assurance services performed by a CPA firm than with other lines of
professional work?

A. Integrity
B. Competence
C. Independence
D. Keeping informed on current professional developments.

28. An investor, while recording the financial statements of Silver

Corporation, learned that the statements are accompanied by an
unqualified auditor‘s report. From this the investor may conclude that:
 A. Any disputes over significant accounting issues have been
settled to the auditor‘s satisfaction.
B. The auditor is satisfied that Silver‘s operationally efficient.
C. Informative disclosures in the financial statements but not
necessarily in the notes to financial statements are to be regarded
as reasonably adequate.
D. The auditor has ascertained that Silver‘s financial statements
have been prepared accurately.

29. A CPA should maintain objectively and be free of conflicts of

interest when performing:

A. Audits, but not any other professional services

B. All attestation services, but not other professional services
C. All attestation and tax services, but not other professional services
D. All professional services

30. A summary of findings rather than assurance is most likely to be

issued n which engagement?

A. Agreed-upon
B. Compilation
C. Examination
D. Review

31. Which of the following professional has primary responsibilityfor

the performance of an audit?

A. The managing partner of the firm

B. The senior assigned t the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement

32. Which of the following services provides the highest level of

assurance to third parties about a company‘s financial statements?

A. Audit
B. Review
C. Compilation
D. Each of the above provides the same level of assurance

33. The most common type of audit report contains a(n):

A. Adverse opinion
B. Disclaimer of opinion
C. Qualified opinion
D. Unqualified opinion
34. The auditor‘s judgment concerning the overall fairness of presentation
of financial position, results of operation, and changes in cash flow is
applied within the framework of

A. Quality control
B. Generally accepted auditing standards which include concept of
materiality
C. The auditor‘s evaluation of the audited company‘s internal control
D. Philippine Financial Reporting Standards

35. In ―auditing‖ accounting data, the auditor is concerned with

A. determining whether recorded information properly reflects the

economic events that occurred during the accounting period.
B. determining if fraud as occurred.
C. determining if taxable income has been calculated correctly.
D. analyzing the financial information to be sure that it complied
with government requirement.

36. In all cases, audit reports must

A. be signed by the individual who performed that audit procedures.

B. certify the accuracy of the quantitative information which was
audited.
C. inform readers of the degree of correspondence between the
quantifiable information and the established criteria.
D. communicate the auditor‘s findings to the general public.

37. Which one of the following is an example of management

expectations from the independent auditor?

A. An expert providing a written communication as the product of

the engagement.
B. Individuals who perform day-to-day accounting functions on
behalf of the company.
C. An active participant in management decision-making.
D. An individual source of expertise on financial and other matters.

38. When providing consulting services, the CPA acts primarily as a(n):

A. independent accountant.
B. expert on compliance with industry standards.
C. technology specialist.
D. objective advisor on how to use the information.

39. In performing attestation services, a CPA will normally:

 A. improve the quality of information, or its context, for better use of
the decision makers
B. recommend how to use the information.
C. perform market analysis and cost estimates.
D. states a conclusion about a written assertion.

40. Which of the following best describes an operational audit?

A. It requires a constant review of the administrative controls by

internal auditors as they relate to operations of the company.
B. It concentrates on implementing financial and accounting control
in a newly organized company.
C. It attempts of verifying the fair presentation of a company‘s
results of operations.
D. It concentrates on seeking out aspects of operations in which
waste would be reduced by the introduction of controls.

41. Evidence is defined as any information used by the auditor to

determine whether the quantifiable information being audited is
stated in accordance with the established criteria. Evidence takes
many diferent forms, including

A. oral representation (testimony) from the client management.

B. written communication (confirmation) with outsiders.
C. observations made by the auditor.
D. all of these.

42. Because the client company pays the external auditor a professional
fee, he

A. is absolutely independent and may conduct an audit.

B. may be sufficiently independent to conduct an audit.
C. is never considered to be independent.
D. must receive approval of the Securities and Exchange
Commission before conducting an audit.

43. A typical objective of an operational audit is to determine whether an

entity‘s

A. financial statements fairly present financial position and cash flows.

B. financial statements present fairly the results of operations.
C. financial statements fairly present financial position, results of
operations, and cash flows.
D. specific operating units are functioning efficiently and efectively.

44. Which of the following is more difficult to evaluate objectively?

A. Efficiency and efectiveness of operations.

B. Compliance with applicable government regulations.
 C. Presentation of financial statements in accordance with the
applicable financial reporting criteria.
D. All the given criteria are equally difficult to evaluate objectively.

45. An audit which is undertaken in order to determine whether the

auditee is following specific procedures or rules laid down by somme
higher authority is classified as a(n)

A. audit of financial statements.

B. compliance audit.
C. operational audit.
D. production audit.

46. Assurance services involve which of the following?

A. Relevance as well as reliability.

B. Non-financial information as well as traditional financial statements.
C. Electronic databases as well as printed reports.
D. All of these.

47. Which of the following is a diference between attestation and auditing

standards?

A. Attestation standards cover attest engagements other than those

involving GAAP financial statement.
B. Attestation standards do not require independence in mental
attitude.
C. Auditing standards apply only to CPAs while attestation standards
apply to all accountants.
D. Attestation standards do not include standards of reporting.

48. Which of the following pertains to the reliability of audit evidence?

A. The independence of the source of evidence.

B. The expertise level of the auditor who obtains the evidence.
C. Whether the audit client uses a manual or computerized accounting
system.
D. The quantity of the evidence obtained.

49. The audit committee of the board of directors of a company is

responsible for:

A. hiring the auditor.

B. preparing the financial statements.
C. the audit workpapers.
D. independence and obtaining evidence.

50. Which of the following statements is true concerning a compliance

audit?
 A. Compliance audits are only performed by government auditors.
B. Risks such as inherent risk, control risk, and detection risk are
not appropriate in planning and performance of a compliance audit.
C. Materiality is difficult to measure in a compliance audit.
D. A report on compliance can only include negative assurance.

51. Audits of financial statements include an expression of a conclusion

about which of the following financial statement characteristics?

A. Governance
B. Reliability
C. Relevance
D. Timeliness

52. A review of company‘s financial statements by a CPA firm:

A. is significantly less in scope than an audit and results in a

report which provides positive assurance, although not absolute
assurance.
B. is similar in scope to an audit and adds similar credibility to the
statements.
C. concludes with the issuance of a report expressing the CPA‘s
opinion as to the fairness of the statements.
D. is designed to provide only limited or moderate assurance.

53. The attest function:

A. is an essential part of every engagement performed by a CPA.

B. require a complete review of all transactions during the period
under examination.
C. requires a review of all transactions during the period under
examination.
D. includes the preparation of a written report about the CPA‘s
conclusion.

54. Broadly defined, the subject matter of any audit consists of

A. assertions.
B. operating data.
C. financial statements.
D. economic data.

55. The expertise that distinguishes auditors from accountants is in terms of

the

A. ability to interpret generally accepted accounting principles.

B. requirement to possess education beyond the Bachelor‘s degree.
C. accumulation and interpretation of evidence.
D. ability to interpret accounting standards.
56. Most of the independent auditor‘s work in formulating an opinion
on financial statements consists of

A. studying and evaluating internal control.

B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorder accountability with physical existence of
property.

57. Attestation risk is limited to a low level in which of the following

engagement(s)?

A. Both examination and review

B. Examination but not review
C. Review but not examination
D. Neither examination nor review

58. An engagement in which a CPA firm arranges for a critical review of its
practices by another CPA firm is referred to as a(n):

a. Peer review engagement

b. Quality control engagement
c. Quality assurance engagement
d. Attestation engagement

59. The review of a company‘s financial statements by a CPA firm

A. is substantially less in scope of procedures than an audit.

B. requires detailed analysis of major accounts.
C. has similar scope as an audit and adds similar credibility to the
statements.
D. culminates in issuance of a report expressing the CPA‘s opinion
as to the fairness of the statements.

60. The risk associated with a company‘s survival and profitability is

referred to as:

A. Business risk
B. Information risk
C. Detection risk
D. Control risk

61. An operational audit difers in many ways from an audit of financial

statements. Which of the following is the best example of these
diferences?

A. The unusual audit financial statement covers the four basic

financial statements whereas the operational audit is usually
limited either the balance sheet or the income statement.
B. The boundaries of an operation audit are often drawn from an
organization chart and are not limited to a single accounting
period.
 C. Operation audits do not ordinarily result in preparation of a report.
D. The operational audit deals with operating profit while financial
audit considers both the operating and net profits.

62. The audit of historical financial statements should be conducted by

the CPA professionals in accordance with

A. Philippine Financial Reporting Standards

B. Philippine Standards on Auditing
C. The auditor‘s judgment
D. The audit program

63. Whenever a CPA professional is engaged to perform an audit of

financial statements according to Philippine Standards on Auditing, he
is required to comply with those standards in order to

A. eliminate audit risk.

B. eliminate the professional judgment in resolving audit issues.
C. have a measure of the quality of audit performance.
D. to reduce the audit program to be prepared by the auditor.

64. What is the overall objective of internal auditing?

A. To attest to the efficiency with which resources used.

B. Ascertain that the cost of internal control is justified.
C. To ascertain that financial statements present accurately the
financial position, operating results, and changes in cash and
stockholders‘ equity.
D. To help other members of the organization of efectively
discharging their responsibilities.

65. In determining the primary responsibility of external auditor for an

audit if a company‘s financial statements, the auditor owes primarily
allegiance to:

A. the management of the audit client because the auditor is hired

and paid by management.
B. the audit committee to the audit client because that committee is
responsible for coordinating and reviewing all audit objectives
within the company.
C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it
determines auditing standards and auditor‘s responsibility.

66. Which of the following would not represent one of the primary
problems that would lead the users to demand for independent audits
of a company‘s financial statements?

A. Management bias in preparing financial statements.

 B. The downsizing of business and financial markets.
C. The complexity of transactions afecting financial statements.
D. The remoteness of the user from the organization and thus the
inability of the user to directly obtain financial information from the
company.

67. Assurance services involve all the following except:

A. Improving the quality of information for decision purposes.

B. Improving the quality of the decision model used.
C. Improving the relevance of information.
D. Implementing a system that improves the processing of information.

68. Which of the following is the broadest and most inclusive concept?

A. Audits of financial statements

B. Internal control audit
C. Assurance services
D. Compilation services

69. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of

the client‘s assertions.
B. A review provides positive assurance by attesting the reliability of
the client‘s assertions.
C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.

70. Unlike consulting services, assurance services:

A. Make recommendation to management

B. Report on how to use information
C. Report on the quality of information
D. Are two-party contracts

71. Financial statement audits:

A. Reduce the cost of capital

B. Report on compliance with laws and regulations
C. Assess management‘s efficiency
D. Overlook information risk

72. A summary of findings rather than assurance is most likely to be

included in a(n):

A. Agreed-upon procedures report

 B. Compilation report
C. Examination report
D. Review report

73. The risk associated with a company‘s survival and profitability is

referred to as:

A. Business risk
B. Information risk
C. Detection risk
D. Control risk

74. An engagement in which a CPA firm arranges for a critical review of its
practices by another CPA firm is referred to as a(n):

A. Peer review engagement

B. Quality control engagement
C. Quality assurance engagement
D. Attestation engagement

75. Attestation risk is limited to a low level in which of the following

engagement(s)?

A. Both examination and reviews

B. Examination but not reviews
C. Review but not examinations
D. Neither examination nor reviews

76. An operational audit difers in many ways from an audit of financial

statements. Which of the following is the best example of these
diferences?

A. The unusual audit financial statement covers the four basic

financial statements whereas the operational audit is usually
limited either the balance sheet or the income statement.
B. The boundaries of an operation audit are often drawn from an
organization chart and are not limited to a single accounting
period.
C. Operation audits do not ordinarily result in preparation of a report.
D. The operational audit deals with pre-tax income.

77. The review of a company‘s financial statements by a CPA firm

A. is substantially less in scope of procedures than an audit.

B. requires detailed analysis of major accounts.
C. is of similar scope as an audit and adds similar credibility to the
statements.
D. culminates in issuance of a report expressing the CPA‘s opinion
as to the fairness of the statements.
78. When performing an engagement to review a nonpublic entity‘s
financial statements, an accountant most likely would:

A. Obtain an understanding of the entity‘s internal control.

B. Limit the distribution of the accountant‘s report.
C. Confirm a sample of significant accounts receivable balances.
D. Ask about actions taken a board of directors meetings.

79. Which of the following professionalshas

primary responsibility for the performance of an audit?

A. The managing partner of the firm

B. The senior assigned to the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement

80. Assurance services may include which of the following?

A. Attesting to financial statements

B. Examination of the economy and efficiency if governmental
operations
C. Evaluation of a division‘s performance for management
D. All of the given choices

81. The auditor of financial statements must make very difficult

interpretations regarding authoritative literature. Additionally, the
auditor must

A. Proceed beyond PFRS to assess how the economic activity is

portrayed in the financial statements.
B. Force management to make certain decisions regarding their
financial statements.
C. Disregard independence in order to find the underlying truth of the
evidence.
D. Establish new criteria by which financial statements may be
compared.

82. Which one of the following is not a part of the attest process?

A. Gathering evidence about assertions

B. Providing the accuracy of the books and records
C. Evaluating evidence against objective criteria
D. Communicating the conclusions reached

83. Which one of the following is not a reason why the users of financial
statements desire for an independent assessment of the financial
statement presentation?

A. Complexity f transactions afecting the financial statements

B. Lack of criteria on which to base information
C. Remoteness of the user from the organization
 D. All of them are potential reasons

84. Independent professional services that are provided on financial or

other information that improve the quality of decision making are
known as

A. Internal auditing
B. Financial auditing
C. Assurance services
D. Attestation services

85. An audit which determines whether organizational policies are being

followed nd whether external mandates are being met is known as

A. A financial audit
B. A compliance audit
C. An operational audit
D. None of the above

86. Which of the following statements is correct regarding a review

engagement if a nonpublic entity?

A. An accountant must establish an understanding with the client in

an engagement letter.
B. An accountant must obtain an understanding if the client‘s internal
control when performing a review.
C. A review provides an accountant with a basis for expressing limited
assurance on the financial statements.
D. A review report contains an accountant‘s opinion that the financial
statements, taken as a whole, present fairly the assertions issued
by the management.

87. May a CPA hire for the CPA‘s public accounting firm a non CPA system
analyst who specializes in developing computer systems?

A. Yes, provided the CPA is qualified to perform each of the specialist‘s

tasks.
B. Yes, provided the CPA is able to supervise the specialist and
evaluate the specialist‘s end product.
C. No, because non CPA professionals are not permitted to be
associated with CPA firms in public practice.
D. No, because developing computer systems is not recognized as
a service performed by public accountants.

88. Which of the following services may a CPA perform in carrying out a
consulting service for client?

I. Analysis of the client‘s accounting system

 II. Review of the client‘s proposed business plan
III. Preparation of information for obtaining financing

A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

89. Which of the following describes how the objective of a review of

financial statements difers from the objective of a compilation
engagement?

A. The primary objective of a review engagement is to test the

completeness of the financial statements prepared, but a
compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide
positive assurance that the financial statements are fairly
presented, but a compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance,
but a compilation expresses no assurance.
D. In a review engagement, accountants provide reasonable or
positive assurance that the financial statements are fairly
presented, but a compilation provides limited assurance.

90. Which of the following factors most likely would cause a CPA to
decline a new audit engagement?

A. The CPA does not understand the entity‘s operations and industry.
B. Management acknowledges that the entity has had recurring
operating losses.
C. The CPA is unable to review he predecessor auditor‘s working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
 MODULE 2

AUDITING STANDARDS

1. As guidance measuring the quality of the performance of an auditor,

the auditor should refer to

A. Statements of Financial Accounting Standards Board

B. Philippine Standards on Auditing
C. Interpretations of Rules of Conduct.
D. Statement on Quality Control Standards.

2. Generally Accepted Auditing Standards (GAAS) and Philippine

Standards on Auditing (PSA) should be looked upon by practitioners as

A. ideals to work for, but which are not achievable.

B. maximum standards which denote excellent work
C. minimum standards of performance which must be achieved on
each audit engagement.
D. benchmarks to be used on all audits, reviews, and compilations.

3. The auditor‘s responsibility for the detection of client's

noncompliance with laws and regulation is

A. Greater than for errors or fraud.

B. Less than for errors or fraud.
C. Restricted to information that comes to his attention.
D. The same as it is for errors or fraud.

4. Reasonable assurance means:

A. Gathering of all available corroborating evidence for the auditor to

conclude that there are no material misstatements in the financial
statements, taken as a whole.
B. Gathering of the audit evidence necessary for the auditor to
conclude that the financial statements, taken as a whole, are
free from misstatements.
C. Gathering of the audit evidence necessary for the auditor to
conclude that the financial statements are free of material
unintentional misstatements.
D. Gathering of the audit evidence necessary for the auditor to
conclude that there are no material misstatements in the
financial statements, taken as a whole.

5. Required auditor communication to the Audit Committee

concerning noncompliance with laws and regulations that were
detected includes:
 A. All material items.
B. All those which are not adequately addressed by management.
C. All those that constitute management fraud.
D. Any of such acts.

6. An auditor who accepts an audit engagement but does not possess

the industry expertise of the business entity should

A. Engage financial experts familiar with the nature of the business

entity.
B. Obtain a knowledge of matters that relates to the nature of
the entity's business.
C. Refer a substantial portion of the audit to another CPA who will
act as the principal auditor
D. First inform the Client management that on unqualified opinion
cannot be issued.

7. Auditors focus on

A. areas where the risk of material errors and irregularities is least

B. areas where the risk of material errors and irregularities is greatest
C. all areas equally
D. a random selection of all areas.

8. The decision as to how much evidence to be accumulated for a

given set of circumstance is.

A. provided by following the generally accepted accounting principles.

B. one requiring professional judgment
C. determined by statistical analysis
D. provided in the Philippine Standards on Auditing.

9. Which of the following statements best describes the primary

purpose of Philippine Standards of Auditing?

A. They are guides intended to set forth auditing procedures that are
applicable to a variety of situations.
B. They are procedural outlines which are intended to narrow down
the areas of inconsistency and divergence of auditor‘s opinion.
C. They are authoritative statements, enforced through the
Code of Professional Conduct, that are intended to limit the
degree of auditor's judgment.
D. They are interpretations which are intended clarify the meaning of
"generally accepted auditing standards.‖
10. An auditor need not abide by, a Philippines Standard on Auditing if the
auditor believes that

A. The amount is insignificant.

B. the requirement of the PSA is impractical to perform
C. the requirement of the PSA is impossible to perform
D. any of the given three choices is correct.

11. Auditing standards are

A. statutory in nature
B. rules imposed by the securities exchange commission
C. rules imposed by the picpa
D. general guidelines to help the auditors.

12. Though PSAs do not provide ―hard and fast rules‖ they provide
subjective guidance which allow the auditors to:

A. Tailor their audit to procedures requested by management

B. Only apply those standards that are important to the audit
C. Accurately interpret the profession‘s Code of Professional Conduct.
D. Use adequate professional judgment when applying the standards.

13. Every independent audit engagement involves both auditing standards

and auditing procedures. The relationship between the two may be
illustrated by how they apply from management to engagement. The
best representation of this application is that, from one audit
engagement to the next.

A. Both auditing standards and auditing procedures are applied

uniformly
B. Auditing standards are applied uniformly, but auditing procedures
may vary.
C. Auditing standards may vary but auditing procedures are applied
uniformly.
D. Auditing standards are applied uniformly, but auditing
procedures are optional.

14. Philippine Financial Reporting Standards (PFRS] are distinguished from

generally accepted auditing standards (GAAS) is that:

A. PFRS are the principles for presentation of financial

statements and underlying transactions, while GAAS are the
standards that the auditors should follow when conducting an
audit.
B. PFRS are the principles auditors follow when conducting an
audit, while GAAS are the standards for presentation of
financial statements and underlying transactions.
 C. PFRS are promulgated by the SEC, while GAAS are promulgated
by the FRSC
D. When PFRS are violated sufficiently strong GAAS may make up
for most PFRS deficiencies

15. The Philippine Standards on Auditing issued by the Auditing and

Assurance Standards Council (AASC).

A. are interpretations of generally accepted auditing standards

B. are the equivalent of laws for audit practitioners.
C. must be followed in all situations.
D. are optional guidelines which an auditor may choose not to
follow when conducting an audit.

16. Competence as a certified public accountants includes all of the

following except

A. Having the technical qualifications to perform an engagement.

B. Possessing the ability to supervise and evaluate the quality of staf
work.
C. Warranting the infallibility of the work performed.
D. Consulting others if additional technical information is needed.

17. In any case in which the incoming accountant is not qualified to

perform the work, a professional obligation exists to

A. Acquire the required level of knowledge and skills.

B. Recommend someone else who is qualified to perform the work.
C. Decline the engagement.
D. Any of the given choices.

18. Ultimately, the decision about whether or not an auditor is

independent must be made by the

A. auditor
B. audit committee
C. client
D. public

19. To be independent, the auditor:

A. cannot place any reliance on the client's verbal and written assertion
B. is responsible only to third-party users of the financial statements.
C. cannot perform any other professional services for an audit client
D. must be impartial when dealing with the client
20. What is the meaning of the generally accepted auditing standard that
requires that the auditor the auditor be independent?

A. the auditor must be without bias with respect to the client entity.
B. the auditor must adopt a critical attitude during the audit.
C. the auditor‘s sole obligation is to third parties.
D. the auditor may have a direct ownership in the client‘s business
if it is not material.

21. A CPA, while performing on audit, strives to achieve independence in

appearance in order to

A. Reduce risk and liability.

B. Comply with the generally accepted standards of field work.
C. Become independent in fact.
D. Maintain public confidence in the profession.

22. Which of the following best describes why publicly-traded corporations

follow the practice of having the outside auditor appointed by the
board of directors or elected by the stockholders?

A. To comply with the regulations of the Financial Reporting Standards

Council.
B. To emphasize the auditor‘s independence from the management of
the client entity.
C. To encourage a policy of rotation of the independent auditor.
D. To provide the corporate owners with an opportunity to voice
their opinion concerning the quality of the auditing firm selected
by the directors.

23. Practitioner's independence:

A. minimizes risk.
B. helps achieve public confidence
C. defends against professional liability
D. achieves compliance with the standards of fieldwork

24. If the client refuses to accept an audit report that is qualified due to a
known existence of noncompliance to laws and regulation, the auditor
should:

A. Issue on adverse opinion if management agrees lo fully disclose the

matter
B. Withdraw from the engagement and communicate the reasons
to the audit committee in willing
C. Withdraw from the engagement and communicate the reasons
to the Securities and Exchange Commission or other regulatory
body in writing.
 D. Issue an unqualified opinion if management agrees to fully
disclose the matter.

25. Which of the following is not required by the Generally Accepted

Auditing Standard that states that due professional care is to be
exercised in the performance of the audit?

A. Observance of the standards of field work and reporting.

B. Critical review of the audit work performed at every level of
supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment.

26. The standard of due audit care requires the auditor to

A. Apply judgment in a conscientious manner, carefully weighing

the relevant factors before reaching a decision.
B. Ensure that the financial statements are free from error
C. Make perfect judgment decision in all cases.
D. Possess skills clearly above the average for the profession.

27. Which of the following mostly describes the function of AASC?

A. To promulgate auditing standards practice and procedures

that shall be generally accepted by the accounting profession
in the Philippines.
B. To monitor full compliance by all auditors to PSAs.
C. To assist the Board of Accountancy in conducting administrative
proceedings on erring CPAs in audit practice.
D. To undertake continuing research on both auditing and financial
accounting in order to make them responsive to the needs of the
public.

28. The exercise of due professional care requires that an auditor

A. Examine all available corroborating evidence

B. Critically review the judgment exercised at every level of supervision.
C. Reduce control risk below the maximum.
D. Attain the proper balance of professional experience and formal
education.

29. Which of the following best describes the reference to the expression
―taken as a whole‖ in the fourth generally accepted auditing standard
of reporting?

A. It applies only to a complete set of financial statements.

B. It applies equally to each item in each financial statement.
C. It applies equally to each material item in each financial statement.
 D. It applies equally to a complete set of financial statements
and to each individual financial statement.

30. Philippine Standards on Auditing issued by AASC

A. apply to independent examination of financial statements of any

entity when such an examination is conducted for the purpose of
expressing an opinion.
B. must not apply to other related activities of auditors.
C. need not to be applied on all audit-related engagements.
D. require that in no circumstances would an auditor may judge it
necessary to depart from a psa, even though such a departure
may result to more efective achievement of the objective of an
audit.

31. Which of the following is required by the Generally Accepted Auditing

Standard that states that du professional care is to be exercised in the
performance of an audit?

A. Observance of the standards of fieldwork and reporting

B. Critical review of the audit work performed of every level of
supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment.

32. A CPA who has been retained by a client that operates in an industry
that is totally new to him.

A. May not accept such engagement.

B. May accept the engagement only if the accounting firm
specializes in the audit of commercial banks.
C. May accept the engagement after attaining a suitable level of
understanding of the transactions and accounting practices
unique to commercial banking.
D. May accept the engagement because his training as a CPA
transcends unique industry characteristics.

33. Which of the following is the best statement concerning the concept of
materiality?

A. materiality is determined by reference to PSA matrix.

B. materiality depends only on the peso amounts involves.
C. materiality depends on the nature of an item rather than on the peso
amount.
D. materiality is o matter of professional judgment.
34. The first standard of field work, 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 auditor is advantageous, both to the
auditor and to the client.
B. Acceptance of an audit engagement after the close of the client‘s
fiscal year is generally not permissible.
C. Appointment of the auditor subsequent to the physical count of
inventories requires a disclaimer of opinion
D. Performance of substantial parts of the engagement is necessary
at interim dates

35. Which of the following underlies the application of generally accepted

auditing standards, particularly the standards of fieldwork and
reporting?

A. Elements of materiality and risk

B. Element of corroborating evidence
C. Element of internal control
D. Element of reasonable assurance

36. Which of the following is not an attestation‘s standard?

A. The engagement shall be performed by a practitioner having

adequate knowledge in the subject matter of the assertion.
B. Sufficient evidence stroll be obtained to provide a reasonable
basis for the conclusion that is expressed in the report.
C. The work shall be adequately planned, assistants, if any, shall
be properly supervised.
D. The report shall state whether the financial statements are
presented in accordance with generally accepted accounting
principles.

37. Which of the following is a conceptual diference between the

attestation standards and generally accepted auditing standards?

A. The attestation standards provide a framework for the attest

function beyond historical financial statements.
B. The requirement that the practitioner be independent in mental
attitude is omitted from the attestation standard
C. The attestation standards do not permit an attest engagement to
be part of a business acquisition study or a feasibility study
D. None of the standards of fieldwork in generally accepted auditing
standards are included in the attestation standards.

38. The auditor‘s judgment concerning the overall fairness of the

presentation of financial position, results of operations, and changes in
financial position is applied within the framework of
 A. Philippine Financial Reporting Standards
B. Generally accepted auditing standards
C. Internal Control
D. Information systems control

39. The auditor communicates the results of his or her work through the
issuance of:

A. Engagement letter
B. Management letter
C. Audit report
D. Financial statements

40. The four major steps in conducting an audit are:

I. Testing internal control

II. Audit report
III. Planning
IV. Testing transactions and balances

The proper sequence in applying the above steps is:

A. III, I, IV, II
B. III, IV, I, II
C. II, III, IV, I
D. I, IV, III, II
 MODULE 3

PROFESSIONAL AND LEGAL RESPONSIBILITY

PSA BASED QUESTIONS

1. The revised Code of Ethics is mandatory for all CPAs and is applicable to
professional services performed in the Philippines on or:

A. Before June 30, 2008

B. After June 30, 2008
C. Before January 1, 2008
D. After January 1, 2008

2. Which of the following is not explicitly referred to in the Code of Ethics as source
of technical standards?

A. Commission on Audit (COA)

B. Auditing and Assurance Standards Council (AASC)
C. Securities and Exchange Commission (SEC)
D. Relevant legislation

3. Immediate family includes:

A. Parent
B. Sibling
C. Non-dependent child
D. Spouse

4. Close family includes the following except:

A. Parent
B. Sibling
C. Non-dependent child
D. Spouse

5. Firm includes the following except

A. A sole practicing professional accountant.

B. An entity that controls a partnership of professional accountants.
C. An entity controlled by a partnership of professional accountants.
D. A sole practitioner, partnership or corporation of professional accountants.

6. Existing accountant, as defined in the Code of Ethics, means:

A. A professional accountant employed un industry, commerce, the public

sector or education.
 B. A professional accountant in public practice currently holding an audit
appointment or carrying out accounting taxation, consulting or similar
professional services for a client.
C. Those persons who hold a valid certificate issued by the Board of Accountancy
D. A sole proprietor or each partner or person occupying a position similar to
that of a partner and each staf in a practice providing professional services
to a client irrespective of their functional classification (e.g. audit, tax or
consulting) and professional accountants in a practice having managerial
responsibilities.

7. The term professional accountant in public practice includes the following except:

A. A sole proprietor providing professional services to a client.

B. Each partner or person occupying a position similar to that of a partner staf
in a practice providing professional services to a client.
C. Professional accountants employed in the public sector having
managerial responsibilities.
D. A firm of professional accountants in public practice.

8. The term receiving accountant includes the following except:

A. A professional accountant in public practice to whom the existing has

referred tax engagement.
B. A professional accountant in public practice to whom the client of the existing
accountant has referred audit engagement.
C. A professional accountant in public practice who is consulted in order to
meet the needs of the client.
D. A professional accountant in public practice currently holding an audit
appointment or carrying out accounting, taxation, consulting or similar
professional services for a client.

9. Related entity is an entity that has any of the following relationships with the client,
except:

A. An entity that has direct or indirect control over the client provided that
the client is material to such entity.
B. An entity with a direct financial interest in the client even though such
entity has no significant influence over the client provided the interest in
the client is material to such entity.
C. An entity over which the client has direct or indirect control.
D. An entity which is under common control with the client (referred to as a
―sister entity‖) provided the sister entity and the client are both material
to the entity that controls both the client and sister entity.

10.A primary purpose for establishing a code of ethics within a professional

organization is to:

A. Demonstrate the acceptance of responsibility to the interest of those

served by the profession.
B. Reduce the likelihood that members of the profession will be sued for
substandard work.
C. Ensure that all members of the profession posses approximately the
same level of competence.
D. Require the members of profession to exhibit loyalty in all matters
pertaining to the afairs of the organization.
11.Which statement is incorrect regarding the Code of Ethics for Professional
Accountants in the Philippines?

A. Professional accountants refer to persons who are registered in the PRC AS

Certified Public Accountants (CPA) and who hold a valid certificate issued
by the Board of Accountancy.
B. Where a national statutory requirement is in conflict with a provision of the
IFAC Code, the IFAC Code requirement prevails.
C. The Code of Ethics for Professional Accountants in the Philippines is
mandatory for all CPAs and is applicable to professional services performed
in the Philippines on or after June 30, 2008.
D. Professional accountants should consider the ethical requirements as
the basic principles, which they should follow in performing their
work.

12.The communication to the public of facts about a professional accountant,

which are not designed for the deliberate promotion of that professional
accountant.

A. Publicity
B. Indirect Promotion
C. Advertising
D. Solicitation

13.Advertising, as defined in the Code of Ethics, means

A. The communication to the public of facts about a professional accountant

which are not designed for the deliberate promotion of that professional
accountant.
B. The approach to a potential client for the purpose of ofering professional
services.
C. The communication to the public of information as to the services or skills
provided by professional accountants in public practice with a view to
procuring professional business.
D. Any of the given choices.

14.The following bodies develop and or issue technical and professional

standards for implementation:

I. Board of Accountancy
II. II. National Economic Development Authority
III. Financial Reporting Standards Council
IV. Securities and Exchange Commission
V. Auditing and Assurance Standards Council
VI. Cooperative Commission of the Philippines

According to the revised code of ethics for CPAs, which of the foregoing are
sources of technical and professional standards in the Philippines?
 A. I, III, IV, V
B. I, III, IV, V, VI
C. I, III, IV
D. All of them

15.The attainment of professional competence can be fulfilled by a combination of:

I. Period of work experience

II. High standard for professional education
III. High standard of general education
IV. Training and examination in professionally relevant subjects

What should be the logical pattern of the foregoing development for a professional
accountant?

A. III, II, IV, I

B. III, I, II, IV
C. II, III, IV, I
D. II, III, I, IV

16.Which of the following is least likely the basis of determining audit fees?

A. The skill and knowledge required for the type of work involved.
B. The degree of responsibility ad urgency that the work entails.
C. The expected outcome of the engagement.
D. The required level of training and experience of the persons engaged on the
work.

17.Which of the following is not allowed by the revised code of ethics?

A. A professional accountant in public practice may issue to client or, in

response to an unsolicited request, to a non-client a factual and objectively
worded of the services provided.
B. Booklets and other documents bearing the name of a professional and giving
technical information for the assistance of staf or clients may be issued to
such persons, or other professional accountants or other interested parties.
C. The use of the name of an international accounting firm affiliation/
correspondence is generally allowed.
D. A firm or CPA practitioner can continue to use the term ―Accredited‖ or any
similar words or phrase calculated to convey the same meaning if the
claimed accreditation has not expired.

18.How frequent can a professional accountants have press and other media
releases commemorating their anniversaries in public practice by informing
the public of their achievements or accomplishments in contributing toward
nation building or enhancing the image r standards of the accounting
profession?

A. 2 years
B. 3 years
C. 5 years
D. 6 years
19.Which of the following is not allowed to be included in a website of a firm of
professional accountants?

A. Names of partners/ principals with their educational attainment.

B. Membership in any professional body.
C. Awards received
D. Listing of the firm‘s clients.

20.In their fiduciary role, the professional accountants owe their primary loyalty to:

A. The accounting profession

B. The general public
C. The client
D. Government regulatory agencies

21.Which of the following is a distinguishing mark of the accountancy profession?

A. A drive to excellence
B. Acceptance of the responsibility to act in the public interest
C. Professional objectivity
D. Professional skepticism

22.Which statement is incorrect regarding the Code of Ethics for Professional

Accountants in the Philippines?

A. The objectives as well as the fundamental principles are of a general nature

and are not intended to be used to solve a professional accountant‘s ethical
problems in a specific case.
B. The code is divided in two parts, part A and part B.
C. Part A applies to all professional accountants unless otherwise specified.
D. Part B applies only to those professional accountants in public practice.

23.A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession. This is a
fundamental principle of:

A. Objectivity
B. Professional competence and due care
C. Professional behavior
D. Integrity

24.The IFAC Code of Professional Conduct will ordinarily be considered to have

been violated when the member represents that specific consulting services will be
performed for a stated fee and it is apparent at the time of the representation that
the

A. Actual fee would be substantially higher.

B. Actual fee would be substantially lower than the fees charged by other
members for comparable services.
C. Fee was a competitive bid.
 D. Member would not be independent.

25.Which of the following is not one of the fundamental principles of ethical

conduct for professional accountants?

A. Integrity
B. Confidentiality
C. Loyalty
D. Professional competence and due care

26.To what fundamental principle does the following statement best fit? A
professional accountant is likened to a prudent father to his son.

A. Professional competence and due care

B. Confidentiality
C. Integrity
D. Objectivity

27.Which fundamental principle is seriously threatened by an engagement that is

compensated based on the net proceeds on loans received by the client from a
commercial bank?

A. Objectivity
B. Professional behavior
C. Confidentiality
D. Integrity

28.Which of the following is required to comply with the fundamental principle of

professional competence and due care?

A. A professional accountant should not allow bias, conflict of interest or undue

influence of others to override professional or business judgment.
B. A professional accountant should act diligently and in accordance with
technical and professional standards when providing professional
services.
C. A professional accountant should comply
D. The accountant should observe fair dealings and truthfulness.

29.―A professional accountant should be straight-forward and honest in all his

professional and business relationships.‖ This description appropriately describes
the fundamental principle of:

A. Integrity
B. Objectivity
C. Confidentiality
D. Professional Behavior

30.It is essential that uses of the audited financial statements regard CPA firms as
 A. Competent
B. Unbiased
C. Technically proficient
D. All of the given choices

31.The Code of Professional Ethics states, in part, that a CPA should maintain
integrity and objectivity. Objectivity refers to the CPA‘s ability to

A. Determine accounting practices that were consistently applied

B. Maintain an impartial attitude on all matters which come under his review
C. Determine the materiality of items
D. Insist on all matters regarding audit procedures

32.Which of the following values is not necessary for a professional accountant?

A. Honesty
B. Objectivity
C. Integrity
D. A primary commitment to self-interest

33.Which of the following is not a fundamental principle in codes of ethics for

professional accountants?

A. Act in the client‘s best interest

B. Objectivity and independence
C. Maintain the good reputation of the profession
D. Maintain confidentiality

34.Which of the following statements about conceptual framework of the code

of ethics is incorrect?

A. A conceptual framework that requires a professional accountant to identify,

evaluate and address threats to compliance with the fundamental principles,
rather than merely with a set of specific rules which may be arbitrary is in
the public interest.
B. As a concern to public interests, the professional accountant should comply
with a set of specific rules rather than arbitrarily identify, evaluate and
address threats to compliance with fundamental principles.
C. If identifies threats are other than clearly insignificant, a professional
accountant should appropriately apply safeguards to eliminate the threats
or reduce them to an acceptable level.
D. The Code provides a framework to assist a professional accountant to
identify, evaluate and respond to threats to compliance with the
fundamental principles.

35.Which of the following is true of the conceptual framework approach?

 A. It is impossible to define every situation that creates specific threats and and
specify the appropriate mitigating action.
B. A professional accountant should take qualitative but not quantitative
factors into account when considering the significance of a threat.
C. A professional accountant should take quantitative but not qualitative
factors into account when considering the significance of a threat.
D. All inadvertent violations of the code of Ethics, irrespective of their
nature and significance, always compromise compliance with the
fundamental principles

36.Which of the following appropriately describes an advocacy threat?

A. The professional accountant may be deterred from acting objectivity by

threats, actual or perceived.
B. Because of a close relationship, a professional accountant becomes too
sympathetic to the interest of others.
C. The professional accountant should provides a position or opinion to the
point that subsequent objectivity may be compromised.
D. The professional accountant needs to be reevaluate his previous judgment.

37.A threat that prevents the professional accountant from acting objectively by
threats, actual or perceived.

A. Self-interest
B. Familiarity
C. Intimidation
D. Advocacy

38.A form of threat which may occur when a previous judgment needs to be
reevaluated by the professional accountant who is responsible for that judgment.

A. Self-interest threat
B. Self-review threat
C. Familiarity threat
D. Advocacy threat

39.Advocacy threat may occur:

A. As a result of the financial or other interests of a professional

accountant or an immediate or close family member.
B. When, because of a close relationship, a professional accountant
becomes too sympathetic to the interests of others.
C. When a professional accountant promotes a position or opinion to the
point that subsequent objectivity may be compromised.
D. When a professional accountant may be deterred from acting objectively
by threats, actual or perceived.
40.It occurs when a firm or member of the assurance team could benefit
from a financial interest in, or other self-interest conflict with, an assurance
client.

A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

41.A financial interest beneficially owned through a collective investment vehicle,

estate, trust or other intermediary over which the individual or entity has no
control.

A. Indirect financial interest

B. Financial instrument
C. Direct financial interest
D. Clients‘ monies

42.Financial interest means:

A. Any bank account which is sued solely for the banking of clients‘ monies.
B. Any monies received by a professional accountant in public practice to be
held or paid out on the instruction of the person from whom or on whose
behalf they are received.
C. A financial interest beneficially owned through a collective investment
vehicle, estate, trust or other intermediary over which the individual or
entity has no control.
D. An equity interest or other security, debenture, loan or other debt instrument
of an entity, including rights and obligations to acquire such an interest and
derivatives directly related to such interest.

43.Direct financial interest is a financial

interest: A B C D

 Owned directly by and

under the control of an
individual or

entity (including those Yes Yes Yes No

managed on a discretionary
basis by other)
 Beneficially owned
through a collective
investment vehicle,
estate, trust or other
intermediary over which the Yes Yes No
No individual or entity has
control
 Benecially owned
through a collective
investment vehicle,
estate, trust or other
intermediary over which the Yes No No Yes
individual or entity has no
 control

44.Occurs when any product or judgment of a previous assurance engagement or

non- assurance engagement needs to be re-evaluated in reaching conclusions on
the assurance engagement or when a member of the assurance team was
previously a director or officer of the assurance client, or was an employee in a
position to exert direct and significance influence over the subject matter of the
assurance engagement.

A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

45.Intimidation threat

A. is not a threat to independence.

B. occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threat, actual or
perceived, from the directors, officers or employees of an assurance client.
C. occurs when, by virtue of a close relationship with an assurance client,
its directors, officers or employees, a firm or a member of the assurance
team becomes too sympathetic to the client‘s interests.
D. occurs when a firm, or a member of the assurance team, promotes, or may
be perceived to promote, an assurance client‘s position or opinion to the
point that objectivity may, or may be perceived to be, compromised.

46.Safeguards created by the profession, legislation or regulation, include the

following, except:

A. Educational, training and experience requirements for entry into the profession.
B. Continuing education requirements.
C. Legislation governing the independence requirements of the firm.
D. Policies and procedures that emphasize the assurance client‘s
commitment to fair financial reporting.

47.Which of the following is an example of engagement-specific safeguards?

A. Advising partners and professional staf of those assurance clients and

related entities from which the must be independent.
B. Consulting an independent third party, such as committee of independent
directors, a professional regulatory body or another professional
accountant.
C. Policies and procedures that will enable the identification of interests or
relationships between the firm or members of engagement teams and
clients.
D. External review by a legally empowered third party of the
reports, returns, communications or information produced by a
professional accountant.
48.Which of the following is not a safeguard created by the profession, legislation or
regulation?
 A. Professional standards
B. Professional and procedures to implement and monitor quality control of
engagements.
C. Continuing professional development requirements
D. Educational, training and experience requirements for entry into the profession.

49.Safeguards may eliminate or reduce threats to an acceptable level. The

following are examples of these safeguards:

I. Professional or regulatory monitoring and discipline procedures.

II. Documented internal policies and procedures requiring
compliance with the fundamental principles.
III. Policies and procedures to monitor and, if necessary, manage the
reliance on revenue received from a single client.

Which of the foregoing examples of safeguards is/ are classified firm-wide

safeguards in the work environment?

A. All of these
B. I and II
C. II and III
D. I and III

50.Which of the following fundamental principles is compromised when a

professional accountant is associated with reports or returns that are
significantly misleading?

A. Integrity
B. Competence and due professional care
C. Objectivity
D. Professional behavior

51.Safeguards may eliminate or reduce threats to an acceptable level. The

following are examples of these safeguards:

I. Professional or regulatory monitoring and disciplinary procedures.

II. Documented internal policies and procedures requiring
compliance with the fundamental principles.
III. Policies and procedures to monitor and, if necessary, manage the
reliance on revenue received from a single client.
IV. Corporate governance regulations

Which of the foregoing examples of safeguards that can be applied is(are) created by
the profession, legislation or regulation?

A. I and III
B. II and Iv
C. I and IV
 D. II and III

52.Which of the following examples of safeguards that may efectively

reduce threats to compliance with the fundamental of principles is created
by the profession, legislation or regulation?

A. Published policies and procedures to encourage and empower staf to

communicate to senior levels within the firm any issue relating to
compliance with the fundamental principles that concerns them.
B. Efective, well-publicized complaints system operated by the employing
organization, the profession or a regulator, which enable colleagues,
employers and members of the public to draw attention to unethical
behavior.
C. Designating a member of senior management to be responsible for
overseeing the adequate functioning of the firm‘s quality control
system.
D. Disclosing to those charged with governance of the client the nature of
services provided and the extent of fees charged.

53.Professional accountants may encounter problem in identifying unethical

behavior or in resolving an ethical conflict. When faced with significant ethical
issues, professional accountants should do the following except

A. Follow the established policies of the employing organization to seek a

resolution of such conflict.
B. Review the conflict problem with the immediate superior if the
organization‘s policies do not resolve the ethical conflict.
C. If the problem is not resolved with the immediate superior and the
professional accountant determines to go to the next higher managerial
level, the immediate superior need not be notified of the decision.
D. Seek counseling and advice on a confidential basis with an independent
advisor or the applicable professional accountancy body or regulatory body
to obtain an understanding of possible courses of action.

54.As a resolution of the conflict in the application of fundamental principles, the

auditor, after considering the ethical issues and relevant facts may do any of the
following except:

A. Must immediately resign from the engagement or the employing entity.

B. Should weigh the consequences of each possible course of action.
C. Should consult with other appropriate persons within the firm or employing
organization foe help to finally resolve the matter.
D. The professional accountant may wish to obtain professional advice from
the relevant professional body without breaching confidentiality if
significant conflict cannot be resolved.

55.Which of the following is incorrect regarding integrity and objectivity?

A. Integrity implies not merely honesty but fair dealing and truthfulness.
 B. The principle of objectivity imposes the obligation on all professional
accountants to be fair, intellectually honest and free of conflicts of interest.
C. Professional accountants serve in many diferent capacities and should
demonstrate their objectivity in varying circumstances.
D. Professional accountants should neither accept nor ofer any gifts or
entertainment.

56.If a professional accountant is billing an audit client a number of hours

greater than those actually worked, which of the following fundamental
principles is likely violated?

A. Objectivity
B. Integrity
C. Professional due care
D. Confidentiality

57.Which of the following is incorrect regarding professional competence?

A. Professional accountants may portray themselves as having expertise or

experience they do not possess.
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence requires initially a high
standard of general education.
D. The maintenance of professional competence requires a continuing
awareness of development in the accountancy profession.

58.In which of the following circumstances may disclosure of confidential

information be appropriate?

A. Disclosure is necessary as required by legal proceedings.

B. The professional accountant volunteered to reveal information in order to
help a faster resolution of legal proceedings.
C. Working papers are returned over to other professional accountant who
purchased the accounting practice.
D. Detailed listing of inactive customers of one assurance client is passed on to
other non- assurance client.

59.The underlying reason for a code of professional conduct for any profession is

A. the need for public confidence in the quality of service of the profession.
B. that it provides a safeguard to keep unscrupulous people out.
C. that it is required by the congress.
D. that it allows Professional Regulation Commission to have a yardstick
to measure deficient performance.

60.A professional accountant may be associated with a tax return that

A. contains a false or misleading statement.

 B. contains statements r information furnished recklessly or without any real
knowledge of whether they are true or false.
C. omits or obscures information required to be submitted and such omission
or obscurity would mislead the revenue authorities.
D. uses of estimates if such use is generally acceptable or if it is
impractical under the circumstances to obtain exact data.

61.There are fundamental principles that the professional accountant has to

observe when performing assurance engagements. The requirement of which
principle is of particular importance in an assurance engagement in ensuring
that the conclusion of the professional accountant has value to the intended
user?

A. Integrity
B. Confidentiality
C. Professional competence
D. Objectivity

62.If a professional accountant is auditing a public company and he receives from

his client its shares of stock as payment for his audit services, he will be violating
the fundamental principle of:

A. Integrity
B. Professional due care
C. Objectivity
D. Confidentiality

63.Which of the following is least likely an indication that the CPA violates
the Integrity principle? The CPA is associated with reports or information
that:

A. The CPA issues a qualified opinion due to scope limitation because he fails to
arrive at a clear-cut conclusion.
B. Contains a materially false or misleading statement.
C. Omits or obscures information required to be included when such omission
or obscurity would make the information misleading,
D. Contains statements or information furnished recklessly.

64.Which of the following is the least required in attaining professional competence?

A. High standard of general education

B. Specific education, training and examination in professionally relevant subjects.
C. Period of meaningful work experience.
D. Continuing awareness of development in the accountancy profession.

65.Which of the following is incorrect regarding confidentiality?

 A. Professional accountants have an obligation to respect the confidentiality of
information about a client‘s or employer‘s afairs acquired in the course of
professional services.
B. The duty of confidentiality ceases after the end of the relationship
between the professional accountant and the client or employer.
C. Confidentiality should always be observed by a professional accountant
unless specific authorization has been given to disclose information or there
is a legal or professional duty to disclose.
D. Confidentiality requires that a professional accountant acquiring
information in the course of performing professional services neither
uses nor appear to use that information for personal advantage or for
the advantage of a third party.

66.A professional accountant is auditing Maiden Company and providing consulting

services to Widow Company. Both clients are in the same industry. IF the
professional accountant uses specific information from Maiden‘s audit to prepare a
business plan for Widow, he will be violating the principle of:

A. Integrity
B. Professional behavior
C. Objectivity
D. Confidentiality

67.Which of the following statements is incorrect about the principle of

confidentiality?

A. The professional accountants must refrain from disclosing confidential

information acquired as a result of professional and business relationships
to any party outside the firm or employing organization unless there is a
legal or professional right or duty to disclose.
B. The professional accountants must never disclose confidential information
obtained as a result of professional business relationships.
C. The need to comply with confidentiality principle continues even after
the end of relationships between a professional accountant and a
client or employer.
D. A professional accountant should consider that some information
may be kept confidential within the firm or employing organization.

68.The confidential relationship applies to

A. all services provided by CPAs.

B. only audit a d attestation services.
C. audit and tax services, but not MAS services.
D. audit and MAS services, but not tax services.

69.Which of the following may not be a professional duty to disclose confidential

information?

A. In compliance with the quality review of a member body or professional body.

B. In compliance with technical standards and ethics requirements.
C. In response to specific inquiry from the major stockholder.
D. In protecting the professional interests of the professional accountant
in case of litigation.
70.The professional accountant has a professional duty or right to disclose
confidential information in each of the following, except

A. To comply with technical standards and ethics and requirements.

B. To disclose to BIR fraudulent scheme committed by the client on payment of
income tax.
C. To comply with the quality of review of a member body or professional body.
D. To respond to an inquiry or investigation by a member body or regulatory body.

71.What kind of threat to noncompliance to fundamental principles is created if the

professional if the professional fees due from a financial statement audit client
remain unpaid for a long time?

A. Self-interest review threat

B. Self-review threat
C. Familiarity threat
D. No threat is created

72.A CPA in public practice shall not disclose any confidential client information
without the specific consent of the client. The confidentiality rule is violated if the
CPA discloses information without a client‘s consent as a result of a

A. subpoena or summons
B. peer review
C. complaint filed with the trial board of the Board of Accountancy.
D. request from a client‘s largest stockholder.

73.The confidential relationship will be violated if, without the client‘s

permission, the CPA provides working papers about the client to

A. a court of law which subpoenas them.

B. another CPA firm as part of a peer review.
C. another CPA firm which has just purchased the CPA‘s entire practice.
D. an investigate or disciplinary body which is conducting a review of the CPA‘s
practice.

74. Assurance team include

A B C D

 All professionals participating

In the assurance engagement Yes Yes Yes Yes
 All others within a firm
who can directly
influence the
outcome of the assurance
engagement Yes Yes No No
 For the purposes of an audit
client, all those within a
network firm who can directly
influence the outcome of the
 audit engagement Yes No No Yes

75.Examples of circumstances that may create self-interest threat include:

A. Contingent fees relating to assurance engagements.

B. A direct financial interest or material indirect financial interest in an assurance
client.
C. A loans or guarantee to or from an assurance client or any if its directors or
officers.
D. All of the given choices

76.Which of the following is least likely create ―self-interest threat‖?

A. Undue dependence on total fees from an assurance client.

B. Concern about the possibility of losing the engagement.
C. Having a close business relationship with an assurance client.
D. Pressure to reduce inappropriately the extent of work performed in order to
reduce fees.

77.If the firm is involved in the preparation of accounting records or financial

statements and those financial statements are subsequently the subject matter
of an audit engagement of the firm, this will most likely create

A. self-interest threat
B. self-review threat
C. intimidation threat
D. familiarity threat

78.Examples of circumstances that may create self-review threat least likely include

A. preparation of original data used to generate financial statements or

preparation of other records that are the subject matter of the assurance
engagement.
B. a member of the assurance team being, or having recently been, an
employee of the assurance client in a position to exert direct and
significant influence over the subject matter of the assurance
engagement.
C. potential employment with an assurance client.

79.Family and personal relationships between a member of the assurance team

and a director, an officer or certain employees, depending on their role, of the
assurance client, least likely create

A. self-interest threat
B. self-review threat
C. intimidation threat
D. familiarity threat

80.A director, an officer or an employee of the assurance client in a position to

exert direct and significant influence over the subject matter of the assurance
engagement has been a member of the assurance team or partner of the firm.
This situation least likely create
 A. self-interest threat
B. advocacy threat.
C. intimidation threat.
D. familiarity threat.

81.A former officer, director or employee of the assurance client serves as a

member of the assurance team. This situation will least likely create

A. self-interest threat.
B. self-review threat.
C. intimidation threat.
D. familiarity threat.

82.Which of the following will least likely impair independence?

A. An immediate family member of a member of the assurance team is a

director, an officer or an employee of the assurance client in a position to
exert direct and significant influence over the subject matter of the
assurance engagement.
B. A member of the assurance team participates in the assurance
engagement while knowing, or having reason to believe, that he or she is
to, or may, join the assurance client in the future.
C. A partner or employee of the firm serves as an officer or as a director on the
board of an assurance client.
D. A partner or employee of the firm or a network firm serves as Company
Secretary for an audit client, the duties and functions undertaken are limited
to those of a routine and formal administrative nature as such as the
-preparation of minutes and. maintenance of statutory returns.

83.The provision of services by a firm or network firm to an audit client that

involve the design and implementation of financial information technology
systems that are used to generate information forming part of a client's financial
statements may most likely create

A. self-interest threat.
B. self-review threat.
C. intimidation threat.
D. familiarity threat.

84.Occurs when a firm, or a member of the assurance team, promotes, or may be

perceived to promote, an assurance client's position or opinion to the point that
objectivity may, or may be perceived to be, compromised. Such may be the case if
a firm or a member of the assurance team were to subordinate their judgment to
that of the client.

A. Self-interest threat
B. Self-review threat
C. Advocacy threat.
D. Familiarity threat
85.A CPA-lawyer, acting as a legal counsel to one of his audit client, is an example of

A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

86.Which of the following is not likely a threat to independence?

A. Acting as an advocate on behalf of an assurance client in litigation or

in resolving disputes with third parties.
B. Long association of a senior member of the assurance team with the assurance
client.
C. Threat of replacement over a disagreement with the application of an
accounting principle.
D. Owning immaterial indirect financial interest in an audit client.

87.Occurs when, by virtue of a close relationship with an assurance client, its

directors, officers or employees, a firm or a member of the assurance team
becomes too sympathetic to the client‘s interests.

A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat

88.Examples of circumstances that may create familiarity threat least likely include

A. a member of the assurance team having an immediate family member or

close family member who is a director or officer of the assurance client.
B. a member of the assurance team having an immediate family member or
close family member who, as an employee of the assurance client, is in a
position to exert direct and significant influence over the subject matter of
the assurance engagement.
C. a former partner of the firm being a director, officer of the assurance client
or an employee in a position to exert direct and significant influence over
the subject matter of the assurance engagement.
D. dealing in, or being a promoter of, share or other securities in an assurance
client.

89.Consideration of the nature of the safeguards to be applied will be afected by

matters such as the

A B C D

 Significance of the threat Yes Yes Yes Yes

 Nature of the assurance Yes Yes Yes No
engagement
  Intended users of the assurance Yes Yes No Yes
report
 Structure of the firm Yes No No No

90.The safeguards available to eliminate the threats or reduce them to acceptable

level include

A B C D

•Safeguards created by
the profession,
legislation or
regulation YES YES YES YES
•Safeguards within the
assurance client YES YES NO NO
•Safeguards within the firm's
own systems and procedures YES NO NO YES

91.Safeguards within the firm's own systems and procedures, include the following,
except:

A. Firm leadership that stresses the importance of independence and the

expectation that members of assurance teams will act in the public
interest.
B. External review of a firm's quality control system.
C. Policies and procedures to implement and monitor quality control of
assurance engagements.
D. Policies and procedures that will enable the identification of interests or
relationships between the firm or members of the assurance team and
assurance clients.

92.Safeguards within the assurance client, include the following, except

A. Professional standards and monitoring and disciplinary processes.

B. The assurance client has competent employees to make managerial decisions.
C. Internal procedures that ensure objective choices in commissioning non-
assurance engagements.
D. A corporate governance structure, such as an audit committee, that provides
appropriate oversight and communications regarding a firm's services.

93.In determining estimates of fees, an auditor may take into account each of
the following, except the:

A. Value of the service to the client.

B. Degree of responsibility assumed by undertaking the engagement.
C. Skills required in performing the service.
D. Attainment of specific findings.

94.The Code of Professional Conduct would be violated if a member

accepted a fee for services and the fee was
A. fixed by a public authority
B. based on price quotation submitted in competitive bidding.
 C. based on the result of judicial proceedings.
D. payable after a specified finding was attained.

95.In the marketing and promotion of themselves and their Work professional
accountants should:

A. Not use means which brings the profession into disrepute.

B. Not make exaggerated claims for the services they are able to ofer. the
qualifications they possess. or experience they have gained.
C. Not denigrate the work of other accountants.
D. All of the above.

96.Which of the following is incorrect regarding independence?

A. Independence consists of independence of mind and independence in

appearance.
B. Independence of mind is the state of mind that permits the provision of an
opinion without being afected by influences that compromise professional
judgment, allowing an professional skepticism. individual to act with
integrity', and exercise objectivity and
C. Independence in appearance is the avoidance of facts and circumstances
that are so significant a reasonable and informed third party, having
knowledge of all relevant information, including any safeguards applied,
would reasonably conclude a firm‘s or a member of the assurance team‘s
integrity, objectivity or professional skepticism had been comprmised.
D. Independence is a combination of impartiality, intellectual honesty and a
freedom from conflicts of interest.

97.The network firms are required to be independent of the client

A. for assurance engagements provided to an audit client the client.

B. for assurance engagements provided to clients that are not audit clients,
when the report is r:ioty expressly restricted for use by identified users.
C. for assurance engagements provided to clients that are not audit
clients, when the assurance report is expressly restricted for use by
identified users.
D. All of the given choices

98.For assurance engagements provided to an audit client, the following

should be independent of the client:

A B C D

•The members of the assurance YES YES YES YES

team YES YES NO NO
•The firm
•Network firms YES NO NO YES
99.Using partners who do not report to the audit partners for the provision of
non-assurance services to an audit client is an example of:

A. Safeguards reducing the risk of conflict of interest created by the profession,

legislation, or regulation.
B. Safeguards reducing the risk of conflict of interest within a client.
C. Safeguards reducing the risk of conflict of interest within a professional
accounting firm.
D. All of these.

100.The recommendation for the appointment of the external auditors by the audit
committee is an example of:

A. Safeguards reducing the risk of conflict of interest created by the profession,

legislation, or regulation.
B. Safeguards reducing the risk of conflict of interest between an
auditor and the management.
C. Safeguards reducing the risk of conflict of interest within a professional
accounting firm's own systems and procedures.
D. All of these

101.For assurance engagements provided to clients that are not clients, when the
report is not expressly restricted for by identified users, the following should be
independent of the client:

A B C D

•The members of the assurance YES YES YES YES

team
•The firm YES YES NO NO
•Network firms YES NO NO YES
102.For assurance engagements provided to clients that are not audit clients,
when the assurance report is expressly restricted for use by identified users,
the following should be independent of the client:

A B C D

•The members of the assurance team YES YES YES YES

•The firm YES YES NO NO
•Network firms YES NO NO YES

103.Contingent fee pricing of public accounting services is:

A. Always strictly prohibited in public accounting practice.

B. Never restricted in public accounting practice.
C. Prohibited for clients for who m attestation services arc
D. Considered an act discreditable to the profession.

104.The firm should be independent of the client in the following engagements:

 A B C D

 Assurance engagements provided

to an audit client YES YES YES YES
 Assurance engagements
provided to clients that are not
audit clients, when the report is
not expressly
restricted for use by identified users YES YES NO NO
 Assurance engagements
provided to clients that are not
audit clients,
when the assurance report is expressly
restricted for use by identified users YES NO NO YES

105.When the safeguards available are insufficient to eliminate the threats to

independence or to reduce them to an acceptable level, or when a firm chooses
not to eliminate the activities or interest creating the threat, the only course of
action available will be the

A. Issuance of an adverse opinion.

B. Issuance of qualified opinion or disclaimer of opinion.
C. Issuance of unqualified opinion with explanatory paragraph.
D. Refusal to perform, or withdrawal from, the assurance engagement.

106.Which of the following is incorrect regarding engagement period?

A. The period of the engagement starts when the tesurance team begins to
perform assurance services and ends when the assurance report is
issued, except when the assurance engagement is of a recurring nature.
B. If the assurance engagement is expected to recur, the period of the
assurance engagement ends with the notification by either party that the
professional relationship has terminated or the issuance of the final
assurance report, whichever is earlier.
C. In the case of an audit engagement, the engagement period includes the
period covered by the financial statements reported on by the firm.
D. When an entity becomes an audit client during or after the period
covered by the financial statements that the firm will report on, the firm
should consider whether any threats to independence may be created by
previous services provided to the audit client.

107.If a member of the assurance team, or their immediate family member, has a
direct financial interest, or a material indirect financial interest, in the assurance
client, the self-interest threat created would be so significant that the only
safeguards available to eliminate the threat or reduce it to an acceptable level
would be to (choose the incorrect one)

A. dispose of the direct financial interest prior to the individual becoming a

member of the assurance team.
B. dispose of the indirect financial interest in total prior to the individual
becoming a member of the assurance team.
 C. dispose of a sufficient amount of the indirect financial interest so that the
remaining interest is no longer material prior to the individual becoming a
member of the assurance team.
D. limit the participation of the member of the assurance team.

108.If a member of the assurance team, or their immediate family member

receives, by way of, for example, an inheritance, gift or, as a result of a merger, a
direct financial interest or a material indirect financial interest in the assurance
client, a self-interest threat would he created. The following safeguards should be
applied to eliminate the threat or reduce it to acceptable level:

A. Disposing of the financial interest at the earliest practical date.

B. Removing the member of the assurance team from the assurance engagement.
C. Either a or b
D. Neither a nor b

109.When a member of the assurance team knows that his or her close family
member has a direct financial interest or a material indirect financial interest in
the assurance client, a self- interest threat may be created. Safeguards least likely
include:

A. The close family member disposing of all or a sufficient portion of the

financial interest at the earliest practical date.
B. Discussing the matter with those charged withgovernance, such as the audit
committee.
C. Involving a professional accountant who took part in the assurance
engagement to review the work done by the member of the assurance
team with the close family relationship or otherwise advice as
necessary
D. Removing the individual from the assurance engagement.

110.When a firm or a member of the assurance team holds a direct financial

interest or a material indirect financial interest in the assurance client as a
trustee a self-interest threat tray created by the possible influence of the trust
over the assurance client. Accordingly, such an interest cannot be held when:

A. The member of the assurance team, an immediate family member of the

member of the assurance team, and the firm are beneficiaries of the trust.
B. The interest held by the trust in the assurance client is not material to the trust.
C. The trust is not able to exercise significant influence over the assurance client.
D. The member of the assurance team or the Jinn does not have significant
influence over any investment decision involving a financial interest in the
assurance client.

111.An inadvertent violation of the Independence rules as it relates to a financial

interest in an assurance client would not impair the independence of the firm, the
network firm or a member of the assurance team when:
 A. The firm, and the network firm, has established policies and procedures
that require all professionals to report promptly to the firm any breaches
resulting from the purchase, inheritance or other acquisition of a financial
interest in the assurance client.
B. The firm, and the network firm, promptly notifies the professional that
the financial interest should be disposed of.
C. The disposal occurs at the earliest practical date after identification of the
issue, or the professional is removed from the assurance team.
D. All of the given choices.

112.The following self-interest threat created would be so significant no safeguard

could reduce the threat to an acceptable level, except

A. If a firm, or a network firm, has a direct financial interest in an audit client of

the firm.
B. If a fir, or a network firm, has a material indirect financial interest in an audit
client of the firm.
C. If a firm, or a network firm, has a material financial interest in an
entity that has a controlling interest in an audit client.
D. If the retirement benefit plan of a firm, or network firm, has a financial
interest in an audit client

113.If a firm, or a network firm, has a direct financial interest in an audit client of
the firm, the self-interest threat created would be so significant no safeguard could
reduce the threat to an acceptable level. The action appropriate to permit the firm
to perform the engagement would be to

A. dispose of the financial interest.

B. dispose of a sufficient amount of it so that the remaining interest is no longer
material.
C. Either of the given choices
D. Neither of the given choices

114.If a firm, or a network firm, has a. direct financial interest in a financial

statement audit client of the firm, the appropriate safetuard against the self-
interest threat created would be-

A. Dispose the entire financial interest.

B. Dispose of a sufficient amount of the financial interest so that the remaining
interest is no longer material.
C. Any of the two is appropriate.
D. None of the two is appropriate.

115.If a firm, or a network firm, has a material financial interest in an entity that has
a controlling interest in a financial statement audit client, the self interest threat
created is so significant. The audit firm can only perform the engagement if it:

I. Dispose of the entire financial interest.

II. Dispose of a sufficient amount of the financial interest so that the
remaining interest is no longer significant
 A. Either I or II
B. Neither I or II
C. I only
D. II only

116.Which of the following safeguards is inappropriate if a firm has a material

financial interest in an entity that has a controlling interest in a financial statement
audit client?

A. Discuss the presence of self-interest threat with the client's board of directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the
financial interest in total.

117.The retirement benefit plan of a firm, or a network firm, has a financial interest
in a financial statement audit client. If the self-interest threat that is created by the
financial interest is significant, the firm that intends to continue the engagement
should:

A. Reduce the financial interest so that the remaining interest is no longer

material
B. Discuss the matter with the audit committee of the financial statement audit
client.
C. Refer the audit of the stockholders' equity of the financial statement audit
client to other CPA.
D. Either dispose of the financial interest in total or a sufficient amount
so that the remaining amount is no longer material.

118.The following loans and guarantees would not create a threat to independence,
except:

A. A loan from, or a guarantee thereof by, an assurance client that is a bank or

a similar institution, to the firm, provided the loan is made under normal
lending procedures, terms and requirements and the loan is immaterial to
both the firm and the assurance client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank
or a similar institution, to a member of the assurance team or their
immediate family, provided the loan is made under normal lending
procedures, terms and requirements.
C. Deposits made 1* or brokerage accounts of, a firm or a member of the
assurance team with an assurance client that is a bank, broker or similar
institution, provided the deposit or account is held under normal commercial
terms.
D. If the firm, or a member of the assurance team, makes a loan to an
assurance client that is not a bank or similar institution, or guarantees such
an assurance clients‘ borrowings

119.Examples of close business relationships that may create self_ interest and
intimidation threat least likely include:
A. Having a material financial interest in director, officer or assurance client or
a controlling owner, director, officer or other individual who performs senior
managerial functions for that client.
B. Arrangements to combine one or more services or products of the firm with
one or more sees or products of the assurance client and to market the
package with reference to both parties.
 C. Distribution or marketing arrangements under which the firm acts as a
distributor or marketer of the assurance client's products or services, or the
assurance client acts as the distributor or marketer of the products or
services of the firm.
D. The purchase of goods and services from an assurance client by the firm
(or from an audit client by a network firm) or a member of the assurance
team, provided the transaction is in the normal course of business and on
an arm's length basis.

120.When a firm or a member of the assurance team and the audit client or one
of its officers hold interest in a closely-held entity, a . threat to independence is
not created, except:

A. The relationship is clearly insignificant to the member of the assurance

team and the audit client.
B. The relationship is other than insignificant acceptable for indirect financial
interest.
C. The interest held is immaterial to the investors or group of investors.
D. The interest does not give the investor, or group the ability to control the
closely-held entity.

121.When an immediate family member of a member of the assurance team is a

director or an officer of the assurance client in a position to exert diret and
siginficant infuence over the subject matter information of the engagement, the
threat to independence can only be reduced to an acceptable level, aside from
withdrawing from the engagement, by:

A. Removing the individual from the assurance team.

B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family
member of the professional to go on forced vacation leave.

122.Which of the following relationships is most likely to impair a CPA's

independence with respect to a particular audit client on which the CPA works
as a member of the engagement team?

A. A close relative has a material investment in that client of which the CPA is not
aware.
B. A cousin has an immaterial investment in that client of which the CPA is not
aware.
C. The CPA's father is the president of the audit client.
D. The CPA's spouse participates in a savings plan sponsored by the client.

123.An inadvertent violation of the rules on family and personal relationships

would not impair the independence of a firm or a member of the assurance team
when:

A. The firm has established policies and procedures that require all
professionals to report promptly to the firm any breaches resulting from
 changes in the employment status of their immediate or close family
members or other personal relationships that create threats to
independence.
B. Either the responsibilities of the assurance team are re-structured so that
the professional does not deal with matters that are within the
responsibility of the person
 with whom he or she is related or has a personal relationship, or, if this is not
possible, the firm promptly removes the professional from the assurance
engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.

124.If a member of the assurance team, partner or former partner of the firm has
joined the assurance client, the significance of the self-interest, familiarity or
intimidation threats created is least likely afected by.

A. The position the individual has taken at the assurance client.

B. The amount of any involvement the individual will have with the
member of the assurance team.
C. The length of time that the individual was a member of the assurance team or
firm.
D. The former position of the individual within the assurance team or firm..

125.Using the same senior personnel on an assurance engagement over a long

period of time may create a familiarity threat. The significance of the threat will
least likely depend upon.

A. The length of time that the individual has been a member of the assurance
team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.

126.A small CPA firm provides audit services to a large local company. Almost 80
percent of the CPA firm's revenues come from this client. Which statement is
most likely to be true?

A. Appearance of independence may be lacking.

B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative
assurance care in the audit.
D. The auditor should provide an "emphasis of a matter his audii report
adequately- disclosing information and then it may issue an
unqualified opinion.

127.A professional accountant has been the partner-in-charge of a particular audit

client for the past eight years. This situation could result to the following threat to
professional independence:

A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity
128.Which statement is incorrect regarding long association of senior
personnel with audit clients that are listed entities?
 A. Using the same lead engagement partner on an audit over a prolonged
period may create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined period,
normally no more than six years.
C. A partner rotating after a pre-defined period should not participate in the
audit until a further period of time, normally two years, has elapsed.
D. When audit client becomes a listed entity the length of time the lead
engagement partner has served the audit client in that capacity should be
considered in determining when the partner should be rotated.

129.The professional accountant who has been the lead engagement partner for
an audit engagement for a prolonged period of time may continue to serve as the
lead engagement partner before rotating of the engagement for how many years
after the audit client becomes a listed entity?

A. One year
B. Three years
C. Two years
D. Four years

130.While the lead engagement partner should be rotated after such a pre-
defined period, some degree of flcxibihty over timing of rotation may be
necessary in certain circumstances. Examples of such circumstances include:

A. Situations when the lead engagement partner's continuity is especially

important to the audit client, for example, when there will be major changes
to the audit client's structure that would otherwise coincide with the rotation
of the lead engagement partner.
B. Situations when, due to the size of the firm, rotation ip not possible or does
not constitute an appropriate safeguard.
C. Both choices are correct.
D. Both choices are incorrect.

131.A CPA can continue to be an engagement partner on the audit financial

statements of listed entities over a prolonged petioci Of engagement. In order to
avoid a creation of familiarity threat of subject to transitional provisions, how many
years are prescribed by the as maximum for the CPA to continue serving as
engagement partner for a listed entity?

A. Five years
B. Three years
C. Seven years
D. Ten years

132.An engagement partner who is rotated in the audit of financial statements of

listed entity can only participate in the audit engagement for the same client
after a period of:

A. Twelve months
 B. two yen
C. Three years
D. Five years

133.While the engagement partner for an audit of financial statements of listed

entities should be rotated after a predefined period, some degree of flexibility over
the timing of rotation maybe necessary. How many years are allowed as
transitional period for the rotation?

A. Six months
B. One year
C. Two years
D. Three years

134.The following activities would generally create self-interest or self-

review threats that are so significant and that only avoidance of the
activity or refusal to perform the assurance engagement would reduce the
threats to an acceptable level, except

A. Authorizing, executing or consummating a transaction, or otherwise

exercising authority on behalf of the assurance client, or having the
authority to do so.
B. Determining which recommendation of the firm should be implemented.
C. Reporting, in a management role, to those charged with governance.
D. Providing technical assistance and advice on accounting principles for audit
clients.

135.Which of the following may not create a self-review threat?

A. Supervising assurance client employees in the performance of their

normal recurring duties.
B. Preparing source documents in electronic or other form evidencing a
business transaction.
C. Prolonged period of assignment as member of engagement team in one
particular audit engagement.
D. Performing corporate financial services for the audit client.

136.If firm, or network firm, personnel providing such assistance make

management decisions, the self-review threat created could not be reduced to an
acceptable level by any safeguards. Examples of such managerial decisions
include the following, except

A. Determining or changing journal entries, or the classifications for

accounts or transactions or other accounting records without obtaining
the approval of the audit clients
B. Authorizing or approving transactions.
C. Preparing source documents or originating data (including decisions on
evaluation assumptions), or making changes to such documents or
data.
D. Assisting an audit client in resolving account reconciliation problems.
137.The following services are considered to be a normal part of the audit process
and do not, under circumstances, threaten independence, except

A. Analyzing and accumulating information for regulatory reporting.

B. Assisting in the preparation of consolidated financial statements.
C. Drafting disclosures items.
D. Having custody of an assurance client's assets.

138.If the firm is involved in the preparation of accounting records or financial

statements and those financial statements are subsequently the subject matter of
an audit engagement of the firm, this will most likely create

A. Self-interest threat
B. Intimidation threat
C. Self-review threat
D. Familiarity threat

139.The firm, or a network firm, may provide an audit client that is not a listed
entity with accounting and bookkeeping services, including payroll services, of a
routine or mechanical nature, provided any self-review threat created is reduced
to an acceptable level. Examples of such services least likely include:

A. Recording transactions for which the audit client has determined or

approved the appropriate account classification.
B. Posting coded transactions to the audit client's general ledger.
C. Preparing financial statements based on information in the trial balance.
D. Determining and posting journal entries without obtaining the approval of the
audit client.

140.The safeguards necessary to reduce the threat created by providing

accounting and bookkeeping services to an audit client that is not a listed entity
to an acceptable level might include the following, except:

A. Making arrangements so that such services are not performed by a

member of the assurance team.
B. Implementing policies and procedures to prohibit the individual providing
such services from making any managerial decisions on behalf of the audit
client.
C. Requiring the source data for the accounting entries to be orignated by
the assurance team
D. Obtaining audit client approval for any proposed journal entries or
other changes afecting the financial statements.

141.The provision of accounting and bookkeeping senrs of a routine or mechanical

nature to divisions or subsidiariesice of listed audit clients would not be seen as
impairing independence with respect to the audit client provided that the following
conditions are met, except:

A. The services do not involve the exercise of judgment.

 B. The divisions or subsidiaries for which the service is provided are collectively
immaterial to the audit client.
C. The services provided are collectively immaterial to the division or
subsidiary. D. The fees to the firm, or network firm, from such services are
collectively significant.

142.The provision of accounting and bookkeeping services to audit clients in

emergency or other unusual situations, when it is impractical for the audit client
to make other arrangements, would not be considered to pose an unacceptable
threat to independence provided:

A. The firm, or network firm, does not assume any managerial role or make any
managerial decisions.
B. The audit client accepts responsibility for the results of the work.
C. Personnel providing the services are not members of the assurance team.
D. All of the given choices.

143.If the valuation services involves the valuation of matters material to the
financial statements and the valuation involves a significant degree of subjectivity,
the self-review threat created (choose the incorrect one)

A. Could not be reduced to an acceptable level by the application of any

safeguard.
B. Could be reduced to an acceptable level by the application of safeguards.
C. Such valuation services should not be provided.
D. The assurance team should withdraw from the audit engagement, if the
team opted to perform the valuation services.

144.The following would generally create a significant threat to independence,

except:

A. When a firm, or a network firm, performs a valuation service for an audit

client for the purpose of making a filing or return to a tax authority.
B. The firm provides formal taxation opinions and assistance in • the
resolution of tax disputes to an audit client.
C. The firm renders internal services involving an extension of the procedures
required to conduct an audit in accordance with Philippine Standards on
Auditing to an audit client.
D. When a firm, or a network firm, provides assistance in the performance
of a client's internal audit activities or undertakes the outsourcing of
some of the activities.

145.Which of the following may least likely create a self-review threat?

A. The lending of staf by a firm to the financial Statement audit client.

B. The firm provides internal audit services to the financial statement audit
client. C. The firm renders litigation support services to the financial
statement audit.
C. Recruitment of senior manager for the financial statement audit client.
146.Which of the following is least likely considered to create a threat to
independence?
 A. The provision of services by a firm or network firm to an audit client which
involve either the design or the implementation of financial information
technology systems that are used to generate information forming part of a
client's financial statements.
B. The provision of services in connection with the assessment, design and
implementation of internal accounting controls and risk management
controls.
C. The lending of staf by a firm, or network firm, to an. audit client when the
individual is in a position to influence the preparation of a client's accounts
or financial statements.
D. The provision of litigation support services to an audit client which include
the estimation of the possible outcome and thereby afects the amounts or
disclosures to be reflected in the financial statements.

147.The lending of staf by a firm to a financial statement audit client may be

made only on the understanding that the firm's personnel will not be involved in
the following, except:

A. Assembling the annual financial statements based recorded transactions.

B. Making management decisions.
C. Approving or signing agreements or other similar documents.
D. Exercising discretionary authority to commit the client.

148.Which of the following is not a factor to evaluate the efect of litigation

support services rendered by a firm to an audit client?

A. The nature of the engagement.

B. The degree of subjectivity inherent in the matter concerned.
C. The materiality of the amount involved.
D. The manner of payment of professional fee on litigation service.

149.Legal services are defined as:

A. The making of assumptions with regard to future developments, the

application of certain methodologies and techniques, and the combination
of both in order to compute a certain value, or range of values, for an asset,
a liability or for a business as a whole.
B. A broad range of services, including compliance, planning, provision of
formal taxation opinions and assistance in the resolution of tax disputes.
C. May include such activities as acting as an expert witness, calculating
estimated damages or other amounts that might become receivable or
payable as the result of litigation or other legal dispute, and assistance with
document management and retrieval in relation to a dispute or litigation.
D. Any services for which the person providing the services must either be
admitted to practice before the Courts of the jurisdiction in which such
services are to be provided, or have the required legal training to practice
law.

150.The provision of legal services to financial statement auait clients most likely di
edit a(an).
A. Familiarity threat
B. Self-interest threat
C. Advocacy threat
D. Intimidation threat
151.When the firm provides legal services to support a financial statement audit
client in the execution of corporate restructuring the threat created can be
reduced to an acceptable level provided that:

A. Members of the assurance team who are involved in providing the

services are given reduced participation in providing assurance service.
B. The advice provided was of the assurance team
C. The staf who makes ultimate decision is not a member of the
D. In relation to the advice provided, the audit client makes the ultimate decision.

152.Which of the following threats to independence can be eliminated or

reduced to an acceptable level?

A. Acting for an audit client in the resolution of a dispute or litigation in such

circumstances when the amounts involved are material in relation to the
financial statements of the audit client.
B. When a firm is asked to act in an advocacy role for an audit client in the
resolution of a dispute or litigation in circumstances when the amounts
involved are not material to the financial statements of the audit client.
C. The appointment of a partner or an employee of the firm or network firm
as General Counsel for legal afairs to an audit client.
D. None of them.

153.The recruitment of senior management for an such as those in a position

to afect the subject of the assurance engagement may least likely create:

A. Self-interest threat
B. Intimidation threat
C. Advocacy threat
D. Familiarity threat

154.Which of the following corporate finance services create advocacy or seif-

review threats cannot be reduced to an acceptable level?

A. Committing the assurance client to the terms of a transaction or

consummating a transaction on behalf of the client.
B. Assisting a client in developing corporate strategies.
C. Assisting in identifying or introducing a client to possible sources of capital
that meet the client specifications or criteria.
D. Providing structuring advice and assisting a client in analyzing the
accounting efects of proposed transactions.

155, Which of the following is not likely to create a threat to independence?

A. The total fees generated by an assurance client represent a large

proportion of a firm's total fees.
 B. Fees due from an assurance client for professional services remain unpaid
for a long time.
C. A firm obtains an assurance engagement at a significantly lower fee
level than that charged by the predecessor firm, or quoted by other
firms.
D. A court or other public authority is the one that established the fees.

156.A client company has not paid its 2008 audit fees. According to the Code of
Professional Conduct, for the auditor to be considered independent with respect to
the 2009 audit, the 2008 audit fees must be paid before the

A. 2008 report is issued

B. 2009 report is issued
C. 2009 field work is started
D. 2010 field work is started

157.When a firm obtains an assurance engagement at a significantly lower

professional fee than that charged by the predecessor firm, or quoted by other
firms, a(an):

A. threat to independence is not created.

B. intimidation threat is created.
C. advocacy threat is created.
D. self-interest treat is created.

158.Fees calculated on a predetermined basis relating to the outcome or result of a

transaction or the result of the work preformed.

A. Contingent fees
B. Flat sum fees
C. Retainer fees
D. Per diem fees

159.Which of the following is least likely to create a threat to independence?

A. The fees generated by the assurance client represent a large proportion of

the revenue of an individual partner.
B. The firm charges a contingent fee to an assurance client.
C. Accepting gifts or hospitality, the value of which is clearly
insignificant, from an assurance client.
D. When litigation takes place, or appears likely, between the firm or a
member of the assurance team and the assurance client.

160.Which of the following does not create a self-interest threat to independence?

 A. An audit of an insurance company is engaged by the assurance client
based upon the instruction from the Office of Insurance Commission. The
audit fee is contingent upon the assessment by the Office of Insurance
Commission of the liquidity of the company.
B. An audit fee on an assurance client that is outstanding for two years.
C. An assurance engagement with a fee significantly lower than the fee
quoted by other firm.
D. A litigation between the firm and the assurance client that relates to a
prior assurance engagement involving a breach of contract.

161.When litigation takes place between the firm and the assurance client, the firm
and the client management may be placed in adversarial positions and the firm
may face a self-interest- threat. Which of the following is least likely a factor in
determining the Significance of the threat created by this litigation?

A. The nature of the-assurance engagement.

B. Whether the litigation relates to a prior assurance engagement.
C. The materiality of the amount involved on litigation.
D. The likelihood of the firm winning the litigation.

162.When independence is threatened by litigation between the member of

the assurance team and the client management, the following safeguards that
can reduce the efect to an acceptable level may be applied, except:

A. Involve an additional professional accountant in the firm who is not a

member of the assurance team to review the work done.
B. Disclose to the audit committee, or others charged with governance, the
extent and the nature of the litigation.
C. Remove the particular member of the assurance team who is involved in
litigation hum cite engagement.
D. Submit a new engagement letter.

163.Which of the following threats to independence is least likely considered a

result of the firm's service of recruiting senior managers for an assurance
client?

A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat

164.Which of the following combination of threats to independence is most likely to

occur as a result of the provision of corporate finance services advice or assistance
to an assurance client?

A. Advocacy and self-review threats

B. Self-review and familiarity threats
C. Familiarity and advocacy threats
D. Self-review and self-interest threats
165.Which of the following is not allowed to be included in a website of a firm of
professional accountants?

A. Names of partners/principals with their educational attainment.

B. Membership to any professional body.
C. Awards received.
D. Listings of the firm's clients.

166.The set of rules and regulations promulgated in 2004 for the "supervision,
control and regulation" of the practice of Accountancy in the Philippines.

A. Philippine Financial Reporting Standards.

B. The Code of Ethics for Professional Accountants.
C. Philippine Standards on Auditing.
D. The IRR of the Philippine Accountancy Act of 2004.

167.The objectives of the Philippine Accountancy Act of 2004 are the following except:

A. The standardization and regulation of accounting education.

B. Examination for registration of certified public accountants.
C. Supervision, control, and regulation of the practice of accountancy.
D. Integration of accountancy profession.

168.A document under seal issued to an individual by the Professional Regulation

Commission signifying that he has complied with all the legal and procedural
requirements for such issuance including the passing of the licensure examination
for Certified Public Accountants.

A. Certificate of Accreditation
B. Professional Identification Card
C. Certificate of Registration
D. Professional Seal

169.The following is deemed a practice of accountancy, except:

A. Appointment to a position in the government that requires a CPA

license as a prerequisite.
B. Employment as budget officer in a local government unit regardless of the
officer being a holder of a CPA license or not.
C. Teaching professional subjects in a collegiate program leading to the degree
of Bachelor of Science in Accountancy.
D. Representing his clients before government agencies on tax and other
matters related to accounting.

170.The following statements relate to RA 9298. Which statement is true?

 A. The Professional Regulation Commission has the authority to remove any
member of the Board of Accountancy for negligence, incompetence, or
any other just cause.
B. Insanity is not a ground for proceeding against a CPA.
C. A person shall be considered to be in the professional practice of
accounting if, as an officer in a private enterprise, he makes decisions
requiring professional accounting knowledge.
D. After three years, subject to certain conditions, the Board of Accountancy
may order the reinstatement of a CPA whose certificate of registration has
been revoked.

171.The president of the Philippines appoints the members of the Board of

Accountancy based on the recommendation submitted to the office of the
president. Which of the following is an incorrect statement about the submission of
nominations?

A. The Accredited National Professional Organization of CPAs shall submit the

names of its nominees to the PRC not later than 60 days prior to the expiry of
the term of an incumbent chairman or member.
B. There should be an adequate documentation to show the qualifications and
primary field of professional activity of each nominee
C. The Accredited National Professional Organization of CPAs shall submit the
names of its nominees to the PRC not later than days prior to the expiry of
the term of an incumbent chairrn or member.
D. If the Accredited National Professional Organization of CPAs failsto submit
its own nominee(s) to the PRC within the prescribed period, the PRC, in
consultation with the Board of Accountancy shall submit to the president
of the Philippines a list of three nominees for each position.

172.Which of the following is not a qualification of a member of the Board of

Accountancy?

A. He must be a natural-born citizen and a citizen of the Philippines.

B. He must not be a director or officer of the Accredited National. Professional
Organization of CPAs at the time of his appointment.
C. He must be of good moral character and must not have been
convicted of crimes involving moral turpitude.
D. He must be a duly registered certified public accountant with at least
ten years of experience in public accounting.

173.The following statements relate to the term of office of the chairman and
members of the Board of Accountancy. Which of them is incorrect?

A. The chairman and members of the Board of Accountancy shall hold office
for a term of three years.
B. Any vacancy occurring within the term of a member shall be filled up for
the unexpired portion of the term only.
C. Appointment to fill up an expired term is not to be considered as a complete
term.
D. The Board of Accountancy member who has served two successive
complete terms as chairman or member shall be eligible for reappointment
until the lapse of three years.
174.No person shall serve the Professional Regulatory Board of Accountancy for more
than
 A. 3 years
B. 6 years
C. 9 years
D. 12 years

175.Which of the following is not a function of the Board of Accountancy as

specified in the Philippine Accountancy Act of 2004?

A. To investigate violations of the Accountancy Law and the rules and

regulations promulgated therewith.
B. To look from time to time into the conditions afecting the practice of the
accountancy profession.
C. To create and direct accrediting agencies that are entrusted the functions
of reviewing higher educational institutions' policies and practices leading
to accreditation/reaccreditation of BSA program.
D. To determine and prescribe minimum requirements leading to the
admission of candidates to the CPA licensure examination.

176.The following are represented both to the Financial Reporting Standards

Council (FRSC) and Auditing and Assurance Standards Council (AASC), except:

A. Bangko Sentral ng Pilipinas

B. Securities and Exchange Commission
C. Bureau of Internal Revenue
D. Board of Accountancy

177.All of the following are represented to the Financial Reporting Standards Council,
except:

A. Commission on Higher Education

B. Board of Accountancy
C. Securities and Exchange Commission
D. Bureau of Internal Revenue

178.The Financial Reporting Standards Council which is the accounting standards

setting body is composed of a chair and:

A. Fourteen members
B. Fifteen members
C. Sixteen members
D. Seventeen members

179.The chairman and the members of both Financial Repo standards Council
and Auditing and Assurance Standard: Council have a renewable term of:

A. 4 years
B. 2 years
 C. 3 years
D. 5 years

180.Which of the following is not a requisite in applying for the CPA licensure
examinations?

A. Natural-born citizen of the Philippines

B. Good moral character
C. Holder of the degree of Bachelor of Science in Accountancy
D. Has not been convicted of any criminal ofers e.2 involving moral turpitude

181.Which of the following is incorrect?

A. Candidates who fails to obtain a general average of 75% but obtains a

rating of at least 75% in at least four subjects shall receive a conditional
credit for the subjects passed.
B. To successfully pass the licensure examination, the candidates should obtain
a general weighted average of at least 75% with no rating lower than 65%
in any subject.
C. Conditional candidates shall take an examination in the conditional
subject(s) within two years from the preceding examination.
D. Candidates who failed in three complete examinations must enroll in
refresher course consisting of twenty-four units of the subjects given in
the licensure examination.

182.Which of the following is one of the reasons for not issuing a certificate of
registration to a successful examinee? The individual:

A. Is of unsound mind.
B. Had been guilty of immoral and dishonorable conduct.
C. Had been convicted by a court of a criminal ofense involving moral
turpitude. D. All of the given choices.

183.A CPA whose certificate of registration has been revoked:

A. Can no longer be reinstated.

B. Is automatically reinstated as a CPA by the PRC after two years if he has
acted in an exemplary manner.
C. May be reinstated by the Professional Regulation Commission after two
years if he has acted in an exemplary manner.
D. May be reinstated as a CPA by the Board of Accountancy after two year if he
has acted in an exemplary manner.

184.The Philippine Accountancy Act of 2004 provides that all working papers
made during an audit shall be the property of the auditor. These working papers
shall include the following, except:

A. Working papers prepared by the CPA and his staf.

B. Analysis and schedule prepared and submitted to the auditor by his client's
staf.
C. Excerpts or copies of documents furnished to the auditor.
 D. Any report submitted by the auditor to his client.

185.Who are required to apply for accreditation with the Professional Regulation
Commission if the applicant is a partnership of Professional Accountants?

A. Managing partner only

B. All partners only
C. Partners and staf members
D. Partners, principals, and staf members

186.Which of the following is not included in the seal of a professional accountant?

A. Tax identification number

B. Name of the professional accountant
C. Title of the profession
D. Registration number

187.The body mandated by law to promulgate rules and regulations afecting

the practice of Accountancy.

A. Professional Regulation Commission

B. Philippine Institute of Certified Public Accountants
C. Professional Regulatory Board of Accountancy
D. Commission on Higher Education

188.Individual CPAs, Finns or Partnerships of CPAs, including partners and staf

members thereof shall register with the 130A and the PRC. If the accreditation of
Alano and Co. CPAs, was renewed on September 30, 2008, the next renewal
must be on or before:

A. September 30, 2010

B. September 30, 2011
C. December 31, 2010
D. December 31, 2011

189.How many CPE credit units must be accumulate-1 by a registered accounting

professional within the 3-year period?

A. 15 credit units
B. 45 credit units
C. 60 credit units
D. 90 credit units
190.The APO shall renew its Certificate of Accreditation once every how many
years after the date of the Resolution granting the petition for re-accreditation and
the issuance of the said certificate upon submission of the requirements?

A. 2 years
B. 3 years
C. 4 years
D. 6 years

191.Engagement letters are widely used in practice for professional engagements

of all types. The primary purpose of the engagement letter is to

A. remind management of its primary responsibility over the financial

statements. B. satisfy the requirements of the Code of Professional Conduct
for CPAs.
B. provide a starting point for the auditor's preparation of the peliwirtaly audit
program.
C. provide a written record of the agreement with the client as to the
services to be provided.

192.The accuracy of information included in the footnotes that accompany the

audited financial statements of a company whose shares are traded on a stock
exchange is the primary responsibility of the:

A. stock exchange officials.

B. company's management.
C. independent auditor.
D. Securities and Exchange Commission.

193.Which of the following is not likely a quality control procedure on consultation?

A. Identifies areas and specialized situations where consultation is required

and encourages personnel to consult with or in use authoritative sources
on other complex matters.
B. Designates individuals as specialists to serve as authoritative sources and
define their authority in consultative situations.
C. Assigns an appropriate person or persons to be responsible for assigning
personnel to audits.
D. Specifies the extent of documentation to be provided for the result of
consultation in those areas and specialized situations where consulthtion
is required.

194.According to Philippine Standards on Auditing, because there are inherent

limitations in an audit that afect the auditor's ability to detect material
misstatements, the auditor is:

A. neither a guarantor nor an insurer of financial statements.

B. a guarantor but not an insurer of the statements.
C. an insurer but not a guarantor of the statements.
D. both a guarantor and an insurer of the financial statements.
195.The objective of an ordinary examination by the independent auditor is the
expression of an opinion on the:

A. accuracy of the financial statements.

B. balance sheet and income statement.
C. fairness of the presentation of the financial statements.
D. quality of the decision process of the management.

196.When a CPA expresses an opinion on the financial statements, his

responsibilities extend to

A. the underlying wisdom of the client's management decision.

B. active participation in the implementation of the advice given to the client.
C. an ongoing responsibility for the client's solvency.
D. whether the results of the client's operating decisions are fairly presented in
the financial statements.

197.The working papers prepared by a CPA in connecction with an audit

engagement are owned by the CPA, subject to certain limitations. The
rationale for this rule is to

A. protect the working papers from being subpoenaed.

B. provide the basis for excluding admission of the working papers as evidence
because of the privileged communication rule.
C. provide the CPA with evidence and documentation which may be helpful in
the event of a lawsuit.
D. establish a continuity of relationship with the client whereby indiscriminate
replacement of CPAs is discouraged.

198.The responsibility for adopting sound accounting policies, maintaining

adequate internal control, and making fair representations in the financial
statements rests

A. with the management.

B. with the independent auditor.
C. equally with management and the auditor.
D. with the internal audit department.

199.Fraudulent financial reporting is often called:

A. Management fraud
B. Defalcation
C. Theft of assets
D. Employee Fraud
200.The ordinary examination of financial statements is not primarily designed
to disclose defalcations and other irregularities although their discovery may
result. Normal audit procedures are more likely to detect a fraud arising from

A. collusion on the part of several employees.

B. failure to record cash receipts for services rendered.
C. forgeries on company checks.
D. theft of inventories.

201.The factor that distinguishes an error from an irregularity is

A. materiality.
B. intent.
C. whether it is peso amount or a process.
D. whether it is a caused by the auditor or the client.

202.Audit standards require an auditor to:

A. Perform procedures that are designed to detect all instances of fraud.

B. Provide reasonable assurance that the financial statements are not materially
misstated.
C. Issue an unqualified opinion only when the auditor is satisfied that no
instances of fraud have occurred.
D. Design the audit program to meet financial statement users' expectations
concerning fraud.

203.If specific information comes to an auditor's attention that implies the

existence of possible noncompliance with laws and regulations that could have a
material, but indirect efect on the financial statements, the auditor should next

A. apply audit procedures specifically directed to ascertaining whether a

noncompliance with laws and regulations has occurred.
B. seek the advice of an informed expert qualified to practice law as to
possible contingent liabilities.
C. report the matter to an appropriate level of management at least one level
above those involved.
D. discuss the evidence with the client's audit committee, or others with
equivalent authority.

204.A principal purpose of a letter of representation from management is to

A. serve as an introduction to company personnel and an authorization to

examine the records.
B. discharge the auditor from legal liability for his examination.
C. confirm in writing management's approval of limitations the scope of the
audit. D. remind management of its primary responsibility for fin statements.
205.The auditor should not assume that management is but the possibility of
dishonesty must be considered." This is an example of

A. expectation gap.
B. an attitude of professional skepticism.
C. due diligence.
D. an ethical requirement.

206.Which of the following statements is true?

A. It is usually easier for the auditor to uncover irregularities than errors.

B. It is usually easier for the auditor to uncover errors than irregularities.
C. It is usually equally difficult for the auditor to uncover errors or irregularities.
D. It is usually, none of the given statements is true.

207.Should the auditor uncover circumstances that may cause suspicions of

management fraud, the auditor must

A. issue an adverse opinion.

B. issue a disclaimer of opinion.
C. evaluate their implications and consider the need to modify audit evidence.
D. withdraw from engagement.

208.Generally, the decision to notify parties outside te client‘s organization

regarding a noncompliance with laws and regulations is the responsibility of
the

A. independent auditor.
B. management.
A. c. outside legal counsel.
C. internal auditors.

209.An audit made in accordance with Philippine Standards on Auditing generally

should

A. be expected to provide assurance that noncompliance with laws and

regulations will be detected if the internal control is efective.
B. be relied upon to disclose indirect-efect noncompliance with laws and
regulations.
C. encompass a plan to search actively for noncompliance with laws and
regulations which relate to operating aspects.
D. not be relied upon to provide assurance that all noncompliance with laws and
regulations will be detected.

210.An auditor who believes that a material irregularity may exist should initially

A. discuss the matter with those believed to be involved in the

perpetration of material irregularity.
B. discuss the matter with a higher level of management.
 C. withdraw from the engagement.
D. consult legal counsel.

211.When management refuses to disclose in the financial statements

noncompliance to laws and regulations which are identified by the independent
auditor, the CPA may be charged with unethical conduct for

A. withdrawing from the engagement.

B. issuing a disclaimer of opinion.
C. failure to uncover the noncompliance to laws and regulations during the prior
audits.
D. reporting these activities to the audit committee.

212.In discovering material management fraud and an equally material error, the
audit plan

A. should be expected to provide the same degree of assurance

B. cannot be expected to provide the same degree of assurance.
C. provide no assurance of detecting either.
D. should provide complete assurance of detection.

213.An auditor who finds that the client has committed noncompliance
with laws and regulations would most likely withdraw from the
engagement when the

A. noncompliance with laws and regulations afects the auditor's

ability to rely on management representations.
B. noncompliance with laws and regulations has material financial statement
implications.
C. noncompliance with laws and regulations has received widespread publicity.
D. auditor cannot reasonably estimate the efect of the noncompliance
with laws and regulations on the financial statements.

214.When the auditor knows that a noncompliance with laws and regulations has
occurred, the auditor must

A. issue an adverse opinion.

B. withdraw from the engagement.
C. consider the efects on the financial statements, including the adequacy of
disclosure.
D. report it to the proper government authorities.

215.When an independent auditor's examination of financial statements discloses

special circumstances that make the auditor suspects that fraud may exist, the
auditor's initial course of action should be to

A. recommend that the client pursue the suspected fraud to a conclusion that
is agreeable to the auditor.
B. extend normal audit procedures in an attempt to detect the full extent of
the suspected fraud.
C. reach an understanding with the proper client representative as to whether
the auditor or the client is to make th e investigation necessary to determine
if a fraud has in Met occurred.
D. determine whether the fraud, if .in fact it does exist, might.be of such a
magnitude as to afect the auditor's report on the financial statements
QUIZZERS

1. A procedure n which a quality control partner periodically tests the

application of quality control procedures is most directly related to which
quality control element?

A. Engagement performance
B. Independence, integrity, and objectivity
C. Monitoring
D. Personnel management

2 The work of each assistant needs to be reviewed by personnel of at least equal

competence. Which of the following is not one of the objectives of this requirement?

A. The conclusions expressed are consistent with the result of the work
performed and support the opinion.
B. The work performed and the results obtained have been adequately
documented.
C. The audit objectives have been achieved.
D. All available evidences have been obtained, evaluated and documented.

3. Which of the following acts is prohibited by the Code of Professional Ethics for CPAs?

A. The use of a firm name which includes the name of a retired partner.
B. An announcement in a newspaper of the opening of a public
accounting office. C. Engaging in civic activities during business hours.
C. Accepting an engagement or employment which one cannot
reasonably expect to complete or discharge with professional
competence.

4. Which of the following is a violation of the code of professional ethics for

certified public accountants?

A. A CPA permits his name to be used in a client's advertising as having

verified financial data and/or statistical facts with respect to client‘s
products.
B. Based on information obtained in an audit, a CPA reports a noncompliance
with laws and regulations of his client to government authorities.
C. Three years after a partner has retired, the remaining partners continue to
practice under a firm name that includes the name of the retired partner.
The retired partner has severed all connections with the CPA firm.
D. A CPA running for public office uses the professional designation "CPA" after
his name on posters employed in connection with his election campaign.

5. Which of the following is incorrect regarding the professional accountants' tax

practice?

A. A professional accountant rendering professional tax services is entitled to

put forward the best position in favor of a client, or an employer.
B. Doubt may be resolved in favor of the client or the employer if there is a
reasonable support for the position.
 C. A professional accountant may hold out to a client or an employer the
assurance that the tax return prepared and the tax advice ofered by him are
beyond challenge.
D. Professional accountants should ensure that the client or the employer is
aware of the limitations attaching to tax advice and services so that they
do not misinterpret an expression-of opinion as an assertion of fact.

6. Which of the following is least likely an application of maintaining an attitude of

professional skepticism?

A. The auditor does not consider representations from management as

substitute for obtaining sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the audit opinion.
B. In planning and performing an audit, the auditor assumes that management is
dishonest.
C. The auditor is alert to audit evidence that contradicts or brings into question
the reliability of documents or management representations.
D. The auditor makes a critical assessment, with a questioning mind, of the
validity of audit evidence obtained.

7. Prior to beginning the field work on a new audit engagement in which a

CPA does not possess expertise in the industry in which the client operates,
the CPA should

A. reduce audit risk by lowering the preliminary levels of materiality. special

substantive tests to compensate for the lack of
B. design industry expertise.
C. engage financial experts who are familiar with the nature of the industry.
D. obtain a knowledge of matters that relates to the nature of the entity's
business.

8. Which of the following statements is true when the CPA has been
engaged to do an attestation engagement?

A. The CPA firm is engaged and paid by the client; therefore, the firm
has primary responsibility to be an advocate for the client.
B. The CPA firm is engaged and paid by the client, but the primary beneficiaries
of the audit are the statement users.
C. Should a situation arise where there is no convincing authoritative standard
available, and there is a choice of actions, which could impact client's
financial statements either positively or negatively, the CPA is free to endorse
the choice which is best in the client's interest.
D. As long as CPA firms are competent, it is not required that they remain
unbiased.

9. One diference between auditors and other professionals is that most professionals

A. need not be concerned about remaining independent.

B. do not have requirements for continuing education beyond the baccalaureate
program.
C. do not have to pass a rigorous examination.
D. are not expected to act in public interest.
10.Independence of a CPA with respect to a client is not impaired if

A. The CPA has a loan to an officer of the client.

B. The 1 CPA has an immaterial direct financial interest in the client
C. The CPA is a trustee for the client's pension plan.
D. The CPA has an immaterial joint, closely held tin investment with the client.

11.For which of the following services is a CPA professional not required to be

independent?

A. Tax returns preparation

B. Audits of historical financial statements
C. Review engagement
D. Examination of a forecast

12.Which of the following will impair the independence of a CPA in public practice?

A. He has his name and address listed on a one-page section of the telephone
book.
B. He obtained a loan from a bank under the normal lending procedures,
terms and requirements of the bank.
C. He holds one share of the client's capital stock.
D. He failed to disclose a client's departure from GAAP.

13.When CPAs are able to maintain an independent attitude in fulfilling their

responsibility, it is referred to as independence in

A. fact.
B. appearance.
C. conduct.
D. total.

14.When the users of financial statements have confidence in the independence of

the CPA, it is referred to as in independence in

A. fact.
B. appearance.
C. conduct.
D. total.

15.Which of the following statements is incorrect? CPAs lose their independence if

they:

A. acquire any direct financial interest in a client.

B. have a material direct financial interest in a client.
C. acquire any indirect financial interest in a client.
D. acquire a material indirect financial interest in a client.
16.When determining whether independence is impaired because of an ownership
interest in client company, materiality will afect Whether ownership is a violation
of rule of independence

A. in all circumstances.
B. only for direct ownership.
C. only for indirect ownership.
D. under no circumstances.

17.A successor auditor is required to communicate with the previous auditor.

The primary concern in this communication is

A. information which will help the successor auditor determine

whether the client management has integrity.
B. to learn about client by examining predecessor's working papers.
C. to enable successor auditor to perform a more efficient audit.
D. to save successor auditor time and money in gathering data.

18.When a. CPA firm is requested to provide a written or oral opinion on the

application of accounting principles or the type of audit opinion that would be
issued for a specific or hypothetical transaction relating to an audit client of
another CPA firm, primary among the requirements set forth is that

A. client is entitled to confidentiality, so the consulting CPA firm is

forbidden from communicating with the CPA firm which does the
audit.
B. the consulted CPA firm should communicate with the entity's existing
auditors to ascertain all the available facts relevant to forming a
professional judgment on the matters the firm has been requested to
report on.
C. client is entitled to confidentiality; so the CPA firm which does the audit,
should refuse to share any information with the consulting CPA firm under
any circumstances.
D. client is not entitled to confidentiality under these circumstances, so the
existing auditors should share an information with the consulting CPA firm.

19.A professional accountant has a professional duty or right to disclose

confidential information in each of the following, except:

A. To comply with technical standards and ethics requirements.

B. To disclose to the Bureau of Internal Revenue any fraudulent scheme
committed by the client on payment of income tax.
C. To comply with the quality review of a member body or professional body.
D. To respond to an inquiry or investigation by a member body or regulatory body.

20.Which of the following best describes the paccing of confidential information

from a client to its auditor? The information:

A. Should in no circumstances be conveyed to third parties.

B. Is not legally protected and can be subpoenaed by a competent court.
 C. Can only be released for peer reviews after receiving permission from the
client.
D. Should be conveyed to the public if it afects the "correctness" of
the financial statements.

21.The CPA must not subordinate his or her professional judgment to that of others in
every

A. engagement.
B. audit engagement.
C. engagement except tax services.
D. engagement except management advisory services.

22.Which of the following is an indication of lack of objectivity of an auditor?

A. The auditor believes that accounts receivable may not be collectible,

but accepts management's opinion without an independent
evaluation.
B. In preparing client:s. tax return, the CPA encourages client to take a
deduction which tile CPA believes is valid, but for which there is some but not
complete support.
C. Both are violations.
D. Neither would be a violation

23.Several months after an unqualified audit report was issued, the auditor
discovers that the financial statements were materially misstated. The client's
chief executive officer agrees that the statements are misstated, but refuses to
issue a correction, and claims that "confidentiality" prevents the CPA from
informing anyone.

A. CEO is correct; the auditor must maintain confidentiality.

B. CEO is wrong, but since auditor's report is issued, it is too late to retract.
C. CEO is wrong; and the auditor has an obligation to issue a revised correct
audit report, even if CEO will not revise and correct the financial
statements.
D. CEO is correct, but to be ethically correct the auditor should violate the
confidentiality rule and disclose the error.

24.A member in public practice may perform for a contingent fee any professional
services for a client for whom the member or member's firm performs

A. an audit.
B. a review.
C. a compilation used only by management.
D. an audit of prospective financial information.

25.Which one of the following contingent fee is allowed?

A. All services performed by a CPA firm.

B. Non-attestation services.
C. Non-attestation services, unless the CPA firm was also performing
attestation services for the same client.
 D. Attestation services.

26.Solicitation consists of the various means that CPA firms use to engage new
clients. Which one of the following would not be an example of solicitation?

A. Accepting new clients that approach the firm.

B. Taking prospective clients to lunch.
C. Ofering seminars on current tax law changes clients.
D. Advertisements in the yellow pages.

27.If requested to perform a review engagement for a nonpublic entity in which

an accountant has an immaterial direct financial interest, the accountant is

A. independent because the financial interest is immaterial and therefore,

may issue a review report.
B. not independent and, therefore, may not he associated with the financial
statements.
C. not independent and, therefore, may not issue a review report.
D. not independent and, therefore, may issue c review report, but may
not issue an auditor's opinion.

28.Which of the following most completely describes how independence has been
defined by the CPA profession?

A. Performing an audit from the viewpoint of the public.

B. Avoiding the appearance of significant interests in the afairs of an audit, client.
C. Possessing the ability to act with integrity and objectivity.
D. Possessing the ability to act professionally and accordance with a
professional code of ethics.

29.To emphasize auditor independence from management, many corporations

follow the practice of

A. appointing a partner of the CPA firm to the corporation's audit committee.

B. establishing a policy of discouraging social contact between
employees of the corporation and the staf of the independent
auditor.
C. requesting that a representative of the independent auditor be on hand
at the annual stockholders' meeting.
D. having the independent auditor report to an audit committee of outside
members of the board of directors.

30.In determining independence with respect to any engagement, the ultimate

decision as to whether or not the auditor is independent must be made by the

A. auditor.
B. client.
C. audit committee.
 D. public.

31.When a CPA who is not independent is associated with financial statements,

he would be precluded from expressing an opinion because any audit
engagement, the auditor is independent

A. the public would be aware of his lack of independence and would place
little or no faith on his opinion.
B. he would place himself in the position of sufering an adverse decision in
a possible liability suit.
C. he would be in the position of auditing his own work.
D. any auditing procedures he might perform would not be in accordance
with generally accepted auditing standards.

32.Which of the following statements best describes why the profession of

certified public accountants has deemed it essential to promulgate a code of
ethics and to establish a mechanism for enforcing observance of the code?

A. A distinguishing mark of a profession is its acceptance of responsibility to the

public.
B. A prerequisite to success is the establishment of an ethical code that
stresses primarily the professional's responsibility to clients and colleagues.
C. The law requires an establishment of a code of ethics.
D. An essential means of self-protection for the profession is the
establishment of flexible ethical standards by the profession.

33.In which of the following circumstances would a CPA be bound by ethics to

refrain from disclosing any confidential information obtained during the course
of a professional engagement?

A. The CPA is issued a summons enforceable by a court that orders the CPA
to present confidential information.
B. A major stockholder of a client company seeks accounting information
from the CPA after the management declined to disclose the requested
information.
C. Confidential client information is made available as part of a quality review
of the CPA's practice by a peer review team authorized by the PICPA.
D. An inquiry by a in disciplinary body of PICPA requests confidential client
information.

34.Which of the following best describes why publicly-traded corporations follow

the practice of having the outside auditor appointed by the board of directors or
elected by the stockholders?

A. To comply with the regulations of the FRSC.

B. To emphasize the auditor's indeper c. once from the management of the
corporation.
C. To encourage a policy of rotation of the independent auditors.
D. To provide the corporate owners with an opportunity to voice their opinion
concerning the quality of the auditing firm selected by the directors.
35.A violation of the ethical standards would most likely have occurred when a CPA

A. made arrangement with a bank to collect notes issued by a client in

payment of fees due.
B. joined an accounting firm made up of three non-CPA practitioners.
C. issued an unqualified opinion on the 2009 financial statements when fees
for the 2008 audit were unpaid.
D. purchased a bookkeeping firm's practice of monthly write-ups for a
percentage of fees received over a three-year period.

36.The concept of materiality would be least important to an auditor when

considering the

A. decision whether to use positive or negative confirmations of accounts

receivable.
B. adequacy of disclosure of a client's noncompliance with laws and regulations.
C. discovery of weaknesses in a client's internal control structure.
D. efects of a direct financial interest in the client upon the CPA's independence.

37.Which of the following is a violation of Confidentiality rule of the 37. code of

Professional Conduct?

A. The CPA, in response to a court subpoena, submits auditor-preparedworking

papers as evidence of possible noncompliance with laws and regulations
perpetrated by the client.
B. The CPA discloses to the board of directors a scheme concocted by top
management to intentionally inflate earnings.
C. The CPA warns Client B as to the inadvisability of acquiring Client A. The
CPA bases this warning on knowledge of Client A's financial condition and a
belief that the management of Client A lacks integrity. This knowledge was
obtained by the CPA as a result of auditing Client A during the past several
years.
D. The CPA, when questioned in court, admits of having a knowledge
of certain noncompliance with laws and regulations perpetrated by
the client.

38.An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity, should

A. engage financial experts familiar with the nature of the business entity.
B. obtain a knowledge of matters that relates to the nature of the entity's
business.
C. refer a substantial portion of the audit to another CPA who will act as
the principal auditor.
D. first inform management that an unqualified opinion cannot be issued.

39.A CPA, while performing an audit, strives to achieve independence in

appearance in order to
A. reduce risk and liability.
B. comply with the generally accepted standards of fieldwork.
 C. become independent in fact.
D. maintain public confidence in the profession

40.In which of the following instances would the independence of the CPA not be
considered to be impaired? The CPA has been retained as the auditor of a
brokerage firm

A. which owes the CPA audit fees for more than one year.
B. in which the CPA has a large active margin account.
C. in which the CPA's brother is the controller.
D. which owes the CPA audit fees for services in the current year and has
just filed a petition for bankruptcy.

41.Which of the following fee arrangements is in violation of the Code of Professional

Conduct?

A. A fee based on whether the CPA's report on the client's financial

statements results in the approval of a bank loan.
B. A fee based on the outcome of a bankruptcy proceeding.
C. A fee based on the nature of the service rendered and the CPA's
particular expertise instead of the actual time spent on the engagement.
D. A fee based on the fee charged by the prior auditor.

42.The auditor is not liable to his client for

A. negligence.
B. bad faith.
C. dishonesty.
D. errors of judgment.

43.When the auditor issues an erroneous opinion as a consequence of an

underlying failure to comply with the requirements of generally accepted auditing
standards, it results to

A. business failure.
B. audit failure.
C. audit risk.
D. all of them

44.The reason why an auditor accumulates evidence is to

A. defend himself in the event of a lawsuit.

B. justify the conclusions he has otherwise reached.
C. satisfy the requirements of the Bureau of Internal Revenue.
D. enable him to reach conclusions about the fairness of the financial
statements and issue an appropriate audit report.
45.The auditor gives an audit opinion on the fair presentation of the financial
statements and associates his or her name with them when, on the basis of
adequate evidence, the auditor concludes that the financial statements are
unlikely to mislead

A. a prudent user.
B. management.
C. the reader.
D. investors.

46.When preparing the financial statements, it is acceptable .for the auditor to

prepare

A. the statements for the client.

B. the footnotes for the client.
C. a draft of the statements for the client.
D. a draft of the statements and footnotes for the client.

47.Which of the following statements best describes the auditor's responsibility

regarding the detection of material errors and frauds?

A. The auditor is responsible for the failure to detect material errors and frauds
only when such failure results from the misapplication of generally accepted
accounting principles.
B. The audit should be designed to provide reasonable assurance that
material error and frauds are detected.
C. The auditor is responsible for the failure to detect material errors and
frauds only when the auditor fails to confirm receivables or observe
inventories.
D. Extended auditing procedures are required to detect unrecorded
transactions even if there is no evidence that material errors and frauds
may exist.

48.The auditor has considerable responsibility for notifying users as to

whether or not the financial statements are properly stated. This imposes
upon the auditor a duty to

A. be an insurer of the fairness of the presentation of the financial statements.

B. be a guarantor of the fairness in the statements.
C. be equally responsible with management for the preparation of the financial
statements.
D. provide reasonable assurance that material misstatements will be detected.

49.Which of the following statements best distinguishes ordinary negligence

from gross negligence?

A. Failure to detect material errors, whether internal control is strong or

weak, suggests gross negligence.
B. Failure to exercise reasonable care denotes ordinary negligence, whereas
failure to exercise minimal care indicates gross negligence.
C. Gross negligence is most probable when the auditor fails to detect errors
that occurred under conditions of strong internal control.
D. The more material the undetected error is, the greater the likelihood
of ordinary negligence being committed.
50.The auditor's responsibility for failure to detect fraud arises

A. when such failure clearly results from non-compliance to generally

accepted auditing standards.
B. whenever the amounts involved are material.
C. only when the examination was specifically designed to detect fraud.
D. only when such failure clearly results from negligence so gross as to
sustain an inference of fraud on the part of the auditor.

51.Which of the following statements is correct concerning the auditor‘s

responsibility with respect to noncompliance with laws and regulations? An
auditor must design tests to:

A. obtain reasonable assurance of detecting material direct-

efect,noncompliance with laws and regulations.
B. detect both immaterial and material direct-efect noncompliance
with laws and regulations.
C. detect both direct-efect and indirect-efect noncompliance with laws and
regulations.
D. detect both material direct-efect and material indirect-efect
noncompliance with laws and regulations.

52.Most accounting and auditing professionals agree that when an . audit has
failed to uncover material misstatements, and the wrong type of audit opinion is
issued, the audit firm.

A. has failed to follow Philippine standards on auditing (PSAs).

B. deserves to lose the lawsuit.
C. should be asked to defend the quality of the audit.
D. should not be held responsible for the financial loss sufered by others.

53.What is the independent auditor's responsibility prior to the completion of

fieldwork when he believes that a material fraud may have occurred?

A. Notify the appropriate law enforcement authority.

B. Investigate the persons involved, the nature of the fraud, and the amounts
involved.
C. Reach an understanding with the appropriate client representatives as to
the desired nature and extent of subsequent audit work.
D. Continue to perform normal audit procedures and write the audit report in
such a way to disclose adequately the suspicion of material fraud.

54.The risk that an audit will fail to uncover a material misstatement is eliminated

A. if client has good internal control.

B. if client follows generally accepted accounting principles.
C. when the auditor has complied with genrally accepted auditing standards.
D. under no circumstances.
55.The auditor's evaluation of the likelihood of material employee fraud is normally
done initially as a part of

A. the assessment of whether to accept the audit engagement.

B. understanding the entity's internal control structure.
C. the tests of controls.
D. the tests of transactions.

56.A CPA establishes quality control policies and procedures for deciding whether
to accept a new client or continue to perform services for a current client. The
primary purpose for establishing such policies and procedures is to

A. enable the auditor to attest to the integrity or reliability of a client.

B. comply with the quality control standard established by regulatory bodies.
C. lessen the exposure to litigation resulting from failure to detect material
misstatements due to irregularities in client's financial statements.
D. minimize the likelihood of association with clients whose management lacks
integrity.

57.In which circumstance is a CPA firm's independence most likely to be impaired?

A. A member of the engagement team has a close relative who is a

receptionist for the client.
B. The father of the audit senior holds a material financial interest in the client
of which the senior is unaware.
C. The spouse of a member of the audit team has an immaterial common stock
investment in the audit client.
D. The partner in charge of the office's compensation is afected by office
profitability, a portion of which arises from this audit.

58.While performing services for their clients, professionals have always had a
duty to provide a level of care which is

A. reasonable.
B. greater than average.
C. superior
D. guaranteed to be free from error.

59.The existence of extreme or unusual negligence, even though 0. there was

no intent to deceive or do harm, is a(n)

A. fraud.
B. gross fraud.
C. constructive fraud.
D. ordinary fraud.

60.The failure of the auditor to meet generally accepted auditing standards is

 A. an accepted practice.
B. a suggestion of negligence.
C. an evidence of negligence.
D. tantamount to criminal behavior.

61.Which of the following statement(s) is (are) true?

A. Gross negligence may constitute constructive fraud.

B. Constructive fraud is also termed recklessness.
C. Fraud requires the intent to deceive.
D. All the responses are true.

62.Which of the following, if present, would support a finding of constructive fraud

on the part of a CPA?

A. Privity of contract
B. Intent to deceive
C. Reckless disregard
D. Ordinary negligence

63.In rare cases auditors have been held liable for criminal acts. A criminal
conviction against an auditor can result only when it is demonstrated that the
auditor

A. was negligent.
B. was grossly negligent.
C. intended to deceive or harm others.
D. caused financial loss to an innocent third party.

64.The principal issue to be resolved in cases involving alleged negligence is usually

A. the amount of the damages sufered by the users of the financial statements.
B. whether to impose punitive damages on defendant.
C. the level of care required to be exercised.
D. whether defendant was involved in fraud.

65."Absence of reasonable care that can be expected of a person in a set of

circumstances" is the description of

A. ordinary negligence.
B. constructive fraud.
C. gross negligence.
D. fraud.

66.A CPA firm is considered independent when it performs which of the following
services for a publicly-traded audit client?
 A. Serving as a member of the client's board of directors.
B. Determining which accounting policies will be adopted by the client.
C. Accounting information system design and implementation.
D. Tax return preparation as approved by the board of directors.

67.The limitation of an auditor's liability under contract law is known as

A. privity of contract.
B. contributory liability.
C. statutory liability.
D. common law liability.

68.As a consequence of his failure to adhere to generally accepted auditing

standards in the course of his examination of the s Corporation, Herman, CPA, did
not detect the embezzlement of a material amount of funds by the company's
controller. As a matter of common law, to what extent would Herman be liable to
Leis Corporation for losses attributable to the theft?

A. He would have no liability, since the ordinary examination A' cannot be

relied upon to detect defalcations.
A. B.He would have no liability because privity of contract is lacking.
B. He would be liable for losses attributable to his negligence.
C. He would be liable only if it could be proven that he was grossly negligent.

69.In connection with the examination of financial statements, an independent

auditor could be responsible for failure to detect a material fraud if

A. statistical sampling techniques were not used on the audit engagement.

B. the auditor planned the work in a hasty and inefficient manner.
C. accountants performing important parts of the work failed to discover a close
relationship between the treasurer and the cashier.
D. the fraud was perpetrated by one client employee, who circumvented
the existing internal control.

70.A CPA is criminally liable if he

A. refuses to turn over the schedules or working papers prepared by the client
staf to the client.
B. performs an audit in a negligent manner.
C. intentionally allows an omission of a material fact required to be stated
in a financial statement.
D. was not able to submit the audited financial statements on time.

71.The auditor's defense of contributory negligence is most likely to prevail when

A. third party injury has been minimal.

 B. the auditor fails to detect fraud resulting from management override of
the control structure.
C. the client has privately held as contrasted with a public company.
D. undetected errors have resulted in materially misleading financial statements.

72.Ana and Associates, CPAs, issued an unqualified opinion on the financial

statements of Seral Corp. for the year ended December 31, 2010. It was
determined later that Seral's treasurer had embezzled P300,000 from Seral
during 2010. Seral sued Ana because of Ana's failure to discover the
embezzlement. Ana was unaware of the embezzlement. Which of the following is
Ana‘s best defense?

A. The audit was performed in accordance with PSAs.

B. The treasurer was Seral's agent and, therefore, Seral was responsible for
preventing the embezzlement.
C. The financial statements were presented in conformity with PFRS.
D. Ana had no actual knowledge of the embezzlement.

73.The factor that distinguishes constructive fraud from actual fraud is

A. materiality.
B. quality of internal control.
C. type of error or irregularity.
D. intent.

74.If a CPA recklessly abandons standards of due care and diligence while
performing an audit, he or she may be held liable to unknown third parties for:

A. Fraudulent misconduct.
B. Gross misconduct.
C. Gross negligence.
D. Contributory negligence.

75.Salve Corp. orally engaged Rex & Co., CPAs, to audit its financial statements.
The management of Salve informed Rex that it suspected that the accounts
receivable were materially overstated. Although the financial statements audited
by Rex did, in fact, include a materially overstated accounts receivable balance,
Rex issued an unqualified opinion. Salve relied on the financial statements in
deciding to obtain a loan from City Bank to expand its operations. City Bank relied
on the financial statements in making the loan to Salve. As a result of the
overstated accounts Salve has defaulted on the loan and has incurred a substantial
loss. If Salve sues Rex for negligence in failing to discover the overstatement,
Rex‘s best defense would be that

A. no engagement letter had been signed by Rex.

B. the audit was performed by Rex in accordance with generally
accepted auditing standards.
 C. Rex was not in privity of contract with Salve.
D. Rex did not perform the audit recklessly or with an intent to deceive.

76.In a common law action against an accountant, the lack of privity is a viable
defense if the plaintif

A. bases his action upon fraud.

B. is the accountant's client.
C. is a creditor of the client who sues the accountant for negligence.
D. can prove the presence of gross negligence which amounts to a reckless
disregard for the truth.

77.Which of the following conditions suggests an auditor's negligence?

A. Failure to detect material errors under conditions of weak internal control.

B. Failure to detect collusive fraud perpetrated by members of middle
management.
C. Failure to detect collusive fraud perpetrated by members of top management.
D. Failure to detect errors occurring outside the internal control structure.

78.Marcia Corporation orally engaged Legaspi and Lopez, CPAs, to audit its year-
end financial statements. The engagement was to be completed within two months
after the close of Marcia's fiscal year for a fixed fee of PI25,000. Under these
circumstances, what obligation is assumed by Legaspi and Lopez?

A. None. The contract is unenforceable since it is not in writing.

B. An implied promise to exercise reasonable standards of competence and care.
C. An implied obligation to take extraordinary steps to discover all
defalcations. D. The obligation of an insurer of its work, which is liable
without fault.

79.A third party sues a public accounting firm for negligence under common law on
the basis of materially false financial statements. Which of the following is the
firm's defense?

A. Lack of privity
B. Lack of reliance
C. Lack of intent
D. Contributory negligence

80.What type(s) of liability do CPA's have in the Philippines?

Common Law Liability Statutory Law Liability

A. YES YES
B. YES NO
C. NO YES
D. NO NO
81.A CPA firm issues an unqualified opinion on financial statements that were not
prepared in accordance with GAAP. The CPA firm would have acted with fraud or
its equivalent in all the following circumstances except where the firm

A. intentionally disregards the truth.

B. has actual knowledge of fraud.
C. negligently performs auditing procedures.
D. intends to gain monetarily by concealing the fraud.

82.Conflict between financial statement users and auditors often arises because of
the

A. high cost of performing an audit.

B. technical vocabulary which the auditor uses in the report.
C. placement of the auditor's report at the back of the client's annual report
where it is hard to locate
D. expectation gap.

83.A CPA will most likely be negligent when he fails to:

A. Correct errors discovered in the CPA's previously issued audit reports.

B. Detect all of a client's fraudulent activities.
C. Include a: negligence disclaimer in the CPA's engagement letter.
D. Warn a client's customers of embezzlement that may be perpetuated by
the client's employees.

84.A CPA should not be liable to any party if he performs his services with:

A. Ordinary negligence
B. Regulatory providence
C. Due professional care
D. Good faith

85.If a CPA recklessly departs from the standards of due care when conducting
an audit, the CPA will be liable to third parties who are

A. Ordinary negligence
B. Gross negligence
C. Strict liability
D. Criminal deceit
 MODULE 4
AUDIT REPORT

PSA BASED QUESTION

1. General purpose financial statementsare financial statementsprepared

in accordance with a financial reporting framework that is designed to:

A. meet the particular information needs of a wide range of users

B. meet the particular information needs of a group of users
C. meet the common information needs of a wide range of users
D. meet the common information needs of a group of users

2. PSA 700 provides guidance on the:

A. audit report that includes an unqualified opinion

B. audit report that includes an unqualified opinion
C. audit report that includes an unqualified opinion, through the
auditor‘s report is modified due to an emphasis of matter
D. audit report, irrespective of the type of opinion issued by the auditor

3. PSA 701 provides guidance on the:

A. auditor‘s report issued as a result of an audit of a complete set

of general purpose financial statements
B. auditor‘s report issued as a result of performing a special
purpose audit engagement|
C. auditor‘s report that contains an opinion other than
unqualified and/ or a modified report due to an emphasis of
matter
D. auditor‘s report issued as a result of an audit of a single statement
or specified account(s)

4. PSA 800, ―The Independent Auditor‘s Report on Special Purpose

Audit Engagements‖ least likely applies to auditor‘s report issued as a
result of an audit of:

A. compliance to royalty engagement

B. a component of a complete set of general purpose financial
statements wherein the opinion of the auditor is unqualified
C. complete set of general purpose financial statements where the
auditor is
 prohibited from observing the inventory count
D. summarized financial statements

5. The auditor‘s judgment regarding whether the financial statements give a

―true and fair view‖ or ―are presented fairly‖ on all material respects, is
made in the context of:

A. generally accepted auditing standards

B. standards of reporting of generally accepted auditing standards
C. applicable financial reporting framework
D. applicable Philippine Standards on Auditing (PSAs)

6. In forming an opinion on the financial statements,

A. the auditor should evaluate the conclusion drawn from the audit
evidence obtained during the course of the audit
B. the auditor evaluates whether there is a reasonable assurance
about whether the financial statements are free from any
misstatements
C. the auditor evaluates whether sufficiently appropriate audit
evidence has been obtained to eliminate the risk of material
misstatements
D. the auditor verifies that all errors that misstate the financial
statements have been corrected by the client

7. In evaluating whether the financial statements have been prepared and

presented in accordance with the specific requirements of the applicable
financial reporting framework for particular classes of transactions, account
balances and disclosures, the auditor should consider:

A. that the accounting estimates made by the management are

reasonable in the circumstances
B. that the information presented in the financial statements, including
accounting policies id relevant, reliable, comparable, and
understandable
C. that the accounting policies selected and applied are
consistent with the financial reporting framework
D. All of the choices given are to be considered

8. Which of the following is least likely considered by the auditor when he

has to evaluate the fair presentation of the financial statements?
A. Whether the financial statements, after any adjustments
made by the management as a result of audit process, are
consistent with the auditor‘s
 understanding of the entity and its environment
B. Whether the financial statements, including the disclosures
faithfully represent the underlying transaction and events in a manner
that gives a true and fair view of, in all material respects, the
information conveyed in the financial statements within the context of
the financial reporting framework
C. Whether the results of analytical procedures performed at or near
the end of the audit help to corroborate conclusion formed during
the audit
D. Whether the financial statements are approved by the
client‘s board of directors

9. If the auditor encounters circumstances that lead him to conclude that the
compliance with a specific requirement results to financial statements that
are misleading, the auditor:

A. considers the need to appropriately modify the auditor‘s report

B. does not need to modify the report
C. needs to issue qualified opinion
D. needs to disclaim his opinion

10.What is the overriding benefit of having consistency in the report?

A. Consistency promotes credibility in the global marketplace by

making more readily identifiable those audits that have been
conducted in accordance with globally recognized standards
B. Consistency in the form promotes the expression of unqualified
opinion
C. Consistency lessens the auditor‘s legal and civil liabilities
D. The audit report eliminates some disclosures required in the
financial statements

11.The auditing profession recognizes the need for uniformity in reporting as

means of

A. defending against third party litigations

B. systematic and easier review of the audit report by the lead
engagement partner
C. standardizing the policies of various CPA firms
D. avoiding confusion

12. What is the descriptive word in the title of an audit report issued on a
complete set of general purpose financial statement which affirms that the
auditor has met all of the relevant ethical requirements?
 A. Audit
B. Opinion
C. Independent
D. Report

13.The auditor‘s standard report should always include in its tittle the word:

A. Standard
B. Independent
C. Opinion
D. Audit

14.The auditor‘s report may be addressed to any of the following, except the
client‘s

A. Stockholders
B. Chief executive
officer C, Board of
directors
D. Partners

15.The introductory paragraph of the standard audit report may include the
following:

A) Identification of the entity whose financial statements have been audited

B) Statement that the financial statements have been audited
C) Title of each of the financial statements that comprise the complete set
of financial statements
D) Reference to ―basic financial statements‖ without indicating the title of
each financial statements
E) Reference to the summary of significant accounting policies and other
explanatory notes
F) Specific date and period covered by the financial statements
G) Reference to Philippine Standards on Auditing

Which of the foregoing are specifically required by the applicable standards

on auditing to be included or referred to in the introductory paragraph of the
standard audit report?

A. A, B, D, F, G
B. A, B, C, E, F, G
C. A, B, C, E, F
D. B, C, E, F
16.The purpose of the introductory paragraph in the standard unqualified
report is

A. to clarify the responsibilities of the auditor

B. to identify the financial statements which were audited, and the
dates and time periods covered by the report
C. to communicate the responsibilities of management in preparing
the financial statements, and to clarify the respective roles of
management and the auditor
D. all of the responses are correct

17. The complete set of general purpose financial statement that are
prepared in accordance with PFRS comprise of:

A. Balance Sheet, Income Statement, Statement of Changes in

Equity, Cash Flow Statement
B. Statement of Assets and liabilities, Income statements, Statement
of Changes in Retained Earnings, Cash Flow Statement
C. Balance Sheet, Income Statement, Cash Flow Statement,
Summary of Significant Accounting Policies and Other
Explanatory Notes
D. Balance Sheet, Income Statement, Cash Flow Statement,
Statement of Changes in Equity, Summary of Significant
Accounting Policies and Other Explanatory Notes

18. When an entity presents, together with the financial statements,

supplementary information that cannot be clearly diferentiated from the
financial statements because of its nature and how it is presented, such
supplementary information

A. must be specifically referred to in the introductory paragraph of

the auditor‘s report
B. is covered by the auditor‘s opinion
C. is referred by adding an emphasis of matter paragraph
D. is not covered by the auditor‘s opinion

19.Which of the following is an incorrect statement about supplementary

information?

A. The auditor‘s opinion may or may not cover the supplementary

information
B. It is important for the auditor to be satisfied that any
supplementary information that is not covered by the
financial statements
C. The supplementary information that cannot be diferentiated from
the financial statements is covered by the auditor‘s opinion
D. Supplementary information that is presented as an integral part of the
financial
 statement always needs to be specifically referred to in the
introductory paragraph of the auditor‘s report

20. Which of the following is not specifically referred to in the second

paragraph of the standard audit report as management‘s responsibilities?

A. Designing, implementing, and maintaining internal control

relevant to the preparation and fair presentation of financial
statements
B. Efectiveness and efficiency of operating decisions
C. Selecting and applying appropriate accounting policies
D. Making accounting estimates that are reasonable in the circumstances

21.Management‘s responsibility for the financial statements is

A. Implicitly represented in the auditor‘s standard report

B. Explicitly represented in the opening paragraph of the
auditor‘s standard report
C. Explicitly represented in the scope – responsibility of the
management paragraph of the auditor‘s standard report
D. Explicitly represented in the opinion paragraph of the auditor‘s
standard report

22. Which paragraph(s) of the standard auditor‘s report affirms the

responsibility of the management with respect to the entity‘s financial
statements?

A. First paragraph
B. Second paragraph
C. Second and Third paragraphs
D. Third paragraph

23. How are management‘s responsibility and the auditor‘s responsibility

represented in the applicable paragraph(s) of the standard auditor‘s report?

Management Auditor
A. Explicit Explicit
B. Implicit Implicit
C. Implicit Explicit
D. Explicit Implicit

24.The auditor‘s responsibility in an audit engagement is limited to:

 A. expression of an opinion on the financial statements
B. expression of an opinion on the financial statements and
adequacy of summary of accounting policies and other notes
C. opinion issued and the fairness of presentation of the financial
statements
D. expression of opinion and an inclusion of supplementary
information if necessary

25. The existence of audit risk is recognized by the statement in the scope
paragraph - auditor‘s responsibility of the auditor‘s standard report that the

A. auditor is responsible for expressing an opinion on the financial

statements
B. financial statements are presented fairly, in all material respects, in
conformity with PFRS
C. audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements
D. auditor obtains reasonable assurance about whether the financial
statements are free of material misstatements

26. The standard audit report explains that a financial audit includes all of
the following except

A. Examining support for the amounts and disclosure in the financial

statements
B. Assessing the level of control risk
C. Assessing the accounting principles used and significant estimates
made by the management
D. Evaluating the overall financial statement presentation

27.Which of the following statements is a basic element of the standard audit

report?

A. The disclosures provide reasonable assurance that the financial

statements are free from material misstatements
B. The auditor tested compliance to internal control by the client
C. An audit includes assessing significant estimates made by the
management
D. The financial statements are consistent with those of the prior period

28. The auditor‘s report should describe an audit by addressing some

concerns that may include:
A) An audit includes evaluating the appropriateness of the accounting policies
used
B) An audit includes evaluating the reasonableness of the accounting
estimates made
by management
C) Evaluating the overall presentation of the financial statements
D) An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements
E) The procedures selected depend on the auditor‘s

judgment Which of the foregoing concerns are stated

in the audit report?

A. A, B, C, D, E
B. A, B, C
C. A, C, E
D. A, B, D

29. The audit report date is important to users of financial statements

because it indicates

A. the last day of the fiscal period

B. the date on which the financial statements were filed with the SEC
C. the last date on which users may institute a lawsuit against the
client or the auditor
D. the last day of the auditor‘s responsibility for the review of
significant events that occurred after the date of financial
statements

30.The standard audit report refers to GAAS and PFRS in which paragraphs?

GAAS PFRS
A. Scope only Opinion only
B. Introductory only Scope and opinion
only C.Introductory and scope only Opinion
D.Introductory only All paragraphs

31. The auditor‘s judgment of whether financial statements are fairly

presented is made within the context oof:

A. Philippine financial reporting standrads

B. control risk
C. attestation standards
D. auditing standards
32. The auditor‘s standard report states that the financial statements are
presented fairly
A. with reasonable assurance
B. in all material respects
C. without significant errors
D. on a consistent basis

33.How are other reporting responsibilities addressed within the auditor‘s

report?

A. They should be addressed in a separate section that follows

the opinion paragraph
B. They should be addressed within the introductory paragraph
C. They should be addressed within the scope paragraph
D. They should be addressed within the introductory paragraph and
separately described in a separate paragraph

34.Which of the following is incorrect regarding the auditor's signature?

A. The auditor's signature is either in the name of the audit firm,

the personal name of the auditor, or both, as appropriate
B. The auditor's signature is either in the name of the audit firm or
the personal name of the auditor, but not both
C. In addition to the auditor's signature, the auditor may be required
to declare the auditor's professional accountancy designation
D. The auditor's report filed with the Securities and Exchange
Commission (SEC) must be manually signed
35 Which of the following information is(are) required when an auditor's
report is issued on financial statements to be filed with the Securities and
Exchange Commission?

1. Audit report is manually signed.

2. Certifying partner to sign his name.
3. Partner's Tax Identification Number.
4. PRC registration number
5. Accreditation with SEC

A. 1, 2, 3, 4, 5
B. 2, 4, 5
C. 1, 3, 1, 5
D. 2, 3, 4, 5
36.An audit report should be dated as of the

A. date the stockholders approve the audited financial statements

B. date of management approving the audited financial statements
C. balance sheet date of the latest period reported on
D. date a letter of audit inquiry is received from the entity's attorney.

37.Why is the date of the auditor's report important?

A. To have a basis of determining the audit fees to be paid to the auditor

B. The date of the auditor's report informs the readers that the
auditor has considered the efect of events and transactions of
which the auditor became aware and that occurred up to that date
C. To emphasize completeness assertion
D. To inform the users of the financial statements that the auditor
complied with the applicable Philippine Standards on Auditing.

38. How is the auditor's report on the financial statements that require final
approval by stockholders before such financial statements are issued
publicly dated?

A. The auditor's report should be dated coinciding the date of

approval of the financial statements by the stockholders
B. The auditor's report should be dated after the approval of
the financial statements by the stockholders
C. The date of the auditor's report coincides the date of approval of
the financial statements by the board of directors
D. The audit report should be dual dated, the first date coinciding the
approval by the board of directors and the second date to coincide
with the approval by the stockholders

39.The auditor's address is indicated in the auditor's report by:

A. naming the location in the country where the auditor practices his
profession
B. including the complete mailing address of the auditor
C. identifying the country from where the auditor had secured his
professional license
D. the auditor's address is omitted in the report

40. Which of the following is ordinarily true of a modification of the audit

report by adding an emphasis of matter paragraph?
 A. The modification by adding an emphasis of matter paragraph is an
"except for" qualification of opinion
B. The emphasis of matter paragraph is a "subject to qualification of
opinion
C. The emphasis of matter paragraph would ordinarily refer to the
fact that the auditor's opinion is not qualified
D. The emphasis of matter paragraph is presented before the opinion
paragraph

41. When additional language is added to the auditor's report without -

modifying the opinion, the additional language should be included in:
A. the introductory paragraph
B. the scope paragraph
C. the opinion paragraph
D. one or more additional paragraphs that follow the opinion paragraph.

42.Which of the following-statements is not true?

A. A one-paragraph report is generally used when the auditor is not

independent
B. A modification of the audit report that involves modified wordings
may contain an unqualified opinion
C. An addition of another paragraph to an otherwise standard audit
report always requires a modification of an unqualified opinion
D. An unqualified opinion may be issued though the audit report
requires an additional explanatory paragraph
43. An auditor includes a separate paragraph in an otherwise unmodified
report to emphasize that the entity being reported on had significant
transactions with related parties. The inclusion of this separate paragraph

A. is considered an "except for" qualification of the opinion

B. violates generally accepted auditing standards if this information
is already disclosed in the footnotes to the financial statements
C. necessitates a revision of the opinion paragraph to include the
phrase "with the foregoing explanation."
D. is appropriate and would not negate the unqualified opinion.

44. An auditor concludes that there is substantial doubt about an entity's

ability to continue as a going concern for a reasonable period of time. If the
entity's disclosures concerning this matter are adequate, the audit report
should include a(an)

Adverse opinion "Except for" qualified opinion

A. Yes Yes
 B. No No
C. No Yes
D. Yes No

45. Under certain circumstances, the CPA may wish to emphasize specific
matters regarding the financial statements even though he or she intends to
express an unqualified opinion. Normally, such an explanatory information
should be included in

A. the introductory paragraph

B. a separate paragraph following the opinion paragraph in the report
C. the opinion paragraph
D. A separate paragraph preceding the opinion paragraph

46. Salmon Company's financial statements adequately disclose

uncertainties that concern future events, the outcome of which cannot
reasonably be estimated. The auditor's report should include a(an)

A. unqualified opinion
B. except for qualified opinion
C. "subject to" qualified opinion
D. adverse opinion

47.The paragraphs of the report which is modified for uncertainties are the
same as the standard unqualified report. The explanatory Paragraph as a
form of the modification to describe the uncertainty is added as the

A. first paragraph
B. last paragraph
C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last

48. An explanatory paragraph following an opinion paragraph that describes

an uncertainty is as follows:

As discussed in Note X to the financial statements, the company is a

defendant in a lawsuit alleging infringement of certain patent rights and
claiming damages. Discovery proceedings are in progress. The ultimate
outcome of the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
 A. Unqualified
B. Disclaimer
C. Qualified
D. adverse

49. The audit report issued by Lozano and Co., CPAs, included the following
paragraph that followed the opinion paragraph: Without qualifying our
opinion we draw attention to Note 11 to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of certain
patent rights
This paragraph is considered:

A. an inappropriate reporting practice

B. an additional information to be a part of the notes to financial
statements
C. an emphasis of matter regarding uncertainty which is
considered an acceptable reporting practice
D. inappropriate because it contradicts the unqualified opinion
issued by the auditor

50. In extreme cases such as situations involving multiple uncertainties that

are significant to the financial statements, the auditor

A. may consider to express a disclaimer of opinion

B. may qualify his opinion instead of issuing an unqualified opinion with
emphasis of matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a "subject to" opinion because the situations
related to uncertainties

51. A client company has issues that cause substantial doubt regarding the
entity's ability to continue as a going concern. If this is the only major audit
issue, which type of opinion will the auditor usually refrain from issuing?

A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion

52.Which of the following situations, the efect of which is significant, least

likely require a decision of whether to issue a qualified or adverse opinion?
 A. Any disagreement with entity management regarding the
acceptability of the accounting policies selected by the management
B. Limitation on the scope of the auditor's work
C. Inadequate disclosures of financial information
D. Unjustified changes in accounting policies

53. The auditor may continue to express unqualified opinion though there
are modifications made in the audit report. Which of the following situations,
would the auditor likely modify his opinion?

A. The existence of multiple uncertainties that are adequately

described in the notes to financial statements
B. The prior year's financial statements were audited by other CPAs
C. An important subsidiary whose financial statements were
included in the consolidated financial statements were audited by
other CPAs
D. A substantial doubt about the client's ability to continue as a
going concern that is adequately disclosed in the financial
statements.

54.In which of the following situations would qualified opinion be

inappropriate?

A. Financial statements are materially misstated

B. A doubt that is more than substantial about the ability of the
company to continue as a going concern
C. A significant scope limitation
D. The management insisted of not attaching the statement of cash flows

55. Which of the following is not a reason to issue a modified audit report
with opinion other than unqualified opinion?

A. The scope of the auditor's work is restricted by the client

B. The amount of inventories at cost as presented in the
balance sheet significantly exceeded their market values
C. Certain significant matter is omitted from either the financial
statements or notes to financial statement
D. An adequately disclosed significant uncertainty, the resolution of
which is dependent upon future events and which may afect the
financial statements.

56. Which of the following situations may likely require a modified audit
report witn modified wordings or an emphasis of matter paragraph?
 A. A significant uncertainty, not adequately disclosed in the financial
statements
B. An audit of inventory is restricted by the client. The auditor was
satisfied about the balance of the inventory by doing alternative audit
procedures
C. A change in the application of generally accepted accounting
principle that is justified.
D. A less than substantial doubt regarding the ability of the entity to
continue as a going concern.

57.Which of the following circumstances may not result- to a disclaimer of

opinion?

A. A significant scope limitation in auditing the existence of

inventories. The inventory amount comprises 75 percent of the
total assets of the client
B. The auditor believes that there are multiple, uncertainties that are
significant to the financial statements
C. The accounts receivable of the client comprises 80 percent of the
total assets. The auditor was instructed by the client not to confirm
account balances. The auditor, however, was satisfied by the results of
alternative audit procedures
D. The auditor's wife owns very a few number of common shares of the
client.

58.An auditor may express a qualified opinion because of

Departure from PFRS Lack of Consistency Scope

Limitation
A. YES YES YES
B. NO YES NO
C. YES NO NO
D. NO YES YES

59.Whenever an auditor issues a qualified report, he or she

A. must use the term "subject to" in the opinion paragraph

B. may use either the terms "subject to" or " except for" in the opinion
paragraph, depending on the nature of the qualification
C. must use the term "except for" in the opinion paragraph
D. must not use the terms "subject to" or "except for" in the opinion
paragraph
60. An explanatory paragraph may be added to the audit report while at the
same time issuing an unqualified opinion in all cases except when:

A. the client has changed an accounting principle with the

agreement of the auditor
 B. there is an immaterial departure from GAAP to ensure fair
presentation with the agreement of the auditor
C. the audit opinion is partly based on the work of another auditor
D. the audit work has been significantly limited by management. .

61. Under which of the following sets of circumstances might an auditor

disclaim an opinion?

A. The financial statements contain a departure from PFRS, the efect

of which is material
B. The principal auditor decides to make reference to the report
of another auditor who audited a subsidiary
C. There has been a material change between periods in the
method of the application of accounting principles
D. There were significant limitations on the scope of the audit.

62. If an auditor is engaged to audit a client's financial statements after the

annual physical inventory count was made and the accounting records are
not sufficiently reliable to enable the auditor to become satisfied as to the
year-end inventory balances, the opinion to be expressed is

A. either an "except for" qualified opinion or an adverse opinion

B. either a disclaimer or opinion or an "except for" qualified opinion
C. either an adverse opinion or disclaimer of opinion
D. an unqualified opinion.

63.An adverse opinion is issued when the auditor believes

A. some parts of the financial statements are materially misstated or

misleading
B. the financial statements investigation be found to be misleading or
misstated, if an adequate investigation is performed
C the overall financial statements are so materially misstated or
misleading as a whole that they do not present fairly the financial
position or results of operations, changes in cash and stockholders'
equity in conformity with PFRS
D. the audit firm is not independent

64. If the scope of the auditors procedures in conducting an audit is

significantly restricted by the client management, the audit opinion will most
likely be a(n):
 A. Adverse opinion
B. Qualified opinion
C. Unqualified with explanatory paragraph
D. Disclaimer of opinion.

65.The auditor would most likely disclaim his opinion because of

A. the client's failure to present supplementary information required by

the FRSC
B. inadequate disclosure of material information
C. the qualification of an opinion by the other auditor of a subsidiary
where there is a division of responsibility
D. a client-imposed scope limitation.

66. Whenever the client imposes restrictions on the scope of the audit, the
auditor should be concerned about the possibility that management is trying
to prevent discovery of misstated information. In such cases, PSA 701 has
encouraged the auditor to issue a:

A. disclaimer of opinion in all cases

B. qualification of both scope and opinion in all cases
C. disclaimer of opinion, whenever materiality is in question
D. qualification of both the scope and opinion paragraphs whenever
materiality is in question

67. An explanatory paragraph or modified wordings may be added to the

audit report while at the same time issuing an unqualified opinion in all cases
except when:

A. the client has changed an accounting principle with the

agreement of the auditor
B. there is an immaterial departure from PFRS to ensure fair
presentation with the agreement of the auditor
C. the audit opinion is partly based on the work of another auditor
D. the audit work has been materially limited by management.

68. The most common case in which conditions beyond the client's and
auditor's control cause a scope restriction is an engagement

A. agreed upon after the client's balance sheet date

B. where client will not allow the auditor to confirm receivables
for fear of ofending its customers
 C. where auditor does not have enough staf to audit all of
client's foreign subsidiaries satisfactorily
D. where client is going through a bankruptcy

69. An audit report contains the following paragraph: "Because of the

inadequacies in the company's accounting records during the year ended
June 30, 2008, it was not practicable to extend our auditing procedures to
the extent necessary to enable us to obtain certain evidential matter as it
relates to classification of certain items in the consolidated statements of
operations." This paragraph most likely describes

A. A material departure from PFRS requiring a qualified audit opinion

B. An uncertainty that should not lead to a qualified opinion
C. A matter that the auditor wishes to emphasize and that does
not lead to a qualified audit opinion
D. A material scope restriction requiring a qualification of the audit
opinion.

70. Which of the following circumstances least likely result to either a

qualified opinion or an auditor disclaiming his opinion?

A. The auditor is unable to carry out an audit Procedure believed to be

desirable; the auditor carried out alternative audit procedures to
support the management's assertion
B. The auditor believed the client's accounting records are inadequate
C. A client-imposed scope limitation with respect to the audit of
inventory
D. Circumstances did not permit the auditor to perform certain
required audit procedure.

71. Addition of an "emphasis of a matter" paragraph to what remains an

unqualified opinion is least likely required for which of the following
situations?

A. Related party transactions

B. Scope limitation
C. A significant subsequent event
D. An uncertainty.

72. When the scope of the auditor's work has been limited, the audit report
should contain a(n):

A. unqualified opinion if the scope limitation was unavoidable

B. indication that the financial statements are materially misstated
because of a
 departure from PFRS
C. estimate of the financial impact of the scope limitation on
the financial statements
D. emphasis of matter paragraph that refers to the particular note to
the financial statements.

73. When there is a limitation on the scope of the auditor's work that
requires a modification of the audit report:

A. The auditor's report should either contain a qualified or adverse

opinion
B. The auditor's report may contain an unqualified opinion with an
emphasis of matter paragraph that follows the opinion paragraph
C. The auditor's report should describe the limitation and indicate
the possible adjustments to the financial statements that might
have been determined to be necessary had the limitation not
existed
D. Should always contain a disclaimer of opinion

74. Which of the following least likely requires an expression of unqualified

opinion with modified wordings or an emphasis of the matter paragraph?

A. The financial statements of prior period, which are presented for

comparative purposes, were audited by as 'Gillet CPAs
B. The auditors have substantial doubt about the ability of the entity
to continue as a going concern
C. The entity changed the measurement of certain significant
transaction from one GAAP to another GAAP
D. The auditors failed to observe physical inventory count. however,
the auditor was satisfied that the inventory amount was fairly
presented by doing alternative audit procedures.

75. When there is a limitation in the scope of the audit that results to a
disclaimer of opinion, the following paragraphs are modified, except:

A. Introductory paragraph
B. Management's responsibility for the financial statements
C. Auditor's responsibility
D. Auditor's opinion.

76. The expression of a qualified opinion means that the financial

statements, taken as a whole, in all material respects, are
 A. materially misstated
B. materially misleading
C. presented fairly
D. do not present fairly

77. When the auditor cannot perform certain required procedures and the
amounts are so material that a disclaimer of opinion rather than a qualified
opinion is required

A. the opinion paragraph will state "do not present fairly"

B. the opinion paragraph will state "present fairly"
C. the scope - auditor's responsibility paragraph will be deleted
D. the scope paragraph will be unchanged from the standard unqualified
opinion.

78.Which of the following indicates a qualified opinion?

A. The financial statements do not present fairly in all material

respects, the financial position, results of operations, and cash flows
in conformity with PFRS
B. The auditor does not express an opinion on the financial statements
C. The financial statements present fairly, in all material respects,
the financial position, results of operations, and cash flows in
conformity with PFRS
D. Except for the efects of a matter, the financial statements present
fairly, in all material respects, the financial position, results of
operations, and cash flows in conformity with PFRS

79. An auditor who qualifies an opinion because of his inability to obtain

sufficient evidential matter should describe the limitation in an explanatory
paragraph that is inserted between the scope -responsibility of the auditor
and opinion paragraphs. The auditor should also refer to the limitation in the:

Scope Opinion Notes to

(Responsibility Notes to Paragrap financial
the of the auditor) h statements
A. YES NO YES
B. NO YES NO
C. YES YES NO
D. YES YES YES

80. Which of the following circumstances requires the auditor to omit the
sentence stating the responsibility of the auditor in the auditor's report?
 A. Limitation on the scope of the audit, resulting to qualified opinion
B. Limitation on the scope of the audit resulting to disclaimer of opinion
C. The management refuses to issue a representation letter that
prompts the auditor to qualify his opinion
D. A material misstatement that requires an adverse opinion

81. When the client is not following PFRS, and the auditor believes that
adherence to PFRS would result to misleading statements, the opinion
paragraph of the audit report

A. must express an adverse opinion

B. must express a qualified opinion
C. should be unqualified with a required explanatory paragraph
D. should be the standard unqualified opinion

82. In which of the following conditions is an unqualified audit opinion least

likely issued?

A. The auditor believes that a substantial doubt about the

entity's ability to continue as a going concern exists
B. The auditor believes that inventory is valued at market values that
accurately reflect market conditions and materially exceed cost
C. The audit is conducted with no circumstance or imposed scope
limitation
D. PFRS are not consistently applied from year to year

83. Once the auditor has determined that an exception is material enough to
warrant a qualification of his auditor's report, he must then determine if the
exception is sufficiently material to negate an overall opinion. If the auditor is
applying this decision process to an exception based on a departure from
Philippine financial reporting standards, he is deciding
A. Whether to issue an adverse opinion rather than a disclaimer of
opinion
B. Whether to issue a disclaimer of opinion rather than a qualified
opinion
C. Whether to issue an adverse opinion rather than a qualified opinion
D. Nothing because such a decision process is not applicable to
this type of exception.

84. An auditor who is reporting on financial statements that contain a

material departure PFRS should include in his audit report a separate
explanatory paragraph and
A. not modify the opinion paragraph as long as the departure is
adequately disclosed in a footnote
 B. disclaim an opinion on the financial statements
C. express a qualified or adverse opinion
D. express a qualified opinion or disclaim an opinion

85.When the auditor knows that the financial statements may be

misleading because they are not prepared in conformity with Philippine
financial reporting standards, he must issue a(n)

A. a qualified opinion
B. an adverse opinion
C. a disclaimer of opinion
D. a qualified or an adverse opinion, depending on the materiality of
the item in question.

86. An auditor should disclose the substantive reasons for expressing an

adverse opinion in an explanatory paragraph

A. preceding the scope - responsibility of the auditor paragraph

B. between the scope - responsibility of the auditor paragraph, and
the opinion paragraph
C. following the opinion paragraph
D. within the notes to the financial statements.

87. A qualified opinion report can be used only when the auditor
believes that the overall financial statements are

A. fairly stated
B. not fairly stated
C. materially misstated
D. materially misleading.

88.If the auditor believes that a required material disclosure is omitted from
the financial statements, the auditor should decide between issuing a(n)

A. qualified opinion or an adverse opinion

B. disclaimer of opinion or a qualified opinion
C. adverse opinion or a disclaimer of opinion
D. unqualified opinion or a qualified opinion
89. An auditor is confronted with an exception sufficiently material to warrant
departing from the standard wording of an unqualified report. it the
exception relates to a departure from the Philippine financial reporting
standards, the auditor must decide between a(n)

A. adverse opinion and an unqualified opinion

B. adverse opinion and a qualified opinion
C. adverse opinion and a disclaimer of opinion
D. disclaimer of opinion and a qualified opinion

90. In which of the following situation would a decision of selecting between a

qualified or adverse opinions be inappropriate?

A. limitation in the scope of the audit

B. The financial statements are significantly misleading
C. A disagreement between the auditor and the client arose
because of capitalization of research and development costs
D. A required disclosure that is significant is omitted from the
financial statements.

91. When the auditor qualifies his opinion due to his disagreement with the
client in applying accounting policies, the auditor modifies:

A. The introductory paragraph and opinion paragraph

B. Management's responsibility for the financial statements,
and opinion paragraphs.
C. The opinion paragraph only
D. Management's responsibility for the financial statements,
auditor's responsibility, and auditor's opinion paragraphs.

92. Which of the following circumstances requires the modification of both

the auditor's responsibility, and the auditor's opinion paragraphs of the
auditor's report?

A. Limitation on the scope of audit that results to qualified opinion

B. Auditor's disagreement with the client management on accounting
policies that requires qualified opinion
C. Inadequate disclosures that requires qualified opinion
D. Disagreement with the client management regarding accounting
policies that requires adverse opinion
93. In which of the following situations would an auditor ordinarily
choose between expressing a qualified opinion or an adverse opinion?

A. The auditor did not observe the entity's physical inventory and is
unable to be satisnea about its balance by other auditing procedures
B. Conditions that cause the auditor to have substantial doubt about
the entity's ability to continue as a going concern are not disclosed
C. There has been a change in accounting principles, the material
efect on the comparability of the entity's financial statements has
been properly disclosed in the financial statements
D. The auditor is unable to apply necessary procedures concerning an
investor's share on an investee's earnings recognized on the equity
method

94. How should the auditor address the comparatives that are
presented as corresponding figures?

A. The comparatives are specifically identified in the audit report

because the auditor's opinion on the current period financial
statements applies also to the corresponding figures
B. The comparatives are specifically identified in the introductory
paragraph and in the opinion paragraph
C. The comparatives are not specifically identified because the
auditor's opinion applies to the current period financial statements as
a whole, including the corresponding figures
D. The comparatives are referred to in the opinion paragraph as
the auditor applies to both the current year's financial statements
and the corresponding figures.

95.Which of the following circumstances requires an issuance of

unqualified opinion with modified wordings?

A. A significant uncertainty that may afect the financial statements

of the future period is adequately disclosed in the financial
statements
B. The auditor agrees with the client for a change in accounting
policy that significantly afects the financial statements
C. An insignificant scope limitation in the work of the auditor
D. The successor auditor reports on the current year's financial
statements. The prior-years financial statements that were presented
as comparatives were audited by another CPA
96. When management prepares financial statements on the basis of a going
concern and the auditor believes the company may not continue as a going
concern, the auditor should issue a(n)

A. qualified opinion
B. unqualified opinion with an explanatory paragraph
C. disclaimer of opinion
D. adverse opinion

97. If an amendment is necessary in the other information and the entity

refuses to make the amendment, the auditor, depending on particular
circumstance, may do any of the following, except:

A. Describe the material inconsistency as an emphasis of matter in a

paragraph following the opinion paragraph
B. The auditor may not issue the auditor's report.
C. The auditor may withdraw from the engagement
D. The auditor to issue either a qualified or adverse opinion.

98. An auditor concludes that there is a substantial doubt about an entity's

ability to continue as a going concern for a reasonable period of time. If the
entity's financial statements adequately disclose these financial difficulties,
the auditor's report is required to include an explanatory paragraph that
specifically mentions

"Management's plans" "Going concern"

A. Yes Yes
B. Yes No
C. No Yes
D. No No

99.When there is uncertainty about a company's ability to continue as a

going concern, the auditor's concern is the possibility that the client may not
be able to continue its operations or meet its obligations for a "reasonable
period of time." For this purpose, a reasonable period of time is considered
not to exceed

A. six months from the date of the financial statements

B. six months from the date of the audit report
C. one year from the date of the financial statements
D. one year from the date of the audit report.
100.When the auditor concludes that there is a substantial doubt the
entity's ability to continue as going concern, he should issue a(n)

A. unqualified opinion with an explanatory paragraph provided that

there is an adequacy of disclosures in the financial statements
B. qualified opinion with an explanatory paragraph, regardless of the
adequacy of disclosures in the financial statements
C. adverse opinion, regardless of the adequacy of disclosures in the
financial statement D. standard unqualified report, provided that client
has made adequate disclosures in the financial statements
QUIZZERS

1. Which of the following representations does an auditor make explicitly and

implicitly when issuing an unqualified opinion?

Conformity with PFRS Adequacy of

Disclosure
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly

2. Materiality
is:

A. addressed within a practitioner's attestation am: audit reports.

B. expressed in terms of pesos.
C. measured using guidelines established by the FRSC.
D. not applicable to attestation engagements.

3. Which one of the following is an example of the contents of an opinion

paragraph found in a disclaimer of opinion?

A. "except for..."
B. "nothing came to our attention..."
C. The financial statements do not present fairly...'
D. None of these represents a disclaimer of opinion.

4. An auditor issued an audit report that was dual dated for a subsequent
event occurring after the management's approval of the financial statements
but before issuance of the auditor's report. The auditor's responsibility for
events occurring subsequent to the completion of fieldwork was

A. Extended to subsequent events occurring through the date of

issuance of the report.
B. Extended to include all events occurring since the date of
approval of the financial statements by the management.
C. Limited to the specific event referenced.
D. Limited to include only events occurring up to the date of the last
subsequent event referenced.
5. An auditor has been asked to report on the balance sheet of Jane
company but not on the other basic financial statements. The auditor will
have access to all information underlying the basic financial statements.
Under these circumstances, the auditor

A. May accept the engagement but should disclaim an opinion because

of his inability to apply the procedures that are considered necessary
in the circumstance.
B. May accept the engagement because such engagements merely
involve limited reporting objective.
C. Should refuse the engagement because there is a client-imposed
scope limitation.
D. Should refuse the engagement because of a departure from
generally accepted auditing standards.

6. The use of a negative assurance in the audit reports for historical financial
statements is

A. a violation of the standards of reporting.

B. supported by PSAs and their interpretations.
C. allowed if the auditors' opinion is unqualified.
D. properly located in the a opinion paragraph of the unqualified report.

7. Which of the following is true of the notes to financial statements that are
prepared in accordance with PFRS?

A. Notes are not required, but are typically included by all companies.
B. Notes are not required, since they only give additional information
contained in the financial statements.
C. Notes are an integral part of the financial statements.
D. Notes are not encompassed in the auditors' opinion of the financial
statements since they are supplementary information.

8. If the balance sheet of a publicly-held company is dated December 31,

2010, the audit report is dated March 6, 2011, and both are released to the
public on March 15, 2011, this indicates that the auditor has searched for
material subsequent transactions and events that occurred up to

A. December 31, 2010

B. March 15, 2011
C. March 6, 2011
 D. None of these

9. The three main types of audit opinion other than the unqualified report are
the

A. adverse opinion, disclaimer of opinion, and qualified opinion.

B. adverse opinion, reports on unaudited financial statements, and
disclaimer.
C. disclaimer, the qualified opinion, and reports on unaudited
financial statements.
D. special audit reports, reports on unaudited financial statements, and
adverse opinion.

10. In the scope - responsibility of the auditor paragraph of the audit report,
the use of the term "material misstatements" conveys that auditors are
responsible to search for

A. minor misstatements.
B. significant misstatements.
C. fraudulent misstatements.
D. all misstatements.

11. The guidelines which enable auditors to decide when something is

immaterial, material, or highly material are provided by

A. the AASC through its Philippine Standards on Auditing.

B. the FRSC through its Statements on Financial Accounting Standards.
C. the Securities and Exchange Commission.
D. auditor's judgment.

12.When financial statements of prior period are presented on a comparative

basis with financial statements of the current period, the continuing auditor
is responsible for

A. expressing dual dated opinions.

B. updating the report on the previous financial statements only if
there has not been a change in the opinion.
C. updating the report on the previous financial statements only if
the previous report was qualified and the reasons for the qualification
no longer exists.
D. updating the report on the previous financial statements
regardless of the opinion previously issued.
13. If a principal auditor decides to assume responsibility for another
auditor's work, the principal auditor should consider performing all of the
following procedures except:
 A. Performing a peer review of the other auditor.
B. Reviewing the audit program of the other auditor.
C. Reviewing the working papers of the other auditor .
D. Discussing the audit procedures and the results of the audit with other
auditor.

14. When the audited financial statements of the prior year are presented
together with those of the current year, the continuing auditor's report
should cover

A. both years.
B. only the current year.
C. only the current year, but the prior year's report should be :
presented.
D. only the current year, but the prior year's report should be referred to.

15. As a further attempt to appear that the auditor is independent, the

addressee of the audit report is usually the:

A. client company.
B. board of directors of client company.
C. President and/or CEO of client company.
D. stockholders of client company.

16. Which of the following is not a true statement? "In the opinion
paragraph of the standard unqualified report, required to state

A. an opinion about the financial statements taken as whole

B. a conclusion about whether the company follows Philippine financial
reporting standards.‖
C. whether the management has or has not made adequate disclosure.
D. That the financial statements are presented fairly."

17. In the auditor's responsibility - scope paragraph of the audit report, the
use of the term "reasonable assurance" is intended to indicate that

A. no misstatements exist in the financial statements.

B. no material misstatements exist in the statements.
C. there is a possibility that material misstatements still exist in
the financial statements.
D. there is a possibility that immaterial statements still exist in the
financial statements.
18.An audit opinion that is considered a "good" opinion is on that is

A. A disclaimer of opinion.
B. Adverse.
C. Qualified.
D. Unqualified.

19. Most auditors believe that the financial statements are "presented fairly"
when the statements are in accordance with Philippine financial reporting
standards, but it is also necessary to

A. determine that they are not in violation of FRSC statements.

B. examine the substance of transactions and balances for
possible misinformation.
C. review the statements using the financial reporting standards
that are promulgated by the Accounting Standards council.
D. assure investors that the net income reported this year willequal or
exceed the prior year's. an unqualified opinion, the implication is that
the auditor

20.Whenever an auditor issues an unqualified opinion, the implication is that

the auditor

A. does not know if the statements are presented fairly.

B. does not believe the statements are presented fairly.
C. is satisfied that the statements are presented fairly except for a
specific aspect of them.
D. is satisfied that the statements are presented fairly.

21.The most common type of audit report contains a(n):

A. adverse opinion.
B. disclaimer of opinion.
C. qualified opinion.
D. unqualified opinion.

22. When a misstatement in the financial statements exists, but is unlikely to

afect the decisions of a reasonable user, it would be appropriate to issue
a(n)

A. unqualified opinion.
B. qualified opinion.
 C. disclaimer of opinion.
D. adverse opinion.

23. A misstatement in the financial statements can be considered material if

A. it overshadows the financial statements as a whole.

B. knowledge of the misstatement would afect a decision of a
reasonable user of the statements.
C. it afects more than one account on the statements.
D. it afects only one account on the statements.

24. If a misstatement is immaterial relative to the financial statements of the

entity for the current period and is not expected to have a. material efect in
future periods, it is appropriate to issue a(n)

A. unqualified opinion.
B. qualified opinion.
C. adverse opinion.
D. disclaimer of opinion.

25.The only unqualified reports which use modified wording are those
involving

A. the use of other auditors.

B. material uncertainties.
C. substantial doubt about going concern.
D. lack of consistent application of PFRS.

26.When the principal auditor decides to refer to another

auditor in his/her report, the report should always include:

A. a qualified or adverse opinion.

B. a disclaimer of opinion regarding the financial statements audited
by the other auditor.
C. the percentage and 'monetary amounts of the portion of the
financial statements examined by the other auditor.
D. reference to a footnote where the division of responsibility
between the principal auditor and the other auditor is described in
detail.

27. A principal auditor decides not to take responsibility for the work of
another CPA who audited a wholly-owned subsidiary of the principal
auditor's client. The total assets
and revenues of the subsidiary represent 30% and 24% of the related
con s3lidated totals. What type of opinion should the auditor generally
issue?

A. Unqualified opinion.
B. Adverse opinion.
C. Qualified opinion.
D. Disclaimer of opinion.

28. When a principal auditor decides to make reference to the examination of

another auditor, the principal auditor's report should clearly indicate the

A. Principal auditor's qualification on the overall fairness of the

financial statements, taken as a whole, "subject to" the work and
report of the other auditor.
B. Procedures that were performed by the other auditor in connection
with the oilier auditor's examination.
C. Division of responsibility between that portion of the financial
statements covered by the examination made by the principal
auditor and that covered by the examination made by the other
auditor.
D. Procedures that were performed by the principal auditor to obtain
satisfaction as to the reasonableness of the examination made by the
other auditor.

29. The principal auditor is satisfied with the independence and professional
reputation of the other auditor who has audited a subsidiary but wants to
indicate the division of responsibility. The principal auditor should modify

A. only the introductory paragraph.

B. only the scope - auditor's responsibility paragraph.
C. the introductory, scope - auditor's responsibility and opinion
paragraphs.
D. only the opinion paragraph.

30. Francis and Company, CPAs, acted as the principal auditor. However,
since Francis and Company, CPAs, did not have the resources, it hired other
CPA firm to audit a subsidiary of the client located in Bukidnon. If Francis is
willing to take the responsibility for the work of other CPA firm, which type of
audit report is Francis and Company most likely to issue?

A. Standard unqualified report.

B. Unqualified with explanatory language.
C. Qualified with explanatory language.
 D. Disclaimer of opinion.

31. When the report of a principal auditor makes reference to the

examination made by another auditor, the other auditor may be named if an
expressed permission to do so is given and:

A. The report of the principal auditor names the other auditor in both
the scope and opinion paragraphs. B. The principal auditor accepts
responsibility for the work of the other auditor.
C. The report of the other auditor is presented together with the report
of the principal auditor.
D. The other auditor is not an associate or correspondent firm whose
work is done at the request of the principal auditor.

32. When a client declines to disclose essential information in the financial

statements or their accompanying notes, the auditor should?

A. Provide the information in the audit report, if practicable, and

qualify his opinion because of a scope limitation.
B. Provide the information in the audit report, if practicable, and
quality his opinion because of a departure from PFRS.
C. Issue a disclaimer of opinion because the client has interfered with
the auditor's function of assessing the adequacy of disclosure.
D. Issue an unqualified opinion but inform the readers by including
the omitted information in an emphasis of matter paragraph.

33. Magsombol, CPA, is the principal auditor for a multi-national corporation.

Another CPA has examined and reported on the financial statements of a
significant subsidiary of the corporation. Magsombol is satisfied with the
independence and professional reputation of the other auditor, as well as the
quality of his examination. With respect to Magsombol's report on the
consolidated financial statements, taken as a whole, Magsombol

A. must not refer to the examination of the other auditor.

B. must refer to the examination of the other auditor.
C. may refer to the examination of the other auditor.
D. may refer to the examination of the other auditor, in which case
Magsombol must include in the auditor's report on the consolidated
financial statements a qualified opinion.
34. If a company's financial statements violate PFRS for an immaterial item
which is expected to become material in the future, the auditor is likely to
issue:

A. Unqualified standard report.

B. Unqualified with explanatory language.
C. Qualified.
D. Adverse.

35. In performing an audit, the auditor found that the client had changed the
estimated useful life of its assets. The auditor believed that the change in
useful lives of the assets is realistic. The appropriate report is:

A. Unqualified standard report.

B. Unqualified with explanatory language.
C. Qualified.
D. Disclaimer.

36. In which of the following circumstances would the auditor likely issue an
unqualified opinion?

A. Client company's financial statements show a significant net loss

for each of the last three years, including the current fiscal period.
B. The financial statements have not been prepared in accordance
with Philippine financial reporting standards.
C. The auditor is not independent during the fiscal period under audit.
D. The scope of the auditor's examination has been restricted due
to circumstances which are beyond the control of either the auditor or
the client.

37. Comparative financial statements include the prior-year statements that

were audited by a predecessor auditor whose report is not presented. If the
predecessor's report was unqualified, the successor should:

A. express an opinion on the current year statements alone and make

no reference to the prior year's statements.
B. Indicate in the auditor's report that the predecessor auditor
expressed an unqualified opinion.
C. Obtain a letter of representation from the predecessor concerning
any matters that might afect the successor's opinion.
D. Request that the predecessor auditor reissue the prior report.
38. The "unqualified report with explanatory paragraph" and the 'unqualified
report with modified wording'

A. arise as a result of an incomplete audit.

B. arise when the financial statements are not quite "presented fairly".
C. meet the criteria of a complete audit with satisfactory results.
D. meet the criteria of a complete audit but with unsatisfactory results.

39. Which of the following is not a cause of an explanatory paragraph or

modified wordings to be added to the standard unqualified report?

A. Emphasis of a matter.
B. Reports involving other auditors.
C. Auditor disagrees with client's departure from PFRS.
D. Lack of consistent application of PFRS.

40. When determining whether an exception is highly material, the extent to

which the exception afects diferent parts of the financial statements must
be considered. This is referred to as

A. materiality.
B. pervasiveness.
C. financial analysis.
D. ratio analysis.

41. In order to make materiality decisions when a condition requiring a

departure from an unqualified report exists, the auditor must evaluate

A. the magnitude of the error on the account involved.

B. the efect on the financial statement which contains the erroneous
account.
C. the efect of the error on both the income statement and the balance
sheet.
D. all efects on the financial statements.

42. In which of the following situations would an auditor ordinarily express

an unqualified audit opinion with an explanatory paragraph?

A. The auditor wishes to emphasize that the entity had significantly

lost a market share.
B. The auditor decides not to refer to the report of another auditor as
a basis, in part, for the auditor's opinion.
 C. The entity issues financial statements that present financial
position and results of operations, but omits the required notes to
financial statements.
D. At the client's request, the client's attorney has refused to
respond to the auditor's inquiries about ongoing litigation.

43. A report other than an unqualified report must be issued whenever any of
the three conditions requiring a departure from an unqualified report

A. exists
B. exists and is material
C. exists, is material, and is within management's control
D. exists, is material, and is within either management's or the auditor's
control

44.When a material uncertainty exists, the auditor must

A. disclose it in the audit report

B. first determine whether adequate disclosure is included by the
client in the financial statements
C. issue a disclaimer
D. issue a qualified opinion

45. Which of the following opinion is appropriate if a company has a probable

and material loss contingency, and the company has accrued the loss in the
financial statements?

A. Adverse opinion.
B. Qualified opinion.
C. Standard unqualified opinion.
D. Unqualified opinion with explanatory language.

46.Which of the following conditions most likely requires the auditor to

consider issuing a going concern modification?

A. A decrease in profitability as compared to the previous year.

B. A loss contingency related to a lawsuit.
C. Default on a loan agreement.
D. A material related-party transaction.
47. Which of the following, by itself, would not cause uncertainty about the
ability of a company to continue as a going concern?

A. A significant net loss.

B. inability to nay its obligations as they come due.
C. The occurrence of uninsured catastrophes.
D. Legal proceeding that might jeopardize the entity's ability to
continue operating.

48. JJ, CPA, has performed most of the audit of Macmood Company's financial
statement and qualifies as the principal auditor, RT, CPA did the remainder of
the work. JJ wishes to assume f responsibility for RT's work. Which of the
following correct?

A. In such circumstance, when appropriate requirements h been met, JJ

should issue a standard unqualified opinion on the financial
statements.
B. Such assumption of responsibility violates the profession's standards.
C. In such circumstance, when appropriate requirements have been
met, JJ should issue an unqualified opinion but should make
appropriate reference to RT in the audit report.
D. JJ should normally qualify his audit report on the basis of the scope
limitation as there is another auditor involved in the audit.

49. Which of the following is a change which does not afect consistency and
therefore does not require an explanatory paragraph?

A. Change in accounting principle, such as a change from LIFO to FIFO.

B. Change in reporting entity, such as the inclusion of an additional
company in combined financial statements.
C. Change in an accounting estimates, such as a decrease in the life of
an asset for depreciation purposes.
D. Correction of errors by changing from non-PFRS to PFRS.

50.If an auditor is not independent of a client, the auditor should issue a(n):

A. unqualified opinion with an explanatory paragraph describing the

lack of independence.
B. explanatory letter accompanying the financial statements.
C. disclaimer of opinion.
D. qualified opinion because of the lack of independence.
51.Whenever an auditor issues an adverse opinion, the implication is that the
auditor

A. does not know if the statements are presented fairly.

B. does not believe the statements are presented fairly.
C. is satisfied that the statements are presented fairly except for a
specific aspect within we financial statements.
D. is satisfied that the statements are presented fairly.

52. When a misstatement in the financial statements would afect a user's

decision but the overall statements are fairly stated, it would be appropriate
to issue a(n):

A. unqualified opinion.
B. qualified opinion.
C. adverse opinion.
D. disclaimer of opinion.

53. Which of the following is most accurate with respect to a CPA's

responsibility in considering a going concern question on financial statement
audits?

A. Based on audit procedures performed, assess whether there is

substantial doubt about the entity's ability to continue as a going
concern.
B. Perform analytical procedures aimed particularly at assessing
whether bankruptcy is probable.
C. Issue a report with a "going concern" modification when failure
is at least reasonably probable.
D. Determine that related uncertainties are properly disclosed and
make no mention in the audit report.

54.The distinction between an adverse opinion and a disclaimer is

A. the lack of PFRS versus lack of GAAS.

B. knowledge versus lack of knowledge.
C. the audit report versus the review report.
D. AASC statements versus the FRSC Standards.

55. The auditor's best course of action with respect to "other financial
information" included in an annual report containing the auditor's report is to
A. indicate hi die auditor's report, that the "other financial information"
is unaudited.
 B. Consider whether the "other financial information" is accurate uy
pert-waling a limited review.
C. Obtain written representations from management as to the
material accuracy of the 'other financial information.
D. Read and consider the manner of presentation of the "other
financial information."

56. A CPA is not able to confirm a large account receivable, but he has
satisfied himself as to the proper statement of the receivable by means of
alternative auditing procedures. The auditor's report on the financial
statements should include

A. A description of the limitation on the scope of his examination and

the alternative auditing procedures used, but an opinion qualification is
not required.
B. An opinion qualification, but reference to the use alternative
auditing procedures is not required.
C. Both a scope qualification and an opinion qualification.
D. Neither a comment on the use of alternative auditing procedures
nor an opinion qualification.

57. An auditor expressed a qualified opinion on a company's prior year

financial statements because of a material departure from PFRS in the prior
year. The company has properly restated last
of year's financial statements and presents them in comparative form with
the current year's financial statements. The auditor's updated report on the
prior year's financial statements should:

A. express an unqualified opinion on the restated financial statements

of the prior year.
B. continue to express a qualified opinion on the prior year's financial
statements.
C. include the auditor's qualified opinion from the prior year.
D. not mention the opinion on the prior year's financial statements.

58. An auditor would express an unqualified opinion with an explanatory

paragraph added to the audit report for:

An Unjustified Accounting Material Weakness in

The internal Control
A. YES YES
B. YES NO
C. NO YES
 D. NO NO

59. Which of the following statements appropriately distinguishes a

disclaimer of opinion from an adverse opinion?

A. A disclaimer of opinion indicates that the auditor is not able to

gather enough evidence to render an opinion on the financial
statements, while an adverse opinion indicates that the financial
statements are materially misstated.
B. A disclaimer of opinion indicates that the financial statements are
materially misstated, while an adverse opinion indicates that, the
auditor is not able to gather enough evidence to render an opinion on
the financial statements.
C. The opinions are generally equivalent, except on adverse opinion
includes a going concern paragraph.
D. Adverse opinion indicates that the financial statements are
materially misstated, while a disclaimer indicates that the financial
statement are "so pervasively erroneous" that no opinion can be given.

60. A departure from PFRS with a material efect on the financial

statements is most likely to result in a (n):

A. Disclaimer of opinion.
B. Qualified opinion.
C. Standard unqualified opinion.
D. Unqualified opinion with explanatory language.

61. When a CPA has concluded that an action should be taken to prevent
future reliance on his report, he should

A. Advise his client to make appropriate disclosure of the newly

discovered facts and their impact on the financial statements to
persons who are known to be currently relying or who are likely to rely
on the financial statements and the related report.
B. Recall the financial statements and issue revised statements and
include an appropriate opinion.
C. Advise the client and others not to rely on the financial statements
and make appropriate disclosure of the correction in the statements of
a subsequent period.
D. Recall the financial statements and issue a disclaimer of opinion
which should generally be followed by revised statements and a
qualified opinion.
62. In which circumstance would an auditor be most likely to express an
adverse opinion?

A. The chief executive officer refuses the auditor's access to minutes of

the board of directors' meetings.
B. Tests of controls show that the client's internal control is so
inefective that it cannot be relied upon.
C. The financial statements are not in conformity with the FRSC
Statements regarding the capitalization of leases.
D. Information comes to the auditor's attention than raises
substantial doubt about the client's ability to continue as a going
concern.

63. An auditor's report would be designated as a special report when it is

issued in connection with financial statements that are:

A. for an interim period and are subject to a limited review.

B. unaudited and are prepared from a client's accounting records.
C. prepared in accordance with a comprehensive basis of accounting
other than Philippine financial reporting standards.
D. purported to be in accordance with generally accepted accounting
principles but do not include a presentation of the Statement of Cash
Flows.

64. The opinion paragraph of a CPA's report states: "In our opinion, with the
exception of the efects of not observing inventory in one of the client's
Mactan warehouses, as discussed in the preceding paragraph, the financial
statements present fairly, in all material respects,..." This paragraph
expresses a (n)

A. unqualified opinion.
B. adverse opinion due to scope limitation
C. qualified opinion due to scope limitation.
D. opinion modified because of an uncertainty.

65. Which of the following subsequent events will be least likely to result to
an adjustment on the financial statements?

A. Culmination of events afecting the realization value of accounts

receivable owned as of the balance sheet date.
B. Culmination of events afecting the realization of inventories
owned as of the balance sheet date.
 C. Material changes in the settlement of liabilities which were
estimated as of the balance sheet date.
D. Material changes in the quoted market prices of listed investment
securities since the balance sheet date.

66. An auditor was unable to obtain sufficient competent evidential matter

concerning certain transactions because a fire burned down the client's
office building destroying all the company's records. Given these
circumstance, the auditor would choose between a (n)

A. qualified opinion and an unqualified opinion with an explanatory

paragraph.
B. unqualified opinion with an explanatory paragraph and an adverse
opinion.
C. adverse opinion and a disclaimer of opinion.
D. disclaimer of opinion and a qualified opinion.

67.The necessity to issue a disclaimer of opinion may arise because of

A. a severe limitation on the scope of the audit examination

B. a nonindependent relationship between auditor and client
C. either of the two choices
D. neither of the two choices

68. In his Letter to Stockholders in the annual report, the president of Better
Vision's states that this year was the most profitable year in the company‘s
history Actually the company did better, profit-wise, last year according to
the audited financial statements. What type of opinion should the auditor
issue?

A. An unqualified opinion with an emphasis of a matter paragraph

noting the inconsistency.
B. A disclaimer of opinion because the additional information
accompanying the financial statements wasn't audited.
C. An adverse opinion because the annual report does not present
fairly the financial condition of the company.
D. An "except for " qualification because the President's letter is not
part of the audited financial statements.

69.Both disclaimers and adverse opinions are used

A. only when the condition is highly material.

B. whether the condition is material or not.
 C. regardless of the auditor's independence.
D. regardless of client's choice of a non-PFRS accounting method.

70.Soon after Patricia's audit report was issued, Patricia learned of certain
related party transactions that occurred during the year under audit. These
transactions were not disclosed in the notes to the financial statements.
Patricia should

A. plan to audit the transactions during the next engagement.

B. recall all the copies of the audited financial statements.
C. determine whether the lack of disclosure would afect the auditor's
report.
D. ask the client to disclose the transactions in subsequent interim
statements.

71. When an auditor mentions consistency in the audit report, a reader of the
financial statements may infer

A. that PFRS have not been consistently observed in the current

period in relation to the preceding period.
B. that a material departure from PFRS has been detected.
C. that a reclassification of items or change in classifications has
occurred.
D. nothing about application of accounting principles within the period.

72. As a result of management's refusal to permit the auditor to physically

examine inventory, the auditor has not accumulated sufficient evidence to
conclude whether financial statements are stated in accordance with PFRS.
The auditor must depart from the unqualified audit report because

A. the financial statements have not been prepared in accordance with

PFRS.
B. the scope of the audit has been restricted by circumstances beyond
either the client's or auditor's control.
C. the auditor has lost independence.
D. the scope of the audit has been restricted.

73.A disclaimer of opinion is issued whenever the auditor

A. is unable to satisfy himself that the overall financial statements arc

presented fairly.
B. believes that the overall financial statements are not presented fairly.
C. believes that some material parts of the financial statements are not
presented fairly.
D. has determined that the financial statements are presented fairly.
74.Management of Blue Company has decided not to account for a material
transaction in accordance with the provisions of an FRSC standard. In setting
forth its reasons in a note to the financial statements, management has
clearly demonstrated that due to unusual circumstances had the financial
statements been presented in accordance with the PFRS, they would be
misleading. The auditor's report should include an explanatory separate
paragraph and contain a(an)

A. adverse opinion.
B. unqualified opinion.
C. "except for" qualified opinion.
D. "subject to" qualified opinion.

75.In the ―management discussion and analysis (MD&A)‖ contained in the

2008 annual report of Concorde Corporation, the management started that
the total sales were P4.95 billion and net profit was P500 million. The audited
sales and net profit, however, wereP3.8 billion and P450 million respectively.
The financial statements, contained in the annual report, reflected the
audited figures and the CPA planned to issue an unqualified opinion. Upon
noting the inconsistencies between the data in the annual report and the
audited financial statements, however, the CPA should

A. refer to the inconsistency in the audit report and issue a qualified

audit opinion.
B. issue an unqualified opinion without an explanatory paragraph,
because the MD&A is not covered in the audit report.
C. issue an unqualified audit opinion with an explanatory paragraph
describing the inconsistency.
D. render an adverse opinion on the basis that management had
intentionally misrepresented reported sales and net profit.

76.The adverse opinion report will be issued by the independent auditors when
they

A. suspect that the client has not followed Philippine financial

reporting standards.
B. suspect that the client's financial statements are not in conformity
with generally accepted auditing standards.
C. have knowledge that the financial statements are not in conformity
with Philippine financial reporting standards (PFRS).
D. have knowledge that generally accepted auditing standards (GAAS)
were not followed.
77. A post-audit review, conducted by another audit partner, revealed that
the audit team had failed to examine or confirm securities held in
safekeeping. The amounts involved were material in relation to reported net
assets. The unqualified audit report, along with the audited financial
statements, had been released two-months earlier. Based on this
information, the audit team should

A. request the client for permission to examine or confirm the securities.

B. notify persons known to be relying on the audit report that the
report can no longer be relied upon.
C. draft a revised audit report containing a qualified opinion due
to a scope restriction.
D. ignore the finding inasmuch as the financial statements and audit
report have already been released.

78.Which of the following statements is true?

A. The auditor is required to issue a disclaimer of opinion in the

event of a material uncertainty.
B. The auditor is required to issue a disclaimer of opinion in the event
of a going concern problem.
C. The auditor is required to issue a disclaimer of opinion for a
material uncertainty and for a going concern problem.
D. The auditor has the option, but is not required, to issue a disclaimer
of opinion for a material uncertainty or for a going concern problem.

79. The least severe type of report for disclosing departures from an
unqualified report is the

A. adverse opinion
B. qualified opinion
C. disclaimer of opinion
D. report on unaudited financial statements

80. Which of the following statements is correct with respect to explanatory

paragraphs in report on an audit of financial statements?

A. They always precede the opinion paragraph.

B. The always follow the opinion paragraph.
C. They always precede the scope paragraph.
 D. Sometimes they precede and sometimes they follow the opinion
paragraph.

81. Of the two major categories of scope restrictions, (1) those caused by
client and (2) those caused by conditions beyond the control of either the
client or auditor; the efect on the auditor's judgment is

A. the same for either.

B. more serious for i than for 2.
C. more serious for 2 than for 1.
D. negligible.

82.Whenever an auditor issues a qualified opinion, the implication is that the

auditor

A. does not know if the statements are presented fairly.

B. does not believe the statements are presented fairly.
C. is satisfied that the statements are presented fairly 'except for a
specific aspect of them.
D. is satisfied that the statements are presented fairly.

83. Whenever an auditor issues a disclaimer of opinion, the implication is

that the auditor

A. does not know if the statements are presented fairly.

B. does not believe the statements are presented fairly.
C. is satisfied that the statements are presented fairly exc ot for a
specific aspect of them.
D. is satisfied that the statements are presented fairly.

84. Which of the following best describes the auditor's responsibility for
"other information" that is, together with the audited financial statements
and the auditor's report, included in the annual report to stockholders?

A. The auditor has rio obligation to read the "other information."

B. The auditor has no obligation to corroborate the "other information,"
but should read the "other information" to determine whether it is
materially inconsistent with the financial statements.
C. The auditor should extend the examination to the extent necessary
to verify the "other information."
D. The auditor must modify the auditor's report to state that the 'Other
infoz- mation is unaudited" or "not covered by the auditor's report."
85. If the inventory comprises the largest balance on the financial
statements, a large misstatement that is so material would cause the
auditor to issue a(n):

A. unqualified opinion.
B. adverse opinion.
C. qualified opinion.
D, disclaimer of opinion.

86.When a known or suspected misstatement with highest level of

materiality exists on the financial statements, the auditor must issue

A. an adverse opinion.
B. a disclaimer of opinion.
C. either a qualified opinion or an adverse opinion, depending on which
condition exist.
D. either an adverse opinion or a disclaimer of opinion, depending
on which conditions exist.

87 When a disclaimer of opinion is issued because the auditor lacks

independence,

A. no report title is included in the report.

B. a one-paragraph audit report is issued.
C. the only reason cited for issuing the disclaimer of opinion is the
lack of independence.
D. all of the choices are required.

88. Under which of the following circumstances would an unqualified

audit opinion, followed by an explanatory paragraph, not be appropriate?

A. The auditor wishes to emphasize that the client has entered into
material transactions with related parties. The substance of the related
party transactions is properly disclosed in the audited financial
statements.
B. The client has completed material transactions with related parties
and the auditor is unable to persuade management to properly reflect
the economic substance of the transactions in the financial
statements.
C. The client has used a method of revenue recognition that is at
variance with promulgated accounting standards. The auditor,
however, agrees with the departure on the basis that the use of the
promulgated standard would make the financial statements materially
misleading.
 D. The auditor believes that substantial doubt exists concerning the
ability of the client to continue as a going concern.

89. If the auditor is determined to lack independence, a disclaimer of opinion

must be issued

A. in all cases.
B. Only if it is highly material.
C. Only if it is material.
D. If the client requests it.

90.Any deviation from the independence rule is considered

A. immaterial.
B. Slightly material.
C. Material.
D. Highly material.

91. When comparing misstatements with a measurement base, the auditor

must consider the pervasiveness of the misstatement. An example of a
pervasive misstatement would be

A. an understatement of inventory, caused by an oversight.

B. an understatement of retained earnings, caused by a
miscalculation of dividends payable.
C. a misclassification of notes payable as a long-term liability when it
should be current.
D. a misclassification of salary expense as a selling expense when it
should be allocated equally to both selling and administrative expense.

92. Kim, an independent auditor, was engaged to perform an examination of

the financial statements of Sue Incorporated one month after its fiscal year
had ended. Although the count was not observed by Kim, and accounts
receivablein:ternet riot inventory confirmed by direct communication with
debtors, Kim was able to gain satisfaction by applying alternative auditing
procedures. Kim's auditor's report will probably contain

A. a standard unqualified opinion.

B. an unqualified opinion and an explanatory middle paragraph.
C. either a qualified opinion or a disclaimer of opinion.
 D. an "except for" qualification.

93. The peso amount of some e misstatements cannot 9 measured. If, for
example, the client is unwilling existing lawsuit, the materiality question that
the evaluate in such a situation is

A. what efect will it have on net income.

B. how will it afect management's future decisions.
C. does it increase the auditor's exposure to lawsuits.
D. what efect will it have on statement users.

94.Whenever there is a scope restriction, the appropriate response

is to issue be accurately to disclose an auditor must

A. a disclaimer of opinion.
B. an adverse opinion.
C. a qualified opinion.
D. an unqualified report, a qualification of scope and opinion, or a
disclaimer, depending on materiality.

95. The adverse efects of events causing an auditor to believe there is

substantial doubt about an entity's ability to continue as a going concern
would most likely be mitigated by evidence relating to the

A. ability to expand operations into new product lines in the future.

B. feasibility of plans to purchase leased equipment at less than market
value.
C. marketability of assets that management plans to sell.
D. committed arrangements to convert preferred stock to long-term debt.

96. After an audit report containing an unqualified opinion on a non-public

client's financial statements was issued, the client decided to sell the shares
of a subsidiary that accounts for 30% of its revenue and 25% of its net
income. The auditor should

A. determine whether the information is determined to be reliable,

request that statements be issued.
B. notify the entity that the auditor's report associated with the
financial statements.
reliable and, if revised financial may no longer be
 C. describe the efects of this subsequently discovered information
in a communication with persons knovyn to be relying on the financial
statements.
D. take no action because the auditor has no obligation to make
any further inquiries.

97. A client company has changed its method of inventory, valuation from
an unacceptable one to one in conformity with Philippine financial reporting
standards. The auditor's report on the financial statements in the year of the
change should include

A. no reference to consistency.
B. a reference to a prior period adjustment in the opinion paragraph.
C. an explanatory paragraph explaining the change.
D. a justification for making the change and the impact of the change
on reported net income.

98. The client has presented all the required financial statements with the
exception of the statement of cash flows. The auditor has completed the
audit and is satisfied that everything, with the exception of the missing
statement, is presented fairly. Accordingly, the auditor

A. must issue a qualified opinion.

B. must issue an adverse opinion.
C. may issue an unqualified opinion.
D. may issue either an unqualified or qualified opinion.

99. An audit report contained the following wording: "In our opinion, except
for the omission of the segment information referred to in the preceding
paragraph…‖ The excerpt was taken from a(n)

A. Unqualified audit opinion with an explanatory paragraph added to

emphasize a matter.
B. Unqualified audit opinion with an explanatory paragraphto describe
a material uncertainty.
C. Audit opinion qualified due to a departure from PFRS
D. Adverse audit opinion

100.For the report containing a disclaimer for lack of independence, the

disclaimer is in the

A. fourth or opinion paragraph.

 B. Scope -responsibility of the auditor paragraph.
C. first and only paragraph.
D. explanatory paragraph.

101.Should a situation arise where all audit procedures considered "

necessary in the circumstances were performed and the auditor would
otherwise issue an unqualified report, and then it was discovered that the
auditor has not fulfilled the independence requirements specified by the
Code of Ethics, the audit report issued

A. may still be the unqualified opinion.

B. must be a disclaimer of opinion.
C. may be either an unqualified or disclaimer of opinion.
D. must be an adverse opinion.

102. An auditor's examination reveals a misstatement in segment

information that is material in relation to the financial statements taken as a
whole. If the client refuses to make modifications to the presentation of
segment information, the auditor should issue a (n)

A. "Except for" opinion.

B. Adverse opinion.
C. Unqualified opinion.
D. Disclaimer of opinion.

103.In a qualified, adverse, or disclaimer report, the auditor

A. has not per a satisfactory audit.

B. is not satisfied that the financial statements are
presented fairly.
C. either of the two responses.
D. none of the two responses.

104. When there is a significant change in accounting principle, an auditor‘s

report should refer to the lack of consistency in

A. the scope paragraph.

B. an explanatory paragraph between the second paragraph and
the opinion paragraph.
C. the opinion paragraph.
D. an explanatory paragraph following the opinion paragraph.
105.If client has been inconsistent in applying PFRS from year one to year
two and the auditor does not concur with the appropriateness of the change,
the auditor will issue a (n)

A. disclaimer.
B. qualified opinion.
C. adverse opinion.
D. unqualified opinion.

106. When a principal auditor decides to make reference to another auditor's

examination, the principal auditor's report should always indicate clearly, in
the introductory, scope, and opinion paragraphs, the

A. Magnitude of the portion of the financial statements examined by

the other auditor.
B. Disclaimer of responsibility concerning the portion of the financial
statements examined by the other auditor.
C. Name of the other auditor.
D. Division of responsibility.

107. Which of the following requires recognition in the auditor's opinion as to

consistency?

A. The correction of an error in the prior year's financial statements

resulting from a mathematical mistake in capitalizing interest.
B. The change from the cost method to the equity method in
accounting for investment in common stock.
C. A change in the estimate of provisions for warranty costs.
D. A change in depreciation method which has no efect on current
year's financial statements but is certain to afect future years.

108. Items that materially afect the comparability of financial statements

generally require disclosure in the footnotes. If the client refuses to properly
disclose the item, the auditor may require to issue

A. the disclaimer.
B. a qualified opinion.
C. an unqualified opinion.
D. an adverse opinion.
109.A statement in a report such as "Nothing came to our attention that
would lead us to question the fairness of the presentations" is referred to as

A. the unqualified opinion.

B. a disclaimer of opinion.
C. negative assurance.
D. positive assurance.

110.An auditor may issue the standard audit report when the

A. auditor refers to the findings of an expert.

B. financial statements are derived and condensed from complete
audited financial statements that are filed with a regulatory agency.
C. financial statements are prepared on the cash receipts and
disbursements basis of accounting.
D. principal auditor assumes responsibility for the work of another
auditor.

111. Several types of "special audit reports" are issued by CPAs. Which
one of the following circumstances would not require the issuance of such a
special report?

A. Client's financial statements are prepared using the cash basis.

B. Client's financial statements are prepared using the accrual basis.
C. The CPA has been retained to audit only the current assets.
D. The CPA has been retained to review the internal control
system, not the financial statements.

112.In which of the following situation would an auditor ordinarily, issue an

unqualified audit opinion without an explanatory paragraph?

A. The auditor wishes to emphasize that the entity had significant

related party transactions.
B. The auditor decides to make reference to the report of another
auditor as a basis, in part, for the auditor's opinion.
C. The entity issues financial statements that present financial
position, the results of operations, and the changes in stockholders'
equity but intentionally omits the statement of cash flows.
D. The auditor has substantial doubt about the entity's ability to
continue as a going concern, but the circumstances are fully disclosed
in the financial statements.
113.Comparative financial statements include the financial statements of the
prior year that were audited by a predecessor auditor whose report is not
presented. If the predecessor's report was qualified, the successor should

A. indicate the substantive reasons for the qualification in the

predecessor auditor's opinion.
B. request the client to reissue the predecessor's report on the prior
year's statements.
C. issue an updated comparative audit report indicating the
division of responsibility.
D. express an opinion only on the current year's statements and make
no reference to the prior year's statements.

114. Which of the following events occurring after the issuance of an

auditor's report most likely would cause die auditor to make further inquiries
about the previously issued financial statements?

A. A technological development that could afect the entity's future

ability to continue as a going concern.
B. The discovery of information regarding a contingency that existed
before the financial statements were issued.
C. The entity's sale of a subsidiary that accounts for 30 per cent of
the entity's consolidated sales.
D. The final resolution of a lawsuit that was fully explained in a footnote.

115 A principal auditor decides not to refer to the audit by another CPA who
audited a subsidiary of the principal auditor's client. After making inquiries
about the other CPA's professional reputation and independence, the
principal auditor most likely would

A. add an explanatory paragraph to the auditor's report indicating that

the subsidiary's financial statements are not material to the
consolidated financial statements.
B. document in the engagement letter that the principal auditor
assumes no responsibility for the other CPA's work and opinion.
C. obtain written permission from the other CPA to omit the reference
in the principal auditor's report.
D. contact the other CPA and review the audit programs and working
papers pertaining to the subsidiary.
116.The Fragile Company's financial statements contained a departure from
Philippine financial reporting standards because, due to unusual
circumstances, the statements would have otherwise been misleading. The
auditor should express an opinion that is

A. unqualified but not mention the departure in the auditor's report.

B. unqualified and describe the departure in a separate paragraph.
C. qualified and describe the departure in a separate paragraph.
D. qualified or adverse, depending on materiality, and describe the
departure in a separate paragraph.

117. When a predecessor auditor reissues the report on the prior period's
financial statements at the request of the former client, the predecessor
auditor should

A. indicate ill tile introductory paragraph of the reissued report that the
financial statements of the subsequent period were audited by another
CPA.
B. obtain an updated management representation letter and compare
it to that obtained during the prioi period audit.
C. add an explanatory paragraph to the reissued report stating that
the predecessor has not performed additional auditing procedures
concerning the prior period's financial statements.
D. Review the current year's financial statements for reasonableness.

118. Miller Company uses the first-in, first-out method of costing for its
international subsidiary's inventory and the last-in, first-out method of
costing for its domestic inventory. Under these circumstances, Miller should
issue an auditor's report with an

A. "except for" qualified opinion.

B. unmodified opinion.
C. explanatory paragraph as to consistency.
D. opinion modified as to consistency.

119. When the audited financial statements are presented in a client's

document containing other information, the auditor should

A. perform inquiry and analytical procedures to ascertain whether the

other information is reasonable.
B. add an explanatory paragraph to the auditor's report without
changing the opinion on the financial statements.
C. perform the appropriate substantive auditing procedures to
corroborate the other information.
 D. read the other information to determine that it is consistent with
the audited financial statements.

120. When an auditor qualifies an opinion because of inadequate

disclosure, the auditor should describe. the nature of the omission in a
separate explanatory paragraph and • modify the respective paragraphs

Introductory Scope Opinio

n
A. YES NO NO
B. YES YES NO
C. NO YES YES
D. NO NO YES

121.If an accounting change has no material efect on the financial

statements in the current year but the change is reasonably certain to have
a material efect in later years, the change should be

A. treated as a consistency modification in the auditor's report for

the current year.
B. disclosed in the notes to the financial statements of the current year.
C. disclosed in the notes to the financial statements and referred to in
the auditor's report for the current year.
D. treated as a subsequent event.

122. When comparative financial statements are presented, the fourth

reporting standard, which refers to financial statements "taken as a whole",
should be considered to apply to the financial statements of the

A. periods presented plus one preceding period.

B. current period only.
C. current period and those of the other periods presented.
D. current and immediately preceding period only.

123. An auditor's report includes a statement that "the financial statements

do not present fairly the financial position in conformity with Philippine
financial reporting standards." This auditor's report was probably issued in
connection with financial statements that were

A. prepared on a comprehensive basis for accounting other than PFRS.

B. restricted for use by management.
 C. misleading.
D. condensed.

124.In relation to the "The Auditor's Consideration of an Entity's Ability to

Continue as a Going Concern", an independent auditor is responsible to

A. predict whether the entity will be in business one year from the
balance sheet date.
B. evaluate whether there is substantial doubt about the entity's
;ability to continue as a going concern.
C. weigh mitigating factors against contrary information about the
entity's ability to continue as a going concern.
D. report the entity's ability to continue as a going concern to senior
management and to the board of directors.

125. An auditor is unable to determine the amounts associated with illegal

acts committed by a client. The auditor would most likely issue

A. either a qualified opinion or a disclaimer of opinion.

B. an adverse opinion.
C. either a qualified opinion or an adverse opinion.
D. a disclaimer of opinion.
MODULE 5

AUDIT PLANNING

PSA-BASED QUESTIONS

1. Given that an audit in accordance with generally accepted auditing

standards is influenced by the possibility of materials errors and fraud,
the auditor should conduct the audit with an attitude of

a. Professional responsiveness
b. Conservative advocacy
c. Objective judgment
d. Professional skepticism

2. With respect to errors and fraud, which of the following should be a

part of an auditor‘s planning in an audit engagement?

a. Planning to search for error or fraud that would have a material or

immaterial efect on the financial statements
b. Planning to discover errors or fraud that are either material or
immaterial
 c. Planning to discover errors or fraud that are material
d. Planning to consider factor afecting the risk of material
misstatements both at the financial statement and the account
balance level

3. The risk that the auditor may unknowingly fail to appropriately modify
the unqualified opinion on financial statements that are materially
misstated is referred to as

a. Audit risk
b. Detection risk
c. Information risk
d. Business risk

4. The risk the financial statements are likely to be misstated materially

without regard to the efectiveness of internal control is which type of
risk?

a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
5. The type of transactions that ordinarily have a high inherent risk
because they involve management judgment or assumptions are
referred to as

a. Estimation transactions
b. Nonroutine transactions
c. Routine transactions
d. Related-party transactions

6. Inherent risk is defined as the susceptibility of an accountant balance

or class of transactions to error that could be material assuming that
there were no related internal controls. Of the following conditions,
which one does not increase inherent risk?

a. The client has entered into numerous related party transactions

during the year under audit.
b. Internal control over shipping, billing, and recording of sales revenue
is weak
c. The client has lost a major customer accounting for approximately
30% of annual revenue
d. The board of directors approved a substantial bonus for the
president and chief executive officer, and also approved an
attractive stock option plan for themselves

7. Which of the following descriptions best describes inherent risk?

a. Auditors fail to discover a material misstatement in the course of

their audit and do not modify their audit opinion.
b. A company‘s internal control fails to identify a material
misstatement on a timely fashion
c. Auditing procedures fail to find a material misstatement
d. The possibility that a material misstatement will occur in any
given account before considering internal control

8. The risk that a material misstatement in an assertion will not be

prevented or detected on a timely basis by internal control is

a. Detection risk
b. Control risk
c. Inherent risk
d. Audit risk
9. The risk that the audit will fail to uncover a material misstatement is
eliminated

a. If a client has a strong internal controls

b. If a client follows generally accepted accounting principles (GAAP)
c. When the auditor has complied with the generally accepted
auditing standards (GAAS)
d. Under no circumstances

10. Audit risk components consist of inherent, control and detection

risks. Which of them is (are) the dependent variable(s)?

a. Inherent risk
b. Control risk
c. Detection risk
d. Inherent and control risks

11. The probability that an auditor‘s procedures leading to the

conclusion that a material error does not exist in an account balance
when, in fact, such error does exist is referred to as

a. Prevention risk
b. Inherent risk
c. Control risk
d. Detection risk

12. Which of the following is the best definition of detection risk?

a. The auditor will compute audit materiality incorrectly

b. The auditor will fail to detect material misstatements that exist
c. The auditor will apply more audit procedures than are required in
the circumstances
d. The auditor will fail to modify the audit opinion on financial
statement that are materially misstated.

13. Which of the following is not a component of audit risk?

a. Detection risk
b. Business risk
c. Control risk
d. Inherent risk
14. Which of the following types of risk is significantly afected by the
nature, amount and timing of substantive auditing procedures?

a. Inherent risk
b. Control risk
c. Detection risk
d. Sufficiency risk

15. The understanding between the client and the auditor as to the
degree of responsibilities to be assumed by each is normally set forth
in a(an)

a. Representation letter
b. Engagement letter
c. Management letter
d. Comfort letter

16. After an auditor had been engaged to perform the first auditor for
a non-public entity, the client requested to change the engagement to
a review.in which of the following situations would there be a
reasonable basis for the auditor to comply with the client‘s request?

a. the client‘s bank required an audit before committing to a loans,

but the client subsequently acquired alternative financing
b. the auditor is prohibited by the client from corresponding with the
client‘s legal counsel
c. management refuses to sign the client representation letter
d. the audit is substantially complete and the auditor determined that
an unqualified opinion is warranted but there is a disagreement
concerning the audit fee

17. Which of the following statements is correct with respect to

obtaining an understanding with a client?

a. Auditors are not required to obtain an understanding with their

clients.
b. Auditors must obtain an understanding only if an audit is to be
conducted
c. Auditors must document their understanding of the engagement
d. Auditors must obtain an engagement letter

18. An engagement letter is best described as:

 a. A letter from company management to the auditors specifying
management‘s expectations for completion of the audit on a timely
basis and the fees
b. A letter from the auditors to company management specifying that
management is responsible for the financial statements and the
auditors will issue an opinion on the financial statement.
c. A letter from the auditors to company management that specifies
the responsibilities of both the company and the auditors in
completing the audit and the timing for its completion
d. A letter from the Board of Directors audit committee to the auditor
that indicates that the auditor has been engaged to perform the
audit and the fees to be paid.

19. The primary reason why an engagement letter is submitted by

audit fism prior to starting the work is that it

a. Clarifies the responsibilities of the management and those of the

audit firm
b. Defines the firm‘s policies and procedures regarding new clients
c. Provides an insurance policy for both the firm and its client
d. Communicated the type of opinion that will be rendered on the
engagement

20. Which of the following best describes the purpose of an engagement

letter?

a. The engagement letter relieves the auditor of some responsibility

for the exercise of due care
b. By clearly defining the nature of the engagement, the engagement
letter helps avoid and resolve misunderstandings between the CPA
and the client regarding the precise nature of the work to be
performed and the type of report to be issued
c. The engagement letter conveys to the management the detailed
steps to be applied in the audit process
d. The engagement letter should be signed by both the client and the
CPA and should be used only for independent audits

21. Which of the following is not included in an audit engagement letter?

a. Objectives of the engagement

b. Representations that the financial statements were prepared in
accordance with PFRS
c. Management responsibilities
d. A clear explanation of the services to be performed on the
engagement
22. Which of the following statement would least likely appear in an
auditor‘s engagement letter?

a. The fees for our serviced are based on our regular per diem rates,
plus travel and other out-of-pocket expenses
b. During the course of our audit, we may observe opportunities for
economy in, or improved controls over, your operations
c. Our engagement is subject to the risk that material errors, fraud,
and defalcations, if they exist, will not be detected
d. After performing our preliminary analytical procedures we will
discuss with you the other procedures we consider necessary to
complete the engagement

23. Which of the following is not done during the client selection and
retention phase of planning?

a. Obtain an understanding of internal controls

b. Obtain and review financial information
c. Consider the need for special skills
d. Ensure that the firm has sufficient resources to complete the
engagement on a timely manner

24. Professional skepticism

a. Neither assumes that the management is dishonest nor of

unquestioned honesty
b. Assumes that management is either dishonest or of unquestioned
honesty
c. Either assumed that management is hones or dishonest
d. None of the given choices is a correct statement
25. Which of the following is not required by PSA No.315,
―consideration of fraud in a financial statement audit‖?
a. Conduct a continuing assessment of the risks of material
misstatement due fraud throughout the audit
b. Conduct a discussion by the audit team of the risks of material
misstatement dues to fraud
c. Conduct the audit with professional skepticism, which includes an
attitude that assumes balances are incorrect until verified by the
auditor
d. Conduct inquiries of the audit committee as to their views about
the risks of fraud and their knowledge of any fraud or suspected
fraud
26. The primary diference between financial statement errors and fraud
is that

a. Errors are intentional misstatement by management, while fraud

involves unintentional mistakes or omissions, while fraud involves
intentional misstatements
b. There is no diference as error and fraud have the same meaning
c. Errors are more likely to provide an indication that an illegal act may
have occurred

27. The risk of fraudulent financial reporting increases in the presences

of

a. Incentive systems based on operating income

b. Improved control systems
c. Substantial increases in sales
d. Frequent changes in suppliers

28. Which of the following is least likely included in an auditor‘s inquiry

of management while obtaining information to identify the risks of
material misstatement due to fraud?

a. Are financial reporting operations controlled by and limited to one

location
b. Does it have knowledge of fraud or suspect or fraud
c. Does it have programs to mitigate fraud risks
d. Has it reported to the audit committee the nature of the
company‘s internal control

29. Which of the following should the auditors normally interview as

part of their assessment of fraud risk?

a. Senior management
b. Audit committee
c. Various employees whose duties do not include normal financial
reporting responsibilities
d. All of the given choices

30. Which of the following characteristics most likely would heighten

an auditor‘s concern about the risk of intentional manipulation of
financial statements?

a. Turnover of senior accounting personnel is low

b. Insiders recently purchase additional shares of the entity‘s stock
 c. Management places substantial emphasis on meeting earning
projections
d. The rate of change in the entity‘s industry is low

31. When planning the audit, if the auditor has no reason to

believe that noncompliance to laws and regulations exist, he should

a. Make inquiries of management regarding their policies and their

knowledge of violations, and then rely on normal audit procedures
to detect error, irregularities, and illegalities
b. Still include some audit procedures designed specifically to uncover
illegal acts
c. Ignore the possibility of illegal acts to occur
d. Include audit procedures which have a strong probability of
detecting illegal acts

32. An audit plan is a

a. Detailed plan of analytical procedures and all substantive tests to

be performed in the course of the audit
b. Document that provides an overview of the company and a general
plan for the audit work to be accomplished, timing of the work, and
other matters of concern to the audit
c. Generic document that auditing firms have developed to lead the
process of the audit through a systematic and logical process
d. Budge of the time that should be necessary to complete each phase
of the audit procedures

33. What will an auditor who has been proposed for an audit
engagement usually do prior to accepting a new client?

a. Draft the financial statement of the client as a measure of goodwill

b. With the permission from the prospective client, contact the
predecessor auditor to determine if there are any disagreements
between the client and the audit firms
c. Obtain the potential client‘s permission to talk to the former auditor
and review work papers
d. Perform a peer review on the potential client in accordance with
professional standards
34. Philippine Standards on Auditing reacquire auditors to assess the
risk of material misstatements due to fraud

a. For every audit

b. For first-time audits
c. Sufficient to find any frauds which may exist
d. Whenever it would be appropriate

35. If, when performing analytical procedures, an auditor observes that

operating income has declined significantly between the preceding
year and current year, the auditor should next

a. Require that the decline be disclosed in the financial statements

b. Consider the possibility that the financial statements may be
materially misstated
c. Inform management that a qualified opinion on the financial
statement will be necessary
d. Determine managements responsibility for the decline and discuss
the issue with the audit committee

36. Which of the following statements best describes materiality?

a. Materiality is typically measures as a fixed percentage of assets

b. Materiality is typically measure as a fixed percentage of net income
c. Materiality does not depend on the company being audited but is
solely dependent on the auditor‘s discretion
d. Materiality provides a cutof point at which judgment, based on
the financial statements, may be altered

37. If the auditor sets the preliminary judgment about materiality level
at a relatively low peso amount

a. More evidence will be required that for a high level

b. Less evidence will be required that for a high level
c. The same amount of evidence will be required as for a high level
d. The amount of evidence required will not be afected

38. Which of the following statement is true with regard to the

relationship among audit risk, audit evidence, and materiality?
 a. The lower the inherent risk and control risk, the lower the
aggregated materiality threshold
b. Under conditions of high inherent and control risk, the auditor
should place more emphasis on obtaining external evidence and
should reduce reliance on internal evidence
c. Where inherent risk is high and control risk is low, the auditor may
safely ignore inherent risk
d. Aggregated materiality thresholds should not change under
conditions of changing risk levels

39. Which of the following is most likely to be an overall response to

fraud risks identifies in an audit?

a. Supervise members of the audit team less closely and rely more
upon judgment
b. Use less predictable audit procedures
c. Use only certified public accountants on the engagement
d. Place increased emphasis on the audit of objective transactions
rather than subjective transactions

40. When must an auditor perform analytical review procedures in a

financial statement audit?

a. Testing controls over financial cycles

b. Performing tests of substantiate balances
c. Planning the nature, timing and extent of procedures
d. Performing tests to substantiate transactions

41. The purpose of analytical procedures during the audit planning stage
is to

a. Aid in planning the observation of physical inventory

b. Identify unusual circumstances that the auditor may need to
investigate further
c. Flag individual transactions for further review
d. Determine whether scales transactions are approved

42. Which of the following represents a procedure that the auditor may
use because plausible relationships among financial statement
balances are expected to exist?
 a. Attributes testing
b. Enterprise risks assessment
c. Inherent tests of control
d. Analytical review

43. The main purpose of risk assessment procedures is to

a. Obtain an understanding of the entity and its environment,

including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels
b. Test the operating efectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertions
level
c. Detect material misstatement at the assertion level

44. Which of the following statements is

incorrect regarding obtaining an understanding of the entity and
its environment?

a. Obtaining an understanding of the entity and its environment is an

essential aspect of performing an audit in accordance with PSAs
b. Understanding of the entity and its environment establishes a frame
of reference within which the auditor plans the audit and exercises
professional judgment about assessing risks of material
misstatement in the financial statement and responding to those
risks throughout the audit
c. The auditor‘s primary consideration is whether the understanding
that has been obtained is sufficient to assess the risks of material
misstatement in the financial statements and to design and perform
further an audit procedures
d. The depth of the overall understanding that is required by the
auditor in performing the audit is at least equal to that possessed by
management in managing the entity

45. Which statement is incorrect regarding analytical procedures?

a. Analytical procedures may be helpful in identifying the existence of

unusual transactions or events, and amounts, ratios, and trends that
might indicate matters that have financial statement and audit
implications
b. In performing analytical procedures as risk assessment procedures,
the auditor develops expectations about plausible relationships that
are reasonably expected to exist
c. When comparison of those expectation with recorded amounts or
ratios developed from recorded amounts yields unusual or
unexpected
 relationships, the auditor considers those results in identifying risks
of material misstatement
d. When such analytical procedures use data aggregated at a high
level (which is often the situation), the result of those analytical
procedures provide a clear-cut indication about whether a material
misstatement may exist

46. Which statement is correct regarding business risk?

a. The risk of material misstatements in the financial statements is

broader than business risk, through it includes the latter
b. The auditor should identify or assess all business risks
c. All business risks give risk to risks of material misstatement
d. A business risk may have an immediate consequence of the risks of
misstatement for classes of transactions, account balances, and
disclosures at the assertion level or the financial statements as a
whole

47. Inquiries directed towards those charged with governance may most
likely

a. Related to their activities concerning the design and efectiveness

of the entity‘s internal control and whether management has
satisfactorily responded to any finding from these activities
b. Help the auditor understand the environment in which the financial
statements are prepared
c. Relate to changes in the entity‘s marketing strategies, sales trends,
or contractual arrangement with its customers
d. Help the auditor in evaluating the appropriateness of the selection
and application of certain accounting policies

48. Which statement is incorrect regarding significant risks that

require special audit consideration?

a. The auditor should determine which of the identified risks are, in the
auditor‘s judgment, require special audit consideration
b. The auditor excludes the efect of identified controls related to the
risks to determine whether the nature of the risk, the likely
magnitude of the potential misstatement including the possibility
that the risk may give risk to multiple misstatements, and the
likelihood of the risk occurring are such that they require special
audit consideration
 c. Routing, non-complex transactions that are subject to systematic
processing are more likely to give rise to significant risks because
they have higher inherent risks
d. Significant risks are often derived from business risks that may
result in a material misstatement

49. The assessment of the risks of material misstatement at the

financial statement level is afected by the auditor‘s understanding of
the control environment.
Weaknesses in the control environment ordinarily will lead the auditor to

a. Have more confidence in internal control and the reliability of

audit evidence generated internally within the entity
b. Conduct some audit procedures at an interim date rather than at
period end
c. Modify the nature of audit procedures to obtain more persuasive
audit evidence
d. Decrease the number of locations to be included in the audit scope

50. The auditor should determine overall responses to address the

risks of material misstatement at the financial statement level. Such
responses least likely include

a. Emphasizing to the audit team the need to maintain professional

skepticism in gathering and evaluating audit evidence
b. Assigning more experienced staf or those with special skills or using
experts
c. Incorporating additional elements of unpredictability in the
selection of further audit procedures to be performed
d. Performing substantive procedures at an interim date instead of at
period end

51. Which statement is incorrect regarding the nature of further audit

procedures?

a. The nature of further audit procedures refers to their purpose and

their type
b. Certain audit procedures may be more appropriate for some
assertions then others
c. The higher the auditor‘s assessment of risk, the less reliable and
relevant is the audit evidence sought by the auditor from
substantive procedures
d. The auditor is required to obtain audit evidence about the accuracy
and completeness of information produced by the entity‘s
 information system when that information is used in performing
audit procedures

52. Which statement is incorrect regarding the extent of further audit

procedures?
 a. Extent included the quantity of a specific audit procedures to be
performed
b. The extent of an audit procedure is determined by the judgment of
the auditor after considering the materiality, the assessed risk, and
the degree of assurance the auditor plans to obtain
c. The auditor ordinarily decreases the extent of audit procedures as
the risk of material misstatement increases
d. Increasing the extent of an audit procedure is efective only if the
audit procedure itself is relevant to the specific risk

53. The auditor should design and perform further audit procedures
whose nature, timing and extent are responsive to the assessed risks
of material misstatement at the assertion level. Which of the following
is the most important consideration in responding to the assessed
risk?

a. The nature of the audit procedures

b. The timing of the audit procedures
c. The extent of the audit procedures
d. All of these are equally important

54. While assessing the risk of material misstatement, the auditor

identify risks, relate risk to what could go wrong, consider the
magnitude of risks and:

a. Assess the risk of misstatements due to noncompliance to laws

and regulations
b. Consider the complexity of the transactions involved
c. Consider the likelihood that the risks could result in material
misstatements
d. Determine the materiality level

55. Which of the following would heighten an auditor‘s concern about

the risk of fraudulent financial reporting?

a. Inability to generate positive cash flows from operations while

reporting large increases in earning
b. Management‘s lack of interest in increasing the dividend paid on
common stock
c. Large amount of liquid assets that are easily convertible into cash
d. Inability to borrow necessary capital without obtaining waivers on
debt covenants
56. Which of the following is least likely considered a financial
statement audit risk factor?

a. Management operating and financing decisions are dominated by

top management
b. A new client with no prior audit history
c. Rate of change in the entity‘s industry is rapid
d. Profitability of the entity relative to its industry is inconsistent

57. Which of the following is most likely to be considered a risk

factor relating to fraudulent financial reporting?

a. Low turnover of senior management

b. Extreme degree of competition within the industry
c. Capital structure including various operating subsidiaries
d. Sales goals in excess of any of the preceding three years

58. Which of the following is correct concerning requirement about

auditor‘s communications about fraud?

a. Fraud that involves senior management should be reported directly

to the audit committee regardless of the amounts involved
b. All fraud with a material efect on the financial statements should be
reported directly by the auditor to the Securities and Exchange
Commission
c. Fraud with a material efect on the financial statement should
ordinarily be disclosed by the auditor through the use of an
emphasis of a matter paragraph added to the audit report
d. The auditor has no responsibility to disclose fraud outside the
entity under any circumstances

59. Which of the following factors most likely would heighten an

auditor‘s concern about the risk of fraudulent financial reporting?

a. Large amounts of liquid assets that are easily convertible into cash
b. Low growth and profitability as compared to other entity‘s in the same
industry
c. Financial management‘s participation in the initial selection of
accounting principles
d. An overly complex organizational structure involving unusual lines of
authority
60. Which of the following is most likely to be an overall response
to fraud risks identified in an audit?

a. Only use certified public accountants on the engagement

b. Place increased emphasis on the audit of objective transactions
rather than subjective transactions
c. Supervise members of the audit team less closely and rely more
upon judgment
d. Use less predictable audit procedures
QUIZZERS

1. As part of audit planning, CPAs should design audit programs for each
individual audit and should include audit steps and procedures to

a. Detect and eliminate fraud

b. Increase the amount of management information available
c. Provide assurance that the objectives of the audit are met
d. Ensure that only material items are audited

2. Preplanning the audit involves several key activities. Which of the

following would not be included in preplanning an audit?

a. Investigating the client‘s background

b. Determining the likelihood of issuing an unqualified audit opinion on
the client‘s financial statements
c. Communicating with the prospective client‘s prior auditor to inquire
about any disagreements with the client
d. Understanding the client‘s reasons for obtaining an audit

3. During audit planning, which of the following is not a factor that afects
the auditor‘s judgment as to the quantity, type and content of working
papers?

a. The auditor‘s prelimary assessment of control risk

b. The auditor‘s prelimary evaluation of inherent risk based on
discussions with the client
c. The nature of the client‘s business
d. They type of report to be issued by the auditor

4. Which one of the following is not considered a valid source of

information about the client‘s processes?

a. Confirmation from third-parties

b. Review of the client‘s budget
c. A tour of the client‘s plant facility
d. Management inquiry

5. The element of the audit planning process most likely to be agreed

upon with the client before the implementation of audit strategy is the
determination of the

a. Method of statistical sampling to be used in confirming accounts

receivable
 b. Pending legal matters to be included in the inquiry of the client‘s
attorney
c. Evidence to be gathered to provide a sufficient basis for the auditor‘s
opinion
d. Schedules and analyses to be prepared by the client‘s staf

6. Which of the following is not a component of audit planning?

a. Observing the client‘s annual physical inventory taking and making

test counts of selected items
b. Making arrangement with the client concerning the timing of
audit fieldwork and use of the client‘s staf in completing certain
phases of the examination
c. Obtaining an understanding of the business
d. Developing audit program

7. R & O, CPAs, have been retained as the auditors of City Corporation.

What are the R & O‘s responsibilities with regards to contracting City
Corporation‘s predecessor auditors?

a. If City Corporation had a disagreement with the predecessor

auditors, R & O should not contact the predecessor auditors
b. R& O is not required to attempt communication with the
predecessor auditors under any circumstances
c. R&O should attempt communications with the predecessor auditor
and ask if they had any accounting policy disagreements with City
Corporation
d. It would be unethical for R & O to ask the predecessor auditors
about the integrity of City Corporation‘s management

8. An initial audit requires more audit time to complete than a recurring

audit. One of the reasons for this is that

a. The new auditors are usually assigned to an initial audit

b. The predecessor auditors need to be consulted
c. The client‘s business, industry, and internal control are unfamiliar
to the auditor and he needs to carefully study them
d. A large proportion of customer accounts receivable need to be
confirmed on an initial audit

9. Prior to beginning the fieldwork on a new audit engagement in which

he does not possess industry expertise, the CPA should

a. Reduce audit risk by lowering the preliminary levels of materiality

 b. Design special substantive tests to compensate for the lack of
industry expertise
c. Engage financial experts who are familiar with the nature of the
industry
d. Obtain a knowledge of matters that relates to the nature of the
entity‘s business and industry

10. Which of the following will an auditor least likely discuss with the
former auditors of a potential client prior to acceptance of an audit
engagement?

a. Integrity of the management

b. Fees charges for the services
c. Disagreements between the predecessor auditor and the
management regarding accounting principles
d. Reasons for changing audit firms

11. What is the most likely course of action to be taken by an auditor

in assessing management integrity?

a. Tour the plant

b. Review the minutes of the board of directors
c. Research the background and histories of officers
d. Review the bank reconciliation statements

12. An engagement letter should be written before the start of an audit

because

a. It may limit the auditor‘s legal liability by specifying the

auditor‘s responsibilities
b. It specifies the client‘s responsibility for preparing schedules and
making the record available to the auditor
c. It specifies the basis for billing the audit for the upcoming year
d. All of the choices given are correct

13. When a CPA is approached to perform an audit for the first time,
the CPA should make inquiries of the predecessor auditor. This is a
necessary procedure because the predecessor may be able to provide
the successor with information that will assist the successor in
determining whether:

a. The predecessor‘s work should be utilized

b. The company follows the policy of rotating its auditors
c. In the predecessor‘s opinion, internal control of the company is
satisfactory
 d. The engagement should be accepted

14.A A written understanding between the auditor and the client

concerning the auditor‘s responsibility for the discovery of
noncompliance to laws is usually set forth in a(an):

a. Client representation letter

b. Letter of audit inquiry
c. Management letter
d. Engagement letter

15. Prior to acceptance of an audit engagement with a client who has

terminated the services of the predecessor auditor, the CPA should

a. Contact the predecessor auditor without advising the prospective

client and request a complete report of the circumstances leading to
the termination of the engagement with an understanding that all
information disclosed will be kept confidential
b. Accept the engagement without contacting the predecessor auditor
since the CPA can include audit procedures to verify the reason
given by the client for the termination of the engagement
c. Not communicate with the predecessor auditor because this
would in efect be asking the auditor to violate the confidential
relationship between an auditor and the client
d. Advise the client of the intention to contact the predecessor auditor
and request a permission for the contact

16. Before accepting an audit engagement, a successor auditor should

make specific inquiries of the predecessor auditor regarding the
predecessor‘s

a. Opinion of any subsequent event occurring since the

predecessor‘s audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of PFRS between
periods
d. Evaluation of all matters of continuing accounting significance

17.A A successor auditor would most likely make specific inquiries of the
predecessor auditor regarding

a. Specialized accounting principle being used by the client‘s industry

 b. The competency of the client‘s internal audit staf
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures

18. Which of the following statement concerning materiality thresholds

is incorrect?

a. Aggregate materiality threshold are a function of the auditor‘s

preliminary judgment concerning audit risk
b. In general, the more misstatements the auditor expects, the higher
should be the aggregate materiality threshold
c. The smallest aggregate level of errors or fraud that could be
considered material to any of the financial statements is referred to
as a ―materiality threshold‖
d. Materiality thresholds may change between the planning and review
stages of the audit. These changes may be due to quantitative
and/or qualitative factors

19. Which of the following concepts about materiality is incorrect?

a. Materiality is directly related to the acceptable level of detection risk

b. Materiality does not apply if internal control is highly efective
c. Materiality is a matter of professional audit judgment
d. Materiality is more closely related to fieldwork and reporting
standards than to general standards

20. Which of the following would not be a source of information

about the risk of a potential new audit client?

a. The predecessor auditor

b. Management
c. The internet
d. The new auditor‘s permanent file

21. In comparing management fraud with employee fraud, the

auditor‘s risk of failing to discover the fraud is greater for:

a. Employee fraud because of the larger number of employees in

the organization
b. Employee fraud because of the higher crime rate among blue collar
workers
c. Management fraud because of management‘s ability to override
existing internal controls
 d. Management fraud because managers are inherently smarter
than employees

22. Management‘s integrity afects all of the following risks except:

a. Enterprise risk
b. Financial reporting risk
c. Engagement risk
d. All of the above risks are afected

23. The auditor is most likely to presume that a high risk of irregularities
exists if

a. The client is a multinational company that does business in

numerous foreign countries
b. The client does business with several related parties
c. Inadequate segregation of duties places an employee in a
position to perpetrate and conceal thefts
d. Inadequate employee training results in lengthy EDP exception
reports each month

24. Which of the following audit risk components may be assessed in

nonquantitaive terms?

Inherent Risk Control Risk Detection Risk

a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

25. Which of the following combinations of engagement risk, audit

risk, and materiality would lead the auditor to most audit work?

Engagement Risk Audit Risk Materiality

a. Low High High

b. Moderate Low Low
c. Low Moderate Low
d. High High High
26. Which of the following conditions justifies an auditor‘s decision
of raising the materiality level?

a. Internal control over revenue and receipts cycle is excellent

b. Application of analytical procedures reveals a significant increase
in sales revenue in December, the last month of the fiscal year
c. Internal control over shipping, billing and recording of sales revenue is
weak
d. Study of the business reveals that the client recently acquired a
new company in an unrelated industry

27. Which of the following does an auditor least likely perform in

assessing audit risk?

a. Gather audit evidence in support of recorded transactions

b. Obtain an understanding of the client‘s system of internal control
c. Understand the economic substance of significant transactions
completed by the client
d. Understand the entity and the industry in which it operates

28. Which type of risk does the management of a company have

the most control over in the short term?

a. Inherent risk
b. Control risk
c. Detection risk
d. Sufficiency risk

29. In which of the following order would the auditors perform the
following steps?

a. Determine audit risk; assess control risk; determine detection

risk; set materiality
b. set materiality; determine audit risk;assess control risk; determine
detection risk
c. set materiality; assess control risk;determine detection risk;
determine audit risk
d. Determine audit risk;set materiality;assess control risk;determine
detection risk

30. If the results of the auditor‘s tests of controls induce the auditor
to change the assessed level of control risk for inventory from 0.2
to 0.4 and audit risk and
 inherent risk remain constant, what is the efect on the acceptable
level of detection risk?

a. A change in detection risk cannot be calculate because audit risk

and inherent risk values are not given
b. Detection risk would increase from 0.3 to 0.6
c. Detection risk would decrease from 0.4 to 0.2
d. Detection risk would not change since audit risk and inherent
risk do not change

31. Which of the following may cause the management to

intentionally understate profits?

a. Management wants to create ―cookie jar‖ reserves fir a rainy day

b. The company is under scrutiny by tax authorities
c. The company is sufering a large loss and wants to take a ―big bath‖
d. All of the given choices

32. Which of the following is true?

a. Auditors are responsible for detecting all fraudulent financial reporting

b. Auditors must specifically consider fraud risk from overstating
liabilities
c. Auditor must specifically consider fraud risk from management
override of controls
d. All of them are true

33. Why should the auditor plan more work on individual accounts
as lower acceptable levels of both audit risk and materiality are
established?

a. To find smaller errors

b. To find larger errors
c. To increase the tolerable error in the accounts
d. To decrease the risk of overreliance

34. With respect to error and fraud, the auditor should plan to

a. Search for errors or fraud that would have a material efect on

the financial statements
b. Discover errors or fraud that would have a material efect on
the financial statement
 c. Search for errors that would have a material efect and for fraud
that would have either material or immaterial efects on the
financial statement
d. Search for fraud that would have a material efect and for errors
that would have either material or immaterial efects on the
financial statements

35. The auditor‘s responsibility for identifying ―direct-efect‖ non-

compliance to laws and regulations difers from their responsibility for
detecting

a. Errors
b. Indirect-efect non-compliance to laws and regulations
c. Fraud
d. Management fraud

36. Which of the following might be considered a ―red flag‖ that may
indicate possible fraud in a large manufacturing company with several
subsidiaries?

a. The existence of a financial subsidiary

b. A consistent record of above average return on investment for all
subsidiaries
c. Complex sales transactions and transfers of funds between affiliated
companies
d. Use of separate bank accounts for payrolls by each subsidiary

37. Experience has shown that certain conditions in an organization

are symptoms of possible management fraud. Which of the following
conditions would not be considered an indicator of possible fraud?

a. Managers are regularly assuming subordinates ‗duties

b. Managers are dealing in matters outside their profit center‘s scope
c. Manager are not complying with corporate directive and procedures
d. Manager are subject to formal performance reviews on a regular basis

38. Warning signs that cause the auditor to question management

integrity must be taken seriously and pursued vigorously. Which of the
following may lead the auditor to suspect management dishonesty?

a. The president/CEO of the client corporation has held numerous

meetings with the controller for the purpose of discussing
accounting practices that will maximize reported profits
b. The client has been names as a defendant in a product liability suit
 c. The client has experienced a decrease in revenue from
increased import competition
d. A new statutory regulation making customer licenses more
difficult to obtain may adversely afect the client‘s operations

39. Which of the following methods may be used to commit fraudulent

financial reporting?
a. Overstate revenues
b. Understate liabilities
c. Fail to provide adequate disclosure
d. Each of the given choice can be used to commit fraudulent financial
reporting

40. Which of the following internal control policies, when absent,

would increase the opportunity for fraud?

a. Appropriate segregation of duties or independent checks

b. Job applicant screening for employees with access to assets
c. Mandatory vacations for employees with access to assets
d. The absence of any of the given choices increases the opportunity for
fraud.

41. Whom should the auditors contact when they suspect a fraud?

a. Senior management
b. Expected perpetrators of the fraud
c. Audit committee of the board of directors
d. Either the senior management or the audit committee

42. Analytical procedures performed in the planning stage of an audit

suggest that several accounts have unexpected relationships. The
results of these procedures most likely would indicate that:

a. Irregularities exist among the relevant account balances

b. Additional tests of details are required
c. Internal control activities are not operating efectively
d. The communication with the audit committee should be revised

43. Which of the following statements identifies a potential weakness

when comparing client fata with the industry?

a. Industry data may not be representative of the client‘s business

b. Other companies in the industry could use accounting principles
diferent from what the client is using
 c. Data bases are comprised of data from thousands of companies of
various sizes, which may limit the efectiveness of the comparisons
d. All the given choices are weaknesses

44. Which of the following statements is correct with respect to the

auditor‘s use of analytical procedures?

a. Analytical procedures are time saving procedures that auditors may

employ at their discretion
b. Analytical procedures are powerful tools that are required to be
used during the planning and testing phases of the audit
c. Analytical procedures may be used to identify misstatements in
a client‘s accounts
d. Analytical procedures are required to be used during the planning
and completion phases of the audit.

45. Which of the following is not an information source for developing

analytical procedures used in the audit?

a. Relationships among financial statement elements

b. Relationships between financial and relevant nonfinancial data
c. Comparison of financial data with anticipated results (e.g., budgets
and forecasts)
d. Comparison of current year financial data with projections for
next year‘s financial results

46. Which of the following results from analytical procedures might

indicate obsolete inventory?

a. A decline in inventory turnover

b. A decline in day‘s sales in inventory
c. A decline in the gross margin ratio
d. An increase in operating margin

47. Auditors try to identify predictable relationship when using

analytical procedures. Which of the following accounts would most
likely yield the highest level of evidence regarding relationships that
involve transactions?

a. Accounts payable
b. Accounts receivable
c. Payroll expense
d. Advertising expense

48. Analytical procedures are performed in the following order:

 a. Calculate predictions and compare them to the recorded amount;
define a significant diference; develop an expectation; investigate
significant diferences
b. Calculate predictions and compare them to the recorded
amount;investigate significant diferences;define a significant
diference; develop an expectation
c. develop an expectation;define a significant diference;calculate
predictions and compare them to the recorded amount;investigate
significant diferences
d. develop an expectation;calculate predictions and compare them to
the recorded amount;define a significant diference;investigate
significant diferences

49. An auditor compares experience as a percent of sales to

expectations. This is an example of:

a. Ratio analysis
b. Trend analysis
c. Internal control analysis
d. Vertical analysis

50. How is the audit program best described at the beginning of the
audit process?

a. Temporary
b. Conclusive
c. Confirmed
d. Optional

51. After discovering that a related-party transaction exists, the

auditor should be aware that the

a. Substance of the transaction could be significantly diferent from its

form
b. Adequacy of disclosure of the transaction is secondary to its legal
form
c. Transaction is assumed to be outside the ordinary course of business
d. Financial statements should recognize the legal form of the
transaction rather than its substance

52. In which of the following would the auditor most likely find
information about compensation of corporate officers?

a. Corporate charter
b. Corporate by-laws
c. Corporate minutes
d. Audit engagement letter

53. The existence of a related-party transaction may be indicated

when another entity
 a. Sells real estate to the corporation at a price that is comparable to
its appraised value
b. Absorbs the expenses of the corporation
c. Borrow from the corporation at a rate of interest which equals
the current market rate
d. Lends to the corporation at a rate of interest, which equals the
current market ratio

54. An auditor judges an item to be immaterial when planning an audit. .

However, the auditor may still include the item if it is subsequently
determined that

a. sufficient number of staf is available

b. Adverse efects related to the item are likely to occur.
c. Related evidence is reliable.
d. Miscellaneous income is afected.

55. Which of the following is least likely required in an audit?

a. Test appropriateness of journal entries and adjustment

b. Review accounting estimates for biases
c. Evaluate the business rationale for significantly unusual transactions
d. Make a legal determination of whether fraud has occurred

56. Of the following procedures, which one is not considered a purl

"obtaining an understanding of the client's environment?"

a. Reading trade publications to gain a better understanding of the

client's industry
b. Confirming customer accounts receivable for existence and valuation
c. Touring the client‘s manufacturing and warehousing facilities to
gain a clearer understanding of the entity's operations
d. Studying the internal controls over cash receipts disbursements

57. The element of the audit planning process most likely to be agreed
upon with the client before the implementation of the audit strategy is
the determination of the

a. Timing of inventory observation procedure to be performed

b. Evidence to be gathered to provide a sufficient basis for the auditor‘s
opinion
c. Procedures to be undertaken to discover litigation, claims, and
assessments.
d. Pending legal matters to be included in the inquiry of the client's
attorney.

58. Which of the following concepts is most useful in assessing the

scope of an auditor's program relating to various accounts?

a. Attribute sampling
b. Materiality
 c. The reliability of information
d. Management fraud

59. With respect to the auditors planning of a year-end

examination, which of the following statements is always true?

a. An engagement proposed after the fiscal year ends should not

accepted.
b. An inventory count must be observed at the balance sheet date
c. The client's audit committee should not be told of the specific
audit procedures that will be performed.
d. It is an acceptable practice to-carry out substantial parts of the
examination at interim dates

60. Which of the following is not a consideration in the development

of audit programs?

a. Internal control over the recording of plant asset additions and

repairs and maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central
manufacturing facility during the year under audit.
c. The client is a private university located in Southern Philippines.
d. The members of the board of directors are elected by the
stockholders during the annual meeting.

61. An audit program provides a proof that

a. Sufficient competent evidential matter is obtained.

b. The work is adequately planned.
c. There is compliance with generally accepted standards of reporting.
d. There is a proper study and evaluation of internal control.

62. The principal reason for developing a written audit program is to

assure that the

a. audit work is properly supervised

b. Audit work is properly planned and documented.
c. audit report contains only significant-findings
d. Work of diferent auditors is properly coordinated.

63. One of the primary uses of an audit program is to

a. Serve as a tool for planning, directing, and controlling the audit work.
b. Document an auditors understanding of the internal control
c. Provide for a standardized approach to the audit engagement
d. Delineate the audit risk accepted by the auditor.

64. An audit program is

 a. the detailed plan of audit procedures to be performed in the
course of the audit.
b. an overview of the company and a general plan for the work to
be accomplished
c. a generic document that auditing firms have developed to lead the
process of the audit through a. systematic logicalprocess
d. a budget of the time that should be necessary to complete each
phase of the audit procedures.

65. In deciding whether to use the work of internal auditors, external

auditors must evaluate the internal auditors‘
a. Objectivity and competence.
b. Independence and professionalism.
c. education and certification
d. age and gender

66. Which of the following is not true

regarding planning in an electronic environment?

a. The definition of auditing is not changed

b. The purposes of auditing is not changed
c. The procedures used are not changed
d. Auditing standards are not changed

67. For which of the following judgments may on independent auditor

share responsibility with an entity's internal auditor who is assessed to
be both competent and objective?

Assessment of inherent risk assessment of control risk

a. Yes Yes
b. No No
c. No Yes
d. No No

68. After studying and evaluating a client's existing internal control, an

auditor has concluded that the policies and procedures are well
designed and functioning as intended. Under these circumstances, the
auditor would most likely

a. Perform further control tests to the extent outlined in the audit

program.
b. Determine the control policies and procedures that should prevent
or detect errors and fraud.
c. Setacceptable detection, risk at a higher level than would be set
under conditions of weak internal control.
 d. set acceptable detection risk at a lower level than would be set
under conditions of weak internal control.

69. Which of the following matters is generally included in an

auditor's engagement letter?

a. Limitations of the engagement

b. Factors to be considered in establishingpreliminaryjudgment
about materiality
c. Management'sliability for non-complianceto laws committedby
its employees
d. The auditor's responsibilityto obtain negative assurance relating
to the occurrence of non-compliance to laws

70. Which of the following factors most likely would lead a CPA to
conclude that a potential audit engagement should not be accepted?

a. There are significant related party transactions that management

claims occurred in the ordinary course of business.
b. Internal control activities requiring the segregation of duties are
subject to management override.
c. Management continues to employ an inefficient system of
information technology to record financial transactions
d. It is unlikely that sufficient evidence is available to support an
opinion on the financial statements.

71. Which of the following is an example of fraudulent financial

reporting?

a. The company management falsifies inventory count tags thereby

overstating ending inventory and understating cost of goods sold.
b. An employee diverts customer payments to his personal use,
concealing his actions by debiting an expense account, thus
overstating expenses.
c. An employee steals inventory and the shrinkage is recorded in cost
of goods sold.
d. An employee borrows tools from the company and neglects to
return them the cost is reported as a miscellaneous operating
expense.

72. Which of the following statements is accurate about "fraud risk

factors" considered when conducting an audit?

a. Factors whose presence indicates that fraud exists.

b. Factors whose presence often have been observed in
circumstances where frauds have occurred.
c. Factors whose presence will require modification to planned
audit procedures.
 d. Factors obtained during the audit which leads to required
communications with the audit committee.

73. Which of .the following is not an example of a likely adjustment in

the auditor‘s overall audit approach when significant risk is found to
exist?

a. Apply increased professional skepticism about material transactions

b. Increase the assessed level of detection risk
c. Assign personnel with particular skill to areas of high risk.
d. Obtain increased evidence about the appropriateness of
management's selection of accounting principles.

74. Which of the following conditions identified during the audit

increases the risk of employee fraud?

a. Large amount of cash in the bank.

b. Existence of a mandatory vacation policy for employees performing
inventory key functions.
c. Inventory items of small size, but high value
d. Presence of reconciling items on a client prepared year-end proof of
cash.

75. Which of the following is not ordinarily considered a factor

indicative of increased financial reporting risk when an auditor is
considering a client‘s risk assessment policies?

a. fixed monthly salaries for sales personnel

b. implementation of a new information system
c. Rapid growth of the organization
d. Corporate restructuring
 MODULE 6

CONSIDERATIONS OF INTERNAL CONTROL

PSA-BASED QUESTIONS

1. An auditor considers internal control in order to

a. Determine whether assets are safeguarded

b. Suggest improvements in internal control.
c. Plan audit procedures
d. Express an opinion

2. The primary purpose of the auditor's consideration of internal control is

to provide a basis for

a. Determining whether procedures and records that are concerned

with the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal
control
c. Determining the nature, timing, and extent of audit tests to be
applied
d. Expressions of an opinion.

3. The primary objective of procedures to be performed in obtaining

an understanding of internal control is to provide an auditor with

a. Evidential matter for use in reducing detection risk

b. Knowledge necessary to plan the audit
c. A basis for which to modify tests of controls
d. Information necessary to prepare flowcharts.

4. A reason to establish internal control is to

a. Have a basis of planning the audit.

b. Provide reasonable assurance that the objectives of the
organization are achieved
c. Encourage compliance with organizational objectives.
d. Ensure the accuracy, reliability, and timeliness of information

5. What is the primary purpose of efective internal control organization?

a. Achievement of certain organizational gods.

b. Completion of a successful audit for the entity.
 c. Shareholders' involvement in the company‘s success
d. Obtaining profitability and financial strength.

6. An efective internal control is not expected to provide. a reasonable

assurance regarding the achievement of objectives concerning

a. Reliability of financial reporting.

b. Compliance to applicable laws and regulations.
c. Elimination of material misstatements.
d. Efectiveness and efficiency of operations.

7. Internal control is primarily establishedwithin a companyto

accomplish which of the following objectives?

a. Prevent irregularities
b. Provide reasonable assurance that the company's objective be
achieved
c. Catch all errors that may occur in the company
d. Aid in the efective auditing of the company

8. Which of the following is not an element-of an entity's internal control?

a. Control risk
b. Control activities
c. The information System
d. The control environment

9. One of the major components of an organization‘s internal control

structure includes:

a. Audit control risk

b. The cost-benefit ratio
c. Risk assessment
d. Communication

10. Which of the following best describes the interrelated

components of internal control?

a. Organizational structure, management philosophy, and planning.

b. Control environment, risk assessment, control activities,
information and communication systems, and monitoring
 c. Risk assessment backup facilities, responsibility accounting and
natural laws
d. Legal environment of the firm, management philosophy, and
organizational structure.

11. Which of the following is not typically one of management's

concerns in designing an efective internal control structure?

a. Reliability of financial reporting.

b. Obtaining the best internal control system possible.
c. Compliance with applicable laws and regulations
d. Efficiency and efectiveness of operations.

12. The auditor‘s review of the client's internal control is

documented in order to substantiate

a. Conformity of the accounting records, with Philippine Financial

Reporting Standards.
b. Representation as to adherence to requirements of management.
c. Representation as to compliance with Philippine Standards on
Auditing
d. The fairness of the financial statement presentation.

13. An auditor would most likely .be concerned with internal

control policies and procedures that provide reasonable assurance
about:
a. The efficiency of management's decision-making process
b. Appropriate prices thatthe entity should charge for its products.
c. Methods of assigning production tasks to employees
d. The entity's ability to process and summarize financial data.

14. When considering the efectiveness of internal control, the auditor

should recognize that inherent limitations do exist. Which following is
an example of inherent limitations in a client‘s internal control?

a. The efectiveness of procedures depends or the segregation of

employee duties.
b. Procedures are designed to assure the execution and of
transactions in accordance with management's authorization
c. In the performance of most control procedures, there are
possibilities of errors arising from mistakes in judgment
d. Procedures for handling large numbers of transactions are
processed by electronic data processing equipment.
15. Which of the following is least likely to be an evidence of
efectiveness of controls?

a. Cancelation of supporting document.

b. The policy of documenting the usage of computer program
c. Confirmation of bank balances.
d. Signatures on authorization forms.

16. Which of the following is an inherent limitation of any client‘s

internal control?

a. The benefits expected to be derived from efective internal control

should not exceed the costs of such control.
b. The competence and integrity of client personnel provide an
environment conducive to control and provide assurance that
efective control will be achieved.
c. The procedures that are designed to assure the execution and
recording of transactions in accordance with proper authorizations
are efective against frauds perpetrated by management
d. The procedures whose efectiveness depends on segregation of
duties can be circumvented by collusion.

17.A A system of internal control, regardless of how carefully

designed and implemented, contains certain inherent limitations.
Which of the following errors or irregularities is not caused by an
inherent limitation?

a. The president and chief executive officer, with the assistance of the
corporate controller, inflated earnings by recording fictitious sales at
year-end.
b. A newly-installed electronic data processing system failed to provide
for a comparison of sales order amount with prior customer balance
and credit limit. This resulted in numerous sales to customers who
had already exceeded their credit limits.
c. Numerous recording errors occurred because persons analyzing and
recording transactions did not have the necessary accounting
background.
d. A computer programmer and a computer operator conspired to
divert funds from the company to an account controlled by
dishonest employees.
18. Corporate directors, management, external auditors, and internal
auditors all play important roles in creating a proper control
environment. Top management is primarily responsible for
 a. Establishing a proper environment and specifying overall internal
control.
b. Reviewing the reliability and integrity of financial information and
the means used to collect and report such information.
c. Ensuring that external and internal auditors adequately monitor
the control environment.
d. Implementing and monitoring controls that are designed by the
board of directors

19. The primary responsibility for establishing and maintaining internal

controls rests with the

a. internal auditors
b. management
c. Securities and Exchange Commission
d. External auditors.

20. Which of the following is not a part of the control environment?

a. Management philosophy and operating style

b. Organizational structure
c. Information rind communication systems
d. Assignment of authority and responsibility

21. Internal control is a function of management, and efective control

is based upon the concept of charge and discharge of responsibility
and duty. Which of the following is an important feature of efective
internal control?

a. Responsibility for accounting and financial duties should be

assigned to one responsible officer.
b. Responsibility for the performance of each duty must be fixed
c. Responsibility for the accounting duties must be borne by the
auditing committee of the company.
d. Responsibility for accounting activities and duties must be
assigned only to employees who are bonded.

22. The control environment includes which of the following?

a. Control activities
b. Management philosophy and operating style
c. Assessing activity level risks
 d. Application level controls

23. Which of the following is not a major emphasis in the design of

efective internal accounting control?

a. Assets are properly protected

b. Duties are segregated.
c. Transactions are authorized
d. Processes are efficient.

24.A A proper understanding of the client's internal control is an

integral part of the audit planning process. The results of the
understanding

a. Must be reported to the major stakeholders.

b. always require the auditor in testing the control policies and
procedures.
c. are not reported to client management.
d. May be used as the basis for withdrawing from an audit engagement

25. The auditor who becomes aware of reportable conditions is

required to communicate such a weakness to the

a. Audit committee and client‘s legal counsel

b. Board of directors and internal directors.
c. Senior management and board of directors
d. Internal auditors and senior management.

26. As part of understanding internal controls, an auditor is not required

to

a. Consider factors that afect the risk of material misstatement

b. Ascertain whether internal control policies and procedures have
been placed in operation
c. Identify the types of potential misstatements that may occur
d. Obtain knowledge about the operating efectiveness of internal
control

27. The purpose of tests of controls is to provide reasonable assurance

that the

a. Accounting treatment of transactions and balances is valid and proper

b. Control procedures are functioning as intended
c. Entity has complied with disclosure requirements of PFRS
d. Entity has complied with requirements of quality control.
28. Tests of controls are used to test whether controls are

a. Operating efectively
b. Placed in operation (implemented)
c. Properly accumulated into balance sheet totals
d. Properly documented by the client

29. After documenting internal control in an audit engagement, the

auditor may perform tests on

a. Those controls that the auditor plans to rely on

b. Those controls in which deficiencies were identified.
c. Those controls that have a material efect on the financial statement
balances
d. A random sample of the controls that were reviewed.

30. Which of the following audit techniques would most likely provide
an auditor with the most assurance about the efectiveness of the
operation of an internal control procedure?

a. Inquiry of client personnel

b. Recomputation of an accountbalance
c. Observation of client personnel
d. Confirmation of balances or transactions with outside parties

31. After the study and evaluation of a client's internal control policies and
procedures has been completed, an auditor might decide to

a. increase the extent of substantive testing in areas where the

internalcontrol policies and procedures are strong
b. Reduce the extent of control testing in areas where the in control
policies and procedures are strong.
c. Reduce the extent of both substantive and control testing in areas
where the internal control policies and procedures are strong
d. Increase the extent of substantive testing in areas where internal
controls are weak.

32. The Philippine Standards on Auditing require the auditor to obtain

an understanding of the client's internal controls
 a. for every audit.
b. for first-time audits.
c. sufficient to find any frauds which may exist.
d. whenever it would be appropriate.

33. Control testing is performed in order to determine whether or not

a. The assessed level of control risk can be reduced

b. Necessary controls are absent.
c. Incompatible functions exist.
d. material peso errors exist

34. The auditor is studying internal control policies and procedures

within the sales, shipping, and billing subset of the revenue cycle.
Which of the following conditions suggests a need for additional
testing of controls?

a. Internal control is found to be weak with regard to shipping and billing

b. Internal control over sales, billing; and shipping appears strong but
80% of sales revenue is attributable to three major customers
c. Internal control over billing and shipping is thought to be
strong and the auditor considers additional testing of selected
controls will result in a major reduction in substantive testing
d. Internal control over the recording of sales is found to be weak and
the sales are evenly divided among a large number of customers

35. To obtain an understanding of the relevant policies and procedures

of internal control, the auditor performs all of the following except:

a. Make inquiries
b. Make observations
c. Inspect documents and records
d. Design substantive tests

36. It is most appropriate that tests of controls be applied to

transactions and controls

a. At the balance sheet date

b. At each quarterly interim period.
c. For the entire period under audit
d. At the beginning of the fiscal period.
37. To obtain evidence about control risk, an auditor ordinarily selects
tests from a variety of techniques, including

a. Analysis
b. Confirmation
c. Reperformance
d. Comparison

38. An auditor wishes to perform tests of controls on a client's cash

disbursements procedures. If the controls leave no audit trail of
documentary evidence; the auditor most likely will test the procedures
by

a. confirmation and observation

b. analytical procedures and confirmation
c. observation and inquiry
d. inquiry and analytical procedures

39. Management's attitude toward aggressive financial reporting and

its emphasis on meeting projected profit goals most likely would
significantly influence an entity's control environment when

a. The audit committee is active in overseeing the entity's financial

reporting policies.
b. external policies established by parties outside the entity afect its
accounting practices
c. Management is dominated by one individual who is also a
shareholder.
d. Internal auditors have direct access to the board of directors and
entity management.
QUIZZERS

1. Of the following control environment characteristics, identify the one

that contributes most to efective internal control.

a. The audit committee consists of the president, two vice-dents, and

the corporate controller.
b. The company does not have a centralized human resource function
c. The company has an efective internal audit stafs that monitors
controls on a continuous basis.
d. The company routinely transacts business with related parties.

2. Efective internal control

a. Reduces the need for management to review exception reports on a

day-to- day basis.
b. Eliminates risk and potential loss to the organization.
c. Cannot be circumvented by management.
d. Is unafected by changing circumstances arid conditions
encountered by the organization.

3. Efective internal control requires organizational independence of

diferent departments. Organizational, independence would be
impaired in which of the following situations?

a. The internal auditors report to the audit committee of the board of

directors
b. The controller reports to the vice president of production.
c. The payroll accounting department reports to the chief accountant
d. The cashier reports to the treasurer

4. Internal controls are designed to provide reasonable assurance that:

a. Control policies have not been circumvented through

management‘s joint efort.
b. The internal auditing department's guidance and oversight of
management‘s performance is accomplished economically and
efficiently.
c. Management is planning, organizing, and directing processes are
properly evaluated.
d. Material errors or fraud would be prevented or detected and
corrected within a timely period by employees in the course of
performing their assigned duties.
5. Which of the following is not an assurance to be provided by an
efective internal control system?

a. Management is responsible for knowledge and authorization of

transactions.
b. Transactions are recorded to maintain account accountability for
assets
c. Access to assets is limited to members of management
d. Transactions are recorded to permit the preparation of reliable
financial statements.

6. An entity's internal control consists of policies and procedures

established to provide reasonable assurance that specific entity
objectives will be achieved. Only some of these objectives, policies and
procedures are relevant to a financial statement audit. Which of the
following would most likely be considered in an audit of financial
statements?

a. Timely reporting and review of quality control

b. Maintenance of control over unused checks.
c. Marketing analysis of sales generated by advertising projects
d. Maintenance of statistical production analyses.

7. When an organization has strong internal control, management can

expect various benefits. The benefit least likely to occur is

a. a reduced cost of an external audit

b. an elimination of employee fraud
c. the availability of reliable data for decision-making purposes and
protection of important documents and records.
d. an assurance of compliance to applicable laws and regulations

8. Which of the following statements about internal control is correct?

a. Efectively designed internal control reasonably ensures that

collusion among employees cannot occur
b. The establishment and maintenance of internal control are
important responsibilities of the internal auditor
c. Exceptionally strong internal control is enough for the auditor to
eliminate substantive tests on a significant account balance.
d. The cost benefit relationship is a primary criterion that should be
considered in designing internal control.
9. Internal control can only provide reasonable and not an absolute e of
achieving entity's control objectives. One of the factors limiting the
likelihood of achieving those objectives is that

a. The auditor's primary responsibility is the detection of fraud.

b. The board of directors is activeand independent.
c. The cost of internal control should not exceed its benefits.
d. Management monitors internal control.

10.A A proper segregation of duties requires that an individual who is:

a. Authorizing a transaction records it.

b. Authorizing a transaction maintains custody of the asset that
results from the transaction
c. Maintaining a custody of an asset be entitled to have access to
the accounting records for the asset
d. Recording a transaction not compares the accounting record of the
asset with the asset itself.

11. External factors can either strengthen or weaken an entity's internal

control. Which of the following conditions supports strong internal
control?

a. Strict monitoring by the Bureau of Internal Revenue.

b. The existence of related parties and related-party transactions.
c. Pressure imposed by the financial community to improve earnings
d. An economic downturn.

12. Proper segregation of functional responsibilities in an efective system

control calls for separation of the functions of:

a. Authorization, execution and payment

b. Authorization, recording and custody
c. Custody, executionand reporting.
d. Authorization, payment, and recording.

13. For good internal control, which of the following functions should not be
the responsibility of the treasurer's department?

a. Data processing.
b. Handling of cash
 c. Custody of securities.
d. Establishing credit policies.

14. In general, a material internal control weakness may be defined as a

condition in which material errors or fraud would ordinarily not be
detected within a timely period by

a. an auditor during the normal study and evaluation of the system

of internal control
b. a controller when reconciling accounts in the general ledger
c. Employees in the normal course of performing their assigned
functions.
d. The chief financial officer when reviewing interim financial
statements.

15. In general, material irregularities perpetrated by which of the following

are most difficult to detect?

a. Internal auditor
b. Computer operator
c. Cashier
d. Controller

16. Controls that enhance the reliability of the financial statements may be
classified as prevention controls and detection controls. Which the
following is primarily a detection control?

a. Separation of duties between recording cash receipts and cash

custody.
b. Bank accounts are reconciled monthly by persons who are
independent of cash recording and cash custody.
c. The human resource department authorizes the hiring of only those
persons for accounting positions that meet the written job
requirements specified by the corporate controller.
d. An accounting manual, accompanied by a detailed chart of
accounts, carefully and clearly describes each type of transaction
afecting the entity.

17. One aspect of internal control requires companies to maintain

adequate documentation and records. Which of the following
statements is not correct with respect to an entity's maintenance of
documents and records?
a. Documents should be pre-numbered only if the client has no other
means to maintain records of which documents have been used
 b. Documents should be sufficiently simple to ensure that they are
clearly understood.
c. Documents should be prepared at the time a transaction occurs
or as soon thereafter as possible.
d. Documents should be pre-numbered consecutively to facilitate
control over missing documents

18. Which of the following factors are included in an entity's control

environment?

Audit CommitteeInternal Audit FunctionManagement Style

a. YES YES NO
b. YES NO YES
c. NO YES YES
d. YES YES YES

19. Emir is responsible for the custody of finished goods in the warehouse.
If his company wishes to maintain strong internal control, which of the
following responsibilities are incompatible with his primary job?

a. He is also responsible for the company's fixed asset control ledger.

b. He is also responsible for receiving of goods into the warehouse.
c. He is responsible for the accounting records for all receipts and
shipments of goods from the warehouse.
d. He is responsible for issuing goods for shipment.

20. As part of a periodic planning exercise, a company discovers that an

Eastern European political dispute may interfere with supply sources.
This is an example of:

a. Control environment
b. Risk assessment
c. Control activities
d. Monitoring

21. Infernal control procedures are not designed to provide reasonable

assurance that
 a. Transaction are executed in accordance with management‘s
authorization
b. Irregularities will be eliminated
c. Access to assets is permitted only in accordance with
management's authorization
d. The recorded accountability for assets is compared with the existing
assets at reasonable intervals.

22. Transaction authorization within on organization may be either

specific or general. An example of specific transaction authorization is
the

a. Setting of automatic reorder points.

b. Approval of a construction budget for a new warehouse
c. Establishment of a customer's credit limits
d. Establishment of sales prices.

23. Which of the following statements best describes a weakness often

associated with computers?

a. Computer equipment is more subject to a systems error than

manual processing which is subject to human error
b. Computer equipment processes and records similar transactions in
a similar manner.
c. Control activities for detecting invalid and unusual transactions are
less efective than manual control activities
d. Functions that would normally be separated in a manual system
are combined in a computer system.

24. The financial statements are not likely to correctly reflect Philippine
Financial Reporting Standards if

a. The controls afecting the reliability of financial reporting are

inadequate.
b. The company's controls do not promote efficiency
c. The company‘s control do not promote efectiveness
d. All them are true.
25. The basic concept of internal control which recognizes that the cost
of internal control should not exceed the benefits expected to be
derived is known as:
 a. Management by exception
b. Management responsibility
c. Limited assurance
d. Reasonable assurance

26. Internal control should provide reasonable (but not necessarily

absolute) assurance which means that:

a. Internal control is a management‘s, not auditor‘s responsibility

b. An attestation engagement about management‘s internal control
assertion may not necessarily detect all reportable conditions
c. The cost of control activities should not exceed the benefits
d. There is always a risk that reportable conditions may result in
material misstatements

27. When considering internal control, an auditor must be aware of the

concept of reasonable assurance which recognizes that

a. The employment of competent personnel provides assurance

that the objectives of internal control will be achieved
b. The establishment of and maintenance of a system of internal
control is an important responsibility of the management and not of
the auditor
c. The cost of internal control should not exceed the benefits
expected to be derived from internal control
d. The segregation of incompatible functions is necessary to obtain
assurance that the internal control is efective.

28. To qualify as an "outside director" in an audit committee, one must

a. Not own any stock in client company.

b. Not be a part of management.
c. Not receive any remuneration or expense reimbursement.
d. Work for CPA firm.

29. Adequate separation of duties. within an EDP department would ensure

that
 a. the programmer does not have an access to computer operation
b. the librarian has no physical control over the computer programs
c. the computer operator does not have access to computer run
instructions.
d. the data control group hove as little independence as possible.

30. Which of the following duties would indicate a weakness in the internal
control system?

a. The accounting function is under the controller

b. The custodianship of cash is the responsibility of the treasurer's
function.
c. The internal auditor reports to the board of directors.
d. The custodianship of buildings and equipment is the responsibility
of the controller's function.

31. Control risk is a measure of the auditor's expectation that the internal
control structure

a. Will prevent material misstatements from occurring.

b. Will detect and correct material misstatements.
c. Will either prevent material misstatements or detect and correct them
d. Will neither prevent material misstatements nor detect and correct
them.

32. Of the following statements about an internal control system, which

one is not valid?

a. No one person should be responsible for the custodial

responsibility and the recording responsibility for an asset.
b. Transactions must be properly authorized before such transactions
are processed.
c. Because of thecost benefit relationship, a client may apply control
procedures on a test basis.
d. Control procedures reasonably ensure that collusion among
employees cannot occur.

33. An entity should consider the cost of a control in relation to the risk.
Which of the following controls best reflects this philosophy for a large
peso investment in heavy machine tools?
 a. Conducting a weekly physical inventory
b. Placing security guards at every entrance 24 hours a day.
c. Imprinting a controlled identification number on each tool.
d. Having all dispositions approved by the vice president of sales

.
UNDERSTANDING AND DOCUMENTATION OF INTERNAL CONTROL

34. In an audit of financial statements, an auditor's primary consideration

regarding internal control is whether it

a. incorporates management's philosophy and operating style.

b. afects management's financial statement assertions.
c. provides adequate safeguards over access to assets.
d. supports management's decision-making processes.

35. The procedures to test efectiveness of control policies and

procedures in support of a reduced assessed control risk are called

a. tests of transactions.
b. analytical tests.
c. tests of controls.
d. a walk-through.

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

objectively evaluated by

a. Completing a questionnaire and flowchart related to the accounting

system in the year under audit.
b. A review of the previous year's audit work papers to update the
report of the internal control evaluation.
c. A selection of items processed by the system and 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.

37. The auditor places, primary emphasis on controls over

 I. Classes of transactions
II. Account balances

a. I only.
b. II only.
c. both I and II, because they are equally weighted.
d. both I and II, because they vary from client to client

38. The three key concepts that underlie the study of an internal control
structure and the assessment of control risk would not include a
criterion that

a. the control risk may range from zero to 100%.

b. Management, not the auditor, must establish and maintain the
entity's controls.
c. the internal control structure provides reasonable, but not
absolute, assurance that the financial statements are fairly sated.
d. the internal control structure can never be regarded as completely
efective.

39. Even with the most efectively designed internal control structure,
the auditor must obtain audit evidence, beyond testing the controls,
for every

a. Financial statement account.

b. Material financial statement account.
c. Financial statement account that will be relied upon by third parties.
d. Transaction.

40. The primary purpose of performing controls is to provide reasonable

assurance that:

a. The internal control is efective.

b. The accounting system isdocumented accurately.
c. Transactions are recorded at the amounts executed.
d. All control activities leave visible evidence,

41.A A consideration of internal control made during an audit is usually

not sufficient to express an opinion on an entity's controls because
 a. weaknesses in the system may go unnoticed during the audit
engagement.
b. a consideration of internal control is not necessarily made during
an audit engagement.
c. only those controls on which an auditor intends to rely are
reviewed, tested, and evaluated.
d. controls can change each year.

42. An auditor's report on internal control of a publicly held company

would ordinarily be of least use to

a. shareholders.
b. directors.
c. officers.
d. regulatory agencies.

43. The accountant's report that expresses an opinion on an entity's

internal controls should state that the

a. establishment and maintenance of internal control is the

responsibility of management.
b. objectives of the client's internal controls are being met.
c. consideration of the internal controls is conducted in accordance
with generally accepted auditing standards.
d. inherent limitations of the client's internal controls are examined.

44. Reportable conditions are matters that come to an auditor's

attention and that should be communicated to an entity's audit
committee because they represent

a. material irregularities or illegal acts perpetrated by management.

b. significant deficiencies in the design or operation of internal control.
c. flagrant violations of the entity's documented conflict-of-interest
policies.
d. intentional attempts by client personnel to limit the scope of
the auditor's work.

45. The accountant's report that expresses an opinion on an entity's

internal controls would not include a
 a. description of the scope of the engagement.
b. specific date that the report covers rather than a period of time.
c. brief explanation of the broad objectives and inherent limitations
of internal control.
d. statement that the entity's internal controls are consistent with that
of the prior year after giving efect to subsequent changes.

46.A A CPA's consideration of internal control in an audit

a. is generally more limited than that made in connection with an

engagement to express an opinion on internal control.
b. is generally more extensive than that made in connection with
an engagement to express an opinion on internal control
c. will generally be identical to that made in connection with an
engagement to express an opinion on internal control.
d. will generally result in the CPA expressing an opinion on the internal
control.

47. The understanding of internal control that relates to a financial

statement assertion should be used to do all of the following except:

a. Determine inherent risk for that assertion.

b. identify types of potential misstatements for that assertion.
c. Consider factors that afect the risk of material misstatement for
that assertion and assess control risk.
d. Design substantive tests that correspond with the assessment of
control risk.

48. The sequence of steps in gathering evidence as the basis of the

auditor‘s opinion is:

a. Substantive tests, documentation of control structure, and tests of

controls.
b. Documentation of control structure, substantive tests, and tests of
controls
c. Documentation of control structure, tests of controls, and substantive
tests.
d. Tests of controls, documentation of control structure, and substantive
tests
49. Which of the following procedures is essential in determining
whether necessary control activities are prescribed and are being
followed?
 a. Development of questionnaires and checklists
b. Evaluation of the entity's procedures for risk assessment
c. Documentation of and testing controls.
d. Observing employees and making inquiries

50. Which of the following is the logical order of performing the

following auditing procedures?

a. Tests of internal control procedures.

b. Preparation of a flowchart depicting the client's internal control
system.
c. Substantive tests.

a. ABC
b. ACB
c. BAC
d. BCA

51.A A secondary purpose of the auditor's consideration of internal

control is to provide a(n)

a. basis for constructive suggestions about improvements in internal

control structure.
b. basis for assessing control risk
c. assurance that the records and documents have been
maintained in accordance with existing company policies and
procedures.
d. basis for the determination of the resultant extent of the tests to
which auditing procedures are to be restricted

52. Which of the following statements with respect to the independent

auditor‘s evaluation of internal control is correct?

a. The auditor should decrease control testing when weaknesses in

cashreceipts are mitigated by strong controls in cash disbursement
procedures.
b. The auditor should increase control testing when weaknesses in
billing procedures are mitigated by strong controls in collection
procedures.
 c. The auditor generally should not evaluate the overall efectiveness
of internal control, but should separately evaluate each of the
transaction cycles.
d. The auditor should evaluate all internal control weaknesses before
determining the, control procedures that should prevent or detect
errors or irregularities.

53. The auditor concludes that a public company has significant

deficiencies in its internal controls over financial reporting. Which of
the following is not a proper response to this finding?

a. Report the deficiencies to management and the audit committee.

b. Report the deficiencies to the shareholders.
c. Expand the planned testing of account balances to consider the
types of errors that might occur because of the deficiency.
d. Any of the responses

54. The development of constructive suggestions to clients for

improvements in internal accounting control is

a. a requirement of the auditor‘s study and evaluation of internal

accounting control.
b. a desirable by-product of an audit engagement.
c. only addressed by the auditor during a special engagement.
d. as important as establishing a basis for reliance on internal
accounting control system.

55. Which of the following statements concerning the independent

auditor's required communication of material weaknesses in internal
control is correct?

a. Weaknesses reported at interim dates must be repeated in the

final communication
b. If the auditor is not aware of any material weaknesses during the
examination, that fact must be communicated
c. Weaknesses that had been reported in prior years' communications
and have not been corrected need not be repeated in thecurrent
year‘s communication.
d. Although written communication is preferable; the auditor may
communicate the findings orally.
56. After obtaining a sufficient understanding of internal control, the
auditor assesses

a. The need to apply PSAs

b. detection risk to determine the acceptable level of inherent risk
c. Detection risk and inherent risk to determine the acceptable level
control risk.
d. Control risk to determine the acceptable level of detection risk.

57. The ultimate purpose of assessing control risk is to contribute to

the auditor‘s evaluation of the risk that

a. Tests of controls may fail to identify controls relevant to assertions.

b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may
circumvented by collusion.
d. Entity policies may be circumvented by senior management

58. It is important for the auditor to consider the competence of the

audit employees because their competence bears directly and
importantly upon the

a. Cost-benefit relationship of internal control

b. achievement of the objectives of internal control
c. comparison of recorded accountability with assets
d. timing of the tests to be performed

59. in gaining an understanding of internal control the auditor may

trace several transactions through the control process, including how
the interface with any service organizations whose services are part of
the information system. The primary purpose of this task is to

a. replace substantive tests.

b. Determine whether the controls have been placed in operation.
c. determine the efectiveness of the control procedures.
d. Detect fraud.
60. When obtaining an understanding of an entity's internal control,
the auditor should concentrate on the substance of controls rather
than on their form because

a. The controls may be operating efectively but may not be

documented.
b. Management may establish appropriate controls but not act on them.
c. the controls may be so inappropriate that no reliance is
contemplated by the auditor:
d. Management may implement controls with costs in excess of benefits.

61. In obtaining an understanding at an entity's internal control in a

financial statement audit, an auditor is not required to

a. determine whether the controls have been placed in operation

b. perform procedures to understand the design of controls.
c. document the understanding of the entity's internal control
components.
d. search for significant deficiencies in the operation of internal control

62. Which of the following tasks should be performed prior to the final
audit?

a. Determining the fairness of property, plant, and equipment

b. Confirming accounts receivable.
c. Understanding internal control.
d. Collecting and evaluating evidence supporting the fairness of
inventory values.

63.A A conceptual approach to the auditor's evaluation of internal

accounting control consists of the following four steps:

I. Determine whether the necessary procedures are prescribed

and are being followed satisfactorily.
II. Consider the types of errors and fraud that could occur.
III. Determine the internal control policies and procedures that
should prevent or detect errors and fraud
IV. Evaluate any weakness to determine its efect on the nature,
timing or extent of auditing procedures to be applied and
suggestions to be made to the client.
What should be the logicalorder in which these four steps are performed?

a. III, IV, I, II
b. III, I, II, IV
c. II, III, I, IV
d. II, I, III, IV

64. An auditor evaluates the existing internal control in order to

a. determine the extent of substantive tests which must be performed

b. determine the extent of control tests which must be performed.
c. ascertain whether irregularities are probable.
d. ascertain whether any employees have incompatible functions.

65. The auditor‘s study and evaluation of internal control may be done
for all but which of the following reasons?

a. To provide a basis for ofering the client, other value-added services

designed to increase efficient and efective operations.
b. To determine the nature, timing, and extent of other audit tests.
c. To establish a basis for reliance on internal controls.
d. To provide training and development for staf accountants.

66. Regardless of the assessed level of control risk, an auditor would

perform some

a. tests of control policies and procedures in order to determine their

operating efectiveness.
b. analytical procedures to verify the design of controls.
c. substantive tests to restrict detection risk for significant transaction
classes
d. dual-purpose tests to evaluate both the risk of monetary
misstatement and preliminary control risk

67.A A procedure that involves tracing a transaction from its origination

through the company's information systems is referred to as a (n):

a. Inquiry/analysis approach.
 b. Re-analysis approach.
c. Remediation
d. Walkthrough

68. Auditors frequently use flowcharts in connection with which of the

following?

a. Preparation of generalized computer audit programs.

b. Review of the client's internal control procedure
c. Use of statistical sampling in performing on
d. Performance of analytical review procedures for account balances.

69.A A well-prepared flowchart should make it easier for the auditor to

a. prepare audit procedure manuals.

b. prepare detailed job descriptions.
c. trace the origin and disposition of documents.
d. assess the degree of accuracy of financial data.

70. Flowcharting as a means of internal control evaluation provides the

following advantage over the use of questionnaires and descriptive
narratives:

a. Ease of preparation
b. Comprehensive coverage of controls.
c. Simplicity.
d. Ease in following information flow.

71. As part of the evaluation of a client's system of internal control, to

determine whether the necessary procedures are prescribed and have
been implemented satisfactorily, an auditor must

a. develop questionnaires and checklists

b. obtain an understanding of internal control.
c. perform tests of internal control procedures
d. evaluate administrative policies
72. Which of the following is an appropriate form of documenting the
auditor's understanding of a client's internal controls?

a. Narratives
b. Flowcharts
c. Internal control questionnaires
d. Each of the three documentation techniques is appropriate to do

73. Which of the following is of least concern to an auditor regarding a

client‘s internal controls?

a. Efficiency and efectiveness of operations

b. Controls related to the reliability of financial reporting
c. Controls over classes of transactions
d. Auditors are equally concerned with each issue

74. An auditor is least likely to test for on internal control that provides
for

a. segregation of the functions of recording disbursements and

reconciling the bank account.
b. comparison of receiving reports and vendors‘ invoices with purchase
orders
c. approval of the purchase and sale at marketable securities.
d. classification of revenue and expense transactions by product

75. An internal control questionnaire (ICQ) contains the following

question: ―Does a single individual receive and list cash receipts and
perform posting tosales and general ledgers?" What action should an
auditor take if the accounting manager responds "yes to the question?

a. No action is required because "yes" responses on an ICQ indicate

the presence of good control
b. Statistically sample the response along with all other "yes‖
responses to verify their accuracy.
c. Treat it as a potential control weakness and perform appropriate
testing
d. Include it with other reportable findings in the next audit report.
76. Which of the following would be considered an advantage of using
an internal control questionnaire in understanding and documenting
the controls for an important accounting application? The
questionnaires can be:

a. computerized to provide linkages of weaknesses to particular type

of errors that might occur in the account balances
b. used for many years without updating.
c. easily understood and provide easy
identification of potential control
deficiencies through ―no‖responses to questions.
d. Adopted to bothe large and small businesses as well as to diferent
industries

77. Which method provides the auditor with the best visual grasp of a
system and a means for analyzing complex operations?

a. A flowcharting approach
b. A questionnaire approach.
c. A matrix approach
d. A detailed narrative approach.

78. In addition to gaining an understanding of the internal controls,

anexternal auditor, at the minimum would be expected to

a. evaluate the internal auditor‘s work as an important part of the

accounting system element of the internal controls
b. observe client employees to determine the extent of their
compliance with quality control standards
c. trace a few transactions through the control process to obtain
evidence that the controls have been placed in operation.
d. study organizational charts to obtain an understanding of the
informal lines of communication

79. An advantage of an internal control questionnaire is:

a. Flexibility in design and application

b. Its strict adherence to a yes/no format
c. That it provides sufficient data for the assessment of control risk.
d. Ease of completion.
80. The auditors‘understanding of their clients‘ internal control provides
a basis for:

Assessing Sufficiency RiskPlanning the auditAssessing

control risk a.Yes Yes Yes

b.Yes Yes
No c.No Yes
Yes d.No
Yes No

81. With respect to the client's system of internal control, the auditor is
concerned that the existing policies, and procedures provide
reasonable assurance that

a. operational efficiency can be achieved in accordance with

management plans.
b. Errors and fraud can be prevented or detected.
c. fraud cannot be committed through collusion.
d. management cannot override the internal controls.

82. Which of the following best describes the primary reason why an
auditor uses flowcharts during on audit engagement?

a. To comply with the requirements of Philippine Standards on Auditing

b. To classify the client's documents and transactions by major
transaction Cycles, e.g., cash receipts, cash disbursements, etc.
c. To record the auditor's understanding of the client's internal
control 'policies and procedures
d. To interpret the operational efectiveness of the client's existing
organizational structure.

83. Regardless of whether the auditor decides to test or not the

controls for operating efectiveness, he/she must fully document his or
her understanding of the internal control policies and procedures
obtained through whatever means. Which of the following does not
describe on appropriate means for documenting his/her understanding
of the control system?

a. internal control flowchart

b. Internal control implementation
c. internal control memorandum
 d. internal control questionnaire

84. Which of the following questions would an auditor most likely

include in an internal control questionnaire for notes payable?

a. Are assets that collateralize notes payable critically needed for

the entity‘s continuedexistence? B
b. Are two or more authorized signatures required on checks that
repay notes payable?.
c. Are the proceeds from notes payable used for the purchase of
noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of
directors?

85. In an auditor‘s consideration of internal control, the completion of

a questionnaire is most closely associated with which of the following?

a. Separation of duties
b. Flowchart accuracy
c. Understanding the system
d. Tests of controls

86. During the review of the client's system of internal control, the
auditor observes theclient employees as they apply the operating
controls in order to

a. prepare flowchart.
b. update information contained in the organization and procedure
manuals
c. corroborate the information obtained during the initial review of the
system.
d. determine the extent of compliance with quality control standards.

87. An auditor's flowchart of a client‘s internal controls is a diagram

depicting the auditor‘s

a. understanding of the internal controls

b. program for tests of controls.
c. documentation of consideration of internal controls.
d. understanding of the types of irregularities that are probable.
 88. Which of the following statements regarding the auditor's
documentation of the client‘s internal control structure is correct?

a. Documentation must include flow chart.

b. Documentation must include procedural write-ups
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary and the
extent of documentation may vary

TESTS OF CONTROLS

89. Which of the following the auditor's purpose of further testing the
control procedures?

a. Provide a basis for reducing the assessed level of control risk.

b. Reduce the risk that error or fraud that has not been prevented or
detected by the internal control system is not detected by the
independent audit.
c. Provide assurance that transactions are executed in accordance
with management's authorization and access to assets is limited by
a segregation of functions.
d. Provide assurance that transactions are recorded as necessary to
permit the preparation of the financial statements in conformity
with PFRS.

90. Tests of controls are concerned primarily with each of the

following questions except:

a. How were the controls applied?

b. Why were the controls applied?
c. Were the necessary controls consistently performed?
d. By whom were the controls applied?

91. The objective of tests of details of transactions that are being

performed as tests of controls procedures is to

a. monitor the design and use of entity documents such as pre-

numbered shipping form.
b. determine whether controls have been placed in operation.
 c. detect material misstatements in the account balances in the
financial statements.
d. evaluate whether controls operate efectively.

92. Which of the following is ordinarily considered a test of internal

control procedures?

a. Send confirmation letters to banks.

b. Count and list cash on hand.
c. Examine signatures on checks.
d. obtain or prepare reconciliation of bank accounts as of the
balance sheet date.

93. Auditors can use several types of audit procedures to test controls.
Which of the following type of audit procedures is least likely to be
used during tests of controls?

a. Physical examination of assets

b. Inquiries of client personnel
c. Examination of documents, records, and reports
d. Observation of control-related activities.

94. The objective of dual-purpose tests is to:

a. Evaluate whether internal controls are operating efectively.

b. Detect material misstatements in the financial statements
c. Identify unusual trends or patterns in comparative financial
statements
d. Test internal controls as well as transactions and balances using
the same test procedures

95. Which of the following types of evidence will be gathered in order

to test internal controls?

a. Confirmations of accounts receivable with customers.

b. Observation of client personnel receiving inventory shipments.
c. Observation of inventory counts.
d. Inquiry of management regarding significant litigation.
96. Tests of controls least likely include:

a. Inquiries of appropriate client vendors.

b. Reperformance of a control.
c. Observation of the application of an accounting procedure.
d. Inspection of documents

97.A A procedure that would most likely be used by on auditor in

performing tests of control regarding segregation of functions on which
no audit trail is available:

a. inspection.
b. Observation
c. Reprocessing
d. Reconciliation

98. The primary purpose of performing further control tests is to provide

a. A basis for the assessed level of control risk below the maximum level
b. a basis for understanding the flow of transactions through the
accounting system.
c. assurance that transactions are properly recorded.
d. all accounting control procedures leave visible evidence.

99. Which of the following procedures most likely would be included

as part of an auditor's tests of control procedures?

a. Inspection
b. Reconciliation
c. Confirmation
d. Analytical procedures

100. Which of the following audit tests would be a test of controls?

a. Tests of the specific items making up the balance in a financial

statement account
 b. Comparing inventory prices to vendors' invoices.
c. Tracing signatures on cancelled checks to board of directors'
authorizations
d. Tests of the additions to property plant and equipment by physical
inspections.

101. Which of the following statements is true?

a. Tests of controls are necessary if the auditor plans to use the

primarily substantive approach
b. Tests of controls are necessary if the auditor plans to assess the
level of control risk at maximum
c. The auditor can simultaneously obtain an understanding of
internal control and perform tests of controls.
d. After performing tests of controls, the auditor will always assess
control risk at maximum.

102. In considering the evidence needed to assess control risk during

the period from interim to year-end, all of the following should be
considered except the:

a. Significance of the assertion being tested.

b. Specific internal control policies and procedures tested during
the interim period.
c. Degree to which the policies and procedures weretested and the test
results.
d. Control risk on other assertions.

103. After obtaining an understanding of a client's controls, an auditor

may decide to omit tests of controls. Which of the following is not an
appropriate reason to omit tests of controls?

a. The controls appear adequate

b. The controls duplicate other controls.
c. Reportable conditions preclude the auditor of assessing control risk
below the maximum.
d. The efort to test controls exceeds the efort saved by not
performing substantive tests.
104. The auditor is examining copies of sales invoices only for the
initials of the person responsible for checking the extensions. This is
an example of

a. test of controls.
b. dual purposetest.
c. substantive test.
d. test of balances

105. Which of the following statements about tests of controls is not

valid?

a. The auditor mayperform inquiry and observation and gathering

audit evidence about the operating efectiveness of the control
b. Ordinarily, making inquiries provides more reliable audit evidence
than doing observation when testing segregation of functional
responsibilities
c. Audit evidence obtained by doing observation pertains only to the
point in time at which the procedure was applied.
d. Observation of who applies a control procedure is useful as a test of
control procedures when evaluating control efectiveness of both
cornpuferized and manual system

106. Which of the following is appropriate about risk assessment?

a. The assessed level of inherent and control risk can be sufficiently

low, thus resulting to eliminating the need for substantive tests.
b. Audit risk may be more efectively determined by assessing
inherent and control risk separately.
c. There is an inverse relationship between detection risk and the
combined level of inherent and control risk
d. Detection risk is eliminated if an auditor were to examine 100
percent of the account balance or class of transactions.

107. Tests of controls are directed toward the control's

a. Efficiency
b. efficiency and efectiveness.
c. efectiveness.
d. cost benefit ratio.
 108. Audit evidence concerning segregation of duties ordinarily is best
obtained by

a. performing tests of transactions that corroborate management's

financial statement assertions.
b. observing the employees as they apply specific controls.
c. obtaining a flowchart of activities performed by available personnel
d. developing audit objectives that reduce control risk.

ASESSMENT OF CONTROL RISK

109. Which of the following is a step in an auditor's decision to assess

control risk at below the maximum?

a. Apply analytical procedures to both financial data and

nonfinancial information to detect conditions that may indicate
weak controls.
b. Perform tests of details of transactions and account balances to
identify potential errors and fraud.
c. Identify specific controls that are likely to detect or prevent
misstatements
d. Document that the additional audit efort to perform tests of
controls exceeds the potential reduction in substantive testing

110. Which of the following statements concerning control risks correct?

a. Assessing control risk and obtaining an understanding of an

entity‘s internal control maybe performed concurrently.
b. When control risk is at the maximum level an auditor is required to
document the basis for that assessment.
c. Control risk may be assessed sufficiently low to eliminate
substantive testing for significant transaction classes
d. When assessing control risk, an auditor should not consider
evidence obtained in prior audits about the operation of controls

111. After obtaining an understanding of internal control and assessing

control risk, an auditor decides not perform additional tests of controls.
The auditor most likely concludes that the
 a. additional evidence to support a further reduction in control risk
is not cost- beneficial to obtain
b. Assessed level of inherent risk exceeds the assessed level of control
risk.
c. internal control is property designed and can be relied on
d. Evidence obtainable through tests of controls would not support an
increased assessment of control risk.

112. Which of the following models expresses the general relationship of risks
associated with the auditor's evaluation of internal control (CR), study of
the business and application of analytical procedures (IR), and overall
audit risk (AR), that would lead the auditor to conclude that additional
substantive tests of details of on account balance are not necessary?

IR CR AR
a. 20% 40% 10%
b. 20% 60% 5%
c. 10% 70% 4.5
%
d. 30% 40% 5.5

113. In studying internal control and assessing control risk, the

auditor applies the following steps:

A. Determine the internal control policies and procedures

necessary to prevent or detect errors or fraud that could occur
in case of the absence of controls
B. Identify control weaknesses
C. Determine whether the necessary policies and procedures
have been designed and whether they have been placed in
operation
D. Design substantive audit programs
E. Consider the types of errors or fraud that could occur in the
absence of necessary controls.

The proper sequence in applying these steps is:

a. CDEAB
b. CBAED
c. EACBD
d. AECBD
114. After obtaining an understanding of the client's internal control,
the auditor should consider whether

a. the projected degree of efectiveness of internal control is justified.

b. the evidential matter obtained from the study of the internal
control system can provide a reasonable basis for an opinion.
c. further testing of internal control procedures is likely to permit
further reduction in the assessed-level of control risk.
d. sufficient knowledge has been obtained about the entity's entire
system of internal control.

115. An independent auditor has concluded that the client's records,

procedures and representations can be relied upon based on tests
made during the year when internal control was found to be efective.
The aucitor should test the records, procedures, and representations
again at year-end if:

a. Inquiries and observations lead the auditor to believe that

conditions have changed significantly
b. Comparisons of year-end balances with like balances at prior dates
revealed significant fluctuations.
c. Unusual transactions occurred subsequent to the completion at
the interim audit work
d. Client records are in a condition that facilitates efective and efficient
testing.

116. In assessing control risk, The auditor must, as a minimum,

a. perform tests of all significant controls

b. obtain an understanding of the design and implementation of the
client's internal control.
c. obtain an understanding of the design of the client's internal control
d. obtain an understanding of the design, implementation, and
operating efectiveness of the client's internal control.

117. In the assessment of control risk, the auditor is basically concerned

that the client‘s internal control provides reasonable assurance that

a. management cannot override the system

 b. operational efficiency has been achieved in accordance with
management plans.
c. errors and fraud have been prevented or detected.
d. controls have not been circumvented by collusion.

118. Which of the following is one of the most fundamental and efective
controls?

a. Increased use of computers for recording accounting transactions.

b. Increased reliance on internal auditors to monitor accounting systems
c. Segregation of incompatible duties across several people
d. Having internal auditors report only tothe Board of Directors.

119.Which circumstance would be consistent with both the planned

assessed level and the assessed level of controlrisk being low?

a. No tests of controls have been performed.

b. Tests of controls have been performed.
c. Externally generated evidence supports management's contentions
relating to internal control.
d. The results of the consideration of internal control suggest that
controls are not operating efectively.

120. The results of the considerations of internal control least likely

afect the auditor‘s decisions pertaining to:

a. The use of analytical procedures.

b. The assessment of control risk.
c. The assessment of inherent risk.
d. Detailed tests of ending balances.

121.A material weakness in the design and the operation of controls that
had been discovered in an audit of internal controls results in:

a. A management letter
b. An unfavorable opinion
c. Firing of the auditors
d. Adjusting audit journal entries
122. Which of the following requirements of internal control is expected
of management of a public entity?

a. Accept responsibility for the efectiveness of internal control.

b. Evaluate the efectiveness of internal control using a written assertion
c. Prepare a detailed flowchart that summarizes the company's internal
control.
d. Provide a monthly updated report on-internal control.
123. The definition of which type of control deficiency explicitly
includes an amount that is more than inconsequential?

a. Material weakness.
b. Reportable condition.
c. Significant deficiency
d. Strong control deficiency.

124. Which of the following terms includes the concept that least
likely to have a likelihood of occurrence?

a. Material Weakness–Yes; Reportable Condition—Yes

b. Material Weakness–Yes; Reportable Condition—No
c. Material Weakness–No; Reportable Condition—Yes
d. Material Weakness–No; Reportable Condilion—No

125. When performing an audit of internal control for a public

company, the auditors will consider which of the following types of
controls?

a. Preventive–Yes: Detective—Yes
b. Preventive–Yes: Detective—No
c. Preventive--No; Detective—Yes
d. Preventive--No; Detective—No

126. Which of the following is not a strong indicator of the existence

of a material weakness in internal control?

a. An inefective control environment.

b. An inefective internal audit function.
 c. Inadequate controls over the selection of the best investment
opportunities.
d. Inefective oversight of external reporting by the audit committee.

127.Acontrol that reduces the risk that on existing or potential control

weakness will result in a failure to meet a control objective is referred
to as a:

a. Compensating control.
b. Conditional control.
c. Non-routine control.
d. Walkthrough control.

128. Which of the following is not a characteristic of the primarily

substantive approach?

a. The auditor usually gathers all or most of the evidence with

substantive tests.
b. Usually little or no reliance is placed on controls.
c. The assessment of control risk is usually at or near maximum level.
d. Extensive tests of controls are performed.

129. Which Of the following is not a characteristic of the lower control risk
approach?

a. Control risk is usually assessed at maximum level.

b. Substantive tests are usually restricted.
c. The auditor usually plans to place considerable reliance on the
controls.
d. The auditor plans to perform extensive tests of controls.

130. If the auditor uses the primarily substantive approach instead of

the lower control risk approach

a. A higher level of understanding of internal control is required.

b. The auditor plans to assess control risk at a lower level.
c. The auditor plans a heavier reliance on substantive tests
d. The auditor plans to restrict substantive tests
131. After obtaining an understanding of an entity's internal control,
an auditor may assess control risk at the maximum level for some
assertions because he
 a. believes the internal control policies and procedures are unlikely
to be efective.
b. determines that the pertinent internal control components are not
well documented.
c. performs tests of controls to restrict detection risk to an acceptable
level.
d. identifies internal control policies and procedures that are likely
to prevent material misstatements.

132. An auditor may decide to assess control risk at the maximum level
for certain assertions because he believes

a. sufficient evidential matter to support the assertions is likely to be

available
b. Evaluating the efectiveness of policies and procedures is inefficient.
c. more emphasis on tests of controls than substantive tests is
warranted,
d. Considering the relationship of assertions to specific account
bc4ances is more efficient.

133. The assessment of control risk can be made at any of the

following times except:

a. Immediately after obtaining an understanding of internal control.

b. After some tests of controls are performed concurrently with
obtaining an understanding.
c. After the performance of additional tests of controls designed to
further lower the assessment of control risk.
d. After performing all the necessary substantive tests.

134. Which of the following statements is true? If control risk is

assessed of the maximum, the

a. nature of related substantive tests should be changed from

more to less efective
b. nature of related substantive tests should be changed from less
to more efective.
c. timing of related substantive tests should be changed from year-
end to an interim date.
 d. extent of related substantive tests should he changed from a
larger to a smaller sample.

135. After obtaining an understanding of an entity's internal controls

and assessing control risk, an auditor may next:

a. Perform tests of controls to verify management's assertions that

are embodied in the financial statements
b. Consider whether he can reduce the assessed level of control risk
further
c. Discontinue searching for reportable condition.
d. Evaluate whether control activities can detect material
misstatements.

136. After considering a client's internal control, the 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 planned substantive tests
c. increase the extent of anticipated analytical procedures.
d. perform all tests of controls to the extent outlined in the pre-
planned audit program.

137. Which of the following statements is correct concerning reportable

conditions in an audit?

a. An auditor is required to search for reportable conditions during an

audit.
b. All reportable conditions are also considered to be material
weaknesses.
c. An auditor may communicate reportable conditions during an
audit or after the audit's completion.
d. An auditor may report that no reportable conditions were noted
during an audit.

138. As a result of tests of controls, an auditor assessed control risk too

low d decreased substantive testing. This assessment occurred
because the true deviation rate in the population was
 a. Less than the risk of assessing control risk too low, based on the
auditor's sample.
b. Less than the deviation rate in the auditor's sample.
c. More than the risk of assessing control risk too low, based on the
auditor's sample.
d. More than the deviation rate in the' auditor's sample.

139. After obtaining an understanding of internal control and

assessing control risk, an auditor decided to perform tests of controls.
The auditor most likely decided that:

a. It would be efficient to perform tests of controls that would result

in a reduction in planned substantive tests.
b. Additional evidence to support a further reduction in control risk is
not available
c. An increase in the assessed level of control risk is justified for
certain financial statement assertions.
d. There were many internal control weaknesses that could allow
errors to enter the accounting system.

140. Once an understanding of the internal control structure that is

sufficient for audit planning is obtained, then the auditor must first
assess

a. whether a lower level of control risk could be supported

b. whether the financial statements are auditable
c. the level of control risk supported by the understanding obtained
d. the level of control risk to use.
 Module 7

Computerized Environment

1. Which of the following is not an advantage of a computerized accounting

system?

A. Computers process transactions uniformly

B. Computers help alleviate human errors
C. Computers can process many transactions quickly
D. Computers leave a thorough audit trail which can be easily followed

2. A common difficulty in auditing a computerized accounting system is:

A. Data can be erased from the computer with no visible evidence

B. Because of the lack of an audit trail, computer systems have
weaker controls and more substantive testing is required
C. Because of the uniform nature of transaction processing,
computer systems have strong controls and less substantive testing
is required
D. The large dissemination of the entity points into the computer
system leads to weak overall reliance on information generated by
a computer

3. Which of the following most likely represents a disadvantage for an entity

that maintains computer data files rather than manual files?

A. It‘s usually more difficult to detect transposition errors.

B. Transactions are usually authorized before they are executed and
recorded.
C. It‘s usually easier for unauthorized persons to access and alter the
files.
D. Random error is more common when similar transactions are
processed in diferent ways.

4. Which of the following statements best describes a weakness often

associated with computers?

A. Computer equipment is more subject to a systems error than

manual processing is subject to human error.
B. Computer equipment processes and records similar transactions in
a similar manner.
C. Control activities for detecting invalid and unusual transactions are
less efective than manual control activities.
D. Functions that would normally be separated in a manual system
are combined in a computer system.
5. How have Electronic Data Interchange (EDI) systems afected audits?

A. Since orders and billing transactions are done over the

computer, source documents cannot be obtained/
B. Auditors often need to plan ahead to capture information about
selected transactions over the EDI.
C. There is no audit trail in an EDI systems, so controls are typically
assessed as weak.
D. Since all transactions occur over the computer, reliability is high
and little substantive testing is needed.

6. Since the computer can do many jobs simultaneously, segregation is not

as defined as it is in a manual system. How can a computer system be
modified to compensate for the lack of segregation of duties?

A. The computer system should be under the direction of the

internal audit department.
B. The computer system should be accessible to various competent
parties so they can check on each other‘s work.
C. Strong controls should be built into both the computer software and
hardware to limit access and manipulation.
D. Many companies run complete parallel manual and automated
accounting systems for a cross check on input and output.

7. Internal control is inefective when the computer personnel

A. Participates in computer software acquisition decisions.

B. Designs documentation for computerized systems.
C. Originates changes in master files.
D. Provides physical security for program files.

8. An auditor‘s consideration of a computer‘s control activities has disclosed

the following four circumstances. Which circumstance constitutes a
significant deficiency in internal control?

A. Computer operators do not have access to the complete

software support documentation.
B. Computer operators are closely supervised by the programmers.
C. Programmers are not authorized to operate computers.
D. Only one generation of backup files is stored in an of-premises
location.
9. Matthews Corp. has changed from a system of recording time worked on
time cards to a computerized payroll system in which employees record
time in and out with magnetic cards. The IT system automatically updates
all payroll records for the time worked. Because of this change,

A. Generalized audit software must be used.

B. Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.

10. The increased presence of the microcomputer in the workplace has

resulted in an increasing number of persons having access to the
computer. A control that is often used to prevent unauthorized access to
sensitive programs is:

A. Backup copies of the diskettes.

B. Passwords for each of the users.
C. Disaster-recovery procedures.
D. Record counts of the number of input transactions in a batch
being processed.

11. Checklists, systems development methodology, and staf hiring are

examples of what type of controls?
A. Detective
B. Preventive
C. Subjective
D. Corrective

12. When an on-line, real-time (OLRT) computer-based processing system is

used, internal control can be strengthened by

A. Providing for the separation of duties between keypunching and

error listing operations.
B. Attaching plastic file protection rings to reels of magnetic tape
before new data can be entered on the file.
C. Making a validity check of an identification number before a user
can have access to the computer files.
D. Preparing batch totals to provide assurance that file updates are
made for the entire input.

13. One of the features that distinguishes computer processing from manual
processing is
 A. Computer processing virtually eliminates the occurrence of
computational error normally associated with manual processing.
B. Errors or fraud in computer processing will be detected soon after
their occurrences.
C. The potential for systematic error is ordinarily greater in manual
processing than in a computerized processing.
D. Most computer systems are designed so that transaction trails
useful for audit do not exits.

14. What type of computer-based system is characterized by data that are

assembled from more than one location and records that are updated
immediately?

A. Microcomputer system
B. Minicomputer system
C. Batch processing system
D. Online real-time system

15. For the accounting system of Acme Company, the amounts of cash
disbursements entered into on CBIS terminal are transmitted to the
computer that immediately transmits the amounts back to the terminal
for display on the terminal screen. This display enables the operator to

A. Establish the validity of the account number.

B. Verify that the amount was entered accurately.
C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.

16. The technique that lends an efective control for protecting confidential
information from unauthorized access by transforming programs and
information into an unintelligible form:

A. Defragmentation.
B. Cryptography.
C. Trojan horse.
D. Recycle.
17. Which of the following is not a major reason why an accounting audit
trail should be maintained for a computer system?
A. Query answering
B. Deterrent to fraud
C. Monitoring purposes
D. Analytical review

18. Adequate control over access to data processing is required to

 A. Prevent improper use or manipulation of data files and programs.
B. Ensure that only console operators have access to program
documentation.
C. Minimize the need for backup data files.
D. Ensure that hardware controls are operating efectively and as
designed by the computer manufacturer.

19. In studying a client‘s internal controls, an auditor must be able to

distinguish between prevention controls and detection controls. Of the
following data controls; which is the best detection control?

A. Use of data encryption techniques

B. Review of machine utilization logs
C. Policy requiring password security
D. Backup and recovery procedure

20. Which of the following is classified as general computerized information

system controls that relates to segregation of duties?

A. Reconciliation of record counts.

B. Authorization of modifying the operating system.
C. A system of transaction logs.
D. Follow up all errors detected during processing.

21. For good internal control over computer program changes, a policy
should be established requiring that

A. The programmer designing the change adequately test the revised

program.
B. All program changes be supervised by the CBIS control group.
C. Superseded portions of programs be deleted from the program run
manual to avoid confusion.
D. All proposed changes should be approved in writing by a
responsible individual.

22. Which of the following would result to an inefective control in a

computer-based information system?

A. The computer librarian maintains custody of computer program

instructions and detailed listings.
B. Computer operators have access to operator instructions and
detailed program listings.
 C. The control group is solely responsible for the distribution of all
computer output.
D. Computer programmers write and debug programs which perform
routines designed by the systems analyst.

23. What is the computer process called when data processing is performed
concurrently with a particular activity and the results are available as
soon enough to influence the particular course of action being taken or
the decision being made?

A. Batch processing
B. Real time processing
C. Integrated data processing
D. Random access processing

24. Online real-time systems and electronic data interchange systems have
the advantages of providing more timely information and reducing the
quantity of documents associated with less automated systems. The
advantages, however, may create some problems for the auditor. Which
of the following characteristics of these systems does not create an audit
problem?

A. The lack of traditional documentation of transactions creates a

need for greater attention to programmed controls at the point of
transaction input.
B. Hard copy may not be retained by the client for long periods of
time, thereby necessitating more frequent visits by the auditor.
C. Control testing may be more difficult give the increased
vulnerability of the client‘s files to destruction during the testing
process.
D. Consistent on-line processing of recurring data increases the
incidence of errors.

25. To ensure that goods received are the same as those shown on the
purchase invoice, a computerized system should:

A. Match selected fields of the purchase invoice to goods received.

B. Maintain control totals of inventory value.
C. Calculate batch totals for each input.
D. Use check digits in account numbers.

26. Errors in data processed in a batch computer system may not be

detected immediately because
A. Transaction trails in a batch system are available only for a limited
period of time.
B. There are delays in processing transactions in a batch system.
 C. Errors in some transactions cause rejection of other transactions in
the batch.
D. Random errors are more likely in a batch than in an on-line system.

27. An integrated group of programs that supervised and support

operations of a computer system as if executes users‘ application
programs is called a(n)

A. Operating system
B. Utility programs
C. Data base management system
D. Language program

28.A A compiler is

A. A procedure oriented language.

B. A machine that translates the assembler program to machine
language.
C. A program that converts procedure oriented language to machine
language.
D. A program that translates symbolic language to machine language.

29. An operating system is

A. The assembler program including the source and object program.

B. All hardware and software needed to operate the computer system.
C. The programs that manage the processing operations of the
computer.
D. Only the hardware of the computer system.

30. Computer systems are becoming more vulnerable to unauthorized access

because

A. Hardware design consideration have declined.

B. Software cannot be readily written to control access.
C. Systems documentation must be available to all users.
D. Access can be gained electronically without physical entry to the
facilities.

31.A A partial set of standard characteristics of a real-time system is

A. Batched input, on-line files, and an extensive communication network.

B. Reliance upon sequential files, prompt input from users, and
interactive programs.
C. On-line files, prompt input users, and an extensive communication
network.
 D. The use of high-level language and the major need being for
historical reports.

32.A A system flowchart

 A. Is synonymous with a program flowchart
B. Is necessary for only computer processes
C. Shows general flow and sequence but not processing details
D. Is necessary for only manual processes

33. An advantage of decentralizing data processing facilities is

A. Economy of scale obtainable through the use of microcomputer.

B. That all similar activities are better handled at a local level.
C. That system failure is of lesser significance.
D. The virtual elimination of the need for communication capability.

34. Which of the following may not be a purpose of using computer-audit

software?

A. Add transactions or balances in the data files for comparison

with control account balance.
B. Select accounts or transactions for detailed testing.
C. To evaluate the collectability of accounts receivable.
D. To examine data bases for unusual items.

35. While systems analysis focuses on information needs and objectives,

system design concentrates on

A. Writing programs
B. Providing for controls
C. Testing completed modules
D. What to do and how to do it

36. All activities related to a particular application in a manual system are

recorded in a journal. The name of the corresponding item in a
computerized system is a

A. Master file.
B. Transaction file.
C. Year-to-date file.
D. Current balance file.

37. The most important factor in planning for system change is

A. Having an auditor as member of the design team.

B. Using state-of-the-art techniques.
C. Involving top management and people who use the system.
 D. Selecting the user to lead the design team.

38. Specialized programs that are made available to users of computer

systems to perform routing and repetitive functions are referred to as

A. Operating system.
B. Utility programs.
C. Database management system.
D. Language program.

39. An interactive system environment is best characterized by

A. Data files with records that are arranged sequentially.

B. Sorting the transaction file before processing.
C. Processing data immediately upon input.
D. The overlapping of input/output and processing operations.

40. Mainframe computer systems include several advanced processing

procedures. Two of the most common processing procedures are
multiprocessing and multiprogramming. Which one of the following
statements about these processing procedures is false?

A. Multiprogramming allows multiple programs to be executed at

exactly the same time.
B. Multiprogramming switches back and forth
between programs during processing.
C. Multiprocessing allows the sharing of a central memory during
processing.
D. Multiprocessing allows multiple programs to be executed at exactly
the same time.

41.A A system with several computers that are connected for

communication can also process its own data, is known as

A. Distributed data processing network.

B. Multidrop network.
C. Centralized network.
D. Decentralized network.

42. Which of the following represents a lack of internal control in a computer-

based information system?
 A. The design and implementation is performed in
accordance with management‘s specific authorization.
B. Any and all changes in application programs have the authorization
and approval of management.
C. Provisions exist to ensure the accuracy and integrity of computer
processing of all files and reports.
D. Both computer operators and programmers have unlimited access
to the programs and data files.

43. The most critical aspect regarding separation of duties within the
information systems is between

A. Project leaders and programmers.

B. Programmers and computer operators.
C. Data control and file librarians.
D. Management and users.

44. Which of the following most likely represents a significant deficiency in

the internal control structure?

A. The systems analyst review applications of data processing and

maintains systems documentation.
B. The systems programmer design systems for computerized
application and maintains output control.
C. The control clerk establishes control over data received by the
EDP department and reconciles control totals after processing.
D. The accounts payable clerk prepares data for computer processing
and enters the data into the computer.

45. Which of the following activities would most likely be performed in the
EDP department?

A. Initiation of changes to master records.

B. Conversion of information to machine-readable form.
C. Correction of transactional errors.
D. Initiation of changes to existing applications.

46. An arrangement where two or more personal computers are linked

together through the use of special software and communication lines.

A. A stand-alone work station.

B. Extension.
C. Local area network.
 D. Internet.

47. Which of the following controls most likely would assure that an entity
can reconstruct its financial records?

A. Hardware controls are built into the computer by the computer

manufacturer.
B. Backup diskettes or tapes of files are stored away from originals.
C. Personnel who are independent of data input and output operations.
D. System flowcharts provide accurate description of input and
output operations.

48. Mill Co. uses a batch processing method to its sales transactions.
Data on Mill‘s sales transactions tape are electronically checks in
preparing its invoice, sales journals, and updated customer account
balance. One of the direct outputs of the creation of the tape most likely
would be a

A. Report showing exceptions and control totals.

B. Printout of the updated inventory records.
C. Report show overdue accounts receivable
D. Printout of the sakes price master file

49. An auditor anticipates assessing control risk at a low level in a

computerized environment. Under these circumstances, on which , of the
following procedires would be the auditor initially focus?

A. Programmed control procedures

B. Application control procedures
C. Output control procedures
D. General control procedures.

50. A computer system that enables users to access data and programs
directly through workstations.

A. On-line computer systems

B. Data-base system
C. Flat-file system
D. Computer line system

51. Which of the following client electronic data processing (EDP) systems
generally can be audited without examining or directly testing the EDP
computer programs of the systems?
 A. A system that performs relatively uncomplicated processes and
produces detailed output.
B. A system that afects a number of essential master filers and
produces a limited output.
C. A system that updates a few essential master files and produces
no printed output other than final balances.
D. A system that performs relatively complicated processing and
produces very little detailed output.

52. Computer systems are typically supported by a variety of utility

software packages that are important to an auditor because they

A. May enable unauthorized changes to data files if not properly

controlled.
B. Are very versatile programs that can be used on hardware of
many manufacturers.
C. May be significant components of a client‘s application programs.
D. Are written specifically to enable auditors to extract and sort data.

53. To obtain evidence that online access controls are properly functioning
an auditor most likely would

A. Create checkpoints of periodic intervals after live data processing

to test for unauthorized use of the system.
B. Examine the transaction log to discover whether any transactions
were lost or entered twice due to a system malfunction
C. Enter invalid identification numbers or passwords to ascertain
whether the system rejects them.
D. Vouch a random sample of processed transactions to assure
proper authorization.

54. Whether or not a real time program contains adequate controls is most
efectively determined by the use of

A. Audit software
B. A tracing routine
C. An integrated test facility
D. A traditional test deck

55. An auditor would least likely use computer software to:

A. Access client date fails

B. Prepare spreadsheets
C. Assess EDP controls
 D. Construct parallel simulations

56. Which of the following is not a basis of classifying an on-line system?

A. How information is processed

B. How information is entered into the system
C. When the results are available to the user
D. The type of information to be processed

57. Which of the following is not a characteristic of a batch processed

computer system?

A. The collection of like transactions which are sorted and

processed sequentially against a master file
B. Keypunching of transactions, followed by machine processing
C. The production of numerous printouts
D. The posting of a transaction, as it occurs, to several files, without
immediate printouts.

58. In a computerized system, procedure or problem-oriented language is

converted to machine language through a(an):

A. Interpreter
B. Verifier
C. Compiler
D. Converter

59. Adequate technical training and proficiency as an auditor encompasses

an ability to understand an IT system sufficiently to identify and evaluate:

A. The processing and imparting of information.

B. All accounting control features.
C. The degree to which programming conforms with application of
generally accepted accounting principles.
D. Essential control procedures

60. The computer process whereby data processing is performed

concurrently with a particular activity and the results are available soon
enough to influence the course of action being taken or the decision
being made is called:

A. Random access sampling.

B. Integrated data processing.
 C. On-line, real-time system.
D. Batch processing system.

61. A type of computer system whereby individual transactions are entered

on line and are added to a transaction file that contains other transactions
entered during the period. Later, this transaction file, on a periodic basis,
updates the master file.

A. On-line, batch system.

B. On-line, real-time system.
C. On-line, memo update system.
D. On-line, shadow update system.

62. When a database administrator‘s position exists within an organization,

the auditor must be aware of the:

A. Output efectiveness/efficiency considerations

B. Need for coded program files
C. Use of encrypted dialog in a two-way authentication process
D. Inherent violation of the principle of separation of duties

63. Which of the following functions would have the least efect on an audit
if they are not properly segregated?

A. The systems analyst and the programmer functions.

B. The computer operator and programmer functions.
C. The computer operator and the user functions.
D. The applications programmer and the systems programmer.

64. Which of the following is the least significant characteristic of an on-line

computer system?

A. Adequately visible transaction trail

B. Potential access to the system by the programmer
C. On-line access to the system by users
D. On-line data entry and validation

65. When software or files can be accessed from on-line servers, users
should be required to enter a(n)

A. Parity check.
B. Self-diagnosis test.
C. Personal identification code.
 D. Echo check.

66. Controls which are designed to assure that the information processed by
the computer is valid, complete, and accurate are called

A. Input controls.
B. Output controls.
C. Processing controls.
D. General controls.

67. Input controls include controls over:

A. Conversion of input data to machine-readable form.

B. Visual scanning.
C. Comparison to source documents.
D. Process tracing data.

68. Which of the following is mostly a potential threat to an on-line computer

system?

A. A user may have the potential ability to make unauthorized

changes to the data and program.
B. Validation checks of data entered is usually ignored.
C. Most of transactions may be omitted because of the absence of
adequate audit trail.
D. Most of documents that will be processed may lack proper
authorization.

69. In a computer system, hardware controls are designed to

A. Arrange data in a logical sequence for processing.

B. Correct errors in software.
C. Monitor and detect errors in source documents.
D. Detect and control errors arising from use of equipment.

70. Which of the following represent examples of general, application and

user control activities, respectively, in the computer environment?

A. Control over access to programs, computer exception reports,

and manual checks of computer output.
B. Manual checks of computer output, control over access to
programs, and computer exception reports.
C. Computer exception reports, control over access to programs,
and manual checks of computer output.
 D. Manual checks of computer output, computer exception reports,
and control over access to programs.

71. Which of the following is not a type of general information technology

controls?

A. Processing controls.
B. Systems development.
C. Physical and on-line security
D. Segregation of IT duties

72. Suppose that the computer operators are also programmers and have
access to computer programs and data files, in which of the following
general controls will the auditor most likely conclude to have a weakness?

A. Processing controls.
B. Back-up and contingency planning
C. Systems development
D. Segregation of computer professionals‘ duties

73. The possibility of losing a large amount of information stored in computer

files most likely would be reduced by the use of

A. Back-up files.
B. Check digits.
C. Completeness tests.
D. Conversion verification.

74. In considering a client‘s internal control structure in a computer

environment, the auditor will encounter general controls and application
controls. Which of the following is an application control?

A. Organizations charts
B. System flowcharts
C. Hash total
D. Control over program changes

75. Which of the following control policies would potentially prevent the
programmer to make unauthorized changes to programs?

A. An unscheduled rotation of duties of the diferent programmers.

B. Having a system programmer, a person diferent form an
application programmer.
 C. A thorough checking and testing of the application program
before they are finally installed.
D. A strict implementation of a policy that prevents the
programmer to have access to program used in the computer
operations

76. Totals of amounts in the computer-record data fields which are not
usually added for other purposes but are used only for data processing
control purposes are called

A. A record totals.
B. Hash totals.
C. Processing data totals.
D. Field totals.

77.A A hash total of employee numbers is part of the input to a payroll

master file update program. The program compares the hash total
to the total computed for transactions applied to the master file. The
purpose of this procedure is to:

A. Verify that employee numbers are valid.

B. Verify that only authorized employees are paid.
C. Detect errors in payroll calculations.
D. Detect the omission of transaction processing.

78. An accounts payable program posted a payable to a vendor that is not

included in the on-line vendor master file. A control which would prevent
this error is a

A. Validity check
B. Range check
C. Reasonableness test
D. Parity check

79. In a computerized sales processing system, which of the following

controls is most efective in preventing sales invoice pricing errors?

A. Sales invoices are reviewed by the product managers before being

mailed to customers.
B. Current sales prices are stored in the computer, and, as stock
numbers are entered from sales orders, the computer automatically
prices the orders.
C. Sales prices, as well as product numbers, are entered as sales
orders are entered at remote terminal locations.
D. Sales prices are reviewed and updated on a quarterly basis.
80. A computer report which is designed to create an audit trail for each on-
line transaction.

A. Transaction file
B. Master file
C. Transaction edit report
D. Transaction log

81. If a control total were to be computed on each of the following data

items, which would best be identified as a hash total for a payroll
computerized application?

A. Net pay
B. Department numbers
C. Hours worked
D. Total debits and total credits

82.A A control to verify whether the peso amounts for all debits and credits
for incoming transactions are posted to a receivables master file is the:

A. Generation number check.

B. Master reference check.
C. Hash total.
D. Control total.

83. Which of the following would not be an appropriate procedure for testing
the general control activities of an information system?

A. Inquiries of client personnel.

B. Inspecting computer logs
C. Testing for the serial sequence of source documents.
D. Examination of the organizational chart to determine the
segregation of duties.

84. While entering data into the cash receipts transaction file, an employee
transposed two numbers in a customer code. Which of the following
controls could prevent input of this type of error?

A. Sequence check
B. Record check
C. Self-checking digit
D. Field-size check
85. Reconciling the processing control totals is an example of

A. An input control
B. An output control
C. A processing control
D. A file management control

86. The completeness of computer-generated sales figures can be tested by

comparing the number of items listed on the daily sales report with the
number of items billed on the actual invoices. This process uses

A. Check digits
B. Control totals
C. Validity tests
D. Process tracing data

87. If an auditor is using test data in a client‘s computer system to test the
integrity of the systems output, which of the following types of controls is
the auditor testing?

A. General controls
B. User controls
C. Quantitative test controls
D. Application controls

88. Which of the following controls would be most efficient in reducing

common data input errors?

A. Keystroke verification
B. A set of well-designed edit checks
C. Balancing and reconciliation
D. Batch totals

89. EDP accounting control procedures are referred to as general or

application controls. The primary objective of application controls in a
computer environment is to

A. Ensure that the computer system operates efficiently.

B. Maintain the accuracy of the inputs, files and outputs for specific
applications.
C. Ensure the separation if incompatible functions in the data
processing departments.
D. Plan for the protection of the facilities and backup for the systems.
90. Which of the following is an incorrect statement regarding testing
strategies related to auditing through the computer?

A. The test data approach involves processing the client‘s data on a

test basis to determine the integrity of the system
B. The test data approach involves processing the auditor‘s test data
on the client‘s computer system to determine whether computer-
performed controls are working properly
C. Test data should include all relevant data conditions that the auditor
is interested in testing
D. When the auditor uses the embedded audit module approach, an
audit module is inserted in the client‘s system to capture
transactions with certain characteristics

91. An internal auditor noted the following points when conducting a

preliminary survey in connection with the audit of an EDP department.
Which of the following would be considered a safeguard in the control
system on which the auditor might rely?

A. Programmers and computer operators correct daily processing

problems as they arise
B. The control group works with user organizations to correct rejected
input
C. New systems are documented as soon as possible after they
begin processing live data
D. The average tenure of employees working in the EDP
department is ten months

92. The employees in a manufacturing are made many errors as they wrote
their clock numbers on time sheets and cost distribution forms. An
efective control technique would have been the use of

A. Batch totals.
B. Turn around documents.
C. Hash totals.
D. Record counts.

93. An on-line access control that checks whether the user‘s code number is
authorized to initiate a specific type of transaction of inquiry us referred
to as

A. Password
B. Computability test
C. Limit check
D. Reasonableness test
94. A control procedure that could be used in an on-line system to provide
an immediate check on whether an account number has been entered on
a terminal accurately is a

A. Compatibility test
B. Self-checking digit
C. Hash total
D. Sequence check

95. When erroneous data are detected by computer program controls, such
data may be excluded from processing and printed on an error report. The
error report should most probably be reviewed and followed up by the

A. IT control group
B. Supervisor of computer operations
C. System analyst
D. Computer programmer

96. An advantage of having a computer maintain an automated error log in

conjunction with a computer edit process is that

A. Reports can be developed that summarize the errors by type,

cause and person responsible.
B. Less manual work is required to determine how to correct errors.
C. Better editing techniques will result.
D. The audit trail is maintained.

97. Program documentation is a control designed primarily to ensure that

A. Programmers have access to the tape library or information on disk

files.
B. Programs do not make mathematical errors.
C. Programs are kept up to date and perform as intended.
D. No one has made use of the computer hardware of personal reasons

98. In order to control purchasing and accounts payable, an information

system must include

A. Purchase order, receiving reports, and vendor invoices.

B. Receiving reports, and vendor invoices.
C. Purchase requisitions, purchase orders, receiving reports of goods
needed, and vendor invoices.
D. Purchase orders, receiving reports, and inventory reports of goods
needed.
99. Which of the following is not an inherent characteristic of customize
application software?

A. They are typically used without modifications of the programs.

B. The programs are tailored-made according to the specific needs of
the user.
C. They are developed by software manufacturer according to a
particular user‘s specifications.
D. It takes a longer time of implementation.

100. Payroll systems should have elaborate controls to prevent, detect,

and correct errors and authorized tampering. The best set of controls for
a payroll system includes

A. Batch and hash totals, record counts of each run, proper separation
of duties, special control over unclaimed checks, and backup copies
of activities and master files.
B. Passwords and user codes, batch totals, employee supervision and
record count for each run.
C. Sign tests, limit tests, passwords and user codes on-line edit check,
and payments by check.
D. Batch totals, record counts, user codes, proper separation of duties,
and on- line edit checks.

101. Some of the more important controls that relate to automated

accounting information systems are validity checks, limit checks, field
checks, and sign tests. These are classified as

A. Control total validation routines.

B. Output controls.
C. Input validation routines.
D. Data access validation routines.

102. In an automated payroll processing environment, a department

manager substituted the time card for a terminated employee with a time
card for a fictitious employee. The fictitious employee had the same pay
rate and hours worked as the terminated employee. The best control
technique to detect this action using employee identification numbers
would be a

A. Batch total
B. Hash total
C. Record count
D. Subsequent check
103. An employee in the receiving department keyed in a shipment
from a remote terminal and inadvertently omitted the purchase order
number. The best systems control to detect this error would be

A. Batch total
B. Sequence check
C. Compatibility test
D. Completeness test

104. The reporting of accounting information plays a central role in the

regulation of business operations. Preventive controls are an integral part
of virtually all accounting processing systems, and much of the
information generated by the accounting system is used for preventive
control purposes. Which one of the following is not a preventive essential
element of a sound preventive control system?

A. Separation of responsibilities for the recording, custodial, and

authorization functions.
B. Sound personnel policies
C. Documentation of policies and procedures
D. Implementation of state-of-the-art software and hardware

105. Which one of the following input validation routines is not likely to
be appropriate in a real time operation?

A. Field check
B. Sequence check
C. Redundant data check
D. Reasonableness check

106. Which of the following controls is a processing control designed to

ensure the reliability and accuracy of data processing?

Limit test Validity check

A. Yes Yes
B. No No
C. No Yes
D. Yes No

107. For control purposes, which of the following should be

organizationally segregated from the computer operations functions?
 A. Data conversion
B. Surveillance of CRT messages
C. Systems development
D. Minor maintenance according to a schedule

108. When EDP programs or files can be accessed from terminals,

users should be required to enter a(n)

A. Parity check
B. Personal identification code
C. Self-diagnostic test
D. Echo check

109. An auditor would most likely be concerned with which of the

following controls in a distributed data processing system?

A. Hardware controls
B. Systems documentation controls
C. Access controls
D. Disaster recovery controls

110. Which of the following standards or group of standards is(are)

mostly afected by a computerized information system environment?

A. General standards
B. Standards of fieldwork
C. Reporting standards
D. All of these are equally afected.

111.A control feature in an electronic data processing system requires the

central processing unit (CPU) to send signals to the printer to activate the
print mechanism for each character. The print mechanism, just prior to
printing, sends signal back to the CPU verifying that the proper print
position has been activated. This type of hardware control is referred to as

A. Echo check
B. Validity control
C. Signal control
D. Check digit control

112.Which of the following is an example of a check digit?

 A. An agreement of the total number of employees to the total
number of checks printed by the computer
B. An algebraically determined number produced but the other
digits of the employee number
C. A logic test that ensures all employee numbers are nine digits
D. A limit check that an employee‘s hours do not exceed 50 hours
per work week

113.Acustomer erroneously ordered item No. 86321 rather than item No.
83621. When this order is processed, the vendor‘s EDP department would
identify the error with what type of control?

A. Key verifying
B. Self-checking digit
C. Batch total item inspection
D. Item inspection

114. In an automated payroll system, all employees in the finishing

department were paid at the rate of P75 per hour when the authorized
rate was P70 per hour. Which of the following controls would have been
most efective in preventing such an error?

A. Access controls which would restrict the personnel department‘s

access to the payroll master file data
B. A review of all authorized pay rate changes by the personnel
department
C. The use of batch control totals by department
D. A limit test that compares the pay rate per department with the
maximum rate for all employees

115. Which of the following errors would be detected by batch controls?

A. A fictitious employee as added to the processing of the weekly

time cards by the computer operator
B. An employee who worked only 5 hours in the week was paid for 50
hours
C. The time card for one employee was not processed because it
was lost in transit between the payroll department and the date
entry functions
D. All of the above

116. After preliminary phase of the review of a client‘s EDP controls, an

auditor may decide not to perform tests of controls (compliance tests)
related to the control procedures within the EDP portion of the client‘s
internal control structure. Which of the following would not be a valid
reason for choosing to omit such tests?
 A. The controls duplicate operative controls existing elsewhere in
the structure
B. There appear to be major weaknesses that would preclude
reliance on the stated procedure
C. The time and costs of testing exceed the time and costs in
substantive testing if the tests of controls show the controls to
be operative
D. The controls appear adequate

117. To obtain evident that user identification and password control

procedures are functioning as designed, an auditor would most likely

A. Attempt to sign on to the system using invalid user

identifications and passwords
B. Write a computer program that simulates the logic of the
client‘s access control software
C. Extract a random sample of processed transactions and ensure
that the transactions were appropriately authorized
D. Examine statements signed by employees stating that they
have not divulged their user identifications and passwords to any
other person

118.Awell prepared flowchart should make it easier for the auditor to

A. Prepare audit procedures manuals

B. Prepare detailed job descriptions
C. Trace the origin and disposition of documents
D. Assess the degree of accuracy of financial data

119. Testing controls without the use of the computer is possible when
the:

A. Computer generates visible evidence of compliance with the

control
B. Auditor does not fully understand the computer system
C. Controls appear to be adequate
D. Input/output is done in batches

120. Which of the following audit techniques most likely would provide
an auditor with the most assurance about the efectiveness of the
operation of an internal control procedure?

A. Inquiry of client personnel

B. Recomputation of account balance amounts
C. Observation of client personnel
D. Confirmation with outside parties
121. Creating simulated transactions that are processed through a
system to generate results that are compared with predetermined results,
is an auditing procedure referred to as:

A. Desk checking
B. Use of test data
C. Completing outstanding jobs
D. Parallel simulation

122. Which of the following is least likely a risk characteristic associated

with CIS environment?

A. Error embedded in an application‘s program logic maybe difficult to

manually detect on a timely basis
B. The separation of functional responsibilities diminishes in a
computerized environment
C. Initiation of changes in the master file is exclusively handled by
respective users
D. The potential unauthorized access to data or to alter them
without visible evidence maybe greater

123. Which of the following is an incorrect statement regarding testing

strategies related to auditing through the computer?

A. The test data approach involves processing the client‘s data on a

test basis to determine the integrity of the system
B. The test data approach involves processing the auditor‘s test data
on the client‘s computer system to determine whether computer
performed controls are working properly
C. Test data should include all relevant data conditions that the auditor
is interested in testing
D. When the auditor uses the embedded audit module approach, an
audit module is inserted in the client‘s system to capture
transactions with certain characteristics

124. Which of the following is not one of the auditor‘s major concerns
when he has to make a documentation of the internal control in a
computerized environment?

A. The organizational structure of the clients CIS activities

B. The access controls
C. The significance and complexity of computer processing in each
significant accounting application
D. The use of software packages instead of customized software
125. An auditor is preparing test data for use in the audit of a computer-
based accounts receivable application. Which of the following items would
be appropriate to include as an item in the test data?

A. A transaction record which contains an incorrect master file control

total
B. A master file record which contains invalid customer identification
number
C. A master file record which contains an incorrect master file control
total
D. A transaction record which contains an invalid customer identification
number

126. If an auditor is using test data in a client‘s computer system to

test the integrity of the systems output, which of the following types of
controls is the auditor testing?

A. General controls
B. User controls
C. Quantitative test controls
D. Applications controls

127. Which of the following is not a function of generalized audit

software?

A. To aid in the random selection of transactions for substantive testing

B. To run in parallel with the client‘s application software and compare
the output
C. To test the mathematical accuracy by footing and cross-foot
items in the accounting system
D. To keep an independent log of access to the computer applications

software 128.Which of the following is not a computer-assisted audit

technique?

A. Test data
B. Tagging and lagging
C. Integrated test facility
D. Program analysis

129.When auditing ―around the computer‖, the auditor performs tests of

A. General computer controls but does not test application computer

controls
 B. Application computer controls but does not test general computer
controls
C. Neither general nor application computer controls
D. Both general and application computer controls

130.Acommon difficulty in auditing a computerized accounting system is:

 A. Data can be erased from the computer with no visible evidence
B. Because of the lack of audit trail, computer systems have
weaker controls and more substantive testing is required
C. Because of the uniform nature of transaction processing,
computer systems have strong controls and less substantive testing
is required
D. The large dissemination of entry points into the computer
system leads to weak overall reliance on information generated by
a computer

131. In auditing through a computer, the test data method is used by

auditors to test the

A. Accuracy of input data

B. Validity of the output
C. Procedures obtained within the program
D. Normalcy of distribution within the program

132. An integrated test facility (ITF) would be appropriate when the

auditor needs to

A. Trace a complex logic path through an application system

B. Verify processing accuracy concurrently with processing
C. Monitor transactions in an application system continuously
D. Verify load module integrity for production programs

133. The auditor‘s objective to determine whether client‘s computer

programs can correctly handle valid and invalid transactions as they arise
is accomplished through the:
A. test data approach
B. Generalized audit software approach
C. Microcomputer-aided auditing approach
D. Generally accepted auditing standards

134. Which of the following is a disadvantage of the integrated test

facility approach?

A. In establishing fictitious entities, the auditor may be compromising

audit independence
B. Removing the fictitious transactions from the system is somewhat
difficult and, if not carefully done, may contaminate the client‘s files
C. ITF is simple an automated version of auditing ―around‖ the
computer
D. The auditor may not always have a current copy of the authorized
version of the client‘s program
135. When testing a computerized accounting system, which of the
following is not true of the test data approach?
 A. The test data need consist pf only those valid and invalid
conditions in which the auditor is interested
B. Only one transaction of each type need be tested
C. Test data are processed by the client‘s computer programs under
the auditor‘s control
D. The test data must consist of all possible valid and invalid conditions

136. Which of the following procedures is an example of auditing

―around‖ the computer?

A. The auditor traces adding machine tapes of sales order batch totals
to a computer printout of the sales journal
B. The auditor develops a set of hypothetical sales transactions and,
using the client‘s computer program, enters the transactions into
the system and observes the processing flow
C. The auditor enters hypothetical transactions into the client‘s
processing system during client processing of live data
D. The auditor observes client personnel as they process the biweekly
payroll. The auditor is primarily concerned with the computer
rejection of data that fails to meet reasonableness limits

137. Auditing by testing the input and output of a computer-based

system instead of the computer program itself will

A. Not detect program errors which do not show up in the output

sampled
B. Detect all program errors regardless of the nature of the output
C. Provide the auditor with confidence in the results of the auditing
procedures
D. Not provide the auditor with confidence in the results of the
auditing procedures

138. Which of the following is an acknowledged risk of using test data

when auditing computerized records?

A. The test data may not include all possible types of transactions
B. The computer may not process a simulated transaction in the
same way it would an identical actual transaction
C. The method cannot be used with simulated master records
D. Test data may be useful in verifying the correctness of account
balances, but not in determining the presence of processing
controls

139. An auditor used test data to verify the existence of controls in a

certain computer program. Even though the program performed will on
the test, the auditor may still have a concern that
 A. The program tested is the same one used in the regular production
runs
B. Generalized audit software may have been a better tool to use
C. Data entry procedures may change and render the test useless.
D. No documentation exists for the program

140. An auditor most likely would introduce test data into a

computerized payroll system to test internal controls related to the

A. Existence of unclaimed payroll checks held by supervisors

B. Early cashing of payroll checks by employees
C. Discovery of invalid employee I.D. numbers
D. Proper approval of overtime by supervisors

141. When an auditor tests a computerized accounting system, which

of the following is true of the test data approach?

A. Test date must consist of all possible valid and invalid conditions
B. The program tested is diferent from the program used throughout
the year by the client
C. Several transactions of each type must be tested
D. Test data are process by the client‘s computer programs under the
auditor‘s control

142. Which of the following is not among the errors that an auditor
might include in the test data when auditing a client‘s EDP system?

A. Numeric characteristics in alphanumeric fields

B. Authorized code
C. Diferences in description of units of measure
D. Illogical entries in fields whose logic tested by programmed
consistency checks

143. An auditor who is testing EDP controls in a payroll system would

most likely use test data that contain conditions such as

A. Deductions not authorized by employees

B. Overtime not approved by supervisors
C. Time tickets with valid job numbers
D. Payroll checks with unauthorized signatures
144. Which of the following computer-based assisted auditing
techniques allows fictitious and real transactions to be processed
together without client operating personnel being aware of the testing
process?

A. Integrated test facility

B. Input controls matrix
C. Parallel simulations
D. Data entry monitor

145. Which of the following methods of testing application controls

utilized a generalized audit software package by the auditors?

A. Parallel simulation
B. Integrated testing facility approach
C. Test data approach
D. Exception report tests

146. Test data, integrated test data and parallel simulation each require
an auditor to prepare data and computer programs. CPA‘s who lack either
the technical expertise or time to prepare programs should request from
the manufacturers or EDP consultants for

A. The program Code

B. Flowchart checks
C. Generalized audit software
D. Application controls

147. Parallel simulation is an audit technique employed to verify

processing logic by making use of audit test programs. These audit test
programs ―simulate‖ the processing logic of an application program or
programs under review. Which statement indicates the use of parallel
simulation audit techniques?

A. Live transactions are processed using live programs

B. Live transactions are processed with test master fil
C. Test transactions are processed using test programs
D. Live transactions are processed using test programs.

148. The output of a parallel simulation should always be

A. Printed on a report
B. Compared with actual results manually
C. Compared with actual results using comparison program
 D. Reconciled to actual processing output

149. In auditing through the computer, actual client data is used with:

A. Integrated test facility

B. The test data approach
C. Parallel simulation
D. An expert system

150. Assume that an auditor estimated that 10,000 checks were issued
during the accounting period. If an application control that performs a
limit check for each check request is to be subjected to the auditor‘s test-
data approach, the sample should include

A. Approximately 1,000 test items

B. A number of test items determined by the auditor to be sufficient
under the circumstances
C. A number of test items determine by the auditor‘s reference to the
appropriate sampling tables
D. One transaction
 Module 8

Documentation, financial assertions, and audit evidence

PSA- based questions

1. When receiving audit working papers, the primary responsibility of an

audit supervisor is to determine that

A. Each worksheet is properly identified with a decretive heading.

B. Working papers are properly reference and kept in logical groupings.
C. Standard departmental procedures are adhered to with regard
to working paper preparation and technique.
D. Working papers adequately support the audit findings, conclusions,
and report.

2. A diference of opinion concerning accounting and auditing matters

relative to a particular phase of the audit arises between an assistant
auditor who is an the senior auditor responsible for the engagement. After
appropriate consultation, the assistant auditor asks to be disassociated
from the resolution of the matter. The working papers would probably be

A. Silent on the matter because it is an internal matter for the auditing

firm.
B. Expanded to document that the assistant auditor is completely
disassociated from responsibility for the auditor‘s opinion.
C. Expanded to document the additional work required because
all disagreements of this type will require further substantive
testing.
D. Expanded to document the assistant auditor‘s position and the
manner in which the diference of opinion was resolved

3. During the course of an audit engagement, an auditor prepares and

accumulates audit working papers. The primary purpose of audit working
papers is to

A. Aid the auditor in adequately planning his work.

B. Serve as a reference for future audit engagements.
C. Support the underlying concepts included in the preparation of the
basi financial statements.
D. Support the auditor‘s opinion
4. Which of the following characteristics is most important in assuring the
achievement of the primary purpose of worming papers?

A. Working papers must be of standard format and standard content

B. Working papers must be properly indexed and corss-referenced to
the draft of audit report.
C. Working papers must provide sufficient, competent, and useful
information to support the audit report.
D. Working papers must be arranged in logical order following the
audit program sequence.

5. The primary purpose of the auditor‘s working papers is to

A. Provide evidence of planning and execution of audit procedures

performed.
B. Serve as a means with which to prepare the financial statements.
C. Document the deficiencies in internal control with
recommendations to management for improvement.
D. Comply with the auditing standards of the profession.

6. What is (are) the purpose(s) of audit documentation?

A. Provide reasonable assurance that the audit is conducted in

accordance with PSAs
B. Provide a basis for determining the appropriate audit report
C. Provide the supervisory personnel an opportunity to assess the
sufficiency of evidence obtained during and audit.
D. Audit documentation serves all the given choices.

7. Which of the following is not a primary purpose of audit working papers?

A. Coordinate the examination

B. Assist in the preparation of the audit report
C. Support the financial statements
D. Provide evidence of the audit work performed

8. Which of the following conditions constitutes inappropriateworking

paper preparation?

A. All forms and memoranda used/issued by the auditee department

are included in the working papers.
 B. Flowcharts are included in the working papers.
C. The findings are cross-referenced to the supporting documentation.
D. Tick marks are explained in the working papers.

9. Working papers that record the procedures used by the auditor to gather
evidence should be

A. Considered the primary support for the financial statements being

audited.
B. Viewed as the connecting link between the books of accounts and
the financial statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the particular audit engagement is terminated.

10. Which of the following factors will least afect the auditor‘s judgement as
to the quantity, type, and content of the working papers desirable for a
particular engagement?

A. Nature of the auditor‘s report

B. Nature of the financial statements, schedules, or other information
upon which the auditor is reporting
C. Need for supervision and review
D. Number of personnel assigned to the audit

11. During the audit engagement, data are compiled and included in the
audit working papers. The working papers are

A. Client-owned record of conclusions reached by the auditors who

performed the engagement.
B. Evidence supporting financial statements.
C. Support for the auditor‘s compliance with generally accepted
auditing standards.
D. A record to be used as a basis for the following year‘s engagement.

12. Which of the following is not a factor afecting the independent auditor‘s
judgement about the quantity, type, and content of audit working papers?

A. The need for supervision and review of the work performed by

assistants.
B. The nature and condition of the client‘s records and internal controls.
C. The expertise of the client personnel and their participation in
preparing the schedules.
 D. The type of financial statements, schedules, or other information on
which the auditor is reporting.

13. Which of the following factors most likely afects the auditor‘s judgment
about the quantity, type and content of the working papers?

A. The assessed level of control risk

B. The content of the client‘s representation letter
C. The timing of substantive tests completed prior to the balance sheet
date
D. The usefulness of the working papers as a reference source for the
client

14. Audit working papers are used to record the results of the auditor‘s
evidence gathering procedures. When preparing working papers, the
auditors should remember that working papers should be

A. Kept on the client‘s premises so that the client can have access to
them for reference purposes.
B. The primary support for the financial statements being examined,
C. Considered as part of the client‘s accounting records that are
retained by the auditor.
D. Designed to meet the circumstances and the auditor‘s needs on
each engagement.

15. Audit working papers are indexed by means of reference numbers. The
primary purpose of indexing is to

A. Permit cross-referencing and simplify supervisory review.

B. Support the audit report.
C. Eliminate the need for follow-up reviews
D. Determine that working papers adequately support the findings,
conclusions and reports.

16. The principal purpose for cross-indexing the audit working papers is to

A. Give the working papers a professional appearance.

B. Explain the use of tick marks.
C. Provide an explanation on the audit steps performed.
D. Provide a trail for the auditor and the reviewer.

17. Documentation may not be deleted form the working papers after the
 A. Audit report delivery date.
B. Date of the audit report.
C. Completion of the assembly of final audit file.
D. Final day of field work

18. The reason why the auditors accumulate evidence is to

A. Defend themselves in the event of lawsuit.

B. Justify the conclusions they have otherwise reached.
C. Satisfy the requirements of the Bureau of Internal Revenue.
D. Enable them to reach conclusions about the fairness of the
financial statements and issue an appropriate audit report.

19. To be competent, evidence must be all of the following except:

A. Sufficient
B. Reliable
C. Relevant
D. Unbiased

20. Which of the following is not one of the determinants of the

persuasiveness of evidence?

A. Competence
B. Physical examination
C. Relevance
D. Sufficiency

21. In determining the sufficiency of evidential matter, which of the

following would not normally be a factor?

A. Cost/benefit considerations
B. The sampling technique used
C. Audit risk
D. Materiality of the account

22. Which of the following statements is not true regarding the

competence of audit evidence?
 A. Relevance is enhanced by an efective information system.
B. To be competent, evidence must be both valid and relevant.
C. Validity is related to the quality of the client‘s information system.
D. Relevance must always relate to audit objectives.

23. Which of the following statements concerning evidence is correct?

A. Competent evidential matter supporting management‘s assertions

should be convincing rather than merely persuasive
B. Efective internal control unlikely contributes to the reliability of
the evidence created within the entity.
C. The cost of obtaining evidence is not an important consideration to
anauditor in deciding what evidence should be obtained.
D. A client‘s accounting data cannot be considered a sufficient audit
evidence to support the financial statements.

24. Which of the following statements is incorrect about audit evidence?

A. Evidence obtained from an independent source outside the client

organization is more reliable than that obtained from within.
B. Documentary evidence is more reliable when it is received by the
auditor directly from an independent third party.
C. Documents that originate outside the company are considered
more reliable than those that originate within the client‘s
organization.
D. External evidence, such as communications from banks, is
generally regarded as more reliable than the information obtained
from the client.

25. Which of the following factors is most important in determining the

competence of audit evidence?

A. The reliability of the evidence in meeting the audit objective

B. The objectivity of the auditor in gathering the evidence
C. The quantity of the evidence obtained
D. The independence of the source of evidence

26. Which of the following pertains to the reliability of audit evidence?

A. The independence of the source of evidence

B. The experience level of the auditor who obtains the evidence
C. Whether the audit client uses a manual or computerized accounting
system
 D. The quantity of the evidence obtained

27. Which of the following is not one of the characteristics of competent

evidence?

A. Independence of the source of the evidence

B. Efectiveness of internal control structure under which the internal
evidence has been developed
C. Size of the sample
D. Degree of objectivity of the auditor

28. Which of the following presumptions does not relate to the competence
of audit evidence?

A. The more efective the internal control is, the more assurance it
provides about the accounting data and financial statements
B. An auditor‘s opinion, to be economically useful, is formed within a
reasonable time and based on evidence obtained at a reasonable
cost.
C. Evidence obtained from independent sources outside the entity is
more reliable than evidence secured solely within the entity.
D. The independent auditor‘s direct personal knowledge, obtained
through observation and inspection, is more persuasive than
information obtained indirectly.

29. Which of the following statement relating to the competence of

evidential matter is always true?

A. Evidential matter gathered by an auditor from outside an enterprise is

reliable.
B. Accounting data developed under satisfactory conditions of
internal control are more relevant than data developed under
unsatisfactory conditions.
C. Oral representations made by managements are not valid
D. Evidence gathered by auditors must be both valid and relevant to
be considered competent.

30. Although the validity of evidential matter is dependent on the

circumstances under which it is obtained, there are three general
presumptions that have some usefulness. The situations given below
indicate the relative reliability that a CPA has placed on two types of
evidence obtained in diferent situations. Which of these is an exception
to one of the general presumptions?
 A. The CPA places more reliance on the balance in the scrap sales
account at Plant A, where the CPA has made limited tests of
transactions because of efective controls, than at Plant B where the
CPA has made extensive tests of transactions because of inefective
controls.
B. The CPA places more reliance on the CPAs computation of interest
payable on outstanding bonds than on the amount confirmed by the
trustee.
C. The CPA places more reliance on the report of an expert on an
inventory of precious gems than on the CPAs physical observation
of the gems.
D. The CPA places more reliance on a schedule of insurance coverage
obtained from the company‘s insurance agent than on one prepared
by the internal audit staf.

31. Which of the following would not be a factor in determining the

competence of evidential matter?

A. The source of the evidence

B. The relevance of the evidence
C. The cost of gathering the evidence
D. Timeliness of the evidence

32. Which of the following statements is incorrect?

A. There are many ways ab auditor can accumulate evidence to meet

the overall audit objectives.
B. Sufficient competent evidence must be accumulated to meet the
auditor‘s professional responsibility.
C. The cost of accumulating the evidence should be minimized.
D. Gathering evidence and minimizing costs are equally important.

33. Each of the following might, by itself, form a valid basis for an auditor
of deciding to omit a test except for the:

A. Difficulty and expense involved in testing a particular item

B. Assessment of control risk at a low level
C. Inherent risk involved
D. Relationship between the cost obtaining evidence and its usefulness

34. The following statements were made in a discussion of audit evidence

by two independent auditors. Which of these statements is not valid?
 A. ―I am seldom convinced beyond all doubt about all aspects of
the financial statements being audited.‖
B. ―I would not undertake that procedure because at best the results
would only be persuasive and I‘m looking for convincing evidence.‖
C. ―I evaluate the degree of risk involved in deciding the kind of
evidence I will gather.‖
D. ―I evaluate the usefulness of the evidence I can obtain against
the cost to obtain it.‖

35. Management assertions that are embodied in the financial statements are

A. Directly related to standards on auditing

B. Directly related to financial reporting framework
C. Indirectly related to standards on auditing
D. Indirectly related to financial reporting framework

36. Management assertions are

A. Stated in the footnotes to the financial statements.
B. Implied or expressed representations about the financial statements.
C. Explicit representations about the financial statements.
D. Provided to the auditor in the assertions letter, but are not
disclosed in the financial statements.

37. As used in auditing, which of the following statements best describes

―assertions‖?
A. Assertions are the representations of managements as to the
reliability of the information system.
B. Assertions are the auditor‘s findings to be communicated in his audit
report.
C. Assertions are the representations of managements as to the
fairness of presentation of the financial statements.
D. Assertions are found only in the notes to the financial statements.

38. Financial statement assertions include all of the following except:

A. Occurrence
B. Presentation and disclosure
C. Consistency and comparability
D. Completeness

39. The audit objective ―that all transactions and accounts that should be
presented in the financial statements are included‖ is related to which
assertion?
 A. Occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

40. The audit objective ―that all footnotes have been included in the
financial statements‖ is related most closely to which assertion?

A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure

41. Which of the following is a management assertion that relates to the

valuation or allocation of fixed assets?

A. Fixed assets are properly classified as noncurrent assets

B. Fixed asset depreciation has been correctly calculated
C. The client has title to the machinery and equipment
D. Lien or encumbrance on fixed assets is appropriately disclosed in
the notes to the financial statements

42. Which of the following statements about the existence and completeness
objectives is incorrect?
A. The existence and completeness objectives emphasize opposite
audit concerns
B. Existence deals with overstatements and
completeness deals with understatements.
C. Existence deals with understatements and
completeness dealswith overstatements.
D. The completeness objective deals with unrecorded transactions.

43. If reported sales for 2009 erroneously included sales that occurred in
2010, the assertion violated on the 2009 statements would be

A. Occurrence
B. Completeness
C. Presentation and disclosure
D. Rights and obligation
44. The completeness assertion would be violated if:
A. Fictitious sale transactions were included in accounts receivable.
B. Unbilled shipments had occurred during the period.
C. The balance of accounts payable was overstated.
D. Disclosure in the statements of pledged receivable was inadequate.

45. The rights and obligations assertion applies to

A. Current liability items only
B. Balance sheet items only
C. Both income statement and balance sheet items
D. Assets that are not owned by the company

46. Which of the following is incorrect?

A. It would be a violation of the completeness assertion if
managements would record a sale that did not take place.
B. The completeness assertion deals with matters opposite from
those of the existence/occurrence assertion.
C. The completeness assertion is concerned with the possibility of
omitting items from the financial statements that should have been
included.
D. The existence/occurrence assertion is concerned with inclusion of
amounts that should not have been included.

47. Which of the following best describes the primary purpose of audit
procedures?
A. To detect errors or irregularities
B. To comply with financial reporting standards
C. To gather corroborative evidence
D. To verify the accuracy of account balances

48. Physical examination of assets is not sufficient form of evidence when

the auditor wants to determine the
A. Existence of the asset
B. Quantity and description of the asset
C. Condition or quality of the asset
D. Ownership of the asset

49. Physical examination is not an objective means of ascertaining an asset‘s

A. Quantity
B. Description
C. Condition or quality
D. Ownership
50. Which of the following statements is not true? ―The evidence gathering
technique of observation
A. Is useful in most parts of the audit.‖
B. Is rarely sufficient by itself.‖
C. Is limited to what the auditor sees.‖
D. Requires the gathering of corroborative evidence.‖

51.A A letter to the auditor in response to an inquiry is an example of

A. Physical evidence
B. Confirmation evidence
C. Documentary evidence
D. Analytical evidence

52.A A CPA, who is performing an independent audit, would most likely use
recalculation as a substantive test for which of the following expense-
related accounts?
A. Purchases of supplies
B. Interest expense
C. Advertising expense
D. Repairs and maintenance expense

53. ―Evaluations of financial information made by a study of plausible

relationships among financial and nonfinancial date involving comparisons
of recorded amounts to expectations developed by the auditor.‖ Refers to:
A. Auditing
B. Tests of balances
C. Tests of transactions
D. Analytical procedures

54. External auditors often confirm assertions contained in the organization‘s

financial statements and accounting records with third parties. Which of
the following best explains why confirmation produces an evidence of
high quality?
A. Written assertions from knowledgeable third parties provide
sufficient evidence to achieve most audit objectives.
B. Confirmation by knowledgeable third parties is usually the most
relevant evidence available.
C. Confirmation by knowledgeable third parties is usually the least
costly evidence to obtain.
D. Confirmation by knowledgeable third parties is highly competent
because of its independent source.
55. When comparing the reliability of external versus internal documents,
the external documents are generally considered
A. More reliable
B. Less reliable
C. Equally reliable
D. Unreliable

56. Traditionally, confirmations are used to verify

A. Individual transactions between organizations, such as sales
transactions.
B. Fixed asset addition
C. Bank balances and accounts receivable
D. Any of the given responses

57. Analytical procedures are so important that they are required during
A. Planning and completion phases
B. Planning and testing phases
C. Testing and completion phases
D. Planning, testing, and completion phases

58. Analytical procedures used in planning an audit should focus

A. Evaluating the adequacy of evidence gathered concerning unusual
balances
B. Testing individual account balances that depend on accounting
estimates.
C. Enhancing the auditor‘s understanding of the client‘s business.
D. Identifying material weaknesses in internal control.

59. Analytical procedures are

A. Substantive tests designed to evaluate system of internal control
B. Tests of controls designed to evaluate the validity of
management‘s representation letter.
C. Substantive tests designed to evaluate the reasonableness of
financial information.
D. Tests of controls designed to evaluate the reasonableness of
financial information.
QUIZZERS

DOCUMENTATION

1. In determining the quantity and quality of evidence to gather, the

auditor will be satisfied when the evidence is

A. Irrefutable.
B. Highly persuasive.
C. Conclusive.
D. Completely convincing.

2. The current file of the auditor‘s working papers generally should include

A. A flowchart of the internal controls.

B. A copy of the financial statements.
C. Organizational charts.
D. Copies of bond and note indentures.

3. It refers to the detailed instructions for the collection of a particular

type of audit evidence that is to be obtained at some time during the
audit

A. Sampling plan.
B. Audit procedure
C. Audit program
D. Audit plan

4. The auditor‘s working papers will least likely include documentation

showing how the

A. Schedules are prepared by the client personnel.

B. Engagement is planned
C. Understanding of the client‘s internal control is obtained and
control rise was assessed.
D. Unusual matters are resolved

5. Although the quantity and content of audit working papers vary with
each particular engagement, an auditor‘s permanent files most likely
include

A. Schedules that support the current year‘s adjusting entries.

B. Prior years‘ accounts receivable confirmations that are
classified as exceptions.
C. Documentation indicating that the audit work is adequately
planned and supervised.
D. Analysis of capital stock and other owners‘ equity accounts.
6. The audit working paper that reflects the major components of an
amount reported in the financial statements is the

A. Interbank transfer schedule

B. Supporting schedule
C. Carry forward schedule
D. Lead schedule

7. An auditor ordinarily uses a working trial balance resembling the financial

statements without footnotes, but containing columns for

A. Cash flow increases and decreases

B. Audit objectives and assertions
C. Reclassifications and adjustments
D. Reconciliation and tick marks

8. In the course of an audit of financial statements for the purpose of

expressing an opinion thereon, the auditor will normally prepare a
schedule of unadjusted diferences for which he did not propose
adjustments when they were uncovered. The primary purpose of this
schedule is to

A. Point out to the responsible client officials the errors made by

various company personnel
B. Summarize the adjustments that must be made before the
company can prepare and submit its income tax returns
C. Identify the potential efects on the financial statement of errors
or disputed items that were considered immaterial when
discovered.
D. Summarize the errors made by the company so that corrections can
be made after the audited financial statements are released.

9. Which of the following analyses appearing in a predecessor‘s working

papers would the successor auditor least likely review?

A. Analysis of noncurrent balance sheet accounts

B. Analysis of current balance sheet accounts
C. Analysis of contingencies
D. Analysis of income statement accounts

10. Using personal computers in auditing may afect the methods used to
review the work of staf assistants because

A. The audit fieldwork standards for supervision may difer

B. Documenting the supervisory review may require assistance of
consulting services personnel
 C. Supervisory personnel may not have an understanding of the
capabilities and limitations of personal computers
D. Working paper documentation may not contain readily observable
details of calculations

11. In an internal audit, the audit supervisor determines that the working
papers are complete

A. When satisfied that the audit objectives have been met and the
working papers support the conclusions
B. When working papers refer to the steps outlined in the audit program
C. Only after the auditor who prepared the working papers has signed
and dated them
D. When proper cross-references to other working papers are noted.

12. Standardized working papers are often used, chiefly because they allow
working papers to be prepared more

A. Efficiently
B. Comprehensively
C. Neatly
D. Accurately

13. After the fieldwork audit procedures are completed, a partner of the CPA
firm who has not been involved in the audit performs a second or wrap-up
working paper review. This second review usually focuses on

A. The fair presentation of the financial statements in conformity with

GAAP
B. Fraud involving the client‘s management and its employees
C. The materiality of the adjusting entries proposed by the audit staf
D. The communication of internal control weaknesses to the client‘s
audit committee

14. An auditor‘s working papers should

A. Not be permitted to serve as a reference source for the client

B. Not contain comments critical of management
C. Show that the accounting records agree or reconcile with the
financial statements
D. Be considered the primary support for the financial statements being
audited

15. ―The detailed description of the results of the various evidence

decisions for a specific audit‖ is called an

A. Audit procedure.
B. Audit plan
 C. Audit program
D. Audit guide

16. In using the work of a specialist, an understanding should exist among

the auditor, the client, and the specialist as to the nature of the work to
be performed by the specialist. Preferably, the understanding should be
documented and would include all of the following except

A. The objectives and scope of the specialist‘s work

B. The specialist‘s representations as to his relationship, if any, to the
client
C. The specialist‘s understanding of the auditor‘s corroborative use of
the specialist‘s findings in relation to the representations in the
financial statements
D. A statement that the methods or assumptions to be used are not
inconsistent with those used by the client

17. Which of the following is an invalid description of why working papers

are developed?

A. Facilitates third-party reviews

B. Aids in the planning, performance, and review of audits
C. Provides the principal evidential support for the auditor‘s report
D. Aids in the professional development of the operating staf

18. During the working paper review, an audit supervisor finds that the
auditor‘s reported findings are not adequately cross-referenced to the
supporting documentation. The supervisor will most likely instruct the
auditor to

A. Prepare a working paper to indicate that the full scope of the

audit was carried out
B. Familiarize himself with the sequence of working papers so that
he will be able to answer questions about the conclusions stated in
the report
C. Eliminate any cross-references to other working papers since the
system is unclear
D. Provide a working paper indexing system that shows the
relationship between findings, conclusions, and the related facts.

19. The main advantage of properly indexed working papers is to

A. Reduce the size of the file

B. Better organize the working papers
C. Allow division of labor within the audit team
D. Facilitate the efficient use of audit staf

20. Which of the following statements about working papers is correct?

 A. Working papers are not permitted to be used as a reference
source by the client
B. The auditor should document his understanding of the client‘s
internal control which is to be used to plan the audit
C. Working papers may be regarded as a substitute for the client‘s
accounting records
D. When reporting on comparative financial statements, the
independent auditor may discard working papers after two years

21. Which of the following is a basic tool used by the auditor to control
the audit work and review the progress of the audit?

A. Time and expense summary

B. Engagement letter
C. Progress flowchart
D. Audit program

22. Which of the following working papers would one normally expect to
find in the permanent file?

A. A copy of a long-term bond indenture

B. The working trial balance
C. An analysis of additions and disposals relating to marketable
securities
D. A workpaper analyzing customer replies to confirmation requests

23. The permanent file section of the working papers that is kept for each
audit client most likely contains

A. Review notes pertaining to questions and comments regarding the

audit work performed
B. A schedule of time spent on the engagement by each individual
auditor
C. Correspondence with the client‘s legal counsel concerning pending
litigation
D. Narrative descriptions of the client‘s internal control policies and
procedures

24. Which of the following statements is correct with respect to ownership of

audit documentation?

A. The audit firm owns the audit documentation

B. The audit client owns the audit documentation
C. The audit client and audit firm jointly own the audit documentation
D. The law is not explicit with respect to the ownership of audit

documentation FINANCIAL ASSERTIONS AND AUDIT OBJECTIVES

25. Which of the following statements is true?

 A. The auditor‘s objectives follow and are closely related to
management assertions
B. Management‘s assertions follow and are closely related to the
auditor‘s objectives
C. The auditor‘s primary responsibility is to find and disclose
fraudulent management assertions
D. Assertions about presentation and disclosure deal with whether the
accounts have been included in the financial statements at
appropriate amounts

26. Which of the following is an incorrect statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives

and procedures
B. Audit objectives should be developed on the basis of management
assertions about the financial statement components
C. Selection of tests to meet audit objectives should depend upon
the understanding of internal control
D. The auditor should resolve any substantial doubt about
any of
the management‘s material financial statement assertions

27. Which of the following assertions is least likely to be tested exclusively

at an interim date?

A. Existence for inventory

B. Completeness for accounts receivable
C. Existence for equipment
D. Valuation for marketable securities

28. Assuming a low assessed level of control risk, which of the following
audit procedures is least likely to be performed?

A. Physical inspection of a sample of inventory

B. Search for unrecorded cash receipts
C. Obtaining a client representation letter
D. Confirmation of accounts receivable

29. Which of the following auditing procedures is ordinarily performed last?

A. Reading the minutes of the directors‘ meetings held during the audit
year
B. Confirming accounts payable balances
C. Obtaining a management representation letter
D. Testing of control procedures on purchasing function
30. Which of the following is not one of the broad categories of assertions?

A. General or specific transaction objectives

B. Existence or occurrence
C. Valuation or allocation
D. Presentation and disclosure

31. Determining whether amounts are in conformity with GAAP addresses

the proper measurement of assets, liabilities, revenues, and expenses
which includes all of the following except:

A. The reasonableness of management‘s accounting estimates

B. Proper application of valuation principles
C. Proper application of matching principle
D. The reasonableness of management‘s accounting policies

32. For a particular assertion, control risk is the risk that

A. Control will now detect a material misstatement that occurs

B. Audit procedures will fail to detect a weak control system
C. The prescribed control procedures will not be applied uniformly
D. A material misstatement will occur in the accounting process

33. Which of the following is an incorrect statement?

A. An example of a completeness assertion would be that notes

payable in the balance sheet includes all such obligations of the
entity
B. An example of an occurrence assertion would be that sales in the
income statement represent exchanges of goods or services that
actually take place
C. An example of a rights/obligations assertion would be that amounts
capitalized for leases in the balance sheet represent the cost of the
entity‘s rights to leased property
D. An example of a valuation/allocation assertion would be that
property, plant, and equipment are recorded at market value

34.A A distinction must be made between general audit objectives and

specific audit objectives for each account balance. Which of the
following is an incorrect statement?

A. The general audit objectives are applicable to every account

balance on the financial statements
B. The specific audit objectives are applicable to every account
balance on the financial statements
C. The general audit objectives are tailored to the engagement
D. The specific audit objectives are tailored to the engagement
35. Which of the following ―general transaction-related audit objectives‖ is
not part of the valuation or allocation assertion?

A. Completeness
B. Accuracy
C. Classification
D. Timing

36. Only three of the following management assertions are associated with
transaction- related audit objectives. Which one of the following is not?

A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure
37. Which of the following statements is incorrectly stated?

A. Balance-related audit objectives are applied to account balance

B. Transaction-related audit objectives are applied to classes of
transactions
C. Balance-related audit objectives are applied to the ending balance
in balance sheet accounts
D. Balance-related audit objectives are applied to both beginning
and ending balances in the balance sheet accounts

38. The detail tie-in objective is not concerned that the details in the account
balance

A. Agree with related subsidiary ledger accounts

B. Are properly disclosed, in accordance with PFRS
C. Foot to the total in the account balance
D. Agree with the total in the general ledger

39. The disclosure objective is concerned that

A. The account balance is properly presented in the financial statements

B. Disclosure requirements are properly presented in the financial
statements and in the footnotes
C. Both responses are correct
D. Both responses are incorrect

40. If a long-term note receivable is included in the account receivable

listing, there is a violation of the

A. Existence objective
B. Completeness objective
C. Classification objective
D. Timing objective
41. After the general objectives are understood, specific objectives for each
account balance on the financial statements can be developed. Which of
the following statements is true?

A. There should be at least one specific objective for each relevant

general objective
B. There will be only one specific objective for each relevant general
objective
C. There will be many specific objectives developed for each relevant
objective
D. There must be one specific objective for each general objective

42. Which of the following is not a proper matching of auditor‘s objective

with management‘s assertion?

A. Validity matches with existence or occurrence

B. Completeness matches with completeness
C. Ownership matches with rights and obligations
D. Classification matches with presentation/disclosure

43. An audit process is a well-defined methodology for organizing an audit to

ensure that

A. The evidence gathered is both sufficient and competent

B. All appropriate audit objectives are specified
C. All appropriate audit objectives are met
D. All of the responses are

correct AUDIT EVIDENCE

44. Which of the following is correct?

A. The evidence that the auditor accumulates remains the same

from audit to audit, but the general objectives vary, depending on
the circumstances
B. The general audit objectives remain the same from audit to
audit, but the evidence varies, depending on the circumstances
C. The circumstances may vary from audit to audit,
but the evidence accumulated remains the same
D. The general audit objectives may vary from audit to audit, but the
circumstances remain the same

45. Auditing standards require the auditor to accumulate sufficient

competent evidence to support the opinion issued. Because of the nature
of audit evidence, it is

A. Unlikely that the auditor will be completely convinced that the

opinion is correct
B. Likely that the auditor will be completely convinced that the opinion is
correct
C. Unlikely that the auditor will arrive at a conclusion
 D. Likely that the auditor would change his/her mind about the
opinion if he/she takes the time to gather additional evidence

46. 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 opinioin?

A. The audit program

B. The auditor‘s judgment
C. Philippines Standards on Auditing
D. The auditor‘s working papers

47. In the final analysis, the amount and kinds of evidential matter that are
required to support the auditor‘s opinion should be determined by

A. The audit committee

B. Auditor‘s judgment
C. Professional standards
D. Standards of auditing

48. To adequately plan the extent of the audit evidence to gather, the
generally accepted auditing standards require the auditor to gain an
understanding of

A. The internal control structure

B. Client‘s organization charts
C. Client‘s procedural manuals
D. All of these

49. When unable to obtain sufficient competent evidential matter to

determine whether certain client management‘s acts are non-compliance
to laws and regulations, the auditor would most likely issue

A. An unqualified opinion with a separate explanatory paragraph

B. Either a qualified opinion or an adverse opinion
C. Either a disclaimer of opinion or a qualified opinion
D. Either an adverse opinion or a disclaimer of opinion

50. An audit evidence is generally considered relevant when it is

A. Derived through valid statistical sampling

B. Objective and unbiased
C. Factual, adequate, and convincing
D. Consistent with the audit objectives

51. Two overriding considerations that afect an auditor‘s judgment in

accumulating evidence are:
 1. Sufficient competent evidence must be accumulated to meet the
auditor‘s professional responsibility
2. Cost of accumulating evidence should be

minimized In evaluating these conditions,

A. The first is more important than the second

B. The second is more important than the first
C. They are equally important
D. It is impossible to prioritize one

52. Most of the independent auditor‘s work in formulating an opinion on the

financial statements consists of

A. Studying and evaluating internal control

B. Obtaining and examining evidential matter
C. Examining cash transactions
D. Comparing recorded accountability with assets

53. There are four subcategories of decisions that the auditors must make in
accumulating audit evidence. Which of the following is not one of those
subcategories?

A. Audit procedures to be used

B. Reasons for deciding not to test controls
C. Sample size
D. Timing of the audit procedures

54. Evidential matter supporting the financial statements consists of the

underlying accounting data and all corroborating information available to
the auditor. Which of the following is an example of corroborating
information?

A. Minutes of meetings of the board of directors

B. General and subsidiary ledgers
C. Accounting manuals
D. Worksheets supporting cost allocations

55. Which of the following is not one of the major phases in an audit process?

A. Plan and design an audit approach

B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made in
the financial statements
D. Complete the audit and issue the report
56. Evidential matter is generally considered sufficient when

A. It is competent
B. There is enough of it to aford a reasonable basis for an
opinion on the financial statements
C. It has the qualities of being relevant, objective, and free from known
bias
D. It has been obtained through random selection

57. In making decisions about evidence for a given audit, the auditor‘s goal
is to obtain a sufficient amount of timely, reliable evidence that is relevant
to the information being verified, and to do so

A. No matter what the cost involved in obtaining such evidence

B. Only if the cost is reasonable
C. At the lowest possible total cost
D. At any cost because the costs are billed to the client

58. Which of the following is not a distinguishing feature of risk-based

auditing?

A. Identifying areas posing the highest risk of financial statement errors

B. Analysis of internal control
C. Collecting and evaluating evidence
D. Concentrating audit resources in those areas presenting the
highest risk of financial statement errors

59. The competence of evidence available to an auditor is least likely afected

by

A. The relevance of such evidence to the financial statement

assertion being investigated
B. The relationship of the source of such an evidence to the entity being
audited
C. The timeliness of the audit evidence obtained
D. The sampling method employed by the auditor to obtain a number
of samples as evidence

60. Which of the following procedures would provide the auditor the most
reliable audit evidence?

A. Inquiries of the client‘s internal audit staf held in private

B. Inspection of prenumbered client purchase orders filed in the
vouchers payable department
C. Analytical procedures performed by the auditor on the entity‘s trial
balance
D. Inspection of bank statements obtained directly from the client‘s
financial institution
61. The most reliable forms of documentary evidence are those documents
that are
 A. Prenumbered
B. Easily documented
C. Internally generated
D. Authorized by a responsible official

62. You have been assigned to audit the maintenance department of an

organization. Which of the following is likely to produce the least reliable
audit evidence?

A. Notes on discussions with mechanics in the maintenance operation

B. A schedule comparing actual maintenance expenses with budgeted
expenses and thoe of the prior period and disclosing important
diferences
C. A narrative covering review of user reports on maintenance service
D. An analysis of changes in certain maintenance department ratios

63. Before applying substantive tests to the details of asset accounts at an

interim date, an auditor should assess

A. Control risk at below the maximum level

B. Inherent risk at the maximum level
C. The difficulty in controlling the incremental audit risk
D. Materiality for the accounts tested as insignificant

64. Before applying principal substantive tests to the details of accounts at

an interim date, an auditor should

A. Assess control risk as below the maximum for the assertions

embodied in the accounts selected for interim testing
B. Determine that the accounts selected for interim testing are not
material to the financial statements taken as a whole
C. Consider whether the amounts of the year-end balances selected
for interim testing are reasonably predictable
D. Obtain written representations from management that all financial
records and related data will be made available

65. If an auditor conducts an audit of financial statements in accordance

with generally accepted auditing standards, which of the following will the
auditor most likely detect?

A. Misposting of recorded transactions

B. Forgery
C. Unrecorded transactions
D. Collusive fund

66. Which of the following best explains the diference between audit
objectives and audit procedures?
 A. Audit procedures establish broad general goals; audit objectives
specify the detailed work to be performed
B. Audit objectives are tailor-made for each assignment; audit
procedures are generic in application
C. Audit objectives define specific desired accomplishments; audit
procedures provide the means of achieving audit objectives
D. Audit procedures and audit objectives are essentially the same

67. In gathering audit evidence in the performance of substantive tests, the

auditor

A. Should use the test month approach

B. Relies on persuasive rather than convincing evidence in the majority
of cases
C. Would consider the client‘s documentary evidence more competent
than evidence gathered from observation and physical inspection
D. Would express an adverse opinion if he has substantial doubt
as to any significant assertion

68. The auditor will not ordinarily initiate discussion with the audit
committee concerning the

A. Extent to which the work of internal auditors will afect the scope of
the examination
B. Extent to which a change in the company‘s organization will
influence the scope of the examination
C. Details of potential problems that the auditor believes might cause
a qualified opinion
D. Details of the procedures that the auditor intends to apply

69. 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 the balance sheet date
C. The client‘s audit committee should not be told of the specific audit
procedures that will be performed
D. It is an acceptable practice to carry out substantial parts of the
examination at interim dates

70. An auditor test counts a batch of inventory. This is an example of

what kind of evidence?

A. Analytical
B. Documentary
C. Physical
D. Testimony
71. The audit program is basically a list of

A. Detailed audit procedures

B. Account balances and their related assertions
C. Audit procedures to be performed
D. Audit controls

72. Each audit program should have a column for all of the following except:

A. Audit procedures to be performed

B. The initials of the auditor who performs each procedure
C. The date that the performance of the procedure is performed and
completed
D. The test of controls related to each procedure

73. Which of the following is not an example of confirmation as an evidence?

A. Requesting the client‘s outside legal counsel to evaluate the

possible outcome of pending litigation
B. Questioning the client‘s employees about existing internal control
policies and procedures
C. Requesting the client‘s customers to verify year-end accounts
receivable balances
D. Requesting payees to respond in writing to the terms contained
in notes payable appearing in the client‘s ledger

74. Accounting for the numeric sequence in the issuance of the sales
invoices meets primarily the

A. Completeness assertion
B. Valuation or allocation assertion
C. Occurrence
D. Presentation or disclosure assertion

75. Which of the following factors afects the competence of evidence

obtained by an auditor?

A. The independence of the information source

B. The competence of the information source
C. The timeliness of the information
D. All of these factors afect the competence of evidence

76. Which one of the following is the least persuasive type of audit evidence?

A. Documents mailed by outsiders to the auditor

B. Correspondence between the auditor and vendors
C. Copies of sales invoices inspected by the auditor
 D. Computations made by the auditor

77. Audit evidence takes diferent forms and varies in persuasiveness.

Which of the following is the least persuasive type of evidence?

A. Vendor‘s invoice
B. Computations made by the auditor
C. Bank statement obtained from the client
D. Canceled checks

78. Which one of the following statements is true?

A. Evidence must pertain to the objective that the auditor is testing

before it can be persuasive
B. Relevance can be considered only in terms of specific audit objectives
C. Evidence may be relevant to one objective but not to other objective
D. All the responses are true

79.A A term which is synonymous with competence is

A. Relevance
B. Reliability of evidence
C. Sufficient
D. Any of the given choices

80. Which of the following statements about the competence of evidence is

not correct?

A. To be competent, an evidence must be both valid and relevant

B. Competence can be improved by selecting a larger sample size
C. Competence can be improved by selecting audit procedures that
contain a higher quality of the characteristics sought
D. Competence cannot be improved by selecting diferent
population items to include in the sample size

81. Which one of the following forms of evidence would be least reliable?

A. Monthly bank statement

B. Positive confirmation of customer‘s balance
C. A letter from the client‘s attorney stating that there are no known
lawsuits pending against the client
D. Client‘s file copy of a purchase requisition

82. Which of the following forms of evidence would be most reliable?

A. An insurance policy in the client‘s file

B. The file copy of a purchase requisition
 C. The file copy of a receiving room report
D. The file copy of sales invoices

83. Evidence obtained directly by the auditor is more competent than

information obtained indirectly. Which of the following is not an example
of the auditor‘s direct knowledge about an evidence?

A. Physical examination
B. Observation
C. Computation
D. Inquiry

84. When the auditor is gathering evidence, he will conclude that if the
source of information is independent, the evidence will

A. Reliable
B. Not be reliable
C. Be reliable if the provider has no reason to be biased
D. Not be reliable unless the provider is qualified to do so

85. Evidence obtained directly by the auditor will not be reliable if

A. It is provided by the client‘s attorney

B. The auditor lacks the qualifications to evaluate the evidence
C. It is impossible for the auditor to obtain additional corroborating
evidence
D. The client denies its veracity

86. Evidence is usually more persuasive for balance sheet accounts when it is
obtained

A. From various times throughout the client‘s year

B. Only from transactions occurring on the balance sheet date
C. As close to the balance sheet date as possible
D. From the time period when transactions in that account were most
numerous furing the fiscal period

87. For income statement accounts, evidence is more persuasive if there is a

sample from

A. The entire period under audit

B. The period closest to the end of the fiscal period
C. At least three months of the fiscal year
D. December, since this would include large holiday sales

88. Which of the following statements is not true?

 A. A large sample of highly competent evidence is not persuasive
unless it is relevant to the objective being tested
B. A large sample of evidence that is neither competent nor timely is
not persuasive
C. A small sample of only one or two pieces of relevant competent,
and timely evidence lacks persuasiveness
D. The persuasiveness of evidence can be evaluated after
considering its competence and its sufficiency

89. Generally, what source of evidence would most persuasively support

audit comclusions?

A. External
B. Inquiry
C. Oral
D. Informal

90. Observation, though considered a reliable audit procedure, has limited

usefulness. However, it is used in a number of diferent audit situations.
Which of the following statements is true regarding observation as an
audit technique

A. It is the most efective audit methodology to use in filling out

internal control questionnaires
B. It is the most persuasive technique to learn how transactions are
really processed during the period under audit
C. It is rarely sufficient to satisfy any audit assertion other than
existence
D. It is the most persuasive audit technique for determining if fraud
has really occurred

91. Which of the following would be the most relevant form of evidence to
evaluate the reasonableness of account balances?

A. Analytical
B. Documentary
C. Physical
D. Representation

92. When an auditor calculates the gross margin as a percent of sales and
compares it with previous periods, this type of evidence is called

A. Physical examination
B. Computation
C. Observation
D. Inquiry
93. Objective evidence is more reliable than evidence that requires
considerable judgment to determine whether it is correct. Which of the
following is not an example of an objective evidence?

A. Confirmation of accounts receivable

B. Confirmation of bank balances
C. Confirmation by client‘s attorney of the likely outcome of
outstanding lawsuits against the client
D. Adding a list of accounts payable to determine the total
reconciles with the general ledger balance

94. Which of the following is an example of subjective evidence?

A. A positive confirmation of an account receivable

B. A bank confirmation
C. Inquiries of the credit manager about the collectability of
noncurrent accounts receivable
D. The physical count of securities and cash

95. Physical examination refers to the inspection or count by the auditor of

assets such as
A. Cash or inventory only
B. Cash, inventory, canceled checks, and sales documents
C. Cash, inventory, securities, notes receivable, and tangible fixed assets
D. Cash, inventory, canceled checks, and tangible fixed assets

96. The distinction between physical examination of assets and examination

of documents is dependent on the item being examined. If the object
being examined has no inherent value, the evidence is called

A. Physical examination
B. Documentation
C. Confirmation
D. Garbage

97. Confirmations are a highly regarded and often used type of evidence
because they

A. Are inexpensive
B. Cause no inconvenience for auditor or third party
C. Come from independent sources
D. All of the given choices

98. Three common types of confirmations used by auditors are:

1. Negative confirmations
2. Positive confirmations with a request for information
 3. Positive confirmations with the information included

If they were placed in the order of their reliability, from highest to

lowest, the sequence would be

A. 1, 2, 3
B. 3, 2, 1
C. 2, 3, 1
D. 3, 1, 2

99. Whenever practicable and reasonable, the CPA must confirm a sample of

A. Accounts receivable
B. Accounts payable
C. Both accounts receivable and accounts payable
D. Client‘s bank accounts

100.Confirmations lose their value if the

client

A. Controls the preparation of the confirmation

B. Does the mailing of the confirmation
C. Receives the responses and turns them over to the auditor
D. Does any of the given choices

101.When the auditor examines the client‘s documents and records to

substantiate the information on the financial statements, it is commonly
referred to as

A. Inquiry
B. Confirmation
C. Vouching
D. Physical examination

102.Documents is a form of evidence

used

A. In every financial statement audit.

B. In most financial statement audit.
C. When it is both readily available and less costly than other procedures
D. Used when nothing is available that is more competent.

103.A document which the auditor receives from the client, but which is
prepared by someone outside the client‘s organization, is a(n)

A. Confirmation
B. Internal document
C. External document
D. Inquiry
104. An example of vouching would be

A. Trace from receiving reports to the acquisition journal

B. Trace from the acquisitions journal to the supporting vendor‘s invoices
C. Trace from duplicate bank deposit slips to the cash receipts journal
D. Trace from canceled checks to cash disbursements journal

105. Which of the following statements is not true? ―The evidence

gathering technique of inquiry

A. Cannot be regarded as conclusive.‖

B. Requires the gathering of corroborative evidence.‖
C. Is the auditor‘s principal method of evaluating the client‘s
internal control structure.‖
D. Does not provide evidence from an independent source.‖

106. An auditor would be least likely to use confirmations in

connection with the examination of

A. Inventories
B. Long-term debt
C. Property, plant, and equipment
D. Stockholders‘ equity

107. Which of the following is an example of internal evidence that the

auditor would obtain in an audit of accounts receivable?

A. The carrier‘s bill of lading

B. Sales invoice copies
C. A customer‘s purchase order
D. A vendor‘s month-end statement.

108. Ordinarily, what source of evidence should least afect audit

conclusions?

A. External
B. Inquiry of management
C. Auditor-prepared analysis
D. Inquiry of company legal

counsel AUDIT PROCEDURES

109.Alist of audit procedures that the auditors need to perform to produce

evidence is called an

A. Audit plan
 B. Audit program
C. Audit standard
D. Audit budget

110. The procedures specifically outlined in an audit program are

primarily designed to

A. Protect the auditor in the event of litigation

B. Detect errors or irregularities
C. Test internal control structure
D. Gather evidence

111. In the context of an audit of financial statement, 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
D. Will increase proportionately with the auditor‘s assessment of control
risk

112. When evaluating the planned level of substantive tests for each
significant assertion, the auditor will consider the evidence obtained from
all of the following except:

A. Procedures to understand the business and industry and related

analytical procedures that have been completed.
B. Evidence about the efectiveness of internal controls gained while
obtaining an understanding of internal control structure.
C. The assessment of detection risk.
D. Evidence of efectiveness of computer control procedures and
related follow- up.

113.Arevision of the planned level of detection risk will be necessary whenever

A. Accounts are afected by more than one transaction class.

B. The multiple control risk assessments for the same account balance
assertion difer.
C. The final assessed control risk is not the same as the actual level.
D. The final assessed control risk does not support the planned level.

114. Tests of details of transactions primarily involve

A. Tracing and vouching

B. Confirmation with outsiders
C. Observation
D. Scanning
115. The objective of dual-purpose tests is to

A. Evaluate whether internal controls are operating efectively.

B. Detect material misstatements in the financial statements.
C. Identify unusual trends or patterns in comparative financial
statements.
D. Test internal controls as well as transactions and balances using
the same test procedures.

116. To test for unsupported entries in the ledger, the direction of audit
testing should be from he

A. Ledger entries
B. Journal entries
C. Externally generated documents
D. Original source documents

117.The least costly form of testing is

usually

A. Test of controls
B. Tests of details of balances
C. Tests of details of transactions
D. Analytical procedures

118. Tracing from source documents to journals most directly

addresses which financial statement assertion?

A. Valuation
B. Completeness
C. Existence
D. Rights

119. An auditor is examining the detailed debut and credit entries in

an account. The auditor is most likely performing

A. Analytical procedures
B. Test of details of balances
C. Test of details of transactions
D. Test of controls

120. Choices about audit evidence are influenced by all of the following
except:

A. The auditor‘s understanding of the business and industry

B. Assessment of inherent and control risk
C. Comparisons of the auditor‘s expectation of the financial
statements with the client‘s books and records
 D. Decisions about immaterial risk factors

121. The auditor is performing substantive tests several months before

the end of the year. This most likely means that

A. Inherent risk is set at moderate to high

B. Detection risk is set at moderate to high
C. Control risk is set at maximum
D. Detection risk is set at low to very low

122. In testing the existence assertion for an asset, an auditor ordinarily

works from the

A. Financial statements to the potentially unrecorded items

B. Potentially recorded items to the financial statements
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records

123. WB Industries has significant information that is transmitted,

processed, maintained, and accessed electronically. The auditor has
concluded that it is not possible to reduce detection risk to an acceptable
level by performing only substantive tests for a number of financial
statements assertions. The auditor‘ alternative strategy is to

A. Increase the acceptable audit risk

B. Focus audit tests on other assertions for which substantive tests
prove to be efective
C. Require management to change its information system to provide
appropriate evidence
D. Perform tests of controls to gather evidential matter to be used
as basis of assessing control risk related to those assertions

124. The decision on the part of the auditor to perform substantive tests
during the interim period will be based upon

A. Audit risk control and cost efectiveness

B. The approach followed in the past
C. The auditor‘s time convenience
D. The cooperation extended by the client

125. Choose the best illustration of objective audit evidence from the
following:

A. The paid invoice file containing invoices matched with the

receiving reports and purchase orders
B. Management‘s assertion that payment procedure requires matching
of invoice with receiving report and purchase order
 C. Clerical staf assurances that management policy regarding
payment of invoices—matching of invoice with receiving report and
purchase order—is always followed
D. The treasurer‘s statement of not remembering any exceptions in
which an invoice was submitted for payment that is not
accomplished by a covering receiving report and purchase order

126. Which of the following audit procedures best supports the valuation
objective?

A. Performing a lower of cost or market test of the client‘s inventories

B. Reviewing a contingent liability disclosure for proper wording
C. Searching for unrecorded liabilities
D. Observing the client‘s year-end physical inventory taking

127. Which of the following is not an appropriate auditing

procedure supporting the fairness of financial statement presentation?

A. Inspecting plant asset additions for existence

B. Recalculating accrued interest on notes payable
C. Examining invoices in support of legal fees recorded during the fiscal
year
D. Reviewing the client‘s production quality control

program 128.Audit procedures are normally performed

A. Early in the accounting period being examined

B. Throughout the accounting period being examined, but with
emphasis on the transactions near the end
C. Within one to three months after the close of the accounting period
D. During all three of the above periods

129. The auditor would unlikely perform early substantive testing of

account balances when:

A. A number of significant deviations from control policies and

procedures were detected during tests of controls
B. Due to economic factors, the fourth quarter activity this year is
expected to be somewhat sluggish
C. The client uses a natural business year
D. The taking of the client‘s inventory is performed at an early date

130. As the acceptable level of detection risk decreases, an auditor may

change the

A. Timing of substantive tests by performing them at an interim date

rather than at year-end
B. Nature of substantive tests from a less efective to a more efective
procedure
 C. Timing of tests of controls by performing them at several dates
rather than one at a time
D. Assessed level of inherent risk to a higher amount

131. The auditor is concerned that a client usually fails to bill customers
for shipments.
An audit procedure that would gather relevant evidence would be

A. Select a sample of duplicate sales invoices and trace each to

related shipping documents
B. Trace a sample of shipping documents to related duplicate sales
invoices
C. Trace a sample of Sales Journal entries to Accounts Receivable
subsidiary ledger
D. Compare the total of the Schedule of Accounts Receivable with
the balance of the Accounts Receivable account in the general
ledger

132. The extent of testing normally applies

A. Exclusively to the number of items to be tested

B. To both the number of items tested and the number of tests
performed.
C. Exclusively to the number of substantive tests performed
D. To both the nature of items tested and the number of tests performed

133. Which of the following, when performed by the auditor, is not a

test of mechanical accuracy?

A. Extending sales invoices

B. Adding journal and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio

134. Which of the following audit procedures would provide the least
reliable evidence about legal title to inventories?

A. Confirmation of inventories at locations outside the client‘s facilities

B. Analytical procedures comparing inventory balances to purchasing
and sales activities
C. Observation of physical inventory counts
D. Examination of paid vendors‘ invoices

135.Which of the following is not a substantive

procedure?

A. Tests of details of transactions

B. Tests of purchasing functions
C. Tests of details of balances
D. Analytical reviews
136. Which of the following types of audit tests are not used to satisfy
planned detection risk?

A. Analytical procedures
B. Tests of controls
C. Substantive tests of transactions
D. Tests of details of balances

137. Substantive tests aid the auditor in all, but which of the following
ways?

A. Identify monetary misstatements in an account

B. Obtain an understanding of internal control structure
C. Satisfy planned detection risk
D. All of the given choices

138. Auditors usually try to plan the audit to minimize the use of tests
of details of balances because

A. Other types of audit tests are more reliable

B. Other types of audit tests are less costly
C. Other types of audit tests require less experienced audit personnel
D. All of the given choices are correct

139. The independent auditor selects several transactions in each

functional are and traces them through the entire accounting system,
paying special attention to evidence about whether or not the control
features are in operation. This audit procedure is an example of a

A. Sequence test
B. Test of controls
C. Substantive test
D. Functional test

140. Ending account balances may be audited through the use of which
of the following types of audit procedures?

A. Tests of details of balances

B. Analytical procedures
C. Tests of controls
D. Analytical procedures and tests of details of balances

141. Which of the following represents an incorrect pairing of a type of

audit test and evidence?

A. Procedures to obtain an understanding of internal controls -

Documentation
B. Analytical procedures – Ratio analysis
 C. Substantive tests of transactions – Confirmation
D. Tests of details of balances – Physical examination

142. After finishing the procedures to obtain an understanding of

internal control, the auditor should perform tests of controls on

A. Key controls that have a material efect on the financial statements

B. A random sample key of controls that were reviewed
C. Key controls upon which the auditor intends to rely and plans
to assess control risk below maximum
D. Key controls which represent material weaknesses.

143. Where the auditor has assessed control risk of a particular area at
a reduced level, he will then

A. Eliminate the need to gather evidence in that area

B. Test the efectiveness of the controls in that area
C. Proceed to expand the sample sizes in that area
D. Negotiate with management to determine which controls will be
tested in that area

144. Many tests of controls involve inspecting documents. These tests

are commonly referred to as

A. Tests of transactions
B. Tests of documentations
C. Tests of balances
D. Tests of analytical procedures

145. Upon completion of all the necessary audit procedures, the auditor
should combine the information obtained to reach an overall conclusion
as to whether the financial statements are fairly presented. This is a
highly subjective process that relies heavily on

A. Philippine standards on auditing

B. Philippine financial reporting standards
C. The auditor‘s professional judgement
D. The management representation letter

146. Which of the following is not an information source for developing

analytical procedures used in the audit?

A. Relationships among financial elements

B. Relationships between financial and nonfinancial data
C. Comparison of financial data with anticipated results (e.g., budgets
and forecasts)
 D. Comparison of current year financial data with projections for
next year‘s financial results

147. The objective of performing analytical procedures in planning an

audit is to identify the existence of

A. Unusual transactions and events

B. Noncompliance to laws that went undetected because of internal
control weaknesses
C. Related party transactions
D. Recorded transactions that were not properly authorized

148.Amajor benefit provided by computerized analytical procedures is

A. The ease of doing the calculations

B. The ease of updating the calculations
C. The ease of correcting math calculations
D. The ability to push the work down to lower levels of the audit staf
to do the analysis

149. When performing analytical procedures, an auditor observes that

operating income has declined significantly between the preceding year
and the current year the auditor should

A. Require that the decline be disclosed in the financial statements

B. Consider the possibility that the financial statements may be
materially misstated
C. Inform the management that a qualified opinion on the financial
statements will be necessary
D. Determine the management‘s responsibility for the decline and
discuss the issue with the audit committee

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

material misstatements in the financial statements?

A. Test of controls
B. Computer controls
C. Analytical procedures
D. Post audit working paper review

151.Which of the following statements is not

correct?

A. Analytical procedures use comparisons and relationships to

determine which account balances are in error
B. For certain immaterial accounts, analytical procedures may be the
only evidence needed.
 C. In some instances, other types of evidence may be reduced when
analytical procedures indicate that an account balance appears
reasonable
D. Analytical procedures are used to isolate accounts or transactions
that should be investigated more extensively

152. Which of the following statements regarding analytical procedures is

not correct?

A. The definition of analytical tests places the emphasis on whether

the client‘s recorded date comply with PFRS
B. Analytical procedures are required on all audits
C. Analytical procedures are required on all review service engagements
D. For small accounts with small balances, analytical procedures
alone may be sufficient evidence

153. An aspect of analytical procedures is referred to as ―attention-

directing‖ when it highlights

A. Errors
B. Irregularities
C. Areas of improvements
D. Areas that need more detailed procedures

154. When analytical procedure reveals no unusual fluctuations, the

implication is that

A. There are no material errors or irregularities

B. There are no material errors
C. There are no material irregularities
D. The possibility of a material error or irregularity is minimized

155.Which of the following is not one of the major types of analytical

procedure?

A. Compare client‘s financial information with industry averages

B. Compare client‘s financial information with prior year
C. Compare client‘s actual data with budget
D. Compare client‘s data with SEC averages

156.Analytical procedures are usually

A. Less expensive to perform than tests of details

B. More expensive to perform than tests of details
C. Just as expensive as tests of details
D. None of them is necessarily correct

157. Most auditors prefer to replace test of details with analytical

procedures whenever possible because
 A. The analytical procedures are more reliable
B. The test of details are more expensive
C. The analytical procedures are more persuasive
D. The tests o details are more difficult to

interpret 158.An example of an analytical procedure is

the comparison of

A. Financial information with similar information regarding the

industry in which the entity operates
B. Recorded amounts of major disbursements with appropriate invoices
C. Results of a statistical sample with the expected characteristic of
the actual population
D. EDP-generated data with similar data generated by a manual
accounting system

159.A schedule set up to combine similar general ledger accounts, the

total of which appears on the working trial balance as a single amount
referred to as a:

A. Supporting schedule
B. Lead schedule
C. Audit note
D. Reconciling schedule

160.The auditors use analytical procedures during the course of an audit.

The most important phase of performing these procedures is the:

A. Vouching of all data supporting various ratios

B. Investigation of significant variations and unusual relationships
C. Comparison of client-computed statistics with the industry data on
a quarterly basis
D. Recalculation of industry data
MODULE 9

SAMPLING

PSA-BASED QUESTIONS

1. Select the description which illustrates sampling risk.

A. Applying audit procedures which are inappropriate for the audit

objectives.
B. Failing to recognize errors or deviations in the documents examined.
C. Arriving at incorrect statistical conclusions due to computational
errors.
 D. Choosing a sample which has proportionately more errors than the
population.

2. Sampling risk is an inherent part of sampling that results from

A. the use of inappropriate

B. a failure to recognize exceptions
C. testing a number of items less than the entire population
D. weaknesses in client‘s internal control system

3. Sampling risk refers to the possibility that:

A. The auditor may use a less than optimal statistical method for
the circumstances, e.g. diference estimation instead of ratio
estimation.
B. The auditor may fail to recognize an error that exists in the sample.
C. Even though a sample is properly chosen, it may not be
representative of the population.
D. The confidence level and/or precision established by the auditor are
not appropriate.

4. One of the causes of nonsampling error is the:

A. use of inappropriate or inefective audit procedures

B. failure to draw a random sample
C. failure to draw a representative sample
D. use of attributes sampling instead of variables sampling

5. Statistical sampling:

A. Measures quantitatively the risk from testing only a part of the

audit population.
B. Allows the same degree of confidence as nonstatistical sampling
but with substantially less work.
C. Allows the auditor to replace some judgments with quantitative
measures.
D. Measures the reliability of misstatements.
6. Statistical sampling provides a technique for

A. exactly defining materiality

B. greatly reducing the amount of substantive testing
C. eliminating judgments in testing
D. measuring the sufficiency of evidential matter

7. Statistical samples as compared to non-statistical samples permit the

auditor to

A. quantify and control sampling risk

B. eliminate any type of non-sampling errors
C. obtain smaller sample sizes in all cases
D. use less complex formulas than those required to evaluate non-
statistical samples

8. Of the following statements, which one of the best diferentiates

statistical sampling from nonstatistical sampling?

A. Statistical sampling is a mathematical approach to inference,

whereas nonstatistical sampling is a more subjective approach.
B. Nonstatistical sampling has greater applicability to large
populations than does statistical sampling.
C. Nonstatistical sampling is more subjective, but produces greater
consistency in the application of audit judgment.
D. Nonstatistical sampling has greater applicability to populations
that lend themselves to random selection.

9. One way to reduce sampling risk is to

A. use an appropriate method of selecting sample items from the

population
B. carefully design the audit procedures to be used
C. provide proper supervision and instructions to the audit team
D. use variables sampling rather than attributes sampling

10. When the auditor goes through a population and selects items for the
sample without regard to their size, source, or other distinguishing
characteristics, it is called

A. block selection
B. haphazard selection
C. systematic selection
D. statistical selection

11. The tolerable deviation rate has a significant efect on sample size. The
relationship of tolerable deviation rate to the sample size is
 A. parallel
B. inverse
C. direct
D. variable

12. The acceptable risk of assessing control risk too low in relation to the
sample size is

A. direct
B. inverse
C. parallel
D. not defined

13. The deviation rate that the auditor will permit in the population and
still be willing to reduce the assessed level of control risk is:

A. tolerable deviation rate

B. estimated population deviation rate
C. acceptable risk of assessing control risk too low
D. sample deviation rate

14. Which of the following statements is correct?

A. The expected population rate has little or no efect on the sample

size.
B. As the population size doubles, the sample size should also double.
C. For a given tolerable rate, a larger sample size should be
selected as the expected population deviation rate decreases
D. The population size has little or no efect on sample size except for
very small populations.

15. Which of the following factors is generally not considered in

determining the sample size for a test of controls?

A. Population size
B. Risk of assessing control risk too low
C. Tolerable rate
D. Expected population deviation rate

16. When an auditor does a sampling for attributes, which of the

following would decrease sample size?

Risk of Assessing Tolerable rate Expected

of population
control risk too low deviation deviation rate
A. Increase Decrease Increase
B. Decrease Increase Decrease
C. Increase Increase Decrease
 D. Increase Increase Increase

17. If all other factors that are specified in a sampling plan remain constant,
changing the expected population deviation rate from 1 percent to 2
percent would cause the required sample size to

A. increase
B. decrease
C. remain the same
D. become indeterminate

18.Which of the following statements concerning the sample size is true?

A. An increase in the tolerable occurrence rate, other factors

remaining unchanged, increases the sample size.
B. The higher the expected occurrence rate, other factors remaining
unchanged, the larger will be the sample size.
C. The more critical the attribute being tested, the higher will be
the tolerable occurrence rate set by the auditor, and the larger will be
the sample size.
D. The lower the acceptable risk of underassessment of control risk,
the smaller will be the sample size be.

19. In attribute estimation, a 10 percent change in which of the following

factors normally will have the least efect on the size of the statistical
sample?

A. Population size
B. Reliability
C. Precision interval
D. Standard deviation

20. An important distinction between a statistical sample and a non-

statistical (judgmental) sample is that with a statistical sample:

A. No judgment is required, everything is by formula.

B. A smaller sample size can be used.
C. More accurate results are obtained.
D. Population estimated with measurable reliability can be made.
QUIZZERS

CONCEPTS

1. The application of statistical sampling technique is least related to

which of the following generally accepted auditing standards?

A. The work is to be adequately planned, and assistants, if any are to

be properly supervised.
B. In all matters relating to the assignment, an independence in
mental attitude is to be maintained by the auditor or auditors.
C. A sufficient understanding of internal control is to be obtained to
plan the audit and to determine the nature, timing and extent of the
tests to be performed.
D. Sufficient competent evidential matter is to be obtained through
inspection, observation, inquires, and confirmations to aford a
reasonable basis for an opinion about the financial statements under
audit.

2. A sample in which the characteristics of the sample are the same as

those of the population is a (an)

A. random sample
B. variable sample
C. acceptance sample
D. representative sample

3. A bank auditor is interested in estimating the average account balance

of it depositors based on a sample. This substantive test is an example
of

A. attribute sampling
B. discovery sampling
C. acceptance sampling
D. variables sampling

4. Nonsampling errors occur when audit tests do not uncover existing

exceptions in the

A. population
B. sample
C. planning stage
D. financial statements

5. Which of the following best illustrates the concept of sampling risk?

A. A randomly chosen sample may not be representative of the

population as a whole on the characteristic of interest.
 B. An auditor may select audit procedures that are not appropriate
to achieve the specific objective.
C. An auditor may fail to recognize errors in the documents
examined for the chosen sample.
D. The documents related to the chosen sample may not be available
for inspection.

6. The auditors who prefer statistical to non-statistical sampling believe

that the principal advantage of statistical sampling flows from its
unique ability to

A. Define the precision required to provide adequate satisfaction.

B. Provide a mathematical measurement of risk.
C. Establish conclusive audit evidence with decreased audit efort.
D. Promote a more legally defensible procedural approach.

7. The primary reason for an auditor to use statistical sampling is to

A. Obtain a smaller sample than would be required by non-statistical

sampling technique.
B. Obtain a sample more representative of the population than
would be obtained by non-statistical sampling technique.
C. Allow the auditor to quantify, and therefore control, the risk of
making an incorrect decision based on sample evidence.
D. Meet requirements of Philippine Standards on Auditing

8. One of the ways to reduce nonsampling risk is through

A. proper supervision and instructions of the client‘s employees

B. proper supervision and instructions of the audit team members
C. the use of attributes sampling rather than variable sampling
D. controls which ensure that the sample drawn is random and
representative

9. Detection risk may be subdivided into the risk that analytical

procedures and other substantive procedures will fail to detect a
material misstatement and the allowable:

A. Risk of incorrect acceptance

B. Risk of incorrect rejection
C. Control risk
D. Audit risk

10. Which of the following statements is incorrect?

A. It is acceptable for auditors to use statistical sampling method.

B. It is acceptable for auditors to use non-statistical sampling method.
 C. The primary benefit of statistical sampling method is the
quantification of sampling risk.
D. An advantage of using statistical sis that the cost/benefit ratio is
always positive.

11. In applying variables sampling, an auditor attempts to

A. Estimate a qualitative characteristic of interest.

B. Determine various rate of occurrence for specified attributes.
C. Discover at least one instance of a critical error.
D. Predict a monetary population value within a range of precision.

12. Which of the following statements is a valid criticism against the

use of nonstatistical sampling methods?

A. Many audit tests, such as footing of journals, must be performed

outside a statistical sampling context.
B. The cost of performing random selection or testing often exceeds
the benefits.
C. Nonstatistical sampling does not difer substantially from
statistical sampling method.
D. Conclusions may be drawn in more precise ways when using
statistical sampling method.

13. Which of the following statements is not correct regarding probabilistic

and nonprobabilistic sample selection?

A. In probabilistic selection, every population item has a known

chance of being selected.
B. Probabilistic selection is required for all statistical sampling methods.
C. It is not acceptable to make nonstatistical evaluation using
probabilistic selection.
D. Both methods are acceptable and commonly used.

14. Which one is not a sample selection method commonly associated

with nonstatistical audit sampling?

A. Directed sample selection.

B. Block sample selection.
C. Probability proportional to size sample selection.
D. Haphazard sample selection.

15. Which one is not a sample selection method commonly associated with
statistical audit sampling?

A. Simple random sample selection.

 B. Systematic sample selection.
C. Block sample selection.
D. Stratified sample selection

16. The major weakness of nonstatistical sampling is that it

A. usually requires larger sample size that statistical sampling

B. does not allow sampling risk to be objectively measured
C. frequently results in samples that are not representative of the
population
D. gives less accurate point estimates of parameters than statistical
sampling does

17. Which of the following statements regarding statistical sampling in

auditing is true?

A. In as much as audits are test-based, generally accepted auditing

standards require the use of statistical sampling methods whenever the
auditor decided to examine only a part of the population.
B. Although statistical sampling may be applied to test controls, it is
required for substantive testing purposes.
C. Sampling methods are used by auditors in both testing of controls
and substantive testing.
D. Statistical sampling methods are more appropriate for testing of
controls when the auditor elects to reprocess transactions, than when
controls are tested by means of document examination.

18. Which of the following is not an aspect of sampling risk?

A. Risk of assessing control risk too high.

B. Risk of not identifying a misstatement included in a sample.
C. Risk of incorrect acceptance.
D. Risk of sampling results indicating that a population is materially
misstated when it is not.

19. Which of the following statement is true?

A. The audit procedures will vary as a result of using either statistical

or nonstatistical sampling.
B. The audit procedures will be the same for either statistical or
non-statistical sampling, but they must be performed diferently for
each.
C. Statistical sampling requires quantitative audit procedures
whereas nonstatistical sampling requires judgmental audit
procedures.
D. The same audit procedures are performed in the same manner
for either statistical or nonstatistical sampling.

20. An underlying feature of random sampling is that each

 A. stratum of the accounting population be given equal
representation in the sample
B. item in the accounting population be randomly ordered
C. item in the accounting population should have an opportunity to be
selected
D. item must be systematically selected using replacement

21. In which of the following cases would the auditor be

most likely The measurement of Error frequency is

Tolerable error is expected to be
A. Large Low
B. Small High
C. Large High
D. Small Low

22. Auditors who prefer statistical sampling to non-statistical sampling may

do so because statistical sampling helps the auditor

A. Measure the sufficiency of the evidential matter obtained.

B. Eliminate subjectivity in the evaluation of sampling results.
C. Reduce the level of tolerable error to a relatively low amount.
D. Minimize the failure to detect a material misstatement due to non-
sampling risk.

23. In order to quantify the risk that the sample evidence leads to
erroneous conclusions about the sampled population

A. Each item in the sampled population must have an equal chance

of being selected.
B. Each item in the sampled population must have a chance of being
selected proportional to its book value.
C. Each item in the sampled population must have an equal or known
probability of being selected.
D. The precise number of items in the population must be known.

24. In examining cash disbursements, an auditor plans to choose a sample

using systematic selection with a random start. The primary advantage
of such a systematic selection approach is that population items

A. which include errors will not be overlooked when the auditor

exercises compatible reciprocal options.
B. may occur in a systematic pattern, thus making the sample
more representative.
C. may occur more than once in a sample.
D. do not have to be prenumbered in order for the auditor to use the
technique.
25. If certain forms are not consecutively numbered

A. Selection of a random sample probably is not possible.

B. Systematic sampling may be appropriate.
C. Stratified sampling should be used.
D. Random number tables cannot be used.

26. If all other factors in a sampling, plan are held constant, changing the
measure of tolerable error to a smaller value would cause the sample
size to be:

A. Smaller.
B. Larger.
C. Unchanged.
D. Indeterminate.

27. Which of the following is an element of sampling risk?

A. Choosing an audit procedure that is inconsistent with the audit

objective.
B. Choosing a sample size that is too small to achieve the sampling
objective.
C. Failing to detect an error on a document that has been
inspected by the auditor.
D. Failing to perform audit procedures that are required by the sampling
plan.

28. Other factors- remaining constant, the audit risk is increased by an

increase in:

A. Materiality.
B. The efectiveness of analytical procedures.
C. The risk of incorrect rejection.
D. Detection risk.

29. In assessing sampling risk, the risk of incorrect rejection and the risk of
assessing control risk too high relate to the

A. efficiency of the audit

B. selection of the sample
C. efectiveness of the audit
D. audit quality

controls SAMPLING FOR

ATTRIBUTES

30. Which type of sampling plan is most frequently used in testing control
activities?
A. Attributes sampling.
B. Discovery sampling.
C. Probability-proportional-to-size sampling.
D. Classical variables sampling.
31. Tests of controls provide reasonable assurance that controls are
applied as prescribed. A sampling method that is useful when testing
controls is:

A. Nonstatistical sampling
B. Discovery sampling
C. Attribute estimation sampling
D. Stratified random sampling

32. Attributes sampling would be an appropriate method to use on which

one of the following procedures in an audit program?

A. Review sales transactions for large and unreasonable amount.

B. Observe whether the duties of the accounts receivable clerk are
separate from handling cash.
C. Examine a sample of duplicate sales invoices for credit approval by
the credit manager.
D. Review the aged schedule of accounts receivable to determine if
the receivables from officers are included.

33. Which of the following is a valid statement about the assessment of

control risk?

A. There is a positive relationship between detection risk and the

combined level of inherent and control risk.
B. Misstatements discovered by conducting substantive procedures
may cause the auditor to modify the previous assessment of control
risk.
C. The auditor should consider the assessed levels of inherent and
control risks in determining the nature, timing, and extent of
substantive procedures required to eliminate audit risk.
D. The assessed level of inherent and control risks can be sufficiently
low in order to eliminate the auditor's need to perform substantive tests
on some assertions.

34. Discovery sampling should be used to estimate whether a population

contains

A. errors of any kind

B. critical deviations
C. noncritical errors
D. no errors

35. Establishing the tolerable deviation rate requires

A. statistical frequency probability tables

B. random number tables
C. a computer program
D. auditor judgment
36. Acceptable risk of assessing control risk too low or too high is directly
related to

A. nonsampling risk
B. sampling risk
C. inherent risk
D. control risk

37. Which of the following statements is true about nonstatistical sampling,

in tests of controls?

A. Nonstatistical sampling plans provide a quantitative measure of

sampling risk.
B. The auditor's judgment in nonstatistical sampling is guided by
classical statistical sampling concepts.
C. The calculated nonstatistical sample should never be altered by the
auditor.
D. The auditor considers the same parameters when determining a
nonstatistical sample size as when determining a statistical sample
size.

38. The risk which the auditor is willing to take of accepting a control as
being efective when, in fact, it is not is the

A. tolerable deviation rate

B. acceptable risk of assessing control risk too low
C. estimated population deviation rate
D. finite correction factor

39. 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

A. Discovery sampling
B. Variables sampling
C. Random sampling
D. Monetary-unit sampling

40. Statistical sampling may be applied to test controls when a client's

control procedures:

A. Depend primarily on segregation of duties.

B. Are carefully reduced to writing and are included in client
accounting manuals.
C. Leave an audit trail as evidence of compliance.
D. Enable the detection of fraud.

41. Which of the following conditions suggest an increase in sample size?

 A. Internal controls in the area of payroll processing are found to be
much stronger than the auditor's initial assessment.
B. Tests of internal controls in nearly all transaction cycle subsets
have produced numerous and widespread errors.
C. The application of analytical procedures reveals a favorable
sales budget variance that is material and that remains unexplained.
D. Study of business and industry reveals a material decline in both
the industry and the client's revenue during the current year.

42. If the size of the sample to be used in a particular test of attributes has
not been determined by utilizing statistical concepts but the sample has
been chosen in accordance with random selection procedures,

A. no inferences can be drawn from the sample

B. the auditor has committed a non-sampling error
C. the auditor may or may not achieve desired allowance for sampling
risk at the desired level of confider
D. the auditor will have to evaluate the results by reference to the
principles of discover/ sampling

43. Which of the following factors does an auditor generally need to

consider in planning a particular audit sample for a control test?

A. Number of items in the population.

B. Total peso amount of the items to be sampled.
C. Estimated standard deviation of the population.
D. Tolerable error.

44. An auditor plans to test a sample of 20 checks for counter signatures

as prescribed by the client's control procedures. One of the checks in
the chosen sample of 20 cannot be found. The auditor should consider
the reasons for this limitation and

A. evaluate the results as if the sample size had been 19.

B. treat the missing check as a deviation for the purpose of
evaluating the sample.
C. treat the missing check in the same manner as the majority of
the other 19 checks, i.e., countersigned or not.
D. choose another check to replace the missing check in the sample.

45. The tolerable rate of deviation for tests of controls necessary to justify a
control risk assessment depends primarily on which of the following?

A. The cause of errors

B. The extent of reliance to be placed on the procedures
C. The amount of any substantive errors
 D. The limit used in audits of similar clients

46. An auditor who is examining inventory may appropriately apply sampling

for attributes in order to estimate the

A. average price of inventory items

B. percentage of slow-moving inventory items
C. peso value of inventory
D. physical quantity of inventory items

47. The tolerable rate of deviations for a test of controls is generally

A. lower than the expected rate of errors in the related accounting

population
B. higher than the expected rate of errors in the related accounting
records
C. identical to the expected rate of errors in the related accounting
records
D. unrelated to the expected rate of errors in the related accounting
records

48. To determine whether the client's internal control operated efectively

in minimizing the likelihood of failing to bill customers for inventory
shipped to them, the auditor would select a sample of transactions from
the population represented by the

A. customer order file

B. bill of lading file
C. open invoice file
D. sales invoice file

49. The precision limit for control testing necessary to justify lowering the
assessed control risk level depends primarily on which of the following?

A. The cause of the errors

B. The materiality of the attribute(s) to be tested
C. The amount of any substantive errors
D. The limit used in audits of similar clients

50. An auditor performs a test to determine whether all merchandise for

which the client was billed was received. The population for this test
consists of all

A. Merchandise received.
B. Vendors' invoices.
C. Canceled checks.
D. Receiving reports.
51. Although mathematically based, statistical sampling does not replace
audit judgment. In utilizing statistical sampling techniques, the auditor
must apply judgment in all but which of the following tasks?
 A. Selecting a tolerable rate of error:
B. Determining an acceptable risk of underassessing control risk.
C. Calculating the actual error rate.
D. Assessing the materiality of control weaknesses.

52. If an auditor, in planning to use statistical sampling, is concerned with

the number of a client's sales invoices that contain mathematical
errors, he would most likely utilize

A. random sampling with replacement

B. sampling for attributes
C. sampling for variables
D. stratified random sampling

53. An auditor wishes to determine if the error rate on travel

reimbursement claims is within the five-percent tolerance level set by
management. What sampling plan should the auditor use?

A. Variables sampling.
B. Attribute sampling.
C. Judgment sampling.
D. PPS sampling.

54. An auditor samples cash disbursement records for significant errors of

P5, 000 or more. Upon finding 'one such error, these records are
scheduled for a complete review. This conclusion is most likely based on
a

A. Cluster sample.
B. Discovery sample.
C. Systematic sample.
D. Stratified sample.

55. In attribute estimation, which of the following must be known in order

to appraise the results of the auditor's sample?

A. estimated peso value of the population

B. standard deviation of the values in the population
C. actual occurrence rate of the attribute in the population
D. sample size

56. Given random sampling, the same sample size, and the same tolerable
error for the testing of two unequal populations, the risk of assessing
control risk too low on the smaller population is

A. the same as the risk of assessing control risk too low on the larger
population
B. higher than the risk of assessing control risk too low on the larger
population
 C. lower than the risk of assessing control- risk too low on the larger
population
D. not determinable relative to the risk of assessing control risk too
low on the larger population

57. When using statistical sampling for tests of controls, an auditor's

evaluation would include a statistical conclusion about whether:

A. Deviations in the population are within an acceptable range.

B. Monetary precision exceeds a predetermined amount.
C. The population's total monetary value is not in error by more
than a predetermined amount.
D. Population characteristics occur at least once in the population.

58. An auditor is testing credit authorization procedures by examining sales

invoices for credit approval by the credit department. The procedures
will be considered to be working adequately if 96% of all sales invoices
either indicate approval or are cash sales. The auditor selects a random
sample of 100 invoices. In this situation, which of the following
outcomes illustrates underassessment?

A. The auditor finds five deviations and concludes that procedures

work inadequately. The actual population deviation rate is 2%.
B. The auditor finds no deviations and concludes that, procedures
work adequately. The true population deviation rate is 5%.
C. The auditor finds no deviations and concludes that the procedures
work adequately. The true population deviation rate is 2%.
D. The auditor finds five deviations and concludes that procedures
work inadequately. The true population deviation rate is 6%.

59. An auditor who uses statistical sampling for attributes in testing internal
controls should increase the assessed level of control risk when the

A. Sample occurrence rate is less than the expected occurrence

rate used in planning the sample.
B. Tolerable rate less the allowance for sampling risk exceeds the
sample occurrence rate.
C. Sample occurrence rate plus the allowance for sampling risk
exceeds the tolerable rate.
D. Sample occurrence rate plus the allowance for sampling risk equals
the tolerable rate.

60. If a selected random number matches the number, of a voided voucher,

the voucher ordinarily should be replaced by another one if it

A. constitutes a deviation
B. cannot be located
C. has been properly voided
 D. represents an immaterial peso amount

61. Assuming the tolerable deviation rate is 5 percent; the expected

population rate is
3 percent, and the allowance for sampling risk is 2 percent, what
should an auditor conclude if the test of 100 randomly selected
documents reveals 4 deviations?

A. accept the sample results as a support for assessing control risk

below the maximum because the tolerable rate less the allowance, for
sampling risk equals the expected population deviation rate
B. assess control risk at the maximum because the sample deviation
rate plus the allowance for sampling risk exceeds the tolerable rate
C. assess control risk at the maximum because the tolerable rate plus
the allowance for sampling risk exceeds the expected population
deviation rate
D. accept the sample results as support for assessing control risk
below the maximum because the sample deviation rate plus the
allowance for sampling risk exceeds the tolerable rate

62. What is ordinarily the preferable course of action when an auditor

finds a higher than expected deviation rate when he is sampling
controls?

A. Triple the size of the sample to further analyze potential problems.

B. Project the level of deviation to the entire sample, and if material
qualify the audit opinion.
C. Continue to selection items from the population until the error rate
diminishes to a tolerable level.
D. Increase the assessed level of control risk and expand
substantive testing procedures.

63. Which one is most likely to have more serious consequences, assessing
control risk as too high or too low, and why?

A. Too high, because too much reliance will be put on weak controls,
increasing overall audit risk.
B. Too high, because of audit inefficiency and consequently audit
reliability will be inhibited.
C. Too low, because too much reliance will be put on weak controls,
increasing overall audit risk.
D. Too low, because audit efficiency and consequently audit
reliability will be inhibited.

64. Assessing control risk too high is the risk that the sample result

A. Does not support tolerable error for some or all of management's

assertions.
B. Contains proportionately more deviations from prescribed control
procedures than what actually exist in the population as a whole.
 C. Contains monetary misstatements that could be material to the
financial statements when aggregated with misstatements in other
account balances or classes of transactions.
D. Contains proportionately fewer deviations from prescribed control
procedures than what actually exist in the population as a whole.

65. Assessing control risk too low relates to:

A. The efficiency of the audit.

B. The efectiveness of the audit.
C. The preliminary estimate of materiality.
D. Tolerable error.

66. At times a 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 assessed level. This situation
illustrates the risk of

A. assessing control risk too low

B. incorrect precision
C. assessing control risk too high
D. incorrect rejection

67. In the examination of the financial statements of Delta Company, the

auditor determines that in performing a test of internal control
efectiveness, the rate of error in the sample does not support the
auditors preconceived notion of a tolerable occurrence rate when, in
fact, the actual error rate in the population does meet the auditors
notion of efectiveness. This situation illustrates the risk of

A. underassessment of control risk

B. overassessment of control risk
C. incorrect rejection
D. incorrect acceptance

68. Several risks are inherent in the 'evaluation of audit evidence which has
been obtained through the use of statistical sampling. Which of the
following risks is an example of the risk of underassessment of control
risk?

A. Failure to properly define the population to be sampled.

B. Failure to draw a random sample from the population.
C. Failure to accept the statistical hypothesis that internal control is
unreliable when, in fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not
materially misstated when the true book value is not materially
misstated.
69. As a result of tests of controls, an auditor underassessed control risk
and decreased substantive testing. This underassessment occurred
because the true occurrence rate in the population was

A. Less than the risk of underassessment in the auditor's sample.

B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor‘s sample.

SAMPLING FOR VARIABLES

70. Which of the following sampling plans would be designed to estimate a

numerical measurement of a population, such as a peso value?

A. Numerical
sampling. B:
Discovery
sampling.
C. Sampling for attributes.
D. Sampling for variables.

71. Which of the following statements is an advantage of classical

variables sampling?

A. If no errors are expected, classical variables sampling will result in a

smaller sample size than probability-proportional-to-size sampling.
B. A classical variables sampling plan can begin before the completed
population is available.
C. Classical variables sampling may .result in a smaller sample size
than probability-proportional-to-size sampling if there are many
diferences between recorded and audited amounts.
D. Classical variables sampling does not require recorded values for
individual sampling units.

72. What is the primary objective of using stratification as a sampling •

method in auditing?

A. To increase the confidence level at which a decision will be reached

from the results of the sample selected.
B. To determine the occurrence rate for a given characteristic in the
.population being studied.
C. To decrease the efect of variance in the total population.
D. To determine the precision range of the sample selected.

73. An auditor is applying PPS sampling. In determining the sample size,

which of the following is not necessary?

A. a reliability factor for overstatement errors

 B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error

74. In a variable sampling plan, an auditor must generally consider each of

the following except

A. variation within the population

B. acceptable risk of incorrect acceptance
C. tolerable error
D. population

75. When sampling methods are used in a substantive test, all of the
following factors must be considered in determining an optimum
sample size, except the

A. variation in the population

B. risk levels that the auditor is willing to accept
C. deviation occurrence rate that the auditor expects to exist in the
sample
D. tolerable misstatement

76. Which of the following factors would influence the sample size for a
substantive test of details for a specific account?

Expected amount of Measure of

tolerable misstatements misstatement
A. No No
B. Yes Yes
C. No Yes
D. Yes No

77. An auditor initially planned to use unrestricted random sampling with

replacement when testing accounts receivable. Later, the auditor
decided to use unrestricted random sampling without replacement. As a
result only of this decision, the sample size should

A. increase
B. remain the same
C. decrease
D. be recalculated using a binomial distribution

78. The relationship between the sampling risk of incorrect acceptance and
the sample size of substantive tests is

A. inverse
B. indeterminate
C. positive
 D. linear

79. The use of the diference estimation sampling technique to estimate

peso amounts is inappropriate when

A. The total book value is known and corresponds to the sum of all the
individual book values.
B. A book value for each sample item is unknown.
C. There are some observed diferences between audited values and
book values.
D. The audited values are nearly proportional to the book value.

80. Which of the following situations would increase the sample size? A
decrease in:

A. risk of incorrect rejection

B. estimated population standard deviation
C. expected frequency of errors
D. tolerable error

81. A number of factors influence the sample size for a substantive test
of details of an account balance. All other factors being equal, which of
the following would lead to a larger sample size?

A. Lowering the assessed level of control risk.

B. Lowering the assessed inherent risk through the use of
analytical review procedures.
C. Smaller expected frequency of errors.
D. Smaller measure of tolerable error.

82. For variables sampling purposes, changes in certain parameters afect

sample size positively while changes in others have a negative efect. In
this regard, which of the following statements is true?

A. An increase in beta risk reduces sample size.

B. Population size afects sample size inversely, i.e., as population
size increases, sample size decreases.
C. An increase in alpha risk, increases sample size.
D. As materiality (M) increases, sample size increases.

83. An auditor is primarily concerned with substantial overstatements of

accounts receivable balances and expects few, if any, errors. In an
efort to concentrate on the large peso values, the auditor would
logically employ

A. ratio, estimation
B. probability proportional to size sampling
C. discovery sampling
 D. mean per unit sampling

84.Ratio estimation is inappropriate when:

A. The total population book value is known and corresponds to the

sum of all population items.
B. There are some observed diferences between audited end
recorded book values
C. Diferences between recorded and audited values are nearly
proportional to the recorded values.
D. There are no recorded values for some items in the population.

85. A population that is physically separated into two or more groups based
on sample variation being less than that for the entire population is
called a

A. systematic sample
B. judgment sample
C. simple random sample
D. stratified sample

86. In probability-proportional-to-size sampling, each invoice:

A. Has an equal probability of being selected.

B. Can be represented by no more than one peso unit.
C. Has an unknown probability of being selected.
D. Has a probability proportional to its peso value or being selected.

87. Which of the following is improper when using probability-proportional-

to-size sampling?

A. Combining negative and positive peso error items

B. Using a sample selection technique in which the same account
balance could be selected more than once
C. Selecting a random starting point and then sampling every nth peso
unit.
D. Defining the sampling unit as an individual peso and not as an
individual account balance.

88. In comparison with classical variables sampling, which of the following

Is an advantage of probability-proportional-to-size (PPS) sampling?

A. PPS sampling automatically results in a stratified sample.

B. PPS sampling results in a smaller sample size if many diferences
are expected between audited and recorded amounts.
C. PPS sampling is particularly appropriate when understatement
errors are expected
 D. PPS sampling is less likely to overstate the allowance for sampling
risk when errors are found in the sample

89. PPS sampling is less efficient if

A. Computerized account balances are being audited.

B. Statistical inferences are to be made.
C. The audit objective is oriented to understatements.
D. The account contains a large number of transactions.

90. Which of the following courses of action would an auditor most likely
follow in planning a sample of cash disbursements if the auditor is
aware of several unusually large cash disbursements?

A. Increase the sample size to reduce the efect of the unusually

large disbursements.
B. Continue to draw new samples until all the unusually large
disbursements appear in the sample.
C. Set the tolerable rate of deviation at a lower level than originally
planned.
D. Stratify the cash disbursements population so that .the unusually
large disbursements are selected.

91. PPS sampling is most appropriate when the auditor

A. anticipates understatement errors

B. anticipates overstatement errors
C. expects no errors
D. has assessed control risk at the maximum

92. The mean-per-unit estimation method calculates the estimated total

audited value of a population of accounts receivable as:

A. A summation of the total individual accounts values in the population.

B. The sample mean audited value multiplied by the number of items
in the population.
C. The estimated total audited value of the population multiplied by
the number of items in the sample.
D. The summation of the sample multiplied by the number of discrete
samples in the population.

93. What is the best description of "tolerable misstatement" for mean-per-

unit estimation?

A. The maximum misstatement that may exist without causing an

account to be materially misstated.
 B. The "bounds" around the sample mean that we would expect the
value to fall within to be correct.
C. The "projected" misstatement in the population based upon the
sample chosen.
D. The upper limit (or lower limit for liabilities) of asset values for
which the book value may exceed that sample mean without being
materially misstated.

94. When are the ratio estimation and diference estimation techniques
most likely to be preferable to the mean-per-unit estimation method?

A. The choice between any of the methods is irrelevant, since they

all provide similar results.
B. When diferences between book and audited values are infrequent.
C. When diferences between book and. audited values are frequent.
D. When diferences between book and projected misstatement is
estimated to be small.

95. What is one of the main advantages of the probability-proportional-to-

size sampling technique over the classical variables approach?

A. It provides a more accurate estimation of the sample mean.

B. It provides a wider range for acceptance so that less
substantive testing needs to be done.
C. It provides a smaller range for acceptance so that more errors are
discovered.
D. If often requires a smaller sample size to be selected.

96. Probability-proportional-to-size sampling will result in what type of

sample items being selected?

A. Highly representative of the population because it is wholly

randomized.
B. A higher proportion of small value items then large value items
because of the sampling interval used.
C. A higher proportion of large value items then small value items
because of the sampling interval used.
D. A biased sample means that may not be representative of the
population.

97. While performing a substantive test of details during an audit, the

auditor determined that the sample results supported the conclusion
that the recorded account balance was materially misstated. It was, in
fact, not materially misstated. This situation illustrates the risk of

A. alpha risk
B. assessing control risk too low
C. beta risk
D. assessing control risk too high
98. The risk of incorrect acceptance relates to the:

A. Efectiveness of the audit.

B. Efficiency of the audit.
C. Preliminary estimate of materiality.
D. Allowable risk of tolerable error.

99. Sample results support the conclusion that a recorded account balance
is materially misstated but, unknown to the auditor, the account is not
misstated, suggesting the risk of

A. incorrect rejection
B. assessing control risk too high
C. incorrect acceptance
D. assessing control risk too low

100. In conducting a substantive test of an account balance, an auditor

hypothesizes that no material error exists. The risk that sample results
will support the hypothesis when a material error actually does exist is
the risk of

A. Incorrect rejection
B. Alpha error
C. Incorrect acceptance
D. Type I error
 MODULE 10

TESTS OF CONTROLS AND SUBSTANTIVE PROCEDURES

REVENUE AND RECEIPTS CYCLE

Tests of Controls

1. Which of the following business functions is associated with the

revenue/receipt cycle?

A. Obligations are paid to vendors and employees.

B. Resources are distributed to outsiders in exchange for promises
of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.

2. Which of the following is not a common activity in the revenue/receipt

cycle?

A. Order
entry B,
Receiving
C. Inventory control
D. Cash collection

3. The cash account is involved in which cycle?

A. Revenue and collection.

B. Acquisition and. expenditure.
C. Production and conversion.
D. All of the given choices.

4. Which of the following is an appropriate audit procedure to test

cancelled checks for authorized signatures?

A. Compare the check date with the first cancellation date.

B. Determine that all checks are to be signed by individual officers
who are authorized by the board.
C. Examine a representative sample of signed checks and trace their
signatures to the specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the
bank.

5. Which of the following is not likely a source of information about the

accounting system in the revenue area?

A. Direct inquiry of customers.

B. Prior experience with the client.
 C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.

6. Which of the following gives an indication of a potential fraudulent

activity?

A. Numerous credit memoranda have been issued to the

company's biggest customer.
B. Internal auditor cannot locate several credit memoranda to support
reductions of customers' balances.
C. The year-end bank reconciliation has no outstanding checks or
deposits older than 15 days.
D. No one was absent the day the auditors handed out the paychecks.

7. Which of the following control procedures could prevent or detect errors

or frauds arising from shipments made to unauthorized parties?

A. Document policies and procedures for scheduling the shipments of

goods.
B. Establish procedures for reviewing and approving the prices and
sales terms before sale.
C. Prenumber the bills of lading and assure that the related billings
are made on a periodic basis.
D. Prepare and periodically update the lists of authorized customers.

8. Which of the following control procedures would most likely assure that
access to shipping, billing, inventory control, and accounting records is
restricted to personnel authorized by management?

A. Segregate the responsibilities 'for authorization, execution, and

recording, and prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and
require a daily reconciliation of cash, receipts records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and
supporting documentation.
D. Periodically substantiate and evaluate the recorded account balances.

9. An entity has implemented a control procedure which requires that

authorized personnel reconcile the total of individual customer accounts
receivable with control totals. This control relates to which of the
following control objectives?

A. Sales, cash receipts, and related transactions should be recorded

at the correct amounts, in the proper period, and should be properly
classified.
B. Recorded accounts receivable balances should reflect
underlying transactions and events.
C. Billings, collections, and related adjustments transactions should
be posted accurately to individual customer accounts.
 D. Access to cash and cash-related records should be restricted to
personnel authorized by management.

10. Which of the following internal control_ procedures most likely would
deter lapping of collections from customers?

A. Independent internal verification of dates of entry in the cash

receipts journal with dates of daily cash summaries.
B. Authorization of writeofs of uncollectible accounts by a
supervisor who is independent of credit approval.
C. Segregation of duties between receiving cash and posting
collections to the accounts receivable ledger.
D. Supervisors comparison of the daily cash summary with the sum of
the cash receipts journal entries.

11. What sequence of steps does an auditor undertake when identifying

control procedures that are potentially reliable in assessing control risk
below the maximum?

A. Consider the errors or frauds that might occur, determine control

procedures, identify control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider
the errors or frauds that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that
might occur, determine control procedures, and design tests of
controls.
D. Design tests of controls, determine control procedures, consider
the errors or frauds that might occur, and identify control objectives.

12. Assuming cash receipts from credit sales have been misappropriated,
which of the following is likely to conceal the misappropriation and
unlikely to be detected?

A. Understating the sales journal.

B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.

13. Which of the following is most likely to provide management with

incentives to overstate earnings?

A. Projected quarterly dividends.

B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.

14. Under which of the following circumstances does management have

some discretion in timing the recognition of revenue?
 A. The timing of revenue is not reasonably determinable and the
earnings process is not complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm's length.

15. After preparing a flowchart of internal control for sales and cash
receipts transactions and evaluating the design of the system, the
auditor would perform tests of controls on all control procedures

A. That are documented in the flowchart.

B. That are considered to be deficiencies that might allow errors to
enter the accounting system.
C. That are considered to be strengths that the auditor plans to rely on
in assessing control risk.
D. That would help in preventing irregularities.

16. Which of the following would the auditor consider to be an

incompatible operation if the cashier receives remittances from the
mail room?

A. The cashier posts the receipts to the accounts receivable subsidiary

ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.

17. Which of the following is not a universal rule for achieving control over
cash?

A. Separate the ash-handling and record-keeping functions.

B. Decentralize the receiving of cash as much as possible.
C. Deposit each day's cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle
cash.

18. On conducting an audit in which point in an ordinary sales transaction

of a wholesaling business is a lack of specific authorization of least
concern to the auditor?

A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.

19. A company has computerized sales and cash receipts journals. The
computer programs for these journals have been properly debugged.
The auditor discovered that the total of the accounts receivable
subsidiary accounts difers
 materially from the accounts receivable control account. This
discrepancy could indicate

A. Lapping of receivables.
B. Credit memoranda being improperly recorded.
C. Receivables not being properly aged.
D. Statements being intercepted prior to mailing.

20. To achieve control when there is no billing department, the billing

function should be performed by the

A. accounting department
B. sales department
C. shipping department
D. credit and collection department

21. The person who opens the mail commonly prepares a remittance advice
when a customer fails to return one with the payment. Consequently,
mail should be opened by the

A. credit manager
B. receptionist
C. sales manager
D. accounts receivable clerk

22. Which of the following control procedures will likely prevent the
concealment of a cash shortage that was, perpetrated by improperly
writing of a trade account receivable?

A. Write of must be approved by a responsible officer after reviewing

the credit department's recommendations and supporting evidence.
B. Write Of must' be supported by an aging schedule showing that
only receivables that are several months overdue have been written of.
C. Write of must be approved by the cashier.
D. Write of must be authorized by field sales representatives.

23. Which of the following would unlikely improve control over an entity's
cash?

A. Separating cash record keeping from the custody of cash.

B. Preparing the monthly bank reconciliation.
C. Processing of checks in batches, rather than intermittently.
D. Separating cash receipts from cash disbursements.

24. Which of the following would best protect a company that wishes to
prevent lapping?
 A. Segregating duties so that accounting staf has no access to an
incoming mail.
B. Segregating duties so that no employee has access both to
checks from customers and money from daily cash receipts.
C. Arrange that customers send payments directly to the company's
bank.
D. Requesting that customers checks be made payable to the
company and be addressed to the treasurer.

25. Which of the following is the greatest drawback of using subsequent

collections that are evidenced only by a deposit slip as an alternative
procedure when responses to positive accounts receivable
confirmations are not received?

A. Checking of subsequent collections can never be used as an

alternative auditing procedure.
B. A deposit slip is not received directly by the auditor.
C. A customer may not have made a payment on a timely basis.
D. By examining a deposit slip only, the auditor does not know whether
the payment is for the receivable at the balance sheet date or a
subsequent transaction.

26. In considering internal control within the revenue/receipt cycle, what is

the purpose of a transaction walk through?

A. To gain an assurance that employees are performing assigned

functions accurately.
B. To confirm the results of the auditor's understanding of the
internal control structure.
C. To select documents, for detailed tests of controls.
D. To verify the results of the auditor's sampling plan.

27. Which of these assignments of duties would least likely lead to an

embezzlement or theft?

A. Inventory warehouse manager has responsibility for making the

physical inventory observation and reconciling the discrepancies to the
perpetual inventory records.
B. The cashier prepares the bank deposit, endorses the checks with a
company stamp, takes the cash and checks to the bank for deposit, and
reconciles the bank statement.
C. Accounts receivable clerk opens customer payments so he could
make entries in the customers' accounts receivable subsidiary
accounts.
D. Financial vice president receives the checks payable to suppliers
and the supporting invoices, signs the checks, and mails them to the
payees.
28. Standard control procedures over customer remittances received
through the mail include the policy that requires the mailroom
personnel to
 A. Forward the remittances, unopened, directly to the cashier.
B. Open the mails, restrictively endorses the checks, and then prelist
each remittance in triplicate copies.
C. Forward the remittances, unopened, directly to the accounts
receivable clerk.
D. Open the mails, restrictively endorses the checks, then, forward
the remittances directly to the accounts receivable clerk.

29. After making the deposit, the daily cash summaries and the validated
deposit slips should be forwarded by the cashier directly to the:

A. Treasurer.
B. Accounts receivable clerk.
C. General accounting.
D. Internal auditor.

30. The accounting and the cash receipts functions should be handled by
which department(s)?

A. Both functions should be under the control of the company Treasurer

B. Both functions should be under the control of the company Controller
C. The Controller should have control of accounting functions and the
Treasurer should have control of cash receipt functions.
D. The Treasurer should have control of accounting, functions and the
Controller should have control of cash receipt functions.

31. When auditing cash, the auditor should mostly be concerned with:

A. Detective risk.
B. Inherent risk.
C. Adjunct risk.
D. Nonsampling risk.

32. Which of the following is most likely to indicate a fraud?

A. Several overpayments are made for goods received from a supplier.

B. The yearend cash balance does not include cash in transit to the
company at year-end.
C. A check received after year end is inadvertently recorded us if
received before year-end.
D. A documented loan to an officer of the company.

33. Jolas embezzled P50,000 from the company's account in Bank A. At

year-end he concealed the shortage by drawing a check in Buy and
deposited it in Bank A. He has not recorded the transaction the books.
This is an example of:
 A. Lapping.
B. Kiting.
C. An efective cash management.
D. Related-party transactions.

34. A client maintains two bank accounts. One of the accounts, Bank A, has
an overdraft of P10, 000. The other account, Bank B, has a positive
balance of P5,
000. To conceal the overdraft from the auditor, the client may decide to

A. Draw a check for at least P 10,000 on Bank A for deposit in Bank B.

Record the receipt but not the disbursement and list the receipt as a
deposit in transit. Record the disbursement at the beginning of the
following year.
B. Draw a check for P 10,000 on Bank B for deposit in Bank A. Record
the disbursement but not the receipt. List the disbursement as an
outstanding check, but do not list the receipt as a deposit in transit.
Record the receipt at the beginning of the following period.
C. Draw a check for at least P10, 000 on Bank B for deposit in Bank A.
Record the receipt but not the disbursement and list the receipt as a
deposit in transit. Record the disbursement at the beginning of the
following year.
D. Draw a check for at least P10, 000 on Bank A for deposit in Bank B.
Record the disbursement but not the receipt and list the disbursement
as an outstanding check. Record the receipt at the beginning of the
following year.

35. A company has a policy of rotating employees' assigned duties. This

policy is most important for employees who:

A. are not bonded

B. maintain the detailed accounting records
C. handle cash receipts
D. have access to the general ledger

36. Alpha Company uses its sales invoices for posting to perpetual
inventory records. Inadequate internal control procedures over the
invoicing function allow goods to be shipped that are not yet invoiced.
The inadequate controls could cause an

A. understatement of revenues, receivables, and inventory

B. overstatement of revenues and receivables, and an
understatement of inventory
C. understatement of revenues and receivables, and an
overstatement of inventory
D. overstatement of revenues, receivables, and inventory

37. Which of the following control procedures may prevent the failure to bill
customers for some shipments?
 A. Each shipment should be supported by a pre-numbered sales
invoice that is accounted for.
B. Each sales order should be approved by authorized personnel.
C. Sales journal entries should be reconciled to daily sales summaries.
D. Each sales invoice should be supported by a shipping document.

38. The most efective control for ensuring that customers are billed only
for goods shipped is to

A. require that carriers sign properly completed bills of lading

B. implement a policy that prevents the mailing of sales invoices to
customers in the absence of a properly approved shipping order and a
bill of lading signed by the carrier.
C. require that all shipments be approved by an accounting personnel
D. prevent goods from leaving the warehouse without being
accompanied by a signed bill of lading and a properly approved
shipping order

39. A company policy should clearly indicate that defective merchandise

returned by customers is to be delivered to the

A. Sales clerk.
B. Receiving clerk.
C. Inventory control clerk.
D. Accounts receivable clerk.

40. During the review of a small business client's internal control system,
the auditor discovered that the accounts receivable clerk approves
credit memos and has access to cash. Which of the following controls
would be most efective in ofsetting this weakness?

A. The owner reviews errors in billings to customers and postings to

the subsidiary ledgers.
B. The controller receives the monthly bank statement directly and
reconciles the checking accounts.
C. The owner reviews credit memos after they are recorded.
D. The controller reconciles the total 'of the detailed accounts
receivable to the amount shown in the ledger.

41. The most efective control to prevent unbilled and unrecorded

shipments of finished goods is to

A. Require all outgoing shipments to be accompanied by a

prenumbered shipping' order and bill of lading (signed by the carrier).
Forward a copy of these documents to accounting, to be placed in an
open file awaiting receipt of the customer invoice copy.
B. Forward a copy of the shipping order and bill of lading to billing.
 C. Implement a policy that prevents sales invoices from being mailed
to customers in the absence of a properly approved shipping order and
bill of lading signed by the carrier.
D. Forward a copy of the signed bill of lading to the store‘s manager.

42. Controls over approving credit relate to the:

A. completeness assertion
B. rights and obligation
C. valuation or allocation
D. occurrence

43. To determine whether internal control operates efectively to minimize

errors of failure to bill a customer for a shipment, the auditor would
select a sample of transactions from the population represented by the

A. customer order file

B. shipping records file
C. subsidiary customer accounts ledger
D. sales invoice

44. To verify that all sales transactions' have been recorded, a test of
transactions should be completed on a representative sample drawn
from

A. entries in the sales journal

B. the billing clerk's file of sales orders
C. a file of duplicate copies of sales invoices for which all
prenumbered forms in the series have been accounted for
D. the shipping clerk's file of duplicate copies of shipping documents

45. To gather audit evidence about the .proper credit approval of sales,
auditor would select sample of documents from the population
represented by the

A. customer order file

B. bill of lading file
C. subsidiary customers' account ledger
D. sale invoice file

46. The purpose of tests of controls over shipping is to determine whether

A. billed goods have been shipped

B. shipments are billed
C. shipping department personnel are competent.
D. credit is approved before goods are shipped

47. The purpose of tests of controls over billing is to determine whether

 A. billed goods have been shipped
B. shipments are billed
C. billing department personnel are competent
D. credit is approved before goods are billed

48. An efective procedure to test for unbilled shipments is to trace from the

A. sales journal to the shipping documents

B. shipping documents to the sales journal
C. sales journal to the accounts receivable ledger
D. sales journal to the general ledger sales account

49. To determine whether refunds granted to customers were properly

approved, the auditor should trace accounts receivable entries to:

A. Sales invoices.
B. Remittance advices.
C. Shipping documents.
D. Credit memos.

50. The following are four steps that an auditor undertakes in assessing
control risk:

A) Determine what control procedures are used by the entity

B) Identify the system's control objectives
C) Design tests of controls
D) Consider the potential errors or irregularities that

could result In what order would an auditor perform

these steps?

A. DBAC
B. BCDA
C. BDAC
D. DCAB

51. In order for the auditors to be able to recognize potential fraud,

they must be aware of the basic characteristics of fraud. Which of the
following is a characteristic of fraud?

A. Unintentional deception.
B. Taking unfair or dishonest advantage of uninformed individuals.
C. Lack of training.
D. Negligence on the part of executive management.

52. Which of the following statements about "window dressing‖ is correct?

 A. Window dressing involves an intentional overstatement of
receivables and sales through decreases in the percentage of
completion of long-term construction projects.
B. An audit is not intended to provide assurance of detecting any
forms of window dressing.
C. A number of window dressing practices represent proper and
appropriate business practices.
D. Window dressing ordinarily .involves the intentional overstatement
of liability and equity accounts.

SUBSTANTIVE TESTS

53. As one of the year-end audit procedures, the auditor instructed the
client's personnel to prepare a standard bank confirmation request
for a bank account that had been closed during the year. After the
client's treasurer had signed the request, it was mailed by the assistant
treasurer. What is the major flaw in this audit procedure?

A. The confirmation request was signed by the treasurer.

B. Sending the request was meaningless because the account was
closed.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.

54. A proof of cash is normally used

A. for all engagements

B. to test the transactions process when controls over cash are weak
C. when control risk for cash is low
D. when lapping is suspected.

55. To gather evidence regarding the balance per bank in a bank

reconciliation, an auditor would examine all of the following except:

A. cutof bank statement

B. year-end bank statement
C. bank confirmation
D. general ledger

56. An auditor requests a cutof bank statement primarily to:

A. verify the cash balance reported on the bank confirmation

B. verify reconciling items on the client's bank reconciliation
C. detect lapping
D. detect kiting
57. An auditor gathers evidence regarding the validity of deposits in
transit by examining the

A. bank confirmation
B. cutof bank statement
C. year-end bank statement
D. bank reconciliation

58. Which of the following audit procedures is most likely to detect a

cash balance that is restricted as to withdrawal?

A. Review the cutof bank statement.

B. Prepare an interbank transfer schedule.
C. Make inquiries of management.
D. Compare cash balance with cash budget.

59. An auditor should trace bank transfers for the last part of the audit
period and the first part of the subsequent period to detect whether

A. the cash receipts journal was held open for a few' days after the year-
end
B. cash balances were overstated because of kiting
C. the last checks recorded before the year-end were actually
mailed by the year-end
D. any unusual payments to or receipts from related parties occurred.

60. An unrecorded check issued during the last week of the year would
Most likely be discovered by the auditor when the

A. check register for the last month is reviewed

B. cutof bank statement is reconciled
C. bank confirmation is reviewed
D. search for unrecorded liabilities is performed

61. An auditor compares information on canceled checks with ii formation

contained in the cash disbursement journal. The objective this test is to
determine that

A. recorded cash disbursement transactions are properly authorized

B. proper cash purchase discounts have been recorded
C. cash disbursements are for goods and services actually received
D. no discrepancies exist between the date on the checks and the
data in the journal

62. Working papers ordinarily would not include

A. Initials of the in-charge auditor indicating a review of the staf

assistants' work.
B. Cut-of bank statements received directly from the banks.
 C. A memo describing the preliminary review of the internal control
structure.
D. Copies of the client's inventory count sheets.

63. Which of the following auditing procedures would: the auditor not apply
to a cutof bank statement?

A. Trace year-end outstanding checks and deposits in transit to the

cutof bank statement.
B. Compare dates, payees and endorsements on returned checks with
the cash disbursements record.
C. Determine that the year-end deposit in transit was credited by the
bank on the first working day of the following accounting period.
D. Reconcile the bank account as of the end of the cutof period.

64. Which of the following would be the most appropriate audit procedure
to test the processing of interbank transfers?

A. Analyze a sample of interbank transfers throughout the period

including period-end reconciliations.
B. Obtain cutof bank statements for each bank account and
reconcile them to accounting records.
C. Send bank confirmation requests to each bank in which accounts
are maintained and reconcile the completed forms to accounting
records.
D. Trace all bank deposits recorded in the accounting records near
the end of the fiscal period to their supporting documentation and to
the bank statements.

65. While performing an audit of cash, an auditor begins to suspect

kiting. Which of the following is the best evidence that the auditor
could obtain concerning whether kiting is taking place?

A. Documentary evidence obtained by vouching entries in the cash

account to supporting documents.
B. Documentary evidence obtained by .vouching credits on the latest
bank statement to supporting documents.
C. Evidence obtained by preparing a schedule of interbank transfers.
D. Oral evidence obtained through discussions with controller personnel.

66. The auditor uses a cutof bank statement to compare:

A. deposits in transit on the year-end bank reconciliation to deposits

in the cash receipts journal
B. checks dated prior to year-end to the outstanding checks listed on
the year- end bank reconciliation
C. deposits listed on the cutof statement to disbursements in the
cash disbursements journal
 D. checks dated subsequent to year-end to the outstanding checks
listed on the year-end bank reconciliation

67. An auditor who examines check disbursements discovers a missing

check number. Upon inquiry to the person responsible for
disbursements and reconciliation of the cash account, he is told that the
check number is missing because the check was voided. What is the
auditor's next step?

A. Prepare a bank transfer schedule to identify the check.

B. Examine the bank confirmation to determine whether the check
cleared.
C. Since the person responsible for disbursements also reconciles the
account, no additional procedures are necessary.
D. Examine the voided checks file to determine whether the check is in
the file.

68. Of the following, which procedure or document is most efective for

defecting kiting?

A. A bank cut-of statement.

B. A bank statement.
C. A bank kiting statement.
D. Confirmation of bank balance.

69. Which of the following is confirmed on the standard form used for cash
balances at financial institution?

A. Factored accounts receivable.

B. Loss contingencies.
C. Loans payable.
D. Safe deposit boxes controlled by the entity.

70. When counting cash on hand, the auditor must exercise control over all
cash and other negotiable assets to prevent

A. theft
B. irregular endorsement
C. substitution
D. deposits in transit

71. Which of the following is not a primary objective of the auditor in the
tests of accounts receivable?

A. Determining the approximate realizable value.

B. Determining the adequacy of internal control.
C. Establishing, the validity of the receivables.
 D. Determining the approximate time of collectability of the receivables.

72. The negative form of accounts receivable confirmation request is

particularly useful except when
A. control procedures surrounding accounts receivable are
considered to be efective
B. a large number of small balances are involved
C. the auditor has reason to believe the persons receiving the requests
are likely to give them consideration
D. individual account balances are relatively large

73.A sales cutof test complements tests of

A. sales returns
B. cash
C. accounts receivable
D. sales allowances

74. Most part of the audit of sales and collection cycle

A. cannot be performed until the audit of cash is completed

B. can be performed independently of the audit of other cycles
C. must be performed simultaneously with the audit of the purchases
and disbursements cycle
D. must be performed first so that the audit of the other cycles can
rely on the data

75. The audit objective: "The accounts receivable balance represents gross
claims on customers and agrees with the sum of the accounts
receivable subsidiary ledger" is derived from the assertion of

A. presentation and disclosure

B. completeness
C. valuation or allocation
D. existence

76. A shipping document used in vouching will primarily meet the:

A. completeness assertion
B. valuation or allocation assertion
C. rights and obligations assertion
D. occurrence assertion

77. A shipping document used in tracing will primarily meet the:

A. completeness assertion
 B. valuation or allocation assertion
C. rights and obligations assertion
D. occurrence assertion

78. An auditor is examining accounts receivable. Which one is the most

competent type of evidence in this situation?

A. Interviewing the personnel who records accounts receivable.

B. Verifying that postings to the receivable account from journals
have been made.
C. Receipt by the auditor of a positive confirmation.
D. No response received for a request for a negative confirmation.

79. Negative confirmation of accounts receivable is less efective than

positive confirmation of accounts receivable because

A. a majority of recipients usually lack the willingness to respond

objectively
B. some recipients may report incorrect balances that require
extensive follow- up
C. the auditor cannot infer that all nonrespondents have verified
their account information
D. negative confirmations do riot produce evidential matter that is
statistically quantifiable

80. Although most substantive testing is performed during the final audit, M
IMO substantive tests may be done during the interim period. Which of
the following statements concerning the timing of substantive tests is
true?

A. When internal control is weak, extensive substantive testing should

be performed during the interim audit.
B. Substantive testing should be performed during the interim audit
only under conditions of excellent internal control.
C. As a general rule, the auditor performs substantive tests of balances
as of the balance sheet date and tests of transactions during the
interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts
receivable as of a point in time at least one month prior to the client's
fiscal year-end.

81. Before applying principal substantive tests to the details of asset and
liability accounts at an interim date, the auditor should

A. assess the difficulty in controlling incremental audit risk

B. investigate significant fluctuations that have occurred in the asset
and liability accounts since the previous balance sheet date
C. select only those accounts which can efectively be sampled during
year-end audit work
 D. consider the control tests that must be applied at balance sheet
date to extend the audit conclusions reached at the interim date

82. Confirming accounts receivable is required whenever:

A. they are material and it is practicable and reasonable to do so

B. they are material in amount
C. it is practicable to do so
D. it is reasonable to do so

83. In the processing of accounts receivable confirmations, the auditor

would not normally be expected to:

A. reconcile the information to the corresponding customer's account

B. personally deposit the requests in the mail
C. include his own return address
envelope D personally prepare the
confirmation letter

84. The auditor should ordinarily mail confirmation requests to all banks
with which • the client has conducted any business during the year,
regardless of the year-end balance, since

A. the confirmation form, also seeks information about indebtedness to

the bank
B. this procedure will detect kiting activities which would otherwise
not be detected
C. the mailing of confirmation, forms to all the client's depository
banks is required by Philippine standards on auditing
D. this procedure relieves the auditor of any responsibility with
respect to non- detection of forged checks.

85. An analysis of the aged accounts receivables is most directly related in

which substantive test objective?

A. Existence and occurrence.

B. Presentation and disclosure.
C. Rights and obligations.
D. Valuation.

86. The tests of balances to evaluate the adequacy of the allowance for
uncollectible accounts do not involve which of the following?

A. Considering the evidence concerning the collectability of past due

amounts.
B. Testing the aging of the amounts shown in the aging categories on
the aged trial balance.
C. Considering the evidence concerning the collectability of current
amounts.
 D. Assessing the reasonableness of the percentages used to compute
the allowance component required for each aging category and the
adequacy of the overall allowance.

87. When scheduling audit work, the auditors are most likely to confirm
accounts receivable balances at an interim date if:

A. negative confirmations are being used

B. internal control is weak
C. internal control is strong
D. there is a simultaneous examination of cash and accounts payable

88. Which of the following is the best argument against the use of negative
accounts receivable confirmations?

A. The cost-per response is excessively high.

B. There is no way of knowing if the intended recipients actually receive
them,
C. The recipients are likely to feel that in reality the confirmation
is a subtle request for payment.
D. The inference drawn from receiving no reply may not be correct.

89. Which of the following procedures least likely helps the auditors to
assess the adequacy of management's accounting estimate of the
allowance for doubtful accounts?

A. Investigate confirmation exceptions for any indication of amounts in

dispute.
B. Review the accounts which have been written of as
uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful
accounts.

90. Which of the following is a proper alternative audit procedure for no

responses to positive accounts receivable confirmation requests?

A. Examination of subsequent cash receipts in payment of the

receivable.
B. Mailing of negative confirmation requests to nonrespondents.
C. Expansion of the sample by the number of nonrespondents.
D. Reduction of accounts receivable by the amount of the no responses.

91. Which of the following might be detected by an auditor's review of the

client's sales cut-of?

A. Excessive goods returned for credit.

B. Unrecorded sales discounts.
C. Lapping of year end accounts receivable.
D. Inflated sales for the year.
92. During the process of confirming receivables as of December 31, 2009,
a positive confirmation was returned indicating that the "balance owed
as of December 31 was paid by a customer on January 9, 2010." The
auditor would most likely

A. determine whether there were any changes in- the account

between January 1 and January 9, 2010
B. determine whether a customary trade discount was taken by the
customer
C. reconfirm the zero balance as of January 10, 2010
D. verify that the amount was received

93. Which of the following analytical audit findings would most likely
indicate a possible problem?

A. A material decrease in the receivables turnover.

B. A material increase in inventory turnover.
C. A material decrease in days' sales outstanding.
D. A material increase in the acid test ratio.

94. When the objective of the auditor is to evaluate the appropriateness

adjustments to sales, the best available evidence would normally be

A. oral evidence obtained by discussing adjustment-related

procedures with controller personnel
B. analytical evidence obtained by comparing sales adjustments to
gross sales for a period of time
C. physical evidence obtained by inspection of goods returned for credit
D. documentary evidence obtained by inspecting documents
supporting entries to adjustment accounts

95 Two types of accounts receivable confirmation requests are used in

practice - positive and negative. Negative confirmations may be

A. when internal control over sales and accounts receivable is weak

B. only when the auditor has assessed inherent risk and control risk as
low, the auditor believes that the recipients will review the request, and
a large number of small balances are involved
C. only when internal control over sales and accounts receivable is
strong
D. only when the auditor has assessed inherent risk and control risk as
low, the auditor believes that the recipients will review the request, and
a small number of large balances are involved

96. In which type of evidential matter would an auditor primarily rely upon
when evaluating the collectability of accounts receivable?

A. Positive confirmation.
 B. Negative confirmation.
C. Aged accounts receivable listing.
D. Management's representations.

97. A client who wishes to inflate earnings decides to hold the sales record
open beyond year-end and record 2011 sales in 2010. Although the
invoices are dated as of year-end, the shipments were made in the
following period. Moreover, the goods were included in the ending
inventory of the period under audit. Which of the following auditing
procedures would not assist in detecting this form of fraudulent
financial reporting?

A. The auditor confirms accounts receivable on a positive basis as of

year-end.
B. The auditor examines shipping documents relating to sales
recorded during the last few days of the year.
C. The auditor examines shipping documents relating to sales
recorded during the first few days of the year following the period
under audit.
D. The auditor applies analytical procedures that compare gross profit
rates and sales volume by month for the current and preceding years.

98. Which of the following substantive field work procedures provides the
best evidence about the completeness of recorded revenues?

A. Reconciling the sales journal to the general ledger control account.

B. Vouching charges made to the accounts receivable subsidiary
ledger to supporting shipping records.
C. Vouching shipping records to the customer order files.
D. Reconciling shipping records to recorded sales.

99. Which source document should an auditor use to verify the correct sales
date for an item sold FOB shipping point?

A. Carrier's bill of lading.

B. Customer's payment document.
C. Customer's purchase order.
D. Sales invoice.

100. Which of the following procedures would an auditor most likely rely on
to verify management's assertion of completeness?

A. Review standard bank confirmations for indications of kiting.

B. Compare a sample of shipping documents to related sales invoices.
C. Observe the client‘s distribution of payroll checks.
D. Confirm a sample of recorded receivables by direct
communication with the debtors.
101. Which account balance is most likely to be misstated if an aging of
accounts receivable is not performed?

A. Sales revenue.
B. Sales returns and allowances.
C. Accounts receivable.
D. Allowance for bad debts.

102. Confirmation is most likely to be a relevant form of evidence with

regard to assertions about accounts receivable when the auditor has
concerns about the receivables

A. valuation
B. classification
C. existence
D. completeness

103. An auditor confirms a representative number of open accounts

receivable as of December 31, 2010, and investigates respondents'
exceptions and comments. By this procedure which of the following
would the auditor most likely learn of?

A. One of the cashiers has been covering a personal embezzlement by

lapping.
B. One of the sales clerks has not been preparing charge slips for
credit sales to family and friends.
C. One of the computer department's staf has been removing all
sales Invoices applicable to his account from the data file.
D. The credit manager has misappropriated remittances from
customers whose accounts have been written of.

104. Which of the following audit objectives is not served by confirming

customers' accounts receivable?

A. Valuation of accounts receivable as of the balance sheet date.

B. Existence of customers represented in the accounts receivable trial
balance.
C. Completeness of customers represented in the accounts receivable
trial balance.
D. Sales and accounts receivable cutof.

105. For customers who are not responding to a first request for positive
confirmation requests, the auditor should next

A. contact the customer by telephone and attempt to confirm the

balance orally
B. analyze subsequent remittances from the customer to see if the
year-end balance has been paid
C. send a second request for confirmation
D. examine underlying documentation supporting the, year-end balance
106. An aged trial balance of accounts receivable is usually used by the
auditor to

A. Verify the validity of recorded receivables.

B. Ensure that all accounts are promptly credited.
C. Evaluate the results of compliance tests.
D. Evaluate the provision for bad debt expense.

107. An auditor reconciles the total of the accounts receivable subsidiary

ledgers to the general ledger control account balance, as of December
31, 2008. Which of the following would the auditor most likely learn?

A. An October invoice was improperly computed.

B. An October check from a customer was posted in error to the
account of another customer with a similar name.
C. An opening balance in a subsidiary ledger account was
improperly carried forward from the previous accounting period.
D. An account balance is past due and should be written of.

108. An auditor's preliminary analysis of accounts receivable revealed the

following turnover rates:
2010 2009 2008
4.3 6.2 7.3

Which of the following is the most likely cause of the decrease in

accounts receivable turnover?

A. Increase in the cash discount ofered.

B. Liberalization of credit policy.
C. Shortening of due-date terms.
D. Increased cash sales.

109. The auditor should use positive confirmation of accounts receivable:

A. When variables estimation sampling technique is not used.

B. For individual account balances that are immaterial in amount.
C. When internal controls over receivables are believed to be strong.
D. When the possibility of disputes in various accounts is greater than
usual.

110. When there are a large number of relatively small account balances,
negative confirmation of accounts receivable is acceptable if internal
control is

A. strong and the individuals receiving the confirmation requests are

unlikely to give them adequate consideration
B. weak and the individuals receiving the confirmation requests are
likely to give them adequate consideration
 C. weak and the individuals receiving the confirmation requests are
Unlikely to give them adequate consideration
D. strong and the individuals receiving the confirmation requests
are likely to give them adequate consideration

111. In the confirmation of accounts receivable, the auditor would most likely

A. request confirmation of a sample of the inactive accounts

B. seek to obtain positive confirmations for at least 50% of the total
amount of the receivables
C. require confirmation of all receivables from government agencies
D. require that confirmation requests be sent a Month before year-end

112. An auditor would perform alternative procedures to substantiate the

existence of accounts receivable when

A. no reply to a positive confirmation request is received

B. no reply to a negative confirmation request is received
C. collectability of the receivables is doubtful
D. pledging of the receivables is probable

113. The auditors may use positive' and/or negative forms of confirmation
requests for accounts receivable. An auditor most likely will use

A. the positive form to confirm all balances, regardless of size

B. a combination of the two forms, with the positive form used for
large balances and the negative form for small balances
C. a combination of the two forms, with the positive form used for
trade receivables and the negative form for other receivables
D. the positive form when the control structure related to
receivables are satisfactory, and the negative form when controls are
unsatisfactory

114. Which of the following statements is correct concerning the use of

negative confirmation requests?

A. Unreturned negative confirmation requests rarely provide

significant explicit evidence.
B. Negative confirmation requests are efective when defection risk is
low.
C. Unreturned negative confirmation requests indicate that
alternative procedures are necessary.
D. Negative confirmation requests are efective when
understatements of account balances are suspected.

115. Which of the following might be detected by sales cutof tests?

A. Understated receivables
 B. Overstated sales
C. Kiting
D. Misappropriated inventory

116. An auditor's purpose in reviewing credit ratings of customers with

delinquent accounts receivable most likely is to obtain evidence
concerning management's assertions about

A. valuation or allocation
B. presentation and disclosure
C. existence or occurrence
D. rights and obligations

117. In auditing accounts receivable, which of the following questions would

add value to an audit?

A. Are accounts receivable pledged?

B. Are customers satisfied with your billing procedures?
C. Are any accounts receivable due from related parties?
D. Is there a separation of duties between the recording of cash
receipts and the handling of cash?

118. Which is the most persuasive evidence to support accounts receivable

(not including the allowance for doubtful accounts)?

A. Sales invoices held by the client.

B. Written confirmation of the balances, sent by the customers
directly to the auditor.
C. Shipping documents held by the client, showing the peso
amount of merchandise sent to the customers.
D. Deposit slips held by the client, showing the amount of cash
received from customers during the month after year-end.

119. Which of the following procedures could reveal unrecorded sales as of

balance sheet date?

A. Comparing shipping documents with sales records.

B. Applying gross profit percentages to inventory shipped during the
period.
C. Tracing payments received after the balance sheet date to
accounts receivable records.
D. Sending accounts receivable confirmations.

120. Once an auditor has determined that accounts receivable have

increased due to slow collections in a "tight money" environment, the
auditor would likely

A. propose an increase in the balance in the allowance for bad debts

account
 B. review the going concern ramifications
C. review the credit and collection policy
D. expand tests of collectability

121. Customers with substantial due balances have failed to reply after a
second requests had been mailed to them directly. Which of the
following audit procedures is most appropriate?

A. Examining shipping documents.

B. Reviewing cash collections during the year being audited.
C. Intensifying the study of internal controls for receivables.
D. Increasing the balance in the accounts receivable allowance account.

122. An auditor's primary concern when performing tests of controls over

purchasing is to determine whether:

A. purchases are properly authorized

B. purchases are properly recorded
C. purchase orders agree to purchase requisitions
D. purchasing personnel are performing their assigned functions properly

123. A client erroneously recorded a large purchase twice. Which of the

following control procedures would most likely detect this error in a
timely and efficient manner?

A. Footing the purchase journal.

B. Reconciling vendors' monthly statements with subsidiary payable
ledger accounts.
C. Tracing totals from the purchases journal to the ledger accounts.
D. Sending written quarterly confirmations to all vendors.

124. The accounts payable department receives a purchase order form to

accomplish all of the following except

A. comparing invoice price to purchase order price

B. ensuring that the purchase had been properly authorized
C. ensuring that the goods had been received by the party requesting
the goods
D. comparing quantity ordered to quantity purchased

125. For efective internal control purposes, which of the following

individuals should be responsible for mailing signed checks?

A. Receptionist
B. Accounts payable clerk
C. Treasurer
 D. Payroll clerk

126. Which of the following is a primary function of the purchasing

department?

A. Authorizing the acquisition of goods.

B. Ensuring the acquisition of goods of a specified quality.
C. Verifying the propriety of goods of a specified quality.
D. Reducing expenditures for goods acquired.

127. How con an auditor determine whether the Receiving Department

procedures are applied properly?

A. Test a sample of receiving documents.

B. Observe receiving procedures on a surprise basis.
C. Review procedures manuals.
D. Interview Receiving personnel.

128. Whit of the following control procedures could prevent or detect

payment for goods that have not been received?

A. Counting goods when received.

B. Matching the purchase order, receiving report, and vendor's invoice.
C. Comparing goods received with goods requisitioned.
D. Verifying vouchers for accuracy and approval.

129. An Internal control questionnaire indicates that an approved receiving

report accompanies every check request. To test this control, an auditor
should select and examine:

A. receiving reports, to determine that the related canceled checks

are dated no earlier than the receiving reports
B. receiving reports, to determine that the related canceled checks
are dated no later than the receiving reports
C. canceled checks, to determine that the related receiving reports
are dated no earlier than the checks
D. canceled checks, to determine that the related receiving reports
are dated no later than the checks

130. Omitting quantities from copies of purchase orders sent to the receiving
department is a control procedure intended mainly to

A. ensure that goods received are physically counted by receiving

department personnel
B. identify and return damaged goods as soon as they are received
C. provide a cross-check for verifying the accuracy of perpetual
inventory records
 D. prevent theft of goods by receiving department personnel

131. Which of the following is not an appropriate activity for the

treasurer's department?

A. Prepares checks.
B. Cancels vouchers.
C. Forwards checks to vendors.
D. Prepares vouchers.

132. As a senior auditor, you are reviewing a write-up of internal control in

cash receipts and disbursement procedures. Which of the following
deficiencies alone should cause you the least concern?

A. Checks are signed by only one person.

B. Signed checks are distributed by the controller 6 approved payees.
C. The treasurer fails to establish bona fide names and addresses
of check payees.
D. Cash disbursements are made directly out of cash receipts.

133. Matching the suppliers' invoice, the purchase order, and the receiving
report normally should be the responsibility of the

A. receiving department
B. accounts payable department
C. purchasing department
D. treasury function

134. To avoid potential errors and irregularities, well-designed controls in the

accounts payable area should include a separation of which of the
following functions?

A. Cash disbursements and vendor invoice verification.

B. Vendor invoice verification and merchandise ordering.
C. Physical handling of merchandise received and preparation of
receiving reports.
D. Check signing and cancellation of payment documentation.

135. Which of the following is a necessary control procedure for cash

disbursements?

A. Checks should be signed by the controller and at least one other

employee of the company.
B. Checks should be sequentially numbered, and the numerical
sequence should be accounted for by the person preparing the bank
reconciliation.
C. Checks and supporting documents should be marked "paid"
immediately after the check is returned with the bank statement.
D. Checks should be sent directly to the payee by the employee who
prepares documents that authorizes check preparation.
136. Which of the following functions is not appropriate for the accounts
payable department?

A. Comparing purchase requisitions, purchase orders, receiving

reports, and vendors' invoices.
B. Preparing purchase orders.
C. Preparing voucher and daily summary.
D. Filing voucher package by due date.

137. The accounts payable department generally should

A. cancel supporting documentation after a cash payment is mailed

B. approve the price and quantity of each purchase requisition
C. assure that the quantity ordered is omitted from the receiving
department's copy of the purchase order
D. agree the vendor's invoice with the receiving report and purchase
order

138. When goods are received, the receiving clerk should match the goods
with the

A. purchase order and requisition

B. vendor's invoice and the receiving report
C. vendor's shipping document and the purchase order
D. receiving report and the vendor's shipping documents

139. To improve control over merchandise purchases, a

company's receiving department should

A. accept merchandise only if an approved purchase order is on hand

B. accept and count all merchandise received from known vendors
C. rely on shipping documents to prepare receiving reports
D. be responsible for handling merchandise but not for preparing
receiving reports

140. To assure that disbursements are neither improper nor inaccurate, an

entity should require that all checks be

A. signed by an officer after supporting documentation has been

examined
B. reviewed by the treasurer before mailing
C. numbered sequentially and accounted for by internal auditors
D. canceled when they are returned with the bank statement

141. The mailing of disbursement checks and remittance advices should be

controlled by the employee who

A. signs the checks last

 B. approves the vouchers for payment
C. matches the receiving reports, purchase orders, and vendor invoices
D. verifies the mathematical accuracy of the vouchers and remittance
advices

142. Expenditure/disbursement cycle begins with requisitions from us

departments and ends with the receipt of materials and the recognition
of a liability. An auditor's primary objective in reviewing the cycle is to:

A. obtain an understanding of the client's prescribed policies and

procedures sufficient to plan the audit
B. investigate the handling and recording of unusual acquisitions
C. consider the need to increase substantive tests of purchases and
accounts payable
D. assure that materials ordered, received, and paid for are actually on
hand

143. Which of the following control questions relates to the existence and
Occurrence objective in purchasing and accounts payable?

A. Are the purchase order forms prenumbered and the numerical

sequence checked for missing documents?
B. Does the accounting department check invoices for mathematical
accuracy?
C. Does the chart of accounts and accounting manual give
instructions for classifying debit entries?
D. Are receiving reports prepared for each item received?

144. The purchasing department:

A. Should obtain competitive bids from vendors.

B. Should inspect incoming goods and forward them to the
receiving department.
C. Should inspect vendor invoices and forward them to the accounting
department.
D. All of the given choices are correct.

145. To adequately provide for the segregation of duties, the purchase

requisitions for regular inventory stock should be initiated by which of
the following departments?

A. Purchasing department.
B. Sales department.
C. Warehouse.
D. Shipping.

146. In a properly designed accounts payable system, a voucher is prepared

after the invoice, purchase order, requisition, and receiving report are
verified. The next step in the system is to
 A. cancel the supporting documents
B. enter the check amount in the check register
C. approve the voucher for payment
D. post the voucher amount to the expense ledger

147. Which of the following is an internal control procedure that would

prevent a paid disbursement voucher from being presented for
payment a second time?

A. Vouchers should be prepared by individuals who are responsible

for signing disbursement checks.
B. Disbursement vouchers should be approved by at least two
responsible management officials.
C. The date on a disbursement voucher should be within a few days
of the date the voucher is presented for payment.
D. The official signing the check should cancel the paid voucher after
examining the documentation supporting the disbursement.

148. Which of the following may be considered an appropriate means for

further testing controls over vendor payments?

A. Confirm year-end balances with vendors.

B. Search for unrecorded invoices at year-end.
C. Develop a set of hypothetical transactions designed to test existing
controls over vendor payments (e.g., introduce into the system, a
voucher containing an invoice for raw materials but lacking a purchase
order and/or receiving report.
D. Constructing an internal control covering the payment processing
function.

149. Which of the following would be the best procedure to determine

whether purchases were properly authorized?

A. Discuss authorization procedures with personnel in the controllers

and purchasing functions.
B. Review and evaluate a flowchart of purchasing procedures.
C. Determine whether a supported by properly sample of entries in
the purchase journal is executed purchase orders.
D. Vouch payments for selected purchases to supporting receiving
reports.

150. In examining liabilities of a company, what is the auditors' primary

concern?

A. Completeness.
B. Presentation.
C. Rights.
D. Valuation.
151. Purchase cutof procedures should be designed to test that
merchandise is included in the inventory of the client when the client:
 A. has paid for the merchandise
B. has physical possession of the merchandise
C. holds legal title to the merchandise
D. holds the shipping documents for the merchandise issued in the
company's name

152. When the auditors discover an overstatement of accounts payable, they

would most likely expect to find an overstatement of:

A. accrued liabilities
B. inventory
C. retained earnings
D. revenues

153. An auditor usually examines receiving reports that support entries in the:

A. voucher register and sales returns journal

B. sales journal and sales returns journal
C. voucher register and sales journal
D. check register and sales journal

154. Which of the following transactions would an auditor most likely repose
an adjustment to the financial statements?

A. Inventory is included on the balance sheet at year-end, but the

check for payment has not been paid until January 12.
B. An order for office supplies that has not been recorded because the
goods have neither been received nor paid for by year-end.
C. Purchase of P5,000 of office furniture that was ordered on
December 22 with a P1,000 deposit being made with an entry debiting
"deposit on furniture" for P1,000 and a credit to cash for P1,000. The
office furniture was received on January 5.
D. Shop supplies are included on the balance sheet at year-end, but
the payable and subsequent cash disbursements are not recorded until
after year-end.

155. Only one of the following four statements which compare confirmation
of accounts payable with suppliers and confirmation of accounts
receivable with customers is true. The true statement is that

A. confirmation of accounts payable with suppliers is a more widely

accepted auditing procedure than is confirmation of accounts
receivable with customers
B. it is less likely that the confirmation request sent to the supplier will
show the amount owed him or her than that the request sent to the
customer will show the amount due from him or her
 C. statistical sampling techniques are more widely 'accepted in the
confirmation of accounts payable than in the confirmation of accounts
receivable
D. compared to the confirmation of accounts payable, the confirmation
of accounts receivable will tend to emphasize accounts with zero
balances at the balance sheet date

156. Confirmation of accounts payable balances is

A. usually performed at interim dates rather than at year end

B. not efective in testing for unrecorded liabilities
C. particularly useful when the auditor suspects liabilities may be
materially understated
D. required by generally accepted auditing standards

157. Which of the following is true about the audit procedure of

confirming accounts payable?

A. Confirmation of payables is most appropriate when the auditor

expects understatement errors.
B. It is not productive to mail second requests.
C. The auditor is not required by current professional
pronouncements to justify his or her opinion on financial statements
when payables are not confirmed.
D. Payables are usually confirmed as of an interim date.

158. Which of the following best explains why accounts payable

confirmation procedures are not always used?

A. Inclusion of representations on accounts payable in the client

representation letter eliminates the need in most situations.
B. Accounts payable generally are immaterial and may be audited
through using analytical procedures.
C. Creditors will press for payment when they receive the confirmation.
D. Confirmations are better at identifying overstatements than
understatements, and overstatements are not typically the major
concern with accounts payable.

159. Which of the following audit procedures is not designed primarily to

test for the correctness of purchases and sales cutof?

A. Observe shipping and receiving areas during physical inventory

observation and relate goods to the last receipt and shipment for the
year. Determine that these are the final entries in the purchases and
sales records for the year.
B. Examine sales and purchases invoices for a few days before and
after year end. Compare with dates of receipt and shipment and with
freight terms to determine that the transactions were recorded in the
proper accounting period.
 C. Record last document numbers (sales invoice, voucher, check,
receiving report) for the year and relate to goods in shipping and
receiving areas at year end.
D. Trace client's unit costs to the auditor's copies of audited price lists.

160. Which of the following procedures relating to the audit of accounts

payable could the auditor delegate entirely to the client's employees?

A. testing footings in the accounts payable ledger

B. reconciling unpaid invoices to vendors' statements
C. preparing a schedule of accounts payable
D. mailing confirmations for selected account balances

161. Assume an auditor's interim consideration of internal control in the

expenditure/disbursement cycle reveals that control risk can be
assessed below the maximum and detection risk above the minimum
for some assertions. Based on the foregoing, which of the following is
true about the substantive tests applied to accounts payable?

A. The auditor is more apt to confirm payable balances.

B. The auditor is less apt to perform substantive tests at the balance
sheet date.
C. The auditor is more apt to increase the extent of substantive tests.
D. The auditor is more apt to ignore the risk of incorrect acceptance
when sampling accounts payable.

162. Which of the following procedures would help an auditor test for
overstatements of accounts payable at the balance sheet date?

A. Trace entries in the cash disbursements records to items in the

accounts payable trial balance.
B. Agree items in the file of unmatched receiving reports to the
accounts payable balance.
C. Trace items in the accounts payable trial balance to documentation
contained in canceled voucher packages.
D. Coordinate cutof tests performed for receiving and for shipping.

163. In testing cutof for purchases and payables at December 31, an auditor
is confronted with the following four scenarios. Which of the four most
likely represents a cutof error, requiring that the auditor propose an
adjusting journal entry?

A. Shipping terms are FOB shipping point. Goods were shipped on

December
31. The purchase was recorded on December 31.
B. Shipping terms are FOB destination. Goods were shipped on
December 31. The purchase was recorded on December 31.
 C. Shipping terms are FOB shipping point. Goods were shipped on
January 2. The purchase was recorded on January 4.
D. Shipping terms are FOB destination. Goods were shipped on
December 31. The purchase was recorded on January 2.

164. When an auditor selects a sample of items from the vouchers payable
register for the last month of the period being audited and traces the
items to underlying documents, the auditor, is gathering evidence
primarily in support of the assertion that

A. recorded obligations were paid

B. incurred obligations were recorded in the correct period
C. recorded obligations were valid
D. cash disbursements were recorded as incurred obligations

165. Which of the following audit procedures is the most efficient for
defecting unrecorded liabilities at the balance sheet date?

A. confirming large accounts payable balances at the balance sheet date

B. comparing cash disbursements in the subsequent period with the
accounts payable trial balance at year end
C. examining purchase orders issued for several days prior to the
close of the year
D. obtaining a letter from the client's attorney

166. Unrecorded liabilities are most likely to be found during the review of
which of the following documents?

A. Unpaid bills
B. Bills of lading
C. Shipping records
D. Unmatched sales invoices

167. Which of the following is not a step in the search for unrecorded
liabilities?

A. Examine the open purchase order file.

B. Examine disbursements for the period immediately before the
end of the period.
C. Examine the unmatched receiving reports.
D. All of the given choices are steps searching unrecorded liabilities.

168. To determine whether accounts payable are complete, an auditor

performs a test to verify that all merchandise received is recorded. The
population of documents for this test consists of all:

A. Vendors' invoices
 B. Receiving reports
C. Purchase orders
D. Canceled checks

169. Which of the following audit procedures is best for identifying

unrecorded trade accounts payable?

A. Reviewing cash disbursements recorded subsequent to the

balance sheet date to determine whether the related payables apply to
the prior period.
B. Investigating payables recorded just prior to and just subsequent to
the balance sheet date to determine whether they are supported by
receiving reports.
C. Examining unusual relationships between monthly accounts
payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports
to identify items received just prior to the balance sheet date.

170. Which of the following procedures is least likely to alert the auditors to
unrecorded accounts payable?

A. Confirmation of accrued liabilities.

B. Reconcile recorded liabilities with monthly statements from creditors.
C. Examine disbursement transactions recorded following year-end.
D. Analytical procedures involving year-end accounts payable.

171. An audit procedure applicable to testing the year-end cutof of liabilities is

A. Tracing recorded liabilities to supporting documents.

B. Preparing an aging schedule for accounts payable.
C. Reviewing the general journal for unusual entries recorded
immediately after year-end.
D. Examining vendor invoices received subsequent to year-end for
shipment date and terms of shipment.

172. The audit procedures applied to accrued liabilities difer from those
applied to accounts payable because

A. accrued liability balances are less material than accounts payable

balances.
B. evidence supporting accrued liabilities is nonexistent, whereas
evidence supporting accounts payable is readily available.
C. accrued liabilities usually pertain to services of a continuing
nature, whereas accounts payable are the result of completed
transactions.
D. accrued liabilities at year-end will become accounts payable during
the following year.

173. Accrued liabilities generally difer from accounts payable in that

occurred liabilities:
 A. Accumulate over time.
B. Are usually confirmed at year-end.
C. Can be found by a review of unpaid invoices.
D. Are never included in cost of goods sold.

174. Which of the following best describes the auditors' approach to the
audit of accrued liabilities?

A. Confirmation.
B. Observation.
C. Plan a low assessed level of control risk.
D. Test computations.

175. Inventory should be recorded when

A. The company has title to it.

B. When it is received.
C. When the related revenue is recognized.
D. When it is from the vendor.

176. The overall production authorization starts with a

A. Purchase order.
B. Production plan.
C. Sales forecast.
D. Bill of materials.

177. The source of authorization for preparation of materials requisitions is

A. Bill of materials.
B. Purchase order.
C. Production plan.
D. Sales forecast.

178. Comparing material usage reports to raw material stores issue slips is a
control to help insure which assertion?

A. Existence and occurrence.

B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.

179. Client's inventory instructions should include all the following except

A. names of client personnel responsible for the count.

 B. instructions for recording accurate description.
C. instructions for auditors' test counts.
D. plans for controlling movement of goods.

180. Tracing a test count to the inventory compilations provides evidence

for which assertion?

A. Existence and occurrence.

B. Completeness.
C. Valuation or allocation.
D. Presentation and disclosure.

181. Which of the following least likely serves as a substitute for performing
other audit procedures?

A. The physical observation of the counting of company inventory.

B. Sending letters to debtors or creditors of the company .to confirm
amount the company owes or is owed, respectively.
C. Tracing an amount on the financial statements back through the
accounting system to the underlying supporting documentation.
D. Obtaining a representation letter signed by top management.

182. Which of the following is an internal control weakness for a

company whose inventory of supplies consists of .a large number of
individual items?

A. Supplies of relatively little value are expensed when purchased.

B. The cycle basis is used for physical counts.
C. The storekeeper is responsible for maintenance of perpetual
inventory records.
D. Perpetual inventory records are maintained only for items of
significant Value.

183. An auditor would most efficiently test for the misclassification of

capital acquisitions as expenses by

A. Taking a physical tour of plant facilities before starting an audit.

B. Reviewing company capital acquisition policies with purchasing
personnel.
C. Tracing capital additions back to source documents.
D. Scanning repair and maintenance records and investigating large
peso-value entries.

184. Ordinarily, are auditors more concerned with an under- or

overstatement of ending inventory, and why?

A. Overstatement, because net income would be overstated also.

B. Understatement, because net income would be overstated.
 C. Overstatement, because this would indicate that liabilities are
likely to be understated.
D. Understatement, because this would indicate that liabilities are
likely to be understated.

185. In conjunction with the observation of a client's physical inventory,

the auditors should:
A. plan the physical inventory
B. segregate damaged and obsolete goods
C. supervise the client's personnel
D. evaluate the adequacy of the client's counting procedures

186. An auditor has accounted for a sequence of inventory tags and is now
tracing information on a representative number of tags to the inventory
summary sheets. Which assertion does this procedure relate in most
directly?

A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.

187. An inventory turnover analysis most likely helps the auditors to detect:

A. inadequacies in inventory pricing

B. methods of avoiding cyclical holding cost
C. optimum automatic reorders points
D. obsolete merchandise

188. During an audit of a non-public entity, which of the following is primarily

an overall audit approach to audit plant assets and equipment by a
continuing auditor?

A. Analysis and inquiry.

B. Direct tests of year-end ending balances.
C. Tests of controls.
D. Tests of transactions during the year.

189. Which of the following is the legitimate reason why a responsible

party would have difficulty estimating environmental cleanup costs?

A. Possible as yet unknown contamination.

B. Possible future legislation.
C. Possible insurance recoveries.
D. Possible preexisting contamination.

190. Which of the following statements concerning plant assets is not correct?
 A. Few transactions ordinarily occur.
B. Typically there is little change in accounts from year to year.
C. Plant assets need to be tightly controlled to prevent defalcation.
D. Year-end cutof of plant assets has no efect net income.

191. An auditor has found many new assets on the plant floor, which
coincides with an increase in the equipment subsidiary ledger.
However, the auditor has noticed that lease payments are being made
to an equipment leasing company. The auditor should primarily be
concerned with which financial statement assertion?

A. Rights and obligations.

B. Relevance.
C. Clerical accuracy.
D. Completeness.

192. The accuracy of perpetual inventory records may be established in part

by comparing perpetual inventory records with:

A. purchase requisitions
B. receiving reports
C. purchase orders
D. vendor payments

193. When auditing merchandise inventory at year end, the auditor performs
a purchase cutof test to obtain evidence that

A. goods purchased before year end are received- before the physical
inventory count
B. no goods held on consignment for customers are included in the
inventory balance
C. no goods observed during the physical count are pledged or sold
D. all goods owned at year end are included in the inventory balance

194. A client's physical count of inventories was higher than the inventory
quantities per the perpetual records. This situation could be the result
of the failure to record:

A. sales
B. sales discounts
C. purchases
D. purchase returns

195. Which of the following audit procedures is not appropriate for

addressing the assertion of valuation?

A. verifying accounts payable trial balance

 B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures

196. When there are few property and, equipment transactions during the
year, the continuing auditor usually makes a

A. complete review of the related internal controls and assesses

control risk relative to them
B. complete review of the related internal controls and performs
analytical review tests to verify current year additions to property and
equipment
C. preliminary review of the related internal controls and performs a
thorough examination of the balances at the beginning of the year
D. preliminary review of the related internal controls and performs
extensive tests of current year property and equipment transactions

197. In analyzing the plant assets account, why is the examination of repairs
and maintenance records important?

A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.

198. In examining the miscellaneous revenue account, an auditor discovers

income from plant assets. What should be a primary audit concern?

A. That such assets have been removed from the ledger of property
owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell
them.
D. That such assets have been replaced by comparable equipment.

199. Which of the following statements is not correct concerning intangible

assets?

A. Auditors review the reasonableness of the client's amortization

program.
B. A lack of physical substance.
C. Valuation is a primary audit concern.
D. Proper presentation as current, assets.

200. When performing an, audit of the property, plant, and equipment
accounts, an auditor should expect which of the following to be most
likely to indicate a departure from generally accepted accounting
principles?
A. A gain was recognized when .a new asset was acquired at a price
lower than its listed retail price.
 B. Interest has been capitalized for self-constructed equipment.
C. Assets have been acquired from affiliated corporations with the
related transactions recorded and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.

201. The auditors are least likely to learn of retirements of equipment

through which of the following?

A. Review of the purchase returns and allowances account.

B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

202. A weakness in internal accounting control over the recording of

retirements of equipment may cause the auditor to

A. inspect certain items of equipment in the plant and trace those

Items to the accounting records
B. review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year
C. trace additions to the "other assets" account to 'search for
equipment that is still on hand but no longer being used.
D. select certain items of equipment from the accounting records
and locate them in the plant

203. When auditing inventories of raw materials, purchased parts, and/or

Merchandise inventory, the auditor's most efective means for
evaluating the valuation assertion is to

A. examine recent invoices from vendors, along with freight bills and
compare with client's unit costs, as adjusted for freight and discount.
B. compare purchases with prior year and with industry averages
and account for significant fluctuations.
C. trace quantifies from tags or count sheets to final inventory listings.
D. scan inventory listings for large extended amounts, and trace
related quantities to auditor's copy of the inventory tag or listing.

204. The auditor tests the quantity of materials charged to work in process
by tracing these quantities to

A. cost ledgers.
B. perpetual inventory records
C. receiving reports
D. material requisitions
205. Which of the following accounts would most likely be reviewed by the
auditor to gain reasonable' assurance that additions to the equipment
account are not understated?

A. Repairs and maintenance expense.

B. Depreciation expense.
C. Gain on disposal of equipment.
D. Accounts payable.

206. The most significant audit step in substantiating additions to the office
furniture account balance is

A. examination of vendors' invoices and receiving reports for current

year's acquisitions
B. review of transactions near the balance sheet date for proper period
cutof
C. calculation of ratio of depreciation expense to' gross office equipment
cost
D. comparison to prior year's acquisitions

207. Instead of taking a physical inventory count on the balance sheet date,
the client may take physical counts prior to the year-end if internal
controls are adequate and

A. computerized records of perpetual inventory are maintained

B. inventory is slow moving
C. CBIS error reports are generated for missing pre-numbered inventory
tickets
D. obsolete inventory items are segregated and excluded

208. Which of the following is not one of the independent auditor's

'objectives regarding the audit of inventories?

A. Verifying that inventory counted is owned by the client.

B. Verifying that the client has used proper inventory pricing.
C. Ascertaining the physical quantities of inventory on hand.
D. Verifying that all inventory owned by the client is on hand at the
time of the count.

209. An auditor is verifying the existence of newly acquired fixed assets

recorded in the accounting records. Which of the following is the best
evidence to help achieve this objective?

A. Documentary support obtained by vouching entries to subsidiary

records and invoices.
B. Physical examination of a sample of newly recorded fixed assets.
C. Oral evidence obtained by discussions with operating management.
D. Documentary support obtained by reviewing titles and tax returns.
210. Which of the following procedures is most relevant to testing the
completeness assertion for prepaid insurance?

A. resting whether insurance coverage exceeds the replacement

value of insured tangible property.
B. Confirming insurance policies with carriers.
C. Reconciling, premium payments with cash disbursement records.
D. Agreeing total expense and unexpired premiums with the general
ledger.

211. In a manufacturing company, which of the following audit procedures

would give the least assurance of the valuation of inventory at the audit
date?

A. Testing the computation of standard overhead rates.

B. Examining paid vendors' invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements.

212. When perpetual inventory records are maintained in quantities and in

pesos, and internal accounting control over inventory is weak, the
auditor would probably

A. want the client to schedule the physical inventory count at the end of
the year
B. insist that the client perform physical counts of inventory items
several times during the year
C. increase the extent of tests for unrecorded liabilities at the end of the
year
D. have to disclaim an opinion on the income statement for that year

213. In auditing plant assets and accumulated depreciation for proper

valuation, the auditor should do all of the f0llowing, except:

A. recalculate depreciation expense on a test basis

B. physically inspect major plant assets additions
C. vouch major additions by reference to underlying documentation
D. vouch repairs and maintenance expense on a test basis

214. To verify the proper value of costs charged to real property records for
improvements to the property, the best source of evidence would be:

A. inspection by the auditor of real property improvements

B. a letter signed by the real property manager asserting the
propriety of costs incurred
C. original invoices supporting entries into the accounting records
D. a comparison of billed amounts to contract estimates

215. An auditor has accounted for a sequence of inventory tags and is now
going to trace information on a representative number of tags to the
physical inventory sheets. The purpose of this procedure is to obtain
assurance that
 A. the final inventory is valued at cost
B. all inventory represented by an inventory tag is listed on the
inventory sheets
C. all inventory represented by an inventory tag is bona fide
D. inventory sheets do not include untagged inventory items.

216. An auditor analyzes repairs and maintenance accounts primarily to

obtain evidence in support of the audit assertion that all
A. non-capitalizable expenditures for repairs and maintenance have
been properly charged to expense
B. expenditures for property and equipment have not been charged h
expense
C. non-capitalizable expenditures for-repairs and maintenance have
been recorded in the proper period
D. expenditures for property and equipment have been recorded in
proper period

217. The auditor may conclude that depreciation charges are insufficient by
noting

A. large amounts of fully depreciated assets

B. continuous trade-ins of relatively new assets
C. excessive recurring losses on assets retired
D. insured values greatly in excess of book values

218.To test the accuracy of the current year's depreciation charges, an

auditor should rely most heavily on

A. vouching of the current year's fixed asset acquisitions

B. comparison of depreciation schedule detailed with schedules
supporting the income tax return
C. tracing of totals from the depreciation schedule to properly
approved journal entries and ledger postings
D. recomputation of depreciation for a sample of plant assets

219. In forming an audit on the existence of inventory contained in a d louse,

an auditor is primarily concerned with

A. observing and testing the number of units on hand

B. determining if the value of the inventory is reasonable
C. identifying the ownership of the inventory
D. locating slow moving items contained in inventory

220. Which of the following audit procedures would provide the least
reliable evidence that the client has legal title to inventories?

A. confirmation of inventories at locations outside the client's facilities

B. analytical review of inventory balances compared to purchasing
and sales activities
 C. observation of physical inventory counts
D. examination of paid vendors' invoices

221. An auditor wants to develop an audit test to evaluate the

reasonableness of the quantity of scrap material resulting from a
certain production process compared to industry standards. Which
would be the most competent type of evidence available to satisfy this
objective?

A. Documentary.
B. Indirect testimony.
C. Physical.
D. Analytical.

222. Which of the following controls would be the most appropriate means to
ensure that terminated employees had been removed from the payroll?

A. Mailing checks to employees' residences.

B. Establishing direct-deposit procedures with employees' banks.
C. Reconciling payroll and time-keeping records.
D. Establishing computerized limit checks on payroll rates.

223. Which of the following departments should have the responsibility for
authorizing payroll rate changes?

A. Human Resources.
B. Payroll.
C. Treasurer.
D. Timekeeping.

224. Efective internal control over the payroll function should include which
of the following?

A. Total time recorded on time clock cards should be reconciled to job

reports by employees responsible for those specific jobs.
B. Payroll department employees should be supervised by the
management of the human resources department.
C. Payroll department employees should be responsible in
maintaining the personnel records.
D. Total time spent on jobs should be compared to the total number
of hours indicated on time clock cards.

225. The purpose of segregating the duties, of hiring personnel and

distributing payroll checks is to separate the

A. administrative controls from the internal accounting controls

B. human resources function from the controllership function
 C. operational responsibility from the record keeping responsibility
D. authorization of transactions from the custody of related assets

226. An auditor would consider internal control procedures relating to a

client‘s payroll procedures to be inefective if the payroll department
supervisor is responsible for

A. hiring subordinate payroll department employees

B. having custody over unclaimed paychecks
C. updating employee earnings records
D. applying pay rates to time tickets

227. The human resources department receives an edit listing of payroll

changes processed at every payroll cycle. If they do not verify the
tinges processed, this could result in:

A. undetected errors in payroll rates for new employees

B. inaccurate social security deductions
C. labor hours charged to the wrong account in the cost reporting
system
D. employees not being asked if they want to contribute to the
company pension plan

228. Estimates in the finance and investment cycle include

A. probability of a correlated hedge

B. classification of equity investments
C. actuarial assumptions for pension costs
D. all of the given choices are correct

229. Inspecting marketable securities provides primary evidence about the

assertion of

A. existence
B. rights and obligations
C. valuation
D. all of the above

230. If market prices are not readily available for fair value measurements,
management should use

A. auditors' best estimates

B. historical cost
C. their own assumptions as long as there are no contrary data
D. the previous year's value

231. Goodwill impairment refers to

A. loss of trust from customers

 B. the amount of amortization
C. a permanent decline in value of recorded goodwill
D. a need for increased professional skepticism

232. Controls over making estimates include all of the following except

A. management communication of the need for proper accounting

estimates
B. comparison of prior estimates with subsequent results
C. consideration of whether estimates are consistent with the
company's operational plans
D. ensuring the efects of the estimate are in line with analysts forecasts

233. Which of the following is least likely to be included in the audit program
for debenture bonds?

A. Examine security pledged relating to, the loan

B. Confirm
C. Review bonds paid during the period
D. Perform analytical procedures

234. An auditor has calculated the interest paid on a company's recorded

bonds and found the interest paid was 10%; in examining the bonds he
notes that they are 8% bonds sold without a premium or a discount.
Which of the following is most likely?

A. Understated debt outstanding.

B. Understated interest expense.
C. Overstated common stock.
D. Overstated accrued interest receivable.

235. An audit found that P10, 000,000 of long term debt on the financial
statements will become due in 6 months. The financial statement
assertion that must be addressed in determining that the proper
amount of debt is included as current is:

A. existence
B. completeness
C. rights
D. presentation

236. Sole of capital stock and large debt financing transactions are usually
authorized by

A. the transfer agent

B. the shareholders
C. the board of directors
D. management
237. For a large publicly traded client the auditors' examination of capital
stock account will not ordinarily include:

A. analysis of capital stock accounts

B. confirmation of shares issued with the independent registrar
C. accounting for the proceeds of a major stock issuance
D. reconciliation of a stock certificate book with the general ledger

238. An audit program for the examination of the retained earnings count
should include a step that requires the verification of the:

A. market value used to charge retained earnings to account for a

two-for-one stock split
B. approval of the adjustment of the beginning balance as a result
of a write- down of an account receivable
C. authorization for both cash and stock dividends
D. gain or loss resulting from disposition of treasury shares

239. When verifying dividend amounts paid, an auditor will typically do all
except which of the following?

A. Determine dates and amounts of dividends paid

B. Send confirmations to shareholders to verify payments
C. Examine arrearages of preferred stock dividends.
D. Examine treatment of unclaimed dividends.

240. When a corporation has convertible debentures or stock options,

which of the following procedures should the auditor perform?

A. Verify that dividends paid are being held in a secured account.

B. Determine that enough shares are held in reserve to fulfill the
obligations.
C. Determine that all stock options and convertible debentures have
been recorded in the stockholder ledger.
D. Confirm options and debentures with stock transfer agent.
 MODULE 11

Completing The Audit

PSA-BASED QUESTIONS

1. Which of the following matters do auditors need not communicate to

the audit committee of a public company?

A. All critical accounting policies

B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted diferences
D. Management letter comments

2. Analytical procedures are required to be performed during the:

A. planning and substantive test stages.

B. substantive test and overall review stages.
C. planning and overall review stages.
D. planning stage only.

3. Which of the following factors would least influence an auditor‘s

consideration of the reliability of data for purposes of analytical
procedures?

A. Whether the data are processed in a computer system or in a

manual accounting system
B. Whether sources within the entity are independent of those who
are responsible for the amount being audited
C. Whether the data are subjected to audit testing in the current
year or prior year
D. Whether the data are obtained from independent sources outside
the entity or from sources within the entity

4. Analytical procedures are

A. substantive tests designed to evaluate a system of internal control

B. tests of control procedures designed to evaluate the validity of
management‘s representation letter
C. substantive tests designed to evaluate the reasonableness of
financial information
D. tests of control procedures designed to detect errors in reported
financial information

5. The auditor notices significant fluctuation in key elements of the

company‘s financial statements. If management is unable to provide
an acceptable explanation, the auditor should
 A. consider the matter as a scope limitation.
B. Perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting
management fraud.
D. withdraw from the engagement.

6. Who is responsible for establishing the process and controls for

preparing accounting estimates?

A. The independent auditor

B. The internal auditor
C. The management
D. The controller

7. The auditor' should adopt one or a combination of the following

approaches in the audit of an accounting estimate:

I. Review and test the process used by management to develop the

estimate.
II. Use an independent estimate for comparison with what the
management prepares.
Ill. Review subsequent events which confirm the estimate made.

A. Any of them
B. None of them
C. Either I or II
D. I only

8. Which of the following is not one of the primary approaches that the
auditors may use when evaluating the reasonableness of accounting
estimates?

A. Review and test management‘s process of developing estimates.

B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be
compared to management‘s estimate.
D. Review subsequent events or transactions that have bearing on the
estimate.

9. The auditor should normally concentrate on the key factors and

assumptions used by management including all of the following except
that those that are

A. insignificant to the accounting estimates.

B. sensitive to variations.
C. deviations from historical patterns.
D. susceptible to misstatements and biases
10. In evaluating the assumptions on which the estimate is based, the
auditor would need to pay particular attention to assumptions which
are
 A. reasonable in light of actual results in prior periods
B. consistent with those used for other accounting estimates
C. consistent with management's plans which appear appropriate
D. subjective or susceptible to material misstatements

11. Subsequent events refer to

A. only significant events that occur between the balance sheet date
and the date of the auditor‘s report which have been discovered by
the auditor during the same period
B. only significant events that occur between the balance sheet
date and the date of the auditor‘s report irrespective of the date
they have been discovered by the auditor
C. only significant events that occur between the balance sheet
date and the date the audited financial statements have been
released to the client, irrespective of the date of their discovery by
the auditor.
D. all significant events that occur after the balance sheet date.

12. Which of the following is not correct concerning a type I and a type II
subsequent event?

A. A type I may require adjustment to financial statements while a

type II would not.
B. Both a type I and a type II subsequent event may require disclosure.
C. A type I is an event that occurred prior to year end, but was
discovered after while a type II is one that arises subsequent to
year end.
D. A type II event may require adjustment to the financial statements
and a type II may require note disclosure.

13. Which of the following statements that relates to subsequent

events is inappropriately described?

A. The auditor is expected to conduct a continuing review of all matters

to which previously applied procedures have provided satisfactory
conclusions.
B. The auditor should consider the efect of subsequent events on the
financial statements and on the auditor‘s report.
C. The procedures to identify events that may require adjustment as
of, or disclosure in the financial statements would be performed as
near as practicable to the date of the auditor's report.
D. The procedures that are designed to obtain sufficientty appropriate
audit evidence that all events up to the date of the audit report that
may require adjustment of, or disclosure in, the financial statements
are in addition to routine procedures which may be applied to specific
transactions.

14. The auditor‘s formal review of subsequent events normally should be

extended through the date of the
 A. auditors report.
B. next formal interim financial statements.
C. delivery of the audit report to the client.
D. mailing of the financial statements to the stockholders.

15. Which of the following appropriately describes the auditor‘s procedures

with respect to subsequent events?

A. The procedures to identity events that may require adjustments of,

or disclosure in, the financial statements would be performed as
early as practicable.
B. Those routine procedures that are applied to specific transactions
occurring after the period ends are designed lo obtain sulticient
appropriate audit evidence that all events up to the date of the
audit report have been identified.
C. When a component is audited by another CPA, the auditor would
consider the other auditor's procedures regarding events after
period end and the need to inform the other auditor of the planned
date of the audit report.
D. The auditor is responsible to inquire regarding the financial
statements after the date of the auditor's report.

16. Which of the following is least likely a procedure that would be

performed by the auditor near the auditor's report date?

A. Reading the minutes of the meetings of shareholders, the board of

directors and audit executive committees held throughout the audit
year.
B. Reading the entity's latest available interim financial statements
C. Inquiring of the client's legal counsel concerning litigations and claims.
D. Reviewing the procedures that management has established to
ensure that subsequent events are identified.

17. Which of the following procedures would an auditor most likely perform
to obtain evidence about the occurrence of subsequent events?

A. Confirming a sample of material accounts receivable established

after year- end.
B. Comparing the financial statements being reported on with those
of the prior period.
C. Investigating personnel changes in the accounting department
occurring after year-end.
D. Inquiring as to whether any unusual adjustments were made after
year-end.

18. Which of the following should the auditor do the least when, after the
financial statement have been issued, the auditor becomes aware of a
fact that existed at the date of the auditor‘s report?
A. Consider whether the financial statements need revisions.
B. Discuss the matter within management.
C. Take the action appropriate in the circumstance.
D. Inform those users who are currently relying on the financial
statements about the fact that has been discovered.

19. If subsequent to the issuance of the audited financial statements, the

auditor becomes aware of material misstatements in the financial
statements that exist prior to the date of the audit report, the auditor
should

A. notify the parties who are currently relying on the financial statements.
B. discuss the matter with the management, and should take the
action appropriate in the circumstances.
C. document such information in the audit plan for succeeding audit.
D. submit a revised copies of the financial statements and audit
report to the stockholders.

20. If, after the audited financial statements have been issued, the auditor
becomes aware that some information included in the statements is
materially misleading, he or she has

A. no obligation to disclose it, assuming he or she acted in good faith

and without negligence in arriving at the audit opinion.
B. an obligation to inform the board of directors of the misleading
statements.
C. an obligation to inform all users who are relying on the financial
statements.
D. an obligation to make certain that users who are relying on the
financial statements are informed.

21. When a new audit report is issued on financial statements because of

subsequent discovery of material misstatements on previously issued
financial statements, the audit report should include

A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the
financial statements that more extensively discusses the reason for the
revision of the previously issued financial statements.

22. When a fact, that existed before the date of the report is discovered
and the management revises the previously issued audited financial
statements, the following are appropriate except the:

A. new auditor's report should include an emphasis of a matter

paragraph that refers to a note to the financial statements that
discusses the reason for the
 revision of the financial statements and to the earlier report issued by
the auditor.
B. new auditor‘s report should contain the original date.
C. performance of the procedures that are designed to obtain sufficient
evidence as to subsequent events would ordinarily be extended to the
date the revised financial statements are approved by the entity's
management.
D. auditor is permitted to restrict the audit procedures regarding the
financial statements to the efects of the subsequent event that
necessitated the revision.

23. The management should assess those events that may cast
significant doubt about the entity's ability to continue as a going
concern for at least

A. two years from the balance sheet date.

B. two years from the date of the audit report.
C. one year from the balance sheet date.
D. one year from the date of the audit report.

24. Which of the following is incorrect about the management's

responsibility to make an assessment of an entity's ability to continue
as a going concern?

A. In assessing whether the going concern assumption is appropriate,

the management takes into account all the available information for
the foreseeable future, which should be at least twelve months from
the balance sheet date.
B. Though there is a history of profitable operations and a ready
access to financial resources, management must make its assessment
with detailed analysis.
C. Management's assessment of the going concern assumption
involves making a judgment, at a particular point of time, about the
future outcomes of events or conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to
continue as a going-concern entity.

25. Which of the following least likely indicate a potential going-concern

problem of on the entity?

A. Historical negative operating cash flows

B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity

26. Which of the following is correct about the auditor's responsibility with
respect to the entity's ability to continue as a going concern?

A. The auditor is responsible to make an assessment of the entity's

ability to continue as a going concern.
 B. The auditor's responsibility is to consider the appropriateness of the
management‘s use of the going concern assumption in the preparation
of the financial statements.
C. The auditor can predict future events or conditions that may cause
an entity to discontinue as a going concern.
D. The auditor may allow the management to make an assessment of
its ability to continue as a going concern if the management is
,believed to be objective in doing such an assessment.

27. In evaluating the management's assessment of the entity's ability to

continue as a going concern, he should consider the following, except,

A. the independence of the management.

B. the process that the management has followed to make its
assessment.
C. the assumptions on which the assessment is based and
management‘s plan for future action.
D. whether the assessment has taken into account all relevant
information of which the auditor is aware of as a result of the audit
procedures.

28. Which of the following is an appropriate procedure to test for an

indication of events or conditions that cast significant doubt on the
entity's ability to continue as a going concern beyond the period
assessed by management?

A. Inspection
B. Inquiry
C. Observing
D. Analysis

29. When events or conditions have been identified to cast significant

doubt on the entity's ability to continue as a going concern, the auditor
should

A. consider reassessing control risk at the maximum.

B. consider the issuance of disclaimer of opinion due to scope limitation.
C. review management plans for future actions based on its going-
concern assessments.
D. report the matter to the board of directors and stockholders.

30. Which of the following audit procedures would most likely assist an
auditor in identifying conditions and events that may indicate that
there could be substantial doubt about an entity's ability to continue as
a going concern?

A. Review compliance with the terms of debt agreements

B. Confirm accounts receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balances
31. The auditor relies on the client representation letter to:

A. confirm written representations given to the auditor.

B. document the continuing materiality of client representations.
C. guarantee the absence of management fraud.
D. reduce the possibility of misunderstanding concerning
management's representations.

32. The auditors are required to obtain a letter of representation from their
clients. Which of the following statements regarding the letter of
representation is correct?

A. A letter of representation should impress upon management its

responsibility for the assertions in the financial statements.
B. A letter of representation should be signed by a company's
financial officials and attorneys.
C. A letter of representation documents the responses from the
management to inquiries about various aspects of the audit.
D. A letter of representation is a written statement from a non-
independent party and as such should not be regarded as a valid
evidence.

33. A purpose of of management representation letter is to reduce

A. audit risk to an aggregate level of misstatement that could be

considered material.
B. an auditor's responsibility to detect material misstatements only to
the extent that the letter is relied on.
C. the possibility of a misunderstanding concerning management's
responsibility for the financial statements.
D. the scope of an auditor's procedures concerning related party
transactions and subsequent events.

34. Which of the following statements is true with respect to management

representations?

A. Management representations are dated as of the balance sheet date.

B. Management representations may serve as a substitute tor
various types of substantive procedures.
C. Management representations are signed by the auditor and
delivered to the client's officers.
D. Management representations are used to corroborate information
obtained during the audit.

35. When considering the use of management's written representations as

audit evidence about the completeness assertion. on auditor should
understand that such representations
 A. complement, but do not replace, substantive tests designed to
support the assertion.
B. constitute sufficient evidence to support the assertion when
considered in combination with a sufficiently low assessed level of
control risk.
C. are not part of the evidence considered to support the assertion.
D. replace a low assessed level of control tisk as evidence to support
the assertion.

36. The auditor should obtain evidence that the management

acknowledges its responsibility for the fair presentation of the financial
statements in accordance with PERS, and has approved
the financial statements. The auditor can obtain evidence of
management's acknowledgment of such responsibility approval

I. From relevant minutes of meetings of the board of directors or similar

body.
II. By obtaining a written representation from the management.
III. By obtaining a signed copy of the financial statements.

A. Any of the given procedures

B. Either I or II
C. I only
D. None of the procedures given

37. A management representation letter would ordinarily be dated as of the

A. date the report is delivered to the entity audited.

B. date the financial statements were approved by the client
management.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity's attorney of
record.

38. A written representation from a client's management that, among

other matters. acknowledges its responsibility for the fair presentation
of the financial statements, should normally be signed by the

A. chief executive officer and the chief financial officer.

B. chief financial officer and the chair of the board of directors.
C. chair of the audit committee of the board of directors.
D. chief executive officer, the chair of the board of directors, and
the client's lawyer.

39. If the management refuses to furnish certain written representations

that the auditor believes are essential, which of the following is
appropriate?
A. The auditor can rely an oral evidence relating to the matter as a
basis for an unqualified opinion.
 B. The client's refusal does not constitute a scope limitation that may
lead to a modification of the opinion.
C. The client's refusal may have an efect on the auditor's ability to
rely on other representations of the management.
D. The auditor should express an adverse opinion because of
management‘s refusal.

40. For which of the following matters should on auditor obtain written
management representations?

A. Management's cost-benefit justifications for not correcting internal

control weaknesses.
B. Management's knowledge of future plans that may afect the
price of the entity's stock.
C. Management's compliance with contractual agreements that may
afect the financial statements.
D. Management's acknowledgement of its responsibility for employee's
violations of laws.

41. A written management representation letter is most likely to be an

auditor‘s best source of corroborative information of a client's intention
to

A. terminate an employee pension plan.

B. make a public ofering of its common stock.
C. settle an outstanding lawsuit for an amount less than the accrued
loss contingency.
D. discontinue a line of business.

42. Which of the following matters would an auditor most likely include
in a management representation letter?

A. Communications with the audit committee concerning weaknesses

in the internal control structure.
B. The completeness and availability of minutes of stockholders' and
directors' meetings.
C. Plans to acquire or merge with other entities in the subsequent year.
D. Management's acknowledgment of its responsibility for the
detection of employee fraud.
QUIZZERS

1. Which of the following is not among the characteristics of the

procedures being performed in completing the audit?

A. They are optional since they have only an indirect impact on the
opinion to be expressed.
B. They involve a lot of subjective judgment by the auditor.
C. They do not pertain to specific transaction cycles or accounts.
D. They are usually performed by the audit managers or other senior
rnembers of the audit team who have extensive audit experience with
the client.

2. Before reaching a final decision on the opinion to be issued, a

conference is generally is held with the client. At this meeting, all of
the following may be expected, except:

A. an oral report of the auditor's major findings.

B. the auditor's rationale for proposed adjustments or additional
disclosures.
C. an agreement between the auditor and the client on the changes
to be made in the financial statements
D. the delivery of the management letter.

3. Which of the following activities is ordinarily performed prior to year

end?

A. Audit documentation review

B. Interim testing
C. ―Roll-forward" work
D. Subsequent event review

4. Which of the following statements is true?

A. It is more difficult to discover unrecorded transactions or events

than to verify recorded information
B. It is more difficult to verily recorded information than to discover
unrecorded transactions or events
C. It is equally difficult to verify recorded information and to discover
unrecorded transactions or events.
D. None of the given choices is true.

5. Upon completion of the audit, the auditor needs to consider

uncorrected misstatements because:

A. The aggregate of uncorrected misstatements, when considered,

makes the financial statements materially misstated.
B. There is a need to revise the financial statements after their issuance.
C. They are basis of whether the auditor needs to redocument internal
control.
 D. The aggregate of uncorrected misstatements is the basis of the
auditor to reassess materiality level.

6. What should a prudent auditor do when the aggregate of uncorrected

misstatements approaches the materiality level?

A B C D
Perform additional YES NO NO YES
procedures
Request management to
adjust financial statements YES YES NO YES
for identified misstatements
Request management to
adjust financial YES NO YES NO
misstatements for
projected misstatements

7. If based on the aggregate of uncorrected misstatements the auditor

believes there may be material misstatements, the auditor should
perform additional procedures. If the client refuses to adjust the
financial statements and the auditor is not able to conclude that the
aggregate of uncorrected misstatements is not material, the auditor
should,

A. issue a standard opinion.

B. consider resigning from the engagement.
C. appropriately modify the audit report.
D. obtain additional representation letter covering uncorrected
misstatements.

8. Which of the following communications is ordinarily signed by the auditor?

A. Attorney's letter
B. Management representation letter
C. Internal control deficiency letter
D. All of these are signed by the auditor

9. They involve analysis of significant ratios and trends including the

resultant investigation of fluctuations and relationships that are
inconsistent with other relevant information or expectation:

A. inquiry
B. analytical procedures.
C. account analysis.
D. inspection.

10. Analytical procedures performed in the overall review stage of on

audit suggest that several accounts have unexpected relationships.
The results of these procedures most likely indicate that
 A. unaccounted efects of irregularities exist.
B. internal control activities are not operating efectively.
C. additional tests of details are required.
D. the communication with the audit committee should be revised.
11. When substantive tests are performed before the balance sheet date,
at a minimum the auditors should, at or after the balance sheet date:

A. changes occurred in the account balances between the two dates.

B. perform analytical procedures, including comparison of the account
balances of the two dates.
C. reconfirm all balances that were confirmed at interim date.
D. confirm all balances that were not confirmed at interim date.

12. An assumption underlying analytical procedures is that

A. these procedures cannot replace tests of balances and transactions.

B. statistical tests of financial information may lead to the discovery
of material errors in the financial statements.
C. the study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations.
D. relationships among data may reasonably be expected to exist and
continue in the absence of known conditions to the contrary.

13. An auditor suspects that fictitious sales may have been recorded
during the year. Which of the following analytical review results would
most likely indicate that fictitious sales were recorded?

A. Uncollectible account write-ofs increased by 10 percent, sales

increased by 10 percent and accounts receivable increased by 10
percent.
B. Gross margin decreased from 40 to 35 percent.
C. The number of days' sales in accounts receivable decreased from 64
to38.
D. Accounts receivable turnover decreased from 7.1 to 4.3.

14. Auditors apply analytical procedures on client's operations in order to

identify

A. improper separation of accounting and other financial duties.

B. weaknesses of a material nature in the client's internal control.
C. unusual transactions.
D. noncompliance with prescribed control procedures.

15. Of the following procedures, which one does not produce analytical
evidence?

A. Compare revenue, cost of sales, and gross profit with the prior
year and investigate significant variations.
B. Examine monthly performance reports and investigate significant
revenue and expense variances.
 C. Confirm customers‘ accounts receivable and clear all material
exceptions.
D. Compare sales trends and profit margins with industry averages
and investigate significant diferences.

16. The extent to which analytical procedures provide useful substantive

evidence depends on

A. the efectiveness of client‘s internal control system

B. the integrity and training of client's personnel.
C. their reliability in the circumstances.
D. the experience of the auditor using them.

17. Analytical procedures:

A. are required to be performed in the planning phase of the audit.

B. are often done during examination's testing stage.
C. are required to be done during the completion phase of the audit.
D. All of them

18. An important benefit from industry comparisons is:

A. an aid to understanding the client's business

B. an indicator of errors.
C. an indicator of irregularities.
D. a least-cost indicator for audit procedures.

19. A benefit obtained from comparing client's data with industry

average is that it provides

A. an indication of the likelihood of financial failure.

B. an indication where errors exist in the statements.
C. a benchmark to be used in evaluating client's budget.
D. a comparison of "what is" with "what should be."

20. When the current year's unaudited trial balance is compared to the
prior year's audited trial balance.

A. errors are identified.

B. discrepancies are discovered.
C. irregularities become apparent.
D. changes are highlighted.

21. When a higher than normal ratio of long-term debt to net worth is
coupled with a lower than average ratio of profits to total assets, the
company

A. is highly successful.
 B. is comparable with industry standards.
C. has a high risk of financial failure.
D. has a liquidity problem.

22. Which of the following discoveries through the use of analytical

procedures would indicate a relatively high risk of financial failure?

A. A decline in gross margin percentages.

B. An increase in the balance of fixed assets.
C. A higher than normal ratio of long-term debt to net worth as well as
a lower than average ratio of profits to total assets.
D. An increase in the ratio of allowance for uncollectible accounts to
gross accounts receivable, while at the same time accounts receivable
turnover also decreased.

23. ―Unusual fluctuations" occur when

A. Significant diferences are not expected but do exist.

B. Significant diferences are expected but do not exist.
C. there is a material accounting error or irregularity.
D. Any one of the given three situations may occur

24. Which method of analytical procedure is most useful because many

expenses, such as cost of goods sold, might be expected to bear a
predictable relationship to net sales?

A. Horizontal analysis
B. Trend analysis
C. Vertical analysis
D. Reasonable analysis

25. One type of analytical procedure is trend analysis. Which of the

following is the best example of trend analysis?

A. Comparison of company financial ratios to that of its competitors.

B. Comparison of accounting records to budgeted amounts.
C. Comparison of inventory levels over the past 3 years.
D. Comparison of interest expenses to outstanding loan balances.

26.Analytical procedures are those that

A. evaluate the accuracy of the account balances.

B. assess the overall reasonableness of transactions and balances.
C. review the efectiveness of internal control procedures.
D. analyze the efect of management procedures on the accounting
system.
27. Analytical procedures enable the auditor to predict the balance or
quantity of an item under audit. Information to develop this estimate
can be obtained from all of the following except

A. tracing transactions through the system to determine whether

procedures are being applied as prescribed.
B. comparison of financial data with data for comparable prior periods,
anticipated results (e.g., budgets and forecasts), and similar data for
the industry in which the entity operates.
C. study of the relationships of elements of financial data that would be
expected to conform to a predictable pattern based upon the entity's
experience.
D. study of the relationships of financial data with relevant nonfinancial
data.

28. Which of the following statements is true concerning analytical

procedures?

A. Analytical procedures usually involve comparisons of ratios

developed from recorded amounts with assertions developed by the
management.
B. Analytical procedures used in planning an audit ordinarily use data
aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering
evidence to support the assessed level of control risk.
D. Analytical procedures are more efficient, but not more efective,
than tests of details and transactions

29. Which of the following items tend to be the most predictable for
purposes of analytical procedures applied as substantive tests?

A. Relationships involving balance sheet accounts

B. Transactions subject to management discretion
C. Relationships involving income statement accounts
D. Data subject to audit testing in the prior year

30. According to professional standards, analytical procedures are least

likely to be applied to:

A. test disclosures about reportable operating segments.

B. review the financial statements or interim financial information.
C. compile the financial statements.
D. plan and audit and assist in the final review.

31. Which of the following is not a typical analytical procedure?

A. Study of relationships of financial information with relevant

nonfinancial information.
B. Comparison of financial information with similar information
regarding the industry in which the entity operates.
 C. Comparison of recorded amounts of major disbursements with
appropriate invoices.
D. Comparison of recorded amounts of major disbursements with
budgeted amounts.
32. Which of the following would be least likely to be comparable
between similar corporations in the same industry line of business?

A. Earnings per share

B. Return on total assets before interest and taxes
C. Accounts receivable turnover
D. Operating cycle

33. Sales commissions as a percentage of sales declined significantly

during the year under audit. Of the following possible causes, the most
likely is

A. sales increased during the year.

B. the sales force was reduced at the end of the year.
C. sales commission rates were increased at the beginning of the year
D. fictitious sales were recorded at year-end to inflate earnings.
Commissions were not recorded on these sales.

34. In evaluating the efectiveness of a company‘s credit and collection

policies, the ratio most likely to be used by an auditor is

A. quick ratio.
B. accounts receivable turnover.
C. working capital turnover.
D. return on sales.

35. During an audit of the accounts receivable function, you found that the
accounts receivable turnover rate had fallen from 7.3 to 4.3 over the
last three years. What is the most likely cause of the decrease in the
turnover rate?

A. An increase in the discount ofered for early payment.

B. A more liberal credit policy.
C. A change from net 30 to net 25.
D. Greater cash sales.

36. Significant unexpected fluctuations identified by analytical procedures

will usually necessitate a(an)

A. consistency qualification.
B. review of internal control.
C. explanation in the representation letter.
D. auditor investigation.
37. An auditor compares 2010 revenues and expenses with those of the
prior year and investigates all changes exceeding 10%. By this
procedure the auditor would be most likely to learn that

A. an increase in property tax rates has not been recognized in

the client's accrual.
B. the 2010 provision for uncollectible accounts is inadequate,
because of worsening economic conditions.
C. fourth quarter payroll taxes were not paid.
D. the client changed its capitalization policy for small tools in 2010.

38. Of the following procedures, which is the most important that on

auditor should use when performing an analytical review of the income
statement?

A. Select sales and expense items and trace their amounts to related
supporting documents.
B. Compare actual revenues and expenses with the corresponding
figures of the previous year and investigate significant diferences.
C. Obtain from the proper client representatives, inventory certificates
for the beginning and ending inventory amounts that were used to
determine cost of sales.
D. Ascertain that the net income amount in the statement of changes
in financial position (statement of cash flows) agrees with the net
income amount in the income statement.

39. The auditor's analytical procedures will be facilitated if the client

A. uses a standard cost system that produces variance reports.

B. segregates obsolete inventory before the physical inventory count.
C. corrects material weaknesses in internal control before the
beginning of the audit.
D. reduces inventory balances to the lower of cost or market.

40. Which of the following is not a purpose served by the application of

analytical procedures?

A. As part of audit planning to assist in locating significant changes in

revenues and expenses.
B. To provide a basis for lowering materiality thresholds where
significant earnings inflation is indicated.
C. To determine the economic substance of related party transactions.
D. As part of audit review to determine that all significant
abnormalities have been resolved to the auditor's satisfaction.
41. Auditors sometimes use comparison of ratios as audit evidence. For
example, an unexplained decrease in the ratio of gross profit to sales
may suggest which of the following possibilities?

A. Unrecorded purchases
B. Unrecorded sales
C. Merchandise purchases being charged to selling and general expense
D. Fictitious sales

42. In applying analytical procedures, the auditor discovered that gross

profit as a percent of sales declined sharply during the current year. A
possible cause might be

A. the client has significant amounts of obsolete inventory carried at full

cost.
B. a significant quantity of finished goods located in a distant
warehouse was inadvertently omitted from the ending inventory.
C. recorded sales included goods that were shipped the following year.
D. depreciation of office equipment was overstated.

43. An abnormal fluctuation in gross profit that might suggest the need for
extended audit procedures for sales and inventories would most likely
be identified in the planning phase of the audit by the use of

A. tests of transactions and balances.

B. a preliminary review of internal control.
C. specialized audit programs.
D. analytical procedures.

44. What form of analytical review might uncover the existence of obsolete
merchandise?

A. Inventory turnover rates

B. Decrease in the ratio of gross profit to sales
C. Ratio of inventory to accounts payable
D. Comparison of inventory values to purchase invoices.

45. What is ordinarily the primary concern when auditing

the income statement?

A. Overstatement of Revenues. Expenses and Net Income

B. Overstatement of Revenues and Expenses, and understatement of
Net Income
C. Overstatement of Net Income and understatement of Revenues
and Expenses
D. Overstatement of Revenues and Net Income. understatement of
Expenses
46. Compared to balance sheet accounts, the audit of income statement
accounts generally relies more heavily on:

A. tests of details of transactions.

B. tests of details of balances.
C. analytical procedures.
D. tests of controls.

47. What audit procedure is not ordinarily used to examine selling, general
and administrative expenses?

A. .Analytical procedures
B. Use of budgets to identify unexpected diferences
C. Confirmations of amounts paid with advertising agencies
D. Detailed tests of balances

48. Which of the following income statement accounts is least likely to be

subject to extensive detailed tests of balances?

A. legal and professional fees

B. Contributions
C. Cost of sales
D. Officers' salaries

49. Which of the following procedures is normally not considered in the

auditor's substantive procedures for revenue and expense accounts?

A. Evaluate evidence gathered in the audit of balance sheet accounts

and examination of transaction cycles.
B. Individually confirm significant transactions with third parties.
C. Perform analytical procedures to verify the overall reasonableness
of revenue and expense accounts.
D. Examine "miscellaneous", "other and "clearing"' accounts that are
classified as revenues and expenses.

50. The auditors' best course of action with respect to "Other financial
information" included in a client prepared annual report containing the
auditor‘s report is to:

A. indicate in the auditors' report that the "other financial

information" is unaudited.
B. consider whether the "other financial information is accurate by
performing a review.
C. obtain written representations from the management as to the
material accuracy of the "other financial information."
D. read and consider the manner of presentation of the "other
financial information.
51. Which of the following events in the subsequent period is on example
of a Type 2 subsequent event?

A. Realization of recorded year-end receivables of a diferent amount

than what is recorded
B. Settlement of recorded year-end estimated product warranty
liabilities at an amount diferent from what is recorded
C. Purchase of a business
D. Purchase of a machine

52. Which of the following statements best expresses the auditor's

responsibility with respect to events occurring in the subsequent
period?

A. The auditor has no responsibility for events occurring in the

subsequent period unless these events afect transactions recorded on
or before the balance sheet date.
B. The auditor's responsibility is to determine that transactions
recorded on or before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the
subsequent period and should extend all detailed procedures through
the last day of the field work.
D. The auditor is responsible for determining that a proper cutof has
been made and for performing a general review of events occurring in
the subsequent period.

53. An auditor concludes that the omission of a substantive procedures

considered necessary at the time of the audit may impair the auditor's
current ability to support the opinion that had been previously issued.
The auditor need not apply the omitted procedure if the

A. risk of adverse publicity or litigation is low.

B. results of other procedures that were applied tend to
compensate for the omitted procedure.
C. auditor's opinion is qualified because of a departure from generally
accepted accounting principles.
D. results of the subsequent period's tests of controls make the
omitted procedure less important.

54. Which of the following procedures can be performed only in the

subsequent period?

A. Examination of data to determine that a proper cutof has been made

B. Tests of the details of balances
C. Tests of the details of transactions
D. Reading of the minutes of the board of directors' meetings
55. A major customer of an audit client sufers a fire just prior to
completion of year- end fieldwork. The audit client believes that this
event could have a significant direct efect on the financial statements.
The auditor should:

A. Advise the management to disclose the event in notes to the

financial statements.
B. Disclose the event in the auditor‘s report.
C. Withhold submission of the auditor‘s report until the extent of the
direct efect on the financial statements is known.
D. Advise the management to adjust the financial statements.

56. An auditor is concerned with completing various phases of the audit

after the balance sheet date. This subsequent period extends to the
date of the

A. auditor's report.
B. final review of the audit working papers.
C. public issuance of the financial statements.
D. delivery of the auditor‘s report to the client.

57. Which of the following procedures should an auditor ordinarily perform

regarding subsequent events?

A. Compare the latest available interim financial statements with

the financial statements being audited.
B. Send second requests to client's customers who failed to respond
to the first accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the
client's audit committee.
D. Review the cutof bank statements for several months after the year-
end.

58. Which of the following events occurring after the issuance of an

auditor‘s report most likely would cause the auditor to make further
inquiries about the previously issued financial statements?

A. A technological development that could afect the entity's future

- ability to continue as a going concern.
B. The discovery of information regarding a contingency that existed
before the financial statements were issued.
C. The entity's sale of a subsidiary that accounts for 30% of the
entity's consolidated sales.
D. The final resolution of a lawsuit which is adequately explained in a
separate paragraph of the auditor's report.

59. After issuing a report, an auditor has no obligation to make continuing

inquiries or perform other procedures concerning the audited financial
statements, unless
 A. an information, which existed at the report dote that afects the
report comes to the auditor's attention.
B. the control environment changes after the issuance of the report.
C. an information about on event that occurred after the end of field
work comes to the auditor's attention.
D. the final determinations or resolutions are made of contingencies
that had been disclosed in the financial statements.

60. Subsequent to the issuance of the auditor's report, the auditor become
aware of facts existing at the report date that would have afected the
report had the auditor then been aware of such facts. After
determining that the information is reliable, the auditor should next

A. notify the board of directors that the auditor‘s report must no

longer be associated with the financial statements.
B. determine whether there are persons relying or likely to rely on
the financial statements who would attach importance to the
information.
C. request the management to disclose the efects of the newly
discovered information by adding a footnote to subsequently issued
financial statements.
D. issue a revised set of pro-forma financial statements that consider
the newly discovered information.

61. On March 15, 2010, Kiel, CPA, expressed an unqualified opinion on a

client's audited financial statements for the year ended December 31,
2009. On May 4, 2010, Kiel's internal inspection program disclosed that
engagement personnel failed to observe the client's physical inventory.
Omission of this procedure impairs Kiel's current ability to support the
unqualified opinion. If the shareholders are currently relying on the
opinion, Kiel should first

A. advise the management to disclose to the shareholders that his

unqualified opinion should not be relied on.
B. undertake to apply alternative procedures that would provide a
satisfactory basis for an unqualified opinion.
C. reissue the auditor's report and add an explanatory paragraph
describing the departure from PFRS.
D. compensate for the omitted procedure by performing tests of
controls to reduce audit risk to a sufficiently low level.

62. Six months after issuing an unqualified opinion on audited financial

statements, an auditor discovered that the engagement personnel
failed to confirm several of the client's material accounts receivable
balances. The auditor should first:

A. request permission of the client to undertake the confirmation of

accounts receivable.
B. perform alternative procedures to provide a satisfactory basis
for an unqualified opinion.
 C. assess the importance of the omitted procedures to the auditor's
ability to support the previously issued opinion.
D. inquire whether there are persons currently relying, or likely to rely
on the unqualified opinion.
63. When a fact is discovered alter the date of the report but before the
financial statements are issued and the client amends the financial
statements, would the following procedures or actions be necessary?

A B C D
Procedures to obtain evidence
with respect to YES YES NO NO
subsequent events
are
extended.
An emphasis of a matter is YES NO NO YES
required.

64. The auditor's primary means of obtaining corroboration of

management's information concerning litigation is a

A. letter of audit inquiry to the client's lawyer.

B. letter of corroboration from the auditor's lawyer upon review of the
legal documentation.
C. confirmation of claims and assessments from other parties to the
litigation.
D. confirmation of claims and assessments from an officer of the court
presiding over the litigation.

65. Which of the following is not a procedure to discover unasserted claims

or contingent liabilities?

A. Review of Board of Director minutes

B. Sending a letter of inquiry to the client's attorney
C. Substantive testing of company accounts receivable
D. Searching newspapers and other periodicals for stories about the
client and its industry

66. Which of the following statements concerning litigation, claims and

assessments which were extracted from a letter from a client's lawyer
is most likely to cause the auditor to request clarification?

A. "I believe that the possible liability to the company is nominal in

amount."
B. "I believe that the action can be settled for less than the damages
claimed."
C. ―I believe that the plaintif's case against the company is without
merit."
D. "I believe that the company will be able to defend this action
successfully."
67. In evaluating whether there is a sufficiently low probability of material
misstatement in the financial statements, the auditors accumulate:
 A. likely misstatements in the financial statements.
B. known misstatements in the financial statements.
C. known, projected and other estimated misstatements in the
financial statements.
D. known, projected and potential misstatements in the financial
statements.

68. Which of the following is typically the auditor‘s initial procedure to be

performed to identify litigation, claims, and assessments?

A. Perform analytical procedures

B. Confirm litigation, claims, and assessments with third-party litigants
C. Obtain a letter from the client's legal counsel
D. Inquire of the client regarding the existence of litigation, claims,
and assessments

69. The auditors should request that on audit client sends 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. an 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 regarding whether a loss is possible, probable, or
remote.

70. In an audit of contingent liabilities, which of the following procedures

would be least efective?

A. Reviewing a bank confirmation letter

B. Examining the customer confirmation replies
C. Examining the invoices for professional services
D. Reading the minutes of the board of directors meetings

71. An attorney, responding to an auditor as a result of the client's letter of

audit inquiry, may appropriately limit the response to

A. items which have high probability of being resolved to the client‘s

detriment.
B. asserted claims and pending or threatened litigation.
C. legal matters subject to unsettled points of law, uncorroborated
information or other complex judgments.
D. matters to which the attorney has given substantial attention in
the form of legal consultation or representation.

72. The primary reason why an auditor requests that letters of inquiry be
sent to the client's legal counsel is to provide the auditor with
 A. a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date of.
B. an expert opinion as to whether a loss is possible, probable, or
remote.
C. the opportunity to examine the documentation concerning
litigation, claims, and assessments.
D. corroboration of the information furnished by the management
concerning litigation, claims, and assessments.

73. An auditor should obtain evidential matter relevant to each of the

following actors concerning third-party litigation against a client except
the

A. period in which the underlying cause for legal action occurred.

B. probability of an unfavorable outcome.
C. jurisdiction in which the matter will be resolved.
D. existence of a situation indicating an uncertainty as to the possible
loss.

74.The primary source of information about litigation, claims, and assessments

is the:

A. board of directors.
B. client's attorneys.
C. management.
D. reply through direct confirmation with the other party involved.

75. The letter of audit inquiry to the client's lawyer(s) is the auditor's
primary means of obtaining:

A. corroboration of the information on litigation. claims, and

assessments provided by the auditor's attorneys.
B. corroboration of the information on litigation, claims, and
assessments, provided by management.
C. corroboration of the information on litigation, claims, and
assessments provided by the other party to the matter.
D. initial information about litigation, claims. and assessments.

76. A lawyer's refusal to respond to a letter of audit inquiry normally

requires the auditor to issue a(n):

A. qualified opinion or a disclaimer of opinion.

B. unqualified opinion with an explanatory paragraph.
C. qualified or adverse opinion.
D. standard three-paragraph unqualified opinion.

77. Which of the following auditing procedures is ordinarily performed last?

A. Reading of the minutes of the directors' meetings held subsequent

to balance sheet date
 B. Confirming accounts payable
C. Obtaining a management representation letter
D. Testing of the purchasing function.

78. When litigation or claims have been identified or when the auditor
believes they may exist, the auditor should

A. seek direct communication with the entity's lawyers.

B. disclose the litigation and claims in the auditor‘s report.
C. issue unqualified opinion with explanatory paragraph.
D. issue qualified or adverse opinion.

79. When an audit is made in accordance with the Philippine Standards on

Auditing, the auditor should always

A. document the understanding of the client's internal control and the

basis for all conclusions about the assessed level of control risk to
financial statement assertions.
B. employ analytical procedures as substantive tests to obtain
evidence about specific assertions related to account balances.
C. obtain appropriate representations from the management.
D. observe the taking of physical inventory on the balance sheet date.

80. Written management representations obtained by the auditor in

connection with a financial statement audit should include

A. a summary of all corrected misstatements.

B. management's belief that the efects of uncorrected
misstatements are not material.
C. a summary of all uncorrected misstatements
D. management's belief that any uncorrected misstatements are in
fact not misstatements.

81. An auditor accepted an engagement to audit the 2009 financial

statements of DRL Corporation and began the fieldwork on September
30, 2009. DRL gave the auditor the 2009 financial statements on
January 7, 2010. The auditor completed the fieldwork and
simultaneously obtains approval of the financial statements by the
management on February 10, 2010. The auditor delivered the report
on February 16, 2010. The management representation letter should
normally be dated:

A. December 31, 2009

B. January 17, 2010
C. February 10, 2010
D. February 16, 2010
82. Which of the following is least likely an action that may mitigate an
entity's difficulty to continue as a going concern?

A. Increased cash dividends

B. Retirement of outstanding capital stock in order to improve earnings
per share
C. Retirement of long-term debt in order to improve profitability
D. Disposal of property in a sale-leaseback arrangement

83. Road, CPA, believes there is "substantial doubt about the ability of
Kennon Company to continue as a going concern for a reasonable
period of time. In evaluating Kennon's plan for dealing with the adverse
efects of future conditions and events, Rood most likely would
consider, as a mitigating factor, Kennon's plans to:

A. Make the credit terms for sales on account more lenient.

B. strengthen internal controls over cash disbursements.
C. purchase the production facilities currently being leased from a
related party.
D. postpone those expenditures for research and development projects.

84. The auditor is most likely to discover omitted audit procedures during:

A. preparation of the management letter.

B. follow-up procedures performed in compliance with generally
accepted auditing standards.
C. a post engagement review performed as part of the firm's
quality control inspection program.
D. the final review of the working papers.

85. Which of the following types of audit documentation review is focused

on ensuring that the quality of audit work and reporting is consistent
with the qualitys standards of the firm?

A. Review of staf work by audit supervisor

B. Review of staf work by audit manager
C. Review of work staf by audit manager and audit partner
D. Review of work by second (reviewing) partner
 MODULE 12

INTERNAL AUDITING

1. An audit committee must comprise of outside directors. Which of the

following is considered an outside director? A member of the board of
directors who is

A. the treasurer.
B. the company‘s president.
C. a retired executive from another company.
D. a consultant to the company.

2. The primary diference between operational auditing and financial

auditing is that In operational auditing

A. the auditor is not concerned with whether the audited activity is

generating Information in compliance with financial accounting
standards
B. The operational auditor is seeking to help management use
resources in the most efective manner possible.
C. the auditor starts with the financial statements of an activity being
audited and works backward to the basic processes involved on
producing them.
D. the auditor can use analytical skills and tools that are not
necessary in financial auditing.

3. Internal auditing often extends beyond examinations leading to the

dtermination of the fairness of financial presentation and includes
audits of efficiency, efectiveness, and

A. internal control
B. evaluation
C. accuracy
D. compliance

4. Which of the following factors are essential to an efective internal

auditing organization?

I. Operating responsibility
II. Organizational status
III. Objectivity
IV. Authority over operations

A. I and II
B. II and III
C. Ill and IV
D. I and IV
5. Internal auditors are most likely to issue a report on which of the
following?

A. Annual financial statement reporting

B. Internal control
C. Tax compliance
D. Quarterly financial statement reporting

6. The internal audit staf has been asked to conduct an audit of the
purchasing department. Top management feels that there have been
some production bottlenecks recently because of out-of-stock
situations. What is the primary objective of the auditors in this
assignment?

A. To appraise the economy with which resources are employed.

B. To review the reliability and integrity of financial and operating
information.
C. To review the means of safeguarding assets and verifying the
existence of such assets.
D. To ascertain whether results are consistent with established
objectives and whether operations are being carried out as planned.

7. The best description of the scope of internal auditing is that it encompasses

A. primarily operational auditing.

B. both financial and operational auditing.
C. primarily the safeguarding of assets and verifying the existence of
such assets.
D. primarily financial auditing.

8. The role of the internal auditor with respect to a purchasing deportment

audit is to

A. evaluate the adequacy of purchasing policies and procedures and

determine the extent of compliance.
B. review and appraise the adequacy of controls over the creation of
all types of company obligations.
C. review and appraise the conditions by which notes payable come
into existence and the control exercised over them.
D. establish that the purchasing deportment is independent of
receiving. inspection, stores, and accounts payable activities.

9. Which of the following statements regarding assurance services is/are

true with respect to internal auditors?

I. Assurance services by internal auditors can be provided only to

internal management and the audit committee: that is. they cannot be
provided to outside entities.
II. Assurance services require the specification of assertions to be tested.
 III. Assurance services can be provided bray in the areas of controls
and financial reporting.

A. I and II
B. II only
C. I. II, and III
D. None of the above

10. Which of the following statements is correct regarding the

performance of consulting activities by internal auditors?

A. Consulting activities: by definition, impair the independence of the

auditor and therefore should be performed only in areas that the
internal audit department does not plan to audit in the future.
B. Consulting activities are simply an extension of the auditor's current
work in providing recommendations.
C. Consulting is a more proactive approach in which the auditor takes
the lead in analyzing problems, deciding the best course of action, and
assisting the management in implementing solutions.
D. Consulting should be limited to internal controls because that is the
auditor‘s area of primary competence.

11. The primary audience for the written report issued by the internal
auditor at the completion of an audit should be

A. the external auditors when they intend to rely on the internal

auditor's work.
B. managers outside the area of audit so as to inform them of what is
going on in other areas of the organization.
C. the audit committee who needs to be kept informed on the risks to
which the organization is exposed.
D. the management inside or outside the audited area who can take
corrective action.

12. Which of the following statements is/are true regarding independence

and objectivity as applied to internal auditing?

I. Independence is a departmental feature that afects the scope of

audits.
II. Only the audit committee can determine independence.
III. Objectivity is a personal feature that is to be exhibited by all
internal audit team members on an audit.

A. I and ll
B. I and III
C. I, II. and III
D. Ill only
13. An internal auditor determines that the actual procedures difer from
prescribed control procedures. The auditor should

I. Require operating personnel to conform to prescribed procedures

2. Document the discrepancies and make any appropriate
recommendations to management.
3 Expand all aspects of the audit to determine other diferences from
prescribed procedures.
4. Modify the audit plan as warranted by the diferences noted.

A. I and 3
B. 2 and 3
C. I and 4
D. 2 and 4

14. The internal audit function should be responsible to:

A. the audit committee.

B. senior management.
C. the external auditor.
D. both the audit committee and senior management.

15. Follow-up activities by the internal auditor may be terminated, even

though corrective action has not been taken, when the

A. recommendations concern activities not included in the scope of

the original audit program.
B. board of directors or management has assumed the risk of not
taking corrective action.
C. auditor has not convinced operating personnel of the soundness of
the audit recommendations.
D. auditor has no authority or responsibility to prescribe or direct the
corrective action.

16. Which of the following would not be an audit activity that contributes
to improved corporate governance?

A. Perform a compliance audit to determine if the marketing

department operates in conformance with company policies.
B. Help train operational managers in Control Self-Assessment.
C. Assist the external auditors in conducting the annual external audit.
D. Perform on operational audit of the company's procurement
processes.

17. An internal auditor is preparing a final audit report to management.

There is, however, disagreement between the auditor .and the auditee
on one finding which details the auditee‘s violation of corporate
purchasing policy. The auditee
 believes the purchasing policy is open to interpretation and that there
was no violation. The auditor believes that the policy is clearly stated
and that the auditee's actions were a violation. In this circumstance,
the auditor should

A. delete the finding from the audit report.

B. present only those facts, with support the audit finding and ignore
those which detract from it.
C. present both the auditor's and auditee's positions in the report.
D. not issue the audit report until the auditor and auditee agree
on all audit findings and recommendations.

18. Which of the following statements is not correct regarding the internal
and external audit profession?

A. External auditors cannot perform internal audit work for their

public company financial statement audit clients.
B. Internal audit work is broader in scope.
C All auditors performing internal audits must be Certified Internal
Auditors.
D. The audit committee is an important client.

19. According to the Standards, the internal audit director should ensure
follow-up of prior audit findings and recommendations:

A. to determine if corrective action was taken and is achieving the

desired results.
B. unless management rejected the recommendation in their initial
response.
C. unless the audit schedule does not allow time for follow-up..
D. unless management has accepted the recommendation.

20. The major objective of operational audit is to:

A. analyze operational areas for control deficiencies, especially those

that would allow a fraud to go undetected.
B. perform trend analysis to identify high risk areas that merit
management attention.
C. analyze operations to identify potential deficiencies as a basis for
improving operational performance.
D. determine mismanagement or inefective management by
department or divisional managers.

21. Internal auditing has been a dynamic profession. Which of the

following best describes the scope of internal auditing as it has
developed to date?

A. Internal auditing involves appraising the economy and efficiency

with which resources are employed.
 B. Internal auditing involves evaluating compliance with policies,
plans, procedures, laws and regulations.
C. Internal auditing has evolved to verifying the existence of assets
and reviewing the means of safeguarding assets.
D. Internal auditing has evolved to more of an operational
orientation from a strictly financial orientation.

22. You have been selected to develop an internal auditing department for
your company. Your approach would most likely be to hire:

A. internal auditors each of whom possesses all the skills required to

handle all audit assignments.
B. inexperienced personnel and train them the way the company
wants them trained.
C. degreed accountants since most audit work is accounting related.
D. internal auditors who collectively have the knowledge and skills
needed to complete all internal audit assignments.

23. Operational auditing is primarily oriented toward:

A. future improvements to accomplish management's goals.

B. the accuracy of data reflected in management's financial records.
C. verifying that the company's financial statements are fairly presented.
D. post protection provided by existing internal control.

24. Which of the following is the most appropriate method of reporting

disagreement between the auditor and the auditee concerning audit
findings and recommendations?

A. State the auditor's position because the report is designed to

provide the auditor's independent view.
B. State the auditee's position because management is ultimately
responsible for the activities reported.
C. State both positions and identify the reasons for the disagreement.
D. State neither position. If the disagreement is ultimately resolved,
there will be no reason to report the previous disagreement. If the
disagreement is never resolved, the disagreement should not be
reported, because there is no mechanism to resolve it.

25. Workpapers document the work done by the internal auditor. The
internal auditor should

A. prepare the workpapers and permit no access to them by auditees.

B. encourage qualified auditees to assist in preparing audit
workpapers on nonsensitive subjects.
 C. prepare the workpapers but review them with the auditee to be
sure that the evidence is appropriately compiled.
D. defer preparation of workpapers for a business segment until the
audit work on that phase is completed.

26. Which of the following could be an organization factor that might

adversely afect the ethical behavior of the director of internal
auditing?

A, The director reports directly to an independent audit committee of the

board of directors.
B. The director of internal auditing is not assigned any
operational responsibilities.
C. A director of internal auditing may not be appointed without
concurrence of the board of directors.
D. The director's annual bonuses are based on peso recoveries of
recommended future savings as a result of audits.

27. Operational audit planning includes

A. establishing the audit objectives and the scope of work

B. determining the efficiency with which the organization uses its
resources
C. establishing qualifications for members of the internal audit
department
D. reviewing existing operating systems on a preliminary basis

28. The president wants to know whether the purchasing function is

properly meeting its charge to ―purchase the right material at the
right time in the right quantities." Which of the following types of
audits addresses the president's request?

A. A financial audit of the purchasing department

B. An operational audit of the purchasing department
C. A compliance audit of the purchasing function
D. A full-scope audit of the manufacturing operation

29. Prior to commencing an operational audit, the auditee management

requests that the auditor include certain tests in the audit program.
The auditor should

A. refuse to add them to the audit program as requested by the auditee.

B. comply if there is sufficient time available in the budget.
C. give priority to these requests.
D. perform the tests when they are approved by the audit committee
or its designee.

30. A company's new president meets the director of internal audit for the
first time, and asks the director to briefly describe his department's
overall responsibility. The director should state that the internal audit's
overall responsibility is to:
 A. act as an independent appraisal function to review operations as a
service to management by measuring and evaluating the efectiveness
of controls.
B. review the means of safeguarding assets and, as appropriate, verify
the existence of such assets.
C. ensure compliance with policies, plans, procedures, laws, and
regulations, which could have a significant impact on operations and
reports.
D. review the reliability and integrity of financial and operating
information and the means used to identify, measure, classify, and
report such information.

31. Which of the following shortcomings that was uncovered during a

review of recent audit should cause the greatest concern to the
supervisor of internal auditing?

A. Incomplete documentation related to certain findings

B. Lack of approval for additions to the audit program
C. Overrun on the time budget and completion schedule
D. Lack of compliance with the prescribed format for workpapers

32. Recommendations in audit reports may or may not actually be

implemented. Which of the following best describes internal auditor's
role in follow-up on audit recommendations? Internal auditor:

A. has no role; follow-up is a management's responsibility.

B. should be charged with responsibility for implementing
audit recommendations.
C. should follow up to ascertain that appropriate action is taken on
audit recommendations.
D. should request that independent auditors follow up on audit
recommendations.

33. The most important function of operational audit report is to

A. report findings and recommendations.

B. state the auditor's opinion or conclusion.
C. direct management to take specified actions.
D. report the objective of the audit

34. A major diference between operational auditing and financial auditing is

A. operational auditing focuses on activities rather than financial

statement assertions.
B. operational auditing extends beyond the entity to analysis of
industry and economic data.
C. unlike financial auditing, operational auditing does not generally
culminate in a formal audit report.
D. operational auditing is narrower than financial auditing in its
breadth of coverage.
35. In an operational audit of a computerized inventory control system that
generates purchase orders based on reorder points and economic
order quantities, which of the following approaches would provide the
best evidence that purchase orders are authorized?

A. Trace purchase orders to the computer listing

B. Compare receiving reports to purchase order details
C. Test the system to determine that only authorized individuals can
change the parameters in the program that generates purchase orders
D. Review the system documentation to determine proper functioning
of the program

36. A major part of an operational audit involves appraising the efficiency

and efectiveness of the activity or unit being audited. Efficiency and
efectiveness appraisal include all but the following steps:

A. assessing the goal selling process.

B. determining the extent to which goals are being achieved and the
degree of goal congruence.
C. assessing the financial stability of the unit.
D. appraising the efectiveness of resource utilization within the unit or
activity.

37. The operational auditor should evaluate the organization's overall

planning process to determine whether.

A. all plans, policies, and procedures are compatible with the

organization's objectives.
B. expected benefits do not exceed the cost of drawing them up.
C. each plan is developed or approved by senior management.
D. the premises for plans are based on historical data.

38. A governmental audit may extend beyond an examination leading to

the expression of an opinion on the fairness of financial presentation to
include

Economy &
Program Results Compliance Efficiency
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D.Yes No Yes

39. The purpose of governmental efectiveness or program results auditing is

to determine if the desired results of a program are being achieved. The
first step in conducting such an audit should be to:

A. evaluate the system used to measure results.

 B. determine the time frame to be audited.
C. collect quantifiable data on the program's success or failure.
D. identify the legislative intent of the program being audited.

40. The major objective of the internal auditor‘s review of computer

program testing procedures in system development is to determine

A. the tested controls are cost efective.

B. significant errors could occur in processing date.
C. programmed tests will allow continuity of the operation tested.
D. a cost-benefit analysis of processing alternatives has been performed.

41. Which one of the following is not reason to conduct an operational audit?

A. Efficiency
B. Economy
C. Correctness of accounting procedures
D. Efectiveness

42. An operational audit resulted in a finding regarding the efficiency of

operations. Select the best approach to gain the auditee's cooperation
in this situation.

A. Allow the auditee to participate in the development of

recommendations for improvement.
B. Emphasize the personal responsibility of the auditee management.
C. Document the adverse finding with a complete list of all
operational deficiencies.
D. Submit a draft copy of the final report to higher-level management.

43.To maximize independence, the director of internal auditing should report

to the

A. audit committee
B. controller
C. chief financial officer
D. director of information systems.

44. Independence of the internal auditors would be least likely achieved

if internal auditors report to the?

A. President
B. Controller
C. Audit Committee
D. The Board of Directors

45. Lydia previously worked in accounts payable before transferring to

internal audit. She has been assigned to do some testing in the
accounts payable because of
 familiarity with that department. Which of the following is the best
response to this situation?

A. The assignment makes good sense because of her expertise.

B. She should not audit this function, since she may be reviewing some
of her own previous work.
C. The assignment should only be made if she works under a supervisor.
D. Lydia should have not transferred to internal audit since she
previously worked in operations.

46. In performing an operational audit, internal auditors are most likely to

focus upon which of the following attributes?

A. Controls relating to the adequacy of the financial statements.

B. All controls and not just those relating to financial statements.
C. Efficiency of operations.
D. Operations of the business including efficiency, efectiveness,
internal control and others.

47. The primary diference between on operational audit and a compliance

audit is which of the following?

A. An operational audit focuses on business efficiencies and

efectiveness, while a compliance audit focuses on whether laws and
other requirements are being followed.
B. An operational audit focuses on reliability of the financial
statements, while a compliance audit focuses on whether laws and
other requirements are being followed.
C. An operational audit focuses on business efficiencies and
efectiveness, while a compliance audit focuses on reliability of the
financial statements.
D. A compliance audit focuses on business efficiencies and
efectiveness, while an operational audit focuses on whether laws and
other requirements are being followed.

48. What is the final step that should be undertaken in an operational audit?

A. Reporting of the findings

B. Follow-up procedures to determine if recommendations
have been implemented
C. Report on the organization's internal control and compliance with
legal requirements
D. An operational meeting with Board of Directors

49. Operational audit generally have been performed by internal auditors

but may be performed by independent accountants. A primary purpose
of an operational audit is to provide:
 A. a means of assuring that internal controls are functioning as planned.
B. aid to the independent auditor, who is auditing the financial
statements.
C. the results of internal examinations of financial and accounting
matters to an entity's top-level management.
D. a measure of management performance in meeting organizational
goals.

50. Which of the following is generally considered one of the main ieasons
why internal auditors evaluate the efectiveness of their company's
internal control structure?

A. To determine whether all risks and exposures of the company have

been either reduced or eliminated.
B. To determine whether the established internal controls are
functioning as intended by management.
C. To determine the extent of reliance the internal auditors can
place on the controls in the process of evaluating the financial
statements.
D. To reduce the amount of detailed testing for their external auditors.

51. Which of the following is not one of the three phases in an operational
audit?

A. Planning
B. Review of the internal control structure
C. Evidence accumulation and evaluation
D. Reporting and follow-up

52. There are several sources that the operational auditor can utilize in
developing specific evaluation criteria. An area that is not considered a
source is

A. generally accepted accounting principles.

B. historical performance, such as results from prior periods.
C. comparable performance. such as the data of comparable entities.
D. discussion and agreement between the management of the entity
to be audited, the operational auditor, and the entity or persons to
whom the findings will be reported.

53. An operational auditor is most likely to be concerned with whether o

transaction was

A. necessary.
B. reasonable.
C. properly approved.
D. properly supported with documentation.

54. When planning an operational audit, the auditor should consider the risk of
A. misleading financial statements.
 B. inadequate internal controls.
C. inefficient operations.
D. lawsuits for inadequate auditing.

55. When performing an operational audit, the auditor would normally be

concerned with all of the following except

A. calculation of earnings per share.

B. investigation of budget variance.
C. follow up on inventory shortages.
D. reasons for idle equipment.

56. The benefits of an operational audit generally include all of following

except

A. increased revenue.
B. increased reliability of the financial statements.
C. increases productivity.
D. decreased costs.

57. An operational audit report is not likely to be addressed to the

A. department supervisors.
B. audit committee.
C. stockholders.
D. top management.

58. In a compliance audit, an auditor is concerned with whether an

entity's transactions are in conformance with

A. management objectives.
B. board of director directives.
C. laws and regulations.
D. accepted business practices.

59. A major responsibility of internal auditing is to:

A. install sound accounting, financial, and operating controls at

reasonable cost.
B. determine the extent of compliance with established policies,
plans, and procedures.
C. account for the company's assets and safeguard them from losses.
D. develop reliable management data.

60. In comparison to the independent auditor, an internal auditor is more

likely to be concerned with:

A. legal and regulatory compliance.

 B. cost accounting procedures.
C. operational auditing.
D. internal control.

61. When an independent auditor decides that the work performed by

internal auditors may have a bearing on the nature, timing, and extent
of planned audit procedures, the independent auditor should evaluate
the objectivity of the internal auditors. Relative to objectivity, the
independent auditor should

A. consider the organizational level to which internal auditors report.

B. review the quality control program in efect for the internal audit staf.
C. examine the quality of the internal audit reports.
D. consider the qualifications of the internal audit staf.
 MODULE 13

OTHER PROFESSIONAL SERVICES

PSA preface, PSRE, PSRS, PSAE –BASED QUESTIONS

1. The primary standards for assurance engagement other than audits or

reviews of historical financial statements are the:

A. Accounting and Review Services.

B. Philippine Standard on Assurance Engagement.
C. Generally Accepted Auditing Standards.
D. Philippine Standards on Review Engagement.

2. The objective of a review of financial statements is

A. to enable the auditor to express an opinion whether the financial

statements are prepared, in all material respects, in accordance with
Philippine financial reporting standards.
B. for the auditor to carry out procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have
agreed and to report on factual findings.
C. for the accountant to use accounting expertise, as opposed to
auditing expertise, to collect, classify: and summarize financial
information.
D. to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an
audit, anything has come to the auditor's attention that causes the
auditor to believe that the financial statements are not prepared, in all
material respects, in accordance with Philippine financial reporting
standards (negative assurance).

3. Performing inquiry and analytical procedures that provide the

accountant with a reasonable basis for expressing limited assurance
that there are no material modifications that should be made to the
financial statements in order for them to be in conformity with PFRS or
with other comprehensive basis of accounting is the definition of

A. compilation
B. audit
C. review
D. agreed-upon procedure

4. Engagement letter for review of financial statements least likely includes

A. the objective of the service being performed

B. the fact that the engagement cannot be relied upon to disclose
errors, illegal acts or other irregularities, for example, fraud 0r
defalcations that may exist
 C. a statement that an audit is not being performed and that an audit
opinion will not be expressed
D. the fact that 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 same material misstatements may remain undiscovered

5. Before performing a review of a non-public entity's financial statements,

an accountant should

A. make inquiries of the management

B. apply analytical review procedures to identify unusual fluctuations
C obtain a sufficient level of knowledge about accounting principles
and practices in the industry wherein the entity operates
D. inquire as to whether the management has significantly omit
disclosures in the financial statements

6. In planning a review of financial statements, the auditor should obtain

or update his knowledge of the business. Which of the following is not
one of this knowledge of the business?

A. Entity's organization
B. Nature of entity's assets, liabilities, revenues and expenses
C. Accounting system
D. Internal control

7. Which of the following is not used as a basis by the auditor in

determining the specific nature, timing and extent of review
procedures?

A. Assessed level of control risk

B. The extent to which a particular item is afected by management
judgment
C. The materiality of transactions and account balances
D. Any knowledge acquired by carrying out a review of the financial
statements of prior periods.

8. Which statement is incorrect regarding procedures and evidence

obtained in a review engagement?

A. The auditor should apply his judgment in determining the

specific nature, timing and extent of review procedures.
B. The auditor should apply the same materiality considerations as
would have been applied had an audit opinion on the financial
statements been expressed.
C. There is a greater risk that misstatements will not be detected in an
audit than in a review.
 D. The judgment as to what is material is made by reference to the
information on which the auditor is reporting and the needs of those
relying on that information, not to the level of assurance provided.

9. Which of the following is least likely done by the auditor in conducting

a review of financial statements?

A. Study of the relationships of the elements of the financial statements

B. Comparison of the financial statements with those statements of prior
periods
C. Comparison of the financial statements with anticipated results
and financial position
D. Comparison of inventory listing with physical inventory count

10. In a review of interim financial information of a publicly-held company,

the CPA is expected to have an understanding of all of the following
except the:

A. industry in which the client operates

B. client's internal control structure
C. nature of the entity's organization
D. entity's accounting practices

11. Which of the following procedures is not included in a review of

financial statements of a nonpublic entity?

A. Inquiries of management
B. Inquiries regarding events subsequent to the balance sheet date
C. Any procedures designed to identify relationships among data that
appear to be unusual
D. Communicating any material weaknesses discovered during the
study and evaluation of internal accounting control

12. Which of the following is generally more important in a review than

in a compilation?

A. Determining the accounting basis on which the financial

statements are to be presented
B. Gaining familiarity with the industry's accounting principles and
practices
C. Obtaining a signed engagement letter
D. Obtaining a signed representation letter

13. Which of the following procedures is ordinarily performed by a CPA in

a review engagement of a non-public entity?

A. Analytical procedures designed to test the accounting records by

obtaining corroborating evidential matter
B. Inquiries concerning entity's procedures summarizing transactions
 C. Analytical review designed to internal control
D. Inquiries of the entity's legal counsel concerning contingent liabilities

14. Which of the following should the auditor perform in a review

engagement?

A. Understand matters that are relevant to the financial statements

B. Understand the entity's internal control system
C. Observe the physical count of inventory
D. Inquire of legal counsel of pending litigations

15. The review of unaudited financial statements consists of:

A. infernal control evaluation and management representation

B. inquiry of management and documentation of internal controls
C. analytical procedures and compliance with laws and regulations
D. inquiry of management and analytical procedures

16. When performing a review of the financial statements of a non public

entity the CPA should:

A. obtain an understanding of internal control

B. inquire about actions taken at the meetings of stockholders and
board of directors
C. send letters of audit inquiry to attorneys
D. read the minutes of meetings of stockholder and board of directors

17. Which of the following is a major diference between a review and an

audit of the financial statements?

A. The scope of the procedures performed and the assurance provided.

B. The level of knowledge of professional standards needed to
perform the procedures.
C. The type of accounting used - reviews are typically on non-PFRS
accounting, while audits are based upon PFRS accounting.
D. The type of company involved in reviews may only be publicly-held.

18. Which of the following is not included in the scope, paragraph of a review
report?

A. A statement that a review is limited primarily to inquiries and

analytical procedures.
B. A reference to Philippine Standard on Auditing applicable to review
engagement.
C. A statement that the review included an evaluation of
reasonableness of accounting estimates made by management.
D. A statement that an audit has not been performed.
19. Where do you find the f0llowing paragraph?

… Nothing has come to our attention that causes us to believe that

the accompanying financial statements are not presented fairly, in all
material respects in accordance with generally accepted accounting
principles in the Philippines.

A. Opinion paragraph of an auditor's report

B. Opinion paragraph of a review report
C. Negative assurance paragraph
D. Scope paragraph of a review report

20. In a review engagement, if there has been a material scope limitation,

the auditor should describe the limitation in the review report and
either

A. express a qualification of the negative assurance or not issue any

assurance
B. express a qualification of the negative assurance provided or give
an adverse statement that the financial statements are not presented
fairly
C. express an adverse statement that the financial statements are not
presented fairly or the auditor does not issue any assurance
D. not modify the negative assurance or not issue an assurance

21. An accountant's standard report on a review of the financial statements

of a nonpublic entity should state that the accountant

A. does not express an opinion or any form of limited assurance on

the financial statements
B. is not aware of any material modifications that should be made to
the financial statements for them to conform with PFRS
C. obtained reasonable assurance about whether the financial
statements are free of material misstatement
D. examined evidence, on a test basis, supporting the amounts and
disclosures in the financial statements

22. A review report states that

A. a review includes assessing the accounting principles used and

significant estimates made by the management
B. a review includes examining on a test-basis.
C. the accountant is not aware of any material modifications that
should be made to the financial statements
D. the accountant does not express an opinion or any other form of
assurance

23. The statement that the reviewer "is not aware of any material
modification that should be made to the financial statements in order
for them to be in conformity with PERS" is known as:
 A. reasonable assurance
B. negligent performance
C. negative assurance
D. necessary ignorance

24. The professional accountants issued the following statement in their

report: ..., nothing came to our attention that caused us to believe that
the accompanying financial statements are not presented fairly,…

What is the nature of the report?

A. Special report on financial statements prepared under

comprehensive basis of accounting
B. Qualified audit report
C. Review report
D. Audit report-with limited reporting objective

25. The objective of an agreed upon-procedures engagement is for the

auditor to:

A. carry out procedures of an audit nature to which the auditor and the
entity and any appropriate third parties have agreed and to report on
factual findings
B. carry out procedures of a review nature to which the auditor and
the entity and any appropriate third parties have agreed and to report
on factual findings
C. carry out procedures of a review nature and to express limited
assurance based on those agreed procedures
D. carry out procedures of an audit nature and to express limited
assurance

26. According to PSRS, engagement to perform agreed-upon procedures,

the procedures employed in doing agreed-upon procedures are:

A. designed to enable the accountant to express a limited assurance

B. designed to enable the accountant to express a negative assurance
C. designed to enable the accountant to provide the identified
user(s) factual findings
D. less extensive than compilation procedures but more extensive
than review procedures

27. Rivera, CPA, has significant indirect financial interest on Mother

Corporation. Mother Corporation engaged Rivera to apply agreed upon
procedures on accounts .receivable and thereafter submits a Report of
Factual Findings to Discount Finance. According to Philippine Standards
on Auditing that applies to this engagement, Rivera:

A. should decline the engagement because of his lack of independence

 B. should convince Mother Corporation to change the engagement
to compilation due to his lack of independence
C. can accept the engagement, issue the Report of Factual Finding
and state in the report his lack of independence
D. perform agreed-upon procedures and withhold the findings due to
his lack of independence

28. Which of the following ethical principles governing the auditor's

professional responsibilities for agreed-upon procedures engagement is
not required of auditors?

A. Technical standards
B. Confidentiality
C. Integrity
D. Independence

29. Which of the following is incorrect about agreed-upon procedures

engagement?

A. An engagement to perform agreed-upon procedures may involve

the auditor in performing certain procedures concerning individual
items of financial data.
B. Users of the agreed-upon procedures report assess for themselves
the procedures and findings reported by the auditor and draw their
conclusion from the auditor's work.
C. The auditor should be independent of the financial data or financial
statements where agreed procedures have to be applied.
D. The report is restricted to those parties that have agreed to the
procedures to be preformed.

30. Which statement is incorrect regarding agreed-upon procedures?

A. Users of the report assess for themselves the procedures and

findings reported by the auditor and draw their own- conclusions from
the auditor's work.
B. The report is restricted to those parties that have agreed to the
procedures to be performed since others, unaware of the reasons for
the procedures, may misinterpret the results.
C. The auditor should conduct an agreed-upon procedures
engagement in accordance with PSA and the terms of the engagement.
D. Where the auditor is not independent, a statement to that efect
need not be made in the report of factual findings.

31. Matters to be agreed in an agreed-upon procedures engagement

include the following, except:

A. stated purpose of the engagement

B. limitations on distribution of the report of factual findings
C. anticipated form of the report and the level of assurance to be
provided
 D. nature, timing and extent of the specific procedures to be applied

32. The following procedures may be performed by CPAs engagement.

I. Consideration of internal control

II. Observation
III. Inquiry and analysis
IV. Inspection
V. Confirmation
VI. Obtaining management representation letter

Which of the foregoing may be performed by the auditor in an agreed-

upon procedures engagement?
A. II and VI only
B. I, II and VI only
C. II, III, IV and V only
D. II, Ill, IV and VI only

33. The report on an agreed-upon procedures engagement needs to

describe the purpose and the agreed-upon procedures on the
engagement in sufficient detail to enable the reader to understand the
nature and the extent of the work performed. The report of actual
findings should not contain:

A. addressee (ordinarily the client who engaged the auditor to

perform the agreed-upon procedures)
B. identification of the purpose for which the agreed-upon procedures
were performed
C. a description of the auditor's .factual findings including sufficient
details of errors and exceptions found
D. a statement that the procedures performed constitute an audit
and, as such, an opinion is expressed

34. A report for an agreed-upon procedure ordinarily includes:

A. Findings--Yes; Negative Assurance-- Yes

B. Findings--Yes; Negative Assurance—No
C. Findings--No; Negative Assurance—Yes
D. Findings--No; Negative Assurance—No

35. Which of the following report is for limited distribution?

A. Review Report
B. Compilation Report
C. Report of Factual Findings
D. Audit Report
36. An accountant may accept an engagement to apply agreed-upon
procedures to prospective financial statements provided that:

A. distribution of the report is limited to the specified parties involved

B. the prospective financial statements are also examined
C. the responsibility for the adequacy of the procedures performed is
taken by the accountant
D. negative assurance is expressed on the prospective financial
statements taken as a whole

37. Distribution of a report is always restricted when:

A. negative assurance is given

B. there is a positive expression of opinion
C. agreed-upon procedures have been performed
D. a review has been performed

38. Which of the following would not be appropriate to a report on an

engagement to apply agreed-upon procedures to specified financial
statement items?

A. indicate the intended distribution of the report

B. Provide an opinion on the specified elements, accounts, or items
C. Enumerate the procedures performed
D. State that the report relates only to the elements, accounts, or items
specified

39. Which of the following is not appropriate for the accountant's report on
the results of applying agreed-upon procedures to prospective financial
statements?

A. Express an opinion on the results of applying the agreed-upon

procedures.
B. Indicate the prospective financial statements reported on.
C. Specify that the use of the report is limited to certain user(s).
D. Indicate that the prospective results may not be achieved.

40. The report on agreed-upon procedures -engagement needs to describe

the purpose and the procedures that have been agreed upon in
sufficient details. The report should appropriately include Iii "title"

A. Report of Agreed-Upon Procedures.

B. Report of Factual Findings.
C. Report of agreed Procedures and Finding.
D. CPA's Report of Agreed-Upon Procedures.

41. Compilation is an example of which one of the following types of

services?

A. Auditing
B. Review
 C. Consulting
D. Accounting

42. A CPA has been, engaged to compile financial statements for a

nonpublic client. Which the following statements best describes this
engagement?

A. The CPA must perform the basic accepted auditing procedures

necessary to determine that the statements are in conformity with
PFRS
B. The CPA is performing an accounting services rather than an
examination of financial statements
C. The financial statements are representation of both
management and the CPA.
D. The CPA may prepare the statements from the books but may not
assist in adjusting and closing the books

43. A CPA who is not independent may issue a

A. compilation report
B. compilation report and review report
C. comfort letter
D. report of any type

44. Which statement is incorrect regarding compilation engagement?

A. This ordinarily entails reducing detailed data to a manageable and

understandable form without a requirement to test the assertions
underlying that information.
B. The procedures .employed are designed to enable the accountant to
express limited assurance on the financial information.
C. Users of the compiled financial information derive some benefit as a
result of the accountant's involvement because the service has been
performed with professional competence and due care.
D. In all circumstances when an accountant's name is associated with
financial information compiled by the accountant, the accountant
should issue a report.

45. When compiling financial information, the accountant is ordinarily

required to

A. obtain a general knowledge of the business and operations of the

entity
B. make any inquiries of management to assess the reliability and
completeness of the information provided
C. verify any matters
D. verify any explanations

46. Indicate whether the following procedures performed in an audit

engagement are also required when performing related services.
 A B C D
• Agreeing on the terms of
engagement Yes Yes Yes No
• Engagement planning Yes Yes Yes No
• Documentation Yes Yes No No
• Issuance of report Yes No No No

47. Which statement is incorrect regarding the procedures -performed in a

compilation engagement?

A. If the accountant becomes aware that information supplied by the

management is incorrect, incomplete, or otherwise unsatisfactory, the
accountant should consider performing appropriate procedures and
request the management to provide additional information.
B. The accountant should read the compiled in and consider whether it
appears to be appropriate in form and fro from obvious material
misstatements.
C. The Philippine financial reporting standards and any known
departures thereof should be disclosed within the financial information,
and their efects should be quantified.
D. The accountant should obtain an acknowledgment from the
management of its responsibility for the appropriate presentation of the
financial information and of its approval of the financial information.

48. If the accountant becomes aware of material misstatements, the

accountant should try to agree appropriate amendments with the entity.
If such amendments are not made and the financial information is
considered to be misleading, the accountant should

A. do nothing
B. withdraw from the engagement
C. issue a qualified or adverse opinion
D. issue a negative assurance

49. In performing a compilation of financial-statements, the accountant

feels that a modification of the standard report is not adequate to
indicate deficiencies in the financial statements taken as a whole, and
the client is not willing to correct the deficiencies. The accountant
should therefore

A. perform a review of the financial statements

B. issue a special report
C. withdraw from the engagement
D. express an adverse opinion

50. Reports on compilation engagements should contain the following,

except:
 A. a statement that the engagement was performed in accordance
with the PSAs applicable to compilation engagements
B. identification of the financial information indicating that it is
based on information provided by the management
C. a statement that the management is responsible for the financial
information compiled by the accountant
D. a statement that the accountant does not express an opinion but
expresses only a limited assurance on the financial statements

51. A compilation report should include all of the following except:

A. a statement that the compilation has been performed in

accordance with the Philippine Standards on Related Services
applicable to compilation
B. a statement that the financial statements are the representation
of the management
C. a statement that adequate disclosure has been made concerning
accounting policy and practice
D. a statement that the financial statement have not been audited or
reviewed

52. Which of the following statements should not be included in an

accountant's standard report based on the compilation of client's
financial statements?

A. The compilation was performed in accordance with the applicable

Philippine Standards on Related Services.
B. The accountant has not audited or reviewed the financial statements.
C. The accountant expresses only a limited assurance on the financial
statements.
D. The compilation is limited to representing in the form of financial
statements, information that is the representation of management.

53. The level of assurance that is provided by the CPA on a compilation report
is

A. low
B. high
C. moderate
D. none

54. An accountant's compilation report should state that

A. a compilation includes assessing the accounting principles used and

significant estimates made
B. a compilation is substantially less in scope than an audit
C. the accountant is not aware of any material modifications that
should be made to the financial statements
D. the accountant does not express an opinion or any form of
assurance on the financial statements
55. An accountant's compilation report on a financial forecast should
include a statement that the

A. compilation does not include an evaluation of the support of the

assumptions underlying, the forecast
B. hypothetical assumptions used in the forecast are reasonable
C. range of assumptions selected is one in which one end of the
range is less likely to occur than the other
D. prospective statements are limited to presenting, in the form of
a forecast, information that is the accountant's representation

56. On each page of the financial information or on the front of the

complete set of financial statements, the financial information compiled
by the accountant should contain a reference such as

A. "Unaudited"
B. "Compiled without Audit or Review"
C. "Refer to Compilation Report"
D. Any of the given choices

57. Each page of the financial statements compiled by an accountant

should include a reference such as

A. see accompanying accountant's footnotes

B. unaudited, see accountant's disclaimer
C. see accountant‘s compilation report
D. subject to compilation restriction

58. In an engagement to examine prospective financial information, the

auditor should obtain sufficient appropriate evidence as to whether:

1. The management's best-estimate assumptions on which the

prospective financial information is based are not unreasonable and, in
the case of hypothetical assumptions, they are consistent with the
purpose of, the information.
2. The prospective financial information is properly prepared on the
basis of the assumptions.
3. The prospective financial information is properly presented and all
material assumptions are adequately disclosed, including a clear
indication as to whether they are best-estimate or hypothetical
assumptions.
4. The financial information is prepared on a consistent basis with
historical financial statements, using appropriate accounting principles.

A. I, II, Ill and IV

B. I, II and III
C. I and ll
D. I, II and IV
59. An examination of a financial forecast is a professional service that
involves

A. compiling or assembling a financial forecast that is based on

management assumptions
B. limiting the distribution of the accountant's report to the
management and the board of directors
C. assuming a responsibility to update the management on key
events for one year after the report's date
D. evaluating the preparation of a financial forecast and the support
underlying management's assumptions

60. Forecast means a

A. financial information based on assumptions about events that may

occur in the future and possible actions by an entity
B. prospective financial information prepared on the basis of
assumptions as to future events which the management expects to
take place and the actions that the management is expected to take
as of the date the information is prepared (best-estimate assumptions).
C. prospective financial information prepared on the basis of
hypothetical assumptions about future events and management actions
which are not necessarily expected to take place.
D. prospective financial information prepared on the basis of a mixture
of best- estimate and hypothetical assumptions.

61. What is meant by a financial forecast under Philippine Standard on

Assurance Engagements?

A. A prospective, financial statement that predicts an expected

financial position, results of operations, and cash flows.
B. A prospective financial statement that is prepared on the basis of
assumptions as to future events which the management expects to
take place and the actions that the management is expected to take as
of the date the information is prepared.
C. A prospective financial statement that presents •an entity's
expected financial position, results of operations, and cash flows based
on one or more hypothetical assumptions.
D. A prospective financial statement that predicts an entity's expected
financial position, results of operations, and cash flows based on one or
more hypothetical assumptions.

62. Given one of more hypothetical assumptions, a responsible party may

prepare, to the best of its knowledge and belief, an entity's expected
financial position, results of operations, and changes in financial
position. Such prospective financial statements are most commonly
known as
 A. special purpose financial statements
B. financial projections
C. partial presentations
D. financial forecasts

63. Prospective financial information can include financial statements or

one or more elements of financial statements and may be prepared for
distribution to third parties in

A. a prospectus to provide potential investors with infc3rmation about

future expectations
B. an annual report to provide information to shareholders,
regulatory bodies and other interested parties
C. a document for the information of lenders which may include, for
example, cash flow forecasts
D. Any of the given choices

64. When prospective financial statements are prepared, the "responsible

party" is usually the

A. management
B. CPA who examines them
C. government entity that requires them
D. audit committee

65. Which statement is incorrect regarding the examination of prospective

financial information?

A. The auditor should not accept or should withdraw from an

engagement when the assumptions are clearly unrealistic or when the
auditor believes that the prospective financial information will be
inappropriate for its intended use.
B. The auditor and the client should agree on the terms of the
engagement.
C. The auditor should obtain a sufficient level of knowledge of the
business to be able to evaluate whether all significant assumptions
required for the preparation of the prospective financial information
have been identified.
D. The auditors need not obtain written representations from the
management regarding the intended use of the prospective financial
information, the completeness of significant management assumptions
and the management's acceptance of its responsibility for the
prospective financial information.

66. Prospective financial statements are for

A. general use
B. limited use only
C. either general or limited use
 D. use by internal management only

67. When an accountant issues on examination report on a financial

forecast, the report ordinarily should:

A. state that the forecast is presented in conformity with the

generally accepted accounting principles in the Philippines
B. provide an explanation of the diferences between an
examination and an audit
C. state that the accountant is responsible for events and
circumstances not to exceed one year after the report's date
D. disclaim an opinion on whether the assumptions provide a
reasonable basis for the projection

68. An auditor should not issue a report on

A. the achievability of forecasts

B. internal control
C. management performance
D. quarterly financial information

69. When the auditor believes that, the presentation and disclosure of the
prospective financial information is not adequate, the auditor should

A. express a qualified or adverse opinion in the report on the

prospective financial information
B. withdraw from the engagement
C. disclaim an opinion in the report on the prospective financial
information
D. either modify the opinion or withdraw from the engagement

70. When an accountant examines financial forecast that fails to disclose

several significant assumptions used to prepare the forecast, the
accountant should describe the assumptions in the accountant's report
and issue a (n)

A. qualified in a negative-assurance form of opinion

B. unqualified opinion with a separate explanatory paragraph
C. disclaimer of opinion
D. qualified or adverse opinion

71. Assurance services are independent professional services that improve

the quality of information or its

A. context
B. profitability
C. reliability
D. sufficiency
72. When an accountant performs more than one level of service,
generally should issue a report that is appropriate for:

A. the lowest level of service rendered

B. a compilation engagement
C. the highest level of service rendered
D. a review engagement
QUIZZERS

1. An auditor who was engaged to perform an examination of the financial

statements of a non-public entity has been asked by the client to refrain
from performing various audit procedures and changed the nature of
the engagement to a review of financial statements. The client made
the request because of the significant cost of completing the
examination. The auditor would most likely

A. qualify the auditor's report and refer to the scope limitation

B. view the request as an indication of possible irregularity
C. complete the examination in progress
D. grant the client request

2. The degree of certainty that the practitioner has attained and wishes to
convey is a (n)

A. assertion
B. conveyance
C. assurance
D. declaration

3. A practitioner who is performing an assurance engagement may ordinarily

report upon the subject matter or a (n):

A. assertion about the subject matter

B. control criterion
C. reliability statement
D. suitable criteria

4. Which of the following types of assurance engagements is similar to an

assurance provided by an audit of historical financial statements?

A. Assessment
B. Detailed review
C. Evaluation
D. Examination

5. Which of the following statements is true concerning interim financial

information?
A. An audit of interim financial information is required for SEC-
registered companies.
B. The accountant needs to obtain sufficient knowledge of the
entity's business and industry before undertaking an engagement on
interim financial information.
C. An accountant may not report on financial information presented
separately from the audited financial statements.
D. Interim financial information may not be included as part of a note
to audited financial statements.
6. What type of assurance is provided by an auditor when he issues a
review report?

A. Limited
B. Neutral
C. None
D. Positive

7. The circumstance most likely to make it impossible for a practitioner

to issue a review report is when the

A. criteria are only available to specified users

B. subject matter contains a departure from the criteria
C. company faces a going concern uncertainty
D. scope of the engag6ment has been significantly limited

8. The objective of a review of interim financial information is to provide

the CPA with a basis for

A. expressing a limited opinion that the financial information is

presented in conformity with generally accepted accounting principles
B. expressing a compilation opinion on the financial statements
C. reporting whether material modifications should be made to such
information to make it conform with generally accepted accounting
principles
D. reporting limited assurance to the board of directors only

9. Which of the following procedures is not appropriate to a review of

interim financial information?

A. Confirm cash balances with all banks and depositories.

B. Make inquiries concerning the accounting system and any
significant changes in the internal control structure.
C. Perform analytical procedures to identify and provide a basis for
inquiry about relationships and individual items that appear unusual.
D. Inquire about the actions taken on meetings of stockholders, the
board of directors, and committees of the board.

10. In a review engagement, the independent accountant's procedures

include:

A. examining bank reconciliation

B. confirming accounts receivable with debtors
C. reading the financial statements to consider whether they appear
to conform to PFRS
D. obtaining a letter of audit inquiry from all legal counsels
11. Which of the following procedures is not normally performed by the
accountant in a review engagement of a non-public entity?

A. Communicating any material weaknesses discovered during the

study and evaluation of internal accounting control.
B. Reading the financial statements to determine whether they are in
conformity with PFRS.
C. Writing an engagement letter to establish an understanding
regarding the services to be performed.
D. Issuing report stating that the review was performed.

12. Performing inquiry and analytical review procedures is the primary basis
for an accountant to issue

A. compilation reports
B. management advisory services report
C. review report
D. audit report

13. The use of negative assurance in an audit report on financial statements

A. is a violation of the standards of reporting

B. is encouraged by PSAs
C. helps in clarifying the degree of responsibility being assumed by the
auditor
D. is properly located in the opinion paragraph of the unqualified report

14. Claire, CPA, was engaged to review the financial statements of Emir
Company, a nonpublic entity. Evidence came to Claire's attention that
indicated a substantial doubt as to Emir's ability to continue as a going
concern. The principal conditions and events that caused the
substantial doubt have been fully disclosed in the notes to Emir's
financial statements. Which of the following statements best describes
Claire's reporting responsibility concerning this matter?

A. Claire is not required to modify the accountant's review report

B. Claire is not permitted to modify the accountant's review report
C. Claire should issue an 'accountant's compilation report instead of
a review report
D. Claire should express a qualified opinion in her review report

15. The objective of a review of the interim financial information: of a public

company is to

A. provide the accountant with a basis for expressing an opinion

B. estimate the accuracy of the financial statements based on
limited tests of accounting records
 C. provide the accountant with a basis for reporting to the board of
directors or shareholders
D. obtain corroborating evidence through inspection, observation,
and confirmation.

16. If requested to perform a review engagement for a non-public entity for

which the accountant has immaterial direct financial interest, the
accountant is:

A. not independent and, therefore, may issue a review report but not
an auditor's opinion
B. not independent and, therefore, may not issue a review report
C. not independent and, therefore, may not be associated with the
financial statements
D. independent because the financial interest is immaterial

17. An accountant is requested to issue a review report on the balance

sheet of a non-public entity but not on the other basic financial
statements. The accountant may not do so

A. because compliance to this request will result to an incomplete review

B. because compliance to this, request is a violation of ethical standards
C. if the scope has been restricted
D. if the review discloses material departure from PFRS

18. When providing a limited assurance that the financial statements of a

non-public entity requires no material modifications in order to present
them in accordance with PFRS, the accountant should

A. understand the system of accounting controls

B. test the accounting records that identify inconsistencies with the
prior year's financial statements
C. understand the accounting principles in the industry wherein the
business entity operates
D. develop an audit program

19. The statement that "nothing came to our attention which would indicate
that these statements are not fairly presented" expresses which of the
following?

A. Disclaimer of opinion
B. Negative assurance
C. Negative confirmation
D. Piecemeal opinion

20. Which of the following would not be included in a CPA's report based
upon a review of the financial statements?
 A. A statement that the review is in accordance with PSAs.
B. A statement that all information included in the financial
statements is the representation of management.
C. A statement describing the principal procedures performed.
D. A statement describing the auditor's conclusions based on the
results of the review.

21. In a review service where the client failed to follow PFRS, the accountant
is

A. not required to determine the efect of a departure if the

management has not done so, but that fact must be disclosed in the
report
B. required to determine the efect of a departure if the
management has not done so and that fact must be disclosed in the
report
C. not required to determine the efect of a departure if
management has not done so and that fact need not be disclosed in
the report
D. required to determine the efect of a departure if management
has not done so but, that fact heed not be disclosed in the report

22. The objective of a review of interim financial information of a public

entity is to provide an accountant with a basis for reporting whether

A. material modification in the financial statements should be made

to conform with PFRS
B. a reasonable basis exists for, expressing an updated opinion
regarding the financial statements that were previously audited
C. condensed financial statements should be included in a
registration statement.
D. the financial statements are presented fairly in conformity with PFRS

23. An accountant who reviews the financial statements should issue a

report stating that a review

A. is substantially less in scope than an audit

B. provides negative assurance that the internal control is
functioning as designed
C. provides only a limited assurance that the financial statements are
fairly presented
D. is substantially more in scope than a compilation

24. In a review engagement, if the CPA believes that the financial

statements lack a material disclosure that the management refuses to
Include, the CPA should

A. issue a qualified opinion

B. issue an adverse opinion
C. express only limited assurance
D. disclose this departure in a separate paragraph
25. Which of the following procedures would normally be included in the
review engagements?

A. Preparing a bank transfer schedule

B. Inquiring about related party transactions
C. Assessing the internal control structure
D. Perform cut-of tests

26. Which of the following procedures is ordinarily performed by CPA in a

review engagement of a non-public entity?

A. Verify changes in key account balances

B. Read the minutes of board of directors' meeting
C. Inspect the open purchase order file
D. Search for unrecorded liabilities

27. Before an independent CPA agrees to a change from an audit

engagement to a review engagement, he should consider the

I. Additional audit efort necessary to complete the engagement

II. Reason for the change in the terms of the engagement

A. Yes, Yes
B. Yes, No
C. No; Yes
D. No, No

28. If the CPA is not familiar with the specialized industry accounting
principles but plans to obtain certain level of knowledge, which of the
following engagements may be accepted?

I. Compilation
II. Review
III. Audit

A. I only
B. I and II only
C. All of the them
D. None of them

29. An accountant should perform analytical procedures in engagement to do

I. Audit
 II. Review
III. Compilation

A. Yes, Yes, Yes

B. No, Yes, No
C. Yes, Yes, No
D. Yes, No, No

30. Which of the following would not be included in a review engagement?

A. Obtaining a representation letter.

B. Considering whether financial statements conform with PFRS
C. Assessing control risk
D. Inquiring about subsequent events

31. Which statement is incorrect regarding the general principles on a

review engagement?

A. The auditor is not required to comply with the "Code of Professional

Ethics for Certified Public Accountants" promulgated by the Board of
Accountancy.
B. The auditor should conduct a review in accordance with PSRE 2400.
C. The auditor should plan and perform the review with an attitude of
professional skepticism, recognizing that circumstances may exist
cause the financial statements to be materially misstated.
D. For the purpose of expressing a negative assurance in the review
report, the auditor should obtain sufficient appropriate evidence
primarily through inquiry and analytical procedures to be able to draw
conclusions.

32. Which of the following is required to be performed in an audit but not

in a review engagement?

A. Complying with the Code of Professional

Ethics for Certified Public Accountants
B. Planning the engagement
C. Agreeing on the terms of engagement
D. Studying and evaluating internal control structure

33. An auditor's report would be designated as a special report when it is

issued in connection with which of the following set of financial
statements?

A. Financial statements for an interim period that are subjected to

a limited review
B. Financial statements that are prepared in accordance with a
comprehensive basis of accounting other than PFRS
C. Financial statements that purport to be in accordance with PFRS
but do not include a statement, of cash flows
 D. Financial statements that are unaudited and are prepared from a
client's accounting records

34. A CPA's report on applying agreed-upon procedures to prospective

financial statements always includes a (n):

A. disclaimer of opinion
B. adverse opinion
C. restrictions on its distribution
D. unqualified opinion

35. Clients sometimes engage auditors to perform a specified set of

procedures concerning an element of a financial statement. This type
of, engagement is called

A. individual account engagement

B. agreed-upon procedures engagement
C. assurance service
D. compliance audit

36. A CPA is not required to comply with the "Code of Professional Ethics for
Certified Public Accountants" when performing a(n):

A. review
B. agreed-upon procedures
C. compilation
D. None of the choices given

37. An accountant's compilation report should be dated as of the date of

A. completion of fieldwork
B. completion of the engagement
C. transmittal of the compilation report
D. the latest subsequent event referred to in the notes to the
financial statements.

38. Which of the following would not be considered an attestation

engagement?

A. A compilation of financial statements

B. A letter to an underwriter
C. A report on the application of an accounting principle
D. A report on financial statements that are prepared on a
comprehensive basis of accounting other than PFRS
39. An accountant has been asked to compile the financial statements of a
nonpublic company that omit substantially all the disclosures required
by generally accepted accounting principles. The accountant may issue
a compilation report if

A. the report indicates the lack of disclosures

B. the absence of disclosure is not, to the CPA‘s knowledge intended
tomislead the users of the financial statements
C. the financial statements are intended primarily for management
purposes only
D. all of the given conditions are met

40. You own Garter, Inc., which manufactures wooden tables. You need to
hire some accountants to prepare your monthly financial statements.
The preparation of your financial statements is referred to as a(n):

A. audit
B. compilation
C. review
D. special report

41. A compilation report is not required when compiled financial statements

are expected to be used by:

A. management only
B. management and third parties
C. third parties only
D. a compilation report is required whenever financial statements are
compiled.

42. Which of the following is not an assurance form of report?

A. Compliance
B. Compilation
C. Examination
D. Review

43. Which of the following procedures is normally performed in connection

with a compilation engagement?

A. Making a risk assessment

B. Making inquiries of management concerning actions taken at the
board meetings
C. Applying analytical review procedures
D. Reading the financial statements for obvious mistakes in the
application of accounting principles

44. An accountant who is not independent may issue a

 A. compilation report
B. review report
C. comfort letter
D. qualified opinion

45. When a CPA compiles a non-public entity's financial statements that

omit substantially all disclosures required by PFRS; the CPA should
indicate in the compilation report that the financial statements are

A. restricted for internal use only

B. not to be given to financial institutions for the purpose of obtaining
credit
C. compiled in conformity with other comprehensive basis of accounting
D. not designed for those who are not informed of the omitted
disclosures

46. When an independent CPA assists in preparing the financial statements

of a publicly-held entity but has not audited or reviewed them, the CPA
should issue a disclaimer of opinion. In such situations, the CPA has
no responsibility to apply any procedures beyond

A. documenting that the internal control is not being relied on

B. reading the financial statements for obvious material misstatements
C. ascertaining whether the financial statements are in conformity with
PFRS
D. determining whether management has elected to omit
substantially all the required disclosures

47. When reporting on financial statements prepared on a comprehensive

basis of accounting other than generally accepted accounting
principles, the independent auditor should include in the report a
paragraph that

A. states that the financial statements are not intended to be in

conformity with generally accepted accounting principles
B. states that the financial statements are not examined in
accordance with generally accepted auditing standards
C. refers to the authoritative pronouncements that explain, the,
comprehensive basis of accounting being used
D. justifies the comprehensive basis of accounting being used.

48. Which of the following is not a type of special report?

A. A report for a company that uses the cash basis of accounting

B. A report on a financial presentation prepared in compliance with
the forms of a debt agreement
C. A report for the board of directors on the company's internal control.
D. A report with an opinion on whether a company's accounts
receivable and cash follow PFRS.
49. A comfort letter is typically sent to whom and for what reason?

A. Banks when a company is applying for a loan

B. The Board of Directors of a company on a report on internal control
C. The underwriters of a company's securities to assist them in their
reasonable investigation of a registration statement
D. Company management indicating the types of procedures
performed during the audit and general findings

50. Which statement is correct regarding report on a component of

financial statements?

A. This type of engagement may be undertaken as a separate

engagement or in conjunction with an audit of the entity's financial
statements.
B. In determining the scope of the engagement, the auditor need not
consider those financial statement items that are interrelated and which
could materially afect the information on which the audit opinion is to
be expressed.
C. The auditor's examination will ordinarily be less extensive than if
the same component were to be audited in connection with a report on
the entire financial statements.
D. When an adverse opinion or disclaimer of opinion on the entire
financial statements has been expressed/the auditor Mc& report on
components of the financial statements even if those components are
so extensive as to constitute, a major portion of the financial
statements.

51. Which statement is incorrect regarding report on compliance with

contractual agreements?

A. The auditor must not be requested to report on an entity's

compliance with certain aspects of contractual agreements, such as
bond indentures or loan agreements.
B. Engagements to express an opinion as to an entity's compliance
with contractual agreements should be undertaken only when the
overall aspects of compliance relate to accounting and financial matters
within the scope of the auditor's professional competence.
C. When there are particular matters forming part of the engagement
that are outside the auditor's expertise, the auditor would consider
using the work of an expert.
D. The report should state whether, in the auditor's opinion, the entity
has complied with the particular provisions of the agreement.

52. Which of the following statements is incorrect regarding report on

summarized financial statements?
 A. Unless the auditor has expressed an audit opinion on the financial
statements from which the summarized financial statements were
derived, the auditor should not report on summarized financial
statements.
B. Summarized financial statements are presented in considerably less
detail than annual audited financial statements.
C. Summarized financial statements need to be appropriately titled in
order to identify the audited financial statements from which they have
been derived.
D. Summarized financial statements contain all the information
required by the financial reporting framework used for the annual
audited financial statements.

53. The auditor's report on summarized financial statements least likely

include

A. an identification of the audited financial statements from which the

summarized financial statements were derived
B. a reference to the date of the audit report on the general-purpose
financial statements and the type of opinion given in that report
C. an opinion as to whether the information in the summarized
financial statements is presented fairly, in all material respects
D. a statement which indicates that for a better understanding of an
entity's financial performance and position and of the scope of the audit
performed, the summarized financial statements should be read in
conjunction with the general- purpose financial statements and the
audit report thereon

54. Which of the following best describes the auditor's responsibility for
"other information" that, is included in the annual report to stockholders
which contains financial statements and the auditor's report?

A. The auditor has no obligation to read the "other information"

B. The auditor has no obligation to corroborate the "other information"
but should read "other information" to determine whether it is
materially inconsistent with the financial statements
C. The auditor should extend the examination to the extent necessary
to verify the "other information"
D. The auditor must modify the auditor's report to state that the "other
information" is not audited or "not covered by the auditor's report"

55. Comfort letters are ordinarily signed by the

A. independent auditor
B. client
C. client's lawyer
D. internal auditor

56. An auditor has been engaged to audit a set of financial statements that
were prepared on a cash basis. The auditor
 A. must ascertain that there is a proper disclosure of the fact that the
cash basis of accounting has been used, the general nature of
material items omitted, and the net efect of the omissions
B. may not be associated with statements that are not in accordance
with PFRS
C. must render a qualified report explaining the departure from PFRS in
the opinion paragraph
D. must restate the financial statements on an accrual basis and then
issue the standard report.

57. Which of the following statements concerning prospective financial

statements is correct?

A. Only a financial forecast would normally be appropriate for limited use

B. Only a financial projection would normally be appropriate for general
use
C. Any type of prospective financial statements would normally be
appropriate for limited use
D. Any type of prospective financial statements would normally be
appropriate for general use

58. Accepting an engagement to examine an entity's financial projection

most likely would be appropriate if the projection were to be distributed
to

A. all employees who work for the entity

B. potential stockholders who request a prospectus or a registration
statement
C. a bank with which the entity is negotiating for a loan
D. all stockholders of record as of the report date

59. Which of the following services is not normally performed in connection

with prospective financial statements?

A. Examination
B. Review
C. Agreed-upon procedures
D. Compilation

60. If a CPA has both compiled and reviewed the financial statements of a
nonpublic entity the CPA should issue:

A. a compilation report only

B. both a review and compilation report
C. a combination review and compilation report
D. a review report only

61. Which of the following represents the highest to lowest level of auditors
in the assurance or even no assurance provided by auditors in the
performance of the engagement?
 A. An audit; a compilation; a review.
B. A compilation; a review; an audit.
C. A review; an audit; a compilation.
D. An audit; a review; a compilation.

62. Which statement is incorrect regarding special purpose audit

engagements?

A. Before undertaking a special purpose audit engagement, the

auditor should ensure that there is agreement with the client as to the
exact nature of the engagement and the form and content of the report
to be issued.
B. To avoid the possibility of the auditor's report being used for
purposes for which it was not intended, the auditor may wish to indicate
in the report the purpose for which the report is prepared and any
restrictions on its distribution and use.
C. When requested to report in a prescribed format, the auditor should
consider the substance and wording of the prescribed report.
D. The auditor need not consider whether any significant
interpretations on an agreement on which the financial information is
based are clearly disclosed in the financial information.

63. A comprehensive basis of accounting comprises a set of criteria used in

preparing financial statements which applies to all material items and
which has substantial support. Other comprehensive financial reporting
frameworks may include the following, except

A. a conglomeration of accounting conventions devised to suit

individual preference
B. that one used by an entity to prepare its income tax return
C. the cash receipts and disbursements basis of accounting
D. the financial reporting provisions of a government regulatory agency

64. The CPA is asked to audit financial statements prepared on a modified

cash basis. This is acceptable provided the CPA

A. converts the financial statement to an accrual basis before

rendering an audit report
B. qualifies the audit opinion due to a departure from PFRS
C. issues an adverse opinion
D. states clearly in the audit report that fairness was evaluated within
the framework of the other basis rather than PF
 SIMULATED EXAMINATION I

1. The subject matter of auditing consists of:

A. Assertions.
B. Established criteria.
C. Evidence.
D. Written reports.

2. A typical objective of an operational audit is for the auditors to

A. determine whether the financial statements fairly present the entity's

operations.
B. evaluate the feasibility of attaining the entity's operational objectives.
C. make recommendations for improving performance.
D. report on the entity's relative success in attaining its profit maximization.

3. Which one of the following best describes the assurance process?

A. Proving the accuracy of the books and records

B. Gathering evidence about specific and known assertions
C: Assisting management in the successful operations of the company
D. Assembling and filing tax returns and related supplemental information

4. Which one of the following is an example of management expectations

for independent auditors?

A. An expert providing a written communication as the product of the

engagement
B. Individuals who perform day-to-day accounting functions on behalf of the
company
C. An active participant in management decision making
D. An internal source of expertise on financial and other matters

5. Public accountants are not prohibited from providing which of the

following services for public audit clients
A. audits of the efectiveness of internal controls
B. the function of the internal auditors
C. selection and implementation of an accounting information system
D. quarterly financial statement bookkeeping

6 Assurance services involve allot the following except:

A. Improving the quality of information for decision purposes.

B. Improving the quality of the decision model used
C. Improving the relevance of information.
D. Implementing a system that improves the processing of information.

7. In forming an opinion on the financial statements.

A. the auditor should evaluate the conclusions drawn from the audit
evidence obtained during the course of the audit
B. the auditor evaluates whether there is a reasonable assurance about
whether the financial statements are free from any misstatements
C. the auditor evaluates whether sufficiently appropriate audit evidence has
been obtained to eliminate the risk of material misstatements
D. the auditor verifies that all errors that misstate the financial
statements have been corrected by the client

8. If the auditor encounters circumstances that lead him to conclude that

compliance with a specific requirement results to financial statements that
are misleading the auditor:
A. considers the need to appropriately modify the auditor's report
B. does not need to modify the report.
C. needs to issue qualified opinion
D. needs to disclaim his opinion

9. An expectation of the public is that the auditor will recognize that the
primary users of audit services are:

A. the employees
B. the Securities and Exchange Commission
C. the investors and creditors
D. the board of directors

10. Which of the following represents a situation in which an auditor is

reasonably independent of the client?

A. The auditor is paid by the client organization rather than the users of
the financial statements.
B. The auditor takes a personal loan from the president of the company.
C. The auditor's dependent son holds 25 shares of the client's common stock.
D. The auditor has not received payment for the previous audit services.

11. A CPA firm is considered independent when it performs which of the

following services for a publicly traded audit client?

A. Serving as a member of the client's board of directors.

B. Determining which accounting policies will be adopted by the client.
C. Accounting information system design and implementation.
D. Tax return preparation as approved by the board of directors.

12. The following are factors that a professional accountant should use the
basis of his acceptance of an assurance engagement, except:
A. The auditor believes that a conclusion based on suitable criteria can be
expressed.
B. The subject matter is identifiable.
C. The conclusion can be meaningful to the intended user of the report of
the practitioner.
D. The likelihood that the conclusion to be expressed always support', the
assertion
of the responsible party.

13. Which of the following represents a procedure the auditor may use
because plausible relationships .among financial" statement balances ore
expected to exist?

A. Attributes testing
B. Enterprise risk assessment
C. Inherent tests of control
D. Analytical review

14. An auditor compares expenses as a percent of sales to expectations.

This is an example of:

A. ratio analysis
B. trend analysis
C. internal control analysis
D. vertical analysis

15.Management's responsibility for the financial statements is

A. implicitly represented in the auditors standard report.

B. Explicitly represented in the opening paragraph of the auditor‘s standard
report.
C. Explicitly represented in the responsibility of the management
paragraph of the auditors standard report.
D. Explicitly represented in the opinion paragraph of he auditor: standard
report.

16.What is the primary purpose of efective internal control in or organization?

A. Achievement of certain organizational goals.

B. Completion at a successful audit for the entity.
C. Shareholder involvement in the company's success
D. Obtaining profitability and financial strength.

17. Which of the following is not a major emphasis in the design a

efective internal control?

A. Assets are property protected.

B. Duties are segregated.
C. Transactions are authorized.
D. Processes are efficient.
18.Which one of the following is the most relevant factor in assessing the
control risk of a computerized environment?

A. Computerized environments provide management with efective

replacement controls
B. Computerized accounting systems enhance efficiency for users
C. An auditor's method of testing the efectiveness of the system controls is
the same in a computerized system as in a mantic II system
D. The control risk over computerized accounting systems must be
assessed during planning

19. What is the overriding objective of the international Auditing Standards

that are issued by the International Auditing Practice Committee of the
International Federation of Accountants?

A. To improve the uniformity of auditing practices and related services

throughout
the world.
B. To override a country's regulations governing the audit of
financialstatements.
C. To replace the generally accepted auditing standards.
D. To provide a uniform application of specific audit procedures that are
acceptable worldwide.

20. Individual CPAs, Firms or Partnerships of CPAs, including partners mid

staf members thereof shall register with the BOA and the PRC. IIII
application for registration of Ocampo and Co., CPAs was approved on July
31, 2006, the registrant should apply for the renewal on or before:

A. Sept. 30, 2008

B. Dec. 31, 2009
C. Dec. 31, 2008
D. July 31, 2008

21. Management's assertions in the financial statements are of relevant to

the audit process because:

A. they embody the procedures that will be performed by the audit team
B. they include representations of financial statement in accordance with
the applicable reporting criteria
C. they provide evidence that -auditors have prepared financial
statements in accordance with GAAP
D. they relate to regulator's expectations about audit results

22. To establish the validity of account balances and transactions relating to

recorded amounts, auditors may resort to:

A. vouching
B. tracing
C. representing
D. footing

23. The assertion of existence can be audited directionally by considering

balances and transactions from:

A. recorded amounts to evidence regarding the source

B. evidence regarding the source to recorded amounts
C. general ledgers to trial balances
D. all of these choices

24.Which of the following types of audits are most similar?

A. Operational audits and compliance audits

B. Independent financial statement audits and operational audits
C. Compliance audits and Independent financial statement audits
D. Internal audits and independent financial statement audits

25.Which of the following best represents an auditor's responsibility for fraud?

A. Auditors are only required to find securities fraud
B. Auditors defer to management to discover the extent of fraud
C. Auditors are required to discover misstatements resulting from
material fraud D. Auditors are required to seek out and find all fraud,
regardless of its magnitude

26. An auditor will most likely estimate the tolerable failure rate in order
to:

A. determine which type of sampling approach to use

B. calculate the probable control risk
C. determine the population to be tested
D. determine the appropriate sample size

27. How many CPE credit units must be accumulated by a registered

accounting professional within the three-year period coinciding the renewal
of a CPA's registration?

A. 90 credit units
B. 60 credit units
C. 40 credit units
D. 20 credit units

28. For a company with strong internal control over receivables, the
distinguishing feature of the audit use of positive confirmations in contrast to
negative confirmations is:

A. the population sampled

B. the involvement of the client in the confirmation process
C. the type of information included
D. the volume of confirmations returned

29. Auditors test management's estimates of an asset's impaired value

through reference to all of the following except:

A. inquiry of fixed asset personnel

B. evidence of fair market value
C. estimated cash flow
D. financial plans

30. The auditor may determine that fixed assets that should have been
capitalized as assets have been recognized as expenses during the period
under audit by testing:

A. assets for impairment

B. repairs and maintenance expenses
C. depreciation expense
D. useful lives of assets

31. The product of inherent risk and control risk is assessed as low. How
would an auditor with this assessment most likely test depreciation expense?

A. As a ratio of total assets

B. As a percent of sales
C. By recomputing all depreciation figures
D. By fagging and tracing transactions through the system

32. Misstatements that are found during an audit and aggregated at the
conclusion of the audit for further consideration by the auditor for their
impact on the financial statements typically include:

A. those material items that have been proposed by the auditor for
adjustment and accepted by the client
B. those of an immaterial magnitude that have been passed by the
auditor until the completion of the audit
C. Those of a material nature that have been ignored by the auditor due to
the risk
of sampling error
D. those of immaterial amounts that were not documented by the auditor
because
they ore of an inconsequential matter to the audit

33. The application of due professional care means that the auditor work
conforms with all of the following except:

A. Current auditing standards as promulgated by Auditing and Assurance

Standards Council.
B. The work that a reasonably prudent auditor would have performed
in the same situation.
C. The work that would have been performed by a reasonable person
who was not necessarily trained in auditing.
D. The work is at least equal to that which had been performed on the
audit engagement during the preceding year.

34. The second standard of fieldwork requires the auditor to do all of the
following except

A. Understand the business and its environment.

B. Understand the risks related to financial reporting
C. Perform analytical procedures to identify potential misstatements in
the financial statements
D. Obtain an understanding of internal control and potential 'weaknesses in
controls.

35.Which of the following is incorrect regarding professional competence?

A. Professional accountants may portray themselves as having the

required expertise or experience they do not possess
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence requires initially a high
standard of general education.
D. The maintenance of professional competence requires a continuing
awareness
of development in the accountancy profession

36. Balboa, a senior auditor, is the - team leader of the audit team assigned
in the audit of HCB Company. His first assignment as audit assistant was the
audit of inventory of NCB Company. Since then, he has been a member, and
far the last 5 years, the in- charge of the team for the audit of HCB. What
kind of threat to independence, if any, has been created by the foregoing
fact?

A. Advocacy threat.
B. Self-interest threat.
C. Self-review threat.
D. Familiarity threat.

37. What kind of threat to independence most likely occurs when any
product or judgment of a previous assurance engagement or non
assurance. engagement needs to be re-evaluated in reaching conclusions on
the assurance engagement or when a member of that, assurance team was
previously a director or officer of the assurance client, or was an employee in
a position to exert direct and significant influence over the subject matter of
the assurance engagement?

A. Self-interest threat
B. Advocacy threat
C. Self-review threat
D. Familiarity threat.
38.Which of the following is prohibited by the Code of Professional Ethic for
CPAs?

A. Use of a firm name which includes the name of a retired partner.

B. Announcement in a newspaper of the opening of a public
accounting firm. C Engaging, in civic activities during business
hours.
D. Accepting an engagement or employment which one cannot reasonably
expect

to complete or discharge with professional competence.

39.The example(s) of circumstances that may create self-interest threat

include

A. Charging contingent fees relating to an assurance engagement.

B. A direct financial interest or material indirect financial interest in an
assurance client.
C. A loan or guarantee to or from an assurance client or any of it directors or
officers.
D. All of these create self-interest threat.

40. Jennifer Gomez, CPA, forgot to test a client's assessment of goodwill

impairment during an audit. Such an act is probably an example of:

A. ordinary negligence
B. due diligence
C. reckless professional behavior
D. fraud

41.Similar to auditors in the CPA realm, internal auditors also strive to possess:

A. independence
B. Objectivity.
C. Competence.
D. All of these choices.

42 In the auditor's responsibility paragraph of the audit report, the use of

the term "misstatements" conveys that the auditors are responsible to each
for

A. minor misstatements.
B. significant Misstatements.
C. fraudulent misstatements.
D. all misstatements.

43.The appropriate date for the audit report is one on which the

A. client's fiscal year ends.

B. auditor and client entered into a contract.
C. client management approves the audited financial statements.
D. auditor types and delivers the report to client.
44. A responsibility of the auditor and opinion qualification can be issued
only when the auditor

A. is not independent.
B. is not able to accumulate all the evidence required by generally
accepted auditing standards.
C. has accumulated all the evidence required by generally accepted auditing
standards.
D. has been restricted by the client from gathering inc needed
information and the possible efect of such a limitation requires a
disclaimer of opinion .

45. A qualified opinion is appropriate when the auditor is satisfied that

the overall financial statements are

A. fairly stated
B. materially misstated
C. misleading
D. fairly stated, even though there is an immaterial exception

46.Analytical procedures are used

A. to set materiality limits.

B: to assess the reasonableness of financial statement amounts.
C. to provide direct evidence about the numbers in the financial statements.
D. to test internal controls.

47. The risk that material misstatements have occurred in transactions

entering the accounting system is

A. audit risk.
B. inherent risk.
C. control risk.
D. detection risk.

48. In the audit risk model, if an auditor wanted to keep audit risk at a low
level, but there was a great inherent risk of material Misstatement and the
internal control was inefective, then procedures would need to be designed
so that
A. detection risk was at a low level.
B. detection risk was at a high level.
C. control risk was at a low level.
D. inherent risk was at a high level.

49.Physical observation by an auditor would include

A. examination of a soles invoice.

B. recalculation of depreciation.
C. examination of securities certificates.
D. scanning the accounts for unusual transactions.

50.When qualified or adverse opinion is issued, the qualifying paragraph is

inserted

A. between the introductory and scope paragraphs.

B. before the opinion paragraph.
C. after opinion paragraph, as last paragraph.
D. immediately otter the address, as the first paragraph.

51. If the auditor believes there is minimal likelihood that the resolution of an
uncertainty will have a material efect on the financial statements. the
auditor would issue a(n)

A. qualified opinion
B. unqualified opinion
C. adverse opinion
D disclaimer of opinion

52. How is the responsibility of the practitioner afected by an involvement

of an expert in an assurance engagement?

A. The practitioner should always refer to the work of the expert in his report.
B. The practitioner should divide the responsibility between him and the
expert.
C. The auditor should have an understanding of the aspects of the subject
matter for which the expert has used, sufficient to enable the practitioner
to accept responsibility for the conclusion on subject matter being
expressed.
D. The practitioner should first obtain a level at knowledge of the business,
sufficient to at least equal the expertise of the expert, so that he can review
the results of the work at the expert.

53.The concept of materiality is not used by auditors as d guide to

A. planning the audit program.

B. evaluation of the evidence.
C. application of general standards.
D. making decisions about the audit report.

54.Inherent risk is not a characteristic of the

A. client's business.
B. substantive procedures.
C. major types of transactions.
D. efectiveness of the client's accountants.

55. Which of the following risks is entirely a quality criterion based on

professional judgment?
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

56. Misstatements must be compared to some measurement base before

a decision can be made about the materiality of the failure to follow GAAP. A
commonly accepted measurement base would be

A. net income.
B. total assets.
C. working capital.
D. all of the given choices.

57.The only unqualified reports which use modified wordings are those
involving

A. the use of other auditors.

B. material uncertainties.
C. substantial doubt about going concern.
D. lack of consistent application of GAAP.
58.Financial statement assertions include ail of the following except:

A. occurrence.
B. presentation and discios6re.
C. consistency and comparability.
D. completeness.

59. Which of the following types of evidence will be gathered in order to test
internal controls?

A. Confirmation: of accounts receivable with customers.

B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.

60. If, when performing analytical procedures, an, auditor observes that
operating income has declined significantly between the preceding year and
the current year, the auditor should next:

A. require that the decline be disclosed in the financial statements.

B. consider the possibility that the financial
statements may be materially misstated.
C. inform management that a qualified opinion on the financial statements
will be necessary.
D. determine management's responsibility for the decline and discuss the
issue with the audit committee.
61.The purpose of analytical procedures in these audit planning stage is to

A. aid in planning the observation of physical inventory.

B. identify unusual circumstances that the auditor may need investigate
further. C.
flag individual transactions for further review.
D. determine whether sales transactions were approved.

62. Which of the following is not a change that afects consistency and
-therefore does not require an explanatory paragraph?

A. Change in accounting principle, such as a. change from weighted-average to

FIFO.
B. Change in reporting entity, such as the inclusion of an additional
company in the combined financial statements.
C. Change in an accounting estimate, such as a decrease in the life of
an asset for depredation purposes.
D. Correction of errors by changing from non-GAAP to GAAP.

63. When there is a subsequent discovery of omitted procedures, although

the financial statements are fairly presented, the auditor may not have met
due diligence requirements. The auditor:

A. is under no obligation to perform addition audit procedures.

B. must contact the client and perform the omitted procedures
C. must notify the SEC of the omitted procedures.
D. immediately resign from the engagement.

64. A statement in a report such as "Nothing came to our attention that is

would lead us to question the fairness of the presentations" is referred to as
a(n):

A. unqualified opinion.
B. disclaimer of opinion.
C. negative assurance.
D. positive assurance.

65.In a financial statement audit, management is responsible for the following

except:

A. the financial statements.

B. for establishing and maintaining internal control.
C. for meeting budget projections.
D. for assuring compliance with laws and regulations.

66.Contingent fee based pricing of accounting services is:

A. Always strictly prohibited in public accounting practice.

B. Allowed in an engagement to corner financial statements..
C. Not prohibited if associated with report based agreed-upon procedures.
D. Always considered an act discreditable to the profession.

67. Adequate planning and design of an audit is necessary for an audit to

restrict which type of component of audit risk?

A. Control risk.
B. Detection risk.
C. Sufficiency risk.
D. Inherent risk.

68. Prior to beginning the field work on a new audit engagement in which a
CPA does not possess expertise in the industry in which the client operates,
the CPA should

A. reduce audit risk by lowering the preliminary levels of materiality

B. Design special substantive tests to compensate for the lack industry
expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain a knowledge of matters that relates to the nature of the entity's
business.

69. An auditor anticipates of assessing control risk at a low level in

computerized environment. Under these circumstances, on which the
following procedures would the auditor initially focus?

A. Output control procedures.

B. General control procedures.
C. Application control procedures.
D. Program control procedures.

70.Engagement risk is, influenced by the risks associated with the following,
except:
A. The sufficiency and appropriateness of the evidence likely to be available.
B. The nature and extent of the process used to collect and evaluate
evidence. C.
The identified user of the assurance engagement report.
D. The nature and form of the subject matter.

71. Discussions with the owner-manager of an audit client reveal to the

auditor that the company is more concerned with minimizing their income
tax payments than maximizing income. Based on this information, which
management assertion will the auditor be concerned about verifying with
regard to sales revenue?

A. Existence and occurrence.

B. Completeness
C. Rights and obligations.
D. Valuation.
72. Which of the following primary assertions is satisfied when an au
observes the client's physical count of inventory
A. Valuation
B. Completeness
C. Existence
D. Rights and obligations

73.Which of the following acts are considered fraudulent?

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance
V. Clerical mistakes.

A.III only
B. I and Ill only
C. I, Ill, and IV only
D. All the given acts are fraudulent

74. Which of the following statements best represents the reason

auditors prepare engagement letters to be signed by their clients?

A. They provide documentation of management's responsibility the financial

statements.
B. They document the audit fees and deadlines that have agreed upon with
their clients.
C. They communicate and clarify the expectations responsibilities of both the
client and the auditor.
D. They help to limit auditor liability in the event of misunderstandings.

75.Which of the following series of steps represent the correct sequence of

evidence as represented in the audit testing hierarchy?

A. risk assessment, tests of controls, tests of details, substantive analytical

procedures.
B. risk assessment, tests of controls, substantive analytical procedures, tests of
details.
C. tests of controls, risk assessment, tests of details, substantive analytical
procedures.
D. tests of controls, risk assessment, substantive • analytical procedures,
tests of details.

76. Professional skepticism dictates that when management makes a

statement to the auditors, the auditors should

A. Disregard the statement because such a statement will be overruled

by external evidence.
B. Corroborate the evidence with other supporting documentation whenever
possible.
C. Ask the client management to put it in a form of board resolution.
D. Accept the statement at its face value because the management has no
reason
to put itself in shameful misrepresentation.
77. Philippine Standards on Auditing require the auditors to assess the risk
of material misstatements due to fraud

A. for every audit

B. for first-time audits
C. sufficient to find any frauds which may exist
D. whenever it would be appropriate

78.Which of the following conditions supports an increase in detection risk?

A. internal control over cash receipts is excellent

B. Application of analytical procedures reveals a significant increase in sales
revenue in December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is
weak. D. Study of the business reveals that the client recently acquired a
new company in
an unrelated industry.

79.An auditor obtains knowledge about a prospective client's business and

industry to:

A. identify areas of specific risk to the engagement.

B. determine whether the client's management is sufficiently trustworthy to
justify accepting the engagement.
C. make preliminary judgments about material misstatements in the
client's financial statements.
D. document weaknesses in the client's internal control.

80.Inspection of tangible assets provides evidence for which assertion?

A. Existence and occurrence.

B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.

81. The auditor has assessed the level of control risk (together with the
assessed level of inherent risk) to determine the acceptable level of
detection risk for financial statement assertions for receivable account
balances. As the acceptable, level of detection risk decreases, which of the
following adjustments to the accounts receivable audit program would the
audit team normally make?

A. Change the, nature of substantive tests to less efficient procedures,

such as using negative rather than positive confirmations.
B. Change the timing of the confirmation process to an interim date.
C. Increase the sample size of the accounts for confirmations.
D. Change the sampling method from random to convenience sampling.
82. An auditor determines that the management integrity is high, the risk of
account misstatements is low, and the client's information system is fellable.
Which of the following conclusions can be reached regarding the need to
perform direct tests of account balances?

A. Direct tests should be limited to material account balances, and the

extent of testing should be sufficient to corroborate the auditor's
assessment of low risk.
B. Direct tests of account balances are not needed..
C. Direct tests of account balances are necessary if audit risk was set at a
low level, but are not necessary if audit risk was set at a high level.
D. Direct tests should be performed on all account balances to independently
verify the correctness of the financial statements.

83.A lest of an asset for overstatement provides corresponding

evidence on: Expense RevenueLiability

A. Overstatement Overstatement Understatement
B. Understatement Overstatement Overstatement
C. Understatement UnderstatementUnderstatement
D. Overstatement Overstatement Overstatement

84. Which of the following best describes the auditor's responsibility' for,
detecting financial reporting fraud versus detecting a defalcation?
A. There is more responsibility for detecting financial reporting fraud because
audits are designed to look for financial misstatements.
B. The auditor is responsible for detecting financial reporting fraud only if it is
material but he is responsible for detecting all defalcations caused by a
known deficiency in the client's internal control.
C. The auditor is responsible for detecting material misstatements to the
financial statements; thus there is no diference in the responsibility of
detecting financial reporting fraud or - a defalcation as long as they are
material.
D. The auditor is responsible for detecting financial reporting fraud of
any amount if collusion and red flags are present.

85.Fraudulent companies will prepare financial statements that materially

misleading by doing all of the following except

A. understate revenues and assets:

B. understate expenses and liabilities.
C. show financial performance better than industry average.
D. have performance exactly meet announced targets.

86. A program for understanding the client's inherent risk and contra would
not include the procedure to:

A. understand economy and industry with which the client opera

B. study previous year audit documentation.
C. evaluate the competence and independence of the internal auditors.
D. obtain written representation from the client concerning collectability of
receivables.

87. A management representation letter is prepared on each engagement

for which of the following primary reasons?

A. It clearly documents the audit procedures that were performed by the

auditors.
B. It further acknowledges that management is responsible for fraud
Contained in the financial statements.
C. It provides the auditor with comfort that the client has integrity and is
not misleading the engagement team.
D. It clarifies certain matters included in the letter and documents them for
the auditor as further evidence from the client.

88. A company issues preferred stock. Which of the following will the auditor
evaluate for disclosure purposes in the financial statements relating to the
outstanding shares of preferred stock?

A. Liquidation preference
B. Fair market value
C. Number of shareholders of record
D. Dividends per share ratio

89. Which of' the following statements is (are) correct regarding the auditor's
use of materiality as if applies to a financial statement audit?

A. The auditor is required to report all incidences of material fraud to the

audit committee.
B. There is no diference between the peso amount of planning materiality
when searching for a defalcation versus .searching for financial reporting
fraud.
C. The auditor must consider qualitative factors such as whether senior
management is involved in determining the materiality of fraud.
D. All of the statements are correct.

90.Which of the following would not be considered a motivation to commit

fraud?

A. Personal financial problems.

B. Stock compensation program.
C. Inefective internal controls.
D. Tight debt covenants.

91. The likelihood of assessing control risk too high is the risk that sample
selected to test controls
A. does not support the auditor's planned assessed level of control risk
when the true operating efectiveness of the control justifies such an
assessment.
B. contains misstatements that could be material to the financial
statements when aggregated with misstatements in other account
balances or transaction classes.
C. contains proportionately fewer deviations from prescribed controls than
what exist in the balance or class or a whole.
D. does not support the tolerable misstatement for some or all of
management's assertions.

92. When an incoming auditor becomes aware of certain material

misstatement in the prior period's comparative financial statements on
which the predecessor auditor previously issued unmodified report, the
incoming auditor should

A. Modify the opening paragraph by referring to the predecessor auditor,

the type of opinion issued and the date of the report
B. Restate the financial statements of the prior period
C. Discuss the matter with the management and, after having obtained
management's authorization, contact the Predecessor auditor and propose
thatthe prior period financial statements be restated.
D. Obtain management's authorization for the revision of the prior year's
financial statements and include an emphasis of matter paragraph to
describe si tch o revision mode

93.What is the reason for ensuring that every copy of a vendor's invoice has
a receiving report?

A. To ascertain that merchandise billed by the vendor Was received by the

company.
B. To ascertain that the merchandise received by the company was billed
by the vendor.
C. To ascertain that the invoice was correctly prepared:
D. To ascertain that a check was prepared for every invoice.

94 Which of the following is not done -by an auditor when obtaining an

understanding of an entity's internal control?

A. Identification Of the types of potential misstatements that can occur.

B. Consideration d the operating-efectiveness of the internal controls.
C. Designation of substantive tests
D. Consideration of factors that afect the risk of material misstatements.

95. The auditor attempts to determine the operation of the accounting

system by tracing one or few transactions through the accounting system.
This procedure is referred to as

A. tracing.
B. tests of controls.
C. vouching.
D. a walk-through.

96. A diference of opinion regarding the results of a sample cannot be

resolved between the, assistant who performed the auditing procedures and
the in-charge auditor. The assistant should

A. Refuse to perform any further work on the engagement.

B. Accept the judgment of the more experienced in-charge auditor.
C. Document the disagreement and ask to be disassociated from the
resolution of
the matter.
D. Notify the client that a serious audit problem exists.

97.When providing consulting services, the CPA acts primarily as a(n):

A. independent accountant.
B. expert on compliance with industry standards.
C. technology specialist
D. objective advisor on the use of information.

98. The Primary deliverable of an engagement to perform based on

procedures prescribed by the intended user of the report is (are):

A. the financial statements

B. The Review Report
C. Report of Factual Findings
D. Management Letter

99.A review engagement difers in scope as compared to an audit due to:

A. the subject matter of the service

B. the quantity and type of evidence obtained
C. ethical requirements with respect to independence
D. the users of the financial statements

100.An internal auditor's report to management will typically include:

A. An opinion paragraph.
B. Issues and findings.
C. A commitment to implement solutions.
D. All of these choices.
 SIMULATED EXAMINATION 2

1. Which of the following best describes the reason why on independent

auditor reports on financial statements?

A. A management fraud may exist and it is more likely to be detected by

independent auditors
B. Diferent interests may exist between the company preparing the
statements and the persons using the statements
C. A misstatement of account balances may exist and is generally corrected
as a result of the independent auditor's work
D. A poorly designed internal control system may be in existence

2. Operational auditing refers to the study of business operations for the

purpose of making recommendations for which of the following?

A. Economic and efficient resources

B. Compliance with rules and regulations.
C. Attesting to the fairness of the financial statements.
D. All of the above

3. The accuracy of information that is included in the footnotes that

accompany the audited financial statements of a company whose shares are
traded on a stock exchange is the primary responsibility of the:

A. stock exchange officials.

B. management.
C. lead engagement partner.
D. Securities and Exchange Commission.

4. When the professional' accountant has obtained sufficient appropriate

evidence to be satisfied that the subject matter is plausible in the
circumstances, he or she can provide what level of assurance?

A. Positive
B. High
C. Moderate
D. Absolute

5. The auditor's responsibility in an audit engagement is limited to:

A. Expression of an opinion on the financial statements.

B. Expression of an opinion on the financial statements and adequacy of
summary
or accounting policies ad other notes.
C. Opinion issued and faire of presentation of financial statements
D. Expression of opinion and inclusion of supplementary information, if
necessary.
6. The existence of audit risk is recognized by the statement in the scope
paragraph auditor‘s responsibility of the auditor's standard report that the

A. auditor is responsible for expressing an opinion on the financial statements.

B. financial statements are presented fairly, in all material respects, in
conformity with PFRS.
C. audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
D. auditor obtains reasonable assurance about whether the financial
Statements are free of material misstatements.

7. Which of the following is, explicitly cited in the Revised Accountancy Law IRA
9298)?

A. The Professional Regulation Commission has the authority to replace any

member of the Board of Accountancy for negligence, incompetence, or any
other just cause
B. Insolvency is a ground for proceedings against a CPA
C. A person shall be considered to be in the professional practice of
accounting if, as an officer in a private enterprise, he makes decisions
requiring professional accounting knowledge
D. After .three years, subject to certain conditions, the Board of Accountancy
may order the reinstatement of a CPA whose certificate of registration has
been revoked

8. Which of the following is not a requisite in applying for the CPA

licensure examinations?

A. Natural-born citizen-of the Philippines

B. Good moral character
C. Holder of the degree of Bachelor of Science in Accountancy
D. Has not been convicted of any criminal ofense involving moral turpitude

9. Individual CFAs, Firms Cr Partnerships of CPAs, including partners and

staf, members thereof shall register with the BOA and the PRC. If the
application for registration of Arnaldo & Associates, CPAs was approved on
May 10, 2006; the registration will aspire on

A. September 30, 2008

B. December 31, 2008
C. December 31, 2009
D. May 10, 2009

10. Which of the following was a modification made to the iFAC Code to
consider Philippine regulatory requirements and circumstances?

A. The period for rotation of the lead engagement partner was changed front
seven to five years
B. Advertising and solicitation, by individual professional accountants in
public practice is allowed in the Philippines
C. When a professional accountant performs services in a country other
than the home country, the professional accountant should always adhere
to the ethical requirements of the country in which services are being
performed
D. When a professional accountant .performs services in a country
other than the home country, the professional accountant should
always adhere to the ethical requirements of the home country

11.To which principle does the following relate?

"The intended user needs to have confidence that the profession

accountant hat no. interest that creates an unacceptable risk of bias with
respect to the subject matter‖

A. Confidentiality.
B. Integrity
C. Professional competence and due care
D. Objectivity

12.Which of the following is most likely a violation of the Code of Ethics?

A. The professional accountant in public practice bills a client a fee, lower

than what previously has been charged for similar services
B. The professional accountant makes a representation that specific
professional services in the current or future periods will be performed for a
stated fee if it is likely at the time of representation that such fee will be
substantially increased
C. The professional accountant in public practice is the one who determines
the appropriate billing rates of each professional staf engaged in performing
services
D. The professional accountant agrees to the client's proposal for a
professional fee that is dependent to the number of service hours
rendered

13.Which of the following acts may potential create a self-review threat?

A. Providing advices on accounting principles for audit clients

B. Determining journal entries without obtaining the approval of audit client
C. Assisting an audit client in resolving account reconciliation
D. Drafting the notes .to the financial statements for audit client

14.Which of the following types of loan granted to a member of the

assurance Team by an assurance client that is a -bank is mostly a potential
threat to independence?
A: Car loan
B. Credit card balance
C. Clean loan
D. Home-mortgage loan
15. The criteria are the standards or benchmarks used to evaluate the
subject matter of an assurance engagement. Among the following criteria,
which one is the least objective?

A. Philippine financial reporting standards governing the preparation of

financial statements
B. Specific agreements in a contract
C. Control policies-and procedures
D. Efectiveness and efficiency in carrying out operating procedures

16. How is the auditor's report on the financial statements that require final
approval by stockholders before 'such financial statements are issued
publicly dated?

A. The auditor's report should be dated coinciding the date of approval of

the financial statements by the stockholders
B. The auditor's report should be dated after the approval of the financial
statements by the stockholders
C. The date of the auditor's report coincides the date of approval of the
financial statements by the board of directors
D. The audit report should be dual dated, the first date coinciding the
approval by the board of directors and the second date to coincide with
the approval by The stockholders

17. In pursuing its quality control objectives with respect to independence, a

CPA -firm may use policies and procedures such as

A. Emphasizing independence in mental attitude in firm training 'programs

and in supervision and review of work
B. Prohibiting employees from owning shares of stock of publicly traded
companies
C. Suggesting that employees conduct their banking transactions with banks
that do not maintain accounts with client firms
D. Assigning employees 'who may lack independence to research positions
that do
not require participation in' field audit work

18. Which of the following is an element of a CPA firm's quality control

system that should be considered in establishing its qualify control policies
and procedures?

A. Complying with laws and regulations

B. Using statistical sampling techniques
C. Assigning personnel to engagements
D. Considering audit risk and materiality

19. Before the practitioners rely on the work of the expert, he should obtain
sufficient appropriate evidence that the work of the expert is adequate by
considering the following, except:
A. the reasonableness and significance of the expert's findings in relation to
the objective of the engagement and the conclusion on the subject matter
B. the professional competence, experience and objectivity of the expert
C. the findings of the expert support the assertion issued by the party
responsible to the subject matter
D. the reasonableness of the assumptions, methods and source data
used by the expert

20. Which of the following is an invalid reason why an auditor cannot issue
an absolute assurance?

A. Most audit evidences ore conclusive rather than persuasive

B. The inherent limitations of any accounting and internal control system.
C. Audit is based on testing
D. Audit procedures that are efective in detecting ordinary
misstatements are inefective in detecting intentional misstatements.

21. The audit procedures deemed necessary in the circumstances to achieve

the objective of the audit refer to:

A. audit program
B. audit objective
C. substantive procedures
D. scope of an audit

22.In which of the following would the judgment of the auditor be most
critical?

A. Verification of the authenticity of the transfer certificate of title

B. Classifying whether a liability is current or long-term
C. Verification of the cut-of of transactions
D. Assessing the reasonableness of the estimates made by management

23. Which of the following does not require the auditor to send a new
engagement letter?

A. An indication that the client misunderstands the objective and scope of the
audit
B. A change of engagement from higher to lower level of assurance
C. A recent change in the engagement
D. Legal requirements and other government agencies‘ pronouncements

24. An auditor who agreed for a change in the type of engagement from
higher to lower level of assurance, should issue the report based on the
revised engagement

A. but should discuss in a separate paragraph the reason for the change
B. and should always refer to any procedures that should have been
performed in
the original engagement
C. and should -qualify the opinion due to scope limitation
D. and should omit reference to the original engagement

25. Which of the following is an appropriate reason why the auditor

considers the professional competence of assistants whom the work will be
delegated?

A. To assure that the assistants will be objective.

B. To have reasonable assurance that such work will be performed with due
care by the audit assistant.
C. To efectively reduce the working paper documentation
D. To eliminate detection risk

27. Detection of noncompliance, regardless of materiality, requires

considerations of the following:

I. Integrity of management.
II. Possible efect on other aspects of the audit.
III. Legal determination of the act of non-compliance.
A. A, B, C
B. A, B
C. A, C
D. C

27. The auditor should perform the following risk assessment procedures to
obtain an understanding of the entity and its environment, including its
internal control, except:
A. inquiries of management and others within the entity
B. inquiries of the entity‘s external legal counsel or of valuation experts
that the entity has used
C. analytical procedures
D. observation arid inspection

28. Which the following distinctions between general audit objectives and
specific audit objectives for each account balance is correct?

A. The general audit objectives are applicable to every account balance on

the financial statements
B. The specific audit objectives are applicable to every account balance on
the financial statements
C. The general audit objectives are stated in terms tailored to the engagement
D. The specific audit objectives are stated in. terms tailored to the engagement

29.The risk that the audit will fail to uncover a material misstatement is
eliminated

A. it‘s a client has strong internal controls.

B. if a client follows Philippine financial reporting standards (PFRS).
C. when the auditor has complied with generally accepted auditing standards
(GAAS).
D. under no circumstances

30.What is the relationship between materiality and the level of control risk?

A. Direct
B. Parallel
C. Inverse
D. Positive

31.Which of the following statements about internal control is correct?

A. Internal control system refers to all the Policies and procedures

adopted by, the management of an entity to assist in eliminating
material errors but not fraud
B. A strong environment, by itself, ensures the efectiveness of the
internal control system
C. The internal control system is confined to those matters which relate
directly to the functions of the accounting system
D. In the audit of financial statements, the auditor is only concerned with
those policies and procedures within the accounting and internal control
system that are relevant
to the financial statements

32. When obtaining an understanding of the accounting and internal control

system the auditor may trace a few transactions through the accounting
system. This technique is:

A. internal control review

B. test of transactions
C. walk-through test
D. validity test

33. Which of the following least likely afects the nature, timing, and extent
of the procedures performed by the auditor to obtain an understanding of the
accounting and internal control system of an audit client

A. Materiality considerations
B. The expected level of detection risk
C. The auditor‘s assessment of inherent risk
D. The complexity of the accounting process

34.Which of the following is incorrect about internal control?

A. Accounting and internal control system provides the management with
reasonable assurance that organizational objectives are to be achieved
B. One of the inherent limitations of accounting and internal control systems
is that the possibility that the procedures may become inadequate due to
changes in conditions, and compliance with procedures may deteriorate.
C. Most internal controls tend to be directed at routine transactions.
D. Management should not consider the costs of the accounting and
internal control systems because such a consideration makes the system
inefective.

35.Which statement is incorrect regarding the nature of tests of controls?

A. As the planned level of assurance increases, the auditor seeks more

reliable audit evidence
B. Those controls subject to testing by performing Inquiry combined with
inspection or re-performance ordinarily provide more assurance than those
controls for which the audit evidence consists solely of inquiry and
observation
C. The absence of misstatements detected by a substantive procedure
provides audit evidence that controls related to the assertion being tested
are efective
D. A material misstatement detected by the auditor's procedures that was
not identified by the entity ordinarily is indicative of the existence of a
material weakness in internal control.

36.Which statement is incorrect regarding the extent of tests of controls?

A. The auditor designs tests of controls to obtain sufficient appropriate

audit evidence that the controls operated efectively throughout the
period of reliance
B. The more the auditor relies on the operating efectiveness of controls in
the assessment of risk, the lesser is the extent of the auditor's tests of
controls
C. If the rate of expected deviation is too high, the auditor may determine
that tests
of controls for a particular assertion may not be efective
D. Because of the inherent consistency of IT processing, the auditor may not
need
to increase the extent of testing, of an automated control

37. When would an auditor typically not perform additional tests of a

computer systems controls?

A. When the assessed level of control risk is at a minimum

B. When computer controls appear to be strong and risk is at a minimum
C. When controls appear to be weak
D. When inherent risk is at a maximum

38. The evaluation of deviations that were observed upon completing the
tests of controls:
A. May require the need for doing more extensive understanding of control.
B. may require more extensive tests of controls.
C. may not require modification of the nature, timing, and extent of the
planned substantive procedures.
D. requires a documentation of the basis of assessment of control risk if
the assessed level of control risk is assessed at the maximum.
39.Which of the following statement is true?
A. If the auditor assesses the level of control risk at the maximum, no
documentation of the reason is necessary
B. If the auditor assesses the level control risk at less than maximum, no
documentation of the reason is necessary
C. If the auditor assesses the level of control risk at the maximum,
documentation of the reason is necessary
D. All of the given choices

40.Which of the following is appropriate about risk assessment?

A. The assessed level of inherent and control risk can be sufficiently low,
thus resulting to eliminating the need for substantive tests
B. There is an inverse relationship between detection risk and the
combined level of inherent and control risks
C. Audit risk may be more appropriately determined by assessing inherent
and control risk 'separately
D. Detection risk is eliminated if an auditor were to examine 100 percent of
the account balance or class of transactions

41.The audit risk model consists of: AR = IR x CR x DR

The detection risk is the dependent variable. What is the acceptable level of
detection risk if the assessed level of Inherent risk is Medium and the Control
risk is Low?

A. Highest
B. Lower
C. Medium
D. Higher

42. Which of the following should the auditor not consider of having
specialized CIS skills in an audit?

A. The auditor needs to obtain a sufficient understanding of the accounting

and internal control system afected by the OS environment
B. The auditor needs to determine the efect of the CIS environment on the
assessment of overall risk and of risk at the account balance and class of
transactions level
C. The need of the auditor to make analytical procedures during the
completion stage of the audit
D. Design and perform appropriate tests of controls and substantive
procedures

43. Which of the following characteristics of CIS environment should the

auditors be least concerned?

A. Lack of segregation of functions

B. Cost-benefit relationships
C. Lack of transaction trails
D. Access control.
44. Which of the following is least likely a risk characteristic associated with
CIS environment?

A. Error embedded in an application's program logic maybe difficult to

manually detect on a timely basis.
B. The separation of functional responsibilities diminishes ir
a computerized environment
C. Initiation of changes in the master file is exclusively handled by respective
users
D. The potential unauthorized access to data or to alter them without
visible evidence maybe greater

45. Which of the following is not one of the auditor's motor concerns when
he has to make a documentation of the internal control in a computerized
environment?

A. The organizational structure of the client's CIS activities

B. The access controls
C. The significance and complexity of computer processing in each
significant accounting application
D. The use of software packages instead of customized software

46.Which of the following is not an advantage of a computerized accounting

system?

A. Computers process transactions uniformly

B. Computers help alleviate human errors
C. Computers can process many transactions quickly
D. Computers leave a thorough audit trail which can be easily followed

47.A common difficulty in auditing a computerized accounting system is:

A. Data can be erased from the computer with no visible evidence

B. Because of the lack of an audit trail, computer systems have weaker
controls and more substantive testing is required
C. Because of the uniform, nature of transaction processing, computer
systems have strong controls and less substantive testing is required
D. The large dissemination of entry points into the computer system
leads to weak overall reliance on information generated by a computer

48. Which of the following should the auditor least consider in determining
the significance of service organization activities to the client and its
relevance to the audit?

A. The control policies and procedures of the client in requiring that all
payments for goods and services be supported by receiving reports
B. The client's internal controls that are applied to the transactions
processed by the service organization
C. The material financial statement assertions that are afected by the use of
the service organization
D. Terms of contract and relationship between the client and the service
organization

49. When the auditor considers that the service organization activities are
significantly relevant to the audit and he concludes that it would be efficient
to obtain evidence from tests of controls, such evidence may be obtained by,
except:

A. visiting the service organization

B. performing tests of the client‘s control over activities of the service
organization
C. reviewing the service contract between the client and the service
organization
D. obtaining a service organization auditor‘s report that expresses an opinion
as to the operating efectiveness of the service organization‘s accounting
and internal control systems for the processing applications and internal
control systems for the processing applications relevant to the audit

50. Which of the following statements about the existence and completeness
objectives are not true?

A. The existence and completeness objectives emphasize opposite audit

concerns
B. Existence deals with overstatements and completeness deals with
understatements
C. Existence deals with understatements and completeness' deals with
overstatements
D. The completeness objective deals with unrecorded transactions

51.In testing for cutof, the objective is to determine

A. whether all of the current period's transactions are recorded

B. that no transactions from the prior period are included in I current period's
balances
C. that no transactions of the current period have been delayed a recorded
in a future period.
D. whether the transactions are recorded in the proper period

52. The determination of the appropriate sample size based on t tolerable

deviation rate in a test of control procedure relates to

A. sufficiency.
B. relevance.
C. validity.
D. appropriateness.

53. Which of the following least likely afect the sufficiency of the
appropriate audit evidence?
A. Nature of the accounting and internal control systems
B. Materiality of the item being examined
C. Source and reliability of information available
D. The type of sampling approach - statistical or judgmental

54. Which of the following statements that relate to the persuasiveness of

audit evidence is invalid?

A. The audit evidence obtained directly by the auditor is more reliable

than that one provided by the client management
B. The oral representation by the dent management is invalid evidence
C. The efectiveness of accounting and internal control adds to the
reliability of internal audit evidence
D. While internal audit evidence is considered to be acceptable, the
auditor usually prefers audit evidence from external sources

55. The following statements are discussions about financial' assertions and
audit evidence. Which of them is (are) correct?

I. When substantial doubt as - to a material financial statement assertion

exists, the auditor likely attempts to obtain sufficient appropriate audit
evidence to remove
such doubt
II. The difficulty and cost involved are valid basis for omitting a necessary
procedure Ill. In obtaining audit evidence, the auditor needs to consider
the relationship between the cost of obtaining it and its usefulness
IV. When there are inconsistent evidences provided by two diferent sources,
the auditor may need to modify his audit opinion

A. II,III, IV
B. I, III
C. II, IV
D. I, III, IV

56.The three major categories of documentary audit evidence are:

1. Documentary audit evidence created by third-parties and held by the

client entity.
2. Documentary audit evidence created and held by third parties.
3. Documentary audit evidence created and held by the client entity.

A. 1, 3, 2
B. 3, 1, 2
C. 2, 1, 3
D. 2, 3, 1

57. The inspection of property and equipment primarily relates to which

financial assertion?

A. ownership
B. Valuation
C. Completeness
D. existence

58. If the reported sales for 2007 erroneously include sales that occurred in
2008, the assertion that caused misstatements on the 2007 financial
statements would be:

A. occurrence
B. Valuation or allocation
C. completeness
D. presentation and disclosure

59.The completeness assertion would be violated if:

A. fictitious sales transactions were included in accounts receivable

B. the allowance for doubtful accounts was understated
C. unbilled shipments had occurred during the period
D. disclosures in the statements of pledged receivables were inadequate

60. According to Philippine Standards on Auditing, the auditor's responsibility

for failure to detect fraud arises

A. when such failure clearly results from failure to comply with generally
accepted auditing standards.
B. whenever the amounts involved are material.
C. only when the examination was specifically designed to detect fraud.
D. only when such failure clearly results-from negligence so gross as to
sustain an inference of fraud on the part of the auditor.

61. If an auditor believes a client may have committed illegal acts, which of
the following actions should the auditor take?

A. Consult with that the client's counsel and the auditor's counsel to
determine how
the suspected illegal acts will be communicated to the stockholders
B. Extend auditing procedures to determine whether the suspected illegal
acts have
a material efect on the financial statements
C. Make inquiries of the clients management and obtain an understanding
of the circumstances underlying the acts and of other evidence to 'determine
the efects of such acts on the financial statements
D. Notify each member of the audit committee of the board at directors
about the nature of the acts and request that they advise an approach to be
taken by the auditor

62. An audit program should be sufficiently detailed to provide all of the

following except:

A. Evidential support for the audit opinion.

B. An outline of the work to be done.
C. A record of the work performed.
D. A basis for controlling the audit

63.The primary purpose of the audit working papers is to:

A. Provide an evidence of compliance with auditing standards.

B. Provide management with an independent copy of financial records.
C. Provide a protection against litigation.
D. Document the deficiencies in client's policies and procedures.

64.Early substantive testing of account balances is done only when

A. the client has a natural business year.
B. evidence indicates efective control policies and procedures.
C. Internal control structure is weak.
D. The primarily substantive approach is taken.

65.Test of details of balances generally tend to be the

A. most costly, and least efective audit procedures.

B. most costly, and most efective audit procedures.
C. least costly, yet most efective audit procedures.
D. least costly, and least efective audit procedures.

66. Which of the following analytical procedures, might highlight a

possible overstatement or understatement of a balance in an expense
account? Compare:

A. gross margin percentage with previous year

B. individual expenses with previous year
C. inventory turnover ratio with previous year
D. individual asset and liability balances with previous year

67. The test of details of balances, when .applied by the auditor to

examine rent and lease expense for- capitalized leases, would satisfy the
audit objective of

A. Existence
B. detail tie-in
C. presentation and disclosure
D. classification

68. Negative confirmation of accounts receivable is less efective than

positive confirmation of accounts receivable because

A. A majority of recipients usually lack the willingness to respond objectively.

B. Some recipients may report incorrect balances that require extensive follow-
up.
C. The auditor cannot infer that all non-respondents have verified their
account information.
 D. Negative confirmations do not produce evidential matter that is
statistically quantifiable.

69. Which of the following circumstances would most likely cause an auditor
to suspect that material fraud exists in a client's financial statements?

A. Property and equipment items are usually sold at a loss before

being fully depreciated.
B. Significantly fewer responses to a positive confirmation requests are
received than what is expected.
C. Monthly bank reconciliations usually include several in-transit items.
D. Clerical errors are listed on an CBIS-generated exception report.

70. Auditor's examine invoices for accounts such as repairs and

maintenance primarily to determine whether

A. expenditures for fixed assets have been 'recorded in the proper period
B. expenditures have been improperly authorized
C. noncapitalized expenditures have been properly expensed
D. expenditures that were expensed should have been capitalized

71. When auditing-contingent liabilities, which of the following procedures

would be least efective?

A. Reading the minutes of the board of directors' meetings.

B. Reviewing the bank confirmation letter.
C. Examining customer confirmation replies.
D. Examining invoices for professional services.

72. When obtaining an evidence regarding litigation against a client, the CPA
would be least interested in determining

A. An estimate of when the matter will be resolved.

B. The period in which the underlying cause of the litigation occurred.
C. The probability-of an unfavorable outcome
D. An estimate of the potential loss.

73. Banaue Company is an affiliate of the audit client and is audited by

another firm of auditors. Which of the following is roost likely to be used by
the auditor to obtain assurance that all guarantees of the affiliate's
indebtedness have been detected?

A. Send the standard bank confirmation request to all the client's lender
banks. B. Review client minutes and obtain representation letter.
C. Examine supporting documents for all entries in intercompany accounts.
D. Obtain written confirmation of indebtedness from the auditor of the affiliate.
74. Which of the following subsequent events will be least likely to result an
adjustment to the financial statements?

A. Culmination of events afecting the realization of accounts receivable

owned as
of the balance sheet date.
B. Culmination of events afecting the realization of inventories owned as ot
the balance sheet date.
C. Material changes in the settlement of liabilities which were estimated
as of the balance sheet date.
D. Material changes in the quoted market price of listed investment
securities since
the balance sheet date.

75. An auditor is concerned with completing various phases of the

examination after the balance sheet date. This "subsequent period" extends
to the date of the:

A. auditor's report.
B. final review of the audit working papers.
C. issuance of the financial statements to the users.
D. delivery of the auditor's report to the client.

76. Which of the following material events occurring subsequent to balance

sheet date would require an adjustment to the financial statements?

A. Sale of long-term debt or capital stock.

B. Loss of a plant as a result of a flood.
C. Major purchase of a business which is expected to double sales volume.
D. Settlement of litigation, in excess at the recorded liability.

77. Selena, CPA, is preparing an audit program for the purpose of

ascertaining the occurrence of subsequent events that may require
adjustment or disclosure essential to a fair presentation of the financial
statements in conformity with the Philippine financial reporting standards.
Which one of the following procedures would be least appropriate for this
purpose?

A. Confirm, as of the completion of the fieldwork, those accounts

receivable that have increased significantly from the year-end date.
B. Read the minutes of the board of directors' meetings.
C. Inquire of management concerning events which may have occurred.
D. Obtain a lawyer's letter as of the completion of fieldwork.

78. An auditor's decision concerning whether or not to "dual date" the audit
report is based upon the auditor's willingness to

A. extend auditing procedures.

B. accept responsibility for subsequent events.
 C. permit inclusion of a footnote captioned event (unaudited)
subsequent to the date of the auditor's report.
D. assume responsibility for events subsequent to the issuance of the
auditor's report.

79. As part of an audit, a CPA often requests a representation letter tram

the client. Which one of the following is not a valid purpose of such a letter?

A. To provide audit evidence.

B. To emphasize to the client the auditor's responsibility for the fairness of
the financial statements.
C. To satisfy himself by means of other auditing procedures when certain
customary auditing procedures are not performed.
D. To provide possible protection to the CPA against a charge of knowledge
in where fraud is subsequently discovered have existed in the accounts.

80. The risk that the auditor gives an unqualified audit opinion when the
financial statements are materially misstated refers to

A. Audit risk
B. Inherent risk
C. Detection risk
D. Control risk

81. Which of the following disagreements with the management may

potentially cause the auditor to disclaim his opinion?

A. Acceptability of accounting policies

B. Method of application of accounting principles
C. Omission of certain required disclosures in the financial statements.
D. Refusal of the client management for the auditor‘s observation of
physical inventory count

82.The auditor's report may be appropriately addressed to

the dients: Board of Directors Stockholders Audit Committee

A. Yes Yes Yes
B. Yes No Yes
C. Yes Yes No
D. Yes No No

83. Which of the following is not explicitly included in the paragraph of

the auditor's report?

A. Financial reporting framework

B. Reasonable assurance
C. Generally accepted auditing standards
D. Assessment of accounting estimates

84.The term present fairly, in all material respect," means:

A. the financial statements conform with PFRS.

B. The auditor considers only those matters that are material to the
financial statements.
C. The financial statements may still be materially misstated because the
auditors
may not have discovered the errors.
D. The financial statements are accurately Prepared.

85. When the auditor concludes that the financial statements are presented
fairly in material respects, in accordance with the identified financial
reporting framework, he should issue:

A. Standard unqualified opinion

B. Qualified opinion
C. Disclaimer of opinion
D. Unqualified opinion with explanatory paragraph

86. In which of the following situations does an auditor need to issue an

unqualified opinion?

A. A significant doubt about the ability of the company to continue as a

going concern; such concern is adequately disclosed by the entity in the
notes to financial statements.
B. A limitation of the scope of the audit the possible efect of which is
material to the financial statements.
C. The auditor has disagreement .with, management regarding the
acceptability of
the accounting policies, the efect of which is material.
D. The omission of significant information in the financial statement.

87. Which of the following disagreements with the management may

potentially cause the auditor to disclaim his opinion?

A. Acceptability of accounting policies

B. Method of application of accounting principles
C. Omission of certain required disclosures in the financial statements
D. Refusal of the client management for the auditor‘s observation of
physical inventory count

88. When the client does not disclose restrictions of future cash dividends
and the CPA discloses the omitted information in the separate paragraph of
the audit report, the opinion should be:

A. Qualified due to scope limitation

B. Qualified due to inadequate
disclosure C: Adverse
D. Unqualified opinion with an explanatory paragraph

89.When the financial -statements of the prior period were audited by

another CPA, the incoming auditor's report indicates:

A B C D
1. The dates and periods covered by prior years' YES YES NO NO
financial
statements
2. That the financial statements of the prior YES YES YES NO
period* were
audited by another CPA
3. The type of opinion issued by another CPA and if YES NO YES YES
modified, the reason thereof

90. When the auditor's report on the prior period, as previously issued,
included a modified opinion, the auditor's report should refer to the
corresponding figures:

A. though the matter which gave rise to the modification of the audit
report had been subsequently resolved
B. if the matter that gave rise to the modification of the previous
auditor's report is unresolved and results in a modification of the auditor's
report regarding the current figures.
C. only when the matter that gave rise to the modification is unresolved and
results to a modification of the auditor's report regarding the current figures.
D. in all cases where the matter which gave rise to the modification of
the previous audit report was satisfactorily resolved and properly dealt
with in the financial statements, the current report would not refer to
the previous modification.

91. In which of the following circumstances would a modification of the

tor's report on the current period not necessary?

A. If the prior period financial statements had been revised and reissued
with a new auditor's report.
B. If the prior period financial statements had not been revised and reissued
but the matter that gave rise to the modification, though material to the
current period
is resolved.
C. If the matter that gave rise to the modification of the previous audit report
was related to an unresolved beginning balance of property accounts.
D. The report of the prior period issued by a continuing auditor.

92. They are not presented as complete financial statements capable of

landing alone, but are an integral part of the current period.

A. Comparative financial statements

B. Corresponding figures
C. Notes of financial statements
D. Supplementary report

93. Which of the following statements applies to consultancy service

engagement?

A. A practitioner should obtain an understanding of the internal control

structure to assess control risk.
B. A practitioner is not permitted to compile a financial forecast.
C. A practitioner should obtain sufficient relevant data to complete the
engagement.
D. A practitioner is to maintain an appearance of independence.

94.Prospective financial statements are for

A. general use
B. limited use only
C. either general or limited use
D. use by internal management only

95. Given one of more hypothetical assumptions, a responsible party may

prepare, to the best of its knowledge and belief, an entity's expected
financial position, results of operations, and changes in financial position.
Such prospective financial statements are most commonly known as

A. special purpose financial statements

B. financial projections
C. partial presentations
D. financial forecasts

96. When reporting on financial statements prepared on a comprehensive

basis of accounting other than Philippine financial reporting standards, the
independent auditor should include in the report a paragraph that

A. states that the financial statements are not intended to be in conformity

with Philippine financial reporting standards.
B. states that the financial statements were not examined in accordance
with generally accepted auditing standards.
C. refers to the authoritative pronouncements that explain the
comprehensive basis
of accounting being used.
D. justifies the comprehensive basis of accounting being used.

97.The objective of a review of interim financial information is to provide the

CPA with a basis for
A. expressing a limited opinion that the financial information presented in
conformity with Philippine financial reporting standards
B. expressing compilation opinion on the financial statements.
C. reporting whether material modifications should be made to such
standards. information to make it conform with Philippine financial reporting
D. reporting limited assurance to the board of directors only standards.

98. Audit reports issued in connection with which of the following are
generally not considered to be special reports or special purpose reports?

A. specified elements, accounts, or items of a financial statement.

B. Compliance with aspects of contractual agreements related to
audited financial statements.
C. financial statements prepared in conformity with the price-level
D. Compiled financial statements prepared in accordance with basis of
accounting. appraised liquidation values.

99. The party that is responsible for the assumptions identified in the
preparation of prospective financial statements is usually

A. A third-party lending institution.

B. The client's management.
C. The reporting accountant.
D. The client's independent auditor. ion

100. In extreme cases such as situations involving multiple uncertainties

that are significant to the financial statements, the auditor

A. may consider to express a disclaimer of opinion

B. may quality his opinion instead of issuing-on unqualified opinion ‗nth
emphasis of matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a "subject to" opinion because the situations related to
uncertainties
 SIMULATED EXAMINATION 3
1. An audit that involves obtaining and evaluating evidence about the
efficiency and efectiveness of an entity's operating activities in relation to
specified objectives is a(n)

A. external audit
B. Financial statement audit.
C. Operational audit.
D. Compliance audit.

2. Which of the following best describes due care?

A. tact in avoiding legal liability

B. requisite skill and diligence
C. reasonable infallibility
D. freedom from undue influence

3. In which of the following situations would qualified opinion be inappropriate?

A. Financial statements are materially misstated.

B. A doubt that is more than substantial about the ability of the company to
continue
as a going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.

4. The auditor's standard report states that the financial statements are
presented tairly

A. with reasonable assurance.

B. in all material respects.
C. without significant errors.
D. on a consistent basis.

5. Which of the following statements about the report that conveys a

high level of assurance on the subject matter is correct?

A. The practitioner's report should contain a subjective expression of his

opinion about a subject matter based on the identified suitable criteria on
the evidence obtained.
B. The practitioner must not issue an oral conclusion about a subject matter
based
on the identified suitable criteria and the evidence obtained.
C. The report can take various forms, such in writing, electronic form, oral or
by symbolic representation.
D. The report should be in a standard format for reporting on all
assurance engagement.

6. How did the Code of Ethics define public interest?

A. A distinguishing mark of a profession is the acceptance of its
responsibility to the public.
B. The accountancy profession's public consists of clients, credit grantors,
governments, employers, employees: investors, the business and financial
community, and others who rely on the objectivity and integrity of
professiOnc.il accountants.
C. The collective well being of the community of people and institution-3
that the professional accountant serves.
D. The standards of the accountancy profession are heavily determined by
the public interest.

7. Which of the following is incorrect regarding professional competence?

A. Professional accountants may portray themselves as having the

expertise or experience they do not possess.
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence initially
requires a high standard of general education.
D. The maintenance of professional competence requires a Continuing
awareness
of development in the accountancy profession.

8. Which of the following statements about the failure of the auditor of

detecting material misstatements always true?

A. The auditor's failure to discover material misstatements is an evidence of

inadequate planning: performance or judgment.
B. The auditor did not comply with Philippine Standards on Auditing.
C. The auditor has the burden of defending the quality of his audit.
D. Such a failure is an indication of the absence of the auditor‘s,
professional competence and due care.

9. A professional accountant may be associated with a fax return that:

A. contains a false or misleading statement.

B. contains statements or information furnished recklessly or without
any real knowledge of whether they are true or false.
C. omits or obscures information required to be submitted and such
omission or obscurity would mislead the revenue authorities.
D. uses of estimates if such use is generally acceptable or if it
impractical under the circumstances to obtain exact data.

10.The Code of Professional Conduct would be violated if a member

accepted a fee for services and the fee was:

A. fixed by a public authority.

B. based on a price quotation submitted in competitive bidding.
C. based on the result of judicial proceedings.
D. payable after a specified finding was attained.

11. No person shall serve the Professional Regulatory Board at Accountancy

for more than

A. 3 years
B. 6 years
C. 9 years
D. 12 years

12. A common difficulty in auditing a computerized accounting system is:

A. data can be erased from the computer with no visible evidence.

B. because of the lack of an audit trail, computer systems have weaker
controls and more substantive testing is required.
C. because of the uniform nature of transaction processing, computer
systems have strong controls and less substantive testing is required.
D. the large dissemination of entry points into the computer system
leads to weak overall reliance on information generated by a computer.

13. A partner of the firm who is serving as a company secretary for an

audit client creates which of the-following threats?

Advocacy Familiarity Self-review

A. Yes No Yes
B. yes Yes No
C. No Yes Yes
D. Yes Yes Yes

14. Which of the following represents a situation in which an auditor is

independent of the client?

A. The auditor is paid by the client organization rather than the SEC.
B. The auditor takes a personal 'rim from the president of the company.
C. The auditor‘s dependent son holds 25 shores (one-half percent) of the
client's outstanding common stock.
D. The auditor has not received .payment for the previous audit services.

15. Which of the following represents a situation in which the auditors

may disclose client information to outside parties?

A. Bringing working papers to a professional CPA workshop as an example

of quality work.
B. Complying with a validly issued and enforceable subpoena or summons.
C. Showing the client's bank statement to a neighbor who is a
shareholder to emphasize its cash position.
D. Explaining to the local television news station why the client is likely to
miss payroll in the 'forthcoming periods.

16.Which of the following constitutes a situation involving a contingent fee?

A. An hourly rate and estimated total fee disclosed in a tax engagement letter
B. An audit fee based upon a budget and respective professional billing
rates in a proposal
C. A promise to deliver the audit opinion prior to a certain deadline for an
estimated fee
D. An additional audit fee based on the positive outcome of securities ofering

17. The rules on independence require that a member in public practice shall
be independent in the performance of professional services as required by
the Code of Professional Ethics. For which of the following services does the
rule apply?

A. Audits of historical financial statements.

B. Review services.
C. Examinations of prospective financial statements.
D. All the three services given.

18. When the users of financial statements have confidence in a

independence, it is referred to as independence in:

A. fact.
B. appearance.
C. conduct.
D. total.

19.A significant aspect of conducting an audit with due professional care is

the auditor's attitude of professional:

A. Pessimism
B. Skepticism
C. Optimism
D. Courtesy

20. Which one of the following is not considered a valid source information
about the client's processes?

A. confirmation of third-parties
B. review of the client's budget
C. a tour of the client's plant
D. management inquiry

21. The risk that financial statements are likely to be misstated materially
without regard to the efectiveness of internal control is which type of risk?
A. inherent risk
B. Audit risk
C. client risk
D. control risk

22. When must an auditor perform analytical review procedures in a financial

statement audit?

A. Testing controls over financial cycles

B. Performing tests to substantiate balances
C. Planning the nature, timing and extent of procedures
D. Performing tests to substantiate transactions

23. Which of the following would an auditor least likely discuss with the
former auditors of a potential client prior to acceptance?

A. Integrity of management
B. Fees charged for services
C. Predecessor's disagreements with management regarding the use of
accounting principles
D. Reasons for changing audit firms

24. Which of the following -represents a procedure that the auditor may
use because plausible relationships among financial statement balances are
expected to exist?

A. Attributes testing
B. Review engagement
C. Inherent test of control
D. Analytical review

25.What is the primary purpose of an efective internal control in an

organization?

A. Achievement of certain organizational goals.

B. Completion of a successful audit for the entity.
C. A shareholder's involvement in the company's success.
D. Obtaining profitability and financial strength.

26.Which of the following is not a major emphasis in the efective internal

control?

A. Assets are properly protected.

B. Duties are segregated.
C. Transactions are authorized.
D. Processes are efficient.

27.One of the major components of an organization's internal structure

includes:
A. audit control risk.
B. the financial environment.
C. risk assessment.
D. telecommunication equipment.

28.The payroll department should be responsible for:

A. authorization of new employees.

B. processing payroll transactions.
C. timekeeping.
D. signing payroll checks.

29.Which of the following is an example of a type of control that tested?

A. Contingent liabilities are disclosed adequately.

B. Property and equipment is classified as a long-term asset
C. Purchase orders are signed by an authorized purchasing officer
D. An undocumented review of the expense budgets

30.Which of the following is a valid statement about the assess control risk?

A. Misstatements discovered by conducting substantive pro may cause the

auditor to modify the previous assess control risk.
B. There is a positive relationship between detection risk combined level of
inherent and control risk.
C. The auditor should consider the assessed levels of inherent control risks
in determining the nature, timing, and e substantive procedures required to
eliminate audit risk.
D. The assessed level of inherent and control risks can be sufficiently low in
order to eliminate the auditor's need to-perform substantive tests on some
assertions.

31.Which of the following statements about tests of controls is not valid?

A. The auditor may perform inquiry and observation and gathering audit
evidence about the operating efectiveness of the control.
B. Audit evidence obtained by doing observation pertains only to the
point in time at which the procedure was applied.
C. Ordinarily, making inquiries provides more reliable audit evidence than
doing observation when testing segregation of functional responsibilities.
D. Observation of who applies a control procedure is useful as a test of
control procedures when evaluating control efectiveness of both
computerized and manual system

32.The auditor should consider whether the assessment of control risk

confirmed:

A. Upon completion of the understanding of infernal control.

B. Upon the conclusion of the audit, based on the results substantive
procedures and other audit evidence obtained.
C. Upon completion of tests of controls ft
D. Before the final audit program is completed.

33. In general, a material weakness in internal control may be defined as a

condition in which material errors or irregularities may occur and not be
detected within a timely period by

A. an independent auditor during tests of controls.

B. employees in the normal course of performing their assigned functions.
C. management when reviewing interim financial statements aria
reconciling account balances.
D. outside consultants who issue a special purpose report on internal control
structure

34. A weakness in internal control procedures over recording retirement of

equipment may cause the auditor to

A. inspect certain items of equipment in the plant and trace those items to-
tile accounting records
B. review the property master file to ascertain whether depreciation was
taken on each item of equipment during the year
C. trace additions to the "other assets" account to search for equipment that
is still
on hand but no anger being used
D. select certain items of equipment fran the accounting records and locate
them in the plant

35. When the auditor performs tests of control regarding the policy counting
materials received from the supplies, the auditor most likely

A. inspect the receiving reports.

B. verify that cash-vouchers are accompanied by receiving reports
C. inquire with the receiving clerk of whether count of incoming
deliveries is being made.
D. observe several times as the receiving section is receiving the incoming
deliveries.

36. Which of the following statements reflects on auditor's responsibility lot

detecting errors and fraud?

A. An-auditor is responsible for detecting employee errors and fraud, but

not for discovering fraud involving employee collusion it management
override.
B. An auditor should plan the .audit to detect errors and fraud that are
caused- by departures from GAAP
C. An auditor is not responsible for detecting errors and fraud unless the
application
of GAAS would result in such detection.
D. An auditor should design the audit to provide reasonably assurance of
detecting errors and .fraud that are material to the financial statements

37. The audit risk is the, product of inherent, control and detection risks.
Which of these risks is the dependent variable?

A. Detection risk
B. Control risk
C. Inherent risk
D. All of these are dependent variables.

38. A type of fraud in which an employee takes assets from an

organization for personal gain:
A. Fraudulent financial reporting.
B. Defalcation.
C. Window dressing.
D. Inside trading.

39.The risk of financial fraud may significantly increase if there is

A. A system of profit-sharing incentive plan.

B. A substantial growth in sales.
C. A change from manual processing to computerized system.
D. Frequent changes in suppliers.

40. In planning an audit engagement, which of the following best likely

afects the independent auditors judgment as to the quantity, type, and
content of working papers?
A. The estimated occurrence rate of attributes.
B. The preliminary evaluations -based on substantive testing.
C. The content of the client's representation letter.
D. The anticipated nature of the auditor report.

41.Which statement is incorrect regarding the discussion among the

engagement team about the susceptibility of the entity's financial
statements to material misstatements?

A. The members of the engagement team should discuss the susceptibility

of the entity's financial statements to material misstatements.
B. The objective of this discussion is for members of the engagement team to
gain a
better understanding of the potential for material misstatements of the
financial statements resulting from fraud or error in the specific areas
assigned to them, and
to understand how the results of the audit procedures that they perform
may afect other aspects of the audit.
C. The discussion provides an opportunity for more experienced engagement
team members, including the engagement partner, to shore their insights
based on
their
knowledge of the entity, and for the team members to exchange information
about the business risks.
D. All the team members should have a comprehensive knowledge of all
aspects of the audit.

42. In which of the following situations would materiality be least likely

considered critical?

A. A decision of whether the auditor has to obtain a representation

letter from the management.
B. In determining the nature, timing and extent of audit procedures.
C. A decision of whether to modify the audit opinion.
D. Evaluating the efect of misstatements.

43.Which of the following statements about materiality is incorrect?

A. The assessment of what is material is a matter of professional judgment.

B. When planning the audit. the auditor should consider what would make
the financial statements materially misstated.
C. The assessed level of materiality should not normally be revised by the
auditor.
D. Materiality is addressed in the auditor's report.

44. They are EDP control procedures that provide reasonable assurance that
all transactions are authorized and recorded, and are processed
completely, accurately and on a timely basis.

A. General controls
B. Application controls
C. Hardware controls
D. Software controls

45.A collection of files that is shared and used by a number of diferent users:

A. Database
B. Flat file
C. Master file
D. Transaction file

46.The applications of auditing procedures using the computer as an audit tool

refer to

A. Integrated test facility.

B. Data-based management system
C. Auditing through the computer
D. Computer assisted audit techniques

47. It refers to an act of omission or commission by the audit client entity.

either intentional or unintentional, which are contrary to the prevailing laws
or regulations
A. Fraud
B. Negligence
C. Noncompliance
D. Defalcation

48. Which of the following elements ultimately determines the specific

auditing procedures that are necessary in the circumstances to aford a
reasonable basis for an opinion?

A. auditor judgment
B. relative risk
C. materiality
D. reasonable assurance

49."Unusual fluctuations" occur when

A. significant diferences are not expected but do exist.

B. significant diferences are not expected and do not exist.
C. significant diferences are expected but do exist.
D. none of the given choices.

50. Which of the following statements is generally correct about the

competence of evidential matter?

A. The auditor's direct personal knowledge obtained through observation

and inspection, is more persuasive than information obtained indirectly from
independent outside sources.
B. To be competent, evidential matter 'must be either valid or relevant, but
need not
be both.
C. Accounting data alone may be considered sufficient competent evidential
matter
to issue an unqualified opinion on financial statements.
D. Competence of evidential matter refers to the amount of corroborative
evidence to be obtained.

51. To adequately plan the appropriate audit evidence, generally accepted

auditing— standards require the auditor to gain an understanding of the
internal control structure. This understanding is obtained by:

A. Reviewing organizational charts and procedural manual.

B. Discussions with client personnel.
C. Observing client activities.
D. All of these

52.Which of the following statements concerning analytical procedures is true?

A. Analytical procedures may be omitted entirely for some financial statement

audits
B. Analytical procedures used in planning the audit should not use
nonfinancial information
C. Analytical procedures usually are efective and efficient for tests of controls
D. Analytical procedures alone may provide the appropriate level of
assurance for some assertions

53. Each of the following might, by itself, form a valid basis for an auditor
to decide to omit a test except for the

A. Difficulty and expense involved in testing a particular item

B. Assessed level of control risk.
C. Relative risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

54. Another entity that executes or records transaction on behalf of a client is

called:

A. Third Party provider.

B. Service organization.
C. Outsourcer.
D. Profit center.

55. Testing in the direction from the source documents to the general
ledger involves testing transactions or balances primarily for which type of
error?

A. Overstatement
B. Understatement
C. Neither overstatement nor understatement
D. Either overstatement or understatement

56. Management's assertions in the financial statements 'are relevant to the

audit process because:

A. they embody the procedures that will be performed by the audit team
B. they include representations that the financial statements are in
accordance with GAAP
C. they provide evidence that auditors have prepared financial
statements in accordance with GAAP
D. they relate to regulators expectations about audit results

57.When may audit procedures be performed?

A. in the interim period

B. At period end
C. Subsequent to period end
D. At of the choices given
58.Existence, as an assertion, can be audited directionally by considering
balances and transactions from

A. recorded amounts to evidence regarding the source

B. evidence regarding the source to recorded amounts
C. general ledgers to trial balances
D. all of these choices

59.Which of the following audit tests is usually the most costly to perform?

A. Analytical procedures.
B. Tests of balances.
C. Tests of controls.
D. Substantive tests of transactions.

60. Auditors usually try to plan the audit to minimize the use of tests of

A. the other tests are more reliable.

B. the other tests are less costly.
C. the other tests require less experienced audit person
D. any of the choices is true.

61. An auditor concludes that the omission of a substantive procedure

considered necessary at the time of the 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 or 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.
D. the results of the subsequent period's tests of controls make the omitted
procedure less important.

62.Which of the following accounts would most likely be reviewed by the

auditor to gain reasonable assurance that additions to the equipment
account are not understated?

A. Repairs and maintenance expense

B. Depreciation expense
C. Gain on disposal of equipment
D. Accounts payable

63.Which of the following is a qualitative misstatement?

A. Inadequate allowance for uncollectible accounts.

B. Padded sales.
C. Unrecorded short-term obligations.
D. Failure to disclose loan restrictions in payment of dividends.

64. In relation to opening balances, which of the following may cause the
auditor to disclaim his opinion?

A. The opening balances contain misstatements that could materially afect

the current period‘s financial statements and such misstatements have not
been corrected.
B. The current period's accounting policies have not been consistently
applied in relation to opening balances and the efect of such change is not
properly accounted for or disclosed.
C. The inability of the auditor to obtain sufficient appropriate audit evidence
concerning opening balances.
D. The assessed substantial doubt about the entity's ability to continue
as a going concern as-indicated by consistent negative cash flows.

65. Which of the following does not afect the sufficiency and
appropriateness of the audit evidence that the incoming auditor will need to
obtain regarding opening balances?

A. Materiality of the opening balances in relation to the current period's

financial statements.
B. The nature of the accounts and the risk of misstatements in the
current period's financial statements.
C. The number of years the client is in business.
D. Whether the prior period's financial statements were audited.

66. Which of the following is the least concern of the, client auditor in
reviewing the report of service organization auditor on the efectiveness of
the internal control design of the service organization?

A. The system's controls have been placed in Operation.

B. The comprehensiveness of a description of the service organization's
accounting and internal control systems which is ordinarily prepared by the
management of
the service organization.
C. The manner of the documentation of the understanding of internal control
made
by the service organization's auditor.
D. The accounting and internal control systems are suitably designed to
achieve the stated objectives.

67. Which of the following is least likely entitled to the report of the service
organization auditor on the suitability of internal control design and
operating efectiveness of the service organization?

A. Service organization management

B. Service organization stockholders
C. Service organization‘s customer
D. Client auditors.

68. Upon completion of the audit, the auditor needs to consider

uncorrected misstatements because:

A. The aggregate of uncorrected misstatements, when considered, makes

the financial statements materially misstated,
B. There is a need to revise the financial statements after their issuance.
C. They are basis of whether the auditor needs to redocument internal
control. D.
The aggregate of uncorrected misstatements is the basis of the auditor to
reassess materiality level.

69.What should a prudent auditor do when the aggregate of uncorrected

misstatements approaches the materiality level?

A B C D
Perform additional procedures YES NO NO YES
Request management to adjust YES YES NO YES
financial
statements for identified misstatements
Request management to adjust YES YES YES NO
financial
statements for projected
misstatements.

70. They involve analysis of significant ratios and trends including the
resultant investigation of fluctuations and relationships that are inconsistent
with other relevant information or expectation:
A. Inquiry.
B. Analytical procedures.
C. Account analysis.
D. Inspection

71. Which of the following procedures may provide the auditor with
information not previously possessed by him?

A. Inspection.
B. Inquiry.
C. Analytical procedures.
D. Computation.

72.It consists of looking at a process or procedures being performed other

persons:

A. Inquiry.
B. Observation.
C. Tracing.
D. Inspection.
73. If the current period's accounting policies have not been consistently
applied in relation to opening balances and if the chance has not been
property accounted for or disclosed, the auditor should issue either a (an)

A. Qualified or disclaimer of opinion.

B. Qualified or adverse opinion.
C. Adverse or disclaimer of opinion.
D. Standard unqualified opinion or unqualified opinion with explanatory
paragraph.

74. An audit of the General Lizard Company, a home appliance manufacturer

company, detects material misapplication of the measurement of the lower
of cost or market principle. General Lizard's executive and financial
management will not change the recorded amounts or disclosures to the
auditor's satisfaction. Such a situation will most likely result in which type of
report?

A. Unqualified
B. Disclaimer
C. Qualified or adverse
D. Negative assurance

75. A client company has issues that cause substantial doubt regarding the
entity's ability to continue as a going concern. If this is the only major audit
issue, which type of opinion will the auditor usually refrain from issuing?

A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion

76. The auditors of White Stained Sheets, Inc. are unable to obtain evidence
regarding accounts receivable which is a material balance. Instead, the
auditors are able .to satisfy themselves with other alternative procedures
relating to the White Stained Sheets audit. Which report will the auditors
most likely issue in this situation?

A. Qualified
B. Unqualified
C. Adverse
D. Disclaimer
77. Ajax Wilson audits Doornail, Inc. without having independence. Such a
situation would lead to the issuance of a(n):

A. unqualified opinion with explanatory language

B. qualified opinion
C. disclaimer of opinion
D. unqualified opinion
78. When management does not amend the financial statements in
circumstances where the auditor believes they need to be amended and the
auditor's report has not been released to the entity, the auditor should issue
either a (n):

A. adverse opinion or disclaimer of opinion

B. standard unqualified opinion or qualified opinion
C. Unqualified opinion with explanatory paragraph or a qualified opinion.
D. qualified opinion or an adverse opinion.

79. When financial statements are audited by an accounting firm, the

partner-in-charge of engagement ordinarily signs in the name of the firm
because:

A. The practice is impliedly required by the Accountancy Law of 2004.

B. This assures the users of financial statements that the firm assumes
the entire responsibility for the financial statements.
C. The firm assumes responsibility for the audit.
D. The opinion becomes more credible if signed in name of the firm

80. Which of the following is least considered a scope limitation in an

audit engagement?

A. The auditor is unable to carry out an audit procedure believed to be

desirable. B. The timing of auditor's appointment is too late which results to
inability of the auditor

to perform prescribed procedures.

C. The audit engagement requires a limited reporting objective.
D. The entity's accounting records are inadequate.

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

accordance with Philippine standards on auditing?
A. An internal control questionnaire.
B. A client engagement letter.
C. A planning memorandum or Checklist.
D. A client representation letter.

82. Which of the following scenarios regarding a lawsuit filed against a client
by a third party would qualify as a "contingent liability"?

A. A lawsuit has been filed, but not yet resolved.

B. A lawsuit has been filed and has concluded with the client winning.
C. A lawsuit has been filed and has concluded with a third parity winning an
award
of P100,000 but client has not paid yet.
D. A lawsuit has been filed and concluded, With the third party winning an
award of P100,000 which the client paid after the balance sheet date but
before the statements are issued.
83.Which of the following factors will least afect the independent auditor's
judgment as to the quantity, type, and content of the working papers
desirable for a particular engagement?
A. Nature of the auditor's report.
B. Nature of the financial statements schedules or other information
upon which the auditor is reporting.
C. Need for supervision and review.
D. Number of personnel assigned to the audit.

84. Before releasing the audit report, the auditor should perform which of the
following?

A. Instruct the client to release the financial statements to the bank

B. Perform planning for the subsequent period audit
C. Review the financial statements analytically for any inconsistencies
D. Secure a deposit from the client to safeguard against lawsuits

85. What is the primary purpose of the auditors' request for an attorney's
letter relating to a client?

A. Receive guidance from experts regarding the interpretation of

Generally Accepted Accounting Principles
B. Gather independent information pertaining to Client's legal matters in
order to assess estimates and disclosures
C. Determine if fraud has occurred on the client premises during the period
under audit
D. Confirm the existence of inventory and accounts receivable that are
held by the attorney in proxy and on behalf of the client

86. Which one of the following subsequent events will most likely result to
an adjustment to the financial statements?

A. Material change in the amount of settlement, of a lawsuit which had

been estimated at year end
B. Entry into a significant-new line of products and business
C. Proceeds received-from a 'related party note payable
D. Signing of a letter-of-intent by the' client to acquire 55% of another entity
for stock
87. Which one of the following is a key condition indicating doubt regarding
an entity's ability to continue as a going-concern?

A. Improvement in key financial ratios

B. Litigation in the normal course of business
C. The company‘s auditors were voted out in the most previous shareholder's
meeting
D. Inability to make principal and interest payments as they become due
88. Misstatements that are found during-an audit and aggregated at the
conclusion of the audit for further consideration by the auditor for their
impact on the financial statements typically include:
A. those material items that have been proposed by the auditor for
adjustment and accepted by the client.
B. those of an immaterial magnitude that have been passed by the
auditor until the completion of the audit.
C. those of a material nature that have been ignored by the auditor due to
the risk
of sampling error.
D. those of immaterial amounts that were not documented the auditor
because they are of an inconsequential matter to the audit.

89. If, after the audited financial statements have been issued, the
auditor becomes aware that some information included in the statements is
materially misleading, he has

A. no obligation to disclose it, assuming he acted in good faith and without

negligence in arriving at the audit opinion.
B. an obligation to inform the board of directors of the misleading statements.
C. an obligation to inform all users who are relying on the financial statements.
D. an obligation to make certain that users who are relying on the financial
statements are informed.

90. According to Philippine Standards on 'Auditing, which of the following

combinations of procedures is appropriately required in performing review
engagement?

A. Inquiry and analytical procedures

B. Analytical procedures and documentation.
C. Observation and analytical procedures
D. Inquiry and inspection.

91. Which of the following is an inappropriate specific procedure that the

auditor may perform in completing-a review engagement?

A. Inquiring with management about the extent of related party transactions.

B. Inquiring with client's legal counsel regarding litigations.
C. Comparing the client's gross profit to industry data.
D. Inquiring with management about its plans of restructuring its long-term

92. Which of the following is true of the report based on-an agreed-upon
procedures engagement?

A. The report is restricted to those parties who have agreed to those

specific procedures to be performed.
B. The CPA provides the recipients of the report a tinged assurance
reasonableness of the assertion(s) presented in the financial information.
C. The report states that the auditor has not recognized any basis that
requires revision of financial statements.
D. The report should state that the procedures performed are limited to
analytical procedures and inquiry.

93.Which of the following services is not considered related to audit?

A. Agreed-upon procedure
B. Compilation.
C. Consultancy
D. Review.

94.Which one of the following the most relevant factor ki assessing the
control risk of a computerized environment?

A. Computerized environment provides management with efective

replacement controls
B. Computerized accounting systems enhance efficiency jar users
C. An auditor‘s method of testing the efectiveness of the system controls is
the same in a computerized system as in a manual system
D. The control risk over computerized accounting systems must be
assessed during planning

95. Which application most efectively allows users to state data in on

organized manner and gather information in a usable format?

A. Database management system

B. Operating system
C. Spreadsheet
D. Access control software

96. Which of the following statements is correct with respect to

obtaining an understanding with a client?

A. Auditors are not required to obtain an understanding with their clients.

B. Auditors must obtain an understanding only if an audit is to be conducted.
C. Auditors must document their understanding of the engagement.
D. Auditors must obtain an engagement letter.
97. Which of the following does not strengthen internal control over the
electronic environment?

A. Users are not allowed to make changes to the applications

B. Programmers test new developments prior to release in production
C. Backup of programs and data is performed only by accounting and
infrequently
D. Internal auditors test changes to software prior to release in production
98. Which one of the following is often utilized to authenticable the user a
computer system?

A. Username and Password

B. Name and address
C. Data and reports
D. Default and null

99. Auditors review the adequacy of client's documentation accounting

information systems in order to do which of the following?

A. Rewrite the coding used to generate programs to satisfy financial audit

assertions
B. Perform analytical procedures associated with the information
technology environment
C. Determine which computer assisted audit techniques are used by the client
D. Understand the use of systems to determine the audit procedures to be
performed

100. Which of the following represents a hash total?

A. Encryption
B. Summary of invoice numbers
C. Financial total of payroll
D. Validation of product ID number
 SIMULATED EXAMINATION 4

1. An operational audit performed by an internal auditor: is best described

as an:

a. audit of a company's compliance with management's policies and

procedures
b. evaluation of a company's operations to determine if the
company
is susceptible to fraud or other material irregularities.
c. Audit of the operations of a company's computer systems
d. audit of a company's operations to determine The economy and-
efficiency with which resources are employed.

2. In the absence of pronouncements issued by the AASC and the PICPA,

published statements and guidelines by other authoritative bodies, like
AICPA, IAPC, and AFA are the basis of determining generally accepted
auditing standards. What efect do these pronouncements provide in
determining the generally accepted auditing standards?

a. Authoritative
b. Alternative
c. Persuasive
d. Parallel

3. Which of the following statements best describes why the profession

of CPAs has deemed it essential to promulgate a code of ethics and to
establish a mechanism for enforcing observance of the code?

a. Distinguishing mark of a profession is its acceptance of

responsibility to the public.
b. A prerequisite for success is the establishment of an ethical code
that primarily stresses the professional's responsibility to clients and
colleagues.
c. A requirement of most laws calls for the profession to establish
acode of ethics.
d. An essential means of self-protection for the profession is the
establishment of flexible ethical standards by the profession

4. A person whose CPA certificate has been revoked

a. can no longer be reinstated as a CPA.

b. Is automatically reinstated as a CPA after two years if he has
acted in on exemplary manner.
 c. May be reinstated as a CPA by the Board of Accountancy after two
years if he has acted in an exemplary manner
d. May be reinstated by the PRC after two years if he has acted in an
exemplary manner.

5. The CPA should not undertake an engagement if his fee is to be based

upon

a. Rates set by a city ordinance

b. Per diem rates plus expenses
c. A percentage of audited net income
d. The findings of a fax authority

6. The objectives of the Philippine Accountancy Act of 2004 are the

following, except:

a. Standardization and regulation of accounting education

b. Integration of accountancy profession
c. Examination for registration of certified public accountants.
d. Supervision, control and regulation of the practice of accountancy.

7. The level of assurance provided by an audit of detecting a material

misstatement is referred to as:

a. Absolute assurance.
b. High assurance
c. Negative assurance
d. Reasonable assurance.

8. Which of the following most completely describes how independence

has been defined by the CPA profession?

a. Performing an audit from the viewpoint of the public.

b. Avoiding the appearance of significant interests in the afairs of an
audit client.
c. Possessing the ability to act with integrity and objectivity.
d. Accepting responsibility to act professionally and in accordance
with a professional code of ethics.
9. Which of the following is a significant: diference between the
Accountancy Law of 1975 and the Accountancy Law of 2004 with
respect to the appointment of members of the Board of Accountancy?

a. The number of years comprising one appointment term.

b. The number of consecutive terms of appointment of a member.
c. The maximum number of years of membership in the Board of
Accountancy
d. Functions of a member of the Board of Accountancy.

10. Which of the following best describes what is meant by the term
generally accepted auditing standards?

a. Pronouncements issued by the Auditing Standards and Practices

Council
b. Rules acknowledged by the accounting profession because of their
universal application
c. Procedures to be used to gather evidence to support financial
statements.
d. Measures of the quality of the auditor's performance.

11. If requested to perform an audit engagement for a non-public

entity in which an auditor has an immaterial direct financial interest,
the he is:

a. Independent because the financial interest is immaterial;

therefore, a review report may be issued.
b. Not independent and, therefore, may not be associated with the
financial statement
c. Not independent and, therefore, may not issue an unqualified audit
report
d. Not independent and therefore, may issue a review report but may
not issue an auditor's opinion.

12. The concept of materiality would be least important to an auditor

when considering the

a. adequacy of disclosure of a client's illegal act.

b. discovery of weaknesses in a client's internal control structure.
c. efects of a direct financial interest in the client on the independence.
d. decision whether to use positive or negative con accounts receivable.
13. The Code of Professional Ethics states, in part, that a CPA should
maintain integrity and objectivity. Objectivity refers to the CPA's ability
to
a. Determine accounting practices that were consistently applied.
 b. Maintain an impartial attitude on all matters which come under
review.
c. Determine the materiality of items.
d. Insist on all matters regarding audit procedures.

14. Which of the following engagements allows the CPA practitioner

charging contingent fees?

a. Agreed upon procedures.

b. Compilation.
c. Review.
d. Examination of a forecast.

15. Are the following CPAs required to comply with the Code Professional
Conduct?
ABCD
CPAs in Commerce and-Industry. Yes YesYesYes
CPAs in Public Accounting No Yes YesNo CPAs in Education/Acaderne Yes
No YesNo CPAs in Government Yes No Yes No

16. If the firm performs a simultaneous services of auditing the client'

financial statements and bookkeeping services, the CPA ma potentially
face a

a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat

17. Financial interest is either direct or indirect. Which one of the

following relatives of the auditor who holds financial interest is
construed as direct financial interest of the auditor?

a. Sibling
b. Parent
c. Spouse
d. Non-dependent child

18. The exercise of due core requires that an auditor

a. Use error-free judgement.

b. Study and review internal accounting control, including compliance
tests
c. Critically review the work done at every level of supervision.
 d. Examine all corroborating evidence available.

19. Karen, CPA, has been retained to audit the financial statements of
Redeemer Company. Redeemer Company's predecessor auditor, Gino,
CPA, who has been notified by Redeemer that Gina's services have
been terminated. Under these circumstances, which party should
initiate the communications between Karen and Gino?

a. Karen, the successor auditor

b. Redeemer's controller or CFO
c. Gina, the predecessor auditor
d. The chairman of Redeemer's board of directors

20.A A successor auditor would most likely make specific inquiries of the
predecessor auditor regarding

a. Specializedaccounting principles of the client's industry.

b. The competency of the client's internal audit staf
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements With management as to auditing procedures.

21. Which of the following factorsmost likely would cause an auditor

not to accept a new audit engagement?

a. An inadequate understanding of the entity's internal control structure.

b. The close proximity to the end of the entity's fiscal year.
c. Concluding that the entity's managementprobably lacks integrity.
d. An inability to perform preliminary, analytical assessing control risk.

22. Which of the following is least likely included in an audit engagement

letter?

a. The responsibility of the auditor to third party users statements

b. Management responsibility for the financial statements
c. The form of any reports or other communication of the results of
the engagement
d. Arrangement concerning the involvement of other experts in some
aspects of the audit

23. Which of the following least likely influence the auditor's decision
to send a separate engagement letter to a component of parent entity
client?
 a. Legal requirements
b. Degree of ownership by parent
c. Reporting requirements of the component entity
d. Who appoints the auditor of the component

24. Which of the following is not an acceptable reason for a change

of the engagement from a higher to a lower level of assurance?

a. Cost considerations.
b. Restriction on the scope of the engagement.
c. Misunderstanding as to the nature of the engagement originally
requested
d. Audited financial statements are no longer needed because the
client was able to obtain alternative financing.

25. The following are quality control procedures that are observed firm:

I. identifies on a timely basis the staffing requirements of

specific audits
II. Periodically counsels personnel as to their progress and
career opportunities
III. Prepares time budget for an audit engagement to
determine manpower requirements and to schedule audit
work.
IV.Evaluates partners periodically by means of senior partner
or fellow partner evaluation and counseling as to whether
they continue to have the qualifications to fulfil their
responsibilities.

Which of the foregoing .procedures is (are} necessary to achieve the

objectives of assignment of personnel?

a. I
b. I, III
c. II, IV
d. I, II, III, IV

26. It involves informing assistants at their responsibilities and the

objectives of the procedures they have to perform:

a. Supervision
b. Delegation
c. Direction
 d. Review

27. The main purpose of risk assessment procedures is to

a. Obtain an understanding of the entity and its environment,

including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
b. Test the operating efectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion
level
c. Detect material misstatements at the assertion level.
d. All of the given choices are main purposes of risk assessment

28. Which of the following statements is incorrect regarding obtaining

an understanding of the entity and its environment?

a. Obtaining an understanding of the entity and its environment is an

essential aspect of performing an audit in accordance with PSAs
b. Understanding of the entity and its environment establishes a frame
of reference within which the auditor plans the audit and exercises
professional judgment about assessing risks of material
misstatement of the financial statements and responding to those
risks throughout the audit.
c. The auditor's primary consideration is whether the understanding
that has been obtained is sufficient to assess the risks of men
misstatement of the financial statement and to design perform
further audit procedures.
d. The depth of the overall understanding that is required by the
auditor in performing the audit is at least equal to that possessed
by management in managing the entity

29. What diferentiates fraud from an error?

a. Materiality
b. Intent
c. Efect on financial statements
d. Frequency of occurrence

30. Which statement is incorrect regarding the auditor's consideration

of laws and regulations in an audit of financial statements?
a. When the auditor becomes aware of information concern possible
instance of noncompliance, the auditor should evaluate its possible
efect on the financial statements.
 b. If the auditor concludes that the noncompliance act has a material
efect on the financial statements, and has not been properly
reflected in the financial statements, the auditor should express a
qualified or an adverse opinion.
c. The auditor may withdraw from the engagement when the entity
does not take the remedial action that the auditor considers it
necessary in the circumstances, even when the noncompliance is
not material to the financial statements.
d. In order to plan the audit, the auditor should obtain a specific
understanding of the legal and regulatory framework applicable to
the entity and the industry and how the entity is complying with
that framework.

31. Which of the following procedures would an auditor most

likelyperform in planning a financial statement audit?

a. Inquiring of the client's legal counsel concerning pending, litigation.

b. Comparing the financial statements to anticipated-results
c. Examining computer generated exception reports to verify the
efectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities.

32. Which statement is incorrect regarding analytical procedures?

a. Analytical procedures may be helpful in identifying the existence of

unusual transactions or events, and amounts, ratios, and trends
that might indicate matters that have financial statement and audit
implications.
b. in performing analytical procedures as risk assessment procedures.
the auditor develops expectations about plausible relationships that
are reasonably expected to exist.
c. When comparison of those expectations with recorded amounts or
ratios developed from recorded amounts yields unusual or
unexpected relationships, the auditor considers those results in
identifying risks of material misstatement.
d. When such analytical procedures use data aggregated at a high
level (which is often the situation), the results of those analytical
procedures provide a clear-cut indication about whether a material
misstatement may exist

33. Which statement is correct regarding business risks?

 a. The risk of material misstatements in the financial statements is
broader than business risk, though it includes the latter.
b. The auditor should identify or assess all business risks.
c. All business risks give rise to risks of material misstatement
d. A business risk may have an immediate consequence for the risk of
misstatement for classes of transactions, account balances and
disclosures at the assertion level or the financial statements as a
whole.

34. Inquiries directed towards those charged with governance may most
likely

a. Relate to their activities concerning the design and efectiveness of

the entity's internal control and whether management has
satisfactorily responded to any findings from these activities
b. Help the auditor understand the environment in which the financial
statements are prepared.
c. Relate to changes in the entity's marketing strategies, sales trends
or contractual arrangements with its customers.
d. Help the auditor in evaluating the appropriateness of the selection
and application of certain accounting policies

35. Which statement is incorrect regarding significant risks that require

special audit consideration?

a. The auditor should determine which of the identified risks are in the
auditor's judgment, require special audit consideration
b. The auditor excludes the efect of identified controls relatedto the
risk to determine whether the nature of the risk, the likely
magnitude of the potential misstatement including the possibility
that the risk may give rise to multiple misstatements and the
likelihood of the risk occurring are such that require audit
consideration.
c. Routine, non-complex transactions that are subject to systematic
processing are more likely to give rise to significant risks they have
higher inherent risks
d. Significant risks are often derived from business risks that may
result in a material misstatement.

36. Some account balances, such as those for pensions or leases are
the results of complex calculations. The susceptibility to material
misstatements in these types of accounts is defined as
a. Audit risk
b. Sampling risk
 c. Detection risk
d. Inherent risk

37. The risk that an auditor's procedures will lead to the conclusion
that material misstatement does not exist in an account balance when
in fact, such misstatement does exist is

a. Audit risk
b. Control risk
c. inherent risk
d. Detection risk

38. Audit risk consists of inherent risk, control risk; and detection risk.
Which of the following statements is true?

a. Cash is more susceptible to theft than an inventory of coal

because it has a greater inherent risk.
b. The risk that material misstatement will not be prevented or
detected on a timely basis by internal control can be reduced to
zero by efective controls
c. Detection risk is a function of the efficiency of an auditing procedure.
d. The existing levels of inherent risk, control risk, and detection
risk can be changed at the discretion of the auditor.

39. The acceptable level of detection risk is inversely related to the

a. Assurance provided by substantive tests.

b. Risk of misapplying auditing procedures.
c. Preliminary judgment about materiality levels.
d. Risk of failing to discover material misstatements.

40. Which of the following audit risk components may be assessed in

non- quantitative terms?

Control Risk Detection Risk Inherent Risk

a. Yes Yes Yes

b. No Yes Yes
c. Yes Yes No
d. Yes No Yes
41. The auditor's considerations of materiality level relate to:
A B C D
Individual account balances YES YES YES NO
Classes of transactions YES YES NO NO
 Disclosures YES NO NO YES

42. The assessment of materiality level in relation to specific account

balances and classes of transactions will enable the auditor to
a. Omit certain necessary audit tests.
b. Assess whether the audit opinion will be modified.
c. Select audit procedures that are appropriate based on acceptable
detection risk
d. Primarily determine whether tests of controls would be performed.

43. The diagram below depicts the auditor's estimated maximum

deviation rate compared with the tolerable rate, and also depic7 the
true population deviation rate compared with the tolerable rate, and
also depicts the true population deviation rate compared with the
tolerable rate.

True State of Population

Auditor‘s estimate Deviation rate is Deviation rate
based on sample less than exceeds
results tolerable rate tolerable rate
Maximum deviation I III
rate is less than
tolerable rate
Maximum deviation II IV
rate exceeds
tolerable rate

As a result of tests of controls, the auditor assesses control risk lower

than necessary and thereby decreases substantive testing. This is
illustrated by situation.
a. I
b. III
c. II
d. IV

44. Which of the following statements concerning audit evidence is

correct?

a. To be competent, audit evidence should be either persuasive or

relevant, but need not be both
b. The measure of the validity of audit evidence lies in the auditor‘s
judgment
 c. The difficulty and expense of obtaining audit evidence concerning
an account balance is a valid basis for omitting the test
d. A client's accounting data can be sufficient audit evidence support
the financial statements

45. Which of the following is the best explanation of the diference, if

any, between audit objectives and audit procedures?

a. Audit procedures establish broad general goals, audit objectives

specify the detailed work to be performed
b. Audit objective are tailor-made for each assignment; audit
procedures are generic in application
c. Audit objectives decline specific desired accomplishments; audit
procedures provide the means of achieving audit
d. Audit procedures and audit objectives are essentially the same

46. In gathering audit evidence in the performance of substantive tests,

the auditor

a. Should use-the-test-month approach

b. Relies on persuasive rather than conclusive evidence in the majority
of cases
c. Would consider the client's documentary evidence more competent
than evidence gathered from observation and physical inspection
d. Would express an adverse opinion if he has substantial doubt
as to any assertion of material significance

47. Which of the following should a prudent auditor do?

a. Determineoverall responses to address risks of material

misstatement at the financial statement level.
b. Design and perform further audit procedures, including tests of the
operating efectiveness of controls when relevant or required, and
substantive procedures, whose nature timing, and extent are
responsive to the assessed risks of material misstatement at the
assertion level
c. Evaluate whether the risk assessment remain appropriate and to
conclude whether sufficient appropriate audit evidence has been
obtained
d. All of the given choices.

48. The assessment at the risks of material misstatement atthe

financial statement level is afected by the auditor‘s understanding of
the control environment. Weaknesses in the control environment
ordinarily will lead the auditor to
 a. Have more confidence in internal control and the reliability of
audit evidence generated internally within the entity.
b. Conduct some audit procedures at an interim date rather than at
period end.
c. Modify the nature of audit procedures to obtain more persuasive
audit evidence.
d. Decrease the number of locations to be included in the audit scope

49. The most reliable forms of documentary evidence are those

documents that are
a. Prenumbered
b. Easily duplicated
c. internally generated
d. Authorized by a responsible official

50. Which of the following auditing procedures is ordinarily performed

last?

a. Reading of the minutes of the directors' meetings

b. Confirming accounts payable
c. Obtaining a management representation letter
d. Testing of the purchasing function

51. Which result of an analytical procedure suggests the existence of

obsolete merchandise?

a. decrease in the inventory turnover rate

b. decrease in the ratio of gross profit to sales
c. decrease in the ratio of inventory to accounts payable
d. decrease in the ratio of inventory to accounts receivable

52. In the audit of which of the following general ledger accounts will
tests of controls be particularly appropriate?

a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
53. The auditor should determine overall responses to address the
risks of material misstatement at the financial statement level. Such
responses least likely include
 a. Emphasizing to the audit team the need to maintain professional
skepticism in gathering and evaluating audit evidence.
b. Assigning more experienced staf or those with special skills or using
experts
c. incorporating additional elements of unpredictability in the
selection of further audit procedures to be performed.
d. Performing substantive procedures at an interim date instead of
at period. end.

54. Which statement is incorrect regarding the nature of further audit

procedures?

a. The nature of further audit procedures refers to their purpose and

their type
b. Certain audit procedures may be more appropriate for some
assertions than others.
c. The higher the auditor's assessment of risk, the less reliable and
relevant is the audit evidence sought by the auditor from
substantive procedures
d. The auditor is required to obtain audit evidence about the accuracy
and completeness of information produced by the entity's
information system when that information is used in performing
audit procedures

55. Which statement is incorrect regarding the extent of further audit

procedures?

a. Extent includes the quantity of a specific audit procedure to be

performed.
b. The extent of an audit procedure is determined by the judgment of
the auditor after considering the materiality, the assessed risk, and
the degree of assurance the auditor plans to obtain
c. The auditor ordinarily decreases the extent of audit procedures as
the risk of material misstatement increases
d. Increasing the extent of an audit procedures is efective only if the
audit procedures itself is relevant to the specific risk

56. Which of the following most would give the most assurance
concerning the valuation assertion of accounts receivable?
a. vouching the amounts in the subsidiary ledger to details on
shipping documents.
b. comparing the receivable turnover ratios with industry statistics
for reasonableness
c. inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for
reasonableness.
57. In auditing accounts payable, an auditor's procedures most likely
will focus primarily on management's assertion of

a. Existence or occurrence
b. Completeness
c. Presentation and disclosure
d. Valuation or allocation

58. Which of the following procedures is least likely to be performed

before the balance sheet date?

a. Observation of Inventory
b. Search for unrecorded liabilities
c. Testing internal control over cash
d. Confirmation of receivables

59. An auditor is most likely to inspect loan' agreements under which

an entity's inventories are pledged to support management‘s
financial statement assertion of

a. Existence or occurrence
b. Presentation and disclosure
c. Completeness
d. Valuation or allocation

60. The auditor should design and perform further audit procedures
whose nature, timing, and extent are responsive to the assessed risks
of material misstatement at the assertion level. Which of the following
is the most important consideration in responding to the assessed
risks?

a. The nature of the audit procedures.

b. The timing of audit procedures
c. The extent of the audit procedures.
d. All of these are equally important.

61. An auditor selected items for test counts while observing a

client's physical inventory. The auditor then traced the test counts to
the client's inventory listing.
This procedure most likely obtained evidence concerning
a. Rights and obligations
b. Existence or occurrence
 c. Completeness
d. Valuation

62. Which of the following would represent the most rational response
by the auditor to an assessment of higher than average risk of fraud in
an upcoming audit engagement?

a. Assign more experienced auditors to the engagement.

b. Increase the audit fee to compensate for the added risk and
potential insurance cost associated with the high-risk environment.
c. Assign more auditors to the engagement
d. Increase the amount of control testing performed.

63.A A test of an asset for overstatement provides corresponding

evidence on expenses, revenues, and liabilities as follows:

a. Expense overstatement, revenue overstatement, and liability

understatement
b. Expense understatement, revenue overstatement, and liability
overstatement
c. Expense understatement, revenue understatement, and
liability understatement.
d. Expense overstatement, revenue overstatement, and liability
overstatement.

64. Which statement is incorrect regarding the timing of further audit

procedures?

a. Timing refers to when audit procedures are performed or the period

or date to which the audit evidence applies.
b. The auditor may perform tests of controls or substantive procedures
at an interim date or at period end.
c. If the auditor performs tests of controls or substantive procedure
prior to period end, the auditor considers the additional evidence
required for the remaining period.
d. All audit procedures can be performed prior to period end

65. Dual-purpose tests are audit tests designed to:

a. test more than one control with single procedure.

b. test controls that are relevant to multiple assertions
c. provide evidence for more than a single accounting period
d. test for monetary errors while testing for compliance with controls
66. Confirmation is most likely to be a relevant form of evidence with
regard to assertions about accounts receivable when the auditor has
concern about the receivables

a. Valuation
b. Classification
c. Existence
d. Completeness

67. The auditor most likely performs extensive tests for possible
understatement of

a. Revenues
b. Assets.
c. Capital
d. Liabilities

68. The auditor generally makes a decision not to test the

efectiveness of controls in operation when

a. the preliminary assessment of control risk is at the maximum

b. it is more cost efficient to directly test ending account balances
than to test control procedures
c. the auditor believes that control procedures are not functioning as
described.
d. all of the given choices are correct.

69. Which of the following is a. correct response of the auditor when he

requires a loweracceptable level of detections risk?

Substantive Testing Procedures

Natur Timing Extent
e
a. Less efective Year- More
end extensive
b. Less efective Interim Less
extensive
c. More efective Year- More
end extensive
d. More efective Year- Less
end extensive

70. An advantage of using statistical sampling techniques is that such

techniques

a. mathematically measure risk.

b. eliminate theneed for judgmental decisions
c. eliminate nonsampling risk
d. have been establishedin the courts to be superior to
judgmentalsampling
71. The risk of incorrect acceptance and the risk assessing control risk
too low relate to the

a. Preliminary estimates of materially levels.

b. Allowable risk of tolerable-misstatement
c. Efficiency of the audit
d. Efectiveness of the audit.

72. An internal auditor is testing purchase order to detect possible

instances of fraudulent activity by an employee. Believing the
occurrence rate of the fraudulent purchase orders to be quite low
(almost zero) the internal auditor would like to specify the
probabilityof observing at least one irregularity if its true rate of
occurrence is greater than expected. The most appropriate sampling
technique for this situation is

a. Sequential sampling
b. Variable estimation Sampling
c. Attribute estimation sampling
d. Discovery sampling

73. In conducting a substantive test of an account balance, an auditor

hypothesizes that no material misstatements exists. The risk that
sample results will support the auditor‘s hypothesis when a material
misstatement exist is the risk of

a. Incorrect rejection
b. Incorrect acceptance
c. Alpha error
d. Type 1 error

74. The sample size of a test of controls varies inversely with

Expected population deviation Tolerable rate

rate
a. Yes Yes
b. No No
c. Yes No
d. No Yes

75. In performing tests of controls over authorization of cash

disbursements, which of the following statistical sampling methods
would be most appropriate?
 a. Variables
b. Stratified
c. Ratio
d. Attributes

76. When performing a financial statement audit, auditors are

required to explicitly assess the risk of material misstatement due to:

a. Errors
b. Fraud
c. Illegal acts
d. Business risk.

77. Generally, the auditor prefers external evidence to internal

evidence. This is a measure of

a. Relevance.
b. Appropriateness.
c. Analysis.
d. Evidence gathering.

78. "A transaction or event is

recorded at the proper amount and revenue
or expense is allocated at the proper period" is a financial assertion of:

a. Occurrence
b. Completeness.
c. Valuation.
d. Measurement

79. Which of the following is an invalid statement about an audit evidence?

a. Ordinarily, audit evidence regarding one assertion will compensate

for failure to obtain audit evidence regarding another assertion
b. Ordinarily, audit evidence is obtained regarding each financial
assertion
c. The nature, timing and extent of substantive tests will vary
depending on the assertions
d. Audit tests can provide audit evidence about more than one assertion
80. With respect to audit objectives, the term validity relates to which
of the following assertions?

a. Existence and occurrence.

b. Completeness
c. Valuation or allocation
d. Presentation and disclosure

81. The rights and obligations assertion applies to:

a. Current liability items.

b. Both balance sheet and income statement accounts.
c. Assets that are not owned by the company.
d. Balance sheet accounts only.

82. Which of the following would not be a factor in determining the

competency of evidential matter?

a. the source of the evidence

b. timeliness of the evidence
c. the degree of objectivity of the evidence
d. the cost of gathering the evidence

83. For the initial audit engagement, the auditor needs not obtain
sufficient appropriate audit evidence that:

a. Accounting procedure are consistently

b. The opening balances do not contain material misstatements.
c. The prior period's real account balances have been brought forward
to the current period.
d. Appropriate accounting policies are consistently observed or
changes in accounting policies have been properly accounted for
and adequately disclosed.

84. The use of the phrase "present fairly, In all material respects" in
the opinion paragraph is most closely associated with which of the
following concepts from the scope - responsibility of the auditor
paragraph?

a. significant estimates
b. substantial guarantee
 c. positive conclusion
d. basis for an opinion

85. Identify the appropriate type of opinion to issue when the

auditor believes that there is a minimal loss resulting from the
resolution of an uncertain

a. Unqualified opinion
b. Unqualified opinion with a separate explanatory paragraph.
c. Qualified opinion or disclaimer of opinion, depending on whether
the uncertainty is adequately disclosed
d. Qualified opinion or disclaimer of opinion, depending upon the
materiality of the loss

86. Which one of the following statements is incorrect?

a. The auditor's report must state whether the financial statements

conform with the Philippine financial reporting standards.
b. The auditor's report must not state whether the applicable
Philippine financial reporting standards were consistently followed
from the prior period to the current period.
c. The auditor's report must state whether the client has provided
adequate disclosure on the finance statements and in the
accompanying notes to financial statements.
d. the auditor's report must express an opinion on the financial
statements taken as a whole, or explain why an opinion cannot be
provided

87. Which of the following statements is not appropriately described in

the responsibility of the auditor paragraph of the independent auditor's
report?

a. The audit was planned and performed to obtain reasonable

assurance about whether the financial statements are free of
material misstatements.
b. The audit was conducted in accordance with generally accepted
auditing standards.
c. The auditor makes the significant estimates in the preparation of
the financial statements.
d. A statement by the auditor that the audit provides a reasonable
basis for the opinion.
88. Which of the following, modification by adding a paragraph to
otherwise a standardaudit report does not constitute an "emphasis of
matter"?
 a. A paragraph that highlights a material matter regarding a going
concern problem.
b. A paragraph that discloses the significant information that should
have been included in the notes to financial statements.
c. A paragraph that discusses a significant uncertainty.
d. A description of material inconsistency if an amendment to other
information in a document containing audited financial statements
is necessary and the entity refuses to make the amendment.

89. When there are extreme uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to:

a. Withdraw from the engagement

b. Issue an adverse opinion
c. Disclaim an opinion
d. Issue a qualified opinion

90. Which of the following may not potentially result to an issuance of

either qualified or disclaimer of opinion?

a. The timing of auditor's appointment is too late which results to

inability of the auditor‘s to perform prescribed procedures.
b. The entity's accounting records are inadequate.
c. The auditor is unable to carry out an audit procedure believed to be
desirable.
d. The audit engagement requires an audit of balance sheet only

91. Where a limitation on the scope of the auditor's work requires

modification of an unqualified opinion, the auditor's report should
describe the limitation and:

a. Indicate that the auditor is no longer responsible to his opinion.

b. Indicate the possible adjustments to the financial statements that
might have been determined to be necessary had the limitation not
existed.
c. Refer the users to the particular note to financial statements that
adequately discusses the limitation
d. Indicate that the auditor is not satisfied of the results of the
alternative procedures that he had performed

92. The audit report of the incoming auditor least likely include an
indication
 a. That the financial statements of the prior period were audited
by another CPA.
b. The type of report issued by the predecessor auditor
c. The division of responsibility between the successor and the
predecessor auditor.
d. The date of the predecessor auditor's report.

93. Which of the following is a true statement?

a. The extent of the audit procedures performed on the corresponding

figures is significantly less than scope of the audit for the current
figures.
b. When the financial statements of the prior period have been audited
by another auditor, the current auditor must insist that there would
be division of responsibility with respect to audit
c. When the financial statements of the prior period have been
audited by another auditor, the successor auditor must insist that
audit of the financial statements of the prior periods be performed
by the successor.
d. When the comparatives are presented as corresponding figures, the
auditor must specifically refer to the predecessor in the introductory
paragraph of the auditor's report.

94. What are the concerns of an auditor when assessing whether

comparative financial statements meet the requirements of the
relevant financial reporting framework?

Concern 1. That prior period figures presented agree with the

amounts and other disclosures presented in the prior period or if
necessary, appropriate adjustments and/or disclosures have been
made
Concern 2. That accounting policies of the prior period are
consistent with those of the current period.

a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No

95. When the comparatives are presented as comparative financial

statements:
a. The auditor should issue a report to which the comparatives are
referred to when the comparative's are materially misstated
 b. The auditor is not required to identify the comparative in his
report because his opinion applies only to the current year's
financial statements.
c. The auditor should issue a report in which the comparatives are
specifically identified because the auditor's opinion is expressed
individually on the financial statements of each period presented.
d. The auditor is only required to specifically identified the
comparatives when his opinion on the prior year's financial
statements is other than unqualified.

96. Which of the following actions by an incoming auditor with respect

to the financial statements of prior year which were audited by another
CPA is inappropriate?

a. The incoming auditor report only on the current period and the
predecessor auditor to reissue the audit report on the prior period.
b. The incoming auditor modifies the opening paragraph by stating
that the prior period's statements were audited by another
auditor, the type of report and the appropriate reasons for a
modification if the report was modified and the date of the report
c. The incoming auditor should assess whether the
comparativefinancialstatements meet the requirements of the
relevant financial accounting framework.
d. Review the working papers prepared by the predecessor auditor and
appropriately assess whether he can assume responsibility with
respect to the comparatives that are presented as comparative
financial statements.

97. Which of the following methods of testing application controls'

utilizes a generalized audit software package prepared by the
auditors?

a. Parallel simulation.
b. Integrated testing facility approach.
c. Test data approach.
d. Exception report tests.

98.A A hot site is most frequently associated with:

a. Online relational database design.

b. Disaster recovery
c. Source program.
d. Temperature control for computer.
 99. Output controls ensue that the results of computer processing are
accurate, complete, and properly distributed. Which of the following is
not a typical output control?
a. Reviewing the computer processing logs to determine that all of
the correct computer jobs executed properly
b. Periodically reconciling outputs reports to make sure that totals,
formats, and critical details ore correct and agree with input.
c. Maintaining formal procedures and documentation specifying
authorized recipients of output reports, checks, or other critical
documents
d. Matching input data with information on master files and placing
unmatched items in a suspense file

100. Which of the following procedures would on auditor most likely

perform in planning a financial statement audit?

a. Inquiring of the client's legal counsel concerning pending litigation.

b. Examining computer generated exception reports to verify the
efectiveness of internal control
c. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities
d. Comparing the financial statements to anticipated results.

SIMULATED EXAMINATION 5

1. The need for assurance services arises because;

a. there is closeness between a user and the organization or trading
partner.
b. there is a potential bias in providing information.
c. economic transactions are less complex than they were a decade ago.
d. most financial statement users today have direct knowledge of a
company‘s operations.
2. Assurance services depict;
a. a wider spectrum of services.
b. a more diverse group of users.
c. greater potential users
d. all of the given choices.
3. A review of any part of an organization‘s procedures and methods for
the pupose of evaluating efficiency and efectiveness is classified as
a(n
a. audit of financial statements
b. compliance audit
c. operation audit
d. production audit
4. The primary purpose of an independent audit of financial statements is
to
 a. provide a basis of assessing management‘s performance
b. comply with laws and regulations
c. assure management that the financial statements are unbiased and
free from materials misstatements
d. provide users with as unbiased opinion about the fairness of
information presented in the financial statements
5. which of the following control procedure may prevent the failure to bill
customer for some shipment?
a. each shipment should be supported by pre numbered sales
invoice that is accounted for
b. each sales order should be approved by authorized personnel
c. sales journal entries should be reconciled to daily sales summaries
d. each sales invoice should be supported by a shipping document
6. an objective of an operation audit is to determine whether as entity‘s;
a. internal control is adequate
b. operation are in accordance with laws and regulations
c. financial statements are presented fairly
d. operation are functioning efectively and efficiently

7. Which of the following is a part of the attest process?

a. communicating the conclusion reached
b. providing the accuracy of the book as records
c. compiling the financial information needed for presentation as
financial statements
d. providing guidance in management decisions
8. Auditing services may include which of the following
a. attesting to financial statements
b. examination of the economy and efficiency of governmental
operations
c. evaluation of a division performance for management
d. all the responses are correct
9. Which of the following is responsible for an entity financial statements
a. management
b. audit committee
c. internal auditors
d. board of directors
10.the objective of a reviw of financial statements is;
a. to enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with
generally accepted accounting principles in the Philippines
b. for the auditor to carry out procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have
agreed and to report on factual findings
c. for the accountant to use accounting expertise, as opposed of
auditing expertise, to collect, classify and summarize financial
information
d. to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an
audit, anything has come to
 the auditor‘s attention that causes the auditor to believe that the
financial statements are not prepared in all material respect, in
accordance with generally accepted accounting principles in the
Philippine (negative assurance)
11. Which of the following standards requires a critical review of the work
done and the judgment exercised by those assisting in an audit at every
level of supervision?
a. proficiency
b. audit risk
c. inspection
d. Due care
12.In conducting a fraud investigation the auditor shoul first;
a. identify the perpetrators.
b. Obtain the facts
c. obtain confession
d Notify a law enforcement agency
13. Which of the following is an element of a CPA firm‘s quality control
system that should be considered in establishing its quality control policies
and procedures?
a. complying with laws and regulations
b. using statistical sampling techniques
c. assigning personnel to engagements
d. considering audit risk and materiality
14. The nature and extent of CPA firm‘s quality control policies and
procedures depend on:
a. the CPA firms size=Yes; The Nature of the CPA firms
practice=Yes; Cost- benefit. Consideration=Yes
b the CPA firms size=Yes; The Nature of the CPA firms practice=Yes;
Cost- benefit. Consideration=No
c. the CPA firms size=Yes; The Nature of the CPA firms
practice=No; Cost- benefit Consideration=YES
d. the CPA firms size=No; The Nature of the CPA firms practice=Yes;
Cost- benefit. Consideration=Yes

15. The primary purpose of establishing quality control policies and

procedures in deciding whether to accept a new client is to
a. enable the CPA firm to attest to the reliability of the client
b. satisfy the CPA firms duty to the public
c. minimize the likelihood of association with clients whose
management lacks integrity
d. anticipate before performing any fieldwork whether an unqualified
opinion can be expressed
16. Which of the following will least create a threat to independence?
a. a member of the assurance team, partner or former partner of the
firm has joined the assurance client
b. deposit made by, or brokerage accounts of, a firm or a member of
the assurance team with an assurance client that is a bank broker or
similar institution, provided the deposit or account is held under
normal commercial terms
 c. arrangements to combine one or more services or products of the
firm with one or more services or products of the assurance client and
to market the package with reference of both parties
d. family and personal relationship between a member of the
assurance team and director, an officer or certain employees.
17. Before accepting an engagement to audit a new client a CPA is required to
obtain
a. an understanding of the prospective clients industry and business
b. the inability to review the predecessor auditor‘s working papers
c. the CPA lack of understanding of the prospective clients operations
and industry
d. the indications that management has not investigated employees
in key positions before hiring them
18. which of the following factors most likey would cause a CPA not to
accept a new audit engagement?
a. the prospective client‘s unwillingness to permit inquiry of its legal
council
b. the inability to review the predecessor auditors working papers
c. the CPA lack of understanding of the prospective clients operation
industry
d. the indications that management has not investigated employees
in key positions before hiring them
19. Which of the following characteristics would most likely heighten an
auditors concern about the risk of material misstatements in an entity‘s
financial statements?
a. the entity industry is experiencing declining customer demand
b. employees who handle cash receipts are not bonded
c. bank reconciliations usually include in- transit deposits.
d. equipment is often sold at a loss before being fully depreciated
20. an account may accept an engagement to apply agreed-upon
procedures to prospective financial statements provided that;
a. distribution of the report is limited to the specified parties involved
b. the prospective financial statements are also examined
c. the responsibility for the adequacy of the procedures performed is
taken by the accountant
d. negative assurance is expressed on the prospective financial
statements taken as a whole
21.An audit obtain knowledge about a new clients business and its industry to
a. make constructive suggestion concerning improvements to the
clients internal control
b. develop an attitude of professional scepticism concerning
management financial statements assertions
c. evaluate whether the aggregation of know misstatements causes
the financial statements taken as a whole to be materially misstated
d. understand the events and transactions that may have an efect on
the clients financial statements
22. Which of the following factor would least influence an auditor‘s
consideration of the reliability of data for purposes of analytical procedures?
a. whether the data were processed in a computer system or in a
manual accounting system
 b. whether sources within the entity were independent of those who
are responsible for the amount being audited
c. whether the date were subjected to audit testing in the current or prior
year
d. whether the date were obtained from independent sources outside
the entity or from sources within the entity
23. in evaluating the reasonable of an entity accounting estimate an
auditors normally would be concerned about assumptions that are;
a susceptible to bias
b Consistent with prior
periods c insensitive to
variations
d similar ro industry guidelines
24. the primary objective of the procedures performed t obtain an
understanding of internal control is to provide an auditor with
a. knowledge necessary for audit planning
b evidential matter to use in assessing inherent risk
c.a basis for modifying test of controls
d. an evaluation of the consistency in the application of management‘s
policies
25. Management philosophy and operating style most likely would have a
significant influence on an entity‘s control environment when:
a. the internal auditor reports directly to management
b. management is dominated by one individual
c. accurate management job descriptions delineate specific duties.
d. the audit committee actively oversees the financial
reporting process 26 the control environment includes which of the
following?
a. control activities
b. management philosophy and operating style
c. assessing activity level
risks d application level
controls
27.Which of the following would an audit of a company‘s internal control
include?
a. An engagement to perform internal audit procedures.
b. Implementation of key financial controls
c. concluding on the accuracy of the statements of cash flows
d. Testing of managements risk assessment procedures
28. which one of the following is considered an adequate document in
an internal control system?
a. the accounting clerk initials the banks reconciliation
b. the mailroom mails commissions checks
c. invoices are prepares without sequential numbering
d. fixed assets are assigned useful lives at random
29. A material weakness in the design of the operation of controls that is
discovered in an audit of internal controls results in;
a. not submitting a management letter
b. an unfavourable opinion
c. the firing of the auditors
 d. adjusting audit journal entries
30. as the acceptable level of detection risk decreases, an auditor may:
 a. reduce substantive testing by relying on the assessment of
inherent risk and control risk
b. postpone the planned timing of substantive test from interim dates
to the year- end
c. eliminate the assessed level of inherent risk form consideration as
a planning factor
d. lower the assessed level of control risk form the maximum level to
below the maximum
31. in an audit of financial statements, an auditors primary considerations
regarding internal control is whether the control:
a. reflects management‘s philosophy and operating style
b. afects managements financial statements assertions
c. provides adequate safe guards over access to assets
d. enhances management‘s decision-making processes
32.Assessing control risk at below he maximum level most likely would
involve:
a. performing more extensive substantive test with large sample sizes
that originally planned
b. reducing inherent risk for most of the assertions relevant to
significant account balances
c. changing the timing of substantive test by omitting interim-date
tsting and performing the test year-end
d. identifying specific internal controls relevant to specific assertions

33. in planning an audit, the auditors knowledge about the design of

relevant internal controls should be used to:
a. identify the types of potential misstatements that could occur
b. assess the operational efficiency of internal control
c. determine whether controls have been circumvented by collusion
d. document the assessed level of control risk
34. To determine whether the client‘s system of internal control is operating
efectively in minimizing an error of failure to invoice a shipment, the auditor
would select of transactions from the population represented by the
a. customer order file
b. bill of loading file
c. open invoice file
d. sales invoice file
35.Tracing copies of sales invoices to shipping document will provide evidence
that all
a. Shipments to customer were recorded as receivables
b. billed sales were shipped
c. debits to subsidiary accounts receivable ledger are for sales shipped
d. shipments to customers were billed
36.Controls over approving credit relate to the:
a. completeness assertion
b. rights and obligations
c. valuation or allocation
d. occurrence
37.The following are the four steps that an auditor undertakes in assessing
control risk

A. Determine what control procedures are used by the entity

B. Identify the system's control objectives
C. Design tests-of controls
D. Consider the potential errors or irregularities that

could result In what order would an auditor perform

these steps?

A. DBAC
B. BCDA
C. BDAC
D. DCAB

38.Which of the following statements is correct concerning an auditor's

assessment of control risk?
a. Assessing control risk may be performed concurrently during an
audit while obtaining an understanding of the entity's internal
control.
b. Evidence about the operation of controls in prior audits may not be
considered during the current year's assessment of control risk.
c. The basis for an auditor‘s conclusion about the assessed level of
control risk should be documented if the control risk is assessed at
the maximum level.
d The lower the assessed level of control risk, the less assurance the
evidence must provide that the controls are operating efectively.

39.After assessing control risk at below the maximum level, an auditor

desires to seek a further reduction in the assessed level of control risk. At
this time, the auditor would consider whether:
a. it would be efficient to obtain an understanding of the entity's
information system relevant to financial reporting.
b. the entity's internal controls have been placed in operation.
c. the entity's internal controls pertain to any financial statement
assertions.
d. additional evidential matter sufficient to support a further
reduction is likely to be available.

40.Proper authorization of write-ofs of uncollectible accounts should be

approved in which of the following departments?
a. Accounts receivable
b. Credit
c. Accounts payable
d. Treasury
41.Which of the following controls most likely could prevent EDP
personnel from modifying programs to bypass programmed controls?
 a. Periodic management review of computer utilization reports
and systems documentation
b. Segregation of duties within EDP for computer programming and
computer operations
c.. Participation of user department personnel in designing and
approving new systems
d. Physical security of EDP equipment

42.Misstatements in a batch computer system caused by incorrect

programs or data may not be detected immediately because:

a. errors in some transactions may caused rejection of other transactions in the

batch.
b. the identification of errors in input data typically is not part of the program.
c. there are time delays in processing transactions in a batch system.
d. the processing of transactions in a batch system is not uniform.

43.Which of the following input controls is a numeric Value computed to

provide assurance that the original value has not been altered in
construction of transmission?
a. Hash total
b. Parity checks
c. Encryption
d. Check digit
44.Which of the following tasks could not be performed by generctli7ed
auditsoftware?
a. Choosing a sample of accounts receivable for confirmation
b. Footing the bank reconciliation
c. Summarizing data
d. Reading the minutes of the board of directors' meeting

45.Which of the following tasks may be performed by generalized audit

software?
a. Selection of a sample
b. Extraction of information
c. Obtaining file statistics
d. All of the given tasks may be performed

46.It involves the application of audit procedures to less than 100

percent of items within an account balance or class of transactions.
a. Analytical procedures
b. Substantive testing
c. Audit sampling
d. Tests of controls

47.The likelihood of an account balance or class of transactions to

misstatements that could be material, 'individually or when aggregated
with misstatements in other balances or transaction classes, assuming
there were no related internal controls.
a. Audit risk
b. Inherent risk
c. Control
risk d
Detection
risk

48.If the auditor is concerned that a population may.Cantain exceptions, the

determination of a sample size sufficient to include at least one such critical
exception is a characteristic of:
a. Random sampling
b. Variable sampling
c. Discovery sampling
d. Probability-proportionalelo-size sampling

.49. Uncertainties that still exist even if the auditor examines 100 percent of
an account balance is •
a. Sampling risk
b. Nonsampling risk
c. Inherent risk
d. Control risk

50.As the expected population deviation rate increases (all other factors
remaining the same)
a. The sample size should increase.
b. The sample size should decrease.
c. The sample size should remain constant,
d. The change in the sample size cannot be determined.
51.The risk of incorrect acceptance and the likelihood of assessing control
risk too low relate to the:

A. allowable risk of tolerable misstatement

B. preliminary estimates of materiality levels
C. efficiency of the audit
D. efectiveness of the audit

52. The maximum misstatements that may exist in a population that an

auditor is willing to accept
A. Materiality level
B. Tolerable error
C. Tolerable deviations
D. Likely misstatements

53.Which of the following is not an element of nonsampling risk?

A. The auditor uses inappropriate procedures in auditing accounts

receivables. B.

The use of unreasonably small sample size.

C. Misinterpretations of audit evidence.
D. Auditor fails to recognize the error in the sample.
54. While performing test of details during on audit, an auditor determined
that the sample results supported the conclusion that the recorded account
balance was materially misstated. It was, in fact, not materially misstated:
This situation illustrates the risk of:

A. assessing control risk too high

B. assessing control risk too low
C. incorrect rejection
D. incorrect acceptance

55. Which of the following would most likely be an advantage in using

classical variables sampling rather than probability-proportional-to-size (PPS)
sampling?

A. An estimate of the standard deviation of the population's recorded

amounts is not required.
B. The auditor rarely needs the assistance of a computer program to design
an efficient sample.
C. inclusion of zero and negative balances generally does not require
special design considerations.
D. Any amount that is individually significant is automatically identified and
selected.

56. An auditor may achieve audit objectives to particular assertions by:

A. 100 percent performing analytical procedures.

B. adhering to a system of quality control
C. preparing auditor working papers
D. increasing the level of detection risk

57. Which of the following is not an information source for developing

analytical procedures used in an audit?
A. Relationships among financial statement elements.
B. Relationships between financial and relevant nonfinancial data
C. Comparison of financial data with anticipated results (e.g., budgets and
forecasts).
D. Comparison of current year financial data with projections for next
year's financial results.

58. If, when performing analytical procedures, an auditor observes that

operating income has declined significantly between the preceding year and,
the current year, the auditor should next:

A. require that the decline be disclosed in the financial statements.

B. consider the possibility that the financial statements may be materially
misstated.
C. inform management that a qualified opinion on the financial statements
will be necessary
D. determine management's responsibility for the decline and discuss The
issue with the audit committee
59. Which of the following is an invalid statement about the relationship of
accounting arid internal control to the persuasiveness of audit evidence?

A. The efectiveness of the client's accounting and internal control has a

significant impact an. the competence of most types of evidence
B. Both physical examination and reperformance are likely to be highly
reliable if the accounting internal controls are efective.
C. The efectiveness of accounting and internal control system is inversely
related to the sufficiency of audit evidence required.
D. The efectiveness of accounting policies and procedures on revenue and
cash receipts significantly afects the extent of substantive procedures on
cash disbursements and expenditures.

60. It refers to the measure of the quantity of audit evidence considered

necessary to achieve the predetermined acceptable level of detection risk:

A. Relevance.
B. Validity.
C. Sufficiency.
D. Appropriateness.
61. The manner of obtaining audit evidence that consists of examining
records, documents or tangible assets:

A. Inspection.
B. inquiry
C. Analytical procedures.
D. Observation.

62. Which of the following least likely afect the persuasiveness of audit
evidence that the auditor obtains?

A. The source of the audit evidence.

B. The consistency of evidence obtained from diferent sources.
C. The number of audit evidence from a group of sources.
D. The efectiveness of accounting and internal control of the client entity.

63.The following statements relate to audit evidence, except:

A. The competence of audit is likely improved by selecting a larger

sample size or diferent population items.
B. The evidence obtained from a source outside the client entity is more
persuasive than that one obtained from within.
C. When a client's accounting and internal controls are efective, the
internal evidence obtained is more reliable.
D. The evidence obtained directly by the auditor through physical
examination, computation, observation, or confirmation is more competent
than the information that
is obtained indirectly.

64. An objective evidence is more reliable than evidence that requires

considerable judgment to determine whether an assertion is correct. The
following are examples of objective evidence, except:

A. Confirmation replies.
B. Physical count of cash and securities.
C. Replies from client's legal counsel.
D. Adding a list of accounts payable.

65.The auditor gathers evidential matter in order to

A. detect fraud and irregularity

B. evaluate management's stewardship
C. eliminate detection risk
D. form an opinion with respect to financial assertions

66. The decision as to how much evidence to be accumulated for a given set
of circumstances

A. is provided by following the Philippine financial reporting standards.

B. is one requiring professional judgment
C. is determined by statistical analysis
D. is provided in the Philippines Standards on Auditing.

67. Which of the "following is least considered in determining the sufficiency

and appropriateness of the audit evidence that the auditor will obtain
regarding opening balances?
A. The length of years in operations of the entity.
B. The materiality of the opening balances relative to the current
period's financial statements.
C. The accounting policies adopted by the entity.
D. The risk of misstatements of accounts.

68. In determining the sufficiency of evidential matter, which of the

following would not normally be a factor?

A. Cost/benefit considerations.
B. The sampling technique used.
C Materiality of the account balance.
D. Acceptable level of audit risk.

69.The aggregate uncorrected misstatements include:

A. Specific misstatements during the current audit year identified by the
auditor. B.

Net efect of uncorrected misstatements identified during the audit of

previous year.
C. The auditors best estimate of other misstatements which cannot be
specifically identified.
D. The sum of the three misstatements given.

70. If based on the aggregate of uncorrected misstatements the auditor

believes there may be material misstatements, the auditor should perform
additional procedures. If the client refuses to adjust the financial statements
and the auditor is able to conclude that the aggregate of uncorrected
misstatements is material, the auditor should:

A. Issue a standard opinion.

B. Consider resigning from the engagement.
C. Appropriately modify the audit report.
D. Obtain additional representation letter covering uncorrected misstatements.

71.When a client auditor uses a report of the auditor of a service

organization, the client auditor:

A. Should refer the matter in a separate emphasis of matter paragraph of

his auditor's report.
B. Should refer the matter by modifying the scope and opinion
paragraphs of the auditor's report.
C. Should attach the copy of the service organization auditor's report to his
audit report.
D. Makes no reference in his auditor's report oh the service organization.

72.Which of the following is incorrect regarding unaudited opening balances?

A. The collection of opening accounts receivable balances during the current

period will provide some audit evidence of their existence.
B. The verification of opening balances for accounts payable and
inventories are equally difficult to do.
C. The verification of opening inventory balance may include analytical
procedures.
D. The auditor will ordinarily examine the records underlying the opening
balances
for noncurrent assets.

73. Opening balances are based upon the closing balances of the prior period
and reflect the efect of

I. Current transactions (e.g., stock dividends) that will be given

retroactive efect recognition.
 II. Transactions of prior periods.
III. Accounting policies applied in the prior periods.

A. All of these
B. I only
C. I and II only
D. II and Ill only

74. The confirmation of customers‘ accounts receivable rarely provides

reliable evidence about the completeness assertion because:

A. many customers merely sign and return the confirmation without

verifying their details.
B. recipients usually respond only if they disagree with the information on the
request
C. customers may not be inclined to report understatement errors in their
accounts.
D. auditors typically select many accounts with low recorded balances to be
confirmed

75. Auditors try to identify predictable relationships when using analytical

procedures. Relationships involving transactions from which of the following
accounts most rely or yield the highest level of evidence?

A. Accounts receivable
B. Interest expense
C. Accounts payable.
D. Travel and entertainment expense

76. To test whether all sates transactions have been recorded, an auditor
should test a sample drawn from an entity's file of:

A. Receiving reports
B. Sales orders
C. Bills of lading
D. Sales invoices

77. An auditor ordinarily sends a standard confirmation request to all banks

with which the client has done business during the year under audit,
regardless of the year-end balance. A purpose of this procedure is to

A. Provide the data necessary to prepare a proof of cash.

B. Request a cutof bank statement and related checks be sent to the auditor.
C. Detect kiting activities that may otherwise not be discovered.
D. Gather evidence regarding the completeness assertion.

78. The type of test used to check that customer sales are not entered tin
some unreasonable amount is known as a in):

A. output control test

B. batch control test
C. parallel testing
D. edit test
79.The auditor notices significant fluctuations in key elements of flu
company's financial statements. it management is unable to provide an
acceptable explanation, the auditor should

A. consider the matter a scope limitation.

B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of management fraud.
D. withdraw from the engagement.

80. The criteria against which the auditor measures the fairness of financial
statement presentation are known as:

A. generally accepted auditing standards.

B. Philippine financial reporting standards.
C. generally used accounting principles.
D. generally accepted governmental accounting principles.

81. A CPA, engaged to examine financial statements: observes that the

accounting for a certain material item is pot in conformity wit Philippine
financial reporting standards, and that ibis fact permanently disclosed in a
footnote to the financial statements. The CPA does not agree with this
departure from PERS and should

A. Not allow the accounting treatment for this it-'n to afect the type of
opinion because the deviation from Philippine financial reporting standards
was disclosed.
B. Express an unqualified opinion and add an explanatory paragraph
emphasizing
the matter by reference to the footnote.
C. Qualify the opinion because of the deviation from Philippine financial
reporting standards.
D. Disclaim an opinion.

82. When the financial statements of the prior period were not audited
the incoming auditor should:

A. not allow the inclusion of the corresponding figures in the financial

statements of
the current period.
B. obtain sufficient appropriate audit evidence that the corresponding figures
meet
the requirements of the relevant financial reporting framework.'
C. Disclaim his opinion and treat the unaudited corresponding figures us
'oasis ul scope limitation
D. Insist that an a prior year's financial statements most be made.

83.Which of the following is an incorrect statement about comparatives

A. The auditor may express a qualified, adverse of disclaimer at opinion with
respect to one or more financial statements for one-or more periods, while
issuing a diferent report oh other financial statements.
B. When reporting on the prior period financial statements in connection with
the current year's audit, if the opinion on such prior period financial
statements is diferent from the opinion previously expressed, the auditor
should disclose the substantive reasons for the diferent opinion in the
opening paragraph.
C. The auditor may consider expressing an opinion on prior period financial
statement which is diferent from the opinion that he had previously
expressed on such
financial statements.
D. When the prior period financial statements are not audited, the
incoming auditor should carry on appropriate procedures of verifying the
opening balances.

84. The following explanatory paragraph accompanies the auditor's report for
financial statements as of and for period ending December 31 2010:
"Because we were appointed auditors of the Company during 2009, we were
not able to observe the counting of the physical inventories at the beginning
of 2009 or satisfy ourselves concerning those inventory quantities by
alternative procedures. Since - opening inventories.... Our audit report on the
financial statements for that, year ended December 31, 2009 was modified
accordingly."
The foregoing paragraph is included in connection with a report in which the
auditor.

A. Expresses an unmodified opinion regarding the current financial

statements but
a modified report regarding comparatives
B. Expresses unmodified opinion regarding the current period figure but
a modified report regarding the corresponding figures.
C. Expresses modified report on both the current financial statement and
comparatives.
D. Expresses modified report regarding the current period arid corresponding
figures.

85. For what purpose does the following explanatory paragraph in (in audit
report that accompanies the financial statements of Grey Company as of and
for the year ended December 31, 2008 serve?
"As discussed in Note Na. 9 to the financial statements no depreciation has
been provided in the financial statements which practice, in our opinion, is
not in accordance with the Philippine financial reporting standards in the
Philippines. This is a result of a decision taken by management at the start of
2007 and caused us to qualify our audit opinion on the financial statements
relating to the year. Based on the straight-line depreciation the loss for the
year should be increased by P1.2 Million in 2008 and P800,000 in 20074...,"
A. An explanatory paragraph for a modification of the auditor's report
regarding the current period and the corresponding figures.
B. An explanatory paragraph for a modification of the corresponding figures
but not
for modification of current period figures
C. An explanatory paragraph for a modification of the auditor's report
regarding both the current financial statements and prior year's financial
statements.
D. An explanatory paragraph regarding a modification of the auditor's
report regarding prior year's financial statements only.
86. The following modification is made on the opening paragraph at the audit
report that accompanies the financial statements of the Gold, Inc.

We have audited the accompanying balance sheet as of December 31. 2008,

and the related ... for the year then ended. These financial statements ...
"The financial statements of the company as of and for the year ended
December 31, 2007, were audited by another auditor whose report dated
April 5, 2008 expressed an unqualified opinion on those statements."

The Modification is made in connection to:

A. Prior period financial statements were audited by other auditor and

the incoming auditor decided to share responsibilities whir
B. Prior period financial statements were audited by another auditor and
such financial statements of prior year are used as comparatives.
C. Reference to the predecessor auditor's report oh the corresponding
figures in the incoming auditor's report for the current period
D. A modified report regarding the current period figures but unmodified
report regarding the corresponding figures.

87. When the prior year's financial statements, which are used as
comparatives, were audited by other auditor, the incoming auditor should
modify:

A. The opening paragraph of the audit report

B. The scope - responsibility of the auditor paragraph of the audit report
C. The opinion paragraph of the audit report
D. All the paragraphs of the audit report

88. Which of the following is appropriate when material inconsistency exist

in the other information and the entity refuses to make the amendment?

A. Issue a qualification opinion due to inconsistent data.

B. issue a qualified opinion because material inconsistency may raise doubt
about
the audit conclusion drawn from audit evidence.
C. Include an emphasis of matter paragraph describing the material
inconsistency.
D. Attach a separate statement that reconciles the inconsistency.

89. They are not presented as complete financial statements capable of

standing atone, but are an integral part of the current period financial
statements intended to be read only in relationship to the current period
figures.

A. Corresponding figures
B. Prior period figures
C. Comparative financial statements
D. Comparatives
90. When the auditor was unable to satisfy himself as to the appropriateness
of the unaudited opening balances for both, current and noncurrent assets,
the auditor should express a(n):

Balance Sheet Income Statement

A. Qualified Unqualified
B. Qualified Qualified
C. Unqualified Unqualified
D.Unqualified Unqualified
.
91. If there is an inconsistent application of accounting policies during the
current period in relation to opening balances and the change has not for or
disclosed, the auditor should express a (n):

A. Unqualified opinion with explanatory paragraph.

B. Qualified opinion or adverse opinion.
C. Unqualified opinion with explanatory paragraph or qualified opinion.
D. Qualified or disclaimer of opinion.

92. It exists when other information, not related to matters appearing in the
audited financial statements, is incorrectly stated or presented.

A. Material inconsistency
B. Material misstatement of fact
C. Material weaknesses
D. Misstatement

93. Which of the following is descriptive of related services as provided by

the framework of Philippine Standards on Auditing and other related PSAs?

A. Related services comprise compilation, agreed-upon procedures and

management advisory consultation.
B. Both audits and reviews are intended to provide moderate level of
assurance. C. The auditor who renders an engagement to undertake agreed-
upon procedures intends to issue factual findings.
D. In a consultancy engagement, the accountant is engaged to use
accounting expertise as opposed to auditing expertise to collect, classify and
summarize financial information.

94. According to Philippine Standard on Auditing, the procedures

employed in doing compilation are:

A. Designed to enable the accountant to express a limited assurance.

B. Designed to enable the accountant to express a negative assurance.
C. Not designed to enable the accountant to express any form of assurance.
D. Less extensive than review procedures but mare extensive than agreed-
upon procedures.
95. What type of assurance would you expect to see for an audit on the
fairness of financial statements?

A. No assurance.
B. Limited assurance.
C. Negative assurance.
D. Positive assurance.

96. What type of assurance would you expect to see for a compilation
of financial statement information?
A. No assurance.
B. Limited assurance.
C. Negative assurance.
D. Positive assurance.

97. Which one of the following consists primarily of inquiries of on entity's

management and comparative analyses of financial information?

A. audit.
B: compilation.
C. agreed-upon procedures.
D. review.

98.The internal audit function

A. can be applied to operations, computer systems, and business processes.

B. is not designed to add value to an organization.
C. is not designed to improve an organization's operations.
D. should not be involved with risk management.

99.Which of the following is not a typical internal audit?

A. Risk management and control evaluations

B. Operational audits
C. Performance audits
D. Compliance audits

100.In order for auditors to be able to recognize potential fraud, they must
be aware of the basic characteristics of fraud. Which of the following is a
characteristic of fraud?

A. Unintentional deception.
B. Taking unfair or dishonest advantage of uninformed individuals.
C. Lack of training.
D. Negligence on the part of executive management.