Chapter 2 services would be considered an attestation

engagement?
1. The practice of accounting includes the a. A consulting service engagement to provide
following except computer processing advice to a client.
a. Practice in public accountancy. b. An engagement to report on statutory
b. Practice in education/ academe. requirements.
c. Practice in the government. c. An income tax engagement to prepare
d. Practice in commerce and industry, when federal and state tax returns.
the CPA is appointed as marketing manager of d. The compilation of financial statements
the enterprise. from a client's financial records.
2. CPAs are considered professional 8. In performing an attestation engagement,
persons because they: a CPA typically
a. holds a license from a government agency. a. Supplies litigation support services
b. passes the CPA examination and have b. Assesses control risk at a low level
qualifying practical experience. c. Expresses a conclusion about an assertion
c. serves the interests of the public in general d. Provides management consulting advice
and clients in particular. 9. Operational audits generally have been
d. are members of the PICPA. conducted by internal auditors and
3. Society has attached a special meaning to government audit agencies but may be
the term "professional." A professional is: performed by certified public accountants. A
a. someone who has passed a qualifying exam primary purpose of an operational audit is to
to enter the job market. provide
b. a person who is expected to conduct himself a. A means of assurance that internal
or herself at a higher level accounting controls are functioning as
than the requirements of society's laws or planned.
regulations. b. A measure of management performance in
c. Any person who receives pay for the services meeting organizational goalsc. The results of
performed. internal examinations of
d. Someone who has both an education in the financial and accounting matters to a
trade and on-the-job experience received company's top-level management.
under an experienced supervisor. d. Aid to the independent auditor, who is
4. Which of the following is not an assurance conducting the audit of the financial
engagement? statements.
a. Compilation 10. In comparison to the external auditor, an
b. Financial statements audit internal auditor is more likely to be
c. Information reliability services concerned with
d. Reviews of prospective financial statements a. Internal administrative control
5. Non-assurance engagements include all b. Cost accounting procedures
of the following except c. Operational auditing
a. agreed-upon procedures. d. Internal control
b. management consulting 11. Which of the following best describes the
c. preparing of tax returns where no conclusion operational audit?
is expressed. a. It requires the constant review by internal
d. compliance audit auditors of the administrative controls as they
6. Independent auditing can best be relate to the operations of the company.
described as b. It concentrates on implementing financial
a. A branch of accounting and accounting control in a newly organized
b. A discipline that attests to the results of company.
accounting and other functional operations c. It attempts and is designed to verify the fair
and data. presentation of a company's results of
c. A professional activity that measures and operations.
communicates financial and business data. d. It concentrates on seeking aspects of
d. A regulatory function that prevents that operations in which waste could be reduced by
issuance of improper financial information. the introduction of controls.
7. Which of the following professional 12. Compliance auditing often extends

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beyond audits leading to the expression of ordinarily form the basis for which type of
opinion on the fairness of financial engagement?
presentation and includes audits of a. Agreed-upon procedures.
efficiency, economy effectiveness, as well b. Audit.
as c. Examination.
a. Accuracy d. Review.
b. Evaluation 19. Operational auditing is primarily oriented
c. Adherence to specific rules of procedures toward:
d. Internal control a. Future improvements to accomplish the
13. A summary of findings rather than goals of management.
assurance is most likely to be included in b. The accuracy of data reflected in
a(n): management's financial records.
a. Agreed-upon procedures report. c. The verification that a company's financial
b. Compilation report. statements are fairly presented.
c. Examination report. d. Past protection provided by existing internal
d. Review report. control.
14. The attest function: 20. A typical objective of an operational
a. Is an essential part of every engagement by audit is for the auditor to:
the CPA, whether performing auditing, tax a. Determine whether the financial statements
work, or other services. fairly present the entity's operations.
b. Includes the preparation of a report of the b. Evaluate the feasibility of attaining the
CPA's findings. entity's operational objectives.
c. Requires a consideration of internal control. c. Make recommendations for improving
d. Requires a complete review of all performance.
transactions during the period under d. Report on the entity's relative success in
examination. attaining profit maximization.
15. Attestation risk is limited to a low level in
which of the following engagement(s)? Chapter 3
a. Both examinations and reviews.
b. Examinations, but not reviews. 1. In the auditing environment, failure to
c. Reviews, but not examinations. meet auditing standards is often
d. Neither examinations nor reviews. - conclusive evidence of negligence
16. An operational audit differs in many ways 2. The prudent person concept establishes
from an audit of financial statements. Which in law that
of the following is the best example of one of - the CPA firm is not expected to be infallible
these differences? 3. To succeed in an action against the
a. The usual audit of financial statements auditor, the client must be able to show that
covers the four basic statements, whereas the - there is a close causal connection between
operational audit is usually limited to either the the auditor's breach of the standard of due
balance sheet or the income statement. care and the damages suffered by the client
b. Operational audits are more subjective and 4. The standard of due care to which the
often involve evaluating efficiency and auditor is expected to be held is referred to
effectiveness of operations. as
c. Operational audits do not ordinarily result in - the prudent person concept
the preparation of a report. 5. The existence of extreme or unusual
d. The operational audit deals with pre-tax negligence, even though there was no intent
income. to deceive or do harm, is
17. Which of the following terms best - constructive fraud
describes the audit of a taxpayer's tax return 6. Most lawsuits against CPAs are filed by
by an BIR auditor? - Client
a. Operational audit. 7. The Commission on Audit (COA):
a. Internal audit. - Responsibilities include conducting
b. Compliance audit operational audits to ensure spending meets
c. Government audit.18. Inquiries and analytical Congress's requirements.
procedures 8. The risk associated with survivability and

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profitability is referred to as management objectives with respect to
- Business risk assigning personnel to engagements, a CPA
9. Which of the following attributes is more firm may use policies and procedures such
essential for an auditor than of as:
management? - Requiring timely identification of the staff
- Independence requirements of specific engagements so that
10. Attestation risk is limited to a low level in enough qualified personnel can be made
which of the following engagement(s)? available
- Examinations, but not reviews ADDITIONAL
Ps. Quality control= Quality Management
Chapter 4 1.The main purpose of implementing quality
control policies and procedures is:
1. in connection with the component of - To provide reasonable assurance that audit
governance and leadership, a CPA firm's will be performed in accordance with PSA
CGM should ordinarily prove that all 2. Which of the following quality control
personnel objectives would best least important to the
- have the knowledge required to enable them auditors?
to fulfill responsibilities assigned2. Quality - Determination of audit fee
management for a CPA firm, as 3. A CPA firm's personnel partner
referred to in auditing standards, applies to periodically studies the CPA firm's
- Auditing and accounting and review services personnel advancement experience to
3. The least important element in the ascertain whetherindividuals meeting stated
evaluation of a CPA firm's system of quality criteria are assigned increased degrees of
controls would concern its policies and responsibility. This is evidence of the CPA
procedures with respect to firm's adherenceto prescribed standards of
- Determination of audit fees -Quality control
4. A basic objective of a CPA firm is to 4. CPA firms should establish quality control
provide professional services that conform policies and procedures for personnel
with professional standards. Reasonable management in order to provide reasonable
assurance of achieving this basic objective assurance that
is provided through - Personnel will have the knowledge required to
- A system of quality Management fulfill responsibilities assigned.
5. The primary purpose of establishing of 5. A CPA establishes QC policies and
quality management and procedures for procedures for deciding whether to accept a
deciding whether to accept a new client is to new client or continue to perform services
- Minimize the likelihood of association with for acurrent client. The primary purpose for
clients whose management lacks integrity establishing such policies is to
6. The nature and extent of a CPA firm's - Minimize the likelihood of association with
quality control policies and procedures clients whose management lacks integrity.6.
depend on Within the context of quality control, the
I. CPA firm's size primary purpose of continuing professional
II. Nature of the CPA firm's practice education and training activities is to enable
III. Cost-benefit considerations a CPA firm to provide personnel within the
- All THREE firm with
8. The primary reason why a CPA firm - Knowledge required to fulfill assigned
establishes a system of quality manegement responsibilities and to progress within the firm.
polices and procedures for human 7. In pursuing its quality control objectives
resources is to with respect to independence, a CPA firm
- Provide reasonable assurance that staff may use policies and procedures such as
personnel will have the capability, competence - Emphasizing independence of mental
and commitment to ethical principles required attitude in firm training programs and in
to enable them to fulfill their responsibilities in supervision and review of work.
accordance with professional standards and 8. In connection with the element of
regulatory and legal requirements monitoring, a CPA firm's system of quality
9. In pursuing its system of quality control should ordinarily provide for

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themaintenance of - Determination of audit fees.6. In pursuing its
- Documentation to demonstrate compliance quality control objectives
with its policies and procedures with respect to acceptance of a client, a CPA
9. Which of the following is a quality control firm is not likely to
standard? - Review the personnel practices of the
- Engagement performance. proposed client.
10.Which of the following is not one of the 7. In pursuing a CPA firms' quality control
six elements of quality control system? objectives, a CPA firm may maintain records
- Review. indicating which partners or employees
11. A requirement to design recruitment ofthe CPA firm were previously employed by
processes and procedures to help the firm the CPA firm's clients. Which quality control
select individuals meeting minimum objective would this be most likely
academic requirements established by the tosatisfy?
firm is an example of a quality control - Independence.
procedure in the area of: 8. Which of the following is an element of
- Human resources quality control?
12. In pursuing a CPA firm's quality control - Personnel management
objectives, a CPA firm may maintain records 9. One element of the personnel
indicating which partners or employees of management quality control standard is
the CPA firm were previously employed by professional development. The primary
the CPA firm's clients. Which quality control reason why a CPA firm establishes policies
objective would this be most likely and procedures for professional
tosatisfy? development of staff accountants is to
- Relevant ethical requirements. - Provide reasonable assurance that staff
13. Which of the following is not an element personnel will have the knowledge required to
of quality control? enable them to fulfill responsibilities.
- Documentation. 10. A procedure in which a quality control
14. An engagement review form of peer partner periodically tests the application of
review is least likely to include a peer quality control procedures is most
reviewer's detailed analysis of: directlyrelated to which quality control
- Overall system of quality control element?
1. A firm of independent auditors must - Monitoring
establish and follow quality control policies 11. A requirement that working papers be
and procedures because these standards reviewed by the supervisor, and any
- Give reasonable assurance that the firm as a deficiencies be discussed with the preparer
whole will comply with professional standards. is anexample of a quality control procedure
2. Which of the following is an element of in the area of:
CPA firm’s quality control system that - Engagement performance.
should be considered in establishing its 12. The body that issues international
quality control policies and procedures? pronouncements providing auditing
- Assigning personnel to engagement procedural and reporting guidance is the:
3. A quality control policy that requires - International Auditing and Assurance
personnel in the firm to adhere to Standards Board.
independence, integrity, objectivity, 13. A CPA firm establishes quality control
confidentiality and professional behavior, policies and procedures for deciding
relates to whether to accept a new client or continue
- Professional requirements toperform services for a current client. The
4. Quality control for a CPA firm as referred primary purpose for establishing such
to in Statements on Quality Control policies and procedures is:
Standards, applies to - To minimize the likelihood of association with
- Auditing and accounting and review services. clients whose managements lack integrity.
5. The least important evidence of a CPA 14. A peer review in which the peer reviewers
firm's evaluation of its system of QC would study and appraise a CPA firm's system of
concern the CPA firm's policies and quality control to perform accounting
procedures for andauditing work is referred to as a(n):

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- System review. performed by a CPA firm than with other
lines of professional work?
Chapter 5 - Independence
12-Which of the following types of
1. Auditors are periodically punished for employees must be independent of an audit
holding an investment in a client. This client?
violates which ethical rule? - A partner in the office that performs the
- Independence engagement.
2-Which of the following is not a broad 13-Cruz & Santos CPAs has one office.
category of threat to auditor independence? Which of the following is least likely to
- Positive work relationship impair independence with respect to an
3-A small CPA firm provides audit services to audit client?
a large local company. Almost eighty - A partner in the firm has an investment in a
percent of the CPA firm's revenues come mutual fund that has a direct interest in the
from this client. Which statement is most client.
likely to be true? 14-Which of the following forms of
- Appearance of independence may be lacking. advertising would most likely be considered
4-Contingency fee-based pricing of a violation of the Code of Ethics?
accounting services is: - Advertising including an indication that the
- Prohibited for clients for whom attestation firm has a close relationship with several tax
services are provided. court judges.
5-Which of the following family relationships 15-Independence is required of a CPA
is most likely to impair a CPA's independence performing
with respect to a particular - Attestation services, but not other
audit client on which the CPA works? professional services.
- The CPA's sister is controller of the audit 16-A CPA should maintain objectivity and be
client. free of conflicts of interest when performing:
6-Independence requirements suggest that - All professional services.
a CPA should evaluate whether a particular 17-In determining the scope and nature of
threat to independence would lead a services to be performed in public practice,
reasonable person, aware of all the relevant a CPA firm should:
facts, to conclude that: - Determine that the performance of all
- An unacceptable risk of non-independence services is consistent
exists. 18-Which of the following is considered a
7-If the Code of Ethics does not specifically type of threat to compliance with the Rules
address a threat to auditor independence, of the Code of Ethics?
the auditor should: - Self-interest
-Consider the threat from the perspective of a 19-A CPA's retention of client records as a
reasonable and informed third party who has means of enforcing payment of an overdue
knowledge of all the relevant information. audit fee is an action that is:
8-Which of the following is not a broad
category of safeguards that mitigate or Chapter 6
eliminate threats to independence?
- Safeguards created to assure proper training Which of the following is false? Philippine
within both the client and attest environment. Framework for Assurance Engagements
9-Which of the following statements is A. describes the objective and elements of
correct? assurance engagements intended to provide either a
- Working papers prepared by the auditor solely reasonable assurance or limited assurance.
for the engagement need not be returned to the B. identifies engagements to which Philippine
client. Standards on Auditing, Philippine Standards on
10-When a threat to independence arises, an Review Engagements, and Philippine Standards on
auditor should consider: Assurance Engagements apply.
- Available safeguards to independence. C. Establishes standards or provides procedural
11-Which of the following attributes is more requirements for the performance of assurance
closely associated with attestation services engagements.

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D. provides a frame of reference for the Auditing * review.
and Assurance Standards Council in its adoption of * compilation.
International Standards on Auditing, International * agreed-upon procedures
Standards on Review Engagements and * independent financial statements audit.
International Standards on Assurance Engagements
for application in the Philippines. 9. Which of the following is not an assurance
engagement?
2. Which of the following is not an assurance * Information System Reliability Service
engagement? * Business Performance Measurement
* Compilation * Risk Assessment Service
* Financial statements audit * Management Consulting Service
* Information reliability services
* Reviews of prospective financial statements 10. When the professional accountant has obtained
sufficient appropriate evidence to conclude that the
3. Non-assurance engagements include all of the subject matter conforms in all material respects
following except with identified suitable criteria, he/she can provide
* agreed-upon procedures. * limited level of assurance. c. reasonable level
* management consulting. of assurance.
* preparation of tax returns where no conclusion * absolute assurance.
is expressed. d. no assurance.
* compliance audit.
11. A practitioner should plan and conduct the
4. Assurance engagements should exhibit the assurance engagement in an effective manner to
following elements except meet the objective of the engagement. Which of the
* a subject matter. following matters need not be a concern of the
* suitable criteria. practitioner in planning
* an engagement process. A Criteria to be used
* appropriate professional fees. B Engagement objective
C Personnel and expertise requirements
5. Which of the following forms may the subject D Specific format of the assurance report
matter of an assurance engagement take?
a. Historical financial information Chapter 7
b. Systems-and processes
* Behavior Which of the following is a principle underlying an
* All of the above audit conducted in accordance with generally
accepted auditing standards?
6. Which of the following is not a,component of A.The audit provides reasonable assurance the
engagement risk? client will remain in business for at least one year.
c. Business risk B.The audit report expresses an opinion on whether
a. Control risk the financial statements are free of material and
d. Detection risk immaterial misstatement.
b. Inherent risk C.Auditors are responsible for, among other things,
maintaining professional objectivism, exercising
7. Engagement risk is influenced by the risks professional engagement, and obtaining appropriate
associated with the following except documentation.
* nature and form of the subject matter. D.An auditor's opinion enhances the degree of
* nature and form of the criteria applied to the confidence that intended users can place in the
subject matter. financial statements.
* nature and extent of the process used to collect
and evaluate evidence. Audits of financial statements are designed to
* unreasonably low professional fee. obtain reasonable assurance of detecting
misstatement due to:
8. An assurance engagement that provides a high
level of assurance that the financial statements are Fraudulent Financial Reporting: Yes, Yes, No, No
free of material misstatement is known as Misappropriation of Assets: Yes, No, Yes, No

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 assurance that the financial statements are free
A. Option A from material misstatement.
B. Option B C. Auditors are responsible for having appropriate
C. Option C competence to perform the audit without the
D. Option D assistance of outside specialists.
A. Option A: Yes, Yes D. Management is responsible for preparing
accurate financial statement amounts, while
An audit provides reasonable assurance of detecting auditors are responsible for auditing those amounts
which of the following types of material illegal and for preparing note disclosures related to those
acts? amounts.

Direct Effect: Yes, Yes, No, No Which of the following is not an underlying
Without a Direct Effect: Yes, No, Yes, No premise of an audit?
A. Management must provide the auditor with all
A. Option A information relevant to the preparation and fair
B. Option B presentation of the financial statements.
C. Option C B. Management and the auditors have
D. Option D responsibility for the preparation of financial
B. Option B: Yes, No statements in accordance with the applicable
financial reporting framework.
An attitude that includes a questioning mind, being C. Where appropriate, the auditor may obtain
alert to conditions that may indicate possible information from those charged with governance.
misstatements, and a critical assessment of audit D. The auditors should be provided unrestricted
evidence is referred to as: access to those within the entity from whom the
a. Reasonable assurance. auditor determines it necessary to obtain audit
c. Audit neutralism. evidence.
b. Professional skepticism.
d. Auditing mindset. By definition, proper professional skepticism on an
audit requires
A set of criteria used to determine measurement,
recognition, representation, and disclosure of all Questioning Mind: No, No, Yes, Yes
material items appearing in the financial statements Subjective Assessment of Audit Evidence: No, Yes,
is referred to as a(n) No, Yes
A. Financial reporting framework.
B. Public Company Accounting Oversight Board A. Option A
Criteria. B. Option B
C. Quality control presentation standard. C. Option C
D. Special purpose audit standard. D. Option D
C. Option C: Yes, No
An audit should be designed to obtain reasonable
assurance of detecting material misstatements due Chapter 8
to:
A. Errors. Which of the following is included as part of the
B. Errors and fraud. principles governing an audit
C. Errors, fraud, and noncompliance with laws a. Auditors need to obtain a high level of assurance
with a direct effect on financial statement that the financial statements are free of all
amounts. misstatements.
D. Errors, fraud and noncompliance with all laws. b. An audit has inherent limitations such that
auditor cannot provide absolute assurance about
Which of the following is accurate, as indicated in whether the financial statements are free of
the principles underlying an audit? misstatement.
A. Management is expected to provide the auditors c. Auditors need to maintain professional
with all needed evidence prior to the beginning of skepticism only on audits where there is a high risk
audit work. of material misstatement.
B. An auditor is unable to obtain absolute d. All of the above are included as part of the

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principles governing an audit. as an audit engagement letter.
d. Reperformance involves checking the
Which of the following statements is true about the mathematical accuracy of a document or record,
audit opinion formulation process? such as an inventory count sheet.
a. The audit opinion formulation process is
significantly different for the financial statement Which of the following items should be included in
only audit and the integrated audit. audit documentation?
b. The audit opinion formulation process is a. Procedures performed
based on the premise that management has b. Audit evidence examined
responsibility to prepare the financial statements c. Conclusions reached with respect to relevant
and maintain internal control over financial financial statement assertions
reporting. d. All of the above should be included
c. The audit opinion formulation process is
comprised of seven phases. Which of the following statements is a false
d. All of the above are true statements regarding the statement regarding audit documentation?
audit opinion formulation process. a. An audit program is an example of audit
documentation.
Which of the following activities is not part of the b. The only purpose of audit documentation is to
activities within the audit opinion formulation provide evidence that the audit was planned and
process? performed in accordance with auditing
a. The auditor develops a common understanding of standards.
the audit engagement with the client c. Audit documentation helps facilitate internal and
b. The auditor determines the appropriate external inspections of completed audits.
nonaudit consulting services to provide to the d. All of the above statements are true.
client.
c. The auditor identifies and assess risks of material Which of the following procedures is least likely to
misstatements and then responds to those identified be performed during the final phase of the audit
risks. opinion formulation process?
d. The auditor determines the appropriate audit a. Assessment of misstatements detected during the
opinion(s) to issue. performance of substantive procedures and tests of
controls.
Which of the following is not one of the b. Performance of preliminary analytical review
management assertions? procedures.
a. Completeness c. Performance of an engagement quality review.
b. Existence d. Determination of the appropriate audit opinion(s)
c. Rights and obligations to issue.
d. They are all management assertions.
Which of the following factors does not create a
Which management assertion addresses whether the demand for external audit services?
components of the financial statements are properly a. Potential bias by management in providing
classified, described, and disclosed? information.
a. Completeness b. Requirement of PICPA.
b. Existence c. Complexity of the accounting processing
c. Rights and obligations systems.
d. Presentation and disclosure d. Remoteness between a user and the organization.

Which of the following is a true statement Which of the following expectations can users of
regarding audit evidence and audit procedures? the audit report reasonably expect with regards to
a. The auditor has a responsibility to design and the audited financial statements?
perform audit procedures to obtain sufficient a. The financial statements include all financial
appropriate audit evidence. disclosures desired by users.
b. Inquiry is a type of audit procedure that typically b. The financial statements are presented fairly
does not corroborating evidence. according to the substance of PFRS.
c. The audit procedures that are performed during c. The financial statements are free from all errors.
an audit are summarized in a document referred to d. All of the above are reasonable expectations.

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Which of the following parties are involved in
preparing and auditing financial statements?
a. Management
b. Audit committee
c. Internal audit function
d. External auditor

Which of the following are the responsibilities of

the external auditor in auditing financial
statements?
a. Maintaining internal controls and preparing
financial reports
b. Providing internal assurance on internal control
and financial reports
c. Providing internal oversight of the reporting
process
d. None of the above.

In terms of technical knowledge and expertise,

which of the following should external auditors do?
a. Understand accounting and auditing authoritative
literature.
b. Develop industry and client-specific knowledge.
c. Develop and apply computer skills.
d. All of the above.

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 Multiple Choice Questions 6. The risk that the auditor will conclude, based on substantive
procedures, that a material misstatement does not exist in an
CHAPTER 9 account balance when, in fact, such misstatement does exist is
referred to as
1. In planning and performing an audit, auditors are concerned
about risk factors for two distinct types of fraud: fraudulent a. Business risk c. Control risk
financial reporting and misappropriation of assets. Which of the
b. Engagement risk d. Detection risk
following is a risk factor for misappropriation of assets?
7. Which of the following best describes what is meant by the term
a. Generous performance-based compensation systems.
"fraud risk factor"?
b. Management preoccupation with increased financial
a. Factors that, when present, indicate that risk exists.
performance.
b. Factors often observed in circumstances where frauds
c. An unreliable accounting system.
have occurred.
d. Strained relationships between management and the
c. Factors that, when present, require modification of planned
auditors.
audit procedures.
2. Which of the following should not normally be included in the
d. Weakness in internal control identified during an audit.
engagement letter for an audit?
8. Three conditions generally are present when fraud occurs. Select
a. A description of the responsibilities of client personnel to
the one below that is not one of those conditions.
provide assistance.
a. Incentive or pressure c. Supervisory position
b. An indication of the amount of an audit.
b. Opportunity d. Attitude
c. A description of the limitations of an audit.
9. Which of the following is most likely to be an overall response to
d. A listing of the client's branch offices selected for testing.
fraud risks identified in an audit?
3. Which portion of an audit is least likely to be completed before
a. Supervise members of the team less closely and rely more
the balance sheet date?
upon judgment.
a. Test of controls.
b. Use less predictable audit procedures.
b. Issuance of an engagement letter.
c. Use only certified public accountants on the engagement.
c. Substantive procedures.
d. Place increased emphasis on the audit of objective
d. Assessment of control risk. transactions rather than subjective transactions.

4. Which of the following should the auditor obtain from the CHAPTER 10
predecessor auditors before accepting an audit engagement?
1. Which of the following is Omong the risk assessment procedures
a. Analysis of balance sheet accounts. that the auditor should perform in obtaining an understanding of
the entity and its environment, including its internal control?
b. Analysis of income statement accounts.
a. Inquiries of management and others within the entity.
c. All matters of continuing accounting significance.
b. Analytical procedures.
d. Facts that might bear on the integrity of management.
c. Observation and inspection.
5. The primary objective of tests of details of transactions
performed as substantive procedures is to: d. Confirmation

a. Comply with generally accepted auditing standards. 2. In determining others within the entity to whom inquiries' may
be directed and the extent of those inquiries, the auditoy considers
b. Attain assurance about the reliability of the accounting what information may be obtained that would help him/her; in
system. identifying risks of material misstatement. The term "others" does
not include the
c. Detect material misstatements in the financial statements.
a. Controller b. In-house legal counsel
d. Evaluate whether management's policies and procedures
are opening effectively. b. Internal auditor d. Major supplier of raw materials
2. The audit procedure that may be helpful in identifying the 9. PSA 315 (Clarified) requires that the auditor should obtain an
existence of unusual transactions or events, and amounts, ratios understanding of the entity's selection and application of
and trends that may indicate matters that have financial statement accounting policies and consider whether they are appropriate for
and audit implications is its business and consistent with the applicable financial reporting
framework and accounting polices used in the relevant industry.
a. Inquiries of management b. Observation and inspection The understanding does not encompass.
c. Confirmation d. Analytical procedures a. The methods the entity uses to account for significant and
unusual transactions.
4. Observation and inspection procedures that may support
inquiries of management and others and also, provide information b. The effect of significant accounting policies in contractual or
about the entity and its environment will involve the following emerging areas for which there is lack of authoritative
except guidance or consensus.
a. Visits to entity's premises and plant facilities c. Changes in the entity's accounting policies.
b. Walk-throughs d. Criteria in the selection ofthe company's chief accounting
executive.
c. Reading minutes of board of directors' meetings
9. PSA requires that the auditor , should obtain an understanding
d. Confirmation of account balances. of the entity's objectives and strategies, and the related business
risks that may result in material misstatement of the financial
4. The auditor's understanding of the entity ånd its environment
statements. Which of the following is not an example of business
consists of an understanding of the following aspects except:
risks that may have financial consequences and may affect the
a. Industry, regulatory, and other external factors, including financial statements?
the applicable financial reporting framework.
a. A contracting customer base due to industry consolidation
b. Nature of the entity, including the entity's selection and that may increase the risk of misstatement associated with
application of accounting policies. the valuation of receivables.

c. Measurement and review Of the entity's financial b. Use of new IT.

performance.
c. New accounting requirements.
d. Entity's selection and screening process of marketing and
d. Contracting economy.
production personnel.
10. The risk of material financial statement misstatement may be
6. PSA 315(Clarified) requires . that the auditor should obtain an
greater when the following conditions exist except
understanding of relevant industry, regulatory and other external
factors including the applicable financial reporting framework. a. When there is greater management intervention to specify
Which of the following is not an example of matters relating to the accounting treatment.
regulatory environment that the auditor would usually consider?
b. When there is greater manual intervention for data
a. Regulatory framework for a regulated industry. collection and processing.
b. Legislation and regulation significantly affecting the entity's c. Complex calculations or accounting principles is involved.
operation.
d. When there is sufficient personnel with appropriate
c. Taxation. accounting and financial reporting skills.
d. Product technology relating to the entity's product. Chapter 11
1. The primary purpose for obtaining an understanding of an
7. PSA 315 (Clarified) requires that the auditor should obtain an
audit client's internal control structure is to:
understanding of relevant industry, regulatory and other external
a. provide a basis for making constructive suggestions in a
factors including the applicable financial reporting framework.
management letter.
Which of the following is not among the items that relate to
industry conditions? b. determine the nature, timing, and extent of tests to be
performed in the audit
a. Energy, supply and cost
c. obtain sufficient competent evidential matter to afford a
b. Cyclical or seasonal activity
reasonable basis for an Opinion on the financial statements
c. Market and competition under examination.

d. Inflation and currency revaluation d. provide information for a communication of internal control
structure-related matters to management.
2. Which of the following can an auditor observe as a general c. A flowchart of the documents and procedures used by the
control procedure used by companies? company.

a. Segregation of functional responsibilities. d. A well- indexed file of working papers.

b. Management philosophy and operating cycle. 8. During consideration of the internal control system in a financial
statement audit, an auditor is not obligated to
c. Open lines of communication to the audit committee of the
board of directors. a. search for significant deficiencies in the operation of the
internal control system.
d. External influences such as bank examiner audits.
b. understand the internal control environment and the
3. A client's control procedure is: accounting system.
a. an action taken by auditors to obtain evidence. c. determine whether the control procedures relevant to the
audit planning have been placed in operation perform
b. an action taken by client personnel for the purpose of
preventing, detecting, and correcting errors and d. procedures in order to understand the design of the
irregularities in transactions. internal control policies.
c. a method for recording, summarizing and reporting 9. The primary objective of procedures performed to obtain an
financial information understanding of the internal control system is to provide an
auditor with
d. the functioning of the board of directors in support of its
audit committee. a. evidential matter to use in reducing detection risk;
4. The control objective designed to reduce the probability that b. knowledge necessary to plan the audit.
fictitious transactions get recorded in the accounts is:
c. a basis from which to modify tests of controls.
a. completeness c. proper period
d. information necessary to prepare flowchart.
b. authorization d. validity
10. Which of the following is not a reason an auditor should obtain
5. The control objective designed to reduce the probability that a an understanding of the elements of an entity's internal control
credit sale transaction will get debited to cash instead of accounts system in planning an audit?
receivable is:
a. To identify types of potential misstatements that can occur.
a. validity c. accuracy
b. To design substantive tests
b. Classification d. completeness
c. To consider the operating effectiveness of the internal
6. In most audits of large companies, internal control risk controls.
assessment contributes to audit efficiency, which means:
d. To consider factors that affect the risk of material
a. the cost of year-end audit work will exceed the cost of misstatements.
control evaluation work.
11. When control risk is assessed-at the maximum level for all
b. auditors will be able to reduce the cost of year-end audit financial statement assertions, an auditor should document
work by an amount more than the control evaluation
the auditor's
costs.
Understanding of Conclusion that Basis for concluding
c. the cost of control evaluation work will exceed the cost of
the entity's internal control risk is at the that control risk is at
year-end audit work.
control elements maximum level the maximum level
d. auditors will be able to reduce the cost of year-end audit
work by an amount less than the control evaluation costs. a. Yes No No

b. Yes Yes No
7. Which of the following is a device designed to help the audit
team obtain evidence. about the control environment and about c. No Yes Yes
the accounting and control procedures of an audit client?
d. Yes Yes Yes
a. A narrative memorandum describing the control system.

b. An internal control questionnaire

12. After obtaining an understanding of an entity's internal control 16. In a study and evaluation of the control system policies and
system, an auditor may assess control risk at the maximum level procedures, the completion of a questionnaire is most closely
for some assertions because the auditor associated with which of the following?

a. believes the internal control policies and procedures are a. Tests of controls
unlikely to be effective.
b. Substantive tests
b. determines that the pertinent internal control system
elements are not well documented. c. Obtaining an initial understanding of the system.

c. performs tests of controls to restrict detection risk to an d. Review of the system design.
acceptable
17. A weakness in internal control over recording retirements of
d. identities internal control policies and procedures that are equipment may cause an auditor to
likely to prevent material misstatements.
a. trace additions to the "other assets" account to search of
13. After obtaining an understanding of an entity's internal control equipment that is still on hand but no longer being used s
system and assessing control risk, an auditor next may
b. select certain items of equipment from the accounting
a. perform tests of controls to verify management's assertions records and locate them In the plant.
that are embodied In the financial statements.
c. inspect certain items of equipment in the plant and trace
b. consider whether evidential matter is available to support those items to the accounting records.
a further reduction in the assessed level of control risk.
d. review the subsidiary ledger to ascertain whether
c. apply analytical procedures as substantive tests to validate depreciation was taken on each item of equipment during
the assessed level of control risk. the year.

d. evaluate whether the internal control system policies and 18. Reportable conditions are matters that come to an auditor's
procedures detected, material misstatements in the attention that should be communicated to an entity's audit
financial statements. committee because they represent

14. The objective of tests of details of transactions performed as a. material irregularities or illegal acts perpetrated by high-
tests of controls is to level management.

a. detect material misstatements in the account balances of b. significant deficiencies in the design or operation of the
the financial statements. internal control system.

b. evaluate whether an internal control system policy or c. flagrant violations of the entity' s documented conflict-of-
procedure operated effectively. interest policies.

c. determine the nature, timing, and extent of substantive d. intentional attempts by client personnel to limit the scope
tests for financial statement assertions. of the auditor's field work.

d. reduce control risk, inherent risk; and detection risk to an 19. Miles Retailing, Inc., maintains a staff of three full-time internal
acceptably low level. auditors who report directly to the controller. In planning to use
the internal auditors to provide assistance in performing the audit,
15. An auditor uses the knowledge provided by the understanding the independent auditor most likely will
of the internal control system and the assessed level of control risk
primarily to a. place limited reliance on the work performed by the
internal auditors.
a. determine whether procedures and records concerning the
safeguarding of assets are reliable. b. decrease the extent of the tests of controls needed to
support the assessed level of detection risk.
b. ascertain-whetner the opportunities to allow any person to
both perpetrate and conceal irregularities are minimized. c. increase the extent of the procedures needed to reduce
control risk to an acceptable level.
c. modify the initial assessments of inherent risk and
preliminary judgments about materiality levels. d. avoid using the work performed by the internal auditors.

d. determine the nature, timing, and extent of substantive

tests for financial statement assertions.
20. In developing a preliminary audit strategy, an auditor should c. analytical procedures for the current year propelty and
consider equipment transactions.

a. whether the allowance for sampling risk exceeds the d. tests of controls and limited tests of current year property
achieved upper precision limit. and equipment transactions.

b. findings from substantive tests performed at interim dates. 25. When an auditor assesses control risk below the maximum
level, the auditor is required to document his or her
c. whether the inquiry of the client's attorney identifies any
litigation, claims, or assessments not disclosed in the Basis for understanding that Understanding of the entity 's
financial statements. control risk is below the internal control system elements
maximum level
d. the planned assessed level of control risk.
a. No No
21. Which of the following statements describes why a properly
designed and executed audit may not detect a material b. Yes Yes
irregularity?
c. Yes No
a. Audit procedures that are effective for detecting an
unintentional misstatement may be ineffective for an d. No Yes
intentional misstatement that IS concealed through
collusion. 26. An auditor most likely would review an entity's periodic
accounting for the numerical sequence of shipping documents and
b. An audit is designed to provide reasonable assurance of invoices to support management's financial statement assertion of
detecting material errors, but there is no similar
responsibility concerning material irregularities. a. Existence c. rights and obligations

c. The factors considered in assessing control risk indicated an b. valuation d. completeness

increased risk of intentional misstatements, but only a low
risk of unintentional errors in the financial statements. 27. An advantage of using internal control flowcharts instead of
internal control 'questionnaires to document information about
d. The auditor did not consider the factors influencing audit internal control is that flowcharts
risk for account balances that have effects pervasive to the
financial statements taken as a whole. a. identify internal control weaknesses more prominently.

22. When an auditor increases the planned assessed level of b. provide a visual depiction of clients' activities.
control risk because certain control procedures were determined
c. indicate whether control procedures are operating
to be ineffective, the auditor would most likely increase the
effectively.
a. extent of tests of details b. level of inherent risk
d. reduce the need to observe clients employees performing
c. extent of tests of controls d. level of detection risk routine; tasks.

23. An auditor's primary consideration regarding an entity's 28. Which of the following audit techniques most likely would
internal control system policies and procedures is whether the provide an auditor with the greatest assurance about the
policies and procedures effectiveness, of the operation of an internal control procedure?

a. affect the financial statement assertions. a. Confirmation with outside parties.

b. prevent management override. b. Inquiry of client personnel.

c. relate to the control environment. c. Recomputation Of account balance amounts.

d. reflect management's philosophy and operating style. d. Observation of client personnel.

24. When there are numerous property and equipment Chapter 12

transactions during the year, an auditor who plans to assess
1. When the auditor assess inherit risk, he considers among others
control risk at a low level usually performs
the following factors except
a. analytical procedures for property and equipment balances
a. Integrity of management
at the end
b. Nature of the entity's business
b. tests of controls and extensive tests of property and
equipment balances at the end of the year. c. Unusual purpose on management
 d. Results of the interim tests 6. Which of the following circumstances most likely would cause an
auditor to believe that material misstatements might exist in an
2. Which of the following is not a benefit claimed for the practice entity's financial statements?
of determining materiality in the initial planning stage of starting
an audit? a. Accounts receivable confirmation requests yield
significantly fewer responses than expected
a. Being able to fine tune the audit work for effectiveness and
efficiency b. Audit trails of computer-generated transactions exist for
only a short time
b. Avoiding the problem of doing more work than necessary
(overauditing) c. The chief financial officer does not sign the management
representation letter until the last day of the auditor's field
c. Being able to decide early what kind of audit opinion to work
give
d. Management consults with other accountants about
d. Avoiding the problem of doing too little work significant accounting matters
(underauditing)
7. For which of the following judgements may an independent
3. The revenue cycle of a company generally includes these auditor share responsibility with an entity's internal auditor, who is
accounts: assessed to be both competent and objective?
a. Inventory, accounts payable, and general expenses I. Materiality of misstatements

b. Inventory, general expenses, and payroll II. Evaluation of accounting estimates

c. Cash, accounts receivable, and sales a. I only b. II only
d. Cash, notes payable, and capital stock c. Neither d. Both

4. Which of the following ordinarily is designed to detect possible 8. An auditor uses the assessed level of control risk to
material peso errors on the financial statements?
a. Evaluate the effectiveness of the entity's control activities
a. Control testing
b. Identify transactions and account balances where inherent
b. Analytical procedures risk is at maximum
c. Computer controls c. Indicate whether materiality thresholds for planning and
evaluation purposes are sufficiently high
d. Post-audit working paper review
d. Determine the acceptable level of detection risk for
5. Which of the following statements best describes an auditor's financial statements assertions
responsibility to detect errors and Irregularities?
9. Which of the following is a step in an auditor's decision to assess
a. The auditor should study and evaluate the client's internal control risk at below maximum?
control system, and design the audit to provide reasonable
assurance of detecting all errors and irregularities a. Apply analytical procedures to both financial data and non-
financial information to detect conditions that may indicate
b. The auditor should assess the risk that errors and weak control
irregularities may cause the financial statements to contain
material misstatements, and determine whether the b. Perform tests of details of transactions and account
necessary internal control procedures have been prescribed balances to identify potential errors and irregularities
and are being followed satisfactorily
c. Identify specific control activities that are likely to detect
c. The auditor should consider the types of errors and or prevent material misstatements
irregularities that could occur, and determine whether the
necessary internal control procedures have been prescribed d. Document that the additional audit effort to perform tests
and are being followed of controls exceed the potential reduction in substantive
testing
d. The auditor should assess the risk that errors and
irregularities may cause the financial statements to 10. Proper segregation of duties reduce the opportunities in which
contain material misstatements, and design the audit to a person could both
provide reasonable assurance of detecting material errors
and irregularities a. Journalize entries and prepare financial statements

b. Record cash receipts and record cash disbursements

 c. Establish internal control and authorize transactions b. Improved internal control

d. Perpetuate errors and irregularities and conceal them c. Substantial increases in sales

11. The objective of tests of details of transactions performed as d. Frequent changes in suppliers
tests of controls is to
16. Jones, CPA, is auditing the financial statements of ABC
a. Monitor the design and use of entity documents, such as Retailing, Inc. What assurance does Jones provide that the audit
prenumbered shipping forms will detect either direct-effect illegal acts that are material to ABC's
financial statements or illegal acts that have a material but indirect
b. Determine whether internal controls have been placed in effect on the financial statements?
operation
I. Direct-Effect Illegal Acts - Reasonable
c. Detect material misstatements in the account balances of
the financial statements II. Direct-Effect Illegal Acts - Limited

d. Evaluate whether the internal controls are operating III. Indirect-Effect Illegal Acts - Reasonable
effectively
a. I only b. I and III
12. Fraud may be most properly defined as
c. II only d. II and III
a. False representation or concealment of a material fact to
the benefit or detriment of an individual or organization 17. Maxie Corporation has a few large accounts receivable that
total P1,000,000. Nadie Corporation has a large number of small
b. Extortion in which the threat of physical violence is used to accounts receivable that also total P1,000,000. The importance of
coerce someone to part with something of value an error in any one account is, therefore, greater for Maxie than for
Nadie. This is an example of the auditor's concept of
c. The use of company assets for one's own personal purposes
a. Materiality
d. Outright theft of company assets without falsification of
records to conceal the act b. Comparative analysis

13. Fraud may be perpetrated with the intent to benefit a c. Reasonable assurance
company. Which of the following is an example of such a fraud?
d. Relative risk
a. Acceptance of bribes or kickbacks by purchasing agent
18. Which one of the following statements is correct concerning
b. Claims submitted for services or goods not actually the concept of materiality?
provided to the company
a. Materiality is determined by reference to guidelines
c. Sale or assignment of fictitious or misrepresented assets established by the PICPA

d. Diversion by an employee or outsider of transaction that b. Materiality depends only on the peso amount of an item
would normally generate profits for the company relative to other items in the financial statements

14. An internal auditor was engaged to audit a foreign c. Materiality depends on the nature of an item rather than
manufacturing subsidiary. The auditor noted that "consulting fees" on the peso amount of the item
and miscellaneous selling expenses appeared to be high and were
not always properly documented. In evaluating the risks associated d. Materiality is a matter of professional judgement
with these facts, the auditor should consider that
19. The ultimate risk against which an auditor requires reasonable
a. A foreign operation's involvement is not important in protection is a combination of two separate risks. The first of these
quantitative terms is that material errors will occur in the accounting process by which
the financial statements are developed, and the second is that
b. A foreign operation's involvement is not important in
qualitative terms a. A company's internal control will not be adequate to detect
errors and irregularities
c. Audit risks are increased because of cultural differences
b. Those errors that occur will not be detected in the
d. The risks associated with failing to detect any wrongdoing auditor's examination
are probably not material
c. Management may possess an attitude that lacks integrity
15. The risk of management fraud increases in the presence of
d. Evidential matter is not competent enough for the auditor
a. Management incentive systems based on operating to form an opinion based on reasonable assurance
income
20. The risk that an auditor's procedures will lead to the conclusion 25. The risk that the auditor's own work will lead to the decision
that a material error does exist in an account balance when, in fact, that material misstatements do not exist in the financial
such error does exist is referred to as statements, when in fact such misstatements do exist is:

a. Audit risks b. Inherent risks a. Audit risks

c. Control risks d. Detection risks b. Inherent risks

21. Which of the following statements is not correct about c. Control risks
materiality?
d. Detection risks
a. The concept of materiality recognizes that some matters
are important for fair presentation of financial statements Chapter 13
in conformity with PFRS, while other matters are not
important 1. Which of the following best describes the primary purpose of
audit procedures?
b. An auditor considers materiality for planning purposes in
terms of the largest aggregate level of misstatements that a. To detect errors or irregularities.
could be material to any one of the financial statements
b. To comply with financial reporting standards.
c. Materiality judgements are made in light of surrounding
c. To gather collaborative evidence.
circumstances and necessarily involve both quantitative and
qualitative judgements d. To verify the accuracy of account balances.
d. An auditor's consideration of materiality is influenced by 2. As a result of analytical procedures, the independent
the auditor's perception of the needs of a reasonable auditor determines that the gross profit has declined from
person who will rely on the financial statements 30% in the preceding year to 20% In the current year. The
auditor should
22. Inherent risk and control risk differ from detection risk in that
inherent risk and control risk are a. document management's intentions with respect to plans
for reversing this trend.
a. Elements of audit risk, whereas detection risk is not
b. evaluate management's performance in causing this
b. Changed at the auditor's discretion, whereas detection risk
decline.
is not
c. require footnote disclosure.
c. Considered at the individual account-balance level, whereas
detection risk is not d. consider the possibility of an error in the financial
statements.
d. Functions of the client and its environment, whereas
detection risk is not 3. The auditor will most likely perform extensive tests for possible
understatement of
23. Which of the following audit risk components may be assessed
in non-quantitative terms? a. revenues c. liabilities
I. Inherent risk b. assets d. capital
II. Control risk 4. Which of the following elements ultimately determines tn
auditing procedures necessary under the circumstances to afford a
III. Detection risk
reasonable basis for an opinion?
a. I only b. I and III only
a. Auditor judgment c. Relative risk
c. II and III only d. All
b. Materiality d. Reasonable assurance
23. Inherent risk and control risk differ from detection risk in that
5. In testing the existence assertion for an asset, an auditor
they
ordinarily works from the
a. Arise from the misapplication of auditing procedures
a. financial unrecorded items to the financial statements.
b. May be assessed in either quantitative or nonquantitative
b. potentially unrecorded items to the financial statements.
terms
c. accounting records to the supporting evidence.
c. Exist independently of the financial statement audit
d. supporting evidence to the accounting records.
d. Can be changed at the auditor's discretion
6. A basic premise underlying the application of analytical b. can enable Lewi to minimize his work on the assessment of
procedures is that control risk for the completeness of expenses.

a. the study of financial ratios is an acceptable alternative to c. should be disregarded because it is not in writing.
the investigation of unusual fluctuations.
d. is not considered a sufficient basis for Lewi to conclude
b. statistical tests of financial information may lead to the that all expenses have been recorded.
discovery of material errors in the financial statements.
2. The evidence considered most appropriate or competent by
c. plausible relationships among data may reasonably be auditors is best described as:
expected to exist and continue in the absence of known
conditions to the contrary. a. internal documents such as sales invoice copies produced
under conditions of strong internal control.
d. these procedures cannot replace tests of balances and
transactions. b. written representations made by the president of the
company.
7. Which of the following circumstances is most likely to cause an
auditor to consider whether a material misstatement exists? c. documentary evidence obtained directly from independent
external sources.
a. Transactions selected for testing are not supported by
proper documentation. d. direct personal knowledge obtained through physical
observation and mathematical recalculation.
b. The turnover of senior accounting personnel is
exceptionally low. 3. Which of the following audit procedures would provide the least
reliable evidence that the client has legal title to inventories?
c. Management places little emphasis on meeting earnings
projections. a. Confirmation of inventories at locations outside the client's
facilities
d. Operating and financing decisions are dominated by several
persons. b. Analytical review of inventory balances coinpared to
purchasing and sales activities
8. An auditor's analytical procedures most likely will be facilitated
if the entity. c. Observation of physical inventory counts

a. corrects material weaknesses in internal control before the d. Examination of paid vendors' invoices
beginning of the audit.
4. Of the following, which is the least persuasive type of audit
b. develops its data from sources solely within the entity. evidence?

c. segregates obsolete inventory before the physical inventory a. Documents mailed by outsiders to the auditor
count.
b. Correspondence between auditor and vendors
d. uses a standard cost system that produces variance reports.
c. Copies of sales invoices inspected by the auditor
9. Which ofthe following procedures would provide the most
reliable audit evidence? d. Computations made by the auditor

a. Inquiries of the client's internal audit staff, held in private. 5. Which of the following statements is generally correct about the
competence of evidential matter?
b. Inspection of prentnnbered client purchase orders filed in
the vouchers payable department. a. The auditor's direct personal knowledge, obtained
through observation and inspection, is more persuasive
c. Analytical procedures performed by the auditor on the than information obtained indirectly from independent
entity' 8 trial balance. outside sources.

d. Inspection of bank statements obtained directly from the b. To be competent, evidential matter must be either valid or
client's financial institution. relevant, but it need not be both.

CHAPTER 14 c. Accounting data alone may be considered sufficient,

competent evidential matter from which to issue an
1. Lewi, CPA, is planning the audit of Jen's Company. Jen verbally unqualified opinion on financial statements.
asserts to Lewi that all the expenses for the year have been
recorded in the accounts. Jen's representation in this regard: d. Competence of evidential matter refers to the amount of
corroborative evidence to be obtained.
a. is sufficient evidence for Lewi to conclude that the
completeness assertion is supported for the expenses.
6. Audit programs should be designed so that b. The objectivity of the auditor gathering the evidence

a. most of the required procedures can be performed as c. The independence of the source of evidence
interim work
d. The quantity of the evidence obtained
b. inherent risk is assessed ata sufficiently low level.
11. Which of the following is the best definition? Appropriate
c. the auditor can make constructive suggestions to evidence is evidence that
management.
a. is reasonably free of error and bias and faithfully
d. the audit evidence gathered supports the auditor's represents what it purports to represent.
conclusions.
b. is obtained by observing people, property, and events.
7. Which of the following procedures would provide the most
reliable audit evidence? c. is supplementary to other evidence already given and tends
to strengthen or confirm it.
a. Inquiries, held in private, of the client's internal audit staff
d. proves an intermediate fact, or group of facts, from which
b. Inspection of pre-numbered client purchase orders filed in one can infer the existence of some other fact that is
the vouchers payable department significant to the issue under consideration.

c. Analytical procedures performed by the auditor on the 12. In testing the reasonableness of interest income, an auditor
entity's trial balance could most effectively use analytical procedures involving

d. Inspection of bank statements obtained directly from the a. the beginning balance in the investments account for fixed-
client's financial institution income securities.

8. Which of the following presumptions does not relate to the b. the average monthly balance in the investments account
competence of audit evidence? for fixed income securities.

a. The more effective internal control is, the more assurance it c. the ending balance in the investments account for fixed-
provides about the accounting data and financial income securities.
statements.
d. documentary support of specific entries in the account.
b. An auditor's opinion, to be economically useful, is formed
within a reasonable time and based on evidence obtained 13. An auditor's preliminary analysis ofaccounts receivables
at a reasonable cost. revealed the following rates: 2015 (4.3%); 2014 (6.2%); 2013
(7.3%). Which of the following is the most likely cause of the
c. Evidence obtained from independent sources outside the decrease in accounts receivable turnover?
entity is more reliable than evidence secured solely from
within the entity. a. Increase in the cash discount offered

d. The independent auditor's direct personal knowledge, b. Liberalization of credit policy

obtained through observation and inspection, is more
persuasive than information obtained directly. c. Shortening of due-date terms

9. Which of the following presumptions is correct about the d. Increased cash sales
reliability of evidential matter?
CHAPTER 15
a. Information obtained indirectly from outside sources is the
1. In an audit sampling application, an auditor:
most reliable evidential matter.
a. performs procedures on all the items in a balance and
b. To be reliable, evidential matter should be convincing rather
makes a conclusion about the whole balance.
than persuasive.
b. performs procedures on less than 100 percent of the items
c. Reliability of evidential matter refers to the amount of
in a balance and formulates a conclusion about the whole
corroborative evidence obtained.
balance.
d. Effective internal control provides more assurance about
c. performs procedures on less than 100 percent of the items
the reliability of evidential matter.
in a class of transactions for the purpose of becoming
10. Which of the following factors is most important in determining familiar with the, client's accounting system.
the appropriateness of audit evidence?
d. performs analytical procedures on the client's unaudited
a. The reliability of the evidence in meeting the audit financial statements when planning the audit.
objective
2. Auditors consider statistical sampling to be characterized by the d. Failing to perform audit procedures that are required by the
following: sampling plan.

a. representative sample selection and nonmathematical 7. In assessing sampling risk, the risk of incorrect rejection and the
consideration of the results. risk of assessing control risk too high relate to the:

b. carefully biased sample selection and statistical calculation a. efficiency of the audit c. selection of the sample.
of the results.
b. effectiveness of the audit d. audit quality controls.
c. representative sample selection and statistical calculation
of the results. 8. In planning a statistical sample for tests of controls, an auditor
increases the expected population exception rate from the prior
d. carefully biased sample selection and nonmathematical year's rate because of the results of the prior year's tests of
consideration of the results. controls. As a result, the auditor would most likely increase the
planned
3. In audit sampling applications, sampling risk is:
a. tolerable exception rate
a. characteristics of statistical sampling applications but not of
nonstatistical applications. b. allowance for sampling risk

b. the probability that the auditor will fail to recognize c. acceptable risk of assessing control risk too low
erroneous accounting in the client's documentation.
d. sample size
c. probability that accounting errors will arise in transactions
and enter the accounting system. 9. From a random sample of items listed from a client's inventory
count, an auditor estimates with a 90 percent confidence level that
d. the probability that an auditor's conclusion based on a the computed upper exception rate (CUER) is between 4 percent
sample might be different from the conclusion based on and 6 percent. The auditor's major concern is that there is one
an audit of the entire population. chance in twenty that the true exception rate in the population is

4. Which of the following should be considered an audit procedure a. more than 6 percent. c. more than 4 percent.
for obtaining evidence?
b. less than 6 percent. d. less than 4 percent.
a. An audit sampling application in accounts receivable
selection. 10. If, from a random sample, an auditor can state with a 5 percent
acceptable risk of assessing control risk too low (ARACR) that the
b. The accounts receivable exist and are valued properly. exception rate in the population does not exceed 20 percent, he or
she can state that the exception rate does not exceed 25 percent
c. Sending a written confirmation on a customer's account with
balance.
a. 5 percent risk.
d. Nonstatistical consideration of the amount of difference
reported by a customer on a confirmation response. b. risk greater than 5 percent.

5. Which of the following elements in the audit risk model is/are a c. risk less than 5 percent.
product of the auditors professional judgment?
d. This cannot be detemined from the information provided.
a. Control risk.

b. Analytical procedures risk.

CHAPTER 16
c. Test of details risk of incorrect acceptance.
1. Test of control audit procedures are required for
d. All of the above.
a. obtaining evidence about the financial statement
6. Which of the following is an element of sampling risk? assertions.

a. Choosing an audit procedure that is inconsistent with the b. accomplishing control over the validity of recorded
audit objective. transactions.

b. Concluding that no material misstatement exists in a c. analytical review of financial statement balances.
materially misstated population based on taking a sample
that includes no misstatement. d. obtaining evidence about the operating effectiveness of
client control procedures.
c. Failing to detect an error on a document that has been
inspected by an auditor.
2. When auditing the client's performance of control to accomplish b. upper precision limit d. risk of incorrect rejection
the completeness objective related to ensuring that all sales are
recorded, auditors should draw sample items from: Questions 7 and 8 are based on the following information:

a. the sales journal list of recorded sales invoices. An auditor desired to test credit approval on' 10,000 sales invoices
processed during the year. The auditor designed a statistical
b. the file of shipping documents. sample that would provide a 1 percent risk of assessing control risk
too low (99% confidence) that not more than 7 percent of the sales
c. the file of customer order copies. invoices lacked approval. The auditor estimated from previous
experience that about 2 1/20/0 of the sales invoices lacked
d. the file of receiving reports for inventory additions. approval. A sample of 200 invoices was examined; 7 of them were
lacking approval. The auditor then determined the upper
3. Nia Wilson was considering the sample size needed for a
occurrence limit to be 8%.
selection of sales invoices for the test of controls audit of the Elmar
Company's internal controls. She presented the following 7. In the evaluation of this sample, the auditor decided to increase
information for two alternative cases: the level of the preliminary assessment ofcontrol risk because the
Case A Case B
a. tolerable rate (7%) was less than the achieved upper
Acce table risk of underreliance High Low occurrence limit (8%).
Acce table risk of overreliance High Low
b. expected occurrence rate (7%) was more than the
Tolerable deviation rate High Low percentage of errors in the sample (3 ½%).

Expected population deviation rate Low High c. achieved upper occurrence limiit (8%) was more than the
percentage oferrors in the sample (3 ⅓%).
Nia should expect the sample size for Case A to be:
d. expected occurrence rate (2 ½%) was less than the
a. smaller than the sample size for Case B.
tolerable rate (7%).
b. larger than the sample size for Case B. 8. The allowance for sampling risk (precision) was
c. the same as the sample size for Case B.
a. 5 ½% c. -3½%
d. not determinable relative to the Case B sample size. b. 4 ½% d. 1%
4. When auditors plan a test of controls and think about several 9. An auditor who uses statistical sampling for attributes in testing
control risk assessments that could be made, they also can think internal controls should increase the assessed level of control risk
about: when the
a. one relevant tolerable deviation rates.
a. sample rate of error is less than the expected rate of error
used in planning the sample.
b. two relevant tolerable deviation rates.
b. tolerable rate less than allowance for sampling risk exceeds
c. three relevant tolerable deviation rates.
the sample rate of error.
d. many relevant tolerable deviation rates.
c. sample rate of error plus the allowance for sampling risk
5. Which of the following combinations results size in a sample exceeds the tolerable rate.
for attributes? d. sample rate of error plus the allowance for sampling risk
Risk of assessing control low risk Tolerable rate Expected population error rate
equals the tolerable rate.

a. Increase Decrease Increase 10. What is an auditor's evaluation of a statistical sample for
attributes when a test of 100 documents results in 4 errors, if the
b. Decrease Increase Decrease tolerable rate is 5%, the expected population error rate is 3%, and
the allowance for sampling risk is 2%?
c. Increase Increase Decrease
a. Accept the sample results as support for lowering the
d. Increase Increase Increase assessed level of control risk, because the tolerable rate less
the allowance for sampling risk equals the expected
6. To detennine the sample size for a test of controls, an auditor occurrence rate.
should consider the tolerable occurrence rate, the allowable risk of
assessing control risk too low, and the b. Do not decrease the assessed level of control risk, because
the sample error rate plus the allowance for sampling risk
a. expected occurrence rate c. risk of incorrect acceptance exceeds the tolerable rate.
 c. Do not decrease the assessed level of control risk, because 15. The diagram below depicts the auditor's estimated
the tolerable rate plus the allowance for sampling risk maximum deviation rate compared with the tolerable rate,
exceeds the expected population error rate. and also depicts tlge true population deviation rate compared
d. Accept the sample results as support for lowering the
with the tolerable rate:
assessed level of control risk, because the sample error rate
True State of Population
plus the allowance for sampling risk exceeds the tolerable
rate. Auditor's Estimate Deviation rate is less Deviation rate
Based On Sample than tolerable rate Exceeds tolerable
11. An auditor plans to examine a sample of 20 checks for
Results rate
countersignatures as prescribed by the client's internal control
procedures. One of the checks in the chosen sample of 20 cannot Maximum deviation I III
be found. The auditor should consider the reasons for this rate is less than a
limitation and toleroble rate
a. evaluate the results as if the sample size had been 19. Maximum deviation II IV
b. treat the missing check as an error for the purpose of rate exceeds
tolerable rate
evaluating the sample.

c. treat the missing check in the same manner in which the As a result of tests of controls, the auditor assesses control risk
majority of the other 19 checks are treated, that is, as higher than necessary, and thereby increases substantive testing.
countersigned or not. This is illustrated by situation

d. choose another check to replace the missing check in the a. I c. III

sample.
b. Il d. IV
12. Which ofthe following controls would be most effective in 16. Which of the following statements is correct concerning
assuring that recorded purchases are free of material errors?
statistical satupling in tests of controls?
a. The receiving department compares the quantity ordered
a. Deviations from control procedures at a given rate usually
on purchase orders with the quantity received on receiving
result in misstatements at a higher rate.
reports.
b. As the population size doubles, the sample size also should
b. Vendors' invoices are compared with purchase orders by an
double.
employee who is independent of the receiving department.
c. The qualitative aspects of deviations are not considered by
c. Receiving reports require the signature of the individual
the auditor.
who authorized the purchase.
d. There is an inverse relationship between the sample size
d. Purchase orders, receiving reports, and vendors' invoices
and the tolerable occurrence rate.
matched independently in preparation of vouchers.
17. What is an auditor's evaluation of a statistical sample for
13. To determine whether accounts payable are complete, an
attributes when a test of 50 documents results in 3 deviations, if
auditor performs a test to verify that all merchandise received is
the tolerable occurrence rate is 7%, the expected occurrence rate is
recorded. The population of documents for this test consist of all
5%, and the allowance for sampling risk is 2%?
a. vendors' invoices. c. receiving reports. a. Modify the planned assessed level of control risk, because
b. purchase orders. d. canceled checks. the tolerable rate plus the allowance for sampling risk
exceeds the expected population deviation rate.
14. Samples to test internal control procedures are intended to
provide a basis from which an auditor can conclude whether b. Accept the sample results as support for the planned
assessed level of control risk, because the sample deviation
a. the control procedures are operating effectively. rate plus the allowance for sampling risk exceeds the
tolerable rate.
b. the financial statements are materially misstated.
c. Accept the sample results as support for the planned
c. the risk of incorrect acceptance is too high. assessed level of control risk, because the tolerable rate less
the allowance for sampling risk equals the expected
d. materiality for planning purposes is at a sufficiently low population deviation rate.
level.
d. Modify the planned assessed level of control risk, because
the sample deviation rate plus the allowance for sampling
risk exceeds the tolerable rate.
18. An entity's internal eontrol system requires that for every check CHAPTER 17
request, there be an approved voucher, supported by a
prenumbered purchase order and a prenumbered receiving report. 1. Zashi considered the sample size needed for a selection of
To determine whether checks are being issued for unauthorized Customers' accounts receivable for the substantive audit of the
expenditures, an auditor most likely would select items for testing total accounts receivable. She presented the following information
from the population of all
for two alternative cases:
a. purchase orders c. receiving reports
Case 0 Case R
b. canceled checks d. approved vouchers
Acceptable risk of incorrect acceptance Low High
19. In planning a statistical sample for a test of controls, an auditor
increased the expected population deviation rate from the prior Acceptable risk of incorrect rejection Low High
year's rate because of the results Of the prior year's tests of
Tolerable peso misstatement in the account Small Large
controls and the overall cqntrol environment. The auditor most
likely would then increase the planned Expected peso misstatement in the account Large Small
a. tolerable rate
Estimate of population variability Large Small
b. allowance for sampling risk
Zashi should expect the sample size for Case 0 to be:
c. risk ofassessing control risk too low
a. smaller than the sample size for Case R.
d. sample size
b. larger than the sample size for Case R.
20. As a result of tests of controls, an auditor assessed control risk
too low and decreased substantive testing. This assessment c. the same as the sample size for Case R.
occurred because the true deviation rate in the population was
d. not determinable relative to the Case R sample size.
a. more than the risk of assessing control risk too low, based
on the auditor's sample. 2. When calculating the total pmount of misstatement relevant to
the analysis of an account balance, an auditor should add to the
b. more than the deviation rate in the auditor's sample.
misstatement discovered in individually significant items the
c. less than the risk of assessing control risk too low, based on following:
the auditor's sample.
a. the projected likely misstatement and the additional
d. less than the deviation rate in the auditor's sample. possible misstatement estimate (not sure)

21. In performing tests of controls over authorization of cash b. the known misstatement in the sampled items.
disbursements, which the following statistical sainpling methods
would be most appropriate? c. the known misstatement in the sampled items, the
a. variables. c. ratio. projected likely misstatement, and the additional possible
misstatement estimate.
b. stratified. d. attribute
d. the additional possible misstatement estimate.
22. As a result of sampling procedures applied as tests of controls,
an auditor incorrectly assessed control risk lower than appropriate. 3. Eddie audited the Mary Company's inventory on a sample basis.
The most likely explanation for this situation is that He audited 120 items from an inventory compilation list and
discovered net overstatement of P480. The audited items had a
a. the deviation rates of both the auditor's satnpJe and the
population exceed the tolerable rate. book (recorded) value of P48,000. There were 1,200 inventory
items listed, and the total inventory book amount was P490,000.
b. the deviation rates of both the auditor's sample and the Which of these calculations is (are) correct?
population are less than the tolerable rate.
a. Known misstatement of P4,800 using the difference
c. the deviation rate in the auditor's sample is less than the method.
tolerable rate, but the deviation rate in the population
exceeds the tolerable b. Projected likely misstatement of P480 using the ratio
d. the deviation rate in the auditor's sample exceeds the method.
tolerable rate, but the deviation rate in the population is
less than the tolerable rate. c. Projected likely misstatement of P4,900 using the ratio
method.
 d. Projected likely misstatement of P4,800 using the 8. Statistical sampling provides a technique for
difference method.
a. exactly defining materiality.
4. Soni Corpuz audited the client's accounts receivable, but he
could not get any good information about customer #102's b. greatly reducing the amount of substantive testing.
balance. The customer responded to the confirmation saying, "Our
c. eliminating judgment in testing.
system does not provide detail for such a response." The sales
invoice and shipping document papers have been lost, and the d. measuring the sufficiency of evidential matter.
customer has not yet paid. Soni should:
9. The theoretical distribution of means from all possible samples
a. get another customer's account to consider in the sample. of a given size is a normal distribution, and this distribution is the
basis for statistical sampling. Which of the following statements is
b. treat customer 102's account as being entirely wrong
not true with respect to the sampling distribution of sample
(overstated), if doing so will not affect his audit conclusion
means?
about the receivables taken altogether.
a. Approximately 68% of the sample means will be within one
c. require adjustment of the receivables to write off customer
standard deviation of the mean for the normal distribution.
102's balance.
b. The distribution is defined in terms of its mean and its
d. treat customer el 02's account as accurate because there is
standard error ofthe mean.
no evidence saying it is fictitious.
c. An auditor can be approximately 95% confident that the
5. When making a sample-based decision about the peso amount
mean for a sample is within two standard deviations of the
in an account balance, the incorrect acceptance decision error is
population mean.
considered more serious than the incorrect rejection decision error
because: d. The items drawn in an auditor's sample will have a normal
distribution.
a. the incorrect rejection decision impairs the efficiency of the
audit. 10. In the application of statistical techniques to the estimation of
peso amounts, a preliminary sample usually is taken primarily for
b. auditors will do additional work and discover the error of
the purpose of estimating the population
the incorrect decision.
a. variability c. range.
c. the incorrect acceptance decision impairs' the
effectiveness of the audit (not sure) b. mode d. median.

d. sufficient, competent evidence will not have been obtained. 11. which of the following would be designed to estimate a
numerical measurement of a population, such as a peso value?
6. "Overauditing" can defined as:
a. Sampling for variables
a. auditing too small a sample size.
b. Sampling for attributes
b. auditing a larger sample size than necessary.
c. Discovery sampling
c. taking more risk than is professionally acceptable.
d. Numerical sampling
d. giving an inappropriate unqualified report on financial
statements. 12. When planning a sample for a substantive test of details, an
auditor should consider tolerable misstatement for the sample.
7. Fran Marcelo audited the P4.5 million book value sporty
This consideration should
Corporation. In his sample of 472 of the customer which the book
value total was P500,000, he found P17,500 overstatement. The a. be related to the auditor's assessment of inherent risk.
projected likely misstatement for this sample is:
b. not be adjusted for qualitative factors.
a. P148,305 c. P1,059
c. be related to preliminary judgments about materiality
b. P157,500 d. P9,534.4 levels.

d. not be changed during the audit process.

13. While performing a substantive test of details during an audit, 19. Which of the following most likely would be an advantage in
the auditor determined that the sample results supported the using classical variables sampling rather than probability
conclusion that the recorded account balance was materially proportional to size (PPS) sampling?
misstated. It was, in fact, not materially misstated. This situation
illustrates the risk of a. An estimate of the standard deviation of the population's
recorded amounts is not required.
a. incorrect rejection
b. The auditor rarely needs the assistance of a computer
b. incorrect acceptance program to design an efficient sample.

c. assessing control risk too low c. Inclusion of zero and negative balances generally does not
require special design considerations.
d. assessing control risk too high
d. Any amount that is individually significant is automatically
14. When using classical variables sampling for estimation, an identified and selected.
auditor normally evaluates the sampling results by calculating the
possible error in either direction. This statistical concept is known 20. Which of the following courses of action would an auditor be
most likely to follow in planning a sample of cash disbursements if
a. precision c. projected error the auditor wereaware of several unusually large cash
disbursements?
b. reliability d. standard deviation
a. Increase the sample size to reduce the effect of the
15. In a probability proportional to size sample with a sampling
unusually large disbursements.
interval of P 10,000, an auditor discovered that a selected account
receivable with a recorded amount of P5,000 had an audit amount b. Continue to draw new samples until all the unusually large
of P2,000. The projected error of this sample was disbursements appeared in the sample.
a. P3,000 c. P6,000 c. Set the tolerable rate of deviation at a lower level than
originally planned.
b. P4,000 d. P8,000
d. Stratify the cash disbursements population so that the
16. A sampling method that can be used to estimate overstatement
unusually large disbursements were selected.
error of an account balance but is not based on normal-curve
mathematics is: CHAPTER 18
a. discovery sampling 1. Which of the following does not affect the form and content of
working papers?
b. mean per unit sampling
a. Nature and complexity of the business
c. attributes sampling
b. Form of the auditor's report
d. probability proportional to size sampling
c. Specific audit methodology and technology used in the
17. Which of the following sampling methods would be used to
course of the audit.
estimate a numerical value measurement-of a population, such as
a peso value? d. Estimated audit fee agreed upon between the client and
the auditor.
a. Discovery sampling. c. Sampling for attributes
2. Which of the following need not be documented in the working
b. Numerical sampling. d. Sampling for variables
papers as required by PSA 230?
18. In a probability proportional to size sample with a sampling
a. Audit evidence obtained, the audit procedures applied and
interval of P5,000, an auditor discovered that a selected account
the testing performed have provided sufficient competent
receivable with a recorded amount of P10,000 had an audit
evidential matter t9 afford a reasonable basis for an
amount of P8,000. If this were the only error discovered by the
opinion.
auditor, the projected error of this sample would be
b. The work has been adequately planned and supervised.
a. PI,000 . c. P4,000

b. P2,000 d. P5,000
 c. A sufficient understanding of the internal control structure 7. Working papers that record the procedures used by the auditor
had been obtained to plan the audit and to determine the to gather evidence should be
nature, timing and extent of tests to be performed.
a. considered the primary support for the financial statements
d. Basis in choosing the members of the audit engagement being examined.
team.
b. viewed as the connecting link between the books of
3. When planning an audit, which of the following is not a factor account and the financial statements.
that affects auditors' decisions about the quantity, type, and
content of audit working papers? c. designed to meet the circumstances of the particular
engagement.
a. The auditors' need to document compliance with financial
reporting d. destroyed when the audited entity ceases to be a client.

8. The primary reason auditors cross-index their working papers is to

b. The existence of new sales contracts important for the
client's business. a. give the working papers of a professional appearance.
c. The auditors' judgment about their independence with b. explain the use of tick marks.
regard to the client.
c. provide an explanation of the audit steps performed.
d. The auditors' judgments about materiality.
d. provide a trail for the auditor and the reviewer.
4. An audit working paper that shows the detailed evidence and
procedures regarding the balance in the accumulated depreciation 9. When reviewing working papers, an audit supervisor will be
account for the year under audit will be found in the: concerned primarily with determining whether the

a. Current file evidence working papers a. audit programs have been carried out without deviation.

b. Permanent file working papers b. working papers adequately support the audit findings,
conclusions, and reports.
c. Administrative working papers in the current file
c. working papers reflect adherence to budget constraints.
d. Planning memorandum in the current file
d. auditing department's standard formats and tick marks
5. The audit working paper that reflects the major components of have been used consistently.
an amount reported in the financial statements is the
10. Which of tile following is required documentation in an audit in
a. interbank transfer schedule accordance with Standards on Auditing?
b. carryforward schedule a. A flowchart or narrative of the accounting system
describing the recording and classification of transactions
c. supporting schedule
for financial reporting.
d. lead schedule
b. An audit program setting forth in detail the procedures
6. The current file of the auditor's working papers generally should necessary to accomplish the engagement's objectives.
include
c. A planning memorandum establishing the timing of the
a. flowchart of the internal controls audit procedures and coordinating the assistance of entity
personnel.
b. organization charts
d. An internal control questionnaire identifying policies and
c. a copy of the financial statements procedures that ensure the achievement of specific
objectives.
d. copies of bond and note indentures
11. Which of the following is not a factor that affects the b. note that the assistant auditors is completely dissociated
independent auditors' judgment as to the quality, type, and from responsibility for the auditor's opinion.
content of working papers?
c. document the additional work required, since all
a. The timing and the number of personnel to be assigned to disagreements of this type will require expanded
the engagement. substantive testing.

b. The nature of the financial statements, schedules, or other d. document the assistant auditor's position and how the
information upon which the auditor is reporting. difference of opinion was resolved.

c. The need for supervision of the engagement. 16. Which of the following statements most accurately summarizes
the auditor's responsibility for reviewing the client's
d. The nature of the auditors' report. correspondence files?
12. Audit working papers should be: a. The auditor should review all correspondence for items
relevant to the audit.
a. kept on the client's premises to allow client access to them
for reference purposes. b. The auditor should not review any correspondence; to do
so would waste time more productively spent on gathering
b. the primary support for the financial statements being
other evidence.
examined.
c. The auditor should apply statistical selection techniques to
c. considered as part of the client's accounting records that is
draw a random sample of correspondence for review.
retained by the auditors.
d. The auditor should review correspondence with banks,
d. designed to meet the circumstances and the auditors'
other lending institutions, attorneys, and governmental
needs on each engagement.
agencies.
13. A primary purpose ofthe audit working papers is to:
17. Which of the following would not be included in the auditor's
a. aid the auditors in adequately planning their work. working papers?

b. provide a point of reference for future audit engagements. a. A time budget for the various audit areas.

c. support the underlying concepts included in the b. The results of the preceding year's audit.
preparation of the basic financial statements.
c. Descriptive information about the internal control
d. support the auditors' opinion structure.

14. An auditor should examine the minutes of board of directors' d. The accounting manual
meetings:
18. The working papers are
a. through the date of the financial statements.
a. the property of client.
b. through the date of the audit report
b. property of the auditor although prepared by client.
c. on a test basis.
c. the primary means of documenting that an adequate
d. only at the beginning of the audit. audit was conducted in accordance with Standards on
Auditing.
15. A different opinion concerning accounting and auditing matters
relative to a particular phase of the audit arises between an d. used primarily as a basis for the partners to review and
assistant auditor and the auditor responsible for the engagement. reward the work of the managers seniors, and staff.
After appropriate consultation, the assistant auditor asks to be
19. Permanent files contain all the data
disassociated from the resolution of the matter. The working
papers would probably: a. about the most recent audits
a. remain silent on the matter since it is an internal matter of b. about the current audit and financial statements
the auditing firm.
 c. of a historical or continuing nature pertinent to the c. an income statement account at the end of the period
current audit. under audit.

d. of a historical or continuing nature about the client. d. an income statenient account during the entire period
under audit, tying together the beginning and ending
20. Which of the following items would not normally be included, balances.
in whole or in part, in the auditor's permanent file on a client?
25. The working papers prepared during the engagement are the
a. The articles of incorporation and by-laws. property of
b. Analyses of accounts such as long-term debt and a. the auditor, but do not include the working papers
stockholders' equity. prepared by client for the auditor
c. Organization charts and internal control questionnaires. b. the auditor, even including those prepared by client for
auditor
d. The audit program
c. the client
21. An example ofa reclassification of entry would be an entry
d. the auditor and client jointly
a. to reduce inventory when client failed to write down its
obsolete, raw materials 26. Ordinarily, the working papers cannot be provided to someone
else without the express permission of the client unless
b. to change material credit balances in accounts receivable
accounts to accounts payable accounts a. the papers are subpoenaed by a court.

c. to increase the allowance for doubtful accounts when it b. the papers are used as part of a PICPA quality review
was discovered that a customer had filed for bankruptcy program.
protection
c. the papers are requested as evidence in a PICPA Trial Board
d. to increase the income tax liability account when it was hearing.
discovered that client would be in a higher tax bracket than
originally estimated. d. the papers are transferred as a result of a CPA selling
his/her practice to another CPA firm.
22. Reclassification entries are recorded in the
27. Which of the following eliminates voluminous details from the
a. salesjournal auditor's working trial balance by classifying and summarizing
similar or related items?
b. cash receipts journal
a. Account analyses
c. general journal
b. Supporting schedules
d. financial statements but not in the general ledger
c. Control accounts
23. The largest portion of the auditor's working papers are the
d. Lead schedules
a. supporting schedules

b. adjusting and reclassification entries.

28. The current file of the auditor's working papers generally
c. lead schedules.
should include
d. working trial balance.
a. a flowchart of the internal controls
24. An analysis schedule is designed to show the activity in
b. organization charts
a. a statement of financial position account at the end of the
c. a copy ofthe financial statements
period under audit.
d. copies of the bond and note indentures
b. a statement of financial position account during the entire
period under audit, tying together the beginning and
ending balances.
29. The permanent section of the auditor's working papers a. There is a potential liability to an employee of the client.
generally should include
b. The amount of the future payment is known.
a. time and expense reports
c. The liability resulted from an existing condition.
b. names and addresses of all audit staff personnel on the
engagement. d. The outcome has been resolved by a current event.

c. a copy of key customer confirmations 2. If the amount of a probable loss on a contingent liability cannot
be reasonably estimated, the liability should be
d. a copy of the engagement letter
a. accrued-and indicated in the body of the financial
30. Working papers that record the procedures used by the auditor statements.
to gather evidence should be
b. disclosed in footnotes, but not accrued
a. considered the primary support for the financial statements
being c. neither accrued nor disclosed in footnotes.

b. viewed as the connecting link between the books of d. disclosed in the auditor's report 'but not disclosed on the
account and the financial statements financial statements.

c. designed to meet the circumstances of the particular 3. If a potential loss on a contingent liability is probable and the
engagement. amount of the loss can be reasonably estimated, the liability
should be
d. destroyed when the audited entity ceases to bea client.
a. accrued and indicated in the body of the financial
31. A written understanding between the auditor and the client statements.
concerning the auditor's responsibility for the discovery of illegal
acts is usually set forth in a(an) b. disclosed in footnotes, but not accrued.

a. client representation letter c. neither accrued nor disclosed in footnotes.

b. letter ofaudit inquiry d. disclosed in the auditor's report but not disclosed on the
financial statements.
c. management letter
4. The client's fiscal period ends 12/31/X3 and the auditor's field
d. engagement letter be completed on 3/15/X4. If contingent liabilities are verified by
the auditor, rather than as an integral part of the various segments
32. The permanent tile section of the working papers that is kept of the engagement, these tests for contingencies would be
for each audit client most likely contains performed
a. review notes pertaining to questions and comments a. as early as possible, perhaps even with the interim work
regarding the audit work performed. performed on 9/30/X3.
b. a schedule of time spent on the engagement by each b. shortly before year-end, between 12/15/X3 and 12/31/X3.
individual litigation.
c. well efore the last few days of completing the engagement,
c. correspondence with the client's legal counsel concerning between 2/15/X4 and 3/1 /X4.
pending litigation.
d. as close to the end of the field work as possible, but no
d. narrative description of the client's internal control earlier than 3/14/X4 or 3/15/X4.
structure.
5. Which of the following is not an audit procedure that is
commonly used to search for contingent liabilities?
CHAPTER 20 a. Inquiries of management (orally and in writing).

1. Which of the following is a required condition for a contingent b. Review the minutes of directors' and stockholders'
liability to exist? meetings.
 c. Analyze legal expense for the period under audit. 10. Which type of subsequent event requires consideration by
management and evaluation by the auditor?
d. Review the current year's tax return.
a. Subsequent events that have a direct effect on the financial
6. At the completion of the audit, management is asked to make a statements and require adjustment.
written statement that it is not aware of any undisclosed
contingent liabilities. This statement would appear in the b. Subsequent ' events -that have direct effect ' on the
financial statements but for which disclosure is advisable.
a. management letter. c. letter of inquiry.
c. Both a and b
b. letter of representation. d. letters testamentary.
d. Neither a nor b.
7. If an attorney refuses to provide the auditor with information
that is within the attorney's jurisdiction and may directly affect the 11. An auditor ordinarily examines invoices from lawyers primarily
fair presentation of financial statements about material existing in order to
lawsuits (asserted claims) or unasserted claims, the audit report
would have to be a. substantiate accruals.

a. an adverse opinion. b. assess the legal ramifications of litigation in progress.

b. a qualified opinion. c. estimate the peso amount of contingent liabilities.

c. an unqualified opinion with an explanatory paragraph. d. identify possible unasserted litigation, claims, and
assessments
d. modified to reflect the lack of available evidence
12. If a lawyer refuses to furnish corroborating information
8. Which of the following items would ordinarily not be included in regarding litigation, claims, and assessment, the auditor should
the standard letter of confirmation from the client's attorney?
a. honor the confidentially of the lawyer-client relationship.
a. A list, prepared by management, of pending threatened
litigation of material amounts. b. consider the refusal to be tantamount to a scope
limitation
b. A request that the attorney furnish information or
comment about the likelihood of an unfavorable outcome c. seek to obtain the corroborating information from
of litigation. management.

c. A request that the attorney furnish an estimate of the d. disclose this fact in a note to the financial statements
amount or range of the potential loss.
13. A client acquired 25 percent of its outstanding capital stock
d. A request that the attorney confirm the amount of after year-end and prior to completion of the auditoes field work.
outstanding fees which client owes for legal services. The auditor should

9. The auditor's responsibility for "reviewing the subsequent a. advise management to adjust the statement of financial
events" of a public company that is about to issue new securities is position to reflect the acquisition.
normally limited to the period of time
b. issue pro forma financial statements giving effect to the
a. beginning with the statement of financial position date and acquisition as if it had occurred at year-end.
ending with the date of the auditor's report.
c. advise management to disclose the acquisition in the
b. beginning with the start of the fiscal year under audit and notes to the financial statements.
ending with the statement of financial position date.
d. disclose the acquisition in the opinion paragraph of the
c. beginning with the start of the fiscal year under audit and auditor's report.
ending with the date of the auditor's report.
14. An auditor issued an audit report that was dual dated for a
d. beginning with the statement of financial position date subsequent event occurring after the completion of field work but
and ending with the date the registration statement before the auditor's report was issued. The auditor's responsibility
becomes effective. for events occurring subsequent to the completion of field work
was
 a. limited to the specific event referenced d. Compare the subsequent period purchase price of
inventory with the recorded cost as a test of lower-of-cost-
b. limited to include only events occurring before the date of or-market valuation.
the last subsequent event referenced.
18. The concept of "dual dating" on the auditor's report refers to
c. extended to subsequent events occurring through the date
of issuance of the report. a. the client's date on the statements (12/31/X3) and the
auditor's date on the report (3/30/X4).
d. extended to include all events occurring since the
completion of field work. b. the auditor's date on the report (3/30/X4) and the review
required when client files a registration statement with the
15. Which of the following procedures is most likely to assist an SEC (5/30/X4).
auditor in identifying conditions and events that may indicate
substantial doubt about an entity's ability to continue as a going c. the auditor's date on the report representing the end of
concern? the field work (3/30/X4) and the review of an important
event that occurred after the completion of field work
a. Inspecting title documents to verify whether any assets are (4/5/X4) but before the auditor's report was delivered.
pledged as collateral.
d. the wording problem created because some of client's
b. Confirming with third parties the details of arrangements statements are for a period of time (for year ended
to maintain financial support 12/31/X3) and others are for one specific date ( 12/3 1/X3).
c. Reconciling the cash balance per books with the cutoff bank 19. During the final re€iew of workfng papers and financial
statement and the bank confirmation. statements, it is common to have the analytical procedures done
by a
d. Comparing the entity's depreciation and asset capitalization
policies to those of other entities in the industry. a. partner c. senior
16. The following events all occurred after the statement of b. manager d. staff member
financial position date (6/30/X3) but prior to the auditor's report
(9/10/X3). Which one would require an adjustment to the account 20. Auditing standard requires the auditor to evaluate whether
balances as of 6/30/X3? there is a substantial doubt about a client's ability to continue as a
going concern for at least one year beyond the statement of
a. Client will market a new series of equity securities (P2 financial position date. Oneof the most important types of
million of preferred stock) on 8/1/X3. evidence to assess the going concern question is
b. Unused equipment on the books at 6/30/X3 for PI 00,000 a. statistical sampling procedures.
was disposed of 7/31/X3 for P60,OOO.
b. analytical procedures
c. Securities costing P30,000 held for temporary investment
on 6/30/X3 declined in value by one-third when the market c. inquiries of client and their legal counsel.
took a plunge on 8/15/X3.
d. confirmations of creditors.
d. Inventory valued at P 100,000 on 6/30/X3 was destroyed in
a fire on 8/1/X3. 21. Which of the following statements regarding the letter of
representation is not correct?
17. The audit procedures for the subsequent events review can be
divided into two categories: (l) procedures normally integrated as a a. It is prepared oh the client's letterhead.
part of the verification of year-end account balances, and (2) those
b. It is addressed to the CPA firm.
performed specifically for the purpose of discovering subsequent
events. Which of the following procedures are in category 2? c. It is signed by high-level corporate officials, usually the
president and chief financial officer.
a. Subsequent-period sales and purchases transactions are
examined to determine whether the cutoff is accurate. d. It is optional, not required, that the auditor obtain such a
letter from management.
b. Correspond with attorneys
22. Refusal by a client to prepare and sign the representation letter
c. Test the collectability of accounts receivable by reviewing
would require a(n)
subsequent period cash receipts.
 a. qualified opinion or disclaimer a. information that existed at the report date and may affect
the report comes to the auditor's attention.
b. adverse opinion or a disclaimer.
b. management of the entity requests the auditor to reissue
c. qualified or an adverse opinion. the auditor's report.
d. unqualified opinion with an explanatory paragraph. c. information about an event that occurred after the end of
field work comes to the auditor's attention.
23. If, after the accumulation of final evidence and during the
evaluation of results, the auditor concludes that sufficient evidence d. final determination or resolutions are made of
has not been obtained to draw a conclusion . about fairness of the contingencies that had been disclosed in the financial
client's representations, there are two choices: statements.
a. (l) obtain additional evidence, or (2) issue a qualified 27. Which of the following events occurring after the issuance of an
opinion or a disclaimer. auditor's report most likely would cause the auditor to make
further inquiries about the previously issued financial statements?
b. ( l ) issue a qualified opinion, or (2) issue a disclaimer.
a. A technological development that could affect the entity's
c. ( I ) issue a disclaimer, or (2) withdraw from the
future ability to continue as a going concern.
engagement.
b. The discovery of information regarding a contingency that
d. ( l ) obtain additional information, or (2) issue an adverse
existed before the financial statements were issued.
opinion.
c. The entity's sale of a subsidiary that accounts for 30% of the
24. There are often a large number of immaterial errors discovered
entity's consolidated sales.
that do not require an adjustment at the time of they are found.
d. The final resolution of a lawsuit explained in a separate
a. Since these items are individually immaterial, the auditor
paragraph of the auditor's report.
would not recommend adjusting entries to client.
28. An auditor has concluded that an audit procedure considered
b. Since there are a large number of these, the auditor would
necessary at the time of the examination was omitted. The auditor
recommend adjusting entries to client.
should assess the importance of the omitted procedure to his or
c. The auditor must combine the individually immaterial her ability to support the previously expressed opinion. Which of
errors and evaluate whether the combined amount is the following would be least helpful in making that assessment?
material.
a. A discussion with the client about whether persons are
d. The auditor would never combine these individually relying on the auditor's report.
immaterial amounts because that would mix apples and
b. A reevaluation of the overall scope of the examinatio
oranges.
c. A discussion ofthe circumstances with engagement
25. Which of the following is not one of the three main reasons
personnel.
why it is essential that working papers be thoroughly reviewed by
another member of the audit firm at the completion of the audit? d. A review of the other audit procedures that were applied
and that might compensate for the one omitted.
a. To evaluate the accuracy of the auditing firin's time budget
for this engagement.

b. To evaluate the performance of inexperienced personnel.

c. To make sure that the audit meets the CPA firm's standard
of performance.

d. To counteract the bias that frequently enters into the

auditor's judgment. 29. The independent auditors for Lee, Inc., a publicly held
company, concluded that their omission of an audit procedure
26. After issuing a report, an auditor has no obligation to make considered necessary at the time of the examination impairs their
continuing inquiries or 'perform other procedures concerning the present ability to support the previously expressed opinion. If they
audited financial statements, unless
believe persons are currently relying on the report, they should c. request that the client issue an immediate revision of the
promptly financial statements containing an explanation of the
reasons for the revision.
a. undertake to apply the omitted procedure or alternative
procedures that would provide a satisfactory basis for the d. do all three of the above.
opinion.
33. After an auditor has issued an audit report on a nonpublic
b. notify the board of directors that the previously expressed entity, there is no obligation to make any further audit tests or
opinion is not to be relied on. inquiries with respect to the audited financial statements covered
by that report unless
c. notify the stockholders currently relying on the report that
the previously expressed opinion is not to be relied on. a. new information comes to the auditor's attention
concerning an event which occurred prior to the date of
d. notify the Securities and Exchange Commission that the the auditor's report which may have affected the auditor's
previously expressed opinion is not to be, relied on. report.
30. Assume the following events occurred after the issuance of an b. material adverse events occur after the date of the
auditor's report. Which would be most likely to cause the auditor auditor's report.
to make further inquiries about the previously issued financial
statements? c. final determination or resolution was made on matters
which had resulted in a qualification in the auditor's report.
a. An uninsured natural disaster occurs, and it may affect the
entity's ability to continue as a going concern. d. final determination or resolution was made of a
contingency which had been disclosed in the financial
b. The entity has resolved a contingency that was disclosed in statements.
its audited financial statements.
CHAPTER 21
c. The auditor has learned new information concerning
undisclosed lease transactions during the audited period. 1. The auditors' report should be dated as of the date the:

d. The entity has sold a subsidiary that accounted for 25 a. Report is delivered to the client.
percent of its consolidated net income.
b. Auditors have accumulated sufficient evidence.
31. If the auditor becomes aware after the audited financial
statements have been released that some information included in c. Fiscal period under audit ends.
the statements is materially misleading, he or she has
d. Review of the working papers is completed.
a. no obligation to disclose it since the he or she acted in good
2. The existence of audit risk is recognized by the statement in the
faith and without negligence in arriving at the audit
auditor's standard report that the auditor
opinion.
a. obtains reasonable assurance about whether the financial
b. an obligation to inform the board of directors of the
statements are free of material misstatement.
misleading statements.
b. assesses the accounting principles used and also evaluates
c. an obligation to inform all users who are relying on the
the overall financial statement presentation.
financial statements.
c. realizes that some matters, either individually or in the
d. an obligation to make certain that users who are relying
aggregate, are important, while other matters are not
on the financial statements are informed.
important.
32. If the auditor becomes aware after the audited financial
d. is responsible for expressing an opinion on the financial
statements have been issued that some information included in
statements which are the responsibility of management.
the statements is materially misleading, the auditor's first and
most desirable approach is to 3. For an entity's financial statements to be presented fairly in
conformity with the requirements of the applicable financial
a. inform the Securities and Exchange Commission and other
reporting framework, which of the following need not be complied
regulatory agencies.
with?
b. inform the users of the misleading statements.
 a. The financial statements adequately disclose the significant 8. The audit report date is important to users because it indicates
accounting policies selected and applied.
a. the last day of the fiscal period.
b. The financial statements should present information that is
relevant, reliable, comparable, and understandable. b. the date on which the financial statements were filed with
the Securities and Exchange Commission.
c. The financial statements should use appropriate
terminology. c. the last date on which users may institute a lawsuit against
either client or auditor.
d. The financial statements should use principles approved by
the Auditing and Assurance Standards Council. d. the last day of the auditor's responsibility for the review
of significant events that occurred after the date of the
4. The introductory paragraph of the standard audit report states financial statements.
that the financial statements and the opinion expressed about
those statements are 9. Most auditors believe that financial statements are "presented
fairly" when the statements are in accordance with financial
a. the responsibility of the auditor reporting standards; but that it is also necessary to

b. the responsibility of management a. determine that they are not in violation of PASs.

c. the joint responsibility of management and the auditor b. examine the substance of transactions and balances for
possible misinformation.
d. none of the above
c. review the statements using the accounting principles
5. The scope paragraph of the standard unqualified report states promulgated by the Securities and Exchange Commission.
that the audit is designed to
d. assure investors that the net income reported this year will
a. discover all errors and/or irregularities. be equaled or exceeded in the future.

b. discover material errors and/or irregularities.

c. obtain reasonable assurance whether the statements are

free of material misstatement.

d. conform to financial reporting standards.

6. In the 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. them is a possibility that material misstatements still exist

in the financial statements.

d. there is a possibility that immaterial misstatements still

exist in the financial statements.

7. In the scope paragraph of the audit report, the use of the term
"material misstatements" conveys that auditors are responsible to
search for

a. minor misstatements. c. fraudulent misstatements.

b. significant misstatements. D all mistatement