List of Topics

1. FUNDAMENTALS OF AUDITING AND ASSURANCE SERVICES

2. THE FINANCIAL STATEMENT AUDIT
3. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS
INTERNAL CONTROL AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT.
4. AUDIT OBJECTIVES, PROCEDURES, EVIDENCES AND DOCUMENTATION
5. COMPLETING THE AUDIT / POST-AUDIT RESPONSIBILITIES
6. REPORTS ON AUDITED FINANCIAL STATEMENTS
7. OTHER ASSURANCE AND NONASSURANCE SERVICES
 I. FUNDAMENTALS OF AUDITING AND ASSURANCE
SERVICES

1. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement and a
limited assurance engagement. Which of the following is the objective of a reasonable assurance
engagement?

a. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of

the engagement as a basis for negative form of expression of the practitioner’s conclusion.
b. A reduction in assurance engagement risk to a very low level in the circumstances of the
engagement as a basis for a disclaimer of the practitioner’s conclusion
c. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the
engagement as a basis for a positive form of expression of the practitioner's conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of
the engagement as a basis for a qualified form of expression of the practitioner's conclusion.

2. Which of the following engagements is covered by the Framework for Assurance Engagements?
a. Consulting engagements.
b. Preparation of tax returns.
c. Independent financial statements audit.
d. Agreed-upon procedures engagement.

3. The following are the elements of an assurance engagement except

a. Suitable criteria.
b. An appropriate subject matter.
c. A two-party relationship involving a practitioner and intended users.
d. Sufficient appropriate evidence.

4. Which of the following is not an assurance engagement?

a. Compilation
b. Financial statements audit
c. Information reliability services
d. Reviews of prospective financial statements

5. The risk that the practitioner expresses an inappropriate conclusion when the subject matter
information is materially misstated
a. Assurance engagement risk
b. Materiality-risk
 c. Non-detection risk
d. Reasonable assurance risk

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

a. An appropriate subject matter
b. Suitable criteria
c. Sufficient appropriate evidence
d. Substantial engagement fee

7. Which of the following characteristics need not be exhibited in determining the identified suitability of
criteria of a subject matter in an assurance engagement?
a. Completeness
b. Relevance
c. Understandability
d. Substantial acquisition cost

8. An attitude of professional skepticism means that the practitioner

a. should assess critically with a questioning mind the validity of evidence obtained
b. should recognize that circumstances may exist that can cause the subject matter information
to be materially misstated
c. is alert to evidence that contradicts or brings into question the reliability of documents or
representations by the responsible party
d. is expected to eliminate the risk of overlooking suspicious circumstances, of over
generalizing when drawing conclusions from observations and of using faulty assumptions in
determining the nature, timing and extent of evidence gathering procedures and evaluating the
results thereof.

9. Nonassurance engagements include all of the following except

a. agreed-upon procedures.
b. management consulting.
c. preparation of tax returns where no conclusion is expressed.
d. compliance audit.

10. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement and a
limited assurance engagement. Which of the following is the objective of a limited assurance
engagement?
a. a reduction in assurance engagement risk to a very low level in the circumstances of the
engagement as a basis for a disclaimer of the practitioner's conclusion.
b. a reduction in assurance engagement risk to an acceptably low level in the circumstances of
the engagement as a basis for a positive form of expression of the practitioner's conclusion.
c. a reduction in assurance engagement risk to a level that is acceptable in the circumstances
of the engagement as a basis for a negative form of expression of the practitioner's conclusion.
d. a reduction in assurance engagement risk to a level that is acceptable in the circumstances
of the engagement as a basis for a qualified form of expression of the practitioner's conclusion.

11. The subject matter of an assurance engagement can take the following forms except
 a. Historical or Prospective financial statements.
b. Performance of an entity that could indicate efficiency and effectiveness.
c. The entity's internal control.
d. Evaluation of a capital investment proposal.

12. Which of the following is not an assurance engagement?

a. Information System Reliability Service
b. Business Performance Measurement
c. Risk Assessment Service
d. Management Consulting Service

13. Assurance engagements should exhibit the following elements except

a. a subject matter.
b. suitable criteria.
c. an engagement process.
d. appropriate professional fees.

14. Which of the following criteria is unique to the auditor's attest function?
a. General competence
b. Familiarity with the particular industry of which the auditor's client is part
c. Due professional care
d. Independence

15. Which of the following may not be an appropriate form of the subject matter of an assurance
engagement?
a. Historical financial information
b. Systems and processes
c. Behavior
d. Non-physical characteristics of a facility

16. CPAs in public practice who perform assurance engagements are governed by the following,
except
a. Philippine Framework for Assurance Engagements
b. Code of Ethics for Professional Accountants in the Philippines
c. Philippine Standards on Quality Control
d. Philippine Standards on Related Services

17. When performing an assurance service, professional accountants use standards or benchmarks to
evaluate or measure the subject matter of an assurance engagement. These are referred to in the
Framework as
a. Norms
b. Criteria
c. Conditions
d. Gauges

18. In an assurance engagement, the responsible party and the intended users
a. should be from different entities.
 b, should be from the same entity.
c. may be from the same entity or different entities.
d. are both responsible for determining the nature, timing and extent of the procedures to be
performed.

19. Relevant criteria contribute to conclusions that are

a. free from bias.
b. clear and comprehensive.
c. subject to different interpretations.
d. useful for decision making.

20.Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of
experts that follow a transparent due process are called
a. Suitable criteria
b. General criteria
c Specifically developed criteria
d. Established criteria

21 After accepting an assurance engagement, a practitioner is not allowed to change the engagement
to a non-assurance engagement, or from a reasonable assurance engagement to a limited assurance
engagement, except when there is reasonable justification for the change. Which of the following
ordinarily will justify a request for a change in the engagement?
I. A change in circumstances that affects the intended user's requirements.
II. A misunderstanding concerning the nature of the engagement.
a. I only
b. Both l and II
c. Il only
d. Neither or Il

22. The following statements relate to the performance of an assurance engagement other than an
audit or review of historical financial information covered by PSAs and PSREs. Which is incorrect?
a. Those persons who are to perform the engagement should collectively possess the
necessary professional competence.
b. The practitioner should consider materiality and assurance engagement risk when planning
and performing an assurance engagement.
c. The practitioner is precluded from using the work of persons from other professional
disciplines.
d. The assurance report should be in writing and should contain a clear expression of the
practitioner's conclusion about the subject matter information.

23. A practitioner should plan and conduct the assurance engagement in an effective manner to meet
the objective of the engagement. Which of the following matters need not be a concern of the
practitioner in planning the work?
a. Criteria to be used
b. Engagement objective
c. Personnel and expertise requirements
d. Specific format of the assurance report
24. Which of the following standards are to be applied, as appropriate, in the audit of historical
financial information?
a. PSREs
b. PSAEs
c. PSRSs
d. PSAs

25. An auditor may accept an engagement to perform specified procedures on the specific subject
matter of specified elements, accounts, or items of a financial statement if
a. The report does not list the procedures performed.
b. The financial statements are prepared in accordance with a special purpose framework.
c. The auditor is also the entity's continuing auditor.
d. Use of the report is restricted.

26. The review of a company's financial statements by a CPA firm:

a. Is substantially less in scope of procedures than an audit.
b. Requires detailed analysis of the major accounts.
c. Is of similar scope as an audit and adds similar credibility to the statements.
d. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the
statements.

27. Which of the following attributes is more closely associated with assurance services performed by
a CPA firm than with other lines of professional work?
a. Integrity.
b. Competence.
c. Independences
d. Keeping informed in current professional developments.

28. Which of the following types of management advisory services may not be performed by a CPA
firm that wants to maintain its independence with respect to the client?
a. Training of employees.
b, Making recommendations for improvements in internal control.
c. Screening and interviewing applicants for a new accounting position.
d. Supervising computer employees.

29. Operational auditing refers to the study of business operations for the purpose of making
recommendations for a!! of the following except
a. economic and efficient use of resources.
b. effective achievement of business objectives.
c. attesting to the fairness of the financial statements.
d. compliance with company policies
.
30. The forecast projection standards do not require
a. a caveat that the prospective results may not be achieved.
b. a statement that examination was made in accordance with standards established by the
Auditing Standards Council.
 c. an opinion on the prospective financial statements.
d. a statement that the accountant should be independent.

31. A person is not considered in the practice of accountancy in education if in an educational

institution, he teaches
a. Humanities.
b. Management Advisory Services.
c. Financial Accounting.
d. Taxation.

32. Assurance engagement involves rendering the following services except

a. audits.
b. reviews.
c. Information System Reliability.
d. compilation of financial or other information.

33. Independent auditing can best be described as a

a. branch of accounting.
b. discipline that attests to the results of accounting and other functional operations and data.
c. professional activity that measures and communicates financial and business data.
d. regulatory function that prevents the issuance of improper financial information.

34. The independent audit is important to readers of financial statements because it

a. determines the future stewardship of the management of the company whose financial
statements are audited.
b. measures and communicates financial and business data included in financial statements.
c. involves the objective audit of and reporting on management-prepared statements.
d. reports on the accuracy of all information in the financial statements.

35. Which of the following best describes why an independent auditor is asked to express an opinion
on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a company's financial position,
cash flow, and operations without the expertise of an independent auditor.
b. It is management's responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial statements.
c. The opinion of an independent party is needed because a company may not be objective
with respect to its own financial statements.
d. It is a customary courtesy that stockholders of a company receive an independent report on
management's stewardship in managing the affairs of the business.

36. In including an audit of financial statements, the overall objectives of the auditor are the following,
except
a. To obtain reasonable assurance whether the financial statement as a whole are free from
material misstatement whether due to fraud or error.
b. To enable the auditor to express an opinion on whether the financial statements are
prepared, in all material respects in accordance with the applicable financial reporting
framework.
 c. To report on the financial statements and communicate as required by the PSAs, in
accordance with the auditor's findings.
d. To conduct a critical, detailed and systematic examination of all the accounts in the financial
statements, as the related document records, procedures and control.

37. When a CPA expresses an opinion on financial statements, his or her responsibilities extend to
a. the underlying wisdom of the client's management decisions.
b. whether the results of the client's operating decisions are fairly presented in the financial
statements.
c. active participation in the implementation of the advice given to the client.
d. an ongoing responsibility for the client's solvency.

38. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly
held company rests with the
a. partner assigned to the audit engagement.
b. management of the company.
c, auditor in charge of the field work.
d. Securities and Exchange Commission.

39. Which of the following is responsible for the fairness of the representations made in financial
statements?
a. Client's management
b. Independent auditor
c. Audit committee
d. PICPA

40. The criteria for evaluating quantitative information vary. Example, in the audit of historical financial
statements by CPA firms, the criteria are usually
a. international auditing standards.
b. financial reporting standards.
c. regulations of the Bureau of Internal Revenue.
d. regulations of the Securities and Exchange Commission.

41. The process of recording, classifying, and summarizing economic events in a logical manner for
the purpose of providing financial information for decision-making is
a. accounting.
b. auditing.
c. management.
d. economics.

42. An audit independence issue might be raised by the auditor's participation in management
advisory services engagements. Which of the following statements is most consistent with the
profession's attitude toward this issue?
a. Information obtained as a result of a management advisory services engagement is
confidential to that specific engagement and should not influence performance of the attest
function.
 b. The decision as to loss of independence must be made by the client based upon the facts of
the particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is also competent to make these
decisions and can do so without loss of independence.

43. This refers to the audit procedures that, in the auditor's judgment and based on the PSAs are
deemed appropriate in the circumstances to achieve the objective of an audit.
a. Analytical procedures
b. Scope of audit
c. Audit sampling
d. Documentation

44. Which of the following is not a component of engagement risk?

a. Control risk
b. Inherent risk
c. Business risk
d. Detection risk

45. Auditing is based on the assumption that financial data and statements are
a. in conformity with appropriate criteria.
b. verifiable.
c. presented fairly.
d. consistently applied.

46. Engagement risk is influenced by the risks associated with the following except
a. nature and form of the subject matter.
b. nature and form of the criteria applied to the subject matter.
c. nature and extent of the process used to collect and evaluate evidence.
d. unreasonably low professional fee.

47. Reducing-assurance engagement risk to zero is very rarely attainable or cost beneficial as
a result of the following factors, except
a. The use of selective testing.
b. The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
c. The practitioner may not have the required assurance knowledge and skills to gather and
evaluate evidence.
d. The use of judgment in gathering and evaluating evidence and forming conclusions based
on that evidence.

48. The decision of whether the criteria are suitable involves considering whether the subject matter of
the assurance engagement is capable of reasonably consistent evaluation or measurement using
such criteria. Which of the following characteristics is not considered necessary in determining
whether the criteria are suitable?
a. Relevance
b. Neutrality
 c. Reliability
d. Sufficiency

49. An operational audit differs in many ways from an audit of financial statements. Which of the
following is the best example of one of these differences?
a. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement.
b. The boundaries of an operational audit are often drawn from an organization chart and are
not limited to a single accounting period.
c. Operational audits do not ordinarily result in the preparation of a report.
d. The operational audit deals with pre-tax income.

50. Operational auditing is primarily oriented toward:

a. Future improvements to accomplish the goals of management.
b. The accuracy of data reflected in management's financial records.
c. The verification that a company's financial statements are fairly presented.
d. Past protection provided by existing internal control.

51. A typical objective of an operational audit is for the auditor to:

a. Determine whether the financial statements fairly present the entity's operations.
b. Evaluate the feasibility of attaining the entity's operational objectives.
c. Make recommendations for improving performance.
d. Report on the entity's relative success in attaining profit maximization.

52. A review of any part of an organization's procedures and methods for the purpose of evaluating
efficiency and effectiveness is classified as a(n)
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.

53. An audit to determine whether the auditee is following specific procedures or rules set down by
some higher authority is classified as
a(n)
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.

54. The primary reason for an audit by an independent, external audit firm is to
a. Satisfy governmental regulatory requirements.
b. Guarantee that there are no misstatements in the financial statements and ensure that any
fraud will be discovered.
c. Relieve management of responsibility for the financial statements.
d. Provide increased assurance to users as to the fairness of the financial statements.

55. Which of the following elements does not relate to audit quality?
 a. Audit competence
b. Independence
c. Audit fees
d. Due diligence

56. In determining the scope and nature of services to be performed in public practice, a CPA firm
should:
a. Require independence for all services performed.
b. Determine that the performance of all services is consistent with the firm's members' role as
professionals.
c. Have in place internal control procedures.
d. Only perform accounting related services.

57. Error that arises from an isolated event that has not recurred other than or specifically identifiable
occasions and is therefore not representative of errors in the population.
a. Expected error
b. Anomalous error
c. Sampling error
d. Unintentional error

58. A government audit evaluates a disbursement to determine if it is necessary, excessive or

extravagant in accordance with existing rules and regulations. What kind of audit is he conducting?
Compliance Audit Economy Audit
a. Yes No
b. No Yes
c. Yes Yes
d. No No

59. Inherent limitations in an audit stem from the following factors except
a. most audit evidence is persuasive rather than conclusive.
b. use of testing.
c. accounting and internal control system limitation.
d. incompetence of an auditor.

60. Which of the following is not one of the concepts in the framework of auditing theory?
a. Ethical conduct.
b. Conflict of interest.
c. Evidence.
d. Fair presentation.

61. Internal auditors' role in preventing and detecting fraud would not include the
a. audit of abnormal expenditures.
b. audit of sensitive expenses such as foreign sage expenses.
c. review of the company's policies regarding questionable payments.
d. direct responsibility of reporting fraud to the SEC.
62. A CPA examines the financial statements of a local bank. According to the Code of Ethics, the
appearance of independence ordinarily would not be impaired if the CPA
a. serves on the bank's committee that approves loans.
b. owns several of the bank's ordinary shares.
c. obtains a short-term loan from the bank.
d. uses the bank's timesharing computer service to solve client- related problems.

63. A CPA should not undertake a management advisory service that includes continued participation
through engagement implementation, unless
a. upon implementation of a new study and evaluation of the system of internal control is
performed.
b. upon implementation, the client's personnel will have the knowledge and ability to
adequately maintain and operate such systems as may be involved.
c. the CPA accepts overall responsibility for implementation of the chosen course of action.
d. the CPA acquires an overall knowledge of the client's business that is equivalent to that
possessed by management.

64. Santos, a CPA not in public practice, is an employee in the internal audit department of Tower's
Company. The management has asked Santos to perform examinations of potential acquisitions and
to express an opinion thereon. Santos will use the reports for internal purposes and to show to its
bankers in accordance with certain loan agreements. How should Santos sign the report?
a. Santos, CPA
b. Santos, Internal Auditor
c. Santos, CPA (Internal Auditor)
d. Santos, Internal Auditor (CPA)

65. An auditor should not render a report on

a. the achievability of forecasts.
b. client internal control.
c. management performance.
d. quarterly financial information.

66. The CPA in public practice violates the Code of Ethics for Professional Accountants if he accepts a
fee which was
a. fixed by a public authority.
b. determined, based on the results of judicial proceedings.
c. payable after a specified finding was obtained.
d. based on the actual audit time charges
.
67. Contingent fees charged by CPAs engaged in tax practice are permitted under the rules of
professional conduct because
a. this practice establishes fees which are commensurate with the value of the services.
b. attorneys in tax practice customarily set contingent fees,
c. determination by taxing authorities are a matter of judicial proceedings which do not involve
third parties.
d. the consequences are based upon findings of judicial proceedings or the findings of tax
authorities.
68. A CPA accepts an engagement for a professional service without violating the rules of
Professional Conduct if the service involves
a. the preparation of cost projections for submission to a government agency as an application
for a rate increase, and the fee will be paid if there is a rate increase.
b. tax preparation, and the fee will be based on whether the CPA signs the tax return prepared.
c. a litigatory, and the fee is not known but it is to be determined by a district court.
d. tax return preparation and the fee is to be based on the amount of taxes saved.

69. The Code of Ethics provides that when a CFA is required to express an opinion on combined or
consolidated financial statements which include a subsidiary, branch, or other component audited by
another independent public accountant, the CPA may
a. insist on auditing any such component which the CPA deems necessary to warrant the
expression of an opinion.
b. insist only on performing a review of any such component.
c. not insist on auditing any such component but may request copies of all working papers
relevant to the other independent public accountant's examinations.
d. not insist on auditing any such component or reviewing working papers belonging to the
other independent public accountant.

70. Which of the following act when committed by a CPA constitutes a violation of the Code of Ethics:
a. Rendering management services to a non-audit client.
b. Offering a position with higher salary to a staff member of another CPA.
c. Charging a professional fee on the savings gained by a client on a tax case.
d. Providing accounting service to a non-audit client.

71. An auditing firm is allowed to offer employment to an employee of another CPA in public practice if
the CPA
a. inform the other CPA in public practice prior to making the offer.
b. makes the offer verbally to an employee who is not a CPA.
c. makes the offer on behalf of an audit client.
d. has an executive search staff that is involved in personnel placement.

72. The CPA should not

a. render management consulting services to an audit client.
b. accept a position with another firm without informing his present employer.
c. advise clients and professional contacts of the opening of a new office.
d. describe himself as tax expert or management consulting specialist.

73. Ethically, the auditor could

a. advertise only as to his expertise in preparing income tax returns.
b. base his audit fee on a percentage of the proceeds of his client's stock issue.
c. own preferred stock in a corporation which is an audit client.
d. perform an examination for a financially distressed client at less than his customary fees.

74. Which of the following is allowable under the rules against advertising?
a. A news item relating to a technical paper read by a CPA at a seminar.
 b. A bold listing of the CPA's name and address in a telephone directory.
c. An announcement as to the expertise in providing taxation services by the CPA.
d. A letter to trade chamber offering audit services at reduced group rates.

75. Inclusion of which of the following in a promotional brochure published by a CPA firm would be
most likely to result in a violation of the Code of Ethics?
a. Names and addresses, telephone numbers, number of partners, office hours, foreign
language competence, and date the firm was established.
b. Services offered.
c. Educational and professional attainments, including date and place of certification, degrees
received, and membership in professional associations.
d. Names, addresses and telephone numbers of the firm's clients, including the number of
years served.

76. Richard, CPA performs accounting services for Tower Corporation. Tower wishes to offer its
shares to the public and asks Richard to audit the financial statements prepared for registration
purposes. Richard refers Tower to Cruz, CPA, who is more competent in the area of registration
statements. Cruz performs the audit of Tower's financial statements and subsequently thanks Richard
foe the referral by giving Richard a portion of the audit fee collected. Richard accepts the fee. Who, if
anyone, has violated professional ethics?
a. Only Richard.
b. Both Richard and Cruz.
c. Only Cruz.
d. Neither Richard nor Cruz.

77. Dela Cruz, a non-CPA, has a law practice. Dela Cruz has recommended one of his clients to
Gomez, CPA. Gomez has agreed to pay Dela Cruz 10% of the fee for services rendered by Gomez to
Dela Cruz client. Who, if anyone, is in violation of the Code Of Ethics?
a. Both Dela Cruz and Gomez.
b. Neither Dela Cruz nor Gomez.
c. Only Dela Cruz.
d. Only Gomez.

78. Which of the following is prohibited by the Code of Professional Ethics?

a. Use of a firm name which indicates specialization.
b. Listing educational attainment in application for employment.
c. Use of the partnership name for a limited period by one of the partners in a public accounting
firm after the death or withdrawal of all other partners.
d. Holding as an investment 10 of outstanding shares in a commercial corporation which
performs business processing outsourcing services.

79. Which of the following is prohibited by the Code of Ethics Professional Accountants in the
Philippines?
a. Use of a firm name which includes the name of retired partner.
b. Announcement in a newspaper of the opening of a public accounting office.
c. Engaging in civic activities during business hours.
 d. Accepting an engagement or employment which one cannot reasonably expect to complete
or discharge with professional competence.

80. In the preparation of an income tax return, the CPA is expected to

a. take a position of client advocacy.
b. take a position of independent neutrality.
c. present the reconciliation of net income in the audited financial statements with the taxable
net income in the income tax return.
d. reconcile the expenses in the audited financial statements with the allowable deductions in
the income tax return.

81. Which of the following actions should be avoided by a CPA?

a. A CPA in public practice agrees to be treasurer of a Lions Club.
b. A CPA, officer of a bank, assists another CPA in practice to obtain a loan from said bank.
c. A CPA in the government service without BOA accreditation signs an audit report to
accompany ä company's income tax return.
d. A CPA teaching in a university accepts an audit engagement with an exporting firm.

82. During the course of an audit, the independent CPA is often called upon to give informal advice on
many diverse questions. This type of service differs from management advisory services in that this
type of service is informal and therefore
a. the CPA does not make any warranties with respect to the competence of the
extemporaneous.
b. the CPA is not exposed to liability as a consequence of the extemporaneous advice.
c. no presumption should exist that all pertinent facts have been identified and considered.
d. no presumption should exist that the advice will impact upon the operations of the business
enterprise.

83. A council created by the Professional Regulation Commission upon the recommendation of the
Board of Accountancy to assist the BOA in the promulgation of accounting standards.
a. Education Technical Council
b. CPE/CPD Council
c. Auditing and Assurance Standards Council,
d. Financial Reporting Standards Council

84. Cruz, Santos, CPAs was hired by RFC, Inc. to prepare unaudited financial statements. The
statement that best describes this engagement is
a. The CPA is performing an accounting service rather than an examination of the financial
statements.
b. The financial statements are representations of both management and the CPA.
c. The CPA must perform the audit in accordance with standards of auditing necessary to
determine that the statements are in conformity with financial reporting standards.
d. The CPA may prepare the statements from the books, but may not assist in adjusting and
closing the books.

85. Internal auditing relates to

a. audit which serves the needs of management.
 b. audit which is performed by a professional practitioner as an independent contractor.
c. audit which is incidentally concerned with the detection and prevention of fraud.
d. audit wherein the auditor should be independent of management both in fact and in mental
attitude.

86. The main objective of operational auditing is

a. to evaluate the integrity of accounting information.
b. to verify fulfillment of plans and sound business requirement.
c. to measure and evaluate the effectiveness of controls.
d. to produce results as desired or directed.

87. Internal auditing is a dynamic profession. Which of the following best describes the scope of
internal auditing as it has developed to date?
a. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
b. Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and
regulations.
c. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.
d. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation.

88. Which of the following activities best describes the term operational audit?
a. Seeks out aspects of company operations in which introduction of proper controls would
reduce waste.
b. The job of implementing financial and accounting controls in a newly organized company.
c. Constant review of the administrative controls as they relate to the operations of the
company.
d. Verification of the fair presentation of a company's results of operations.

89. Which of the following statements best describes the relationship between an external auditor and
an internal auditor?
a. An internal auditor is more likely to be concerned with internal accounting control; while an
external auditor shall be more interested with operational auditing.
b. Although the internal auditor and external auditors have differences in the independence of
their positions, they nevertheless serve similar types of interests.
c. Both the internal auditor and external auditor have the same degree of concern about
financial status and results of operations.
d. The practitioners in the two fields used basically an identical approach; however, there are
differences in the application of auditing techniques.

90. When an independent auditor decides that the work performed by internal auditors may have a
bearing on the nature, timing, and extent of contemplated audit procedures, the independent auditor
should plan to evaluate the objectivity of the internal auditors. Relative to objectivity, the independent
auditor should
a. consider the organizational level to which internal auditors report the results of their work.
 b. review the quality control program in effect for the internal audit staff.
c. examine the quality of the internal audit reports.
d. consider the qualifications of the internal audit staff.

91. Government auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, effectiveness, and
a. Internal control
b. Evaluation
c. Accuracy
d. Compliance.

92. In government auditing, the three elements of expanded scope auditing are
a. goal analysis, audit of operations, audit of systems.
b. financial and compliance, economy and efficiency, program results.
c. preaudit, post audit, internal audit.
d. national government audit, local government audit, corporation audit.

93. The Constitution of the Philippines requires this Office to "keep the general accounts of the
Government and for such period as may be provided by law, preserve the vouchers pertaining
thereto":
a. National Accounting Office, Budget Ministry.
b. Department of Finance.
c. Accounting units.
d. Commission on Audit.

94. One of the statements below cannot be considered an objective of the Commission on Audit.
a. Development and implementation of comprehensive audit program for government.
b. Keeping and enhancement of the information value of government accounts.
c. Assuming fiscal responsibility for the government and its instrumentalities.
d. Preparing the government budget.

95. Under the law, the chief executive officer of the Commission on Audit is the
a. Commissioner.
b. Division Manager.
c. Chairman.
d.. Executive Director.

96. The members who compose the Commission on Audit should

a, be a commissioner and an associate commissioner.
b. hold office for nine years without reappointment.
c. be a CPA or member of the Bar with at least ten years experience.
d. be a member of the bidding committee of the agency.

97. Auditors of the Commission on Audit perform the role of

a. Internal auditors.
b. Independent auditors.
 c. Management accountants,
d. Financial consultants.

98. One of the government auditing standards which is not observed by independent CPAs in the
private sector is
a. the audit is to be adequately planned and assistants are to be properly supervised.
b. a review shall be made of compliance with legal and statutory requirements.
c. an evaluation shall be made of the system of internal control.
d. sufficient competent evidential matter shall be obtained through inspection, observation,
inquiries and confirmations.

99. Which one of the following functions of government auditors is also performed by independent
CPAs?
a. Preserve vouchers pertaining to transactions.
b. Countersign checks or treasury warrants.
c. Inspect deliveries of goods purchased.
d. Examine accounts pertaining to revenues and expenditures and uses of funds and property.

100. One of the central offices created by the Commission on Audit is the National Government Audit
Office. Its function is to
a. advise and assist the chairman on matters pertaining to the audit of departments, regions,
bureaus, and offices of the National Government.
b. exercise technical supervision over government accounting system.
c. formulate long-range and annual plans and programs for the commission.
d. provide the commission with services related to personnel, records, supplies, security,
general and other related services.

101. A CPA shall not practice under a firm name that includes or indicates the following except:
a. fictitious name.
b. specialization.
c. misleading as to the type of organization.
d. name(s) of past partner(s) in the firm name of successor partnership.

102. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for
the CPA's minor child. The trust securities were not material to the CPA but were material to the child's
personal worth. Would the independence of the CPA be considered to be impaired with respect to the
client?
a. Yes, because the stock would be considered a direct financial interest and, consequently,
materiality is not a factor.
b. Yes, because the stock would be considered an indirect financial interest that is material to
the CPA's child.
c. No, because the CPA would not be considered to have a direct financial interest in the client.
d. No, because the CPA would not be considered to have a material indirect financial interest in
the client.

103. Without the consent of the client, a CPA should not disclose confidential client information
contained in working papers to a
 a. quality control review body formed by the BOA.
b. CPA firm that has purchased the CPA's accounting practice.
c. national court that has issued a valid subpoena.
d. disciplinary body created under statute.

104. After beginning an audit of a new client, Barkin, CPA, discovers that the professional competence
necessary for the engagement is lacking. Barkin informs management of the situation and
recommends another CPA, and management engages the other CPA. IJnder these circumstances
a. Barkin's lack of competence should be considered to be a violation of the generally accepted
auditing standards.
b. Barkin may request compensation from the client for any professional services rendered to it
in connection with the audit.
c. Barkin's request for a commission from the other CPA is permitted because a more
competent audit can now be performed.
d. Barkin may be indebted to the other CPA since the other CPA can collect from the client only
the amount the client originally agreed to pay Barkin.

105. in determining estimates of fees, an auditor may take account each of the following, except the
a. value of the service to the client.
b, degree of responsibility assumed by undertaking the engagement.
c. skills required to perform the service.
d, attainment of specific findings.

106. A violation of the profession's ethical standards would most likely occur when a CPA who
a. is also admitted to the Bar, represents on letterhead to be both an attorney and a CPA.
b. writes a newsletter on financial management, also permits a publishing company to solicit
subscriptions by direct mail.
c. is controller of a bank, permits the bank to use the controller's CPA title in the listing of
officers in its publications.
d. forms a partnership for accountancy practice with non-CPAs.

107. Independent auditing can best be described as

a. a branch of management services.
b. a branch of accounting.
c. a professional activity that measures and communicates financial and business data.
d. a discipline which attests to the results of accounting and other functional operations and
data.

108. The following statements relate to the Philippine Accountancy Act of 2004. Which statement is
true?
a. The Professional Regulation Commission has the authority to remove any member of the
Board of Accountancy for negligence, incompetence, or any other just cause.
b. Insanity is not a ground for proceeding against a CPA.
c. A person shall be considered to be in the professional practice of accounting if, as an officer
in a private enterprise, he makes decisions requiring professional accounting knowledge even
if his position does not require that the holder should be a CPA.
 d. After two years, subject to certain conditions, the Board of Accountancy may order the
reinstatement of a CPA whose certificate of registration has been revoked.

109. In which of the following instances would the independence of the CPA not be considered to be
impaired? The CPA has been retained as the auditor of a
a. charitable organization in which an employee of the CPA serves as treasurer.
b. municipality in which the CPA owns P250,000 of the indebtedness of the municipality.
c. cooperative apartment house in which the CPA owns an apartment and is not part of the
management.
d. company in which the CPA's investment club owns a one- tenth interest.

110. A CPA should not submit unaudited financial statements of a nonpublic company to a client or
others unless, as a minimum, the CPA complies with the provisions applicable to
a. compilation engagements.
b. review engagements.
c; statements on auditing standards.
d. assurance engagements.

111. When an accountant is not independent, the accountant is precluded from issuing a
a. compilation report.
b. review report.
c. management advisory report.
d. tax planning report.

112. When a certified public accountant who is not independent is associated with financial
statements, he would be precluded from expressing an opinion because
a. the public would be aware of his lack of independence and place little or no faith in his
opinion.
b. he would place himself in the position of suffering an adverse decision in a possible liability
suit.
c. he would be in the position of auditing his own. work.
d. any auditing procedures he might perform would not be in accordance with PSAs.

113. The profession's ethical standards would most likely be considered to have been violated when
the CPA represents that specific consulting services will be performed for a stated fee and it is
apparent at the same time of the representation that the
a. CPA would not be independent.
b. fee was a competitive bid.
c. actual fee would be substantially higher.
d. actual fee would be substantially lower than the fees charged by other CPAs for comparable
services.

114. The form of communication with a client in a management advisory service consultation should
be
a. either oral or written.
b. oral with appropriate documentation in the work papers.
c. written and copies should be sent to both management and the board of directors.
 d. written and a copy should be sent to management alone.

115. Under common law, which of the following statements most accurately reflects the liability of a
CPA who fraudulently gives an opinion on an audit of a client's financial statements?
a. The CPA is liable only to third parties in privity of contract with the CPA.
b. The CPA is liable only to known users of the financial statements.
c. The CPA probably liable to any person who suffered a loss as a result of the fraud.
d. The CPA probably is liable to the client even if the client was aware of the fraud and did not
rely on the opinion.

116. In rare cases auditors have been held liable for criminal acts. A criminal conviction against an
auditor can result only when it is demonstrated that the auditor
a. was negligent.
b. was grossly negligent.
c. intended to deceive or harm others.
d. caused a financial loss to an innocent third party.

117. The risk that the audit will fail to uncover a material misstatement is eliminated
a. if client has good internal control.
b. if client follows financial reporting standards.
c. when the auditor has complied with Philippine Standards on Auditing (PSA).
d. under no circumstances.

118. Several months after an unmodified audit report was issued, the auditor discovers the financial
statements were materially misstated. The client's chief executive officer agrees that the statements
are misstated, but refuses to issue a correction, and claims that "confidentiality" prevents the CPA
from informing anyone.
a. CEO is correct. Auditor must maintain confidentiality.
b. CEO is wrong, but since auditor's report is issued, it is too late to retract.
c. CEO is wrong, and the auditor has an obligation to issue a revised correct audit report, even
if CEO will not revise and correct the financial statements.
d. CEO Is correct, but to be ethically correct the auditor should violate the confidentiality rule
and disclose the error.

119. Where a reasonable basis exists for omission of an answer to an applicable question on a tax
return
a. the question may be ignored.
b. a brief explanation of the reason for the omission should be provided.
c. the question should be marked as nonapplicable
d. a note should be provided which states that the answer will be provided if the information is
requested.

120. A CPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner
that the tax is
a. the legal minimum.
b. computed in conformity with generally accepted accounting principles.
c. supported by the client's audited financial statements.
 d. not subject to change upon audit.

121. Under which of the following circumstances would the independence of a CPA be considered
impaired if the CPA, who is also an attorney, serves as auditor and provides legal services to the
same client?
a. When the CPA, as legal agent, consummates a business acquisition for the client.
b. When the CPA's audit fees and legal fees are not billed separately.
c. When the CPA uses legal expertise to research a question of income tax law.
d. When the legal services consist of an analysis of the terms of a lease agreement.

122. An audit designed to. evaluate the efficiency and effectiveness of an organization or some part
thereof would not come under the title of
a. performance audit.
b. management audit.
c. operational audit.
d. compliance audit.

123. Which of the following is not one of the major differences between financial and operational
auditing?
a. The financial audit is oriented to the past whereas an operational audit concerns
performance for the future.
b. The financial audit report is distributed to many readers whereas the operational audit report
goes to a few managers.
c. Financial audits are limited to matters that directly affect the financial statements whereas
operational audits cover any aspect of efficiency and effectiveness.
d. Financial audits deal with the information on the financial statements whereas operational
audits are concerned with the information in the ledgers.

124. In which of the following circumstances would a CPA be bound by ethics to refrain from
disclosing any confidential information obtained during the course of a professional engagement?
a. The CPA is issued a summons enforceable by a court order which orders the CPA to
present confidential information.
b. A major stockholder of a client company seeks accounting information from the CPA after
management declined to disclose the requested information.
c. Confidential client information is made available as part of a quality review of the CPA's
practice by a peer review team authorized by the PICPA.
d. An inquiry by a disciplinary body of government regulators.

125. Which of the following is not one of the broad categories of operational audits?
a. Functional audits.
b. Organizational audits.
c. Single Act Audits.
d. Special assignment audits.

126. Which of the groups would not be involved in an operational audit?

a. Internal auditors.
b. Government auditors.
 c. CPA firms.
d.

127. To maximize their effectiveness, the internal audit department should not report to the
a. Controller.
b. President.
c. Chairperson of the Board of Directors.
d. Board of Directors.

128. When CPA firms do an audit of historical financial statements, part of the audit usually consists of
identifying operational problems and making recommendations that may benefit the audit client. The
recommendations can be made orally but they are typically made by use of a
a. letter of representation.
b. engagement letter.
c. management letter.
d. client letter.

129. The two most important qualities for an operational auditor are
a. independence and competence.
b. competence and technical training.
c. personality and appearance.
d. academic background and sufficient experience.

130. Independence of internal auditors is not enhanced by

a. having the internal audit department report to the board of directors.
b. having government auditors report to a level above the operating departments.
c. drafting procedures and designing accounting systems.
d. having the internal audit department report to the president.

131. Which of the following statements is not correct?

a. Objectivity requires that internal auditors have an independent mental attitude.
b. Internal auditors should be independent of the activities they audit.
c. It is acceptable for internal auditors to recommend changes in operations and to install and
implement the operating systems, as long as they do not have the responsibility for operating
them throughout the year.
d. The internal auditor should not be responsible for correcting deficiencies when ineffective or
inefficient operations are found.

132. There are several sources that the operational auditor can utilize in developing specific evaluation
criteria. An area that would not be such a source is
a. generally accepted accounting principles.
b. historical performance, such as results from prior periods.
c. comparable performance, such as the data of comparable entities.
d. discussion and agreement between the management of' the entity to be audited, the
operational auditor, and the entity or persons to whom the findings will be reported.

133. Which of the following is not one of the three phases in an operational audit?
 a. Planning.
b. Review of the internal control structure.
c. Evidence accumulation and evaluation.
d. Reporting and follow-up

134. The different types of evidence are equally applicable for operational and financial auditing.
However, the two which are used less extensively in operational auditing are
a. documentation and client inquiry.
b. observation and physical examination.
c. confirmation and mechanical accuracy.
d. analytical tests and client inquiry.

135. Which of the following is not prohibited by the Code of Ethics for Professional Accountants in the
Philippines?
a. Advertising and solicitation of clients.
b. Payment of commission to obtain a client.
c. Receiving a contingent fee on a tax case before the Bureau of Internal Revenue.
d. Offering employment to staff member of another CPA without first informing the CPA.

136. The CPA profession deemed it necessary to establish a Code of Ethics and a mechanism to its
enforcement because
a. an ethical code that stresses the CPA's responsibility to clients and colleagues is a
prerequisite to success.
b. a requirement of law provides that CPAs establish a code of ethics.
c. acceptance of responsibility to the public is a distinguishing mark of a profession.
d. the establishment of flexible ethical standard provides self- protection for CPAs.

137. A typical objective of an operational audit is to determine whether an entity's

a. internal control structure is adequately operating as designed.
b. operational information is in accordance with generally accepted governmental auditing
standards.
c. financial statements present fairly the results of operations.
d. specific operating units are functioning efficiently and effectively.

138. Internal auditing is considered to be part of an organization's:

a. accounting system.
b. internal control procedures.
c. control environment.
d. external controls.

139. which of the following is not required of an individual seeking to become a certified internal
auditor?
a. Two years work experience in internal auditing or its equivalent.
b. Successful completion of a two-day examination.
c. A baccalaureate degree from an accredited college.
d. One year of supervisory experience.
140. For the highest degree of independence the director of internal auditing should report directly to:
a. the controller.
b. the audit committee of the board of directors.
c. the executive vice-president
d. the chief accountant.

141. Operational auditing does not focus on

a. efficiency.
b. economy.
c. effectiveness.
d. compliance.

142. The operational auditors' preliminary conclusions about problem areas are summarized as
a. the definition of purpose.
b. the audit program.
c. the preliminary survey.
d. the audit report.

143. In an audit in accordance with Philippine Standards on Auditing, the auditors must test
compliance with those laws and regulations that
a. have a direct and material effect on the financial statements.
b. have a direct and material effect on major government programs.
c. have a material direct or indirect effect on the financial statements.
d. have a material effect on major or nonmajor programs.

144. A primary purpose of operational auditing standards is to provide

a. a means of assurance that internal controls are operating effectively.
b. aid to the independent auditor in conducting the audit of financial statements.
c. the results of internal examinations of financial and accounting matters to the company's top-
level management.
d. a measure of management performance in meeting organizational goals.

145. The primary purpose of the internal auditors' evaluation of internal controls is to
a. determine if management has planned and implemented activities needed to attain goals
and objectives.
b. determine the extent of tests of controls needed during field work.
c. identify areas for fraud investigation.
d. determine if employees have incompatible duties that have compromised the control
environment.

146. The internal auditing department provides information about control and quality of performance to
a. management and the board of directors.
b. a level in the organization sufficient to ensure acceptance of all recommendations.
c. outside agencies for regulatory and financial compliance.
d. any member of the organization upon request.
147 It is carried out by a contracted CPA who after adequate examination and investigation offers a
professional opinion as to whether the entity's financial statements present fairly the results of
operation and the financial condition of the enterprise,
a. Internal auditing.
b. Special investigation.
c. Independent auditing.
d. Government auditing.

148. A comprehensive and constructive examination of the organizational structure of a company,

institution or branch of government or any component thereof, its plans and objectives, its means of
operation and its use of human and physical facilities to reveal defects or irregularities and to indicate
possible improvements is called
a. financial audit.
b. management audit.
c. government audit.
d. balance sheet audit.
e. internal audit.

149. The auditor is not responsible for the fairness of representations made in the audited financial
statements unless he
a. makes suggestions on the form or content of the statements.
b. drafts the statements in whole or in part, based on management's accounts and records.
c. issues an unmodified opinion.
d. none of the above.

150. The objectives of the Philippine Accountancy Act of 2004 are the following, except
a. standardization and regulation of accounting education.
b. examination for registration of certified public accountants,
c. supervision, control and regu!3tion of the practice of accountancy.
d. integration of accountancy profession,

151. The Philippine Accountancy Act of 2004 provides that all working papers made during an audit
shall be the property of the auditor. These working papers 5ha!l include the following, except
a. schedules of memoranda made by the CPA and his staff
b. working papers prepared and submitted by the client.
c. excerpts of documents furnished to the auditor
d. reports submitted by the CPA to the client.

152. As society becomes more complex, there is an increased likelihood that unreliable information
will be provided to decision makers. Which of the following is a major source of information risk?
a. Remoteness of information.
b. Voluminous data.
c. Bias in motives of the provider.
d. Existence of complex exchange transactions.
e. All of the above.
153. No matter how competent a-CPA may be, his opinion on financial statements will be of little value
to those who rely on him unless he
a. issues an unmodified opinion.
b. maintains a program of continuing education.
c. serves his clients with professional concern for their best interests.
d. maintains his independence.

154. In "auditing" accounting data, the concern is with

a. determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government requirements.

155. When a company has changed auditors, according to the Professional Standards
a. the successor auditor has the responsibility to initiate contact with the predecessor auditor to
ask about the client before the engagement is accepted; the predecessor has no responsibility
to initiate this contact, even when aware of matters bearing on the integrity of management.
b. the predecessor must respond fully to all inquiries made by the successor auditor.
c. the successor must discuss with the predecessor matters bearing on engagement prior to
accepting the engagement
d. the successor may choose not to attempt any communication with the predecessor auditor.

156. Which of the following statements is not true?

a. The criteria by which an auditor evaluates the information under audit may vary, depending
on the information being audited.
b. The criteria used by an external auditor to evaluate published financial statements are
generally accepted accounting principles.
c. The primary purpose of a compliance audit is to determine whether the overall financial
statements are stated in accordance with generally accepted accounting principles.
d. Information risk increases as business organization become larger.

157. PSA 120, Framework of Philippine Standards on Auditing describes the framework within Which
Philippine Standards on Auditing (PSAs) are issued in relation.to the services which may be performed
by auditors. It requires that financial statements need to be prepared in accordance with one, Or a
combination of the following, except:
a. International Accounting Standards.
b. Accounting standards generally accepted in the Philippines.
c. Other authoritative and comprehensive financial reporting framework designed for use in
financial reporting and identified in the financial statements.
d. Procedures recommended by the industry association Of accountants.

158. Which of the following services of a professional accountant is considered to provide moderate
level of assurance that the information subject to review is free of material misstatement?
a. audit
agreed-upon procedures
c. review
 d. compilation

159. Which of the following is not among the ethical principles governing the auditor's professional
responsibilities?
a. independence
b. integrity
c. objectivity
d. size and profile of clientele

160. An audit has inherent limitations that affect the auditor's ability to detect material misstatements.
Which of the following is not among the factors that result to these inherent limitations?
a. Use of testing
b. Inherent limitations of accounting and internal control system
c. Evidence are basically persuasive rather than conclusive.
d. Physical limitations of auditors due to fatigue and stress.

161. A process comprising an ongoing consideration and evaluation of the firm's system of quality
control including a periodic inspection of a selection of completed engagements designed to provide
the firm with reasonable assurance that its system of quality control is operating effectively.
a. Quality assurance review
b. Monitoring
c. Documenting
d. Auditing

162. Which of the following does a firm need not establish and maintain a system of quality control
for?
a. Leadership responsibilities for quality within the firm
b. Relevant ethical requirements
c. Maximizing revenue
d. Engagement performance

163. ____________ refers to application of relevant training, knowledge and experience, within the
context provided by auditing, accounting and ethical standards in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit engagement.
a. Professional judgment
b. Reasonable assurance
c. Professional skepticism
d. Compliance

164. Which of the following is not among the factors that are relevant to the auditor's determination of
the acceptability of the financial reporting framework to be applied in the preparation of the financial
statements?
a. Nature of the entity
b. Nature of the financial statements
c. Whether laws or regulation prescribes the applicable financial reporting framework
d. Size of the entity
165. Which of the following factors will not influence the decision of an auditor of a parent entity who is
also the auditor of a component whether to send a separate audit engagement letter to the
component?
a. Whether a separate auditor's report is to be issued on the component
b. Legal requirements in relation to audit appointments
c. Degree of ownership of parent
d. The fee to be paid by the parent entity

166. When evaluating the appropriate competence and capabilities expected of the engagement team
as a whole, the engagement partner may take the following into consideration except
a. The team's understanding and practical experience with audit engagements of a similar
nature and complexity through appropriate timing and participation
b. The team's technical experience
c. The team's knowledge of relevant industries in which the client operates
d, The team's average cumulative age and length of service to the firm

167. Audit documentation serves the following purposes except

a. Assisting the engagement team to plan and perform the audit
b. Computing the fee to be billed the client
c. Enabling the engagement team to be accountable for its work
d. Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work

168. The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor
having now previous connection with the audit, achieve the following except
a. To understand the nature, timing and extent of the audit procedures performed to comply
with the PSAs and applicable legal and regulatory requirement
b. To estimate the amount of audit revenue earned corresponding to the bulk of working
papers prepared
c. To understand the results of the audit procedure performed, and the audit evidence obtained
d. To appreciate significant matters arising during the audit, the conclusions reached thereon
and significant professional judgment made in reaching those conclusions

169. In documenting the nature, timing and extent of audit procedures performed, the auditor shall
record the following except
a. The identifying characteristics of the specific items or matters tested
b. Who performed the audit work as well as the date such work was completed
c. Who reviewed the audit work performed and the date and extent of such review
d. The time charges in performing the procedure as well as the corresponding audit revenue
generated

170. Professional skepticism can be described as any of the following except

a. Expertise in the authentication of documents examine
b. An attitude that includes a questioning mind and a critical assessment of audit evidence
c. Conducting ongoing questioning of whether the information and audit evidence suggests that
a material misstatement due to fraud may exist
d. Using the work of an expert to assess the document's authenticity.
171. When auditor suspects material misstatement in the financial statements resulting from
management fraud, he/she may direct inquiries from the following personnel within the entity except
a. In-house legal counsel
b. Chief ethics officer or equivalent person
c. Operating personnel not directly involved in the financial reporting process
d. Top executives who initiated, approved and authorized recording of complex and unusual
transactions

172. Which of the following is not considered among the "Fraud risk factors"?
a. The need to meet expectations of third parties to obtain additional equity financing
b. The granting of significant bonuses if unrealistic profit targets are met
c. Ineffective control environment
d. The existence and enforcement of a written code of conduct

173. Which of the following unusual relationships between the auditor and manager would not
necessarily indicate possibility of fraud?
a. Denial of access to records, facilitate certain employees, vendors or customers or others
from whom audit evidence might be sought
b. Undue time pressures imposed by management to resolve complex or contentious issues
c. Unusual delays by the entity in providing requested information
d. Willingness by management to permit the auditor to meet privately with those charged with
governance

174. Which of the following is not among the business risks that
management faces in relation to the entity's e-commerce activities?
a. Loss of transaction integrity which may be compounded by the lack of an adequate audit trail
in either paper or electronic form.
b. Non-compliance with taxation and other legal and regulatory requirements particularly when
internet/e-commerce transactions are conducted across international boundaries.
c. Failure to ensure that contracts evidenced only by electronic means are binding.
d. Under-reliance on e-commerce when placing significant business systems or other business
transactions on the internet.

175. This refers to an approximation of the amount of an item in the absence of a precise means of
measurement.
a. Projection
b. Forecast
c. Probable amount
d. Accounting estimate

176. The term that describes the role of persons entrusted with the supervision, control and direction
of an entity is
a. management.
b. administration.
c. governance.
d. government.
177. The term that refers to acts of omission or commission by the entity being audited, either
intentional or unintentional which are contrary to the prevailing laws or regulations
a. Error
b. Noncompliance
c. Fraud
d. Misstatement

178. This refers to the financial information based on assumptions about events that may occur in the
future and possible actions by an entity
a. Projected data
b. Prospective financial information
c. Accounting estimates
d. Budget

179. This refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit
a. compliance audit procedures
b, substantive audit procedures
c. scope of an audit
d. analytical procedures

180. A special purpose auditor's report is issued in connection with the independent audit of the
following financial information except
a. financial statements prepared in accordance with a comprehensive basis of accounting.
b. specified accounts, elements of accounts or items in a financial statement.
c. compliance with contractual agreements,
d. financial statements prepared in accordance with FRS.

181. The objective of the ordinary examination by the independent auditor is the expression of an
opinion on
a. the fairness of the financial statements.
b. the accuracy of the financial statements.
c the accuracy of the annual report.
d. the balance sheet and income statement.

182. The reason auditors accumulate evidence is to

a. defend themselves in the event of a lawsuit.
b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Securities Act.
d. enable them to reach conclusions about the fairness of the financial statements and issue an
appropriate audit report.

183. In distinguishing between the detection of a material management fraud and an equally material
error, audits
a. should provide complete assurance of detection.
b. should be expected to provide the same degree of assurance.
 c. cannot be expected to provide the same degree of assurance.
d. provide no assurance of detecting either.

184. Which of the following is not one of the seven broad categories of financial statement assertions,
as classified in Glossary of Terms?
a. General or specific transaction objectives.
b. Existence.
c. Valuation.
d. Presentation and disclosure.

185. Which of the following statements is not correct?

a. It would be a violation of the completeness assertion if management would record a sale that
did not take place.
b. The completeness assertion deals with matters opposite from those of the
existence/occurrence assertion
c. The completeness assertion is concerned with the possibility of omitting items from the
financial statements that should have been included.
D. The existence/occurrence is concerned with inclusion of amounts that should not have
been.

186. While performing services for their clients, professionals have a duty to provide a level of care
which is
a. free from judgment errors.
b. superior.
c. greater than average.
d. reasonable
.
187. An arrangement which offers the injured party a potential gain when the lawsuit is successful but
minimal loss when it is unsuccessful is
a. the public defender's office.
b. the contingent-fee basis.
c. no-fault insurance.
d. liability insurance.

188. When the auditor issues an erroneous opinion as the result of an underlying failure to comply with
the requirements of standards on auditing, it results in
a. business failure.
b. audit failure.
c. audit risk.
d. all of the above.

189. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if
a. statistical sampling techniques were not used on the audit engagement.
b. the auditor planned the work in a hasty and inefficient manner.
c. accountants performing important parts of the work failed to discover a close relationship
between the treasurer and the cashier.
 d. the fraud was perpetrated by one client employee, who circumvented the existing internal
controls.

190. Most accounting and auditing professionals agree that when audit has failed to uncover material
misstatements, and the wrong type of audit opinion is issued, the audit firm
a. has failed to the standards on auditing.
b. deserves to lose the lawsuit.
c. should be asked to defend the quality of the audit.
D. should not be held responsible for the financial loss suffered by others.

191. In the auditing environment, failure to meet the standards on auditing is often
a. an accepted practice.
b. a suggestion of negligence.
c. conclusive evidence of negligence.
d. tantamount to criminal behavior.

192. A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by use of
a(n)
a. expert witness' testimony.
b. engagement letter.
c. letter of representation.
d. confirmation letter.

193. The criteria by which the quality of performance of auditing engagements are measured. These
indicate levels of performance which must be attained for the completion of a satisfactory audit and
these relate to the personal qualifications of the auditor and the exercise of his judgment in performing
the examination and in rendering his report. These are called the
a. Statement of Financial Accounting Standards (SFAS) / International Accounting Standards
(IAS).
b. Philippine Standards on Auditing (PSAs).
c. cost standards.
d. standards of reporting.

194. "Philippine Standards on Auditing (PSAs)'l is best described to mean

a. acts to be performed by the auditor.
b. measures of the quality of the auditor's performance.
c. procedures to be used to gather evidence to support financial statements.
d. audit objectives generally determined on audit engagements.

195. Choose one of the following which would describe best the phrase
"Philippine Standards on Auditing (PSAs)"
a. They identify the policies and procedures for the conduct of the audit.
b. They define the nature and extent of the auditor's responsibilities.
c. They provide guidance to the auditor with respect to planning the audit and writing the audit
report.
d. They set forth a measure of the quality of the performance of audit procedures.
196. The PSAs established by the Board of Accountancy apply
a. only to the PICPA membership.
b. to all CPAs.
c. only to those who choose to follow them.
D. only when conducting audits subject to the Board's jurisdiction.

197. On every audit engagement, the CPA should comply with applicable PSA
a. without exception.
b. except in examinations that result in a qualified report.
c. except in engagements where the CPA is associated with unaudited financial statements.
d. except in examinations of interim financial statements.

198. Professional experience is an important aspect of the training and proficiency of the junior
assistant just entering upon an auditing career. Professional experience should be obtained
a. with proper supervision and review of work by a more experienced supervisor.
b. through a thorough study of the PSAs.
c. by completing a number of continuing education courses each year.
d. by taking appropriate professional certification exams.

199. An auditor, in accepting an audit engagement wherein he does not possess the industry expertise
of the business entity, should
a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity's business.
c. refer substantial portion of the audit to another CPA who will act as the principal auditor.
d. first inform management that an unmodified opinion cannot be issued.

200. During the course of an audit engagement, the CPA needed additional studies and consultation
with experts. This additional study and consultation is deemed to be
a. an unusual practice which should have voided the audit
engagement.
b. lack of competence on the part of the CPA.
c. an appropriate part of the professional conduct of the audit engagement.
d. undertaken as a responsibility of management.

201. Juan dela Cruz, CPA, accepted the audit engagement of XYZ Corporation. During the audit, Juan
dela Cruz became aware of the fact that he did not have the competence required for the
engagement. He must
a. disclaim an opinion.
b. issue a "Subject to" opinion.
c. suggest that XYZ Corporation-engage another CPA to perform the audit.
d. Rely on the competence of client personnel.

202. A CPA's opinion on financial statements is of little value to those who relied on him unless he
a. issues an unmodified opinion.
b. maintains a program of continuing education.
c. serves his clients with professional concern for their best interests.
d. maintains his independence.
203. The essence of a CPA's independence is
a. avoiding significant financial interest in the client's business.
b. performing the examination from the viewpoint of the stockholders.
c. maintaining a mental attitude of impartiality.
d. making sure no relatives or personal friends are employed by the client.

204. In determining independence with respect to any audit engagement, the ultimate decision as to
whether the auditor is independent must be made by the
a. auditor.
b. client.
c. audit committee.
d. public.

205. A CPA in an audit engagement, where he lacks independence, should

a. disclaim an opinion on the financial statements.
b. issue a piecemeal opinion.
c. list, in the auditor's report, all the generally accepted auditing procedures actually performed
by him.
d. state the reason for his lack of independence in his auditor's report.

206. To emphasize auditor independence from management, many corporations follow the practice of
a. appointing a partner of the CPA firm conducting the examination to the corporation's audit
committee.
b. establishing a policy of discouraging social contact between employees of the corporation
and the staff of the independent auditor.
c. requesting that a representative of the independent auditor be on hand at the annual
stockholders' meeting.
d. having the independent auditor report to an audit committee of outside members of the
board of directors.

207. Which of the following best describes why publicly traded corporations follow the practice of
having the outside auditor appointed by the board of directors or elected by the stockholders?
a. To comply with the regulations of the Financial Reporting Standards Council (FRSC).
b. To emphasize auditor independence from the management of the corporation.
c. To encourage a policy of rotation of the independent auditors.
d. To provide the corporate owners with an opportunity to voice their opinion concerning the
quality of the auditing firm selected by the directors.

208. It would not be appropriate for the auditor to initiate discussion with the audit committee
concerning
a. the extent to which the work of• internal auditors will influence the scope of the examination.
b. details of the procedures which the auditor intends to apply.
c. the extent to which change in the company's organization will influence the scope of the
examination.
d. details of potential problems which the auditor believes might cause a qualified opinion.
209. With respect to the auditor's planning of the year-end examination, which of the following is
always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures which will be
performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

210. Rogers & Co., CPAs have policies requiring that all members of the audit staff submit weekly time
reports to the audit manager, who then prepares a weekly summary work report regarding variance
from budget for Rogers' review. This provides written evidence of Rogers & Co.'s professional concern
regarding compliance with which PSAs?
a. Quality control.
b. Due professional care.
c. Adequate review.
d. Adequate planning.

211. Generally, evidential matter is considered sufficient when

a. it is competent.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective, and free from unknown bias.
d. it has been obtained by random selection.

212. Evidential matter is generally considered competent when

a. it has the qualities of being relevant, objective, and free from known bias.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has been obtained by random selection.
d. it consists of written statements made by managers of the enterprise under audit.

213. one of the requirements of the auditing standards is sufficient an evidential matter should be
obtained. The term "competent" refers primarily to
a. relevance of the evidence.
b. measurability of the evidence.
c. consistency of the evidence.
d. dependability of the evidence.

214. The sufficiency and competency of evidential matter is determined by

a. Philippine Standards on Auditing.
b. judgment of the auditor.
c. availability of corroborating data.
d. relevance of evidential matter.

215. Madison Corporation has a few large accounts receivable that total P1,000,000. Nassau
Corporation has a great number of small accounts receivable that also total P1,000,000. The
importance of an error in any one account is, therefore, greater for Madison than for Nassau. This is
an example of the auditor's concept of
a. materiality.
 b. comparative analysis.
c. reasonable assurance.
d. relative risk.

216. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine Institute of
CPAs.
b. Materiality depends only on the peso amount of an item relative to other fees in the financial
statements.
c. Materiality depends on the nature of an item rather than the peso amount.
d. Materiality is a matter of professional judgment.

217. Which of the following best describes the element of relative risk which underlies the application
of the PSAs?
a. Cash audit work may have to be carried out in a more conclusive manner than inventor,'
audit work.
b. intercompany transactions are usually subject to less detailed scrutiny than arm's length
transactions with outside parties.
c. Inventories may require more attention by the auditor on an engagement for a
merchandising enterprise than on an engagement for a public utility.
d. The scope of the examination need not be expanded if errors that arouse suspicion of fraud
are of relatively insignificant amounts.

218. Independence of an auditor in relation to the enterprise may be impaired in the following cases,
except
a. direct or material indirect financial interest in the enterprise.
b. connection with the enterprise as a promoter, underwriter, voting trustee, director, officer or
employee.
c. having a loan to or from the enterprise or any officer, director or principal stockholder thereof,
with certain exceptions.
d. engaged to render management advisory services to the enterprise.

219. One of a CPA firm's basic objectives is to provide professional services that conform with
professional standards. Reasonable assurance of achieving this basic objective is provided through
a. a system of quality control.
b. a system of peer review.
c. continuing professional education.
d. compliance with generally accepted reporting standards.

220. When restrictions that significantly limit the scope of the audit are imposed by the client, the
auditor generally should issue which of the following opinions?
a. "Except for".
b. Disclaimer.
c. Adverse.
d. Unmodified.
221. An auditor has withdrawn from an audit engagement of a publicly-held company after finding
irregularities which may materially affect the financial statements. The auditor should set forth the
reasons and findings in correspondence to the
a. Securities and Exchange Commission.
b. client's legal counsel.
c. stock exchanges where the company's stock is traded.
d. board of directors.

222. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not
likely to
a. make inquiries of the proposed client's legal counsel.
b. review financial-statements of the proposed client.
c. make inquiries of previous auditors.
d. review the personnel practices of the proposed client.

223. Which of the following statements is false?

a. The firm should obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by the Code of Ethics.
b. The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
c. The firm's quality control policies and procedures need not be documented and
communicated to the firm's personnel.
d. The firm should establish policies and procedures requiring appropriate documentation to
provide evidence of the operations of each element of its system of quality control.

224. in determining the form and content of documentation evidencing the operation of each of the
element of the system of quality control, the following factors should be considered except
a. size of the firm and the number of offices.
b. degree of authority that both personnel and officers have.
c. nature and complexity of the firm's practice and organization.
d. geographical location of the offices,

225. A practitioner should accept an assurance engagement only when the engagement exhibits all of
the following characteristics except
a. Subject matter is appropriate.
b. Criteria to be used are suitable and are available to the intended users.
c. Sufficient appropriate evidence to support the practitioner's conclusion is accessible to the
practitioner.
d. Practitioner is assured of being paid the engagement fee.

226. Criteria need to be available to the intended users in an assurance engagement to allow them to
understand how the subject matter has been evaluated or measured. Which of the following is not
among the ways, by which these criteria could be made available to
the intended users?
a. Publicly.
b. Through inclusion in a clear manner in the presentation of the subject matter information.
c. Through inclusion in the firm's office policy manual.
 d. Through inclusion in a clear manner in the assurance report.

227. Which of the following is not a component of assurance engagement risk?

a. Inherent risk.
b. Control risk.
c. Business risk.
d. Detection risk.

228. "Reasonable assurance" is less than absolute assurance. Reducing assurance engagement risk
to zero is very rarely attainable or cost beneficial because of the following factors except
a. use of selective testing.
b. inherent limitation of internal controls.
c. difficulty in meeting the stringent requirements of the regulatory agencies.
d. use of judgment in gathering and evaluating evidence and forming conclusions based on
that evidence.

229. PSA 300 (Redrafted), Planning an Audit of Financial Statements, requires, in part, that audit work
be properly planned. Proper planning as intended by this Standard would occur when the auditor
a. eliminates the possibility of counting inventory items more than once by arranging to make
extensive test counts.
b. uses negative accounts receivable confirmations instead of positive confirmations because
the latter require mailing of
second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff
procedures.
d. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.

230. The PSA recognizes that early appointment of the independent auditor has many advantages to
the auditor and the client. Which of the following advantages is least likely to occur as a result of early
appointment of the auditor?
a. The auditor will be able to plan the audit work so that it may be done expeditiously.
b. The auditor will be able to complete the audit work in less time.
c. The auditor will be able to better plan for the observation of the physical inventories.
d. The auditor will be able to perform the examination more efficiently and will be finished at an
early date after the year end.

231. Which of the following is a basic tool used by the auditor to control the audit work and review the
progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.

232. In the audit of a medium-sized trading company, which one of the following areas would be
expected to require the greatest amount of audit time?
a. Liabilities.
 b. Assets
c. Revenues.
d, Owners’ Equity.

233. During the course of an audit of a medium-sized manufacturing concern, which of the following
areas would be expected to require substantially less audit time than the others?
a. Assets.
b. Liabilities.
c. Revenues.
d. Owners' Equity.

234. When planning an examination, an auditor should

a. consider whether the extent of substantive tests may be reduced based on the results of the
internal control questionnaire.
b. make preliminary judgments about materiality levels for audit purposes.
c. conclude whether changes in compliance with prescribed control procedures justifies
reliance on them.
d. prepare a preliminary draft of the management representation letter.

235. The auditor is likely to accumulate more evidence when the audit is for a company
a. whose stock is publicly held.
b. which has extensive indebtedness.
c. which is to be sold in the near future.
d. all three of the above.

236. Which of the following statements describes why a properly designed and executed audit may not
detect a material irregularity?
a. Audit procedures that are effective for detecting an unintentional misstatement may be
ineffective for an internal misstatement that is concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors, but there
is no similar responsibility concerning material irregularities.
c. The factors considered in assessing control risk indicated an increased risk of intentional
misstatements, but only a low risk of unintentional errors in the financial statements.
d. The auditor did not consider factors influencing audit risk for account balances that have
effects pervasive to the financial statements taken as a whole.

237. Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entity's financial statements?
a. Supporting records that should be readily available are frequently not produced when
requested.
b. Reportable conditions previously communicated have not been corrected.
c. Clerical errors are listed on a monthly computer-generated exception report.
d. Differences are discovered during the client's annual physical inventory count.

238. Disclosure of irregularities to parties other than a client's senior management and its audit
committee or board of directors ordinarily is not part of an auditor's responsibility. However, to which of
the following outside parties may a duty to disclose irregularities exist?
 To a successor To a government
To the SEC when Auditor when the Funding agency
The client reports Successor makes From which the
An auditor Appropriate Client receives
Change Inquiries Financial assistance
a. . Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

239. What assurance does the auditor provide that errors, irregularities and direct effect illegal acts
that are material to the financial statements will be detected?
Direct Effect Illegal
Errors Irregularities Acts
a. Limited Negative Limited
B. Limited Limited Reasonable
c. Reasonable Limited Limited
d. Reasonable Reasonable Reasonable

240. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an
understanding of the nature of the act to
a. evaluate the effect on the financial statements.
b. determine the reliability of management's representations.
c. consider whether other similar acts may have occurred.
d. recommend remedial actions to the audit committee.

241. Which of the following statements concerning illegal acts by clients is correct?
a. An auditor's responsibility to detect illegal acts that have a direct and material effect on the
financial statements is the same as that for errors and irregularities.
b. An audit in accordance with the standards on auditing normally includes audit procedures
specifically designed to detect illegal acts that have an indirect but material effect on the
financial statements.
c. An auditor considers illegal acts from the perspective of the reliability of management's
representations rather than their relation to audit objectives derived from financial statement
assertions.
d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on
the financial statements.

242. The most likely explanation why the auditor's examination cannot reasonably be expected to
bring all illegal acts by the client to the auditor's attention is that
a. illegal acts are perpetrated by management override of internal controls.
b. illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. the client's internal control structure may be so strong that the auditor performs only minimal
substantive testing.
d. illegal acts may be perpetrated by the only person in the client's organization with access to
both assets and the accounting records.
243. If specific information comes to an auditor's attention that implies the existence of possible illegal
acts that could have a material, but indirect effect on the financial statements, the auditor should next
a. apply audit procedures specifically directed to ascertaining whether an illegal act has
occurred.
b. seek the advice of an informed expert qualified to practice law as to possible contingent
liabilities.
c. report the matter to an appropriate level of management at least one level above those
involved.
d. discuss the evidence with the client's audit committee, or others with equivalent authority
and responsibility.

244. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. audit has been performed by persons having adequate technical training and proficiency as
auditors.
b. auditor's system of quality control has been maintained at a high level.
c. results are consistent with the conclusions to be presented in the auditor's report.
d. audit procedures performed are approved in the professional standards.

245. A difference of opinion regarding the results of a sample cannot be resolved between the
assistant who performed the auditing procedures and the in-charge auditor, The assistant should
a. refuse to perform any further work on the engagement.
b. accept the judgment of 'the more experienced in-charge auditor.
c. document the disagreement and ask to be disassociated from the resolution of the matter.
d. notify the client that a serious audit problem exists.

246. To exercise due professional care an auditor should

a. attain the proper balance of professional experience and formal education.
b. design the audit to detect a!! instances of illegal acts.
c. critically review the judgment exercised by those assisting in the audit.
d. examine all available corroborating evidence supporting management's assertions.

247. Because an examination in accordance with Philippine Standards on Auditing is influenced by the
possibility of material errors, the auditor should conduct the examination with an attitude of
a. professional responsiveness.
b. conservative advocacy.
c. objective judgment.
d. professional skepticism.

248. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor
a, increase inherent risk.
b. increase materiality levels.
c. decrease substantive testing
d, decrease detection risk.
249. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements, most likely would withdraw from the engagement if
a. the illegal act is a violation of financial reporting standards.
b. the client does not take the remedial action that the auditor considers necessary.
c. the illegal act was committed during a prior year that was not audited.
d. the auditor has already assessed control risk at the maximum level.

250. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals
meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's
adherence to which of the following prescribed standards:
a. Professional ethics.
b. Supervision and review.
c. Accounting and review services.
d. Quality control.

251. Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entity's financial statements?
a. Accounts receivable confirmation requests yield significantly fewer responses than expected.
b. Audit trails of computer-generated transactions exist only for a short time.
c. The chief financial officer does not sign the management representation letter until the last
day of the auditor's field work.
d. Management consults with other accountants about significant accounting matters.

252. Transactions with related parties are important to the auditors because they will be disclosed in
the financial statements if material. Financial reporting standards would not require disclosure of
a. the nature of the related-party relationship.
b. a description of transactions, including peso amounts.
c. the amounts due from and to related parties.
d. .loans to officers during the year which had been repaid before the balance sheet date.

253. Which of the following would not be classified as a related party transaction?
a. An advance of one week' salary to an employee.
b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of client.
d. Exchanges of equipment between two companies owned by the same person.

254. Which of the following would not usually be included in the minutes of the board of directors
and/or stockholders?
a. The duties and powers of the corporate officers.
b. Declaration of dividends.
c. Authorization of long-term loans.
d. Authorization of individuals to sign checks.

255. The least effective method of identifying related parties would be

a. an inquiry of management.
 b. a review of SEC filings.
c. a review of the purchases and sales journals for the period under audit.
d. an examination of stockholders' listings to identify principal stockholders.

256. When an analytical procedure reveals no unusual fluctuations, the implication is that
a. there are no material errors or irregularities.
b. there are no material errors.
c. there are no material irregularities.
d. the possibility of a material error or irregularity is minimized.

257. Which of the following statements is not a reason for utilizing analytical review procedures?
a. To assess the entity's ability to continue as a going concern.
b. To identify areas with no unusual fluctuations so that fewer detailed tests may be performed
on those accounts.
c. To highlight changes from the prior year to the current year so that trends can be identified
which will influence audit planning.
d. To determine the magnitude of errors in the financial statements.

258. Which of the following discoveries through the use of analytical procedures, would indicate a
relatively high risk of financial failure?
a. A decline in gross margin percentages.
b. An increase in the balance in fixed assets.
c. A higher than normal ratio of long-term debt to net worth as well as a lower than average
ratio of profits to total assets.
d. An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable,
while at the same time accounts receivable turnover also decreased.

259. "Unusual fluctuations" Occur when

a. significant differences are not expected but do exist.
b. significant differences are expected but do not exist.
c. there is a material accounting error or irregularity.
d. any one of the above three situations may occur.

260. Analytical procedures are usually

a. less expensive to perform than tests of details.
b. more expensive to perform than tests of details.
c. just as expensive as tests of details.
d. an indeterminable cost.

261. The extent to which analytical procedures provide useful substantive evidence depends on
a. the effectiveness of client's internal control system,
b. the integrity and training of client's personnel.
c. their reliability in the circumstances.
d. the experience of the auditor using them.

262. It would be regarded as a failure to fulfill the requirement of due care if

a. analytical procedures did not reveal unusual fluctuations.
 b. an unusual fluctuation was indicated and the auditor did not properly investigate the cause.
c. an unusual fluctuation was investigated but no error was found.
d. an unusual fluctuation was investigated and no error or irregularity was found.

263. Overall analysis of income statement accounts may bring to light errors, omissions, and
inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement
analysis can best be accomplished by comparing monthly
a. income statement ratios to balance sheet ratios.
b. revenue and expense account balances to the monthly reported net income.
c. income statement ratios to the published industry averages.
d. revenue and expense account totals to the corresponding figures of the preceding years.

264. The auditor faces a risk that the examination will not detect material misstatements in the
financial statements. In regard to minimizing this risk, the auditor primarily relies on
a. substantive tests.
b. tests of controls.
c. internal control.
d. statistical analysis.

265. Auditing standards require that the audit report must be titled and that the title must
a. indicate whether the auditor is a CPA.
b. include the word independent.
c. indicate whether the auditor is a proprietorship, partnership, or incorporated.
d. not include any discriminatory language.

266. Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
a. no assurance that they will be detected.
b. the same reasonable assurance provided for other items.
c. assurance that they will be detected, if material.
d. assurance that they will be detected, if highly material.

267. The Code of Professional Ethics provides the categories of threats that could compromise or
could be perceived to compromise a professional accountant's compliance with the fundamental
principles. The threat that the professional accountant will not appropriately evaluate the results of a
previous judgment made or service performed on which the accountant will rely when forming a
judgment as part of providing a current service is known as
a. Advocacy threat
b. Self-interest threat
c. Self-review threat
d. Familiarity threat

268. The Code of Professional Ethics provides the categories of threats that could compromise or
could be perceived to compromise a professional accountant's compliance with the fundamental
principles. The threat that a professional accountant will promote a client's position to the point of
compromising his/her objectivity is known as
a. Self-interest threat
b. Advocacy threat
 c. Familiarity threat
d. Self-review threat

269. The Code of Professional Ethics provides the categories of threats that could compromise or
could be perceived to compromise a professional accountant's compliance with the fundamental
principles, The threat that a professional accountant will be too sympathetic to the client or too
accepting of their work due to a long and close relationship is known as
a. Self-interest threat
b. Advocacy threat
c. Familiarity threat
d. Intimidation threat

270. The Code of Professional Ethics provides the categories of threats that could compromise or
could be perceived to compromise a professional accountant's compliance with the fundamental
principles. The threat that a professional accountant will be deterred from acting objectively because of
actual or perceived pressures from the client is known as
a. Intimidation threat
b. Familiarity threat
c. Self-interest threat
d. Advocacy threat

271. Which of the following will not create self-interest threats for a professional accountant in public
practice?
a. The possibility of losing a significant client
b. Direct financial interest in the assurance client
c. Undue dependence on total fees from a client
d. Preparing the original data used to generate records that are the subject matter of the
assurance engagement

272. The following circumstances create advocacy threats for a professional accountant in public
practice except
a. Promoting shares in an audit client.
b. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
c. Acting as campaign manager for the president of a client who is running for a public office.
d. Discovery of a significant error during a re-evaluation of his work.

273. Familiarity threat could be created under the following

circumstances except
a. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial
b. Senior personnel of the engagement team having a long association with the assurance
client
c. A member of the engagement team is the spouse of one of the directors of the client
d. A member of the engagement team is the spouse of the chief accountant of the client

274. Intimidation threat could be created under the following circumstances except
a. A firm being threatened with litigation by the client.
 b. A firm being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
c. A professional accountant being informed by a partner of the firm that he would not be
promoted unless he agrees with an audit client's inappropriate accounting treatment.
d. A firm entering into a contingent fee arrangement relating to an assurance engagement.

275. Work environment safeguards to eliminate or reduce threats for a professional accountant in
public practice to an acceptable level include the following except
a. Documented internal policies and procedures' requiring compliance with the fundamental
principles of quality controls
b. Policies and procedures to monitor and if necessary, manage the reliance on revenue
received from a single client
c. using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client
d. Absence of disciplinary mechanism to promote compliance with policies and procedures

276. Which of the following statements best describes why the profession of certified public
accountants has deemed it essential to promulgate a code of professional conduct and to establish a
mechanism for enforcing observation of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public.
b. A prerequisite to success is the establishment of an ethical code that primarily defines the
professional's responsibility to clients and colleagues.
c. A requirement of most state laws calls for the profession to establish a code of ethics.
d. An essential means of self-protection for the profession is the establishment of flexible
ethical standards by the professions.

277. To emphasize auditor independence from management, many corporations follow the practice of
a. appointing a partner of the CPA firm conducting the audit to the corporation's audit
committee.
b. establishing a policy of discouraging social contract between employees of the corporation
and the staff of the independent auditor.
c. requesting that a representative of the independent auditor be on hand at the annual
stockholders' meeting.
d. having the independent auditor report to an audit committee of outside members of the
board of directors.

278. Which of the following best describes a portion of the auditors' responsibility regarding illegal acts
by clients?
a. The auditors have a responsibility to discover all material illegal acts
b. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
c. If the auditors suspect that illegal acts have been performed, they should conduct a legal
audit of the company.
d. The auditors' responsibility for the detection of all illegal acts is the same as their
responsibility regarding material errors and irregularities.

279. The auditors who find that the client has committed an illegal act would be most likely to withdraw
from the engagement when the:
 a. Management fails to take appropriate corrective action.
b. Illegal act has material financial statement implications.
c. Illegal act has received widespread publicity.
d. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.

280. If an illegal act is discovered during the audit of a publicly held company, the auditors should:
a. Notify the regulatory authorities.
b. Determine who was responsible for the illegal act.
c. Intensify the examination to identify all illegal acts.
d. Report the act to high-level personnel within the client's organization and to the audit
committee.

281. Which of the following is accurate with respect to litigation involving CPAs?
a. A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that
company.
b. A CPA may not successfully assert as a defense that the CPA had no motive to be part of a
fraud.
c. A CPA may be exposed to criminal as well as civil liability.
d. A CPA is primarily responsible, while the client is secondarily responsible for the footnotes in
annual report filed with the SEC.

282. Which of the following statements best explains why the CPA profession har. found it essential to
promulgate ethical standards and to establish means for ensuring their observance?
a. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
b. Ethical standards that emphasize excellence in performance over material rewards establish
a reputation for competence and character.
c. A distinguishing mark of a profession is its acceptance of responsibility to the public.
d. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.

283. Which of the following acts by a CPA would be most likely to be a violation of the Code of Ethics?
a. Assisting a client in preparing a financial forecast.
b. Acting as auditor of a non-profit charitable organization with audit client serving as president.
c. Accepting a fee in a tax matter that is contingent upon the result of an administrative
proceeding.
d. Having an immaterial loan to the president of an audit client,

284. PSA 120, Framework of Philippine Standards on Auditing, provides that financial statements
needed to be prepared in accordance With one, or a combination of the following except:
a. accounting standards generally accepted in the Philippines.
b. International Accounting Standards.
c. another authoritative and comprehensive financial reporting framework designed for use in
financial reporting and is identified in the financial statements.
d. accounting standards developed by the accountant of the business enterprise
herself/himself.
285. Competence as a certified public accountant includes all of the following except
a. having the technical qualifications to perform an engagement'
b. possessing the ability to supervise and evaluate the quality Of staff work.
c. warranting the infallibility of the work performed.
d. consulting others if additional technical information is needed.

286. Diaz, a CPA firm's personnel partner, periodically studies the CPA firm's personnel advancement
record to ascertain whether individuals meeting stated criteria are assigned increased degrees of
responsibility. This is evidence of the CPA firm's adherence to prescribed
a. standards of due professional care.
b. quality control standards.
c. supervision and review standards.
d. standards of field work.

287. A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an
action that is:
a. Considered acceptable by the Code of Ethics.
b. III advised since it would impair the CPA's independence with respect to the client.
c. Considered discreditable to the profession.
d. A violation of the standards on auditing.

288. An audit independence issue might be raised by the auditor's participation in management
advisory services engagements. Which of the following statements is most consistent with the
profession's attitude toward this issue?
a. Information obtained as a result of a management advisory services engagement is
confidential to that specific engagement and should not influence performance of the attest
function.
b. The decision as to loss of independence must be made by the client based on the facts of
the particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is also competent to make these
decisions and can do so without loss of independence.

289. When an accountant is not independent, the accountant precluded from issuing a:
a. Compilation report.
b. Review report.
c. Management advisory report
d. Tax planning report.

290. When a professional accountant learns of a material error or omission in a tax return of a prior
year, he/she has the responsibility to do the following, except
a. promptly advise the client or employer of the error or omission and recommend that
disclosure be made to the revenue authorities.
b. promptly inform the revenue authorities even without the permission of the client.
c. advise the employer to correct the error and recommend that disclosure be made to the
revenue authorities.
d. consider discontinuing association with the client if the client does not correct the error.
291. This threat to independence occurs when a firm or a member of the assurance firm has a direct
financial interest or material indirect financial interest in an assurance client.
a. Self-Review Threat
b. Advocacy Threat
c. Intimidation Threat
d. Self-Interest Threat

292. This threat to independence occurs when a member of the assurance team has recently
performed services for an assurance client that directly affect the subject matter of the assurance
Engagement (e.g., valuation services).
a. Self-Review Threat
b. Self-interest Threat
c. Advocacy Threat
d. Familiarity Threat

293. Which of the following safeguards to eliminate or reduce threats to independence is provided by
the profession, legislation or regulation?
a. Policies and procedures that emphasize the assurance client's commitment to fair financial
reporting.
b. Internal policies and procedures to implement compliance with firm policies and procedures
as they relate to independence.
c. Continuing education requirements.
d. Rotation of senior personnel.

294. A public accounting firm would least likely be considered in violation of the independence rules in
which of the following instances?
a. A partner's checking account, which is fully insured by the Philippine Deposit Insurance
Corporation, is held at a financial institution for which the public accounting firm performs attest
services.
b. A manager of the firm donates service as vice president of a charitable organization that is
an audit client of the firm.
c. An attest client owes the firm fees for this and last year's annual engagements.
d. A covered member's dependent son owns stock in an attest client.

295. An audit independence issue might be raised by the auditor's participation in consulting services
engagements. Which of the following statements is most consistent with the profession's attitude
toward this issue?
a. Information obtained as a result of a consulting engagement is confidential to that
engagement and should not influence performance of the attest function.
b. The decision as to loss of independence must be made by the client based upon the facts of
the particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is. also competent to make these
decisions and con do without loss of independence.
296. If the auditor learns that an entity is inappropriately using the auditor's name in association with
financial information, he/she can do the following except
a. require management to cease doing so.
b. inform any known third party users of the inappropriate use of his/her name in connection
with the information.
c. remain silent.
d. seek legal advice if necessary.

297. A CPA shall not concurrently engage in any business or occupation which impairs his objectivity
in rendering professional services or which is inconsistent with his practice or employment. This
provision of the code of ethics is applicable
a. Only to CPAs engaged in public accountancy.
b. CPAs engaged in public accountancy or employed in a private enterprise.
c. CPAs engaged in public accountancy or employed in a private enterprise or in a government
agency.
d. All CPAs whether engaged in public accountancy, or employed in a private enterprise, a
government agency, or an educational institution.

298. The auditor's opinion makes reference tp appropriate financial reporting framework. The following
are considered as such except
a. The interpretations of accounting rules and procedures by certified public accountants on
audit engagements.
b, The pronouncements made by the Philippine Financial Reporting Standards Council
c. The guidelines set forth by various governmental agencies that derive their authority from
Congress.
d. Philippine Interpretations Committee.

299. Which of the following is a violation of the code of ethics for professional accountants in the
Philippines?
a. A CPA permits his/her to be used in a client's advertising as having verified financial data
and/or statistical facts with respect to the client's product.
b. Based on information obtained in an audit, a CPA reports an illegal act of his client to
government authorities.
c. Three years after d partner has retired, the remaining partners continue to practice under a
firm name that includes the name of the retired partner, The retired partner has severed all
connections with the CPA firm.
d. A CPA running for public office uses the professional designation "CPA" after his name on
posters employed in connection with his election campaign,

300. CPAs should not be liable to any party if they perform their services with:
a. Ordinary negligence.
b. Regulatory providence.
c. Due professional care.
d. Good faith.
301. An investor is reading the financial statements of Sunny Corporation and observes that the
statements are accompanied by an unmodified auditor's report. From this the investor may conclude
that
a. any disputes over significant accounting issues have been settled to the auditor's
satisfaction.
b. the auditor is satisfied that Sunny is operationally efficient.
c. the auditor has ascertained that Sunnv's financial statements have been prepared
accurately.
d. informative disclosures in the financial statements, but not necessarily in the footnotes, are
to be regarded as reasonably adequate.

302. Evidence is defined as any information used by the auditor to determine whether the quantifiable
information being audited is stated in accordance with the established criteria. Evidence takes many
different forms, including
a. oral testimony of the auditee (client).
b. written communication with outsiders.
c. observations by the auditor.
d. all of the above.

303. The risk that the client's financial statements may be materially false and misleading is referred to
as the
a. business risk.
b. information risk.
c. client risk.
d. risk assessment.

304. In determining the type of opinion to express, an auditor assesses the nature of the reporting
qualifications and the materiality of their effects. Materiality will be the primary factor considered in the
choice between
a. an "except for" opinion and adverse opinion.
b. an "except for" opinion and a "subject to" opinion.
c. an adverse opinion and a disclaimer of opinion.
d. a "subject to" opinion and a piecemeal opinion.

305. The practice of accountancy include the following except

a. Practice in commerce and industry where the CPA is appointed as marketing manager of the
enterprise.
b. Practice in education / academe.
c. Practice in the government.
d. Practice in public accountancy.

306. The Code of Ethics would be violated if a CPA accepted a fee for services and the fee was
a. Fixed by a public authority.
b. Based on a price quotation submitted in competitive bidding.
c. Based on the results of judicial proceedings in a tax matter.of
 d. Payable after a specified finding was attained in a review financial statements.

307. irregularities generally refer to

a. unintentional mistakes.
b. illegal acts.
c. intentional distortions of financial statements.
d. violations of PASs.

308. To raise the standards of the profession, the Philippine Accountancy Act of 2004 requires that the
CPA profession be integrated under rules to be established by
a. The Philippine Institute of CPAs.
b. The Board of Accountancy.
c. The Professional Regulation Commission.
d. The Government Association of CPAs.

309. The Code of Ethics for Professional Accountants in the Philippines states, in part, that a CPA
should maintain a high degree of integrity and objectivity in all his actuations. Objectivity in said Code
refers to a CPA's ability
a. To maintain an impartial attitude on all matters which come under the CPA's review.
b. To independently distinguish between accounting practices that are acceptable and those
that are not.
c. To be unyielding in all matters dealing with auditing procedures.
d. To independently choose between alternate accounting principles and auditing standards.

310. The Code of Ethics states that a CPA shall not disclose any confidential information obtained in
the course of a professional engagement except with the consent of his client.' In which of the
situations 'given below would disclosure by a CPA be in violation of the code?
a. Disclosing confidential information in order to property discharge the CPA's responsibilities
in accordance with his profession's standards.
b. Disclosing confidential information in compliance with a subpoena issued by a court.
c. Disclosing confidential information to another accountant interested in purchasing the CPA's
practice.
d. Disclosing confidential information in a review of the CPA's professional practice by the
Quality Review Committee.

311. Upon discovery of irregularities in the client's tax return that the client refuses to correct, a CPA
withdraws from the engagement. How should the withdrawing CPA respond if asked by the successor
CPA why the relationship was terminated?
a. "It was a misunderstanding."
b. "l suggest you get the client's permission for us to discuss all matters freely".
c. "l suggest you ask the client".
d. "l found irregularities in the tax return which the client would not correct."

312. A CPA in public accounting is prohibited from performing which of the following actions?
a. Permit the publication of his being the author of a book.
b. Be a party to a stratagem which permits a non-CPA to practice accountancy.
 c. Allow his wife to acquire shares in a corporation's capital stock which is not an audit client.
d. Act as a stock and transfer agent of a non-audit client.

313. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability,
b, Comply with the standards on auditing.
c. Become independent in fact.
d. Maintain public confidence in the profession.

314. The concept of materiality is of least importance to the CPA in determining the
a. effects of audit exceptions on his opinion.
b. specific transactions which should be reviewed.
c. effect on the CPA's independence of his direct financial interest in the client.
d. scope of his audit of specific accounts.

315. According to the Code of Ethics, a CPA who has a financial interest in a partnership that invests
in a potential client is considered to have
a. an indirect financial interest in the client.
b. a direct financial interest in the client.
c. no financial interest in the client.
d. a partial financial interest in the client.

316. An auditor is about to commence a recurring annual audit engagement. The continuing auditor's
independence would ordinarily be considered to be impaired if the prior year's audit fee
a. was only partially paid and the balance is being disputed.
b. has not been paid and will not be paid for at least twelve months.
c. has not been paid and the client has filed a voluntary petition for bankruptcy.
d. In all of given choices.

317. In which of the following instances would the independence of the CPA not be considered to be
impaired? The CPA has been retained as the auditor of a brokerage firm
a. which owes the CPA audit fees for more than one year.
b. in which the CPA has a low margin account but settled promptly by the client.
c. in which the CPA's brother is the controller.
d. which owes the CPA audit fees for current-year services and has just filed a petition for
bankruptcy.

318. Freedom from conflicts of interest means the absence of relationships that might interfere with
objectivity or integrity. Which of the following would not be a conflict of interest?
a. An auditor who is also an attorney represents a client in legal matters.
b. A partner of a CPA firm recommends that a client have its insurance coverage evaluated by
an insurance agency that is owned by the partner's father,
c. The partner informs client's management about the relationship in b above, and
management proceeds with the evaluation by the insurance agency.
d. A partner of a CPA firm knows that a client is short of cash and recommends that the client
seek a loan from a finance company which is owned by partner's spouse.
319. A person is not considered in the practice of Accounting in Commerce and Industry if
a. the position he is occupying requires that the holder thereof must be a CPA
b. he/she represents his/her employer before government agencies on tax or other matters
related to accounting.
c. he/she makes decisions requiring professional knowledge in the science of accounting as
well as the accounting aspect of finance and taxation.
d. he/she supervises the recording of financial transactions and preparation of financial
statements of a company whose paid- up capital and annual revenue amount to and
respectively.

320. The Code of Ethics contains both general ethical principles that are aspirational in character and
also a
a. list of violations that would cause the automatic suspension Of the CPA's license.
b. set of specific, mandatory rules describing levels of conduct the CPA must observe.
c. description of the CPA's procedures for responding to an inquiry from a trial board.
d. List of specific crimes that would be considered as acts discreditable to the profession.

321. If requested to perform a review engagement for a nonpublic entity in which an accountant has
an immaterial direct financial interest, the accountant is
a. not independent and, therefore, may issue a review report, but may not issue an auditor's
opinion.
b. not independent and, therefore, may not issue a review report.
c. not independent and, therefore, may not be associated with the financial statements.
d. independent because the financial interest is immaterial and, therefore, may issue a review
report.

II. THE FINANCIAL STATEMENT AUDIT

1. Before accepting an engagement with a new client, the CPA firm shall assess the following except
a. If the auditor is competent to perform the engagement, has the capabilities including time
and resources to do so.
b. The auditor can comply with the relevant ethical requirement.
c. If the client has integrity.
d. If the client has the financial capacity to pay the estimated audit fee.

2. Before accepting an engagement to audit a new client, an auditor is required to

a. make inquiries of the predecessor auditor after obtaining the consent of the prospective
client.
b. obtain the prospective client's signature to the engagement letter.
c. prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
d. discuss the management representation letter with the prospective client's audit committee.

3. Audit engagement letters generally include reference to the following except

a. objective of the audit of financial statements.
 b. management's responsibility for the financial statements.
c. scope of the audit.
d. identification of the audit team members.

4. When a professional accountant is the auditor of a parent entity and also the auditor of its
subsidiary, branch or division (component), which of the following factors need not be considered in
deciding whether to send the separate engagement letter to the component?
a. Who appoints the auditor of the component.
b. Whether a separate audit report is to be issued on the component.
c. Legal requirements.
d. Number of reports to be prepared during the peak audit season.

5. On recurring audits, the auditor may decide not to send a new engagement letter each period. In
which of the following situations will there be no need to send a new letter?
a. Revision of special terms of the engagement.
b. Significant change in nature or size of the client's business
c. Recent change of middle management and rank and file organization structure.
d. Indications of misunderstanding of the objective and of the audit

6. Which of the following not necessarily lead the client to request for the auditor to change the
engagement to one which provides a lower level of assurance?
a. Restrictions on the scope of the engagement, whether imposed by management or caused
by circumstances.
b. Misunderstanding as to the nature of an auditor related service originally requested.
c. Recent changes in senior management, board of directors or ownership.
d. Change in circumstances affecting the need for the service.

7. For initial engagements, the auditor should obtain sufficient appropriate audit evidence for the
following except
a. that the opening balances do not contain misstatement that materially affect the current
period's financial statements.
b. that the prior period's closing balances have been correctly brought forward to the current
period, or, when appropriate, have been restated.
c. that appropriate accounting policies are consistently applied or changes in accounting
policies have been properly accounted for or adequately disclosed.
d. that the client has informed the predecessor auditor of his appointment as the new auditor.

8. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a
new client?
a. Client's probability of achieving an unmodified opinion.
b. Client's financial ability,
c. Client's relation with its previous CPA firm.
d. Client's standing in the business community.

9. Where client is changing auditors, PSA requires communication between predecessor and
successor auditors. The burden of initiating the communication rests with the
 a. predecessor.
b. client.
c. successor.
d. SEC.

10. The purpose of an engagement letter is to

a. reduce the terms to writing in order to minimize
b. reduce the CPA firm's responsibility to external users of the audited financial statements.
c. satisfy the Statute of Frauds which requires that contracts for professional services must be
in writing to be enforceable.
d. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.

11. The engagement letter will do one, some, or all of the following:
1. State whether the CPA will perform audit, review, or compilation services.
2. State whether the CPA will perform tax or management advisory or other services.
3. State any restriction to be imposed on the CPA's work.
4. Identify deadlines for completing the work.
5. State the amount and type of work to be done by client's personnel in generating auditor's
workpapers.
6. State the CPA's fees for the engagement.
7. Inform the client that the CPA does not have responsibility for detecting fraud.

The engagement letter will do

a. numbers 1, 2, 4, and 6.
b. numbers 1, 2, 3, 4, and 6.
c. numbers 1, 3, 5, and 7.
d. all seven of the above stated items.

12. The engagement letter

a. does affect the CPA firm's responsibility to external users of audited financial statements.
b. can affect legal responsibilities to the client.
c. can be used to alter the auditor's responsibilities under the standards on auditing.
d. is useful only if it is an engagement, but has no effect for review or compilation services.

13. After preliminary audit arrangements have been made, an engagement confirmation letter should
be sent to the client. The letter usually would not include
a. a reference to the auditor's responsibility for the detection of errors or irregularities.
b. an estimation of the time to be spent on the audit work by audit staff and management.
c. a statement that management advisory services would be made available upon request.
d. a statement that a management letter will be issued outlining comments and suggestions as
to any procedures requiring the client's attention.

14. Early appointment of the independent auditor will enable

a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
 d. a more efficient examination to be planned.

15. In an audit situation, communication between the successor and predecessor auditors should be
a. authorized in an engagement letter.
b. acknowledged in a representation letter.
c. either written or oral.
d. written and included in the working papers.

16. Which of the following topics is not normally included in an engagement letter?
a. The auditors' preliminary assessment of internal control.
b. The auditors' estimate of the fee for the engagement.
c. Limitations on the scope of the engagement.
d. A description of responsibility for the detection of fraud.

17. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by
the auditors. The best place to set forth these arrangements is in
a. a memorandum to be placed in the permanent section of the auditing working papers.
b. an engagement letter.
c. a client representation letter.
d. a confirmation letter attached to the constructive services letter.

18. Which statement is correct relating to a potential successor auditor's responsibility for
communicating with the predecessor auditors in connection with a prospective new audit client?
a. The successor auditors have no responsibility to contact the predecessor auditors.
b. The successor auditors should obtain permission from the prospective client to contact the
predecessor auditors,
c. The successor auditors should contact the predecessors regardless of whether the
prospective client authorizes contact.
d. The successor auditors need not contact the predecessors if the successors are aware of all
available relevant facts.

19. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity, should
a. engage financial experts familiar with the nature of the
b. obtain a knowledge of matters that relate to the nature
c. refer a substantial portion Of the audit to another CPA who
d. first inform management that an unmodified opinion

20. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor's
a. Awareness of the consistency in the application of financial reporting standards between
periods.
b. Evaluation of all matters of continuing accounting significance.
c. Opinion of any subsequent events occurring since the predecessor' audit report was issued.
d. Understanding as to the reasons for the change of auditors,

21. An auditor who has been invited to submit a proposal for an audit engagement is a
 a. predecessor auditor.
b. successor auditor.
c. principal auditor.
d. interim auditor.

22. Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a project study
on the expanded food vending operations of the corporation with the corresponding staffing and
compensation package for its executive staff. Dimalanta, however, has primarily auditing expertise and
only in general merchandising operations. Mr. Dimalanta may properly
a. accept the engagement and carry it out consistent with the standards on auditing.
b. accept the engagement but exercise due professional care.
c. accept the engagement and acquire the necessary competence or consult with established
authorities.
d. decline the engagement for lack of experience or competence in an entirely new line of
specialization.

23. Engagement letters are widely used in practice for professional engagements of all types. The
primary purpose of the engagement letter is to
a, remind management that the primary responsibility for the financial statements rests with
management.
b. satisfy the requirements of the CPA's liability insurance policy.
c. provide a starting point for the auditor's preparation of the preliminary audit program.
d. provide a written record of the agreement with the client as to services to be provided.

24. In making arrangements for an audit, there should be a clear understanding between the auditor
and the client as to the following except
a. the type of audit to be performed.
b. terms of settlement for audit services.
c. assurance of auditor's independence.
d. official to whom audit report shall be addressed.

25. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of
the predecessor auditor. This procedure is necessary because the predecessor may be able to
provide the successor with information that will assist the successor in determining
a. whether the predecessor*s work should be utilized.
b. whether the company follows the policy of rotating its auditors.
c. whether in the predecessor's opinion, internal control of the company has been satisfactory.
d. whether the engagement should be accepted.

26. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding
a. disagreements of the predecessor had with the client concerning auditing procedures and
accounting principles.
b. the predecessor's evaluation of matters of continuing accounting significance.
c. the degree of cooperation the predecessor received concerning the inquiry of the client's
lawyer.
d. the predecessor's assessments of inherent risk and judgement about materiality
27. The predecessor auditor' is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided when
a. predecessor auditor has poor relations with successor auditor.
b. client is dissatisfied with predecessor's work.
c. there are legal problems between client and predecessor.
d. predecessor believes that client lacks integrity.

28. Aquino, CPA, requested permission to communicate with the predecessor auditors of a
prospective client. The prospective client's refusal to permit this will bear directly on Aquino's decision
concerning the
a. adequacy of the preplanned audit program.
b. ability to establish consistency in application of accounting principles between years.
c. apparent scope limitation.
d. integrity of management.

29. Which of the following most accurately what is meant by the term "material misstatement?"
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material fraud.
c. Material error, material fraud, and certain illegal acts.
d. Material error and material illegal acts.

30. Which of the following statements is correct relating to the auditor's consideration of fraud?
a. The auditor's interest in fraud consideration relates to fraudulent acts that cause a material
misstatement of financial statements.
b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while
errors are generally, but not always, intentional.
c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of
assets.
d. While an auditor should be aware of the possibility of fraud management, and not the
auditor, is responsible for detecting fraud.

AUDIT PLANNING

31. Which of the following is not one of the three main reasons why the auditor should properly plan
engagements?
a. To help keep audit costs reasonable.
b. To avoid misunderstandings with the client.
c. To enable the auditor to obtain sufficient competent evidence.
d. To enable proper on-the-job training of employees.

32. One of the major parts of audit planning js preplanning. Which of the following is not involved
during the preplanning phase?
a. Deciding whether to accept or continue this client.
b. Obtaining information about client's legal obligations.
c. Selecting staff for the engagement.
d. Obtaining an engagement letter.
33. Audit planning includes the need to consider prior to the auditor's identification and assessment of
the risks of material misstatement the following matters except
a. The analytical procedures to the applied as risk assessment
b. Obtaining a general understanding of the legal and regulatory
c. The determination of materiality
d. The outright exclusion of experts as Part of the audit team.

34. Although specific audit procedures vary from one engagement to the next, the following stages are
involved in every risk-based audit engagement except
a. Analysis of client's results of operations and its financial position as of the end of the audit
period.
b. Risk Assessment
c. Risk Response
d. Reporting

35. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to general positive cash flows from operations.

36. Management's attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity's control environment when
a. External policies established by parties outside the entity affect its accounting practices.
b. Management is dominated by one individual who is also a Shareholder.
c. Internal auditors have direct access to the board of directors and the entity's management.
d. The audit committee is active in overseeing the entity's financial reporting policies.

37. Which of the following is least likely to be required on an audit?

a, Test appropriateness of journal entries and adjustment.
b. Review accounting estimates for biases.
c. Evaluate the business rationale for significant unusual transactions.
d. Make a legal determination of whether fraud has occurred.

38. Which of the following factors would most likely heighten an auditor's concern about the risk of
fraudulent financial reporting?
a. Large amounts of liquid assets that are easily convertible into cash.
b. Low growth and profitability as compared to other entities in the same industry.
c. Financial management's participation in the initial selection of accounting principles.
d. An overly complex organizational structure involving unusual lines of authority.

39. An auditor who discovers that a client's employees have paid small bribes to public officials most
likely would withdraw from the engagement if the
a. Client receives financial assistance from a government agency.
b. Evidential matter that is necessary to prove that the illegal acts were committed does not
exist.
 c. Employees' actions affect the auditor's ability to rely on management's representations.
d. Notes to the financial statements fail to disclose the employees' actions.

40. Which of the following illegal acts should an audit be designed to obtain reasonable assurance of
detecting?
a. Securities purchased by relatives of management based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue under government contracts.
c. Violations of antitrust laws.
d. Price fixing.

41. Which of the following relatively small misstatements most likely could have a material effect on an
entity's financial statements?
a. An illegal payment to a foreign official that was not recorded.
b. Apiece of obsolete office equipment that was not retired.
c. A petty cash fund disbursement that was not properly authorized.
d. An uncollectible account receivable that was not written off.

42. The most likely explanation why the auditor's examination cannot reasonably be expected to bring
all illegal acts by the client to the auditor's attention is that
a. Illegal acts are perpetrated by management override of internal control.
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. The client's internal control may be so strong that the auditor performs only minimal
substantive testing,
d. Illegal acts may be perpetrated by the only person in the client's organization with access to
both assets and the accounting records.

43. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?
a. The CPA's lack of understanding of the prospective client's internal auditor's computer-
assisted audit techniques.
b. Management's disregard of its responsibility to maintain an adequate internal control
environment.
c. The CPA's inability to determine whether related-party transactions were consummated on
terms equivalent to arm's-length transactions.
d. Management's refusal to permit the CPA to perform substantive tests before the year-end.

44. Which of the following is most likely to require special planning considerations related to asset
valuation?
a. Inventory is comprised of diamond rings.
b. The client has recently purchased an expensive copy machine,
c. Assets costing less than P2S0 are expensed even when the expected life exceeds one year.
d. Accelerated depreciation methods are used for amortizing the costs of factory equipment.

45. To obtain an understanding of a continuing client's business in planning an audit, an auditor most
likely would
a. Perform fests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
 c. Read specialized industry journals.
d. Reevaluate the client's internal control environment.

46. Which of the following matters is generally included in an auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management's vicarious liability for illegal acts committed by its employees.
d. The auditor's responsibility to search for significant internal control deficiencies.

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

48. Tests of controls are directed towards the control's

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

49, Which one of these is not a type of evidence that Would be used for both obtaining an
understanding of the control structure and testing
a. Inquiries.
b. inspection.
c. Observation.
d. Reperformance.

50. A procedure designed to test for peso errors or irregularities directly affecting the correctness of
financial statement balances is a
a. substantive test.
b. compliance test.
c. test of controls.
d. definition of peso-unit sampling.

51. Tests to determine whether the accounting transactions have been properly authorized, correctly
recorded and summarized in the journals, and correctly posted to subsidiary ledgers and the general
ledger are
a. tests of controls.
b. substantive tests of transactions.
c. substantive tests of balances.
d. analytical procedures.

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

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

a. balance sheet accounts.
b. income statement accounts.
c. cash flow statement account.
d. three statements above.

54. Analytical procedures are defined in the Statements on Auditing Standards as

a. compliance tests.
b. substantive tests,
c. tests of controls.
d. helpful procedures not possessing the validity of tests available to the auditor.

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

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

57. Which of the following audit tests is usually the most costly to
a. Analytical procedures.
b. Tests of controls.
c. Tests of balances.
d. Substantive tests of transactions.

58. Which of the following audit tests is usually the least costly to
a. Analytical procedures.
b. Tests of controls,
c. Tests of balances,
d. Substantive tests of transactions.

59. At what stage in the audit are the analytical procedures performed?
a. in the planning stage.
b. In conjunction with tests of transactions and tests of details of balances.
c. Near the end.
d. During all three stages.
60. When planning tests of details of balances, the auditor forecasts the results of tests of controls,
substantive tests of transactions, and analytical procedures. The prediction for these three areas is
usually that there will be
a. no exceptions.
b. few or no exceptions.
c. an average number of exceptions.
d. many exceptions.

61. Which of the following statements is not true?

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

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

63. A written client representation letter most likely would be an auditor's best source of corroborative
information of a client's plans to
a. terminate an employee pension plan.
b. make a public offering Of its common stock.
c. settle an outstanding lawsuit for an amount less than the accrued loss contingency.
d. discontinue a line of business.

64. An auditor concludes that the omission of a substantive procedure considered necessary at the
time of the examination may impair the auditor's present ability to support the previously expressed
opinion The auditor need not apply fie omitted procedure if
a. the risk of adverse publicity litigation is low.
b. the results of other procedures that were applied tend to compensate for the procedure
omitted.
c. the auditor's opinion was qualified because of a departure from financial reporting standards.
d. the results of the subsequent period's tests of controls make the omitted procedure less
important.

65. Which of the following documentation is required for an audit in accordance with the standards on
auditing?
a. An internal control questionnaire.
b. A client engagement letter.
c. A planning memorandum or checklist.
d. A client representation letter.
66. The purpose of tests of compliance is to provide reasonable
a. accounting treatment of transactions and balances is valid
b. accounting procedures are functioning as intended.
c. entity has complied with disclosure requirements of financial
d. entity has complied with requirements of quality control.

67. The reliance Placed on substantive tests in relation to the reliance placed on internal control varies
in a relationship that is ordinarily
a. parallel.
b. inverse.
c. direct.
d. equal.

68. Which of the following ultimately determines the specific audit procedures necessary to provide an
Independence auditor with a reasonable basis for the expression of an opinion?
a. The audit program.
b. The auditor's judgment.
c. Philippine Standards on Auditing.
d. The auditor’s working papers.

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

70. Tests of compliance are concerned primarily with each of the following questions except
a. How were the procedures performed?
b. Why were the procedures performed?
c. Were the necessary procedures performed?
d. By whom were the procedures performed?

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

72. The actual operation of an internal control system may be most objectively evaluated by
a. completing a questionnaire and flowchart related to the accounting system in the year under
audit.
 b. review of the previous year's audit work papers to update the report of internal control
evaluation.
c. selection of items processed by the system and determination of the presence or absence of
errors and compliance deviations.
d. substantive tests of accounts balances based on the auditor's assessment of internal control
strength.

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

74. In the context of an audit of financial statements, substantive tests

a. may be eliminated under certain conditions.
b. are designed to discover significant subsequent events.
c. may be either tests of transactions, direct tests of financial balances, or analytical tests
d. will increase proportionately with the auditor's reliance on internal control.

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

76. Which of the following is ordinarily designed to detect possible material peso errors on the financial
statements?
a. Compliance testing.
b. Analytical review.
c. Computer controls.
d. Post audit working paper review.

77. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting records and
procedures.
c. after reviewing the client's accounting records and procedures.
d. when the audit engagement letter is prepared.
78. Which of the following audit tests would be regarded as a test of "compliance"?
a. Tests of the specific items making up the balance in a given general ledger account.
b. Tests of the inventory pricing to vendor's invoices.
c. Tests of the signatures on canceled checks to board of director's authorizations.
d. rests of the additions to property, plant, and equipment by physical inspection.

79. An auditor evaluates the existing system of internal control in order to

a. determine the extent of substantive tests which must be performed.
b. determine the extent of compliance tests which must be performed.
c. ascertain whether irregularities are probable.
d. ascertain whether any employees have incompatible functions.

80. After finishing the review phase of the study and evaluation of internal control in an audit
engagement, the auditor should perform compliance tests on
a. those controls that the auditor plans to rely on.
b. those controls in which material weaknesses were identified.
c. those controls that have a material effect upon the financial statement balances.
d. a random sample of the controls that were reviewed.

81. Reasons to evaluate internal control would not include

a. basis for planning the audit.
b. determining the nature, timing, and extent of audit procedures.
c. basis for type of opinion to be rendered.
d. formulating constructive suggestions for improvements.

82. An audit team's responsibility would not include

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

83. The functional responsibilities that should be performed by different people would not include
a. authorization to execute transactions.
b. recording of transactions.
c. custody of assets involved in the transactions,
d. reporting of recorded amounts.

84. A set of characteristics that defines good control working relationships in a company is referred to
as
a. control objectives.
b. control environment.
c. control risk assessment.
d. functional responsibilities.

85. Controls intended to ensure that transactions are recorded in the right accounts are designed to
achieve the objective of
 a. validity.
b. accuracy.
c. classification.
d. accounting

86. The financial statement assertion of existence and occurrence would not be related to internal
control objective
a. validity.
b. completeness.
c. authorization.
d. proper period.

87. The "obtaining-an-understanding' work phase of internal control evaluation would not give auditors
an overall acquaintance with the
a. control environment.
b. flow of transaction.
c. effectiveness of control procedures.
d. control ask assessment.

88. The basic standard flowchart symbols would not include

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

89. control strengths and weaknesses should be documented in workpapers, sometimes called
a. questionnaires, narratives, flowcharts.
b. bridge working papers.
c. communications of reportable conditions.
d. Internal control letters.

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

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

91. PSA 300 (Revised), Planning an Audit of Financial Statements, which states that the work is to be
adequately planned, and assistants, if any, are to be properly supervised, recognizes that
a. early appointment of the auditors is advantageous to the auditors and the client.
b. acceptance of an audit engagement after the close of the client's fiscal year is generally not
permissible.
c. acceptance of an audit engagement after the close of the client's fiscal year requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim dates.
92. Which of the following is an effective audit planning and control procedure that helps prevent
misunderstandings and inefficient use of audit personnel?
a. Arrange to make copies, for inclusion In the working papers.
of those client supporting documents examined by the auditors.
b. Arrange to provide the client with copies of the audit programs to be used during the audit.
c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and
other information.
d. Arrange to have the auditors prepare and post any necessary adjusting or reclassification
entries prior to final closing.

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

94. In planning an audit engagement, which of the following is a factor that affects the independent
audit" s judgment as to the quantity, type and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluation based upon initial substantive testings.
c. The contents of the client's representation letter.
d. The anticipated nature of the auditor's report.

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

96. An audit committee's responsibilities normally would not include

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

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

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

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

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

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

102. The auditor's opinion on the financial statements of his clients should be dated as of the date of
a. submittal of the report to the client.
b. receipt of client's letter of representation.
c. completion of all important audit procedures.
d. closing of the client's books.
e. close of the period under audit.

103. The primary difference between an audit of the balance sheet and an of the income statement
lies in the fact that the audit of income statement deals with the verification of
a. transactions.
b. authorizations.
c. costs.
d. cut-off.
104. Which of the following is not considered among the benefits of audit planning?
a. Audit planning helps coordinate the work to be done by auditors of components and other
parties such as experts, specialists, etc.
b. Audit planning helps ensure that the audit is properly organized, managed and performed in
an effective and efficient manner.
c. Audit planning aids in ensuring the examination of financial statements can be performed
without problems and difficulties.
d. Audit planning helps ensure that appropriate attention is devoted to important areas of the
audit.

105. Which of the following procedures is not undertaken by the auditor at the beginning of the current
audit engagement?
a. Determines whether ethical requirements including independence are complied with.
b. Establishes an understanding of the terms of engagement.
c. Determines whether relationship with client can be continued
or not.
d. Determines the types of opinion that should be expressed on the financial statements.

106. Which of the following is not considered by the auditor when establishing the scope of the audit
engagement?
a. The financial reporting framework on which the financial information to be audited has been
prepared.
b. Industry-specific reporting requirements.
c. Expected audit coverage including the number and locations of components to be included,
d. Expected nature and timing of communications among engagement team members
including the nature and timing of team meetings and timing of the review of work performed.

107. Which of the following should be considered by the auditor when ascertaining the reporting
objectives of the engagement, the timing of the audit and the nature of communications required?
a. Availability of client personnel and data.
b. Effect of information technology on the audit procedures.
c. Audit areas where there is a higher risk of material misstatement.
d. The entity's timetable of reporting such as at interim and final stages.

108. The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review of their work. Which of the following factors need not be considered by the
auditor in preparing this plan?
a. Size and complexity of the entity.
b. The reporting currency to be used, including any need for currency translation for the
financial information audited.
c. The capabilities and competence of personnel performing the audit work.
d. The risks of material misstatement,

109. For initial audits, additional matters the auditor may consider in the overall audit strategy and
audit plan include the following except
a. Confirmation of material accounts receivable balance at the end of the year.
 b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening
balances.
c. Assignment of firm personnel with appropriate levels of capabilities and competence to
respond to anticipated significant risks.
d. Major issues including the application of accounting principles or any auditing and reporting
standards discussed with management.

110. In determining the number of people who will be assigned to an engagement, an auditor normally
considers the following except
a. Audit's size and complexity.
b. The availability of the work of internal auditors and the extent
of the auditor's potential reliance on such work.
c. Availability and experience of personnel.
d. The necessity for special expertise.

111. In considering the work to be performed by other auditors, the following should be taken into
account except
a. The involvement of experts.
b, The number of locations.
c. The involvement of other auditors in the audit of components such as subsidiaries, branches,
and divisions.
d. The expected use of audit evidence obtained in prior audits.

112. PSA requires auditors to evaluate whether substantial doubt exists about an entity's ability to
continue as a going concern. Which of the following items will not signify that a material uncertainty
exists?
a. Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
b. Change from cash-on-delivery to credit transactions with suppliers.
c. Withdrawal of financial-support by creditors for essential new product development.
d. Adverse key financial ratios.

113. A time budget is an estimate of the total hours an audit is expected to take. The following are
among the factors to be considered in developing this budget, except
a. Location of client facilities.
b. Client's size as indicated by its gross assets, sales, number of employees.
c. The competence and experience of available staff.
d. Whether the audit is performed during the interim or at year- end.

114. As the audit progresses and additional information about the client is obtained, the acceptable
level of audit risk
a. may be modified.
b. may not be reduced because it would become statistically invalid, but it may be increased.
c. may not be increased because it would become statistically invalid, but it may be reduced.
d. may not be modified.
115. Which of the following is not a consideration when the auditor is attempting to assess the inherent
risk?
a. Nature of client's business.
b. Existence of related parties.
c. Frequency and intensity of top management's review of the accounting transactions and
records.
d. Susceptibility to defalcation.

116. Which of the following is an example of the concept of inherent risk?

a. Humans make more errors than computers, therefore a manual accounting system is riskier
than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so the risk that there
will be errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible than those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller sample sizes.

117. Which of the following discoveries by the auditor would not raise the red flag of increased
inherent risk?
a. Management bonuses are based on a percentage of net income.
b. A bond indenture requires a current ratio of at least three to one.
c. Client makes extensive use of notes receivable and notes payable rather than buying and
selling on open account.
d. Client is a parent company with a subsidiary.

118. Inherent risk is reduced where the likelihood of defalcations is low. This would be true for an
account such as
a. inventory.
b. marketable securities.
c. cash.
d. accounts receivable.

119. Both control risk and inherent risk are set by the auditor. On a typical engagement the auditor
would not set both of these for
a. the overall audit.
b, each cycle.
c. each account.
d. each objective.

120. Because control risk and inherent risk vary from cycle to cycle, account to account, or objective to
objective,
a. acceptable audit risk must remain a constant.
b. detection risk and required audit evidence will also vary.
c. detection risk will vary but audit evidence will remain constant•
d. detection risk will remain constant but audit evidence

121. After obtaining an understanding of an entity's internal control structure and assessing control
risk, an auditor may next
 a. perform tests of controls to verify management's assertions that are embodied in the
financial statements.
b. consider whether evidential matter is available to support a further reduction in the assessed
level of control risk.
c. apply analytical procedures as substantive tests to validate the assessed level of control risk.
d. evaluate whether the internal control structure policies and procedures detected material
misstatements in the financial statements.

122. An auditor may compensate for a weakness in the internal control by increasing the
a. level of detection risk.
b. extent of tests of controls (compliance tests).
c. preliminary judgment about audit Fisk.
d. extent of analytical procedures.

123. When conducting an audit, errors that arouse suspicion of fraud should be given greater attention
than other errors. This is an example of applying the criterion of
a. reliability of evidence.
b, materiality.
c. risk.
d. dual-purpose testing.

124. When an independent auditor's examination of financial statements discloses special

circumstances that make the auditor suspect that material errors and irregularities may exist, the
auditor's initial course of action should be to
a. recommend that the client pursue the suspected fraud to a conclusion that is agreeable to
the auditor..
b. extend normal audit procedures in an attempt to detect the full extent of the suspected fraud.
c. reach an understanding with the proper client representative as to whether the auditor or the
client is to make the investigation necessary to determine if a fraud has in fact occurred.
d. decide whether the fraud, if in fact it should exist, might be of such a magnitude as to affect
the auditor's report on the financial statements.

125. The audit risk against which the auditor requires reasonable protection is a combination of two
separate risks. The first of these is that material errors will occur in the accounting process by which
the financial statements are developed, and the second is that
a. a company's system of internal control is not adequate to detect errors and irregularities.
b. those errors that occur will not be detected in the auditor's examination.
c. management may possess an attitude that lacks integrity.
d. evidential matter is not competent enough for the auditor to form an opinion based on
reasonable assurance.

126. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the
predecessor auditor. The predecessor should permit the successor to review working papers relating
to matters of continuing accounting significance such as those that
a. extent of reliance on the work of specialists.
b. fee arrangements and summaries of payments.
c. analysis of contingencies.
 d. Staff hours required to complete the engagement.

127. Which of the following procedures is not performed as a part of

a. Reviewing papers of the prior year.
b. Performing analytical procedures.
c. Tests of controls.
d. Designing an au<it program.

128. The risk of a material misstatement occurring in an account, assuming an absence of internal
control, is referred to as:
a. Account risk
b. Control risk
c. Detection risk
d. Inherent risk.

129. Which of the following is not generally considered a financial statement audit risk factor?
a. Management operating and financing decisions are dominated by top management.
b. A new client with no prior audit history.
c. Rate of change in the entity's industry is rapid.
d. Profitability of the entity relative to its industry is inconsistent.

130 The risk that the auditors' procedures will lead them to conclude that a material misstatement
does not exist in an account balance when in fact such a misstatement does exist is referred to as:
a. Account risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

131. Which of the following statements is correct regarding the auditor's determination of materiality?
a. The planning level of materiality will normally be the larger of the amount considered for the
balance sheet vs. the income statement.
b. The auditor's planning level of materiality may be disaggregated into smaller "tolerable
misstatements" for the various accounts.
c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not
for determining the planning level of materiality.
d. The amount used for the planning will equal that used for evaluation.

132. The auditors must consider materiality in planning an audit engagement. Materiality for planning
purposes is:
a. The auditor's preliminary estimate of the largest amount of error that would be material to
any one of the client's financial statements.
b. The auditor's preliminary estimate of the smallest amount of error that would be material to
any one of the client's financial statements.
c. The auditor's preliminary estimate of the amount of error that would be material to the client's
balance sheet.
d. An amount that cannot be quantitatively stated since it depends on the nature of the item.
133. The systems approach to an audit is least likely to be appropriate for:
a. Clients with weak internal control.
b. Clients that are :urge in size.
c. Clients in specialized industries.
d. Clients that are publicly held.

134. Which of the following is not an assertion that is made in the financial statements by management
concerning each major account
a. Completeness.
b. Rights and obligations.
c. Legality.
d. Presentation and disclosure.

135. Which of the following income statements is least likely to be verified in conjunction with the audit
of a balance sheet account?
a. Depreciation expense.
b. Interest revenue.
c. Travel and entertainment.
d. Uncollectible accounts expense.

136. Tests for unrecorded assets typically involve tracing from:

a. Source documents to recorded journal entries.
b. Source documents to observations,
c. Recorded journal entries to documents.
d. Recorded journal entries to observations.

137. Tracing from source documents forward to ledgers is most likely to address which assertion
related to posted entries:
a. Completeness.
b. Existence.
c. Rights.
d. Valuation.

138. Determining that receivables are presented at net-realizable value is most directly related to
which management assertion?
a. Existence or occurrence.
b. Rights.
c. Valuation or allocation.
d. Presentation and disclosure.

139. Which of the following is not a general objective for the audit of asset accounts?
a. Establishing existence of assets.
b. Establishing proper valuation of assets.
c. Establishing proper safeguarding of assets.
d. Establishing the completeness of assets.

140. Which of the following is not used by auditors to establish the completeness of recorded assets?
 a. Assessing control risk.
b. Tracing from source documents to entries in the accounting records.
c. Performing analytical procedures,
d. Vouching transactions.

141. To test for unsupported entries in the journals, the direction of audit testing should be to the:
a. Ledger entries.
b. Journal entries.
c. Original source documents.
d. Financial statements.

142. The auditors will not ordinarily initiate discussion with the audit committee concerning the:
a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company's organization will influence the scope of the
examination.
c. Details of potential problems which the auditors believe might cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply.

143. When planning an examination, an auditor should:

a. Consider whether the extent of substantive tests may be reduced based on the results of the
internal control questionnaire.
b. Make preliminary judgments about materiality levels for audit purposes.
c. Conclude whether changes in compliance with prescribed control procedures justifies
reliance on them.
d. Prepare a preliminary draft of the management representation letter.

144. With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
a. An engagement should not be accepted after the fiscal year- end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of any specific audit procedures which will be
performed.
d. It is an acceptable practice to carry our parts of the examination at interim dates.

145. Santos requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will
bear directly on Santos' decision concerning the:
a. Adequacy of the preplanned audit program.
b. Ability to establish consistency in application of accounting principles between years.
c. Apparent scope limitation.
d. Integrity of management.

146. The auditor faces a risk that the examination will not detect material misstatements in the
financial statements. In regard to minimizing this ask, the auditor primarily relies on:
a. Substantive tests.
b. Tests of controls.
 c, Internal control.
d. Statistical analysis.

147. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures
for sales and inventories would most likely be identified in the planning phase of the audit by the use
of:
a. Tests of transactions and balances.
b. An assessment of internal control.
c. Specialized audit programs,
d. Analytical procedures.

148. As the acceptable level of detection risk decreases, the assurance directly provided from
a. substantive tests should increase.
b. substantive tests should decrease.
c. tests of controls should increase.
d. tests of controls should decrease.

149. As the acceptable level of detection risk decreases, an auditor may change the
a. timing of substantive tests by performing them at an interim date rather than at year end.
b. nature of substantive tests from a less effective to a more effective procedure.
c. timing of tests of controls by performing them at several dates rather than at one time,
d. assessed level of inherent risk to a higher amount.

150. Which of the following audit risk components may be assessed in non-quantitative terms?
Inherent risk Control risk Detection risk
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

151. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
a. elements of audit risk while detection risk is not.
b. changed at the discretion while detection risk is not.
c. considered at the individual account-ba!ance level while
d. functions of the client and its environment while detection

152. Which of the following elements underlies the application of the standards on auditing, particularly
the standards of field work and repotting?
a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Materiality and relative risk.

153. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
 b. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
c. Selecting a sample of vendors' invoices for comparison to receiving reports.
d. Reading the current year's interim financial statements.

154. One of the first things that the auditor will do after accepting a new client is
a. tour client's facilities.
b. contact client's attorney to discover legal obligations.
c. study client's internal control structure.
d. communicate with predecessor auditor.

155. Which of the following is not a document or record that should be examined early in-the
engagement?
a. Corporate charter and bylaws.
b. Management letter.
c. Minutes of board of directors' and stockholders' meetings.
d. Contracts.

156. Which of the following would not be found in the corporate charter?
a. The date of incorporation.
b. The kinds and amount of capital stock authorized.
c. The rules and procedures adopted by the stockholders.
d. The types of business activity that the corporation is allowed to conduct.

157. During the planning phase when the auditor is examining the contracts of client, the primary
attention should focus on
a. large peso value items.
b, any aspect of the agreement affecting financial disclosure.
c. tracing the information to verify correct journal entries.
d. the discovery of related party transactions.

158. Which of the following is the most likely first step an auditor would perform at the beginning of an
initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor's report.
b. Study and evaluate the system of internal administrative control.
c. Tour the client's facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

159. A CPA is conducting the first examination of a non-public company's financial statements. The
CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the
predecessor's working papers. This procedure is
a. acceptable if the client and the predecessor auditor agree to it
b. acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's
work.
c. required if the CPA is to render an unmodified opinion.
 d. unacceptable because the CPA should bring an independent viewpoint to a new
engagement.

The Financial Statements Audit

160. The auditors will not ordinarily initiate discussion with the audit committee concerning the
a. extent to which the work of internal auditors will influence the scope of the examination.
b. extent to which change in the company's organization will influence the scope of the
examination.
c. details of potential problems which the auditors believe might cause a qualified opinion.
d. details of the procedures which the auditors intend to apply.

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

162. The auditor should carefully consider the competence of the auditee's employees because their
competence deals directly and importantly upon the
a. cost/benefit relationship of the system of internal control.
b. achievement of the objectives of the system of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.

163. In considering materiality for planning purposes, auditor believes that misstatements aggregating
P10,000 would have a material effect on an entity's income statement, but that misstatements would
have to aggregate P20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to
design auditing procedures that would be expected to detect misstatements that aggregate
a. P10,000.
b. P15,000.
c. P20,000.
d. P30,000.

164. Analytical procedures used in planning an audit should focus on

a. evaluating the adequacy of evidence gathered concerning unusual balances.
b. testing individual account balances that depend on accounting estimates.
c. enhancing the auditor(s understanding of the client's business.
d. Identifying material weaknesses in the internal control structure.

165. Analytical procedures

a. are required to be performed in the planning phase of the audit.
b. are often done during the examination's testing phase.
 c. are required to be done during the completion phase of the
d. may be performed at any of three times during the

166. A benefit obtained from comparing client's data with industry

a. an indication of the likelihood of financial failure.
b. an indication where errors exist in the statements.
c. a benchmark to be used in evaluating client's budgets.
d. a comparison of "what is" with "what should be".

DIRECTION, SUPERVISION AND REVIEW

167. If most companies in the industry use FIFO inventory valuation and straight-line depreciation, and
the audit client uses weighted-average and double-declining balance comparisons of client and
industry data
a. will be a meaningful highlight of the result of these differences in accounting methods.
b. will enable the auditor to spot errors but not irregularities.
c. will enable the auditor to spot irregularities but not errors.
d. may not be meaningful.

168. Two analytical procedures available to the auditor are

1) Compare current year's balances with the preceding year.
2) Compare detail of a total balance with the preceding year. Shortcomings of these two procedures
are that
a. the first fails to consider growth or decline in business activity and the second ignores
relationships of data to other data.
b. the first ignores relationships of data to other data and the second fails to consider growth or
decline in business activity.
c. both fail to consider growth or decline in business activity and ignore relationships of data.
d. it is difficult, time consuming, and therefore costly to perform these procedures.

169. A common comparison occurs when the auditor calculates the expected balance and compares it
with the actual balance. The auditor's expected account balance may be determined by
a. using industry standards.
b. using Dun and Bradstreet reports.
c. relating it to some other balance sheet or income statement account or accounts.
d. Inquiry of client.

170. The first step in applying analytical procedures is to

a. set the objectives.
b. apply the decision rules,
c. conduct the tests.
d. determine what would be relevant data to use.

171. The design of the specific analytical procedures depends upon

a. the objectives the auditor sets.
b. the data available.
c. the decision rules which apply,
 d. the conclusion to be reached.

172. When analytical procedures are being designed, the auditor should evaluate whether
relationships among data are both plausible and predictable. Which one of the following statements is
not true?
a. As a general rule, relationships in a stable environment are more predictable than those in
an unstable or dynamic environment.
b. If the relationships among data are plausible but not adequately predictable, the procedure
will not provide useful results.
c. Relationships are plausible when there is a clear cause and effect relationship among them.
d. Once plausibility has been verified, then predictability can be presumed.

173. Which one of the following statements regarding use of appropriate

a. For comparisons to be useful, the data used must be relevant
to the objectives involved.
b. It is of questionable value to compare current-year unaudited data with data that is
unreliable.
c. To determine trends that enable meaningful analysis, comparisons Should be made of at
least four periods for each ratio and percentage used.
d. Analytical procedures performed on disaggregated data are not as effective as those applied
to the financial statement data.

174. Many auditors believe that the most important aspect of analytical procedures are
a. making the calculations based on design of the test.
b. classifying the results according to the decision rule.
c. performing follow-up procedures.
d. all three of the above.

175. The most common statistical technique used with analytical procedures is
a. disaggregated data.
b. regression analysis.
c. a decision rule table.
d. Comparison of current-year with prior-year data, looking for large peso or large percentage
changes.

176. Where an unusual fluctuation is indicated by analytical procedures and management is unable to
provide a satisfactory explanation, the auditor must assume that there is a high probability that an
error or irregularity exists. In this case, the auditor must
a. issue either a qualified or an adverse opinion.
b. issue a disclaimer.
c. issue either a qualified opinion or a disclaimer.
d. design other appropriate audit procedures to determine if such errors do exist.

177. One feature which is common to all microcomputer-based audit software is

a. the ability to input client's general ledger into the auditor's computer system.
b. the ability to generate decision-rule tables.
c. the ability to download data from client's mainframe into the auditor's microcomputer system
 d. the ability to record adjusting journal entries into client's system directly from the auditor's
system.

178. Which of the following ratios is not an indicator of client's Short- term debt-paying ability?
a. Current ratio.
b. Debt to equity ratio.
c. Quick ratio.
d. Cash ratio.

179. If a company does not have sufficient cash and cash-like items to meet its obligations
a. it is bankrupt.
b. it is insolvent.
c. the key to its debt-paying ability will be the length of time it takes the company to convert
less liquid current assets into cash.
d. the key to its debt-paying ability is the line of credit which it has available from banks.

180. To help plan the nature, timing, and extent of substantive auditing procedures, preliminary
analytical procedures should focus on
a. enhancing the auditor's understanding of the client's business and event that have occurred
since the last audit date.
b. developing plausible relationships that corroborate anticipated results with a measurable
amount of precision.
c. applying ratio analysis to externally generated data such as published industry statistics or
price indices.
d. comparing recorded financial information to the results Of other tests of transactions and
balances.

181. In connection with the examination of financial statements by an independent auditor, the client
suggests the members of the internal audit staff be utilized to minimize audit costs. Which of the
following tasks could most appropriately be delegated to the internal audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal auditor's judgment
as to how many accounts and which accounts will provide sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control of accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.

182. Reportable conditions are matters that come to an auditor's attention, which should be
communicated to an entity's audit committee because they represent
a. material irregularities or illegal acts perpetrated by high-level management.
b. significant deficiencies in the design or operation of the internal control structure.
c. flagrant violations of the entity's documented conflict-of- interest policies.
d. intentional attempts by client personnel to limit the scope of the auditor's field work.

183. An auditor searching for related party transactions should obtain an Understanding of each
subsidiary's relationship to the total entity because
a. this may permit the audit of intercompany account balances to be performed as of
concurrent dates.
 b. intercompany transactions may have been consummated on terms equivalent to arm's-
length transactions.
c. this may reveal whether particular transactions would have taken place if the parties had not
been related.
d. the business structure may be deliberately designed to obscure related party transactions.

184. A basic premise underlying analytical procedures is that

a. these procedures can not replace tests of balances and transactions.
b. statistical tests of financial information may lead to the discovery of material errors in the
financial statements.
c. the study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
d. relationships among data may reasonably be expected to exist and continue in the absence
of known conditions to the contrary.

185. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures
for sales and inventories would most likely be identified in the planning phase of the audit by the use of
a. tests of transactions and balances.
b. a preliminary review of internal control.
c. specialized audit programs.
d. analytical procedures.

186. An example of an analytical procedure is the comparison of

a. financial information with similar information regarding the industry which the entity operates.
b. recorded amounts of major disbursements with appropriate
c. results of a statistical sample with the expected characteristics of the actual population.
d. EDP generated data with similar data generated by a manual accounting system.

187. Before applying principal substantive tests to the details of asset and liability accounts at an
Interim date, the auditor should
a. assess the difficulty in controlling incremental audit risk.
b. investigate significant fluctuations that have occurred in the asset and liability accounts since
the previous balance-sheet date.
c. select only those accounts which can effectively be sampled during year-end audit work.
d. consider the tests of controls that must be applied at the balance-sheet date to extend the
audit conclusions reached at the interim date.

188. For which of the following account balances are substantive tests of details least likely to be
performed unless analytical procedures indicate the need to extend detail testing?
a. Payroll expense.
b. Marketable securities.
c. Research and development costs.
d. Legal expense.

189. An auditor should examine minutes of board of directors' meetings

a. through the date of his report.
b. through the date of the financial statements.
 c. on a test basis.
d. only at the beginning of the audit.

190. One reason why the independent auditor makes an analytical review of the client's operations is
to identify probable
a. weaknesses of a material nature in the system of internal control.
b. non-compliance with prescribed control procedures.
c. improper separation of accounting and other financial duties.
d. unusual transactions.

191. Which of the following ratios would be the least useful in reviewing the overall profitability of a
manufacturing company?
a. Net income to net worth.
b. Net income to total assets.
c. Net income to sales.
d. Net income to working capital.

192. Which of the following best describes the most important stage of an auditor's statistical analysis
of significant ratios and trends?
a. Computation of significant ratios and trends.
b. Interpretation of significant variations and unusual
c. Reconciliation of statistical data to the client's accounting
d. Comparison of statistical data to prior-year statistics and to similar data published by
governmental and private sources.

193. The auditor generally gives most emphasis to ratio and trend analysis in the examination of the
statement of
a. retained earnings.
b. income.
c. financial position.
d. Cash flows.

194. A not-for-profit organization published a monthly magazine that had 30,000 subscribers on
January 2, 2021. The number of subscribers increased steadily throughout the year and at December
31, 2021, there were 32,400 subscribers. The annual magazine subscription cost was P10 on January
1, 2021, and was increased to P12 for new members on April 1, 2021. An auditor would expect that
the receipts from subscriptions for the year ended December 31, 2021, would be approximately
a. P358,800.
b. P343,200.
c. P328,800.
d. P327,600.

195. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting control.
c. after reviewing the client's accounting records and procedures.
 d. when the audit engagement letter is prepared.

196. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Include in the audit program a column for estimated and actual time.
b. Perform audit work only after the client's books of account have been closed for the period
under examination.
c. Write a conclusion on individual working papers indicating how the results thereon will affect
the auditor' report.
d. Include in the engagement letter an estimate of the minimum and maximum audit fee.

197. Which of the following analytical review procedures, should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents.
b. Ascertain that the new income amount in the statement of changes in financial position
agrees with the net income amount in the income statement.
c. Obtain from the proper client representatives, the beginning and ending inventory amounts
that were used to determine costs of sales.
d. Compare the actual revenues and expenses with the corresponding figures of the previous
year and investigate significant differences.

198. Audit programs generally include procedures necessary to test actual transactions and resulting
balances. These procedures are primarily designed to
a. detect irregularities that result in misstated financial statements.
b. test the adequacy of internal control.
c. gather corroborative evidence.
d. obtain information of informative disclosures.

199. An auditor uses analytical review during the course of an audit. The most important phase of this
review is the
a. computation of key ratios such as inventory turnover and gross profit percentages.
b. investigation of significant variations and unusual relationships.
c. comparison of client-computed statistics with industry data on a quarterly and full-year basis.
d. examinations of the client data that generated the statistics that are analyzed.

200. Which of the following is not a typical analytical review procedure?

a. Study of relationships of the financial information with relevant non-financial information.
b. Comparison of the financial information with similar information regarding the industry in
which the entity operates.
c. Comparison of recorded amounts of major disbursements with appropriate invoices.
d. Comparison of the financial information with budgeted amounts

201. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained
decrease in the ratio of gross profit to sales may suggest which the following possibilities?
a. Unrecorded purchases.
b. Unrecorded sales.
c. Merchandise purchases being charged to selling and general expenses
d. Fictitious sales.
202. The risk of a material misstatement occurring in an account, assuming an absence of internal
control is referred to as
a. Account risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

203. Which of the following is not generally considered a financial statement audit risk factor?
a. Management operating and financing decisions are dominated by top management.
b. A new client with no prior audit history.
c. Rate of change in the entity's industry is rapid.
d. Profitability of the entity relative to its industry is inconsistent.

204. The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided when
a. predecessor auditor has poor relations with successor auditor.
b. client is dissatisfied with predecessor's work.
c. there are legal problems between client and predecessor.
d. predecessor believes that client tacks integrity.

205. The systems approach to an audit is least likely to be appropriate for

a. clients with weak internal control.
b. clients that are large in size.
c. clients in specialized industries.
d. clients that ate publicly held.

206. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Include in the audit program a column for estimated and
b. Perform audit work only after the client's books of account have been closed for the period
under examination.
c. Write a conclusion in individual working papers indicating how the results of the audit will
affect the auditor's report,
d. Include in the engagement letter in estimate of the minimum audit fee.

207. An audit program provides proof that

a. sufficient competent evidential matter was obtained.
b. the work was adequately planned.
c. there was compliance with generally accepted standards of reporting.
d. there was a proper study and evaluation of internal control.

208. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting control.
c. after reviewing the client's accounting records and procedures.
d. when the audit engagement letter is prepared.
209. Client acceptance and retention policies and procedures do not
a. evaluating firm's independence with potential client.
b. obtaining and reviewing Information about company.
c. permission of the predecessor auditor.
d. considering whether engagement requires special sees.

210. The probability that an auditor will give an inappropriate opinion on financial statements is
a. audit risk.
b. inherent risk.
c. control risk.
d. detection risk.

211. Auditors would appear not to exhibit due audit care if there was a
a. high audit risk.
b. low detection risk.
c. high inherent risk.
d. low control risk.

212. An auditor who believes that a material irregularity may exist should initially
a. Withdraw form the engagement
b. Discuss the matter with higher level of management
c. Discuss the matter with those believed to be involved in the perpetration of the material
irregularity
d. Consult legal counsel

213. If the independent auditor decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditor's
a. Training and supervisory skills.
b. Efficiency and experience.
c. Competence and objectivity.
d. Independence and review skills.

214. The auditors are planning an audit engagement for a new client in a business that is unfamiliar to
the auditors. Which of the following would be the most useful source of information for the auditors
during the preliminary planning stage when they are trying to obtain a general understanding of audit
problems that might be encountered?
a. Client manuals of accounts and charts of accounts.
b. Industry Audit Guides.
c. Prior-year working papers of the predecessor auditors.
d. Latest annual and interim financial statements issued by the client.

215. Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Assets costing less than P500 are expensed even though expected life exceeds one year.
d. Inventory is comprised of precious stones.
216. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
a. timing of inventory observation procedures to be performed.
b. evidence to be gathered to provide a sufficient basis for the auditor's opinion.
c. procedures to be undertaken to discover litigation, claims, and assessments.
d. pending legal matters to be the inquiry of the client's attorney.

217. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

218. An extensive understanding of the client's business and industry and knowledge about the
company's operations are essential for doing an adequate audit. For a new client, most of this
information is obtained
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the client's premises.

219. Research has indicated several factors which affect business risk and therefore acceptable risk.
Which of the following does not affect business risk?
a. The degree to which external users rely on the statements.
b. The likelihood that client will have financial difficulties after the audit report is issued.
c. The integrity of management.
d. Weaknesses in client's internal control structure.

220. The audit risk against which the auditor requires reasonable protection is a combination of two
separate risks. The first of these is that material errors will occur in the accounting process by which
the financial statements are developed, and the second is that
a. a company’s system of internal control is not adequate to detect errors and irregularities.
b. those errors that occur will not be detected in the auditor’s examination.
c. management may possess an attitude that lacks integrity.
d. evidential matter is not competent enough for the auditor to form an opinion based on
reasonable assurance.

III. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

INCLUDING ITS INTERNAL CONTROL AND ASSESSING THE
RISKS OF MATERIAL MISSTATEMENT.

1. The auditor's understanding of the entity and its environment consists of an understanding of the
following aspects except
 a. Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b. Nature of the entity, including the entity's selection and application of accounting policies.
c. Measurement and review of the entity's financial performance.
d. Entity's selection and screening process of marketing and production personnel.

2. PSA 315 (Clarified) requires that the auditor should obtain an understanding of relevant industry,
regulatory and other external factors including the applicable financial reporting framework. Which of
the following is not an example of matters relating to regulatory environment that the auditor would
usually consider?
a. Regulatory framework for a regulated industry.
b. Legislation and regulation significantly affecting the entity's operation.
c. Taxation.
d. Product technology relating to the entity's product.

3. PSA 315 (Clarified) requires that the auditor should obtain an understanding of relevant industry,
regulatory and other external factors including the applicable financial reporting framework. Which of
the following is not among the items that relate to industry conditions?
a. Energy. supply and cost
b. Cyclical or seasonal activity
c. Market and competition
d. Inflation and currency revaluation

4. PSA requires that the auditor should obtain an understanding of the entity's objectives and
strategies, and the related business risks that may result In material misstatement of the financial
statements. Which of the following is not an example of business risks that may have financial
consequences and may affect the financial statements?
a. A contracting customer base due to industry consolidation that may increase the risk of
misstatement associated with the valuation of receivables.
b. Use of new IT.
c. New accounting requirements.
d. Contracting economy.

5. PSA 315 (Clarified) requires that the auditor should obtain an understanding of the entity's selection
and application of accounting policies and consider whether they are appropriate for its business and
consistent with the applicable financial reporting framework and accounting polices used in the
relevant industry. The understanding does not encompass
a. The methods the entity uses to account for significant and unusual transactions.
b. The effect of significant accounting policies in contractual or emerging areas for which there
is lack of authoritative guidance or consensus.
c. Changes in the entity's accounting policies.
d. Criteria in the selection of the company's chief accounting executive.

6. PSA 315 (Clarified) requires the auditor should obtain an understanding of relevant industry,
regulatory and other external factors including the applicable financial reporting standard. These
external factors should include the following except
a. Industry conditions
 b. Economic conditions and financial trends
c. Legislative and regulatory requirement
d. Competitiveness of the remunerations given to client's executives and managers

7. In assessing the overall attractiveness of the industry where the audit client belongs; the following
factors should be considered except
a. Strength of competitors.
b. Barriers to entry.
c. Bargaining power of supplies of raw materials and labor.
d. Marketing strategies of the “big players" in the industry.

8. PSA 315 requires that the auditor should obtain an understanding of the nature of entity. The nature
of the entity refers to the following except
a. The entity's strongest and closest competitors.
b. The entity's operations, ownership and governance.
c. The types of investment, the entity is making and plans to make.
d. The financial and capital structure of the entity.

9. The auditor should obtain an understanding of the entity's objectives and strategies, and the related
business risk that may result in material misstatement of the financial statements. The following could
create potential business risk to an entity except
a. New products and services.
b. Contracting customers base due to industry consolidation.
c. Regulatory requirements.
d. Training the entity's personnel to cope with the changes in the industry.

10. Management may use a variety of technologies to measure and review the entity's performance.
Which of the following is not among the appropriate techniques that may be applied?
a. Budgets
b. Variance analysis
c. Balanced scorecard
d. Ocular inspection of how payroll is distributed

INTERNAL CONTROL
11. Which of the following is not a factor that is considered in evaluating a client's overall control
environment?
a. The organizational plan.
b. The accounting system.
c. Management philosophy and operating style,
d. An internal audit function,

12. Which of the following would be least likely to be considered a benefit of an effective internal
control structure?
a. Eliminating all employee irregularities.
b. Restricting access to assets.
c. Detecting ineffectiveness.
d. Ensuring authorization of transactions.
13. After documenting the client's. prescribed internal control structure, the auditors will often perform
a walk-through of each transaction cycle. An objective of a walk-through is to
a. verify that the structure has been placed in operation.
b. replace tests of controls.
c. evaluate the major strengths and weaknesses in the client's structure.
d. identify weaknesses to be communicated to management in the management letter.

14. The major elements of an internal control structure include all of the following, except:
a. the accounting system.
b. the control environment.
c. segregation of duties.
d. control procedures.

15. Which of the following is correct with respect to internal control structure related matters
discovered during an audit?
a. Auditors must communicate and identify as such all material weaknesses in internal control.
b. All material weakness in internal control are also reportable conditions.
c. All such matters must be communicated to the audit committee and regulatory agencies.
d. Auditors must re-communicate all prior year matters which were not corrected.

16. After considering the client's internal control structure the auditors have concluded that the
structure is well designed and is functioning as anticipated. Under these circumstances the auditors
would most likely
a. cease to perform further substantive tests.
b. reduce substantive tests.in areas where the internal control was found to be effective.
c. increase the extent of anticipated analytical procedures.
d. perform all tests of controls to the extent outlined in the preplanned audit program.

17. The use of fidelity bonds protects a company from embezzlement losses and also
a. the possibility of employing persons with dubious records in positions of trust.
b. reduces the .company's need to obtain expensive business interruption insurance.
c. allows the company to substitute the fidelity bonds for various parts of internal control.
d. protects employees who made unintentional errors from possible monetary damages
resulting from such error.

18. The independent auditors might consider the procedures performed by the internal auditors
because:
a. they are employees whose work must be reviewed during substantive testing.
b. they are employees whose work might be considered.
c. their work impacts tradeoff in evaluating inherent limitations.
d. their degree of independence may be inferred by the nature Of

18. in the consideration of internal control, the operating effectiveness of controls is tested by
a. flowcharts.
b. tests of controls.
c. substantive tests.
 d. decision tables.

20. When considering internal control, the auditors must be aware of the concept of reasonable
assurance which recognizes that the
a. employment of competent personnel provides assurance that the objectives of internal
control will be achieved.
b. establishment and maintenance of a system of internal control is an important responsibility
of the management and not of the auditor.
c. cost of internal control should not exceed the benefits expected to be derived from internal
control.
d. segregation of incompatible functions is necessary to ascertain that the internal control is
effective.

21. The auditors who become aware of an internal control reportable condition are required to
communicate this to the
a. audit committee and client's legal counsel.
b. board of directors and internal auditors.
c. audit committee.
d. internal auditors and senior management.

22. In general, a material internal control weakness may be defined as a condition in which material
errors or irregularities would ordinarily not be detected within a timely period by
a. an auditor during the normal assessment of the system of internal control.
b. controller when reconciling accounts in the general ledger.
c. employees in the normal course of performing their assigned functions.
d the chief financial officer when reviewing interim financial statements.

23. To provide for the greatest degree of independence in performing internal auditing functions, an
internal auditor most likely should report to the
a. financial vice-president.
b. corporate controller.
c. board of directors.
d. corporate stockholders.

24. A well-designed system of internal control that is functioning effectively is most likely to detect an
irregularity arising from
a. the fraudulent action of several employees.
b. the fraudulent action of an individual employee.
c. informal deviations from the official organization chart.
d. management fraud.

25. The program flowcharting symbol representing a decision is a

a. triangle.
b. circle.
c. rectangle.
d. diamond.
26. Internal controls are not designed to provide reasonable assurance
a. transactions are executed in accordance with management's authorization.
b. irregularities will be eliminated.
c. access to assets is permitted only in accordance with management's authorization.
d. the recorded accountability for assets is compared with the existing assets at reasonable
intervals.

27. The scope of substantive tests as compared to thé scope of tests of control generally vary
a. in a parallel manner.
b. inversely.
c. directly.
d. equally.

28. A primary purpose of the auditor's consideration of internal control is to provide a basis for
a. determining whether procedures and records that are concerned with the safeguarding of
assets are reliable.
b. constructive suggestions to clients concerning improvements in internal control.
c. determining the nature, extent, and timing of audit tests to be
d. the expression of an opinion.

29. Which of the following audit tests would be regarded as a test of a control?
a. Tests of the specific items making up the balance in a given general ledger account.
b. tests confirming receivables.
c. Tests of the signatures on canceled checks to board of director's authorizations.
d. Tests of the additions to property, plant, and equipment by physical inspection.

30. If the independent auditors decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditor's
a. competence and objectivity.
b. efficiency and experience.
c. independence and review skills.
d. training and supervisory skills.

31. In the consideration of internal control, the auditor is basically concerned that the structure
provides reasonable assurance that
a. management can not override the system.
b. operational efficiency has been achieved in accordance with management plans.
c. misstatements have been prevented or detected.
d. controls have been circumvented by collusion.

32. Which of the following is intended to detect deviations from prescribed accounting department
procedures?
a. Substantive tests specified by a standardized audit program.
b. Tests of controls designed specifically for the client.
c. Analytical procedures as designed in the industry audit guide.
d. Computerized analytical procedures tailored for the configuration of EDP equipment in use.
33. An auditor's purpose for performing tests of controls is to provide reasonable assurance that
a. The controls on which the auditor plans to consider are operating effectively.
b. The risk that the auditor may unknowingly fail to modify the opinion on the financial
statements is minimized.
c. Transactions are executed in accordance with management's authorization and access to
assets is limited by a segregation of functions.
d. Transactions are recorded as necessary to permit the preparation of the financial statements
in conformity with financial reporting standards.

34. Of the following statements about an internal control structure, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost/benefit relationship, a client may apply control procedures on a test
basis.
d. Control procedures reasonably insure that collusion among

35. Tests of controls are performed in order to determine whether

a, controls are functioning as designed.
b. necessary controls are absent.
c. incompatible functions exist.
d. material peso errors exist.

36, Which of the following would be least likely to be included in an auditor's tests of controls?
a. Inspection.
b. Observation.
c. Inquiry.
d. Confirmation.

37. Which of the following statements is correct concerning the auditor's required communication of
internal control reportable conditions?
a. If the auditor does not become aware of any reportable conditions during the examination,
that fact must be communicated.
b. Reportable conditions reported at interim dates should be tested for correction before
completion of the engagement.
c. Although written communication is preferable, the auditor may orally communicate the
findings.
d. Reportable conditions reported at interim dates repeated in the communication at the
completion of the engagement.

38. Which one of the following is not a concern of management in designing an effective internal
control structure?
a. To provide reliable data.
b. To promote operational efficiency.
c. To encourage adherence to prescribed policies.
d. To comply with the BIR Tax Code.
39. The auditor's primary concerns as far as internal control is concerned are with the system's ability
to
a, provide reliable data and promote efficiency.
b. promote efficiency and encourage adherence to policy.
c. provide reliable data and safeguard assets and records.
d. provide reliable data, safeguard assets and records, and comply with the foreign corrupt
practices act.

40. The four functions that are common to all accounting systems regardless of complexity are
a. journalizing, posting, trial balance, and reports.
b. data preparation, data entry, transaction processing and master file update, and document
and report generation.
c. data preparation, journalizing, posting, and reports.
d. data entry, transaction processing and master file update, report generation, and document
generation.

41. Errors uncovered by the computer during any part of data entry or processing would
a. be corrected automatically in a good accounting system.
b. cause the computer to stop processing until the error was corrected.
c. be classified as "material".
d. generate a message on an "error correction report".

42. Which of the following is not one of the detailed objectives that an internal control structure must
meet to prevent errors in the journals and records?
a. Validity.
b. Materiality.
c. Authorization,
d, Posting and summarization.

43. The internal control structure cannot permit the inclusion of fictitious or nonexistent transactions in
journals or other accounting records, This defines the control objective of
a. validity.
c. authorization.
b. materiality.
d. posting and summarization.

44. "The client's procedures must prevent the omission of transactions from the records"* This defines
the control objective of
a. validity.
b. authorization.
c. completeness.
d. posting and summarization.

45. "An adequate internal control structure includes procedures to avoid errors in calculating and
recording transaction amounts." This defines the control objective of
a. validity.
b. completeness.
 c. valuation.
d. posting and summarization.

46. Which of the following statements is not correct?

a. The recording or transactions either before or after the time they took place increases the
likelihood of failing to record them or of recording them at the improper amounts.
b. If either early or late recording of transactions occurs, the financial statements will be
misstated.
c. The internal control structure attempts to prevent the inclusion of fictitious transactions in
journals.
d. All of the above statements are not correct.

47. One of the following is not an element of the internal control structure.
a. The control environment.
b. The accounting system.
c. Control procedures.
d. Audits.

48. To qualify to be an "outside director" on an audit committee, one must

a. not own any stock in client company.
b. not be a part of management.
c. not receive any remuneration or expense reimbursement.
d. work for CPA firm.

49. The most important aspect of any system of controls is

a. proper authorization procedures.
b. competent trustworthy personnel.
c. separation of duties.
d. regular review by top management.

50. In order to ensure unbiased information, record keeping is typically included in a separate
department under the
a. Treasurer.
b. Vice-president of Operations.
c. Controller.
d. Internal Auditor.

51. Adequate separation of duties within an EDP department would ensure that
a. the programmer not have access to computer operation.
b. the librarian not have physical control over the computer programs.
c. the computer operator not have access to computer run instructions.
d. the data control group have as little independence as possible.

52. Authorizations can be either general or specific. Which of the following is not an example of a
general authorization?
a. A sales price list for merchandise.
b. Credit limits for various classes of customers.
 c. A sales manager's authorization of customers.
d. Automatic reorder points for raw materials inventory.

53. The most important type of protective measure for safe-guarding assets and records is
a. adequate separation of duties among personnel.
b. proper authorization of transactions.
c. the use of physical precautions.
d. adequate documentation.

54. Which of the following is not a control related to safe-guarding EDP equipment, programs, and
data files?
a. physical controls.
b. automated internal verification procedures.
c. access controls.
d. backup and recovery procedures.

55. Once an understanding of the internal control structure is obtained that is sufficient for audit
planning, then the auditor must first assess
a. whether a lower level of control risk could be supported.
b. whether the financial statements are auditable.
c. the level of control risk supported by the understanding obtained.
d. the level of control risk to use.

56. When it is concluded by the auditor during the planning phase that the client is not auditable
because the accounting records are deficient, the auditor must not
a. withdraw from the engagement without issuing a report.
b. issue a disclaimer.
c. issue an adverse opinion.
d. send the client a bill for services rendered.

57. The process of having the auditor select several documents for the initiation of a transaction type
and tracing them through the entire accounting process is known as
a. documentation.
b. tracing.
c. a walk-through.
d. the transaction cycle.

58. Most audits of a company are done annually by the same CPA firm. Except for initial
engagements, the auditor begins the audit with a great deal of information about the client's internal
control structure developed in prior years. Because systems and controls usually don't change
frequently.
a. the auditor can skip the evaluation of this area on repeat
b. this information can be updated and carried forward to the current year's audit.
c. it eases the burden on the auditor's requirement to do a complete study of the controls this
year.
 d. it is sufficient for the auditor just to inquire of client whether the controls have been changed
since last year.

59. Narratives, flowcharts, and internal control questionnaires are three commonly used methods of
a. documenting the study of internal control.
b. testing the internal control structure.
c. designing the audit manual and procedures.
d. documenting the auditor's understanding of client's organizational structure.

60. Which of the following statements is not correct?

a. It would be unusual to use both a narrative and a flowchart to describe the same system.
b. The use of both questionnaires and flowcharts on the same engagement is highly desirable
for understanding the client's system.
c. The advantage of the narrative description is the ease of describing the details of the internal
control structure.
d. When reliable and understandable narratives, flowcharts, and questionnaires are available
from client, it is desirable to use them rather than have the auditor prepare his/her own
documents.

61. Which of the following statements about the internal control questionnaire is not correct?
a. The primary advantage of the questionnaire approach is the relative completeness of
coverage of each audit areas that a good instrument affords.
b. The questionnaire can be prepared reasonably quickly, and it can be accomplished at the
beginning of the audit engagement.
c. The primary disadvantage of the questionnaire approach is that individual parts of the
system are examined without providing an overall view.
d. It is unacceptable for the auditor to rely on an internal control questionnaire which has been
filled out by client's personnel.

62. When a compensating control exists, a weakness in the system

a. is no longer a concern because the potential for misstatement has been sufficiently reduced.
b. is reduced but not removed, therefore, it is still of concern to the auditor.
c. could cause a material loss, so it must be tested using substantive procedures.
d. is magnified, and must be removed from the sampling process and examined in its entirely.

63. When controls leave no documentary evidence or trail,

a. it is impossible for the auditor to verify them so he/she will have to rely on substantive tests.
b. the only thing available as verification of their effectiveness is inquiry of management.
c. the auditor generally observes them being applied.
d. it is impossible to audit that area of client's system.

64. If evidence was obtained in the prior year's audit that indicates a key control was operating
effectively
a. it will be unnecessary to test that control this year.
b. the tests of that control will be reduced this year.
c. the extent of tests of that control may be reduced this year if the auditor determines that it is
still in place.
 d. the auditor would not test this are again this year.

65. Input documents are typically the responsibility of the

a. user department that transmits the documents to accounting before processing.
b. accounting department which prepares and records them.
c. production and quality control department to see that they are prepared properly.
d. computer department since they will have to be responsible for inputting them.

66. When input documents are collected, controlled, and processed by discrete groups, it is referred to
as
a. on-line processing.
b. batch processing.
c. discrete processing.
d. posting to the ledger.

67. A process or form which is used to determine whether afl the data that were put into the system
were processed is the
a. transmittal control.
b. route slip.
c. control totals.
d. check digit.

68. Which of the following is not a control total?

a. Record count.
b. Hash total.
c. Financial control total.
d. Key verification.

69. Where data are Put into machine-readable media, there Is a risk of key-entry errors. Which of the
following would not be used to detect
a. check-digit.
b. record count.
c. logic test.
d. control total balancing.

70. which of the following tests would not be a programmed control?

a. Validity test.
b. Parity test.
c. Completeness test.
d. Limit test.

71. Of the three common types of flowcharts, for audit purposes the auditor generally prefers
a. system flowcharts.
b. internal control flowcharts.
c. program flowcharts.
d. to use all three types.
72. The flowcharting convention for arrowheads is that they should be used for all directions of flow
a. always.
b. except down.
c. except down and to the right.
d. except down and to the left.

73. In order to show separation of duties, areas of responsibility are established on flowcharts as
a. vertical columns.
b. horizontal rows.
c. highlighted boxes,
d. rectangular boxes.

74. A procedure that would most likely be used by an auditor in performing tests of control procedures
that involve segregation of functions and that leave no transaction trail is
a. Inspection.
b. Observation.
c, Reperformance.
d. Reconciliation.

75. Which of the following statements is correct concerning and auditor's communication of internal
control structure related matters (reportable conditions) noted in an audit?
a. The auditor may issue a written report to the audit committee representing that no reportable
conditions were noted during the audit.
b. Reportable conditions should be re-communicated each year even if the audit committee
has acknowledged its understanding of such deficiencies.
c. Reportable conditions may not be communicated in a document that contains suggestions
regarding activities that concern other topics such as business strategies or administrative
efficiencies.
d. The auditor may choose to communicate significant internal control structure related matters
either during the course of the audit or after the audit is concluded.

76. An accountant's report expressing an opinion on an entity's internal controls should contain a
a. statement that the entity's internal controls are consistent with that of the prior year after
giving effect to subsequent changes.
b. brief explanation of the broad objectives and inherent limitations of internal control.
c. description of the principal controls that protect assets against loss from unauthorized use of
disposition.
d. statement that the engagement was conducted in accordance with the Philippine Standards
on Auditing.

77. An auditor uses the knowledge provided by the understanding of the internal control structure and
the assessed level of control risk primarily to
a. determine whether procedures and records concerning the safeguarding of assets are
reliable.
b. ascertain whether the opportunities to allow any person to both perpetrate and conceal
irregularities are minimized.
 c. modify the initial assessments of inherent risk and preliminary judgments about materiality
levels.
d. determine the nature, timing, and extent of substantive tests for financial statement
assertions.

78. When obtaining an understanding of an entity's control environment, an auditor should concentrate
on the substance of management's policies and procedures rather than their form because
a. the auditor may believe that the policies and procedures are inappropriate for that particular
entity.
b. the board of directors may not be aware of management's attitude toward the control
environment.
c. management may establish appropriate policies and procedures but not act on them.
d. the policies and procedures may be so weak that no reliance is contemplated by the auditor.

79. Evidential matter concerning proper segregation of duties ordinarily is best obtained by
a. inspection of third-party documents containing the initials of who applied control procedures.
b. direct personal observation of the employee who applies control procedures.
c. preparation of a flowchart of duties performed and available personnel.
d. making inquiries of co-workers about the employee who applies control procedures.

80. When considering the objectivity of internal auditors, an independent

auditor should
a, evaluate the quality control program in effect for the internal auditors.
b. examine documentary evidence of the work performed by the internal auditors.
c. test a sample of the transactions and balances that the internal auditors examined.
d. determine the organizational level to which the internal auditors report.

81. An internal control narrative indicates than an approved voucher is required to support every check
request for payment of merchandise. Which of the following procedures provides the greatest
assurance that this control is operating effectively?
a. Select and examine vouchers and ascertain that the related canceled checks are dated no
later than the vouchers.
b. Select and examine vouchers and ascertain that the related canceled checks are dated no
earlier than the vouchers.
c. Select and examine canceled checks and ascertain that the related vouchers are dated no
earlier than the checks.
d. Select and examine canceled checks and ascertain that the related vouchers are dated no
later than the checks.

82. Proper segregation of functional responsibilities in an effective structure of internal control calls for
separation of the functions of
a. authorization, execution, and payment.
b. authorization, recording, and custody.
c. custody, execution, and reporting.
d. Authorization, payment, and recording.
83. When considering internal control, an auditor should be aware of the concept of reasonable
assurance, which recognizes that the
a. segregation of incompatible functions is necessary to ascertain that internal control is
effective.
b. employment of competent personnel provides assurance that the objectives of internal
control will be achieved.
c. establishment and maintenance of an internal control structure is an important responsibility
of the management
d. cost of internal control should not exceed the benefits expected to be derived from internal
control.

84. The development of constructive suggestions to clients for improvements in internal control is
a. a requirement of the auditor's consideration of internal control.
b. a desirable by-product of an audit engagement.
c. addressed by the auditor only during a special engagement.
d. as important as establishing a basis for reliance upon the internal control structure.

85. Which of the following would be least likely to be considered an objective of an internal control
structure?
a. Checking the accuracy and reliability of accounting data.
b. Detecting management fraud.
c. Encouraging adherence to managerial policies.
d. Safeguarding assets.

86. In considering internal control, the auditor is basically concerned that the structure provides
reasonable assurance that
a. operational efficiency has been achieved in accordance with management plans.
b. errors and irregularities have been prevented or detected.
c. controls have not been circumvented by collusion.
d. management can not override the system.

87. After considering a client's internal control structure, an auditor has concluded that it is well
designed and is functioning as intended. Under these circumstances the auditor would most likely
a. perform tests of controls to the extent outlined in the audit program.
b. determine the control procedures that should prevent or detect errors and irregularities.
c. not increase the extent of predetermined substantive tests.
d. determine whether transactions are recorded to permit preparation of financial statements in
conformity with financial reporting standards.

88. which of the following procedures most likely would be included as part of an auditor's tests of
controls?
a. Inspection.
b. Reconciliation.
c. Confirmation.
d. Analytical procedures.
89. An auditor is least likely to test for the internal control that provides for
a. segregation of the functions of recording disbursements and reconciling the bank account.
b. comparison of receiving reports and vendors' invoices with purchase orders.
c. approval of the purchase and sale of marketable securities.
d. classification of revenue and expense transactions by product line.

90. Which of the following is least likely to be evidence the auditor examines to determine whether
operations are in compliance with the internal control structure?
a. Records documenting usage of EDP programs.
b. Canceled supporting documents.
c. Confirmations of accounts receivable.
d. Signatures on authorization forms.

91. In considering the internal control structure, the completion of a questionnaire is most closely
associated with which of the following?
a. Tests of controls.
b. Substantive tests.
c. Analytical procedures.
d. Obtaining and documenting an understanding of the structure design.

92. Which of the following statements regarding auditor documentation of the client's internal control
structure is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable,
d. No one particular form of documentation is necessary, and the extent of documentation may
vary.

93. The reliance placed on substantive tests in relation to the reliance placed on internal control varies
in a relationship that is ordinarily
a. parallel.
b. inverse.
c. direct.
d. equal.

94. Which of the following audit tests would be regarded as a test of a control?
a. Tests of the specific items making up the balance in a given general ledger account.
b. Tests of the inventory pricing to vendors' invoices.
c. Tests of the signatures on canceled checks to board of director's authorizations.
d. Tests of the additions to property, plant, and equipment by physical inspections.

95. Reportable conditions are matters that come to an auditor's attention, which should be
communicated to an entity's audit committee because they represent
a. material irregularities or illegal acts perpetrated by high-level management.
b. significant deficiencies in the design or operation of the internal control structure.
c. flagrant violations of the entity's documented conflict-of- interest policies.
d. intentional attempts by client personnel to limit the scope of the auditors field work.
96. During which phase of an audit examination is the preparation of flowcharts most appropriate?
a. Review of the system of internal accounting control.
b. Tests of compliance with internal accounting control
c. Evaluation of the system of internal administrative control.
d. Analytical review of operations.

97. Effective internal control requires organization independence of departments. Organizational

independence would be impaired in which of the following situations?
a. The internal auditors report to the audit committee of the board of directors.
b. The controller reports to the vice president of production.
c. The payroll accounting department reports to the chief accountant.
d. The cashier report; to the treasurer.

98. Of the following statements about an internal control system, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be property authorized before such transactions are processed.
c. Because of the cost benefit relationship, a client may apply control procedures oa a test
basis.
d. Control procedures reasonably insure that collusion among employees cannot occur.

99. Of the following the best statement of the CPA's primary objective in reviewing internal control is
that the review is intended to provide
a. reasonable protection against client fraud and defalcations by client employees.
b. a basis for reliance the system and determining the scope
of other auditing procedures.
c. a basis for constructive suggestions to the client for improving
d. a method for safeguarding assets, checking the accuracy and reliability of accounting data,
promoting operational efficiency, and encouraging adherence to prescribed managerial
policies.

100. The auditor's study and evaluation of internal control is done for each of the following reasons
except
a. to provide a basis for constructive service suggestions.
b. to aid in determination of the nature, timing, and extent of audit tests.
c. to establish a basis for reliance thereon.
d. to provide training and development for staff accountants.

101. A secondary objective of the auditor's study and evaluation of internal control is that the study
and evaluation provide
a. a basis for constructive suggestions concerning improvements in internal control.
b. a basis for reliance on the system of internal accounting control.
c. an assurance that the records and documents have been maintained in accordance with
existing company policies and procedures.
d. a basis for the determination of the resultant extent of the tests to which auditing procedures
are to be restricted.
102. Internal accounting control comprises the plan of organization and the procedures and records
that are concerned with the safeguarding of assets and the
a. decision processes of management.
b. reliability of financial records.
c. authorization of transactions.
d. achievement of administrative objectives.

103. Which of the following is an invalid concept of internal control?

a. In cases where a person is responsible for all phases of a transaction there should be a
clear designation of that person's responsibility.
b. The recorded accountability for assets should be compared with the existing assets at
reasonable intervals and appropriate action should be taken if there are differences.
c. Accounting control procedures may appropriately be applied on a test basis in some
circumstances.
d. Procedures designed to detect errors and irregularities should be performed by persons
other than those who are in a position to perpetuate them.

104. The normal sequence of documents and operations on a well- prepared systems flowchart is
a. top to bottom and left to right.
b. bottom to top and left to right.
c. top to bottom and right to left.
d. bottom to top and right to left.

105. Which of the following best describes the inherent limitations that should be recognized by an
auditor when considering the potential effectiveness of a system of internal accounting control?
a. Procedures whose effectiveness depends on segregation of duties can be circumvented by
collusion.
b. The competence and integrity of client personnel provides and environment conducive to
accounting control and provides assurance that effective control will be achieved.
c. Procedures designed to assure the execution and record\ng Of transactions in accordance
with proper authorizations are effective against irregularities perpetuated by management
d. The benefits expected to be derived from effective internal accounting control usually do not
exceed the costs of such control.

106. Which of the following is not a medium that can normally be used by an auditor to record
information concerning a client's system of internal accounting control?
a. Narrative memorandum.
b. Procedures manual.
c. Flowchart.
d. Internal control questionnaire.

107. One important reason why a CPA, during the course of an audit engagement, prepares systems
flowcharts is to
a. reduce the need for inquiries of client personnel concerning the operations of the system of
internal accounting control.
 b. depict the organizational structure and document flow in a single chart for review and
references purposes.
c. assemble the internal control findings into a comprehensive format suitable for analysis.
d. prepare documentation that would be useful in the event of a future consulting engagement.

108. Which of the following activities would be least likely to strengthen a company's internal control?
a. Separating accounting form other financial operations.
b. Maintaining insurance for fire and theft.
c. Fixing responsibility for the performance of employee duties.
d. Carefully selecting and training employees.

109. The independent auditor should acquire an understanding of the internal audit function as it
relates to the independent auditor's study and evaluation of internal accounting control because
a. the audit programs, working papers, and reports of internal auditors can often be used as a
substitute for the work of the independent auditor's staff.
b. the procedures performed by the internal audit staff may eliminate tile independent auditor's
need for an extensive study and evaluation of internal control.
c. the work performed by internal auditors may be a factor in determining the nature, timing,
and extent of the independent auditor's procedures.
d. the understanding of the internal audit function is an important substantive test to be
performed by the independent auditor.

110. A system of internal accounting control normally would include procedures that are designed to
provide reasonable assurance that
a. employees act with integrity when performing their assigned
b. transactions are executed in accordance with management's general or specific
authorization.
c. decision processes leading to management's authorization of transactions are sound.
d. collusive activities would be detected by segregation of employee duties.

111. A well-designed system of internal control that is functioning effectively is most likely to detect an
irregularity arising from
a. the fraudulent action of several employees.
b. the fraudulent action of an individual employee.
c. informal deviations from the official organization chart.
d. management fraud.

112. If the independent auditor decides that the work performed by internal auditors may have a
bearing on the independent auditor's own procedures, the independent auditor should consider the
objectivity of the internal auditors. One method of judging objectivity is to
a. review the recommendations made in the reports of internal auditors.
b. examine, on a test basis, documentary evidence of the work performed by internal auditors.
c. inquire of management about the qualifications of the internal audit staff.
d. consider the client's practices for hiring, training, and supervising the internal audit staff.

113. Errors arousing suspicion of fraud should be given greater attention than other errors. This is an
example of the application of
 a. Consistency
b. Materiality
c. Reliability of evidence
d. Relative risk

114. Effective internal control in a small company that has an insufficient number of employees to
permit proper division of responsibilities can best be enhanced by
a. employment of temporary personnel to aid in the separation of duties.
b. direct participation by the owner of the business in the record- keeping activities of the
business.
c. engaging a CPA to perform monthly 'write-up" work.
d. delegation of full, clear-cut responsibility to each employee for the functions assigned to
each.

115. Which of the following would be inappropriate during a preliminary evaluation of the system of
internal control
a. Oral inquiries
b. Use of attribute sampling
c. Review of an accounting manual prepared by the client
d. Completion of an internal control questionnaire

116. George Green, CPA, is preparing a report on internal control. He has already discussed the
internal control weaknesses with the appropriate client officials. During these discussions the client
stated that, given its circumstances, there was no practicable corrective action which could be taken
for one of the major weaknesses and therefore asked that it not be included in Green's report. In the
final analysis, Green concurred that no corrective action by management is practicable. Which of the
following is the most appropriate course of actions or Green to take?
a. He must include this weakness in his report; otherwise, he will be in violation of the
Philippine Standards on Auditing.
b. He may omit this weakness from his report without any further mention.
c. He may omit this weakness from his report but should send a confidential memo to the
Board of Directors pointing out the nature of the weakness and why it was omitted from his
report.
d. He may omit this weakness from his report but should clearly state that the report is
restricted to material weaknesses for which corrective action by management may be
practicable in the circumstances.

117. In a study of the system of internal control the completion of a questionnaire is most closely
associated with which of the following?
a. Separation of duties.
b. Review of the system.
c. Flowchart accuracy.
d. Tests of compliance.

118. The auditor is least concerned with which of the following?

a. Administrative controls.
b. Application controls.
 c. Safeguarding of assets.
d. Access to assets.

119. Internal control can generally be subdivided into administrative controls and accounting controls.
The scope of study and evaluation of internal control contemplated by generally accepted auditing
standards requires the consideration of
a. both administrative controls and accounting controls.
b. administrative controls.
c. accounting controls,
d. accounting controls in an audit engagement and administrative controls in a management
advisory service engagement,

120. Internal administrative control includes the overall plan of organization and the procedures that
are concerned with
a. safeguarding the assets and providing reliable financial records.
b. the decision process leading to management's authorization of transactions.
c. the execution of transactions in accordance with special or general authorization.
d. providing reasonable assurance that access to assets is permitted only in accordance with
management authorization.

121. It is important for the CPA to consider the competence of the audit clients' employees because
their competence bears directly and importantly upon the
a. cost/benefit relationship of the system of internal control.
b. achievement of the objectives of the system of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.

122. Which of the following is not a procedure performed primarily for the purpose of expressing an
opinion on the financial statements, but may bring possible illegal acts to the auditor's attentions?
a. Study and evaluation of internal accounting control.
b. Review of internal administrative control,
c. Tests of transactions.
d. Tests of balances.

123. Internal control is a function of management, and effective control is based upon the concept of
charge and discharge of responsibility and duty. Which of the following is one of the overriding
principles of internal control?
a. Responsibility for accounting and financial duties should be assigned to one responsible
officer.
b. Responsibility for the performance of each duty must be fixed.
c. Responsibility for the accounting duties must be done by the audit committee of the
company.
d. Responsibility for accounting activities and duties must be assigned only to employees who
are bonded.

124. Establishing and maintaining a system of internal control is the responsibility of the
a. Internal auditor
 b. External auditor
c. Management
d. Financial vice-president

125. Transaction authorization within an organization may be either specific or general. An example of
specific authorization is the
a. setting of automatic reorder points for material or merchandise.
b. approval of the purchase of the Company's own capital stock.
c. establishment of requirements to be met in determining a Customer's credit limits.
d. establishment of sales prices for products to be sold to any

126. At which point in an ordinary sales transaction of a wholesaling business is a lack of specific
authorization of least concern to the
a. Granting of credit.
b. Shipment of goods.
c. Determination of discounts.
d. Setting of goods for cash.

127. Of the following statements about an internal control system, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be properly authorized before being processed.
c. Because of cost/benefit considerations, a client may apply control procedures on a test
basis.
d. Control procedures reasonably ensure that no fraudulent activity could occur.

128. Which of the following is not a valid concept of internal control?

a. When one person is responsible for all phases of a transaction, there should be a clear
designation of that person's responsibility.
b. The recorded accountability for assets should be compared with the existing assets at
reasonable intervals and appropriate action should be taken if there are differences.
c. Accounting control procedures may appropriately be applied on a test basis in some
circumstances.
d. Procedures designed to detect errors and irregularities should be performed by persons
other than those who are in a position to perpetuate them.

129. Effective internal control requires organizational independence of departments. Organizational

independence is impaired in which of the following situations?
a. The internal auditors report to the audit committee of the board of directors.
b. The controller reports to the vice-president of sales.
c. The payroll accounting department reports to the chief accountant.
d. The cashier reports to the treasurer.

130. In a small company that employs inadequate number of employees to permit proper division of
responsibilities, effective internal control can best be strengthened by
a. direct participation by the owner of the business in the record keeping activities of the
business.
 b. employment of temporary personnel to aid in the separation of duties.
c. delegation of full clear-cut responsibility to each employee for the functions assigned to
each.
d. affirm in writing management's approval of limitation on the scope of the audit.

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

FRAUD AND ERRORS

131. Which of the following, if material, would be an irregularity?

a. Mistakes in the application of accounting principles:
b. Clerical mistakes in the accounting data underlying the financial statements.
c. Misappropriation of an asset or groups of assets.
d. Misinterpretation of facts that existed when the financial statements were prepared.

132. An error in which an item is posted to the wrong personal account, or the incorrect calculation of
an amount constituting an original entry an
a. error of omission.
c. error of principle.
b. error of commission.
d. counter-balancing error.

133. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts.
a. Misappropriation of goods.
b. Misappropriation of cash.
c. Falsification of accounts.
d. Lapping.

134. The practice of withholding of receipts from customer(s) of one date and giving the customer(s)
credit at a later date out of cash received
a. Lapping.
b. Kiting.
c. Payroll padding.
d. Window dressing.

135. Coverage of shortage in one bank account by means of an unrecorded check drawn on another
bank account is known as
a. Lapping.
b. Kiting.
c. Reconciling.
d. Adjusting.

136. It is any illegal misappropriation of bank funds. Thus a teller who pockets a portion of his receipts
with intent to defraud the bank for the day is guilty of
a. kiting on bank funds.
b. embezzlement.
c. abstraction of bank funds.
d. lapping of bank funds.
137. The independent auditor of 1900 differs from the auditor of today in that the 1900 auditor was
more concerned with the
a. validity of the income statement.
b. determination of fair presentation of financial statements.
c. improvement of accounting systems.
d. detection of irregularities.

138. The auditor, in his plan for an examination in accordance with the Philippine Standards on
Auditing, being influenced by the possibility of material errors will therefore conduct the examination
with an attitude of

a. professional skepticism.
b. subjective mistrust.
c. objective indifference.
d. professional responsiveness.

139. Giving greater attention to errors that arouse suspicion of fraud than other error during the
conduct of an audit is an example of applying the criteria of
a. reliability of evidence.
b. materiality.
c. relative risk.
d. dual-purpose testing.

140. The auditor's responsibility regarding the detection of fraud is best indicated by this statement.
a. The auditor is responsible for the failure to detect fraud only when an adverse opinion is
issued on the financial statements.
b. The auditor is responsible for the failure to detect fraud only when such failure clearly results
from deviations from audit procedures specifically described in the engagement letter.
c. The auditor must extend auditing procedures to actively search for signs or evidence of fraud
in all situations.
d. The auditor must extend auditing procedures to actively search for evidence of fraud where
the examination indicates that fraud may exist.

141. The auditor is responsible for detecting fraud

a. when the fraud did not result from collusion.
b. when third parties are likely to rely on the client's financial statements.
c. when the client's system of internal control is judged by the auditor to be inadequate.
d. when the application of the Philippine Standards on Auditing would have uncovered the
fraud.

142. in connection with the examination of financial statements an independent auditor could be
responsible for failure to detect a material fraud if
a. statistical sampling techniques were not used on the audit
b. the auditor planned the work in a hasty and inefficient manner.
c. accountants performing parts of the work failed to discover a close relationship between the
treasurer and the cashier.
 d. the fraud was perpetrated by one client employee, who circumvented the existing internal
controls.

143. An auditor's examination performed in accordance with auditing standards generally should
a. be expected to provide assurance that illegal acts will be detected where internal control is
effective.
b. be relied upon to disclose violations of truth in lending laws.
c. encompass a plan to actively search for illegalities which related to operating aspects.
d. not be relied upon to provide assurance that illegal acts will be detected.

144. The regular examination of financial statements is not primarily designed to disclose fraud and
other irregularities although their discovery may result. Normal audit procedures are more likely to
detect a fraud arising from
a. forgeries on company checks.
b. failure to record cash receipts for services rendered.
c. theft of inventories.
d. collusion on the part of several employees.

145. Because of his failure to adhere to the Philippine Standards on Auditing in the course of his
examination of the Legacy Commercial, Inca books, the auditor did not detect the embezzlement of
funds by the Company treasurer. To what extent would the auditor be liable to Legacy Commercial for
losses attributable to the theft?
a. He would have no liability, since the ordinary examination cannot be relied upon to detect
defalcation.
b. He would be liable for losses attributable to his negligence.
c. He would have no liability for lack of contractual provision.
d. He would be liable for not discovering the malpractices of the company treasurer.

146. When engaged to prepare unaudited financial statements for a private company, the CPNs
responsibility to detect fraud
a. is limited to informing the client of any matters that come to the auditor's attention which
cause the auditor to believe that an irregularity exists.
b. is the same as the responsibility that exists when the CPA is engaged to perform an audit of
financial statements in accordance with standards of auditing.
c. arises out of the CPNs obligation to apply procedures which are designed to bring to light
indications that a fraud or defalcation may have occurred.
d. does not exist unless an engagement letter is prepared.

147. When the auditor's regular examination leading to an opinion on financial statements discloses
specific circumstances that create suspicion that fraud may exist, and he concludes that the results of
such fraud, if any, could not be so material as to affect the auditor's opinion, he should
a. make a note in the working papers of the possibility of fraud of an immaterial amount so as
to pursue the matter next year.
b. reach an understanding with the client as to whether the auditor or the client, subject to the
auditor's review, is to make the investigation necessary to determine whether fraud has
occurred and, if so, the amount thereof.
 c. refer the matter to the appropriate representatives of the client with the recommendation that
it be pursued to a conclusion.
d. immediately extend audit procedures to determine if fraud has occurred and, if so, the
amount thereof.

148. Which of the following statements best describes the auditor's responsibility with respect to illegal
acts that do not have a material effect on the client's financial statements?
a. Generally, the auditor is under no obligation to notify parties other than personnel within the
client's organization.
b. Generally, the auditor is under an obligation to see that stockholders are notified.
c. Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
d. Generally, the auditor is expected to compel the client to adhere to requirements of the
Labor Code.

149. If, as a result of auditing procedures, an auditor believes that the client may have committed
illegal acts, which of the following actions should be taken immediately by the auditor?
a. Consult with the client's counsel and the auditor's counsel to determine how the suspected
illegal acts will be communicated to the stockholders.
b. Extend normal auditing procedures to ascertain whether the suspected illegal acts may have
a material effect on the financial statements.
c. Inquire of the client's management and consult with the client's legal counsel or other
specialist, as necessary, to obtain an understanding of the nature of the acts and their possible
effects on the financial statements.
d. Notify each member of the audit committee of the board of directors of the nature of the acts
and request that they give guidance with respect to the approach to be taken by the auditor.

150. Generally, the decision to notify parties outside the client's organization regarding an illegal act is
the responsibility of the
a. independent auditor.
b. management.
e. outside legal counsel.
d. internal auditors.

151. An auditor who finds that the client has committed an illegal act would be most likely to withdraw
from the engagement when the
a. illegal act affects the auditor's ability to rely on management representation.
b. illegal act has material financial statement implications.
c. illegal act has received widespread publicity.
d. auditor cannot reasonably estimate the effect of the illegal act on the financial statements.

152. The auditor withdrawing from his audit engagement due to an illegal act committed by client
should
a. notify all parties who may rely upon the company's financial statements of the company's
illegal act.
b. consult with legal counsel as to what other action, if any, should be taken.
 c. return all incriminating evidence and working papers to the client's audit committee for
follow-up.
d. contact the successor auditor to make the successor aware of the possible consequences of
relying on management's representation.

153. An auditor has withdrawn from an audit engagement of a publicly held company after finding
irregularities which may materially affect the financial statements. The auditor should set forth the
reasons and findings in correspondence to the
a. Securities and Exchange Commission.
b. client's legal counsel.
c. stock exchanges where the company's stock is traded.
d. board of directors.

154. An auditor would most likely be concerned with internal control structure policies and procedures
that provide reasonably assurance
a. efficiency of management's decision-making process.
b. appropriate prices the entity should charge for its products.
c. methods of assigning production tasks to employees.
d. entity's ability to process and summarize financial data.

RISK ASSESSMENT PROCEDURES

155. An auditor's primary consideration regarding an entity's internal control structure policies and
procedures is whether the policies and procedures
a. affect the financial statement assertions.
b. prevent management override.
c. relate to the control environment.
d. Reflect management's philosophy and operating style.

156. When considering the internal control structure, an auditor should be aware of the concept of
reasonable assurance, which recognizes that
a. procedures requiring segregation of duties may be circumvented by employee collusion and
management override.
b. establishing and maintaining the internal control structure is an important responsibility of
management.
c. the cost of an entity's internal control structure should not exceed the benefits expected to be
derived.
d. adequate safeguards over access to assets and records should permit an entity to maintain
proper accountability.

157. Which of the following factors are included in an entity's control environment?
Audit Internal audit Organizational
Committee function structure
a. Yes Yes No
b. Yes No yes
c. No Yes yes
d. Yes Yes yes
158. All of the following are elements of an entity's internal control structure, except?
a. Control risk.
b. Control procedures.
c. The accounting system.
d. The control environment.

159. As part of understanding the internal control structure, an auditor is not required to
a. consider factors that affect the risk of material misstatement.
b. ascertain whether internal control structure policies and procedures have been places in
operation.
c. identify the types of potential misstatements that can occur.
d. obtain knowledge about the operating effectiveness of the internal control structure.

160. In an audit of financial statements in accordance with generally accepted auditing standards, an
auditor .is required to
a. perform tests of controls to evaluate the effectiveness of the entity's accounting system.
b. determine whether control procedures are suitably designed to prevent or detect material
misstatements.
c. document the auditor's understanding of the entity's internal control structure.
d. search for significant deficiencies in the operation of the internal control structure.

161. Decision tables differ from program flowcharts in that decision tables
a. ease of manageability for complex programs.
b. logical relationships among conditions and actions.
c. cost benefit factors justifying the program.
d, the sequence in which operations are performed.

162. During consideration of the internal control structure in a financial statement audit, an auditor is
not obligated to
a. search for significant deficiencies in the operation of the internal control structure.
b. understand the internal control environment and the accounting system.
c. determine whether the control procedures relevant to audit planning have been placed in
operation.
d. perform procedures to understand the design of the internal control structure policies.

163. The primary objective of procedures performed to obtain an understanding of the internal control
structure is to provide an auditor with
a. a basis for modifying tests of controls.
b. an evaluation of the consistency of application of management's policies.
c. knowledge necessary for audit planning.
d. evidential matter to use in assessing inherent risk.

164. During which phase of an audit examination is the preparation of flowcharts most appropriate?
a. Review of the system of internal accounting control
 b. Test of compliance with internal accounting control procedures
c. Evaluation of the system of internal administrative controls
d. Analytic review of operations

165. Which of the following is not a reason an auditor should obtain an understanding of the elements
of an entity's internal control structure in planning an audit?
a. Identify the types of potential misstatements that can occur.
b. Design substantive tests.
c. Consider the operating effectiveness of the internal control structure.
d. Consider factors that affect the risk of material misstatements,

166. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
risk that
a. specified controls requiring segregation of duties may be circumvented by collusion.
b. entity policies may be overridden by senior management.
c. tests of controls may fail to identify procedures relevant to assertions.
d. material misstatements may exist in the financial statements.

167. When an auditor increases the planned assessed level of control risk because certain control
procedures were determined to be ineffective, the auditor would most likely increase the
a. extent of tests of details.
b. level of inherent risk.
c. extent of tests of controls.
d. level of detection risk.

168. After obtaining an understanding of the internal control structure and assessing control risk of an
entity an auditor decided not to perform tests of controls. The auditor most likely decided that
a. the available evidential matter obtained through tests of controls would not support an
increased level of control risk.
b. a reduction in the assessed level of control risk is justified for certain financial statement
assertions.
c. it would be inefficient to perform tests of controls that would result in a reduction in planned
substantive tests.
d. the assessed level of inherent risk exceeded the assessed level of control risk.

169. An auditor assessed control risk because it

a. indicates where inherent risk may be the greatest.
b. affects the level of detection risk the auditor may accept.
c. determines whether sampling risk is sufficiently low.
d. includes the aspects of non-sampling risk that are controllable.

170. When control risk is assessed at the maximum level for all financial statement assertions, an
auditor should document the auditor's
Understanding Conclusion Basis for
of the entity's that control concluding
internal control risk is at the that control
 structure maximum level risk is at
elements the maximum

a. Yes No No
b. Yes Yes No
c. No Yes Yes
d. Yes Yes Yes

171. Which of the following types of evidence would an auditor most likely examine to determine
whether internal control structure policies and procedures are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys' responses to the auditor's inquiries.
d. Client records documenting the use of EDP programs.

172. For certain controls, such as segregation of duties, documentary evidence may not exist. An
auditor would most likely test the procedures by
a. re-performance and corroboration.
b. observation and inquiry.
c. inspection and vouching.
d. confirmation and recomputation.

173. Which of the following is not a step in an auditor's decision to assess control risk at below the
maximum?
a. Evaluate the effectiveness of the internal control procedures with tests of controls.
b. Obtain an understanding of the entity's accounting system and control environment:
c. Perform tests of details of transactions to detect material misstatements in the financial
statements.
d. Consider whether control procedures can have a pervasive effect on financial statement
assertions.

174. The objective of tests of details of transactions performed as tests of Controls is to

a. detect material misstatements in the account balances of the financial statements.
b. evaluate whether an internal control structure policy or procedure operated effectively.
c. determine the nature, timing, and extent of substantive tests for financial statement
assertions.
d. reduce control risk, inherent risk, and detection risk to an acceptably low level.

175. Which of the following audit techniques most likely would provide an auditor with the most
assurance about the effectiveness of the operation of an internal control procedure?
a. Inquiry of client personnel.
b. Recomputation of account balance amounts.
c. Observation of client personnel.
d. Confirmation with outside parties.

176, Which of the following procedures most likely would be included as part of an auditor's tests of
controls?
 a. Inspection.
b. Reconciliation.
c. Confirmation.
d. Analytical procedures.

177. Which of the following is least likely to be evidence the auditor examines to determine whether
operations are in compliance with the internal control structure?
a. Records documenting usage of EDP programs.
b. Canceled supporting documents.
c. Confirmations of accounts receivable.
d. Signatures on authorization forms.

178. An auditor uses the knowledge provided by the understanding of the internal control structure and
the assessed level of control risk primarily to
a. determine whether procedures and records concerning the safeguarding of assets are
reliable.
b. ascertain whether the opportunities to allow any person to both perpetrate and conceal
irregularities are minimized.
c. modify the initial assessments of inherent risk and preliminary judgments about materiality
levels.
d. determine the nature, timing, and extent of substantive tests for financial statement
assertions.

179. An auditor may compensate for a weakness in the internal control structure by increasing the
a. level of detection risk.
b. extent of tests of controls.
c. preliminary judgment about audit risk.
d. extent of analytical procedures.

180. Relationship between control risk and detection risk is ordinarily

a. parallel.
b. inverse.
c. direct.
d. equal.

181. An on-line sales order processing system most likely would have an advantage over a batch
sales order processing system by
a. detecting errors in the data entry process more easily by the
b. enabling shipment of customer orders to be initiated as soon as the orders are received.
c. recording more secure backup copies of the data base on magnetic tape files.
d. maintaining more accurate records of customer accounts and finished goods inventories.

182. Which of the following controls most likely would help ensure that all credit sales transactions of
an entity are recorded?
a. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account balances.
 b. The accounting department supervisor independently reconciles the accounts receivable
subsidiary ledger to the accounts receivable control account monthly.
c. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with entries in
the sales journal.

183. An entity with a large volume of customer remittances by mail could most likely reduce the risk of
employee misappropriation of cash by using
a. employee fidelity bonds.
b. independently prepared mailroom prelists.
c. daily cheek summaries.
d. a bank lockbox system.

184. When the shipping department returns non-conforming goods to a vendor, the purchasing
department should send to the accounting
a. unpaid voucher.
b. debit memo,
c. vendor invoice.
d. credit memo.

185, Which of the following controls most likely would be effective in off setting the tendency of sales
personnel to maximize sales volume at the expense of high bad write-offs?
a. Employees responsible for authorizing sales and bad debt write-offs are denied access to
cash.
b. Shipping documents and sales invoices are matched by an employee who does not have
authority to write off bad debts.
c. Employees involved in the credit-granting function are separated from the sales function.
d. Subsidiary accounts receivable records are reconciled to the control account by an
employee independent of the authorization of credit.

186. Immediately upon receipt of cash, a responsible employee should

a. record the amount in the cash receipts journal.
b. prepare a remittance listing.
c. update the subsidiary accounts receivable records.
d. prepare a deposit slip in triplicate.

187. Proper authorization procedures in the revenue cycle usually provide for the approval of bad debt
write-offs by an employee in which of the following department?
a. Treasurer.
b. Sales.
c. Billing.
d. Accounts receivable.

188. Employees bond employees who handle cash receipts because fidelity bonds reduce the
possibility of employing dishonest individuals and
 a. protect employees who make unintentional errors from possible monetary damages resulting
from their errors.
b. deter dishonesty by making employees aware that insurance companies may investigate
and prosecute dishonest acts.
c. facilitate an independent monitoring of the receiving and depositing of cash receipts.
d. Force employees in positions of trust to take periodic vacations and rotate their assigned
duties.

189. During the review of a small business client's internal control structure, the auditor discovered
that the accounts receivable clerk approves credit memos and has access to cash. Which of the
following controls would be most effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the Checking
accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount
shown in the ledger.

190. An auditor selects a sample from the file of shipping documents to determine whether invoices
were prepared. This test is performed to satisfy the audit objective of
a, Accuracy.
b. Completeness.
c, Control.
d. Existence.

191. When a customer fails to include a remittance advice with a payment, it is common practice for
the person opening the mail to prepare one. Consequently, mail should be opened by which of the
following four company employees?
a. Credit manager.
b. Receptionist.
c. Sales manager.
d. Accounts receivable clerk.

192. Ari entity's internal control structure requires for every check request that there be an approved
voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To
determine whether checks are being issued for unauthorized expenditures, an auditor most likely
would select items for testing from the population
of all
a. purchase orders.
b. canceled checks.
c. receiving reports.
d. approved vouchers.

193. Mailing disbursement checks and remittance advises should be controlled by the employee who
a, approves the vouchers for payment.
b. matches the receiving reports, purchase orders, and vendors' invoices.
c. maintains possession of the mechanical check-signing device.
 d. signs the checks last.

194. Which of the following questions would most likely be included in an internal control questionnaire
concerning the completeness assertion for purchases?
a. Is an authorized purchase order required before the receiving department can accept a
shipment or the vouchers payable department can record a voucher?
b. Are purchase requisitions prenumbered and independently matched with vendor invoices?
c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who
does not have access to purchase requisitions?
d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically
accounted for?

195. For effective internal control, the accounts payable department generally should
a. obliterate the quantity ordered on the receiving department copy of the purchase order.
b. establish the agreement of the vendor's invoice with the receiving report and purchase order.
c. stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
d. ascertain that each requisition is approved as to price, quantity, and quality by an authorized
employee.

196. Internal control is strengthened when the quantity of merchandise ordered is omitted from the
copy of the purchase order sent to the
a. department that initiated the requisition.
b. receiving department.
c. purchasing agent.
d. accounts payable department.

197. A client erroneously recorded a large purchase twice. Which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger
d. Sending written quarterly confirmations to all vendors.

198. Periodic or cycle counts of selected inventory items are made at various times during the year
rather than a single inventory count at year end. Which of the following is necessary if the auditor
plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

199. Which of the following control procedures most likely would assist in reducing control risk related
to the existence or occurrence of manufacturing transactions?
a. perpetual inventory records are independently compared with goods on hand.
b. Forms used for direct material requisitions are prenumbered and accounted for.
c. Finished goods are stored in locked limited-access warehouses.
d. Subsidiary ledgers are periodically reconciled with inventory control accounts.
200. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level
of control risk is high, an auditor would probably
a. Insist that the client perform physical counts of inventory items several times during the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls of the inventory cycle.
d. Request the client to schedule the physical inventory count at the end of the year.

201. Which of the following internal control procedures most likely addresses the completeness
assertion for inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting
personnel.

202. Sound internal control procedures dictate that defective returned by customers should be
presented initially to the
a. sales clerk.
b. purchasing clerk.
c. receiving clerk.
d. inventory control risk.

203. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal controls over the invoicing function allow goods to be shipped that are not invoiced. The
inadequate controls could cause an
a. understatement of revenues, receivables, and inventory.
b. overstatement of revenues and receivables, and an understatement of inventory.
c. understatement of revenues and receivables, and an overstatement of inventory.
d. overstatement of revenues, receivables, and inventory.

204. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
a. Inventory items had been counted but the tags placed on the items had not been taken off
the items and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer's books for several items returned to its
suppliers.
d. An item purchased "FOB shipping point” had not arrived at the date of the inventory count
and had not been reflected in the perpetual records.

205. Which of the following is a question that the auditor would expect to find on the production cycle
section of an internal control questionnaire?
a. Are vendors' invoices for raw materials approved for payment by an employee who is
independent of the cash disbursements function?
b. Are signed checks for the purchase of raw materials mailed directly after signing without
returned to the person who authorized the invoice processing?
 c. Are all releases by storekeepers of raw materials from storage based on approved
requisition documents?
d. Are details of individual disbursements for raw materials balanced with the total to be posted
to the appropriate general ledger account?

206. Which of the following procedures most likely would be considered a weakness in an entity(s
internal controls over payroll?
a. A voucher for the amount of the payroll is prepared in the general accounting department
based on the payroll department's payroll summary.
b. Payroll checks are prepared by the payroll department and signed by the treasurer.
c. The employee who distributes payroll checks returns unclaimed Payroll checks to the payroll
department.
d. The personnel department sends employees' termination notices to the payroll department.

207. In meeting the control objective of safeguarding of assets, which department should be
responsible for
Distribution Custody of
Of paychecks unclaimed
paychecks
a. Treasurer Treasurer
b. Payroll Treasurer
c. Treasurer Payroll
d. Payroll Payroll

208. The sampling unit in a-test of controls pertaining to the existence of payroll transactions ordinarily
is a(an)
a. clock card or time ticket.
b. employee form W-2.
c. employee personnel record.
d. payroll register entry.

209. Proper internal control over the cash payroll function would mandate which of the following?
a. The payroll clerk should fill the envelopes with cash and a computation of the net wages.
b. Unclaimed pay envelopes should be retained by the paymaster.
c. Each employee should be asked to sign a receipt.
d. A separate checking account for payroll be maintained.

210. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the
a. Authorization of transactions from the custody of related assets.
b. Operational responsibility from the record-keeping responsibility.
c. Human resources function from the controllership function.
d. Administrative controls from the internal counting controls.

211. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. deposited in a safe deposit box.
b. held by the payroll custodian.
 c. deposited in a special bank account.
d. held by the controller.

212. The auditor may observe the distribution of paychecks to ascertain whether
a. pay-rate authorization is properly separated from the operating function.
b. deductions from gross pay are calculated correctly and are properly authorized.
c. employees of record actually exist and are employed by the client.
d. paychecks agree with the payroll register and the time cards.

213. The primary responsibility of a bank acting as registrar of capital stock is to

a. ascertain that dividends declared do not exceed the statutory amount allowable in the state
of incorporation.
b. account for stock certificates by comparing the total shares outstanding to the total in the
shareholders subsidiary ledger.
c. act as an independent third party between the board of directors and outside investors
concerning mergers, acquisitions, and the sale of treasury stock.
d. verify that stock is issued in accordance with the authorization of the board of directors and
the articles of incorporation.

214. Which of the following controls would be most effective in assuring that the proper custody of
assets in the investing cycle is maintained?
a. Direct access to securities in the safety deposit box is limited to only one corporate officer.
b. Personnel who post investment transactions to the general ledger are not permitted to
update the investment subsidiary ledger.
c. The purchase and sale of investments are executed on the specific authorization of the
board of directors.
d. The recorded balances in the investment subsidiary ledger are periodically compared with
the contents of the safety deposit box by independent personnel.

215. Where no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. be defaced to prevent reissuance and attached to their corresponding stubs.
b. not be defaced but segregated from other stock certificates and retained in a canceled
certificates file.
c. be destroyed to prevent fraudulent reissuance.
d. be defaced and sent to the secretary of state.

216. A company holds bearer bonds as a short-term investment. Responsibility for custody of these
bonds and submission of coupons for periodic interest collections probably should be delegated to the
a. chief accountant.
b. internal auditor.
c. cashier.
d. treasurer.

217. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs
a. analytical procedures for property and equipment balances at the end of the year.
 b. tests of controls and extensive tests of property and equipment balances at the end of the
year.
c. analytical procedures for current year property and equipment
d. tests of controls and limited tests of current year property and equipment transactions.

218. Which of the following controls would an entity most likely use in safeguarding against the joss of
marketable securities?
a. An independent trust company that has no direct contact with the employees who have
record-keeping responsibilities has possession of the securities.
b. The internal auditor verifies the marketable securities in the entity's safe each year on the
balance sheet date.
c. The independent auditor traces all purchases and sales of marketable securities through the
subsidiary ledgers to the general ledger.
d. A designated member of the board of directors controls the securities in a bank safe-deposit
box.

219. In general, material irregularities perpetrated by which of the following are most difficult to detect?
a. Cashier.
b. Key-punch operator.
c. Internal auditor.
d. Controller.

220. Which of the following statements is correct concerning reportable conditions noted in an audit?
a. Reportable conditions are material weaknesses in the design or operation of specific internal
control structure elements.
b. The auditor is obligated to search for reportable conditions that could adversely affect the
entity's ability to record and report financial data.
c. Reportable conditions should be recommunicated each year, even if management has
acknowledged its understanding of such deficiencies.
d. The auditor may separately communicate those reportable conditions considered to be
material weaknesses.

221. Which of the following representations should not be included in a report On internal control
structure related matters noted in an audit?
a. Reportable conditions related to the internal control structure design exist, but none is
deemed to be a material weakness.
b. There are no Significant deficiencies in the design or operation of the internal control
structure.
c. Corrective follow-up action is recommended due to the relative significance of material
weaknesses discovered during
d. The auditor's consideration of the internal control structure would not necessarily disclose all
reportable conditions that exist.

222. Which of the following matters is an auditor required to communicate to an entity's audit
committee?
l. Disagreements with management about matters significant to the entity's financial statements that
have been satisfactorily resolved.
ll. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance.
a. I only.
b. Il only.
c. Both I and ll.
d. Neither I nor ll.

223. Which of the following statements concerning an auditor's communication of reportable conditions
is correct?
a. The auditor should request a meeting with management one level above the source of the
reportable conditions to discuss suggestions for remedial action.
b. An report issued on reportable conditions should indicate that providing assurance on the
internal control structure was not the purpose of the audit.
c. Reportable conditions discovered and communicated at an interim date should be
reexamined with tests of controls before completing the engagement.
d. Suggestions concerning administration efficiencies and business strategies should not be
communicated in the same report with reportable conditions.

224. Should an auditor communicate the following matters to an audit committee of a public entry?
Significant audit Management's consultation with other
Adjustments recorded Accountants about significant
By the entity Accounting matters
a. Yes Yes
b. Yes No
c. No Yes
d. No No

225. When reporting on conditions relating to an entity’s Internal control structure observed during an
audit of the statements, the auditor should include a
a. description of tests performed to search for material weaknesses.
b. statement of a positive assurance on the structure.
c. paragraph describing the inherent limitations of the structure.
d. restriction on the distribution of the report

226. A previously communicated reportable condition that has not been corrected, ordinarily should be
communicated again if
a. the deficiency has a material effect on the auditor's assessment of control risk,
b. the entity accepts that the degree of risk because of cost- benefit considerations.
c. the weakness could adversely affect the entity's ability to report financial data.
d. there has been major turnover in upper-level management and the board of directors.

227. Which of the following statements concerning material weaknesses and reportable conditions is
correct?
a. An auditor should identify and communicate material weaknesses separately from reportable
conditions.
b. All material weaknesses are reportable conditions.
c. An auditor should report immediately material weaknesses and reportable conditions
discovered during an audit.
 d. All reportable conditions are material weaknesses.

228. Reportable conditions are matters that come to an auditor's attention that should be
communicated to an entity's audit committee because they represent
a. manipulation or falsification of accounting records or documents from which financial
statements are prepared.
b. disclosures of information that significantly contradict the auditor's going concern
assumption.
c. material irregularities or illegal acts perpetrated by high-level management.
d. significant deficiencies in the design or operation of the internal control structure.

229. What is the continuing auditor's obligation concerning the discovery at an interim date of a
reportable condition related to internal control?
a. The auditor should communicate this condition to the client immediately because the
discovery of such condition in internal control is the purpose of a review of interim financial
b. The auditor need not communicate this condition to the client.
c. The auditor should communicate this condition to the client following completion of the
examination unless the auditor decides to communicate it to the client at the interim date.
d. The auditor should extend the audit procedures to investigate whether this condition had any
effect on the prior year's financial statements.

230. During the audit the independent auditor identified the existence of a weakness in the client's
internal controls and orally communicated this finding to the client's senior management and audit
committee. The auditor should
a. consider the weakness a scope limitation and therefore disclaim an opinion.
b. document the matter in the working papers and consider the effects of the condition on the
audit.
c. suspend all audit activities pending directions from the client's audit committee.
d. withdraw from the management.

231. An engagement to express an opinion on a system of internal accounting control will generally
a. require procedures that duplicate those already applied in assessing control risk during a
financial statement audit.
b. increase the reliability of the financial statements that have already been audited.
c. be more extensive in scope than the assessment of control risk made during a financial
statement audit.
d. be more limited in scope than the assessment of control risk made during a financial
statement audit.

232. How do the scope, procedures, and purpose of an engagement to express an opinion on an
entity's system of internal accounting control compare to those for obtaining an understanding of the
internal control structure and assessing control risk as part of an audit?
Scope Procedures Purpose
a. Similar Different Similar
b. Different Similar Similar
c. Different Different Different
d. Different Similar Different
233. When an independent auditor reports on internal control based on criteria established by
governmental agencies, the report should
a. note include the agency's name in the report.
b. indicate matters covered by the study and whether the auditor's study included tests of
controls with the procedures covered by the study.
c. not express a conclusion based on the agency's criteria.
d. assume responsibility for the comprehensiveness of the criteria established by the agency
and include recommendations for corrective action.

234. If the independent auditors decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditor's
a. competence and objectivity.
b. efficiency and experience.
c. independence and review skills.
d. training and supervisory skills.

235. When assessing an internal auditor's objectivity, an independent auditor should

a. evaluate the adequacy of the internal auditor's audit programs.
b. inquire about the internal auditor's educational background and professional certification.
c. consider the organizational level to which the auditor reports
d. review the internal auditor's working papers.

236. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
a. factors that raise doubts about the auditability of the financial statement
b. operating effectiveness of internal control policies and procedures.
c. risk that material misstatements exist in the financial statements.
d. possibility that the nature and extent of substantive tests may

237. When an auditor assesses control risk below the maximum level, the auditor is required to
document the auditor's
Basis for Understanding
Concluding of the entity's
that control internal control
risk is below the structure
maximum level elements
a. No no
b. Yes yes
c. yes No
d. No Yes

238. Audit evidence concerning segregation of duties ordinarily is best obtained by

a. performing tests of transactions that corroborate management's financial statement
assertions.
b. observing the employees as they apply control procedures.
c. obtaining a flowchart of activities performed by available personnel.
d. developing audit objectives that reduce control risk.
239. In obtaining an understanding of an entity's internal control structure, an auditor is required to
obtain knowledge about the
Operating
effectiveness of
policies and Design of policies
procedures and procedures
a. Yes Yes
b. No Yes
c. Yes No
d. No No

240. Assessing control risk at below the maximum most likely would involve
a. changing the timing of substantive tests by omitting interim- date testing and performing the
tests at year end.
b. identifying specific internal control structure policies and procedures relevant to specific
assertions.
c. performing more extensive substantive tests with larger sample sizes than originally planned.
d. reducing inherent risk for most of the assertions relevant to significant account balances.

241. Which of the following internal control procedures most likely would deter lapping of collections
from customers?
a. Independent internal verification of dates of entry in the cash receipts journal with dates of
daily cash summaries.
b. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit
approval.
c. Segregation of duties between receiving cash and posting the accounts receivable ledger.
d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal
entries.

242. Which of the following most likely would be the result of ineffective internal control policies and
procedures in the revenue cycle?
a. Final authorization of credit memos by personnel in the sates department could permit an
employee defalcation scheme.
b. Fictitious transactions could be recorded, causing an understatement of revenues and an
overstatement of receivables.
c. Irregularities in recording transactions in the subsidiary accounts could result in a delay in
goods shipped.
d. Omission of shipping documents could go undetected, causing an understatement of
inventory.

243. The authority to accept incoming goods in receiving should be based on a(an)
a. vendor's invoice.
b. materials requisition.
c. bill of lading.
d. approved purchase order.
244. In a well-designed internal control structure, the same employee may be permitted to
a. mail signed checks, and also cancel supporting documents.
b. prepare receiving reports, and also approve purchase orders.
c. approve vouchers for payment, and also have access to unused purchase orders.
d. mail signed checks, and also prepare bank reconciliations.

245. Which of the following internal control procedures most likely would justify a reduced assessed
level of control risk concerning plant and equipment acquisitions?
a. Periodic physical inspection of plant and equipment by the internal audit staff.
b. Comparison of current-year plant and equipment account balances with prior-year actual
balances.
c. The review of prenumbered purchase orders to detect unrecorded trade-ins.
d. Approval of periodic depreciation entries by a supervisor independent of the accounting
department.

246. Which of the following procedures most likely would give the greatest assurance that securities
held as investments are safeguarded?
a. There is no access to securities between the year end and the date of the auditor's security
count.
b. Proceeds from the sale of investments are received by an employee who does not have
access to securities.
c. Investment acquisitions are authorized by a member of the Board of Directors before
execution.
d. Access to securities requires the signatures and presence of two designated officials.

COMMUNICATING WITH THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT

247. A letter issued on reportable conditions relating to an entity's internal control structure observed
during an audit of financial statements should include a
a. restriction on the distribution of the report.
b. description of tests performed to search for material weaknesses.
c. statement of compliance with applicable laws and regulations.
d. paragraph describing management's evaluation of the effectiveness of the control structure.

248. Which of the following statements is correct concerning an auditor's required communication with
an entity's audit committee?
a. This communication should include disagreements with management about significant audit
adjustments, whether or not satisfactorily resolved.
b. If matters are communicated orally, it is necessary to repeat the communication of recurring
matters each year.
c. If matters are communicated in writing, the report is required to be distributed to both the
audit committee and management.
d. This communication is required to occur before the auditor's report on the financial
statements is issued.

249. When communicating internal control structure related matters noted in an audit, an auditor's
report issued on reportable conditions should indicate that
 a. errors or irregularities may occur and not be detected because there are inherent limitations
in any internal control structure.
b. the issuance of an unmodified opinion on the financial statements may be dependent on
corrective follow-up action.
c. the deficiencies noted were not detected within a timely period by employees in the normal
course of performing their assigned functions.
d. the purpose of the audit was to report on the financial statements and not to provide
assurance on the internal control structure.

250. An auditor is obligated to communicate a proposed audit adjustment to an entity's audit

committee only if the adjustment
a. has not been recorded before the end of the auditor's field work.
b. has a significant effect on the entity's financial reporting process.
c. is a recurring matter that was proposed to management the prior year.
d. results from the correction of a prior period's departure from financial reporting standards.

IV. AUDIT OBJECTIVES, PROCEDURES, EVIDENCES AND

DOCUMENTATION
1. The objective of the ordinary examination by the independent auditor is the expression of an opinion
on
a. the accuracy of the financial statements.
b. the balance sheet and income statement.
c. the fairness of the financial statements.
d. the annual report.

2. The auditor has considerable responsibility for notifying users as to whether or not the statements
are properly stated, This responsibility imposes upon the auditor a duty to
a. be an insurer of the fairness in the statements.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial statements.
d. provide reasonable assurance that material misstatements will be detected.

3. The responsibility for adopting sound accounting policies, maintaining an adequate internal control
structure, and making fair representations in the financial statements rests
a. with management.
b. with the independent auditor.
c. equally with management and the auditor.
d. with the internal audit department.

4. "The auditor should not assume that management is dishonest, but the possibility of dishonesty
must be considered". This is an example of
a. unprofessional behavior.
b. an attitude of professional skepticism.
 c. due diligence.
d. a rule in the Code of Ethics for Professional Accountants.

5. If the auditor were responsible for making certain that all the assertions of management in the
statements were correct.
a. bankruptcies could no longer occur.
b. bankruptcies would be reduced to a very small number.
c. audits would be much easier to complete.
d. audits would not be economically feasible.

6. The auditor's best defense when immaterial misstatements in the financial statements are not
uncovered in the audit is that
a. the audit was conducted in accordance with financial reporting standards.
b. client is guilty of contributory negligence.
c. the audit was conducted in accordance with standards on auditing.
d. the financial statements are client's responsibility.

7. The factor which distinguishes an error from an irregularity is

a. materiality.
b. intent.
c. whether it is a peso amount or a process.
d. whether it is a caused by the auditor or the client.

8. Which of the following statement is true?

a. It is usually easier the auditor to uncover irregularities than errors.
b. It is usually easier for the auditor to uncover errors than irregularities.
c. It is usually equally difficult for the auditor to uncover errors or irregularities.
d. Usually, none of the above statements is true.

9. Fraudulent financial reporting is often called

a. management fraud.
b. theft of assets.
c. defalcation.
d. employee fraud.

10. In distinguishing between the detection of a material management fraud and an equally material
error, audits
a. should be expected to provide the same degree of assurance.
b. cannot be expected to provide the same degree of assurance.
c. provide an assurance of detecting either.
d. should provide complete assurance of detection.

11. Should the auditor uncover circumstances during the audit that may cause suspicions of
management fraud, the auditor must
a. issue an adverse opinion.
b. issue a disclaimer.
c. evaluate their implications and consider the need to modify audit evidence.
 d. withdraw from the engagement.

12. When comparing the auditors responsibility for detecting employee fraud and for detecting errors,
the profession has placed the responsibility
a. more on discovering errors than employee fraud.
b. more on discovering employee fraud than fraud.
c. equally on discovering either one.
d. on the senior auditor for detecting errors and on the manager for detecting employee fraud.

13. If there is fraud involving the collusion of several employees that includes the falsification of
documents, the chance that such a fraud would be uncovered in a normal audit is
a. zero.
b. unlikely.
c. 50-50.
d. very high.

14. Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
a. no assurance that they will be detected.
b. the same reasonable assurance provided for other items.
c. assurance that they will be detected, if material.
d. assurance they will be detected, if highly material.

15. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor
should
a. make inquiries of management regarding their policies and regarding their knowledge of
violations, and then rely on normal audit procedures to detect errors, irregularities, and
illegalities.
b. still include some audit procedures designed specifically to uncover illegalities.
c. ignore the topic.
d. include audit procedures which have a strong probability Of detecting illegal acts.

16. When the auditor believes an illegal act may have occurred, it is
a. inquire of management, at a level above-those likely to be involved with the illegality.
b. consult with the client's legal counsel.
c. consider accumulating additional evidence to determine if there is actually an illegal act.
d. do all three of the above.

17. When the auditor knows that an illegal act has occurred, the auditor must
a. issue an adverse opinion.
b. withdraw from the engagement.
c. consider the effects on the financial statements, including the adequacy of disclosure.
d. report it to the proper governmental authorities.

18. The cycle approach to segmenting an audit requires that

a. the client's natural business cycle or year be the primary consideration in planning the audit.
b. closely related transactions and account balances be kept in the same segment.
c. every account balance on the financial statements must be treated as a separate segment.
 d. two different audit teams will cycle between assignments to ensure that the firm has an
unbiased view of the client's records.

19. In describing the Cycle Approach to segmenting an audit, which of the following statements is not
true?
a. All general ledger accounts and journals are included at least once.
b. Some journals and general ledger accounts are included in more than one cycle.
c. The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods
and services and payment" cycle.
d. The "inventory and warehousing" cycle may be audited at any time during the engagement
since it is unrelated to the other cycles.

20. The most important general ledger account included in and affecting several cycles is the
a. general cash account.
b. Inventory account
c. income tax expense and liability accounts.
d. retained earnings account.

21. when using the cycle approach to segmenting the audit, the reason for treating capital acquisition
and repayment separately from the acquisition of goods and services is that
a. the transactions are related to financing a company rather than to its operations.
b. most capital acquisition and repayment cycle accounts involve few transactions, but each is
often highly material and therefore should be audited extensively.
c. both "a" and "b" above.
d. neither "a" nor "b" above.

22. Transaction cycles begin and end

a. at the beginning and end of the fiscal period,
b. at the balance sheet date.
c. at January 1 and December 31.
d. at the origin and final disposition of the company.

23. For the most part, auditors treat each transaction cycle
a. separately as the audit is being performed.
b. as an interrelated unit with the other cycles throughout the entire audit.
c. as a separate business unit with different audit teams.
d. as a joint venture with other clients in the same industry.

24. Management assertions are

a. stated in the footnotes to the financial statements.
b. implied or expressed representations about the accounts in the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the Assertions Letter, but are not disclosed on the financial
statements.

25. Management assertions are

a. directly related to standards on auditing.
 b. directly related to financial reporting standards.
c. indirectly related to standards on auditing.
d. indirectly related to financial reporting standards.

26. Which of the following statements is not correct?

a. It would be a violation of the completeness assertion if management .would record a sale
that did not take place.
b. The completeness assertion deals with matters opposite from those of the
existence/occurrence assertion.
c. The completeness assertion is concerned with the possibility of omitting items from the
financial statements that should have been included.
d. The existence/occurrence assertion is concerned with inclusion of amount that should not
have been.

27. Which of the following statements is not true?

a. An example of a completeness assertion would be that notes payable in the balance sheet
includes all such obligations of the entity.
b. An example of an existence/occurrence assertion would be that sales in the income
statement represent exchanges of goods or services that actually took place.
c. An example of a rights/obligations assertion would be that amounts capitalized for leases in
the balance sheet represent the cost of the entity's rights to eased property.
d. An example of a valuation/allocation assertion would be that property, plant, and equipment
is recorded at current market value.

28. Which of the following statements is true?

a. The auditor's objectives follow and are closely related to management assertions.
b. Management's assertions follow and are closely related to the auditor's objectives.
c. The auditor's primary responsibility is to find and disclose fraudulent management
assertions.
d. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.

29. Which of the following statements is true?

a. The evidence which the auditor accumulates remains the same from audit to audit, but the
general audit objectives vary, depending on the circumstances.
b. The general audit objectives remain the same from audit to audit, but the evidence varies,
depending on the circumstances.
c. The circumstances may vary from audit to audit, but the evidence accumulated remains the
same.
d. The general audit objectives may vary from audit to audit, but the circumstance remain the
same.

30. A distinction must be made between general audit objectives and specific audit objectives for each
account balance.
a. The general audit objectives are applicable to every account balance on the financial
statements.
 b. The specific audit objectives are applicable to every account balances on the financial
statements.
c. The general audit objectives are stated in terms tailored to the engagement.
d. The specific audit objectives are stated in terms tailored to the agreement

31. The general audit objectives of validity and completeness emphasize opposite audit concerns.
a. validity deals with potential overstatement and completeness deals with understatement.
b. validity deals with potential understatement and completeness deals with overstatement.
c. validity and completeness may each deal with overstatements or understatements, but not in
the same transaction.
d. validity always deals with overstatements but completeness may deal with either over or
understatements.

32. Which of the following is not a proper match of auditor's objective with management's assertion?
a. validity matches with existence/occurrence.
b. completeness matches with completeness.
c. ownership matches with rights and obligations.
d. classification matches with presentation.

33. In testing for cutoff, the objective is to determine

a. whether all of the current period's transactions are recorded.
b. that no transactions from the prior period are included in the current period's balances.
c. that no transactions of the current period have been delayed and recorded in a future period.
d. whether transactions are recorded in the proper period.

34. The mechanical accuracy objective is not concerned that the details in the account balance
a. agree with related subsidiary ledger amounts.
b. are properly disclosed, in accordance with PFRS.
c. foot to the total in the account balance.
d. agree with the total in the general ledger.

35. The disclosure objective is concerned that

a. the account balance is presented on the financial statements.
b. disclosure requirements are properly presented on the financial statement snd in the
footnotes.
c. both "a" and "b" above.
d. none of the above.

36. After the general objectives are understood, specific objectives for each account balance on the
financial statements can be developed.
a. There should be at least one specific objective for each relevant general objective.
b. There will be only one specific objective for each relevant general objective.
c. There will be many specific objectives developed for each relevant general objective.
d. There must be one specific objective for each general objective.

37. Which of the following is not one of the four phases in the audit process?
a. Plan and design an audit approach.
 b. Test controls and transactions.
c. Inform client of any adjustments or corrections to be made to the financial statements.
d. Complete the audit and issue the report.

38. Which of the following statements is not correct?

a. There are many ways an auditor can accumulate evidence to meet the overall audit
objectives.
b. Sufficient competent evidence must be to meet the auditor's professional responsibility.
c. The cost of accumulating the evidence should be minimized•
d. Gathering evidence and minimizing costs are equally important considerations that affect the
approach the auditor selects.

39. To adequately plan the appropriate audit evidence to gather, the Philippine Standards on Auditing
require the auditor to gain an understanding of
a. the internal control structure,
b. client's organization charts.
c. client's procedural manuals.
d. all of the above.

40. Where the auditor has assessed control risk of a particular area at a reduced level, he or she will
then
a. eliminate the need to gather evidence in that area.
b. test the effectiveness of the controls in that area.
c. proceed to expand the sample sizes in that area.
d. negotiate with management to determine which controls will be tested in that area.

41. Many tests of controls involve inspecting documents. These tests are commonly referred to as
a. tests of transactions.
b. tests of documentation.
c. tests of balances.
d. tests of analytical procedures.

42. Analytical procedures are those that

a. evaluate the accuracy of the account balances.
b. assess the overall reasonableness of transactions and balances.
c. review the effectiveness of internal control procedures.
d. analyze the effect of management procedures on the accounting system.

43. Tests of details and balances are specific procedures intended to

a. identify the details on the internal control system.
b. prove that the accounts with material balances are classified correctly.
c. test for monetary errors in the financial statements
d. prove that the trial balance is in balance.

44. If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding the internal control structure, assessing control risk,
testing controls, and analytical procedures, then the auditor
 a. can issue an unqualified opinion.
b. needs to do additional tests of controls so that the assurance level can be increased.
c. can write the engagement letter.
d. can significantly reduce the test of details.

45. After the auditor has completed all the procedures, it is necessary to combine the information
obtained to reach an overall conclusion as to whether the financial statements are fairly presented.
This is a highly subjective process that relies heavily on
a. standards on auditing.
b. the Code of Ethics for Professional Accountants.
c. financial reporting standards.
d. the auditor's professional judgment.

46. Which of the following factors is most important concerning an auditor's responsibility to detect
errors and irregularities?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the
misapplication of accounting principles.
b. The probability that unreasonable accounting estimates result from unintentional bias or
intentional attempts to misstate the financial statements.
c. The possibility that management fraud, defalcations, and the misappropriation of assets may
indicate the existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to
contain material misstatements.

47. When is the auditor responsible for detecting fraud?

a. When the fraud did not result from collusion.
b. When third parties are likely to rely on the client's financial statements.
c. When the client's system of internal control is judged by the auditor to be inadequate.
d. When the application of standards on auditing would have uncovered the fraud.

48. An auditor should recognize that the application of auditing procedures may produce evidential
matter indicating the possibility of errors or irregularities and therefore should
a. design audit tests to detect unrecorded transactions.
b. extend the work to audit most recorded transactions and records of an entity.
c. plan and perform the engagement with an attitude of professional skepticism.
d. not depend on internal accounting control features that are designed to prevent or detect
errors or irregularities.

49. When a CPA has concluded that action should be taken to prevent future reliance on his report, he
should
a. advise his client to make appropriate disclosure of the newly discovered facts and their
impact on the financial statements to persons who are known to be currently relying or who are
likely rely on the financial statements and the related auditor's report.
b. recall the financial statements and issue revised statements and include an appropriate
opinion.
c. advise the client and others do not rely on the financial statements and make appropriate
disclosure of the correction in the statements of a subsequent period.
 d. recall the financial statements and issue a disclaimer of opinion which should generally be
followed by revised statements and a qualified opinion.

50. Which of the following statements best describes the auditor's responsibility with respect to illegal
acts that do not h a material effect on the client's financial statements?
a. Generally, the auditor is under no obligation to notify parties other than personnel within the
client's organization.
b. Generally, the auditor is under an obligation to see that stockholders are notified.
c. Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
d. Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act

51. When an independent auditor's examination of financial statements discloses special

circumstances that make the auditor suspect that fraud may exist, the auditor's initial course of action
should be to
a. recommend that the client pursue the suspected fraud to conclusion that is agreeable to the
auditor.
b. extend normal audit procedures in an attempt to detect the full extent of the suspected fraud.
c. reach an understanding with the proper client representative as to whether the auditor or the
client is to make the investigation necessary to determine if a fraud has in fact occurred.
d. decide whether the fraud, if in fact it should exist, might be of such a magnitude as to affect
the auditor's report on the financial statements.

52. Which of the following statements best describes the auditor's responsibility regarding the
detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results
from nonperformance Of audit procedures specifically described in the engagement letter.
b. The auditor must extend auditing procedures to actively search for evidence of fraud in all
situations.
c. The auditor must extend auditing procedures to actively search for evidence of fraud where
the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued.

53. When engaged to prepare unaudited financial statements the CPA's responsibility to detect fraud
a. is limited to informing the client of any matters that come to the auditor's attention which
cause the auditor to believe that an irregularity exists.
b. is the same as the responsibility that exists when the CPA is engaged to perform an audit of
financial statements in accordance with standards on auditing.
c. arises out of the CPA's obligation to apply procedures which are designed to bring to light
Indications that a fraud or defalcation may have occurred.
d. does not exist unless an engagement letter is prepared.

54. When the auditor's regular examination leading to an opinion on financial statements discloses
specific circumstances that make him suspect that fraud may exist and he concludes that the results of
such fraud, if Any, could not be so material as to affect his opinion, he should
 a. make a note in his working papers of the possibility of a fraud of immaterial amount so as to
pursue the matter next year.
b. reach an understanding with the client as to whether the auditor or the client, subject to the
auditor's review, is to make the investigation necessary to determine whether fraud has
occurred and, if so, the amount thereof.
c. refer the matter to the appropriate representatives of the client with the recommendations
that is to be pursued to a conclusion.
d. immediately extend his audit procedures to determine if fraud has occurred and, if so, the
amount thereof.

55. If an auditor is engaged to discover errors or irregularities and the auditor performed extensive
detail work, which of the following could the auditor be expected to detect?
a. Mispostings of recorded transactions.
b. Unrecorded transactions.
c. Counterfeit signatures on paid checks.
d. Collusive fraud.

56. The essence of the attest function is to

a. detect fraud.
b. examine individual transactions so that the auditor may certify as to their validity.
c. determine whether the client's financial statements are fairly stated.
d. assure the consistent application of correct accounting procedures.

57. The accuracy of information included in footnotes that accompany the audited financial statements
of a company whose shares are traded on a stock exchange is the primary responsibility of
a. the stock exchange officials.
b. the independent auditor.
c. the company's management.
d. the Securities and Exchange Commission.

58. Once satisfied that the balance sheet and income statement are fairly presented io accordance
with generally accepted accounting principles, an auditor who is examining the statement of cash
flows would be most concerned with details of transactions in
a. inventory.
b. notes receivables.
c. salaries expense.
d. income tax expense.

59. The primary difference between an audit of the balance sheet and an audit of the income
statement lies in the fact that the audit of the income statement deals with the verification of
a. transactions.
b. authorizations.
c. costs.
d. cutoffs.
60. The Philippine Standards on Auditing require the auditor's report to either contain an expression of
opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an
opinion cannot be expressed. The objective of the standard is to prevent
a. the CPA from reporting on one basic financial statement and not the others.
b. the CPA from expressing different opinions on each of the basic financial statements.
c. misinterpretations regarding the degree of responsibility the auditor is assuming.
d. management from reducing its final responsibility for the basic financial statements.

61. Which of the following forms of evidence would be least persuasive in forming the auditor's
opinion?
a. The auditor's count of marketable securities.
b. Correspondence with a stock broker regarding the quantity of client's investments held in
street name by the broker.
c. Minutes of the board of directors authorizing the purchase of stock as an investment.
d. Responses to auditor's questions by the President and Controller regarding the investments
account.

62. In determining the quantity and quality of evidence to gather, the auditor will be satisfied when the
evidence is
a. irrefutable.
b. conclusive.
c. highly persuasive.
d. completely convincing.

63. "The detailed instructions for the collection of a particular type of audit evidence that is to be
obtained at some time during the audit" is the definition of a(n)
a. sampling plan.
b. audit procedure.
c. audit plan.
d. audit program.

64. Which of the following statements is not correct?

a. It is possible to vary the sample size from one unit to 100% of the items in the population.
b. The decision of how many items to test will not be influenced by the increased costs of
performing the additional tests.
c. The decision of how many items to test must be made by the auditor for each audit
procedure.
d. The sample size for any given procedure is likely to vary from audit to audit.

65. After a sample size of 200 has been determined for a particular audit procedure, which of the
following methods can be used by the auditor to select the 200 items?
a. Select one week and examine the first 200 items,
b. Select the 200 items with the largest peso amounts.
c. Select the 200 items randomly.
d. Any combination of the above three methods.
66. Audit procedures are normally performed
a. early in the accounting period being examined,
b. throughout the accounting period being examined, but with emphasis on the transactions
near the end.
c. within one to three months after the close of the accounting period.
d. during all three of the above periods.

67. "The detailed description of the results of the four evidence decisions for a specific audit" is called
an
a. audit procedure.
b. audit plan.
c. audit program.
d. audit guide.

68. The audit program usually states all four of the choices below, but it
always includes the
a. audit procedures.
b. sample sizes.
c. particular items to select.
d. timing of the tests.

69. Which of the following is not one of the four determinants of the persuasiveness of evidence?
relevance.
a. competence.
b. physical examination.
c. relevance.
d. sufficiency.

70. Which one of the following statements is true?

a. Evidence must pertain to the objective the auditor is testing before it can be persuasive.
b. Relevance can only be considered in terms of specific audit objectives.
c. Evidence may be relevant to one objective but not for a different objective.
d. All three of the above statements are true.

71. A term which is synonymous with competence is

a. relevance.
b. reliability of evidence.
c. sufficient.
d. all three of the above.

72. Which of the following statements about the competence of evidence is not correct?
a. Competence deals only with the audit procedures selected.
b. Competence can be improved by selecting a larger sample size.
c. Competence can be improved by selecting audit procedures that contain a higher quality of
the characteristics sought.
d. Competence cannot be improved by selecting different population items to include in the
sample size.
73. Which one of the following is not one of the characteristics of competent evidence?
a. Independence of provider.
b. Effectiveness of internal control structure.
c. Size of the sample.
d. Degree of objectivity.

74. Which of the following statements is an incorrect use of the terminology?

a. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
b. Documentary evidence is more reliable when it is received by the auditor directly from an
independent third party.
c. Documents that originate outside the company are considered more reliable than those that
originate within client's organization.
d. External evidence, such as communications from banks, is generally regarded as more
reliable than answers obtained from inquiries of client.

75. Evidence obtained directly by the auditor is more competent than information obtained indirectly.
Which of the following is not an example of the auditor's direct knowledge?
a. Physical examination.
b. Observation.
c. Computation.
d. Inquiry.

76. If the auditor calculates the gross margin as a percent of sales and compares it with previous
periods, the evidence gathered would be classified as
a. physical examination.
b. computation.
c. observation.
d. inquiry.

77. When the auditor is gathering evidence, he/she will conclude that if the source of information is
independent, the evidence will
a. be reliable.
b. not be reliable.
c. be reliable if the provider has no reason to be biased.
d. not be reliable unless the provider is qualified to do so.

78. Evidence obtained directly by the auditor will not be reliable if

a. it is provided by client's attorney.
b. the auditor lacks the qualifications to evaluate the evidence.
c. it is impossible for the auditor to obtain additional corroboratory evidence.
d. client denies its veracity.

79. Objective evidence is more reliable than evidence that requires considerable judgment to
determine whether it is correct. Which of the following is not an example of objective evidence?
a. Confirmation of accounts receivable.
 b. Confirmation of bank balances.
c. Confirmation by client's attorney of the likely outcome of outstanding lawsuits against client.
d. Adding a list of accounts payable to determine if it is the same as the balance in the general
ledger.

80. For a given audit procedure, the evidence obtained from a sample of 200 would ordinarily be
a. more sufficient than from a sample of one hundred.
b. less sufficient than from a sample of one hundred.
c. more competent than from a sample of one hundred.
d. less competent than from a sample of one hundred.

81. Evidence is usually more persuasive for balance sheet accounts when it is obtained
a. from various times throughout the client's year.
b. only from transactions occurring on the balance sheet date,
c. as close to the balance sheet date as possible.
d. from the time period when transactions in that account were most numerous during the fiscal
period.

82. For income statement accounts, evidence is more persuasive if there is a sample from
a. the entire period under audit.
b. the period closest to the end of the fiscal period.
c. at least three months of the fiscal year.
d. December, since this would include large holiday sales.

83. Which of the following statements is not true?

a. A large sample of highly competent evidence is not persuasive unless it is relevant to the
objective being tested.
b. A large sample of evidence that is neither competent nor timely is not persuasive.
c. A small sample of only one or two pieces of relevant, competent, and timely evidence lacks
persuasiveness.
d. The persuasiveness of evidence can be evaluated after considering its competence and its
sufficiency.

84. In making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient
amount of timely, reliable evidence that is relevant to the information being verified, and to do so
a. no matter what the cost involved in obtaining such evidence.
b. only if the cost is reasonable.
c. at the lowest possible total cost.
d. at any cost because the costs are billed to the client.

85. Physical examination is the inspection or count by the auditor of assets such as
a. cash or inventory only.
b. cash, inventory, canceled checks, and sales documents.
c. cash, inventory, securities, notes receivable, and tangible fixed assets.
d. cash, inventory canceled checks, and tangible fixed assets.
86. Physical examination of assets is not a sufficient form of evidence when the auditor wants to
determine the
a. existence of the asset.
b. quantity and description of the asset.
c. condition or quality of the asset.
d. ownership of the asset.

87. Traditionally, confirmations are used to verify

a. individual transactions between organizations, such as sales transactions.
b. fixed asset additions.
c. bank balances and accounts receivables.
d. all three of the above.

88. The PSAs requires that, whenever practical and reasonable, the CPA must confirm a sample of
a. accounts receivable.
b. accounts payable.
c. both accounts receivable and payable,
d. client's bank accounts.

89. when comparing the reliability of external versus internal documents, the external documents are
generally considered
a. more reliable.
b. less reliable.
c. equally reliable.
d. unreliable.

90. When the auditor examines the client's documents and records to substantiate the information on
the financial statements, it is commonly referred to as
a. inquiry.
b. confirmation.
c. vouching.
d. physical examination.

91. Documentation is a form of evidence

a. used in every financial statement audit.
b. used in most financial statement audits.
c. used on the rare occasions when it is both readily available and less costly than other
procedures.
d. used when nothing is available that is more competent.

92. A document which the auditor receives from the client, but which was prepared by someone
outside the client's organization, is a(n)
a. confirmation.
b. internal document.
c. external document.
d. inquiry.
93. Which one of the following statements is not true? "The evidence gathering technique of
observation
a. is useful in most parts of the audit",
b. is rarely sufficient by itself".
c. is limited to what the auditor sees."
d. requires the gathering of corroborative evidence."

94. Which of the following statements is not true? "The evidence gathering technique of inquiry
a. cannot be regarded as conclusive.'
b. requires the gathering of corroborative evidence.'
c. is the auditor's principle method of evaluating the client's internal control structure.'
d. does not provide evidence from an independent source.

95. Which of the following, when performed by the auditor, is not a test of mechanical accuracy?
a. Extending sales invoices.
b. Adding journals and ledgers.
c. Tracing amounts from journals to ledgers.
d. Calculating the current ratio.

96. Which of the following statements is not correct?

a. Analytical procedures use comparisons and relationships to determine which account
balances are in error.
b. For certain immaterial accounts, analytical procedures may be the only evidence needed.
c. In some instances, other types of evidence may be reduced when analytical procedures
indicate that an account balance appears reasonable.
d. Analytical procedures are used to isolate accounts or transactions that should be
investigated more extensively.

97. Analytical procedures are one form of test of balances (substantive

test), and their performance should begin
a. early in the audit.
b. after the tests of controls (compliance testing) have been completed.
c. after the internal control System is reviewed but before it is tested and evaluated.
d. after all compliance testing and other substantive testing has been concluded.

98. which one of the following types of evidence does not aid in achieving the audit objective of
determining ownership?
a. Analytical procedures.
b. Confirmation.
c. Documentation.
d. Inquiries of client.

99. Which one of the following types of evidence will aid in achieving the audit objective of determining
mechanical accuracy?
a. Confirmation.
b. Recomputation.
 c. Physical examination.
d. Inquiries of client.

100. Which of the following statements is not correct?

a. The effectiveness of client's internal control structure has a significant effect on the reliability
of most types of evidence.
b. Since the auditor performs the analytical procedures, they will be competent evidence even
if the internal control structure provides inaccurate data.
c. Both physical examination and mechanical accuracy are likely to be highly reliable if the
internal control structure is effective.
d. A specific type of evidence is rarely sufficient by itself to provide competent evidence to
satisfy any audit objective.

101. Which of the following would not be included in the auditor's working papers?
a. A time budget for the various audit areas.
b. The results of the preceding year's audit.
c. Descriptive information about the internal control structure.
d. The accounting manual.

102. The working papers are

a. the property of client.
b. property of the auditor although prepared by client.
c. the primary means for documenting that an adequate audit was conducted in accordance
with standards on auditing.
d. use primarily as a basis for the partners to review and reward the work of the managers,
seniors, and staff.

103. Which of the following items would not normally be included, ih

whole or in part, in the auditor's permanent file on a client?
a. The Articles of Incorporation and By-laws.
b. Analyses of accounts such as long-term debt and stockholders equity.
c. Organization charts and internal control questionnaires.
d. The audit program.

104. An example of a reclassification entry would be an entry

a. to reduce inventory when client failed to write-down its obsolete raw materials.
b. to change material credit balances in accounts receivable accounts to accounts payable
accounts.
c. to increase the Allowance for Doubtful Accounts when it was discovered that a customer had
filed for bankruptcy.
d. to increase the Income Tax Liability account when it was discovered that client would be in a
higher tax bracket than originally estimated.

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

106. When using the work of a specialist, an auditor may refer to and identify the specialist in the
auditor's report if the
a. auditor Wishes to indicate a division of responsibility.
b. specialist's work provides the auditor greater assurance of reliability.
c. auditor expresses an adverse opinion as a result of the specialist's findings.
d. specialist is not independent of the client.

107. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
a. a majority of recipients usually lack the willingness to respond objectively.
b. some recipients may report incorrect balances that require extensive follow-up.
c. the auditor can not infer that all non-respondents have verified their account information.
d. negative confirmations do not produce evidential matter that is statistically quantifiable.

108. The independent auditor selects several transactions in each functional area and traces them
through the entire system, paying special attention to evidence about whether or not the control
features are in operation. This is an example of a(n)
a. application test.
b. tests of a control.
c. substantive test.
d. test of a function.

109. Audit evidence can come in different forms with different degrees of persuasiveness. Which of
the following is the least persuasive type of evidence?
a. Bank statement obtained from the client.
b. Computations made by the auditor.
c. Prenumbered client sales invoices.
d. Vendor's invoice.

110. Which of the following statements relating to the competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered competent.

111. An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical combination of
accounts. The auditor could most likely have been alerted to this irregularity by
a. scanning the general journal for unusual entries.
b. performing a revenue cut-off test at year end.
c. tracing a sample of journal entries to the general ledger.
d. examining documentary evidence of sales returns and
allowances recorded after year end.
112. In the context of an audit of financial statements, substantive tests are audit procedures that
a. may be eliminated under certain conditions.
b. are designed to discover significant subsequent events.
c. may be either tests of transactions, direct tests of financial balances, or analytical fests.
d. will increase proportionately with the audit's reliance on internal control.

113. Working papers ordinarily would not include

a. initials of the in-charge auditor indicating review of the staff assistants' work.
b. cut-off bank statements received directly from the banks.
c. a memo describing the internal control structure.
d. copies of client inventory count sheets.

114. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of bond and note indentures.

115. An audit working paper that reflects the major components of an amount reported in the financial
statements is referred to as a(an)
a. lead schedule.
b. supporting schedule.
c. audit control account,
d. working trial balance.

116. Which of the following eliminates voluminous details from the auditor's working trial balance by
classifying and summarizing similar or related items?
a. Account analyses.
b. Supporting schedules.
c. Control accounts.
d. Lead schedules.

117. The following statements were made in a discussion of audit evidence between two CPAs. Which
statement is not valid concerning evidential matter?
a. "l am seldom convinced beyond all doubt with respect to all aspects of the statements being
examined.
b. "I would not undertake that procedure because at best the results would only be persuasive
and I'm looking for convincing evidence.
c. "Il evaluate the degree of risk involved in deciding the kind of evidence I will gather."
d. "l evaluate the usefulness of the evidence I can obtain against the cost to obtain it."

118. An auditor would be least likely to use confirmations in connection with the examination of
a. inventories.
b. long-term debt.
c. property, plant, and equipment.
 d. stockholders' equity.

119. The Philippine Standards on Auditing state that sufficient competent evidential matter may, in
part, be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable
basis of an opinion regarding the financial statements under examination. The evidential matter
required by this standard may, in part, be obtained through
a. auditor working papers.
b. proper planning of the audit engagement.
c. analytical review procedures.
d. review of the system of internal control.

120. With respect to records in a CPA's possession, rules of conduct provide that
a. copies of client records incorporated into audit working papers must be returned to the client
upon request.
b. worksheets in lieu of a general ledger belong to the auditor and need not be furnished to the
client upon request
c. an extensive analysis of inventory prepared by the client at the auditor's request are working
papers that belong to the auditor and need not be furnished to the client upon request.
d. the auditor who returns copies of client records must return the original records upon
request.

121. Those procedures specifically outlined in an audit program are primarily designed to
a. prevent litigations.
b. detect errors or irregularities.
c. test internal systems.
d. gather evidence.

122. Evidential matter is generally considered sufficient when

a. It is competent.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it has been obtained by random selection.

123. Evidential matter is generally considered competent when

a. it has the qualities of being relevant, objective, and free from known bias.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has been obtained by random selection.
d. it consists of written statements made by managers of the enterprise under audit.

124. The sufficiency and competency of evidential matter ultimately is based on the
a. availability of corroborating data.
b. standards on auditing.
c. pertinence of the evidence.
d. judgment of the auditor.
125. Evidential matter supporting the financial statements consists of the underlying accounting data
and alt corroborating information available to the auditor. Which of the following is an example of
corroborating information?
a. Minutes of meetings.
b. General and subsidiary ledgers.
c. Accounting manuals.
d. Worksheets supporting cost allocations.

126. An auditor examines corroborating evidential matter which includes all of the following except
a. client accounting manuals.
b. written client representations.
c. vendor invoices.
d. minutes of board meetings.

127. The strongest criticism of the reliability of audit evidence that the auditor physically observes is
that
a. the client may conceal items from the auditor.
b. the auditor may not be qualified to evaluate the items which he or she is observing.
c. such evidence is too costly in relation to its reliability.
d. the observation must occur at a specific time, which is often difficult to arrange.

128. During the course of an audit engagement an auditor prepares and accumulates audit working
papers. The primary purpose of the audit working papers is to
a. aid the auditor in adequately planning the work.
b. provide a point of reference for future audit engagements.
c. support the underlying concepts included in the preparation of the basic financial statements.
d. support the auditor's opinion.

129. The permanent section of the auditor's working papers generally should include
a. time and expense reports.
b. names and addresses of all audit staff personnel on the engagement.
c. a copy of key customer confirmations.
d. a copy of the engagement letter.

130. which of the following statements relating to the competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered competent.

131. To be competent, evidence must be both

a. timely and substantial.
b. reliable and documented.
c. valid and relevant.
d. useful and objective.
132. Theoretically, which of the following would not have an effect on the amount of audit evidence
gathered by the auditor?
a. The type of opinion to be issued.
b. The auditor's evaluation of internal control.
c. The types of audit evidence available to the auditor.
d. Whether or not the client reports to the Securities and Exchange Commission.

133. In planning an audit engagement, which of the following is a factor that affects the independent
auditor's judgment as to the quantity, type, and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluation based upon initial substantive testing.
c. The content the client's representation letter.
d. The anticipated nature of the auditor's report.

134. Which of the following is generally included or shown in the auditor's working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the
client's management team.
b. Analyses that are designed to be part of, or a substitute for, the client's accounting records.
c. Excerpts from authoritative pronouncements that support the underlying financial reporting
standards used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor's procedures
were resolved or treated.

135. Although the validity of evidential matter is dependent on the circumstances under which it is
obtained, there are three general presumptions which have some usefulness. The situations given
below indicate the relative reliability a CPA has placed on two types of evidence obtained in different
situations. Which of these is an exception to one of the general presumptions?
a. The CPA places more reliance on the balance in the scrap sales account at plant A where
the CPA has made limited tests of transactions because of good internal control than at plant B
where the CPA has made extensive tests of transactions
because of poor internal control.
b. The CPA places more reliance on the CPA's computation of interest payable on outstanding
bonds than on the amount confirmed by the trustee.
c. The CPA places more reliance on the report of an expert on an inventory of precious gems
than on the CPA's physical observation of the gems.
d. The CPA places more reliance on a schedule of insurance coverage Obtained from the
company's insurance agent than on one Prepared by the internal audit staff.

136. The major reason an independent auditor gathers audit evidence is to

a. form an opinion on the financial statements.
b. detect fraud.
c. evaluate management.
d. evaluate internal control,

137. The Philippine Standards on Auditing require that due professional care be exercised in the
performance of the examination and the preparation of the report. The matter of due professional care
deals with what is done by the independent auditor and how well it is done. For example, due care in
the matter of working papers requires that working paper
a. format be neat and orderly and include both a permanent file and a general file.
b. content be sufficient to provide support for the auditor's report, including the auditor's
representation as to compliance with auditing standards.
c. ownership be determined by the legal statutes of the state where the auditor practices.
d. preparation be the responsibility of assistant accountants whose work is reviewed by senior
accountants, managers, and partners.

138. Which of the following is not a factor affecting the independent auditor's judgment as to the
quantity, type, and content of audit working papers?
a. The needs in the particular circumstances for supervision and review of the work performed
by any assistants.
b. The nature and condition of the client's records and internal controls.
c. The expertise of client personnel and their expected audit participation.
d. The type of the financial statements, schedules, or other information upon which the auditor
is reporting.

139. Which of the following is not a factor that affects the independent auditor's judgment as to the
quantity, type, and content of working papers?
a. The time and the number of personnel to be assigned to the engagement.
b. The nature of the financial statements, schedules, or other information upon with the auditor
is reporting.
c. The need for supervision of the engagement.
d. The nature of the auditor's report.

140. Which of the following factors will least affect the independent auditor's judgment as to the
quantity, type, and content of working papers desirable for a particular engagement?
a. Nature of the auditor's report.
b. Nature of the financial statements, schedules, or other information upon which the auditor is
reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit.

141. An auditor's working papers will generally be least likely to include documentation showing how
the
a. client's schedules were prepared.
b. engagement had been planned.
c. client's system of internal control had been reviewed and evaluated.
d. unusual matters were resolved.

142. When compared to the auditor of fifty years ago, today's auditor places less relative emphasis
upon
a. confirmation.
b. examination of documentary support.
c: overall tests of ratios and trends.
d. physical observation.
143. which of the following is not considered to be an analytical
a. Comparisons of financial statement amounts with source procedure?
b. Comparisons of financial statement amounts with non-
c. Comparisons of financial statement amounts with budgeted
d. Comparisons of financial statement amounts with comparable prior year amounts.

144. The inspection of a vendor's invoice by the auditors is

a. direct evidence about occurrence of a transaction.
b. physical evidence about occurrence of a transaction.
c. documentary evidence about occurrence of a transaction.
d. part of the client's accounting system.

145. Which of the following is generally not true about the sufficiency of audit evidence?
a. The amount of evidence that is sufficient varies inversely with the competency of the
evidence.
b. The amount of evidence concerning a particular account varies directly with the materiality of
the account.
c. The amount of evidence concerning a particular account varies inversely with the inherent
risk of the account.
d. When evidence is competent with respect to an account it is also sufficient.

146. Which of the following is true about analytical procedures?

a. Performing analytical procedures results in the most reliable form of evidence.
b. Analytical procedures are tests of controls used to evaluate the quality of a client's internal
control structure.
c. Analytical procedures are used for planning, but they should not be used to obtain evidence
as to the reasonableness Of specific account balances.
d. Analytical procedures are used in planning, as a substantive test of specific accounts, and in
the final review of the audited financial statements.

147. Which of the following is a basic approach often used by auditors to evaluate the reasonableness
of accounting estimates?
a. Confirmation.
b. Observation.
c. Reviewing subsequent events.
d. Analyze corporate organizational structure.

148. Which of the following is not a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
a. Confirmation of amounts.
b. Review of management's process of development.
c. Independent development of an estimate.
d. Review of subsequent events.

149. An independent auditor finds that Summer Corporation occupies office space, at no charge, in an
office building owned by a shareholder. This finding indicates the existence of
 a. management fraud.
b. related party transactions.
c. window dressing.
d. weak internal control.

150. Which of the following would not necessarily be a related party transaction?
a. Payment of a bonus to the president.
b. Purchases from another corporation that is controlled by the corporation's chief stockholder.
c. Loan from the corporation to a major stockholder.
d. Sale Of land to the corporation by the spouse of a director.

151. The date of the management representation letter should coincide with the
a. date of the auditor's report.
b. balance sheet date.
c. date of the latest subsequent event referred to in the notes to the financial statements.
d. date of the engagement agreement.

152. An example of an analytical procedure is the comparison of

a. financial information with similar information regarding the industry in which the entity
operates.
b. recorded amounts of major disbursements with appropriate invoices.
c. results of a statistical sample with the expected characteristics of the actual population.
d. EDP generated data with similar data generated by a manual accounting system.

153. When considering the use of management's written representations

as audit evidence about the completeness assertion, an auditor should understand that such
representations
a. complement, but not replace, substantive tests designed to support the assertion.
b. constitute sufficient evidence to support the assertion when considered in combination with a
moderate assessed level Of control risk.
c. are generally sufficient evidential matter to support the assertion regardless of the assessed
level of control risk.
d. replace the assessed level of control risk as evidence to support the assertions.

154. Which of the following statements relating to the competence Of evidential matter is always true?
a. Evidential matter gathered by an auditor from within an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered competent.

155. An independent auditor gathers evidence to

a. appraise management.
b. assess and evaluate internal control.
c. form an opinion on the financial statements.
d. discover fraud.
156. The Philippine Standards on Auditing state that sufficient competent evidential matter may in part
be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis
for an opinion regarding the financial statements under examination. The evidential matter required by
this standard may in part obtained through
a. analytical review procedures.
b. proper planning of the audit engagement.
c. auditor working papers.
d. review of the system of internal control.

157. Which one of the following types of documentary audit evidence is the most reliable?
a. Physical examination by the auditor.
b. Documentary evidence calculated by the auditor from company records.
c. confirmations received directly from third parties.
d. Internal documents.

158. Audit evidence can come in different forms with different degrees
of persuasiveness. Which of the following is the least persuasive type of evidence?
a. Vendor's invoice.
b. Bank statement obtained from the client.
c. Computations made by the auditor.
d. Prenumbered client invoices.

159. Which of the following is the least persuasive documentation in support of an auditor's opinion?
a. Schedules of details of physical inventory count conducted by the client.
b. Notation of inferences drawn from ratios and trends.
c. Notation of appraisers' conclusions documented in the auditor's working papers.
d. Lists of negative confirmation requests for which no response was received by the auditor.

160. The strongest criticism of the reliability of audit evidence that the auditor physically observes is
that
a. the client may conceal items from the auditor.
b. the auditor may not be qualified to evaluate the items he is observing.
c. such evidence is too costly in relation to its reliability.
d. the observation must occur at a specific time, which is often difficult to arrange.

161. Although the validity of evidential matter is dependent on the circumstances in which it is
obtained, there are three presumptions which have some usefulness. The situations given below
indicate the relative degrees of reliability a CPA has assigned to two types Of evidence obtained in
different situations. Which describes an exception to one of the general presumption?
a. The CPA places more reliance on the balance in the scrap sates account at Plant A where
the CPA has made limited tests of transactions because of good internal control than at Plant B
where the CPA has made extensive tests of transactions because of poor internal control.
b. The CPA places more reliance on the CPA's computation of interest payable on outstanding
bonds than on the amount confirmed by the trustee.
c. The CPA places more reliance on the report of an expert on an inventory of previous gems
than on the CPAs physical observation of the gems.
 d. The CPA places more reliance on a schedule of insurance coverage obtained from the
company's insurance agent than on one prepared by the internal audit staff.

162. Theoretically, which of the following would not have an effect on the amount of audit evidence
gathered by the auditor?
a. The type of opinion to be issued.
b. The auditor's evaluation of internal control.
c. The types of audit evidence available to the auditor.
d. Whether the client reports to the SEC.

163. As the acceptable level of detection risk increases, an auditor may change the
a. assessed level of control risk from below the maximum to the maximum level.
b. assurance provided by tests of controls by using a larger sample size than planned.
c. timing of substantive tests from year end to an interim date.
d. nature of substantive tests from a less effective to a more effective procedure.

164. Which of the following types of audit evidence is the least persuasive?
a. Prenumbered purchase order forms.
b. Bank statements obtained from the client.
c. Test counts of inventory performed by the auditor.
d. Correspondence from the client's attorney about litigation.

165. In testing the existence assertion for an asset, an auditor ordinarily

a. financial statements to the potentially unrecorded items. works from the
b. potentially unrecorded items to the financial statements.
c. accounting records to the supporting evidence.
d. supporting evidence to the accounting records.

166. An auditor's decision either to apply analytical procedures as substantive tests or to perform tests
of transactions and account balances usually is determined by the
a. availability of data aggregated at a high level.
b. relative effectiveness and efficiency of the tests.
c. timing of tests performed after the balance sheet date.
d. auditors familiarity with industry trends.

167. Analytical procedures used in the overall review stage of an audit generally include
a. considering unusual or unexpected account balances that were not previously identified.
b. performing tests of transactions to corroborate management's financial statement assertions.
c. gathering evidence concerning account balances that have riot changed from the prior year.
d. retesting control procedures that appeared to be ineffective during the assessment of control
Fisk.

168. Which of the following tends to be most predictable for purposes Of analytical procedures applied
as substantive tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c. Relationships involving income statement accounts.
 d. Data subject to audit testing in the prior year.

169. Analytical procedures used in planning an audit should focus on

a. identifying possible scope limitations and gathering evidence in assessing control risk
environmental factors.
b. enhancing the understanding of the entity's business and the transactions and events that
have occurred since the last audit.
c. aggregating data at a low level and substantiating management's assertions that are
embodied in the financial. statements.
d. discovering material weaknesses in the internal control structure and reporting them to the
entity's management for corrective action.

170. A basic premise underlying the application of analytical procedures is that

a. the study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
b. statistical tests of financial information may lead to the discovery of material errors in the
financial statements.
c. plausible relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary.
d. these procedures cannot replace tests of balances and transactions.

171. For all audits of financial statements made in accordance with standards on auditing, the use of
analytical procedures is required to some extent
In the As a In the
planning stage Substantive test Review stage
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No

172. Ah auditor's analytical procedures most likely would be facilitated if the entity
a. corrects material weaknesses in internal control before the beginning of the audit.
b. develops its data from sources solely within the entity.
c. segregates obsolete inventory before the physical inventory
d. uses a standard cost system that produces variance reports.

173. The auditor will most likely perform extensive tests for possible understatement of
a. revenues.
b. assets.
c. liabilities.
d. capital.

174. Which of the following is required documentation in an audit in accordance with standards on
auditing?
a. A written engagement letter formalizing the level of service to be rendered.
b. A flowchart depicting the segregation of duties and authorization of transactions.
c. A written audit program describing the necessary procedures to be performed.
 d. A memorandum setting forth the scope of the audit.

175. Which of the following factors most likely would affect an auditor's judgment about the quantity,
type, and content of the auditor's working papers?
a. The assessed level of control risk.
b. The likelihood of a review by a concurring (second) partner •
c. The number of personnel assigned to the audit.
d. The content of the management representation letter.

176. Which Of the following documentation is not required for an audit in accordance with standards
on auditing?
a. A client engagement letter that summarizes the timing and details of the auditor's planned
field work.
b. The basis for the auditor's conclusions when the assessed level of control risk is below the
maximum level.
c. A written audit program setting forth the procedures necessary to accomplish the audit's
objectives.
d. An indication that the accounting records agree or reconcile with the financial statements.

177. The permanent file section of the working papers that is kept for each audit client most likely
contains
a. review notes pertaining to questions and comments regarding the audit work performed.
b. a schedule of time spent on the engagement by each individual auditor.
c. correspondence with the client's legal counsel concerning pending litigation.
d. narrative descriptions of the client's accounting procedures and internal controls.

178. The audit working paper that reflects the major components of an amount reported in the financial
statements is the
a. Interbank transfer schedule.
b. Carry forward schedule.
c. Supporting schedule.
d. Lead schedule.

Items 179 and 180 are based on the following:

The information below was taken from the bank transfer schedule prepared during the audit of Prime
Co.'s financial statements for the year ended December 31, 2021. Assume all checks are dated and
issued on December 30, 2021.
Disbursement Date Receipt Date
Check Bank Account Per Per Per Per
No. From To Books Bank Books Bank
101 FEB TC PNB Dec. 30 Jan.4 Dec. 30 Jan.3
202 PCIB MBTC Jan. 3 Jan.2 Dec. 30 Dec. 31
303 PNB CBC Dec. 31 Jan.3 Jan. 2 Jan. 2
404 MBTC BPU Jan. 2 Jan.2 Jan. 2 Dec. 31

179. Which of the following checks might indicate kiting?

 a. #101 and #303.
b. #202 and #404.
c. #101 and #404.
d. #202 and #303.

180. Which of the following checks illustrate deposits/transfers in transit at December 31, 2021?
a. #101 and #202.
b. #101 and #303.
c. #202 and #404.
d. #303 and #404.

181. An auditor should trace bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
a. the cash receipts journal was held open for a few days after the year end.
b. the last checks recorded before the year end were actually mailed by the year end.
c. cash balances were overstated because of kiting.
d. any unusual payments to or receipts from related parties occurred.

182. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following except
a. Cutoff bank statement.
b. year-end bank statement.
c. bank confirmation.
d. general ledger.

183. Which of the following cash transfers results in a misstatement of cash at December 31, 2021
Bank Transfer Schedule
Disbursement Receipt
Record Paid by Recorded Received by
Transfer in books Bank In books bank
a. 12/31/21 1/4/22 12/31/21 12/31/21
b. 1/4/22 1/5/22 12/31/21 1/4/22
c. 12/31/21 1/5/22 12/31/21 1/4/22
d. 1/4/22 1/11/22 1/4/22 1/4/22

Items 184 and 185 are based on the following:

Miles Company
Bank Transfer Schedule
December 31, 2021
Check Bank Accounts Date distributed per Date distributed per
Number From To Amount Books Bank Books Bank
2020 FEBTC PNB P32,000 12/31 1/5* 12/31 1/3*
2021 FEBTC PNB 21,000 12/31 1/4 * 12/31 1/3 *
3217 PCIB FEBTC 6,700 1/3 1/5 1/3 1/6
0659 PCIB FEBTC 5,500 12/30 1/5 * 12/30 1/3 *
184. The tick mark * most likely indicates that the amount was traced to the
a. December cash disbursements journal.
b. Outstanding check list of the applicable bank reconciliation.
c. January cash disbursements journal.
d. Year-end bank confirmations.

185. The tick mark most likely indicates that the amount was traced to the
a. Deposits in transit of the applicable bank reconciliation.
b. December cash receipts journal.
c. January cash receipts journal.
d. Year-end bank confirmations

186. A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?
a. Simultaneous confirmations.
b. Simultaneous bank reconciliations.
c. Simultaneous verification.
d. Simultaneous surprise cash count.

187. Which of the following most likely would give the most assurance concerning the valuation
assertion of accounts receivable?
a. Tracing amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios to industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.

188. Confirmation is most likely to be a relevant form of evidence with regard to assertions about
accounts receivable when the auditor has concerns about the receivables.
a. valuation.
b. classification.
c. existence.
d. completeness.

189. An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectability of the receivables is in doubt.
d. pledging of the receivables is probable.

190. An auditor most likely would inspect loan agreements under which an entity's inventories are
pledged to support management's financial statement assertion of
a. existence or occurrence.
b. completeness.
c. presentation and disclosure.
d. valuation or allocation.
191. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management's assertions about
a. existence or occurrence.
b. rights and obligations.
c. presentation and disclosure.
d. valuation or allocation.

192. Which of the following audit procedures probably would provide the most reliable evidence
concerning the entity's assertion of rights and obligations related to inventories?
a. Trace test counts noted during the entity's physical count to
the entity's summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to
any liens.
c. Select the last few shipping advices used before the physical count and determine whether
the shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be considered
for disclosure.

193. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the
physical inventory listing to obtain evidence that all items
a. included in the listing have been counted.
b. represented by inventory tags are included in the listing.
c. included in the listing are represented by inventory tags.
d. represented by inventory tags are bona fide.

194. An auditor usually examines receiving reports to support entries in the

a. voucher register and sales returns journal.
b. sales journal and sales returns journal.
c. voucher register and sales journal.
d. check register and sales journal.

195. When an auditor is unable to inspect and count a client's Investment securities until after the
balance sheet date, the bank where the securities are held in a safe deposit .box should be asked to
a. verify any differences between the contents of the box and the balances in the client's
subsidiary ledger.
b. provide a list of securities added and removed from the box between the balance-sheet date
and the security count date.
c. confirm that there has been no access to the box between the balance sheet date and the
security-count date.
d. count the securities in the box so the auditor will have an independent direct verification.

196. Which of the following combinations of procedures would an auditor most likely perform to obtain
evidence about fixed asset additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing-operating activities and comparing balances to prior period balances.
 d. Confirmation ownership and corroborating transactions through inquiries of client personnel.

197. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of
the audit assertion that all
a. noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
b. expenditures for property and equipment have not been charged to expense.
c. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
d. expenditures for property and equipment have been recorded in the proper period.

198. The auditor is most likely to seek information from the plant manager with respect to the
a. adequacy of the provision for uncollectible accounts.
b. appropriateness of physical inventory observation procedures.
c. existence of obsolete machinery.
d. deferral of procurement of certain necessary insurance coverage.

199. Treetop Corporation acquired a building and arranged mortgage financing during the year.
Verification of the related mortgage acquisition costs would be least likely to include an examination of
the related
a. deed.
b. canceled checks.
c. closing statement.
d. interest expense.

200. When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant
equipment is not available for inspection. The policy's absence most likely indicates the possibility of a
(an)
a. insurance premium due but not recorded.
b. deficiency in the coinsurance provision.
c. lien on the plant equipment.
d. understatement of insurance expense.

201. which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Examining unusual relationships between monthly account payable balances and recorded
cash payments.
b. Reconciling vendors' statements to the file of receiving reports to identify items received just
prior to the balance sheet date.
c. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period.
d. Investigating payables recorded just prior to and just subsequent to the balance sheet date
to determine whether they are supported by receiving reports.

202. Auditor confirmation of accounts payable balances at the balance sheet date may be
unnecessary because
a. this is a duplication of cutoff tests.
 b. accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
c. correspondence with the audit client's attorney will reveal all legal action by vendors for
nonpayment.
d. there is likely to be other reliable external evidence to support the balances.

203. An auditor's program to examine long-term debt most likely would include steps that require
a. comparing the carrying amount of the debt to its year-end market value.
b. correlating interest expense recorded for the period with outstanding debt.
c. verifying the existence of the holders of the debt by direct confirmation.
d. inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.

204. The auditor can best verify a client's bond sinking fund transactions and year-end balance by
a. confirmation with individual holders of retired bonds.
b. confirmation with the bond trustee.
c. recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
d. examination and count of the bonds retired during the year.

205. During an audit of an entity's stockholders' equity accounts, the auditor determines whether there
are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure
most likely is intended to verify management's assertion of
a. existence or occurrence.
b. completeness.
c. valuation or allocation.
d. presentation and disclosure.

206. When a client company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar concerning
a. restrictions on the payment of dividends.
b. the number of shares issued and outstanding.
c. guarantees of preferred stock liquidation value.
d. the number of shares subject to agreements to repurchase.

207. An auditor should trace corporate stock issuances and treasury stock transactions to the
a. numbered stock certificates.
b. articles of incorporation.
c. transfer agent's records.
d. minutes of the board of directors.

208. An audit program for the examination of the retained earnings account should include a step that
requires verification of the
a. market value used to charge retained earnings to account for a two-for-one stock split.
b. approval of the adjustment to the beginning balance as a result of a write down of an
account receivable.
c. authorization for both cash and stock dividends.
d. gain or loss resulting from disposition of treasury shares,
209. To which of the following matters would materiality limits not apply when obtaining written Client
representations?
a. Losses from sales commitments.
b. Unasserted claims and assessments.
c. Irregularities involving management.
d. Noncompliance with contractual agreements.

210. When considering the use of management's written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. complement, but do not replace, substantive tests designed to support the assertion.
b. constitute sufficient evidence to support the assertion when considered in combination with
reliance on internal controls.
c. are not part of the evidential matter considered to support the assertion.
d. replace reliance on internal controls as evidence to support the assertion.

211. A written representation from a client's management which, among other matters, acknowledges
responsibility for the fair presentation of financial statements, should normally be signed by the
a. chief executive officer and the chief financial officer.
b. chief financial officer and the chairman of the board of
c. chairman of the audit committee of the board of
d. chief executive officer, the chairman of the board of directors,

212. A limitation on the scope of the auditor's examination sufficient to preclude an unqualified opinion
will always result when management
a. prevents the auditor from reviewing the working papers of the predecessor auditor.
b. engages the auditor after the year-end physical inventory count is completed.
c. fails to correct a reportable condition of internal control that had been identified during the
prior year's audit.
d. refuses to furnish a management representation letter to the auditor

213. Hall accepted an engagement to audit the 2010 financial statements of XYZ Company. XYZ
completed the preparation of the 2010 financial statements on February 13, 2021, and Hall began the
field work on February 17, 2021. Hall completed the field work on March 24, 2021, and completed the
report on March 28, 2021. The client's representation letter normally would be dated
a. February 13, 2021.
b. February 17, 2021.
c. March 24, 2021.
d. March 28, 2021.

214. In using the Work of a specialist, an understanding should exist among the auditor, the client, and
the specialist as to the nature of the specialist's work. The documentation of this understanding should
cover
a. a statement that the specialist assumes no responsibility to update the specialist's report for
future events or circumstances.
b. the conditions under which a division of responsibility may be necessary.
c. the specialist's understanding of the auditor's corroborative use of the specialist's findings.
 d. the auditor's disclaimer as to whether the specialist's findings corroborative the
representations in the financial statements.

215. which of the following is not a specialist upon whose work an auditor may rely?
a. Actuary.
b. Appraiser.
c. Internal auditor.
d. engineer.

216. When using the work of a specialist, an auditor may refer to and identify the specialist in the
auditor's report if the
a. auditor expresses a qualified opinion as a result of the specialist's findings.
b. specialist is not independent of the client.
c. auditor wishes to indicate a division of responsibility.
d. specialist's work provides the auditor greater assurance of reliability.

217. An auditor should request that an audit client send a letter of inquiry to those attorneys who have
been consulted concerning litigation, claims, Or assessments. The primary reason for this request is to
provide
a. the opinion of a specialist as to whether loss contingencies are possible, probable, or
remote.
b. a description of litigation, claims, and assessments that have a reasonable possibility of
unfavorable outcomes.
c. an objective appraisal of management's policies and procedures adopted for identifying and
evaluating legal matters.
d. the corroboration of the information furnished by management concerning litigation, claims,
and assessments.

218. Which of the following is not an audit procedure that the independent auditor would perform
concerning litigation, claims, and
a. Obtain assurance from management that it has disclosed all unasserted claims that the
lawyer has advised are probable of assertion and must be disclosed.
b. Confirm directly with the client's lawyer, that all claims have been recorded in the financial
statements.
c. Inquire of and discuss with management the policies and procedures adopted for identifying,
evaluating, and accounting for litigation, claims, and assessments.
d. Obtain from management a description and evaluation of litigation, claims, and assessments
existing at the balance sheet date.

219. The scope of an audit is not restricted when an attorney's response to an auditor as a result of a
client's letter of audit inquiry limits the response of
a. matters to which the attorney has given substantive attention in the fo.rm of legal
representation.
b. an evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the
entity.
c. the attorney's opinion of the entity's historical experience in recent similar litigation.
d. the probable outcome of asserted claims and pending or threatened litigation.
220. A CPA has received an attorney's letter in which no significant disagreements with the client's
assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after
receipt of the letter should alert the auditor that
a. undisclosed unasserted claims may have arisen.
b. the attorney was unable to form a conclusion with respect to the significance of litigation,
claims, and assessments.
c. the auditor must begin a completely new examination of contingent liabilities.
d. an adverse opinion will be necessary.

221. When auditing related party transactions, an auditor places primary emphasis on
a. confirming the existence of the related parties.
b. verifying the valuation of the related party transactions.
c. evaluating the disclosure of the related party transactions.
d. ascertaining the rights and obligations of the related parties.

222. An auditor would be most likely to consider modifying an otherwise unqualified opinion if the
client's financial statements include a footnote on related party transactions
a. representing that certain related party transactions were consummated on terms equivalent
to those obtainable in transactions with unrelated parties,
b. presenting the peso volume of related party transactions and the effects of any change in
the method of establishing terms from that used in the prior period.
c. explaining the business purpose of the sale of real property to a related party.
d. disclosing compensating balance arrangements maintained for the benefit of related parties.

223. Which of the following statements is correct concerning related party transactions?
a. In the absence of evidence to the contrary, related party transactions should be assumed to
be outside the ordinary course of business.
b. An auditor should determine whether a particular transaction would have occurred if the
parties had not been related.
c. An auditor should substantiate that related party transactions were consummated on terms
equivalent to those that prevail in arm's-length transactions.
d. The audit procedures directed toward identifying related party transactions should include
considering whether transactions are occurring but are not being given proper accounting
recognition.

224. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity's ability to
continue as a going concern?
a. Review compliance with the terms of debt agreements.
b. Confirmation of accounts receivable from principal customers.
c. Reconciliation of interest expense with debt outstanding.
d. Confirmation of bank balances.

225. A client acquired 25% of its outstanding capital stock after year end and prior to completion of the
auditor's field work. The auditor should
a. advise management to adjust the balance sheet to reflect the acquisition.
 b. issue pro forma financial statements giving effect to the acquisition as if it had occurred at
year end.
c. advise management to disclose the acquisition in the notes to the financial statements.
d. disclose the acquisition in the opinion paragraph of the auditor's report.

226. Which of the following procedures would an auditor most likely perform to obtain evidence about
the occurrence of subsequent events?
a. Recomputing a sample of large-peso transactions occurring after year end for arithmetic
accuracy.
b. Investigating changes in stockholders' equity occurring after year end.
c. Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising
after year end.
d. Confirming bank accounts established after year end.

227. An auditor concludes that a substantive auditing procedure considered necessary during the prior
period's audit was omitted. Which of the following factors would most likely cause the auditor promptly
to apply the omitted procedure?
a. there are no alternative procedures available to provide the same evidences as the omitted
procedures.
b. the omission of the procedures impairs the auditor's present ability to support the previously
expressed opinion.
c. the source documents needed to perform the omitted procedure are still available.
d. the auditor's opinion on the prior period's financial statements was unqualified.

228. Which of the following procedures is least likely to be performed before the balance sheet date?
a. testing of internal control over cash.
b. confirmation of receivables.
c. search for unrecorded liabilities.
d. observation of inventory.

229. Which of the following most likely would be detected by an auditor's review of a client's sales cut
off?
a. shipments lacking sales invoices and shipping documents.
b. excessive writes-offs of accounts receivable.
c. unrecorded sales at year end.
d. lapping of year-end accounts receivable.

230. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management's assertion of
a. presentation.
b. completeness.
c. rights.
d. existence.

231. Which of the following procedures would provide the most reliable
a. Inquiries of the client's internal audit staff held in private.
 b. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
c. Analytical procedures performed by the auditor on the entity's trial balance.
d. Inspection of bank statements obtained directly from the client's financial institution.

232. An auditor most likely would review an entity's periodic accounting for the numerical sequence of
shipping documents and invoices to support management's financial statement assertion of
a. existence or occurrence.
b. rights and obligations.
c. valuation or allocation.
d. completeness.

233. When auditing inventories, an auditor would least likely verify that
a. the financial statement presentation of inventories is appropriate.
b. damaged goods and obsolete items have been properly accounted for.
c. all inventory owned by the client is on hand at the time of the count.
d. the client has used proper inventory pricing.

234. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews
the entity's aging of receivables to support management's financial statement assertion of
a. existence or occurrence.
b. valuation or allocation.
c. completeness.
d. rights and obligations.

235. Which of the following statements is correct concerning analytical procedures?

a. Analytical procedures usually involve comparisons of ratios developed from recorded
amounts to assertions developed by management.
b. Analytical procedures used in planning an audit generally use data aggregated at a high
level.
c. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed level of control risk.
d. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions.

236. In testing long-term investments, an auditor ordinarily would use analytical procedures to
ascertain the reasonableness of the
a. completeness of recorded investment income.
b. classification between current and noncurrent portfolios.
c. valuation of marketable equity securities.
d. existence of unrealized gains or losses in the portfolio.

237. A purpose of a management representation letter is to reduce

a. audit risk to an aggregate level of misstatement that could be considered material.
b. an auditor's responsibility to detect material misstatements only to the extent of the letter is
relied on.
c. the possibility of a misunderstanding concerning management's responsibility for the
financial statements.
 d. the scope of an auditor's procedures concerning related party transactions and subsequent
events.

238. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if
the
a. specialist's findings provide the auditor greater assurance of reliability about management's
representations.
b. auditor adds an explanatory paragraph to an unqualified opinion describing an uncertainty
resulting from the specialist's findings.
c. auditor's use of the specialist's findings is different from that of prior years.
d. speciali.st is a related party whose findings fully corroborate management's financial
statement assertions.

239. The primary purpose of sending a standard confirmation request to financial institutions with
which the client has done business during the year is to
a. detect kiting activities that may otherwise not be discovered.
b. corroborate information regarding deposit and loan balances.
c. provide the data necessary to prepare a proof of cash.
d. request information about contingent liabilities and secured transactions.

240. Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?
a. Review the cash receipts journal for the month prior to the year end.
b. Intensify the study of the internal control structure concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion.
d. Inspect the shipping records documenting the merchandise sold to the debtors.

241. Which of the following is a substantive test that an auditor most likely would perform to verify the
existence and valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that prenumbered purchase orders
are used and accounted for.
b. Receiving the client's mail, unopened, for a reasonable period of time after the year end to
search for unrecorded vendor's invoices.
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports.
d. Confirming accounts payable balances will known suppliers who have zero balances.

242. Which of the following documentation is required for an audit in accordance with standards on
auditing?
a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the
entity's internal control policies and procedures.
b. A client engagement letter that summarizes the timing and details of the auditor's planned
field work.
c. An indication in the working papers that the accounting records agree of reconcile with the
financial statements.
d. The basis for the auditor's conclusions when the assessed level of control risk is at the
maximum level for all financial statement assertions.
243. Although the quantity and content of audit working papers vary with each particular engagement,
an auditor's permanent files most likely include
a. schedules that support the current year's adjusting entries.
b. prior years' accounts receivable confirmation that were classified as exceptions.
c. documentation indicating that the audit work was adequately planned and supervised.
d. analyses of capital stock and other owners' equity accounts.

244. An auditor most likely would modify an unqualified opinion if the entity's financial statements
include a footnote on related patty transactions
a. Disclosing loans to related parties at interest rates significantly below prevailing market
rates.
b. Describing an exchange of real estate for Similar property in a non-monetary related party
transaction.
c. Stating that a particular related party transaction occurred on terms equivalent to those that
would have prevailed in an arm's-length transaction.
d. Presenting the peso volume of related party transactions and the effects of any change in
the method of establishing terms from prior periods.

245. Which of the following procedures should an auditor generally perform regarding subsequent
events?
a. Compare the latest available interim financial statements with the financial statements being
audited.
b. Send second requests to the client's customers who failed to respond to initial accounts
receivable confirmation requests.
c. Communicate material weaknesses in the internal control structure to the client's audit
committee.
d. Review the cut-off bank statements for several months after the year end.

246. An auditor most likely would be responsible for assuring that management communicates
significant deficiencies in the design of the internal control structure
a. to a court-appointed creditors' committee.
b. to shareholders with significant influence (more than 20% equity ownership) when the
reportable conditions are deemed to be material weaknesses.
c. to the Securities and Exchange Commission when the client is publicly-held entity.
d. to specific legislative and regulatory bodies when reporting under Philippine Government
Auditing Standards.

247. Which of the following statements concerning audit evidence is correct?

a. To be competent, audit evidence should be either persuasive or relevant, but need not be
both.
b. The measure of the validity of audit evidence lies in the auditor's judgment.
c. The difficulty and expense of obtaining audit evidence concerning an account balance is a
valid basis for omitting the
d. A client's accounting data can be sufficient audit evidence to support the financial
statements.
248. The primary source of information to be reported about litigation,
claims, and assessments is the
a. client's lawyer.
b. court records,
c. client's management.
d. independent auditor.

249. In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely be justified?
a. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
b. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
c. A small number or accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.
d. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.

250. Which of the following procedures would an auditor most likely perform in searching for
unrecorded payables?
a. Reconcile receiving reports with related cash payments made just prior to year-end.
b. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
c. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase
orders.
d. Compare cash payments occurring after the balance sheet date with the accounts payable
trial balance.

COMPLIANCE AND SUBSTANTIVE PROCEDURES AUDIT OF THE REVENUE CYCLE

251. Which of the following controls would most likely reduce the risk of diversion of customer receipts
by a client's employees?
a. A bank lockbox system.
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.

252. To provide assurance that each voucher is submitted and paid only once, the auditors most likely
would examine a sample of paid vouchers and determine whether each voucher is:
a. Supported by a vendor's invoice
b. Stamped "paid" by the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.

253. In testing controls over cash disbursements, the auditors most likely would determine that the
person who signs checks also:
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
 c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.

254. To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would
examine any of the following except:
a. Cutoff bank statement.
b. Year-end bank statement.
c. Bank confirmation.
d. General ledger.

255. You have been assigned to the year-end audit of a financial institution and are planning the
timing of audit procedures relating to cash. You decide that it would be preferable to:
a. Count the cash in advance of the balance sheet date in order to disclose any kiting
operations at year-end.
b. Coordinate the count of cash with the cutoff of accounts payable.
c. Coordinate the count of cash with the count of marketable securities and other negotiable
assets.
d. Count the cash immediately upon the return of the confirmation letters from the financial
institution.

256. Which of the following procedures would the auditors most likely perform to test controls relating
to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
a. Observe the consistency of the employees' use of cash registers and tapes.
b. Inquire about employees' access to recorded but undeposited cash.
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
d. Compare the cash balance in the general ledger with the bank confirmation request.

257. Reconciliation of the bank account should not be performed by an individual who also:
a. Processes cash disbursements.
b. Has custody of securities.
c. Prepares the cash budget.
d. Reviews inventory reports.

258. The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditors most likely would compare the:
a. Details of deposit slips with details of credits to customer accounts.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.

259. In order to guard against the misappropriation of company-owned marketable securities, which of
the following is the best course of action that can be taken by a company with a large portfolio of
marketable securities?
a. Require that one trustworthy and bonded employee be responsible for access to the
safekeeping area where securities are kept.
 b. Requirement that employees who enter and leave the safekeeping area sign and record in a
log the exact reason for their access.
c. Require that employees involved in the safekeeping function maintain a subsidiary control
ledger for securities on a current basis.
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker
that will act as a custodial agent.

260. Honey Company had large amounts of funds to invest on a temporary basis. The board of
directors decided to purchase securities and derivatives and assigned the future purchase and sale
decisions to a responsible financial executive. The best person or persons to make periodic reviews Of
the investment activity would be:
a. An investment committee of the board of directors.
b. The chief operating officer.
c. The corporate controller.
d. The treasurer.

261. The auditors who physically examine securities should insist that a client representative be
present in order to:
a. Detect fraudulent securities.
b. Lend authority to the auditors' directives.
c. Acknowledge the receipt of securities returned.
d. Coordinate the return of securities to the proper locations.

262. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation.
b. Verification by reference to dividend record books.
c. Confirmation with dividend-paying companies.
d. Examination of cash disbursements records.

263. Which of the following is least likely to be considered an inherent risk relating to receivables and
revenues?
a. Restrictions placed on sales by laws and regulations.
b. Decline in sales due to economic declines.
c. Decline in sales due to product obsolescence.
d. Over-recorded sales due to a lack of control over the sales entry function.

264. Which of the following would provide the most assurance concerning the valuation of accounts
receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on shipping
documents.
b. Compare receivable turnover ratios to industry statistics for reasonableness.
c. Inquire about receivables pledged under loan agreements.
d. Assess the allowance for uncollectible accounts for reasonableness.

265. Which of the following is most likely to be an example of fraudulent financial reporting relating to
sales?
a. Inaccurate billing due to a lack of controls.
 b. Lapping of accounts receivable.
c. Misbilling a client due to a data input error.
d. Recording sales when the customer is likely to return the goods.

266. Which of the following is an example of misappropriation of assets relating to sales?

a. Accidentally recording cash that represents a liability as revenue.
b. Holding the sales journal open to record next year's sales as having occurred in the current
year.
c. Intentionally recording cash received from a new debt agreement as revenue.
d. Theft of cash register sales.

267. There is a presumption that auditors will confirm accounts receivable unless the auditors'
assessment of the risk of material misstatement is low.
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective.
b. And accounts receivable are composed of large accounts.
c. And the effectiveness of confirmations is absolutely determined.
d. Or accounts receivable are from extremely reputable customers.

268. Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?
a. Collectibility is reasonably assured.
b. Delivery has occurred or is scheduled to occur in the near future.
c. Persuasive evidence of an arrangement exists.
d. The seller's price to the buyer is fixed or determinable.

269. To determine that all sales have been recorded, the auditors would select a sample of
transactions from the:
a. Shipping documents file.
b. Sales journal.
c. Accounts receivable subsidiary ledger.
d. Remittance advices.

270. Which of the following would most likely be detected by an auditor's review of the client's sales
cutoff?
a. Excessive goods returned for credit.
b. Unrecorded sales discounts.
c. Lapping of year-end accounts receivable.
d. Inflated sales for the year.

271. To test the existence assertion for recorded receivables, the auditors would select a sample from
the:
a. Sales orders file.
b. Customer purchase orders.
c. Accounts receivable subsidiary ledger.
d. Shipping documents (bills of lading) file.

272. Which assertion relating to sales is most directly addressed when the auditors compare a sample
of shipping documents to related sales invoices?
 a. Existence or occurrence.
b. Completeness.
c. Rights and obligations.
d. Presentation and disclosure.

273. prince, CPA, is auditing the financial statements of a small rural municipality. The receivable
balances represent presidents' delinquent real estate taxes. Internal control at the municipality is
weak. To determine the existence of the accounts receivable balances at the balance sheet date.
Prince would most likely:
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts.
d. Inspect the internal records, such as copies of the tax invoices that were mailed to the
residents.

274. Identify the control that is most likely to prevent the concealment of a cash shortage resulting
from the improper write-off of a trade account receivable:
a. Write-offs must be approved by a responsible official after review of credit department
recommendations and supporting evidence.
b. Write-offs must be approved by the accounts receivable department.
c. Write-offs must be-authorized by the shipping department.
d. Write-offs must be supported by an aging schedule showing that only receivables overdue
by several months have been written off.

275. The overall objective in the audit of the sales and collection cycle is to evaluate whether
a. the sales account and the accounts receivable account are free of errors.
b. the sales account and the accounts receivable account are free of material errors.
c. the sales account and the accounts receivable account are presented fairly in accordance
with financial reporting standards.
d. the account balances affected by the cycle are fairly presented in accordance with financial
reporting standards.

276. For the most part, the audit of the sales and collection cycle
a. cannot be performed until the audit of cash is completed.
b. can be performed independently of the audit of other cycles.
c. must be performed simultaneously with the audit of the purchases and disbursements cycle.
d. must be performed first so that the audit of the other cycles can rely on the data.

277. For the most part, the evidence gathered during the audit of the sales and collection cycle can be
subjectively combined with the other parts of the audit
a. as the evidence accumulation process proceeds.
b. only when all fieldwork processes of the engagement are completed.
c. only after the audit of the sales and collection cycle is concluded.
d. after the conclusion of both the cash cycle and the sales and collection cycle.

278. Which one of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances.
 b. Bad debt expense.
c. Allowance for uncollectible accounts.
d. Cash credits from the cash disbursements journal.

279. The customer's request for merchandise, the customer order, would be in the form of
a. an oral request.
b. a written request on customer's letterhead.
c. a written request on a pre-printed form.
d. any of the above three formats.

280. A document for recording the description, quantity, and related information for goods ordered by
a customer is the
a. customer order.
b. sales order.
c. shipping document.
d. remittance advice.

281. The document used to indicate to the customer the amount of a sale and due date of the
payment is the
a. sales order.
b. shipping document.
c. bill of lading.
d. sales invoice.

282. The document used as the basis for recording sales transactions and updating the accounts
receivable master file is the
a. sales order.
b. bill of lading.
c. sales journal.
d. sales invoice.

283. A document prepared to initiate shipment of the goods sold is the

a. sales order.
b. bill of lading.
c. sales invoice.
d. customer order.

284. When posting the Sales Journal, details of a journal are posted to and journal totals are posted to
"Y".
a. X = the sales account. Y: the general ledger.
b. X = the accounts receivable master life. Y = the general ledger.
c. X = the sales account. Y= the accounts receivable subsidiary ledger.
d. X = the accounts receivable account in the general ledger. Y = the sales account in the
general ledger.

285. The report which typically includes information analyzed by key component as sales person,
product, and territory is the
 a. remittance advice.
b. summary sales report.
c. accounts receivable master life.
d. monthly statement.

286. The document which supports reductions in accounts receivable is the

a. remittance advice.
b. credit memo.
c. sales invoice.
d. monthly statement.

287. The document which accompanies the customer's payment is the

a. credit memo.
b. remittance advice.
c. sales invoice.
d. monthly statement.

288. The document which is used to permit the immediate deposit of cash and to improve the control
over the custody of assets is the
a. sales invoice.
b. credit memo.
c. remittance advice.
d. cash receipts journal.

289. The daily entries in the cash receipts journal are supported by the
a. sales invoices.
b. shipping documents.
c. remittance advises.
d. credit memos.

290. A file for recording individual sales, cash receipts, and sales returns and allowances for each
customer is the
a. sales journal.
b. cash receipts journal.
c. general ledger.
d. accounts receivable subsidiary ledger.

291. The total of the individual account balances in the accounts receivable master file equals the
a. total sales for the period.
b. total sales less the total cash received for the period.
c. balance of the accounts receivable account in the general ledger.
d. balance of the sales account in the general ledger.

292. A listing of the amount owed by each customer which shows how long each component part has
been due is the
a. trial balance.
b. working trial balance.
 c. accounts receivable trial balance.
d. aged accounts receivable trial balance.

293. A document sent to each customer showing their beginning accounts receivable balance and the
amount and date of each sale, cash payment received, credit memo issued, and the ending accounts
receivable balance is the
a. accounts receivable subsidiary ledger.
b. monthly statement.
c. remittance advice.
d. sales invoice.

294. Before goods are shipped on account, a properly authorized person must
a. prepare the sales invoice.
b. approve the journal entry.
c. approve credit.
d. verify that the unit price is accurate.

295. For most firms, the function of indicating credit approval is recorded on the
a. customer order.
b. sales order.
c. remittance advice.
d. sales invoice.

296. Most companies recognize sales when

a. a customer order is received.
b. the merchandise is shipped.
c. the merchandise is received by the customer.
d. cash is received on account.

297. Which one of the following would the auditor be concerned with when examining the billing
function of client?
a. Alt shipments made have been billed.
b. No shipment has been bitted more than once.
c. Each shipment has been billed for the proper amount.
d. All three are of concern.

298. Proper auditing requires that an account receivable must be charged off by client when
a. client company concludes that an amount is no longer collectible
b. customer files for bankruptcy.
c. a collection agency cannot inspire customer to pay the debt.
d. the account is at least six months old.

299. If the internal control structure is deemed to be effective during the obtaining an understanding
phase. the tests of transactions will usually be planned to be performed
a. at the balance sheet date.
b. at an interim date.
c. at the beginning of client's fiscal period.
 d. after the tests of balances are completed.

300. If the controls necessary to satisfy any one of the objectives are inadequate, the likelihood of
errors related to that objective
a. is increased, regardless of the controls for the other objectives.
b, may be increased if the controls for other objectives don't mitigate it.
c. may be decreased if management is aware of the poor controls.
d. is indeterminate.

301. Which one of the following statements is true? In deciding on substantive tests of transactions,
a. Some procedures are commonly employed on every audit regardless of the circumstances.
b. All procedures are dependent on the adequacy of the controls and the results of the tests of
controls.
c. Results obtained in the prior year's audit will not affect the procedures used this year.
d. The materiality of the item will not influence the choice of procedures used.

302. In many audits of sales transactions, no substantive tests of transactions are made for the
completeness objective on the ground that
a. overstatements of assets and income are a greater concern than understatements.
b. understatements of assets and income are a greater concern than overstatements.
c. it doesn't matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
d. the reduced causes a reduction of accounts receivable, therefore the ratios of the two
financial statements will not be misleading.

303. An effective procedure to test for unbilled shipments is to trace from the
a. sales journal to the shipping documents.
b. shipping documents to the sales journal.
c. sales journal to the accounts receivable ledger.
d. sales journal to the general ledger sales account.

304. The audit procedure referred to as proof of cash receipts is useful to test.
a. whether all recorded cash receipts have been deposited in the bank.
b. time lags in making deposits.
c. whether there are cash receipts that have not been recorded in the journals.
d. all three of the above.

305. The cashier diverted cash received over the counter from a customer to his own use and wrote
off the receivable as a bad debt. Select the control that should have prevented the error.
a. Aging schedules of accounts receivable are prepared periodically and reviewed by a
responsible official.
b. Journal entries are approved by a responsible official.
c. Receipts are given directly to the cashier by the person who opens the mail.
d. Remittance advises, letters, or envelopes that accompany receipts are separated and given
directly to the accounting department.
306. Tedori Manufacturing Company received a substantial sales return on December 30, 2021, but
the credit memorandum for the return was not prepared and recorded until March 4, 2012, The
returned merchandise was included in the year-end physical inventory taken on December 31, 2021.
The most effective procedure for preventing this type of error is to
a. prepare an aged schedule of accounts receivable monthly.
b. prenumber and account for all credit memorandums.
c. reconcile the subsidiary accounts-receivable ledger with the general-ledger control account
monthly.
d. prepare and numerically control receiving reports for all materials received.

307. Smith is engaged in the audit of a cable TV firm which services a rural community. All receivable
balances are small, customers are billed monthly, and internal control is effective. To determine the
validity of the accounts receivable balances at the balance sheet date, Smith would most likely
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation requests.

308. An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectibility of the receivables is in doubt.
d. pledging of the receivables is probable.

309. The audit working papers often include a client-prepared, aged trial balance of accounts
receivable as Of the balance sheet date. This aging is best used by the auditor to
a. evaluate internal control over credit sales.
b. test the accuracy of recorded chargé sales.
c. estimate credit losses.
d. verify the validity of the recorded receivables.

310. Skates, an independent auditor, was engaged to perform an examination of the financial
statements of Apex Incorporated one month after its fiscal year had ended. Although the inventory
count was not observed by Skates, and accounts receivable were not confirmed by direct
communication with creditors, Skates was able to gain satisfaction by applying alternative auditing
procedures. Skates' auditor's report will probably contain
a. an "except for" qualification.
b. an unqualified opinion and an explanatory middle paragraph.
c. either a qualified opinion or a disclaimer of opinion.
d. a standard unqualified opinion.

311. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable
confirmation procedures. In such situations the best alternative procedure the auditor might resort to
would be
a. examining subsequent receipts of year-end accounts receivable.
 b. reviewing accounts receivable aging schedules prepared at the balance sheet date and at a
subsequent date.
c. requesting that management increase the allowance for uncollectible accounts by an amount
equal to some percentage of the balance in those accounts that cannot be confirmed.
d. performing an overall analytic review of accounts receivable and sales on a year-to-year
basis.

312, A corporation is holding securities as collateral for an outstanding account receivable. During the
course of the audit engagement the CPA should
a. verify that title to the securities rests with the corporation.
b. ascertain that the amount recorded in the investment account is equal to the fair market
value of the securities at the date of receipt.
c. examine the securities and ascertain their value.
d. refer to independent sources to determine that recorded dividend income is proper.

313. When scheduling the audit work to be performed on an engagement, the auditor should consider
confirming accounts receivable balances at an interim date if
a. subsequent collections are to be reviewed.
b. internal control over receivables is good.
c. negative confirmations are to be used.
d. there is a simultaneous examination of cash and accounts receivable.

314. Returns of positive-confirmation requests for accounts receivable were very poor. As an
alternative procedure, the auditor decided to check subsequent collections. The auditor had satisfied
himself that the client satisfactorily listed the customer name next to each check listed on the deposit
slip; hence, he decided that for each customer for which a confirmation was not received that he would
add all amounts shown for that customer on each validated deposit slip for the two months following
the balance-sheet date. The major fallacy in the auditor's procedure is that
a. checking of subsequent collections is not an accepted alternative auditing procedure for
confirmation of accounts receivable.
b. by looking only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance-sheet date or a subsequent transaction.
c. the deposit slip would not be received directly by the auditor as a confirmation would be.
d. a customer may not have made a payment during the two month period.

315. Which of the following errors would not be discovered during the tests of the bank reconciliation?
a. cash received by the client subsequent to the balance sheet date but recorded as cash
receipts in the current year.
b. Deposits recorded in the cash book near the end of the year, deposited in the bank, and
included in the bank reconciliation as a deposit in transit.
c. The existence of payments on notes payable that were debited directly to the bank balance
by the bank but were not entered in the client's records.
d. Payment to an employee for more hours than he worked.

AUDIT OF THE EXPENDITURE CYCLE

316. Which of the following is least likely to be among the auditors' objectives in the audit of
inventories and cost of goods sold?
a. Determine that the valuation of inventories and cost of goods sold is arrived at by
appropriate methods.
b. Determine the existence of inventories and the occurrence of transactions affecting cost of
goods sold.
c. Establish that the client includes only inventory on hand at year-end in inventory totals.
d. Establish completeness of inventories.

317. The receiving department is least likely to be responsible for the:

a. Determination of quantities of goods received.
b. Detection of damaged or defective merchandise.
c. Preparation of a shipping document.
d. Transmittal of goods received to the store's department.

318. The document issued by a common carrier acknowledging the receipt of goods and setting forth
the provisions of the transportation agreement is the:
a. Bill of lading.
b. Job time shipping.
c. Production order.
d. Production schedule.

319. Which of the following should be included as a part of inventory costs of a manufacturing
company?
Direct Labor Raw Materials Factory Overhead
a. Yes Yes Yes
b. Yes No No
c. No Yes No
d. No No No

320. When a primary risk related to an audit is possible overstated inventory, the assertion most
directly related is:
a. Existence.
b. Completeness.
c. Clarity.
d. Presentation.

321. Instead of taking a physical inventory count on the balance-sheet date, the client may take
physical counts prior to the year-end if internal control is adequate and:
a. Well kept records of perpetual inventory are maintained.
b. Inventory is slow-moving.
c. Computer error reports are generated for missing prenumbered inventory tickets.
d. Obsolete inventory items are segregated and excluded.

322. The auditor's analytical procedures will be facilitated if the client:

a. uses a standard cost system that produces variance reports.
b. Segregates obsolete inventory before the physical inventory count.
 c. Corrects material weaknesses in internal control before the beginning of the audit.
d. Reduces inventory balances to the lower of cost or market.

323. When perpetual inventory records are maintained in quantities and in pesos, and internal control
over inventory is weak, the auditor would probably:
a. Want the client to schedule the physical inventory count at the end of the year.
b. Insist that the client perform physical counts of inventory items several times during the year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
d. Have to disclaim an opinion on the income statement for that year.

324. Which of the following is the best audit procedure for the discovery of damaged merchandise in a
client's ending inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities in the
prior year.
b. Observe merchandise and raw materials during the client's physical inventory taking.
c. Review the management's inventory representations letter for accuracy.
d. Test overall fairness of inventory values by comparing the company's turnover ratio with the
industry average.

325. Maganda Corp. does not make an annual physical count of year- end inventories, but instead
makes weekly test counts on the basis of a statistical plan. During the year, Sam Morales, CPA,
observes such counts as she deems necessary and is able to satisfy herself to the reliability of the
client's procedures. In reporting on the results of her examination, Morales:
a. Can issue an unqualified opinion without disclosing that she did not observe year-end
inventories.
b. Must comment in the scope paragraph as to her inability to observe year-end inventories,
but can nevertheless issue an unqualified opinion.
c. Is required, if the inventories are material, to disclaim an opinion on the financial statements
taken as a whole.
d. Must, if the inventories are material, qualify her opinion.

326. The primary objective of a CPA's observation of a client's physical inventory count is to:
a. Discover whether a client has counted a particular inventory item or group of items.
b. Obtain direct knowledge that the inventory exists and has been properly counted.
c. Provide an appraisal of the quality of the merchandise on hand on the day of the physical
count.
d. Allow the auditor to supervise the conduct of the count in order to obtain assurance that
inventory quantities are reasonably accurate.

327. The total of the individual employee earnings in the payroll master file equals the
a. total balance of gross payroll in general ledger accounts.
b. total of the checks drawn to employees for payroll.
c. total gross payroll plus the total contributed by the employer for payroll taxes.
d. total gross pay for the current week's payroll.

328. No individual with access to time cards, payroll records, or checks should also be permitted
access to
 a. personnel records.
b. the computer.
c. the canceled check file.
d. job time tickets.

329. controls should prevent those responsible for the preparation of payroll checks from all but which
one of the following activities?
a. Signing paychecks.
b. Distributing paychecks.
c. Access to time cards.
d. Access to the payroll journal.

330. The signing and distribution of the checks must be properly handled to prevent their theft. Which
of the following is not an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the
preparation of the payroll.
b. A check signing machine should not be used to replace a manual signature.
c. Distribution of pay checks should be performed by someone who is not involved in the other
payroll functions.
d. Unclaimed paychecks should be immediately returned for re- deposit.

331. Most companies use an imprest account to pay the payroll. Which of the following is not an
advantage of such an account?
a. It limits the company's exposure to payroll fraud.
b. It facilitates cash management.
c. It eliminates the requirement of keeping a minimum balance in a checking account.
d. If allows the delegation of payroll check-signing duties.

332. The careful and timely preparation of ail payroll tax returns is necessary to avoid penalties and
criminal charges. The most important control in the timely preparation of these returns is
a. computerized preparation of tax returns.
b. a well-defined set of policies that indicate when each form must be filed.
c. independent verification of computer output by a competent individual
d. a Gantt chart.

333. The most important means of verifying account balances in the payroll and personnel cycle are
a. analytical procedures.
b. tests of controls.
c. tests of transactions.
d. tests of details of balances.

334. Which of the following would not be a justification for an auditor spending very little time
performing tests of transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background than the former
one.
b. Employees will detect any underpayments.
c. Payroll transactions are uniform and uncomplicated.
 d. Payroll transactions are extensively audited by government agencies.

335. Which of the following circumstances would not cause an auditor to extend payroll procedures
considerably?
a. Payroll significantly affects inventory valuation.
b. There is a possibility of material fraudulent payroll transactions.
c. There is a weak internal control structure.
d. There is a lack of independent third-party evidence, such as confirmations.

336. Which of the following statements is correct?

a. The overhead charged to inventory at the balance sheet date can be understated if the
salaries of administrative personnel are inadvertently or intentionally charged to indirect
manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by
charging labor to incorrect jobs.
c. payroll is a significant portion of inventory for retail and service industry companies.
d. The valuation of inventory is affected if the direct labor cost of individual employees is
improperly charged to the wrong job or process.

337. Which of the following is not a procedure which can be performed on canceled checks in an effort
to detect defalcations?
a. Compare the endorsements on checks with authorized signatures.
b. Scan endorsements for unusual or recurring second endorsements.
c. Examine voided checks to be sure they haven't been used.
d. Examine the payroll records in subsequent periods to determine that terminated employees
are not longer being paid.

338. A procedure in which employee must pick up and sign for his or her check in the presence of a
supervisor and the auditor is
a. a surprise payroll payoff.
b. a payroll roll call.
c. an inexpensive way to uncover payroll "ghosts".
d. a payroll queue.

339. Because of the lack of available evidence, it is usually difficult for an auditor to discover if an
employee records more time on his or her time card than actually worked. One procedure is
a. to reconcile the total hours paid this period with a previous period.
b. to reconcile the total hours paid according to the payroll records with an independent record
of the total hours worked, such as those maintained by production control.
c. to reconcile the total hours worked this period with a previous period.
d. to reconcile the total hours worked according to the summary payroll report with the total
hours worked as recorded on the time card for the period.

340. Which of the following, statements is not correct?

a. Internal controls will vary from company to company; therefore, the auditor must identify the
controls and weaknesses for each organization.
b. The auditor must perform tests of controls on all of client's internal controls.
 c. The substantive tests of transactions will vary depending on the assessed control risk.
d. The tests of controls and substantive tests of transactions are combined where appropriate.

341. "Recorded payroll payments are for work actually performed by non-fictitious employees"
satisfies the control objective of
a. authorization.
b. completeness.
c. validity.
d. valuation.

342. "Existing payroll transactions are recorded" satisfies the control objective of
a. authorization.
b. completeness.
c. validity.
d. valuation.

343. "Recorded payroll transactions are for the amount of time actually Worked and at the proper pay
rate; withholdings are properly calculated" satisfies the control objective of
a. authorization.
b. completeness.
c. validity.
d. valuation.

344. Which of the following is a Test of Controls?

a. Review the payroll journal, general ledger, and payroll earnings records for large or Unusual
amounts.
b. Examine time cards for indication of supervisor approval.
c. Compare canceled check with payroll journal for name, amount, and date.
d. Examine canceled checks or proper endorsement,

345. Which of the following is a substantive test of transactions?

a. Review personnel policies.
b. Account for a sequence of payroll checks.
c. Reconcile the disburse ents in the payroll journal with the disbursements on the payroll bank
statement.
d. Examine printouts of transactions rejected by the computer as having invalid employee
numbers.

346. The auditor should review the preparation of at least one of each type of payroll tax form the
client is responsible for filing, as a part of the auditor's responsibility for
a. understanding the internal control structure.
b. doing tests of controls.
c. doing tests of transactions.
d. doing tests 0f balances.

347. To test whether the client has fulfilled its legal obligation in submitting payments for all payroll
withholdings, the auditor must
 a. contact client's independent attorney.
b. know the dates when tax payments are due.
c. trace these payments to the imprest payroll account.
d. determine the client's requirements for submitting the payments.

348. The periodic payment from the general cash account to the payroll account for net payroll should
be tested for at least one payroll period. The major audit concern is
a. a substantive test that the correct amount was transferred for this test period.
b. a test of transactions that the check is prepared for the proper amount and deposited before
payroll checks are handed out.
c. an analytical review procedure that net pay is reasonable.
d. a test of controls that an imprest account is being used for payroll.

349. Good internal control for the payroll function is usually

a. not difficult to establish.
b. difficult to establish.
c. absent.
d. a result of prior audit results.

350. Which of the following is not a type of error that gives the auditor concern in auditing payroll
transactions?
a. Classification errors in charging labor to inventory and job cost accounts.
b. Computational errors in formulas when a computerized system is used.
c. Weaknesses in the control system which allows underpayment of employees.
d. Any error which indicates possible fraud.

351. Generally, the tests of transactions performed in the payroll cycle will use
a. an attributes sampling plan that assumes a zero deviation rate
b. a variables sampling plan that assumes a zero deviation rate.
c. an attributes sampling plan that assumes a large deviation rate.
d. a variables sampling plan that assumes a large deviation rate.

352. The primary concern in testing payroll-related liabilities is to make sure that
a. accruals are properly valued.
b. transactions are recorded in the proper period.
c. there are no understated or omitted accruals.
d. the accruals are not overstated.

353. Client's liability for payroll taxes withheld but not yet disbursed can be tested by comparing the
balance with
a. the payroll journal.
b. the payroll tax form prepared in the subsequent period.
c. the cash disbursement in the subsequent period.
d. all three of the above.

354. The correct cutoff and valuation of accrued salaries and wages
 a. to calculate the exact hours of pay that were earned in the current period and paid in a
subsequent period.
b. is to compute an approximate proportion of the wages that were earned in the current period
and use that amount as the accrual.
c. allows the client to choose between a and b above each year.
d. depends on company policy, consistently followed.

355. Which of the following would not be a test used when auditing accrued sales commissions?
a. Confirm the amount of commissions directly with the employees.
b. Test the calculations (recalculate) based on the agreement between client and employees,
c. Compare the method of accruing commissions with the previous years.
d. Test the mechanical accuracy in the Commissions Expense account at interim dates.

356. Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be
accomplished by comparing the recorded accrual to the amount
a. in the expense account.
b. used in the prior period.
c. authorized in the minutes of the board.
d. paid in the subsequent period.

357. The most important consideration in evaluating the fairness of the amounts accrued for vacation
pay, sick pay, and other benefits is
a. the consistent accrual of these liabilities relative to those of the preceding year.
b. the actual expense incurred for the prior period.
c. the amount expended to date in the current period.
d. the profitability of the client which will enable these liabilities to be met.

358. Tracing selected items from the payroll register to employee time cards that have been approved
by supervisory personnel provides evidence that
a. internal controls relating to payroll disbursements were operating effectively.
b. payroll checks were signed by an appropriate officer independent of the payroll preparation
process.
c. only bona fide employees worked and their pay was properly computer.
d. employees worked the number of hours for which their pay was computed.

359. To minimize the opportunity for fraud, unclaimed salary checks should be
a. deposited in a special bank account.
b. kept in the payroll department.
c. left with the employee's supervisor.
d. held for the employee in the personnel department.

360. It would be appropriate for the payroll accounting department to be responsible for which of the
following functions?
a. Approval of employee time records.
b. Maintenance of records of employment, discharges, and pay increases.
c. Preparation of periodic governmental reports as to employees' earnings and withholding
taxes.
 d. Temporary retention of unclaimed employee paychecks.

361. Effective internal accounting control over the payroll function should include procedures that
segregate the duties of making salary payments to employees and
a. controlling unemployment insurance claims.
b. maintaining employee personnel records.
c. approving employee fringe benefits.
d. hiring new employees.

362; An auditor will ordinarily ascertain whether payroll checks are properly endorsed during the
examination of
a. time cards.
b. the voucher system.
c. cash in bank
d. accrued payroll.

363. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be clear under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should be segregated,
d. The payment of cash to employees should be replaced with payment by checks.

364. Effective internal accounting control over unclaimed payroll checks that are kept by the treasury
department would include accounting department procedures that require
a. effective cancellation and stop payment orders for checks representing unclaimed wages.
b. preparation of a list of unclaimed wages on a periodic basis.
c. accounting for all unclaimed wages in a current liability account.
d. periodic accounting for the actual checks representing unclaimed wages.

365. Which of the following is an effective internal accounting control used to prove that production
department employees are properly validating payroll time cards at a time-recording station?
a. Time cards should be carefully inspected by those persons who distribute pay envelopes to
the employees.
b. One person should be responsible for maintaining records of employee time for which salary
payment is not to be made.
c. Daily reports showing time charged to jobs should be approved by the supervisor and
compared to the total hours worked on the employee time cards.
d. Internal auditors should make observations of distribution of paychecks on a surprise basis.

AUDIT OF THE INVESTING AND FINANCING CYCLE

366. To assure accountability for fixed asset retirements, management should implement an internal
control that includes:
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of
plant assets.
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have
been retired.
 c. Utilization of serially numbered retirement work orders.
d. periodic observation of plant assets by the internal auditors.

367. The auditors may conclude that depreciation charges are insufficient by noting:
a. Insured values greatly in excess of book values.
b. Large amounts of fully depreciated assets.
c. Continuous trade-ins of relatively new assets.
d. Excessive recurring losses on assets retired.

368. Which of the following is an internal control weakness related to factory equipment?
a. Checks issued in payment of purchases of equipment are not signed by the controller.
b. All purchases of factory equipment are required to be made by the department in need of the
equipment.
c. Factory equipment replacements are generally made when estimated useful lives, as
indicated in depreciation schedules, have expired.
d. Proceeds from sales of fully depreciated equipment are credited to other income.

369. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance
that additions to property, plant and equipment are not understated?
a. Depreciation
b. Accounts Payable
c. Cash
d. Repairs

370. The auditors are most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts.
b. Appropriateness of physical inventory observation procedures.
c. Existence of obsolete machinery.
d. Deferral of procurement of certain necessary insurance

371. To strengthen internal control over the custody of heavy mobile equipment, the client would most
likely institute a policy requiring a periodic:
a. Increase in insurance coverage.
b. Inspection of equipment and reconciliation with accounting records.
c. Verification of liens, pledges, and collateralizations.
d. Accounting for work orders.

372. Which of the following statements is not typical of property, plant and equipment as compared to
most current asset accounts?
a. A property, plant and equipment cutoff error near year-end has a more significant effect on
net income.
b. Relatively few transactions occur-in property, plant and equipment during the year.
c. The assets involved with property, plant and equipment during the year.
d. Property, plant and equipment accounts typically have a higher peso value.

373. For the audit of a continuing non-public client, the emphasis of the testing for property accounts is
on:
 a. All transactions resulting in the ending balance.
b. Tests of controls over disposals.
c. Transactions that occurred during the year.
d. Performing analytical procedures on beginning balances of the accounts.

374. Audit of which of the following accounts is most likely to reveal evidence relating to recorded
retirements of equipment?
a. Accumulated depreciation.
b. Cost of goods sold.
c. Purchase returns and allowances.
d. Purchase discounts.

375. An effective procedure for identifying unrecorded retirements of equipment is to:

a. Foot related property
b. Recalculate depreciation on the related equipment.
c. select items of equipment in the accounting records and then locate them in the plant.
d. Select items of equipment and then locate them in the accounting records.

376. Which of the following is not an overall test of the annual provision for depreciation expense?
a. Compare rates used in the current year with those used in prior years.
b. Test computation of depreciation provisions for a representative number of units.
c. Test deductions from accumulated depreciation for assets purchased during the year.
d. Perform analytical procedures.

377. The audit of intangible assets typically involves

Vouching the Cost of Assets Testing Allocation Methods
a. Yes Yes
b. Yes No
c. No Yes
d. No No

378. Which of the following procedures is least likely to be completed before the balance sheet date?
a. Confirmation of receivables.
b. Search for unrecorded liabilities.
c. Observation of inventory.
d. Review of internal accounting control over rash disbursements.

279. An audit of the balance in the accounts payable account is ordinarily not designed to:
a. Detect accounts payable that are substantially past due.
b. Verify that accounts payable were properly authorized.
c. Ascertain the reasonableness of recorded liabilities.
d. Determine that all existing liabilities at the balance sheet date have been recorded.

380. Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary
trial balance of accounts payable.
 b. Examine unusual relationships between monthly accounts payable balances and recorded
purchases.
c. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain
whether they have been properly recorded.
d. Examine selected cash disbursements in the period subsequent to year-end.

381. Auditor confirmation of accounts payable balances at the balance sheet date may be
unnecessary because:
a. This is a duplication of cutoff tests.
b. Accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
c. Correspondence with the audit client's attorney will reveal all legal action by vendors for non-
payment.
d. There is likely to be other reliable external evidence available to support the balances.

382. A client erroneously recorded a large purchase twice. Which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger
d. Sending written quarterly confirmation to all vendors.

383. For effective internal control, the accounts payable department should compare the information
on each vendor's invoice with the:
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
c. Vendor's packing slip and the purchase order.
d. Vendor's packing slip and the voucher.

384. When confirming accounts payable, the approach is most likely to be one of:
a. Selecting the accounts with the largest balances at year-end, plus a sample of other
accounts.
b. Selecting the accounts of companies with whom the client has previously done the most
business, plus a sample of other accounts.
c. Selecting a random sample of accounts payable at year-end.
d. Confirming all accounts.

385. In an audit, the valuation of year-end accounts payable is most likely addressed by:
a. Confirmation.
b. Examination of cash disbursements immediately prior to year" end.
c. Examination of cash disbursements immediately subsequent to year-end.
d. Analytical procedures applied to vouchers payable at year- end.

386. Ordinarily, the most significant assertion relating to accounts payable is:
a. Completeness.
b. Existence.
c. Presentation.
 d. Valuation.

387. The least likely approach in auditing management's estimate relating to an accrued liability is to:
a. Independently develop an estimate of the amount to compare to management's estimate.
b. Review and test management's process of developing the estimate.
c. Review subsequent events or transactions bearing on the estimate.
d. Send confirmations relating to the estimate.

388. To determine that each voucher is submitted and paid only once, when a payment is approved,
supporting documents should be cancelled by the:
a. Authorized members of the audit committee.
b. Accounting department.
c. Individual who signs the checks.
d. Chief executive officer.

389. In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to
the supporting documents. Which assertion would this test of controls most likely test?
a. Completeness
b. Existence
c, Valuation
d. Rights

390. It is not an audit objective, when auditing manufacturing equipment and the related depreciation
and accumulated depreciation accounts, to determine whether
a. costs and related depreciation for all significant retirements, abandonments, and disposals of
property have been properly recorded.
b. the balances in the property accounts, including the amounts carried forward from the
preceding year, are properly stated.
c. additions represent actual property, whether installed, constructed, or rented.
d. the balances in accumulated depreciation accounts are reasonable, considering expected
useful Jives of property units and possible net salvage values.

391. The emphasis in auditing manufacturing equipment is on the verification of

a. the balance carried forward in the account from the previous period (beginning balance).
b. current period acquisitions and retirements.
c. the balance in the account after the current year's activities are considered (ending balance).
d. all three of the above.

392. The approach used to verify manufacturing equipment is different that the one used to verify
a. current assets.
b. patents.
c. copyrights.
d. all other types of property, plant, and equipment.

393. In the audit of manufacturing equipment. it is helpful to separate the tests into but which one of
the following categories?
a. Verification of the beginning balance,
 b. Verification of current-year acquisitions.
c. Verification of current-year disposals.
d. verification of the ending balance.

394. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the
improper amount, affects the balance sheet
a. for the Current period.
b. for the depreciable life of the asset.
c. until the firm disposes of the asset.
d. forever.

395. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the
improper amount, affects the income statement
a. for the current period.
b. for the depreciable life of the asset.
c. until the firm disposes of the asset.
d. forever.

396. The test of details of balances procedure which "physically examines assets" is done to satisfy
the audit objective of
a. classification.
b. completeness.
c. cutoff.
d. validity.

397. The test of details of balances procedure to "Examine vendors" invoices of closely related
accounts such as repairs to uncover items that should be manufacturing equipment" is done to satisfy
the audit objective of
a. classification.
b. mechanical accuracy.
c. cutoff.
d. validity.

398. The test of details of balances procedure which requires a "recalculation of investment credit" is
done to satisfy the audit objective of
a. classification.
b. mechanical accuracy.
c. validity.
d. classification.

399. The most common audit test to verify additions to manufacturing equipment is examination of
vendors' invoices and receiving reports. This process is known as
a. verifying.
b. cross referencing.
c. dual referencing.
d. vouching.
400. It should ordinarily be unnecessary to examine supporting documentation for each addition to
manufacturing equipment, but it
is normal to verify
a. all large transactions.
b. all unusual transactions.
c. a representative sample of typical additions.
d. all three of the above.

401. The erroneous inclusion of transactions that should properly be recorded as assets into accounts
such as repairs expense, lease expense, or supplies is a common client error. The auditor should
evaluate the likelihood of these types of misclassifications in conjunction with
a. obtaining an understanding of the internal control structure.
b. the test of controls.
c. the tests of transactions.
d. the tests of details of balances.

402. If the client fails to record disposals of manufacturing equipment, both the original cost of the
asset account and the net book value will be incorrect.
a. Both will be overstated indefinitely.
b. The original cost will be overstated indefinitely and the net book value will be overstated until
the asset is fully depreciated.
c. The original cost will be overstated indefinitely and the net book value will be understated
indefinitely.
d. The original cost will be overstated indefinitely and the net book value will be understated
until the asset if finally depreciated.

403. Because the failure to record disposals of manufacturing equipment can significantly affect the
financial statements, the search for unrecorded disposals is essential. Which of the following is not a
procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the
disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review plant modifications and changes in product line, taxes, or insurance coverage.

404. When an asset is sold or disposed of without having been traded in for a replacement asset, the
valuation of the transaction can be verified by examining the related
a. purchase order and property master file.
b. sales invoice and property master file.
c. sales invoice and merchandise inventory listing.
d. purchase order and merchandise inventory listing.

405. An area of special concern to the auditor occurs when client disposes of assets affected by the
investment credit recapture Provisions. Since the recapture affects the current year's income-tax
expense and liability, the auditor must determine that client's calculation of the investment credit is
accurate. Before the recalculation can be made, it is necessary to have an understanding of the
recapture provisions for
 a. the year the asset was disposed.
b. the year the investment credit was implemented by congress.
c. the year the asset was acquired.
d. every year sin& the investment credit was implemented and/or changed by congress.

406. After assessing control risk, the auditor must decide whether it is necessary to verify the
existence of individual items of manufacturing equipment included in the master file. This audit
procedure, if performed, would satisfy the audit objective of
a. valuation.
b. classification.
c. validity.
d. mechanical accuracy.

407. If the auditor believes there is a high likelihood of significant missing permanent assets that are
still recorded on the accounting records, an appropriate procedure is to select a sample from the
assets master file and examine
a. the documents verifying their acquisition.
b. the assets.
c. all the related journal entries.
d. the accumulated depreciation calculations.

408. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior periods because
a. it will not affect the current valuations.
b. they were verified in previous audits.
c. the related depreciation calculations for the current period are more important.
d. the emphasis of the audit is on the income statement items, not the balance sheet items.

409. A major consideration in verifying the ending balance in permanent assets is the possibility of
existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit
objective for
a. validity.
b. classification.
c. disclosure.
d. mechanical accuracy.

410. The proper disclosure of manufacturing equipment in the financial statements would ordinarily not
include the disclosure of
a. gross costs.
b. leased property as a separate line item on the face of the statement.
c. liens on property as a separate line item on the face of the statement.
d. manufacturing equipment as a separate item from other permanent assets.

411. Depreciation expense is one of the few expense accounts that is not verified as a part of
a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. analytical procedures.
412. The most important objective for depreciation expense is proper
a. valuation.
b. classification.
c: cutoff.
d. disclosure.

413. Occasionally, changing circumstances may necessitate a revaluation of the useful life of an
asset. When this occurs, it involves a change in
a. accounting estimate rather than a change in accounting principle.
b. accounting principle rather than a change in accounting estimate.
c. both accounting principle and accounting estimate.
d. neither accounting principle nor accounting estimate.

414. In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part
of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of
a. asset acquisitions.
b. capital acquisitions.
c. disposal of assets.
d. accumulated depreciation.

415. One typical difference between the asset Prepaid Expenses and other assets, such as Accounts
Receivable and Inventory, is the immateriality of the former in many audits. Because of this
immateriality, frequently the only audit procedure necessary to perform is
a. tests of control.
b. tests of transactions.
c. tests of details of balances.
d. analytical procedures.

416. Which of the following is least likely to be an audit objective for debt?
a. Determine the existence of recorded debt.
b. Establish the completeness of recorded debt.
c. Determine that the client has rights to receive proceeds • relating to the redemption of debt.
d. Determine that the valuation of debt is in accordance with financial reporting standards.

417. The auditors would be most likely to find unrecorded long-term liabilities by analyzing:
a. Interest payments.
b. Discounts on long-term liabilities.
c. Premiums on long-term liabilities.
d. Recorded long-term liability accounts.

418. A likely reason that consideration of client compliance with debt provisions is important to an
audit is that violation of such debt provisions may affect the total recorded:
a. Number of debt restrictions.
b. Current liabilities.
c. Long-term assets.
d. Share capital.
419. A transfer agent and a registrar are most likely to provide the auditor with evidence on:
a. Restrictions on the payment of accounts payable.
b. Shares issued and outstanding.
c. Preferred stock liquidation value.
d. Transfers occurring between management and related parties.

420. The audit procedure of confirmation is least appropriate with respect to:
a. The trustee of an issue of bonds payable.
b. Holders of ordinary shares.
c. Holders of notes receivable.
d. Holders of notes payable.

421. An auditor is most likely to trace treasury stock purchase transactions to the:
a. Numbered stock certificates on hand.
b. Articles of incorporation.
c. Year's interest expense.
d. Minutes of the audit committee.

422. In the continuing audit of a manufacturing company of medium size, which of the following areas
would you expect to require the least amount of audit time?
a. Owners' equity.
b. Revenue.
c. Assets,
d. Liabilities.

423. The auditors can best verify a client's bond sinking fund transactions and year-end balance by:
a. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
b. Confirmation with individual holders of retired bonds.
c. Confirmation with the bond trustee.
d. Examination and count of the bonds retired during the year.

424. The auditors' program for the examination of long-term debt should include steps that require the:
a. Verification of the existence of the bondholders.
b. Examination of copies of debt agreements.
c. Inspection of the accounts payable subsidiary ledger
d. Investigation of credits to the bond interest account.

425, Ail corporate share capital transactions should ultimately be traced to the:
a. Minutes of the board of directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.

426. Which of the following is most likely to be an audit objective in the audit of owners' equity?
a. Establish that recorded owners' equity includes all long-term debt and equity balances.
 b. Determine that ordinary share is valued at current market value.
c. Determine that the presentation and disclosure of owners' equity is appropriate.
d. Determine that the existence of recorded owners' equity is in conformity with equity
accounting rule valuations.

427. In an audit of sole proprietorship, a common difficulty is lack of:

a. Segregation of Personal net worth and business capital.
b. Availability of the owner.
c. Agreement as to the distribution between retained earnings and owners' capital.
d. Proper measures of dividends.

428. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily
contain a(n)
a. disclaimer of opinion.
b. "except for" qualified opinion.
c. unqualified opinion.
d. Unqualified opinion with a separate explanatory paragraph.

429. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable time. If the entity's disclosures concerning this matter are adequate, the audit
report may include a (n)
Disclaimer of "Except for"
opinion qualified opinion
a. Yes yes
b. No No
c. No Yes
d. Yes No

430. Which of the following audit procedures would be least effective for detecting contingent
liabilities?
a. Abstracting the minutes of the meetings of the board of directors.
b. Reviewing the bank confirmation letter.
c. Examining confirmation replies from customers.
d. Confirming pending legal matters with the corporate attorney.

431. Management furnishes the independent auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor's primary means of initiating action to corroborate
such information?
a. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and
assessments with which they were consulted during the period under examination.
b. Request that client management send a letter of audit inquiry to those lawyers with whom
management consulted concerning litigation, claims, and assessments.
c. Request that client lawyers provide a legal opinion concerning the policies-and procedures
adopted by management to identify, evaluate, and account for litigation, claims, and
assessments.
 d. Request that client management engage outside attorneys to suggest wording for the text of
a footnote explaining the nature and probable outcome of existing litigation, claims, and
assessments.

432. A company guarantees the debt of an affiliate. Which of the following best describes the audit
procedure that would make the auditor aware of the guarantee?
a. Review minutes and resolutions of the board of directors.
b. Review prior year's working papers with respect to such guarantees.
c. Review the possibility of such guarantees with the chief accountant.
d. Review the legal letter returned by the company's outside legal counsel.

433. A charge in the subsequent period to a notes receivable account from the cash disbursements
journal should alert the auditor to the possibility that
a. a contingent asset has come into existence in the subsequent period.
b. a contingent liability has come into existence in the subsequent period.
c. a provision for contingencies is required.
d. a contingent liability has become a real liability and has been settled.

434. An auditor must obtain written client representations that normally should be signed by
a. the president and the chairperson of the board.
b. the treasurer and the internal auditor.
c. the chief executive officer and the chief financial officer.
d. the corporate counsel and the audit committee chairperson.

435. In connection with the annual audit, which of the following is not a "subsequent events"
procedure?
a. Review available interim financial statements.
b. Read available minutes of meetings of stockholders, directors, and committees and as, too
meetings for which minutes are not available, inquire about matters dealt with at such
meetings.
c. Make inquiries with respect to the financial statements covered by the auditor's previously
issued report if new information has become available during the current examination that
might affect that report.
d. Discuss with officers the current status of items in the financial statements that were
accounted for on the basis of tentative, preliminary, or inconclusive data.

436. Subsequent events affecting the realization of assets ordinarily will require adjustments of the
financial statements under examination because such events typically represent
a. the culmination of conditions that existed at the balance sheet date.
b. the final estimates of losses relating to casualties occurring in the subsequent events period.
c. the discovery of new conditions occurring in the subsequent events period.
d. the preliminary estimate of losses relating to new events that occurred subsequent to the
balance sheet date.

437. As part of an audit, a CPA often requests a representation letter from the client. Which one of the
following is not a valid purpose of such a letter?
 a. To provide audit evidence.
b. To emphasize to the client the client's responsibility for the correctness of the financial
statements.
c. To satisfy the CPA by means of other auditing procedures when certain customary auditing
procedures are not performed.
d. To provide possible protection to the CPA against a charge Of knowledge in cases where
fraud is subsequently discovered to have existed in the accounts.

438. An auditor's decision concerning whether or not to "dual date" the audit report is based upon the
auditor's willingness to
a. extend auditing procedures.
b. accept responsibility for subsequent events.
c. permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the
auditor's report.
d. assume responsibility for events subsequent to the issuance of the auditor's report.

439. An auditor generally obtains from a client a formal written statement concerning the accuracy of
inventory. This particular letter of representation is used by the auditor to
a. reduce the scope of the auditor's physical inventory work but not the other inventory audit
work that is normally performed.
b. confirm in writing the valuation basis used by the client to value the inventory at the lower of
cost or market.
c. lessen the auditor's responsibility for the fair presentation of balance sheet inventories.
d. remind management that the primary responsibility for the overall fairness of the financial
statements rests with management and not with the auditor.

440. Although there is no professional requirement to do so on audit engagements, CPAs normally

issue a formal "management" letter to their clients. The primary purpose of this letter is to provide
a. evidence indicating whether the auditor is reasonably certain that the system of internal
accounting control is operating as
b. a permanent record of the internal accounting control work performed by the auditor during
the course of the engagement.
c. a written record of discussions between auditor and client concerning the auditor's
observations end suggestions for improvements.
d. a summary of the auditor's observations that resulted from the auditor's special study of the
system of internal control.

441. Under which of the following circumstances may audited financial statements contain a note
disclosing a subsequent event which is labeled unaudited?
a. When the subsequent event does not require adjustment of the financial statements.
b. When the event occurs after completion of fieldwork and before issuance of the auditor's
report.
c. When audit procedures with respect to the subsequent event were not performed by the
auditor.
d. When the event occurs between the date of the auditor's original report and the date of the
reissuance of the report.
442. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the
auditor's report would not require disclosure in the financial statements?
a. Sale of a bond or share capital issue.
b. Loss of plant or inventories as a result of fire or flood.
c. A major drop in the quoted market price of the stock of the corporation.
d. Settlement of litigation when the event giving rise to the claim took place after the balance-
sheet date.

443. Ajax Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the
following is most likely to be used by the auditor to obtain assurance that all guarantees of the
affiliate's indebtedness have been detected?
a. Send the standard bank confirmation request to all of the client's lender banks.
b. Review client minutes and obtain a representation letter.
c. Examine supporting documents for a" entries in inter- company accounts.
d. Obtain written confirmation of indebtedness from the auditor of the affiliate,

444. After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make
any further audit tests or inquiries with respect to the audited financial statements covered by that
report unless
a. new information comes to the auditor's attention concerning an event which occurred prior to
the date of the auditor's report which may have affected the auditor's report.
b. material adverse events occur after the date of the auditor's report.
c. final determination or resolution was made on matters which had resulted in a qualification in
the auditor's report.
d. final determination or resolution was made of a contingency which had been disclosed in the
financial statements.

445. The auditor's formal review of subsequent events normally should be extended through the date
of the
a. auditor's report.
b. next formal interim financial statements.
c. delivery of the audit report to the client.
d. mailing of the financial statements to the stockholders.

446. Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of
subsequent events that may require adjustment or disclosure essential to a fair presentation of the
financial statements in conformity with financial reporting standards. Which one of the following
procedures would be least appropriate for this purpose?
a. Confirm as of the completion of field work accounts receivable which have increased
significantly from the year-end date.
b. Read the minutes of the board of directors.
c. inquire of management concerning events which may have occurred.
d. Obtain a lawyer's letter as Of the completion of field work.

447. which of the following auditing procedures is ordinarily performed

a. Reading of the minutes of the directors' meetings. last?
b. Confirming accounts payable.
 c. Obtaining a management representation letter,
d. Testing of the purchasing function.

448. A client has a calendar year end. Listed below are four events that occurred after December 31.
Which one of these subsequent events might result in adjustment of the December 31 financial
statements?
a. Adoption of accelerated depreciation methods.
b. Write-off of a substantial portion of inventory as obsolete.
c. Collection of 90% of the accounts receivable existing at December 31.
d. Sale of a major subsidiary.

449. With respect to contingent liabilities, the Standard Bank Confirmation Inquiry form approved
jointly by the PICPA and the Bank Administration Institute requests information regarding notes
receivable.
a. Held by the bank in a custodial account.
b. Held by the bank for collection.
c. Collected by the bank.
d. Discounted by the bank.

450. A representation letter issued by a client

a. Is essential for the preparation of the audit program.
b. Is a substitute for testing.
c. Does not reduce the auditor's responsibility,
d. Reduces the auditor's responsibility only to the extent that it

451. The statement that best expresses the auditor's responsibility with respect to events occurring
between the balance sheet date and the end of his examination is that
a. the auditor has no responsibility for events occurring in the subsequent period unless these
events affect transactions recorded on or before the balance-sheet date.
b. the auditor's responsibility is to determine that a proper cutoff has been made and that
transactions recorded on or before the balance-sheet date actually occurred.
c. the auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the last day of field work.
d. the auditor is responsible for determining that a proper cutoff has been made and performing
a general review of events occurring in the subsequent period.

452. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they could be issued?
a. Sale of long-term debt or capital stock.
b. Loss of a plant as a result of a flood.
c. Major purchase of a business which is expected to double the sales volume.
d. Settlement of litigation, in excess of the recorded liability.

453. Which of the following is the most efficient audit procedure for the detection of unrecorded
liabilities at the balance sheet date?
a. Confirm large accounts payable balances at the balance sheet
 b. Compare cash disbursements in the subsequent period with the accounts payable trial
balance at years end.
c. Examine purchase orders issued for several days prior to the close of the year.
d. Obtain an attorney's letter from the client's attorney.

454. A CPA has received an attorney's letter in which no significant disagreements with the client's
assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after
receipt of the letter should alert the auditor that
a. undisclosed unasserted claims may have arisen.
b. the attorney was unable to form a conclusion with respect to the significance of litigation,
claims and assessments.
c. the auditor must begin a completely new examination of contingent liabilities.
d. an adverse opinion will be necessary.

455. An auditor performs interim work at various times throughout the year. The auditor's subsequent
events work should be extended to the date of
a. a post-dated footnote.
b. the next scheduled interim visit.
c. the final billing for audit services rendered.
d. the auditor's report.

456. An attorney is responding to an independent auditor as a result of the audit client's letter of
inquiry. The attorney may appropriately limit the response to
a. asserted claims and litigation.
b. matters to which the attorney has given substantive attention in the form of legal consultation
or representation.
c. asserted, overtly threatened, or pending claims and litigation.
d. items which have an extremely high probability of being resolved to ethe client's detriment.

AUDIT PROGRAM AND AUDIT WORKING PAPERS

457. An audit program provides proof that

a. sufficient competent evidential matter was obtained.
b. the work was adequately planned.
c. there was compliance with financial reporting standards.
d. there was a proper study and evaluation of internal control.

458. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting control.
c. after reviewing the client's accounting records and procedures.
d. when the audit engagement letter is prepared.

459. What do you call that type of working paper where matters of importance are noted down for
further verification?
a. Summary sheet.
 b. Audit program.
c. Agenda sheet.
d. Supporting schedules.

460. The permanent file portion of the auditor's working papers generally should include
a. a copy of the engagement letter.
b. a copy of key customer confirmation.
c. names and addresses of all audit staff personnel on the engagement.
d. time and expense reports.

461. During an audit engagement pertinent data are compiled and included in the audit working
papers. The working papers primarily are considered to be
a. a client-owned record of conclusions reached by the auditors who performed the
engagement.
b. evidence supporting financial statements.
c. support for the auditor's representations as to compliance with standards on auditing.
d. a record to be used as a basis for the following year's engagement.

462. Audit work papers are used to record the results of the auditor's evidence gathering work. When
preparing work papers the auditor should remember that
a. work papers should be designed to meet the circumstances and the auditor's needs on each
engagement.
b. work papers should be kept on the client's premises so as to provide ready access to them
by the client.
c. work papers should access to them by the client.
d. work papers should be considered as a substitute for the client's accounting records.

463. Audit working papers should not

a. include any client-prepared papers or documents other than those prepared by the CPA or
his assistant.
b. be kept by the CPA after review and completion of the audit except for items required for the
income tax return or-the permanent file.
c. be submitted to the client to support the financial statements and to provide evidence of the
audit work performed.
d. themselves be expected to provide sufficient support for the auditor's opinion.

464. An auditor's working papers will generally be least likely to include documentation showing how
the
a. client's schedules were prepared.
b. engagement had been planned.
c. client's system of internal control had been reviewed and evaluated.
d. unusual matters were resolved.

465. Although the quantity, type, and content of working paper will vary with the circumstances, the
working papers generally include the
a. copies of those client records examined by the auditor during the course of the engagement.
 b. evaluation of the efficiency and competence of the audit staff assistants by the partner
responsible for the audit.
c. auditor's comments concerning the efficiency and competence of client management
personnel.
d. auditing procedures followed, and the testing performed in obtaining evidential matter.

466. Which of the following is generally included or shown in the Auditor's working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the
client's management team.
b. Analysis that are designed to be a part of, or a substitute for, the client's accounting records.
c. Excerpts from authoritative pronouncements that supports the underlying financial reporting
standards used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor's procedures
were resolved or treated.

467. Which of the following factors will least affect the independent auditor's judgment as to the
quantity, type, and content of working papers desirable for a particular employment?
a. Nature of the auditor's report.
b. Nature of the financial statements, schedules, or other information upon which the auditor is
reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit.

468. In planning an audit engagement, which of the following is a factor that affects the independent
auditor's judgment as to the quantity, type, and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluation based upon initial substantive testing.
c. The content of the client's representation letter.
d. The anticipated nature of the auditor's report.

469. which is not one of the uses of audit working papers?

a. To serve as the basis for the preparation of the financial statements and the audit report.
b. To analyze and organize accounting information so that it can be audited more easily.
c. To provide evidence of the audit work performed.
d. To prove the independence of the auditor.

470. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the
predecessor auditor. The predecessor should permit the successor to review working papers relating
to matters of continuing significance such as those that relate to
a. extent of reliance on the work of specialists.
b. fee arrangements and summaries of payments.
c. analysis of contingencies.
d. staff hours required to complete the engagement.

471. For what minimum period should audit working papers be retained by the independent CPA?
a. For the period during which the entity remains a client of the independent CPA.
b. For the period during which an auditor-client relationship exists but not more than six years
 c. For the statutory period within which legal action may be brought against the independent
CPA.
d. For as long as the CPA is in public practice.

472. The actual operation of an internal control system may be most objectively evaluated by
a. completing a questionnaire and flowchart related to the accounting system in the year under
audit.
b. review of the previous year's audit work papers to update the report of internal evaluation.
c. selection of items processed by the system and determination of the presence or absence of
errors and compliance deviations.
d. substantive tests of accounts balances based on the auditor's assessment of internal control
strength.

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

474. In the context of an audit of financial statements, substantive tests are audit procedures that
a. may be eliminated under certain conditions.
b. are designed to discover significant subsequent events.
c. may be either tests of transactions, direct tests of financial balances, or analytical tests.
d. degree of reliance on the relevant internal controls.

475. Which of the following is ordinarily designed to detect possible material peso errors on the
financial statements?
a. Compliance testing.
b. Analytical review.
c. Computer controls.
d. Post audit working paper review.

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

477. Which of the following audit tests would be regarded as a test of "compliance"?
 a. Tests of the specific items making up the balance in a given general ledger account.
b. Tests of the inventory pricing to vendors' invoices.
c. Tests of the signatures on canceled checks to board director's authorizations.
d. Tests of the additions to property, plant, and equipment by physical inspections.

478. An auditor evaluates the existing system of internal control in order to

a. determine the extent of substantive tests which must be performed.
b. determine the extent of compliance tests which must be performed.
c. ascertain whether irregularities are probable. ascertain whether any employees have
incompatible functions.
d. Substantive tests of accounts balances based on the author’s assessment of internal control
strength.

479. After finishing the review phase. of the study and evaluation of internal control in an audit
engagement, the auditor should perform compliance tests on
a. those controls that the auditor plans to rely one
b. those controls in which material weaknesses were identified.
c. those controls that have a material effect upon the financial statement balances.
d. a random sample of the controls that were reviewed.

480. A CPA wishes to use a representation letter as substitute for performing other audit procedures.
Doing so:
a. Violates professional standards.
b. Is acceptable, but should only be done when cost justified.
c. Is acceptable, but only for non-public clients.
d. Is acceptable and desirable under all conditions.

481. Which of the following is not a procedure that auditors typically perform to search for significant
events during the subsequent period?
a. Review minutes of board of director's meeting.
b. Review the latest available interim financial statements,
c. Inquire about any unusual adjustments made subsequent to the balance sheet date.
d. Review changes in internal control during the period subsequent to the balance sheet date.

482. Which of the following best describes the problem with the use of published industry averages for
analytical procedures?
a. Lack of comparability.
b. Lack of reliability.
c. Lack of competence.
d. Lack of availability.

483. Which of the following subsequent events might require an adjustment to the client's financial
statements?
a. A business combination with another company.
b. Loss on the sale of a closely-held investment.
c. Loss of plant and equipment due to a fire.
d. Retirement of bonds payable at a loss.
484. Which of the following best describes the reason that auditors are concerned with the detection of
related party transactions?
a. The financial statements must often adjusted for the effects of material related party
transactions.
b. Material related party transactions must be disclosed in the notes to the financial statements.
c. The substance of related party transactions will differ from their form.
d. In a related party transaction one party has the ability to exercise significant influence over
the other party.

485. Which of the following is not a typical procedure for testing the general journal?
a. Foot column totals.
b. Scan for unusual entries.
c. Confirm.
d. Vouch selected entries to original documents.

486. The audit time budget is an example of:

a. a supporting schedule.
b. an administrative working paper.
c. a lead schedule.
d. a corroborative working paper.

487. A schedule set up to combine similar general ledger accounts, the total of which appears on the
working trial balance as a single amount, is referred to as a
a. supporting schedule.
b. lead schedule.
c. corroborating schedule.
d. reconciling schedule.

488. Which of the following is not a function of working paper?

a. Provide support for the auditor's report.
b. Aid seniors in reviewing and supervising the work of managers and partners.
c. Aid partners in planning and conducting future audits.
d. Document staff compliance with standards on auditing.

489. A schedule listing account balances for the current and previous years, and columns for adjusting
and reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the
financial statements, is referred to as a
a. working trial balance.
b. lead schedule.
c. summarizing schedule.
d. supporting schedule.

490. Authorization of which of the following is least likely to be found during a review of the minutes of
the board of directors?
a. Dividends.
b. New debt issuance.
 c. New bank accounts.
d. Write-off of trade accounts receivable.

491. In order to determine the authorized capital structure of a corporation the auditors would review
a. the bylaws of the corporation.
b. the articles of incorporation.
c. the minutes of stockholders' meetings.
d. the minutes of board of directors' meetings.

492. An entity's financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved debits and credits to an illogical combination of
accounts. The auditor would most likely have been alerted to this
irregularity by
a. scanning the general journal for unusual entries.
b. performing a revenue cutoff test at year end.
c. tracing a sample of journal entries to the general ledger.
d. examining documentary evidence of sales returns and allowances recorded after year end.

493. Which of the following is not a primary purpose of audit working papers?
a. To coordinate the examination.
b. To assist in preparation of the audit report.
c. To support the financial statements.
d. To provide evidence of the audit work performed.

494. Which of the following has the least effect on the independent auditor's judgment as to the
quantity, type, and content of audit working papers?
a. The needs in the particular circumstances for supervision and review of the work performed
by any assistants.
b. The nature and condition of the client's records and internal controls.
c. The expertise of client personnel and their expected audit participation.
d. The type of the financial statements, schedules, or other information upon which the auditors
are reporting.

495. During an audit engagement pertinent data are prepared and included in the audit working
papers. The working papers primarily are considered to be
a. a client-owned record of conclusions reached b' the auditors who Performed the
engagement .
b. evidence supporting financial statements.
c. support for the auditors' representations as to compliance with the Philippine Standards on
Auditing.
d. a record to be used as a basis for the following year's

496. Although the quantity, type, and content of working papers will vary with the circumstances, the
working papers generally would
a. copies of those client records examined by the auditor during the course of the engagement.
b. evaluation of the efficiency and competence of the audit assistants by the partner
responsible for the audit.
 c. auditor's comments concerning the efficiency and competence of client management
personnel.
d. auditing procedures followed, and the testing performed in obtaining evidential matter.

497. The permanent file section of the working papers that is kept for each audit client most likely
contains
a. review notes pertaining to questions and comments regarding the audit work performed.
b. a schedule of time spent on the engagement by each individual auditor.
c. correspondence with the client's legal counsel concerning pending litigation.
d. narrative descriptions of the client's accounting procedures and internal controls.

498. Working papers that record the procedures used by the auditor to gather evidence should be
a. considered the primary support for the financial statements being examined.
b. viewed as the connecting link between the books of account and the financial statements.
c. designed to meet the circumstances of the particular engagement.
d. destroyed when the audited entity ceases to be a client.

499. In general, which of the following statements is correct with respect to ownership, possession, or
access to working papers prepared by a CPA firm in connection with an audit?
a. The working papers may be obtained by third parties where they appear to be relevant to
issues raised in litigation.
b. The working papers are subject to the privileged communication rule which, in a majority of
jurisdictions, prevents third-party access to the working papers.
c. The working. papers are the property of the client after the client pays the fee.
d. The working papers must be retained by the CPA firm for a period often years.

500. To ascertain the exact name of the corporate client, the auditor relies primarily on
a. corporate minutes.
b. by-laws.
c articles of incorporation.
d. tax returns

501. A sample in which the characteristics in the sample are the same as those of the-population is a
(an)
a. random sample.
b. variables sample.
c. attributes sample.
d. representative sample.

502. Non-sampling errors occur when audit tests do not uncover

existing exceptions in the
a. population.
b. sample.
c. planning stage.
d. financial statements.

503. one of the causes of non-sampling error is

 a. the use of inappropriate or ineffective audit procedures•
b. failure to draw a random sample.
c. failure to draw a representative sample.
d. the use of sampling instead of

504. One of the ways to eliminate non-sampling risk is through

a. proper supervision and instruction of the client's employees.
b. proper supervision and instruction of the audit team.
c. the use of attributes sampling rather than variables sampling.
d. controls which ensure that the sample drawn is random and representative.

505. Sampling risk (sampling error) is an inherent part of sampling that results from
a. inappropriate audit procedures.
b. failure to recognize exceptions.
c. testing less than the entire population.
d. weaknesses in client's internal control system.

506. One of the ways to reduce sampling risk is to

a. use an appropriate method of selecting sample items from the population.
b. carefully design the audit procedures to be used.
c. provide proper supervision and instruction of the audit team.
d. Use variables sampling rather than attribute sampling.

507. Which of the following statements is not correct?

a. it is acceptable for auditors to use statistical sampling methods.
b. It is acceptable for auditors to use non-statistical sampling methods.
c. The primary benefit of statistical sampling methods is the quantification of sampling risk.
d. An advantage of using statistical sampling is that the cost/benefit ratio is always positive.

508. The most common method used of performing statistical tests of transactions is
a. variables sampling.
b. attribute sampling.
c. judgment sampling.
d. random selection of samples.

509. Which of the following statements is a valid criticism of the use of non-statistical sampling
methods?
a. Many audit tests, such as footing of journals, must be performed outside a statistical context.
b. The cost of performing random selection of testing often exceeds the benefits.
c. Non-statistical sampling does not differ substantially from statistical sampling method.
d. Conclusions may be drawn in more precise ways when using statistical sampling methods.

510. Which of the following statements is not correct regarding probabilities and non-probabilistic
sample selection?
a. In probabilistic selection, every population item has a known chance of being selected.
b. Probabilistic selection is required for all statistical sampling methods.
c. It is not acceptable to make non-statistical evaluations using probabilistic selection.
 d. Both methods are acceptable and commonly used.

511. A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a
a. representative sample.
b. statistical sample.
c. random sample.
d. judgment sample.

512. Establishing a route through the random number table

a. is an arbitrary decision.
b. needs to done in advance of choosing the numbers.
c. is essential and the route must be followed consistently.
d. requires that all three of the above be true.

513. correspondence is established between the random number table and the population by
a. identifying each item in the population with a unique number.
b. deciding the number of digits to use in the random number table and their association with
the population numbering system.
c. defining which digits the auditor uses in a column and the method of reading the table.
d. selecting a random starting point on the table.

514. Numbers drawn from a random number table which are outside the range of the population are
a. set aside and used to examine items of the population with a non-sampling method.
b. used only if they represent high peso value items.
c. recycled into the population of random numbers to be used again should they appear a
second time.
d. discarded.

515. Which of the following statements is not correct?

a. The only reason for selecting a random starting point on a random number table is to eliminate the
predictability of the sample.
b. It is acceptable to pick a starting point on a random number table by using a "blind stab"
method.
c. It is impossible to draw a six-digit random number from a table which is separated into
columns of five digits.
d. When selecting a three-digit number from a table which is separated into columns of five
digits, it is permissible to use the first three digits, the middle three digits, or the last three
digits.

516. Which of the following statements regarding documentation of the

sample selection process is not true?
a. Regardless of the method used in selecting a random sample, it is necessary to have proper
documentation.
b. When comparing statistical sampling to judgmental sampling, it is more important that
statistical sampling be properly documented because of its mathematical nature.
 c. Minimum documentation would include sufficient information to permit the reproduction of
the sample at a later date.
d. For documentation, it is permissible for the auditor to include in the working papers a copy of
the table used, with the random numbers identified.

517. Which of the following statements regarding replacement and nonreplacement sampling is not
true?
a. In replacement sampling, an element in the population will not be included in the sample
more than once.
b. In nonreplacement sampling, an element in the population can be included in the sample
only once.
c. If the random number corresponding to an element is selected more than once in
nonreplacement sampling, it is treated as a discard the second time.
d. Auditors rarely use replacement sampling.

518. Which of the following is not an advantage of using computerized selection of random numbers
over use of a random number table?
a. Time saving.
b. Reduced likelihood of auditor error.
c. Automating documentation.
d. Correspondence of the numbers with the population is not

519. The process which requires the calculation of an interval and then selects the items based on the
size of the interval is
a. statistical sampling.
b. random selection.
c. systematic selection.
d. computerized selection.

520. The advantage of systematic selection is

a. it is easy to use.
b. there is limited possibility of it being biased.
c. it is unnecessary to determine if the population is arranged randomly.
d. all three of the above.

521. Which of the following statements regarding block sampling is not true?
a. Block sampling is the selection of several items in sequence.
b. It is acceptable to use block sampling for tests of transactions only if a reasonable number of
blocks are used.
c. A "reasonable number" for most situations is probably at least six blocks from six different
months.
d. Once the first item in the block is selected, the remainder of the block is chosen
automatically.

522. When the auditor goes through a population and selects items for the sample without regard to
their size, source, or other distinguishing characteristics, it is called
a. block selection.
 b. haphazard selection.
c. systematic selection.
d. statistical selection.

523. When the auditor intends to evaluate a sample statistically, the only acceptable selection method
is
a. probabilistic selection.
b. judgmental selection.
c. haphazard selection.
d. block selection.

524. A statistical method used to estimate the proportion of items in a population containing a
characteristic of interest is
a. population proportional to size sampling.
b. attributes sampling.
c. variables sampling.
d. estimation sampling.

525. Since auditors are interested in the occurrence of exceptions in populations, they refer to the
occurrence rate as
a. the exceptions rate.
b. the populations rate.
c. the deviation rate.
d. the confidence level.

526. if an auditor, without statistical sampling, selects a sample of one hundred items from a
population and finds two exceptions, the auditor
a. can conclude that the sample deviation rate is 2 percent.
b. can conclude that the population deviation rate is 2 percent,
c. can conclude the highest deviation rate expected in the population.
d. cannot make any conclusions about either the sample or the population.

527. A one-sided interval specifies

a. a CLDR only.
b. a CUDR only.
c. both CLDR and CUDR.
d. neither CLDR nor CUDR.

528. While attributes sampling is used primarily for tests of controls,

a. analytical review procedures,
b. tests of details of balances,
c. substantive tests of transactions.
d. all three of the above.

529. The risk which the auditor is willing to take of accepting a control as being effective when it is not,
is the
a. tolerable deviation rate.
 b. acceptable risk of over-reliance.
c. estimated population deviation rate.
d. finite correction factor.

530. The deviation rate the auditor will permit in the population and still be willing to reduce the
assessed level of control risk is called the
a. tolerable deviation rate.
b. estimated population deviation rate.
c. acceptable risk of over-reliance.
d. sample deviation rate.

531. The deviation rate the auditor expects to find in the population, before testing begins, is called the
a. tolerable deviation rate.
b. sample deviation rate.
c. computed upper deviation rate.
d. none of the above.

532. The effect of the finite correction factor on small population sizes is to
a. reduce the initial sample size.
c. either reduce or increase the initial sample size, depending on
the circumstances of the situation.
d. increase the population size.

533. Unless a precise statement of what constitutes an attribute is made in advance, the staff person
who performs the audit procedure will have no guidelines
a. to use when evaluating the results of analytical review procedures.
b. to determine what documents to obtain and review for the observation tests.
c. for identifying deviations.
d. for performing all three of the above.

534. Which of the following statements regarding the process of defining the population is not correct?
a. The population represents the body of data about which the auditor wishes to generalize.
b. The auditor can define the population to include whatever data is desired.
c. The auditor can randomly sample from whatever part of the population that he/she chooses.
d. The auditor may generalize only about that population which has been sampled.

535. "Whenever a sample is taken, there is a risk that the quantitative conclusions about the
population will be incorrect."
a. This is always true.
b. This is always true unless 100 percent of the population is tested.
c. This is true for statistical sampling; but not for non-statistical sampling.
d. This is true for non-statistical sampling but not for statistical samplings

536. The risk of overreliance on internal control is a measure of the

a. the auditor is willing to take.
b. is by random number table.
c. is predicted by the statistical frequency table.
 d. is generated as a result of the auditor's knowledge of the true population deviation rate.

537. If the auditor decides to assess control risk at the maximum level, tests of controls are
a. not performed.
b. reduced in number.
c. increased in number.
d. unchanged from prior planned settings.

538. The initial sample size is so called because

a. the auditor must take several samples to ensure randomness.
b. the auditor must tale several samples to ensure that the final sample is representative of the
population.
c. the deviations must be evaluated before deciding whether the sample is sufficiently large to
achieve the objectives.
d. there is always another sample to be done.

539. Statistical theory proves that in most types of population to which attributes sampling applies, the
population size is
a. not a consideration in determining sample size.
b. a minor consideration in determining n.
c. a major consideration in determining n.
d. the determining factor in establishing n.

540. The finite correction factor has the effect of significantly changing the sample size only when
a. 5% or more of the population is included in the sample.
b. more than 10% of the population is included in the sample.
c. greater than 5% but less than 10% of the population is included in the sample.
d. less than 5% but greater than 10% of the population is included in the sample.

541. Of the four factors which determine the initial sample size (population size, tolerable deviation
rate, acceptable risk of overreliance, and expected population deviation rate), a combination of two
factors has the greatest effect on sample size.
a. Population size times expected population deviation rate.
b. expected population deviation rate plus acceptable risk of overreliance.
c. tolerable deviation rate minus expected population deviation rate.
d. acceptable risk of overreliance minus tolerable deviation rate.

542. The sample deviation rate equals

a. the number of deviation in the population divided by the sample size.
b. the number of items in the population multiplied by the number of deviations in the sample.
c. the number of deviations in the sample divided by the sample size.
d. the number of deviations in the population divided by the population size.

543. Which of the following statements is not true?

a. Random selection is statistical measurement.
b. It is acceptable to use random selection procedures without drawing statistical conclusions,
 c. It would be in appropriate to draw a statistical conclusion unless the sample were randomly
selected.
d. Random selection is a part oi statistical sampling.

544. An auditor who uses statistical sampling for attributes in testing internal should increase the
assessed level of control risk
a. sample rate of deviation is less than the expected rate of deviation used in planning the
sample.
b. tolerable rate less than allowance for sampling risk exceeds the sample rate of deviation.
c. sample rate of deviation plus the allowance for sampling risk exceeds the tolevabie rate.
d. sample rate of deviation Pius the allowance for sampling risk equals the tolerable rate.

545. Which of the following factors is generally not considered in determining 'inn for a test of controls?
a. Population size.
b. Tolerable rate.
c. Risk of assessing control risk too low.
d. Expected population deviation rate.

546. An advantage of using statistical over non-statistical sampling methods in tests of controls is that
the statistical methods
a. afford greater assurance than a non-statistical sample of equal size.
b. provide an objective basis for quantitatively evaluating sample risks.
c. can more easily convert the sample into a dual-purpose test useful for substantive testing.
d. eliminate the need to use judgment in determining appropriate sample sizes.

547. A principal advantage of statistical methods of attribute sampling over non-statistical methods is
that they provide a scientific basis for planning the
a. risk of assessing control risk too low.
b. tolerable rate.
c. expected population deviation rate.
d. sample size.

548. An auditor selects a sample from the file of shipping documents to determine whether invoices
were prepared. This tests is performed to satisfy the audit objective of
a. accuracy.
b. completeness.
c. control.
d. existence.

549. To determine whether the internal control structure operated effectively to minimize errors of
failure to invoice a shipment, the auditor would select a sample of transactions from the population
represented by the
a. customer order file.
b. bill of lading file.
c. open invoice file.
d. sales invoice file.
550. In attribute sampling, a 10 percent change in which of the following factors normally will have the
least effect on the size of the statistical sample?
a. Population size.
b. Tolerable deviation rate.
c. Acceptable risk of over reliance.
d. Standard deviation.

551. If the result obtained from a particular sample will be critical (that is, the auditor would not be able
to render an unqualified opinion unless every item in the population were examined), which of the
following is the most important to the auditor?
a. Size of the population.
b. Estimated population deviation rate.
c. Tolerable deviation rate.
d. Acceptable risk of over reliance.

552. Which of the following need to be known to evaluate the results of a sample for a particular
attribute?
a. Deviation rate in the sample.
b. Size of the sample.
c. Acceptable risk of over reliance.
d. Deviations in the sample.

553. A CPA examining inventory may appropriately apply sampling for attributes in order to estimate
the
a. average price of inventory items.
b. percentage of slow-moving inventory items.
c. peso value of inventory.
d. physical quantity of inventory items.

554. if the size of the sample to be used in a particular test of attributes has not been determined by
using statistical concepts, but the sample has been chosen in accordance with random selection
procedures
a. no inferences can be drawn from the sample.
b. the auditor has committed a nonsampling error.
c. the auditor may or may not achieve the tolerable deviation rate at the acceptable risk of over
reliance.
d. the auditor will have to evaluate the results by reference to the principles of discovery
sampling.

555. In estimation sampling for attributes, which one of the following must be known in order to
appraise the results of the auditor's sample?
a. Estimated peso value of the population.
b. Standard deviation of the values in the population.
c. Actual deviation rate of the attribute in the population.
d. Sample size.
556. Auditors who prefer statistical to non-statistical sampling believe that the principal advantage of
statistical sampling flows from its unique ability to
a define the precision required to provide audit satisfaction.
b. provide a mathematical measurement of uncertainty.
c. establish conclusive audit evidence with decreased audit
d. promote a more legally defensible procedural approach.

557. If an auditor, planning to use statistical sampling, is concerned with the number of a client's sales
invoices that contain mathematical errors, the auditor would most likely utilize
a. random sampling with replacement.
b. sampling for attributes.
c. sampling for variables.
d. stratified random sampling.

558. Which of the following best describes the distinguishing feature of statistical sampling?
a. It requires the examination of a smaller number of supporting documents.
b. It provides a means for measuring, mathematically, the degree of uncertainty that results
from examining only part of a population.
c. It reduces the problems associated with the auditor's judgment concerning materiality.
d. It is evaluated in terms of two parameters: statistical mean and random selection.

559. Which of the following is an advantage of systematic sampling over random number sampling?
a. It provides a stronger basis for statistical conclusions.
b. It enables the auditor to use the more efficient "sampling with replacement" tables.
c. There may be correlation between the location of items in the population, the feature Of
sampling interest, and the sampling interval.
d. It does not require establishment of correspondence between random numbers and items in
the population.

560. When using statistical sampling for tests of compliance, an auditor's evaluation of compliance
would include a statistical conclusion concerning whether
a. procedural deviations in the population were within an acceptable range.
b. monetary precision is in excess of a certain pre-determined amount.
c. the population is not in error by more than a fixed amount.
d. population characteristics occur at least once in the population.

561. In performing a review of his client's cash disbursements, a CPA uses systematic sampling with a
random start. The primary disadvantage of systematic sampling is that population items
a. must be recorded in a systematic pattern before the sample can be drawn.
b. may occur in a systematic pattern, thus negating the randomness of the sample.
c. may occur twice in the sample.
d. must be replaced in the population after sampling to permit valid statistical inference.

562. The purpose of tests for compliance is to provide reasonable assurance that the accounting
control procedures are being applied as prescribed. The sampling method that is most useful when
testing for compliance is
a. judgment sampling.
 b. attribute sampling.
c. unrestricted random sampling with replacement.
d. stratified random sampling.

563. An example of sampling for attributes would be estimating the

a. quantity of specific inventory items.
b. probability of losing a patent infringement case.
c. percentage of overdue accounts receivable.
d. peso value of accounts receivable.

564. Which of the following best describes what the auditor means by the rate of occurrence in the
attribute sampling plan?
a. The number of errors that can reasonably be expected to be found in a population.
b. The frequency with which a certain characteristic occurs within a population.
c. The degree of confidence that the sample is representative of the population.
d. The peso range within which the true population total can be expected to fall.

565. When performing a compliance test with respect to control over cash disbursements, a CPA may
use a systematic sampling technique with a start at any randomly selected item. The biggest
disadvantage of this type of sampling is that the items in the population
a. must be recorded in a systematic pattern before the sample can be drawn.
b. may occur in a systematic pattern, thus destroying the sample randomness.
c. may systematically occur more than once in the sample.
d. must be systematically replaced in the population after sampling.

566. Which of the following statistical selection techniques is least desirable for use by an auditor?
a. Systematic selection.
b. Stratified selection,
c. Block selection.
d. Sequential selection.

567. An advantage of using statistical sampling techniques is that such

a. mathematically measure risk.
b. eliminate the need for judgmental decisions.
c. define the values of precision and reliability required to provide audit satisfaction.
d. have been established in the courts to be superior to judgmental sampling.

568. Which of the following best illustrates the concept. of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the
characteristics of interest.
b. An auditor may select audit procedures that are not appropriate to achieve the specific
objective.
c. An auditor may fail to recognize errors in the documents examined for the chosen sample.
d. The documents related to the chosen sample may not be available for inspection.

569. Statistical sampling generally may be applied to test compliance with internal accounting control
when the client's internal accounting control procedures
 a. depend primarily on appropriate segregation of duties.
b. are carefully reduced to writing and are included in client accounting manuals.
c. leave an audit trail in the form of documentary evidence of compliance.
d. enable the detection of material irregularities in the accounting records.

570. The estimated error rate obtained from attribute sampling is most useful in satisfying the auditing
standard which states
a. the work is to be adequately planned, and assistants, if any, are to properly supervised.
b. sufficient competent evidential matter is to be obtained through inspection, observation,
inquiries, and confirmations to afford a reasonable basis for an opinions
c. the examination is to be performed by a person or persons having adequate technical
training and proficiency as an auditor.
d. there is to be a proper study and evaluation of the existing internal control as a basis for
reliance thereon and for the determination of its resultant extent of the tests to which auditing
procedures are to be restricted.

571. The tolerable rate of deviations for a compliance test is generally

a. lower than the expected rate of errors in the related accounting records.
b. higher than the expected rate of errors in the related accounting records.
c. identical to the expected rate of errors in the related accounting records.
d. unrelated to the expected rate of errors in the related accounting records.

572. If certain forms are not consecutively numbered

a. selection of a random sample probably is not possible.
b. systematic sampling may be appropriate.
c. stratified sampling should be used.
d. random number tables can not be used.

573. When using a statistical sampling plan, the auditor would probably require a smaller sample if the
a. population increases.
b. desired precision interval narrows.
c. desired reliability decreases.
d. expected error occurrence rate increases.

574. Which of the following is not a type of statistical method that provides results in terms?
a. attribute sampling.
b. peso-unit sampling.
c. variables sampling.
d. sampling with probability proportional to size.

575. When auditors sample for tests of details of balances, the objective is to determine whether the
account balance
a. is correct.
b. contains material errors,
c. is fairly stated.
d. is material in comparison to operating income.
576. A method in sampling in which all the items in the population are divided into two or more sub-
population is
a. variables sampling.
b. attributes sampling.
c. stratified sampling.
d. divisible sampling.

577. When selecting a stratified sample, the sample size is

a. determined for the un-stratified population and then apportioned to each stratum.
b. determined for each stratum and selected from that stratum.
c. determined for each stratum and selected randomly from the entire un-stratified population.
d. always larger than if un-stratified sampling had been used.

578. An inherent part of the sampling that results from testing less than the entire population is
a. the acceptable risks of over-reliance.
b. sampling risks.
c. the upper bound.
d. inherent risks.

579. The estimated total population error is calculated as

a. the point estimate plus the sampling error.
b. the point estimate minus the sampling error.
c. the sampling error minus the point estimate.
d. none of the above.

580. The final step in the evaluation of the audit results is the decision to
a. accept the population as fairly stated or to require further action.
b. determine sampling error and calculate the estimated total population error.
c. project the point estimate.
d. determine the error in each sample.

581. A relatively recent innovation in sampling methodology that was developed specifically for use by
auditors is
a. attributes sampling.
b. variables sampling.
c. peso-unit sampling.
d. discovery sampling.

582. The most commonly used method of statistical sampling for tests of details of balances is
a. attributes sampling.
b. variables sampling.
c. peso-unit sampling.
d. discovery sampling.

583. The risk the auditor is willing to take of accepting a balance as correct when the true error in the
balance is equal to or greater than the tolerable misstatement is
a. the upper bound.
 b. the tolerable risk.
c. the acceptable risk of incorrect acceptance.
d. the lower bound.

584. The primary factor from the audit risk model which affects the auditor's decision about acceptable
risk of incorrect acceptance is
a. Control risk.
b. Audit risk.
c. Detection risk.
d. Inherent risk.

585. In the application of statistical technique to the estimation of peso amounts, a preliminary sample
is usually taken primarily for the purpose of estimating population.
a. Variability
b. Mode
c. Range
d. Median

586. The method used to measure the estimated total error amount in a population when there is both
a recorded value and an audited value for each item in the sample is
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. peso-unit sampling.

587. The variables sampling method which gene .11y results in smaller sample sizes than any other
method is
a. difference estimation.
b. mean-per-unit estimation
c. ratio estimation.
d. peso-unit sampling.

588. If the size of the errors in population is proportionate to the recorded value of the population
items, smaller sample sizes will be generated using
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. peso-unit sampling.

589. The auditor is concerned with the audited value rather than the error amount of each item in the
sample when using
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. peso-unit sampling.

590. The average audited value of items in the sample multiplied times the population size is
 a. computed precision interval.
b. point estimate.
c. recorded book value.
d. upper confidence limit.

591. Stratification is applicable to difference, mean-per-unit, and ratio estimation, but it is most
commonly used with
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. discovery sampling.

592. While performing a substantive test of details during an audit, the auditor determined that the
sample results supported the conclusion that the recorded account balance was materially misstated.
It was, in fact, not materially misstated. This situation illustrates the risk of
a. incorrect rejection.
b. incorrect acceptance.
c. assessing control risk too low.
d. assessing control risk too high.

593. Which of the following would be designed to estimate a numerical measurement of a population,
such as a peso value?
a. Sampling for variables.
b. Sampling for attributes.
c. Discovery sampling.
d. Numerical sampling.

594. There are many kinds of statistical estimates that an auditor may find useful, but basically every
accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly
correspond to "quantities" and "error rate", respectively, are
a. attributes and variables.
b. variables and attributes.
c. constants and attributes.
d. constants and variables.

595. Tolerable error is a statistical measure of the maximum likely difference between the sample
estimate and the true but unknown population total, and is directly related to
a. reliability of evidence.
b. relative risk.
c. materiality.
d. cost benefit analysis.

96. An important statistic to consider when using a statistical sampling audit plan is the population
variability. The population variability is measured by the
a. sample mean.
b. standard deviation.
c. standard error of the sample men.
 d. estimated population total minus the actual population.

597. Increases in the tolerable misstatement has what effect on the planned allowance for sampling
risk?
a. Increases.
b. Decreases.
c. No effect.
d. Indeterminate.

598. Which of the following is not generally used for selecting samples?
a. Random number tables.
b. Random number generators.
c. Physical representation numbers.
d. Systematic selection.

599. In performing a test of a control last year the auditors specified a tolerable deviation rate of X
percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all
other factors remain the same, which of the following is true regarding the relationship between this
year's sample size compared
to last year's sample size?
a. This year's sample is larger than last year's sample.
b. This year's sample is smaller than last year's sample.
c. This year's sample is equal to last year's sample.
d. This year's sample is indeterminate in relation to last year15 sample.

600. The auditor using non-statistical attributes sampling, but who nevertheless has chosen the
sample in conformity with random
a. Need not consider the risk of assessing control risk too low
b. Had committed a nonsampling error.
c. Will have to use discovery sampling techniques to evaluate
d. Should compare the deviation rate the sample to the

V. COMPLETING THE AUDIT / POST-AUDIT RESPONSIBILITIES

1. Which of the following would be audited in conjunction with the examination of the client's interest-
bearing notes payable?
a. Interest income.
b. Interest expense.
c. Amortization of goodwill.
d. Royalty revenue.

2. The main purpose of management representations is to

a. Shift responsibility for financial statements from the management to auditors.
b. Provide a substitute source of audit evidence for substantive procedures that auditors would
otherwise perform.
 c. Provide management an opportunity to make assertions about the quantity and valuation of
the physical inventory.
d. Impress on management its ultimate responsibility for the financial statements and
disclosures.

3. Which of these substantive procedures or sources is not used to obtain evidence about
contingencies?
a. Scan expense accounts for credit entries.
b. Obtain a letter from the client's attorney.
c. Read the minutes of the board of directors' meetings.
d. Examine terms of sale in sales contracts.

4. A Type I subsequent event involves subsequent information about a condition that existed at the
balance sheet date. Subsequent knowledge of which of the following would cause the entity to adjust
its December 31 financial statements?
a. Sale of an issue of new stock for P500,000 on January 30.
b. Settlement of a damage lawsuit for a customer's injury sustained February 15 for P10,000.
c. Settlement of litigation in February for P100,000 that had been estimated at P12,000 in the
December 31 financial statements.
d. Storm damage of PI million to the entity's buildings on March 1.

5. K. Perez audited the financial statements of Dalandan Company for the year ended December 1,
2021. He completed gathering sufficient appropriate evidence on January 30 and later learned of a
stock split voted by the board of directors on February 5. The financial statements were changed to
reflect the split, and he now needs to dual date the report on the company's financial statements
before sending it to the company. Which of the following is the proper form?
a. December 31, 2021, except as to Note X, which is dated January 30, 2021.
b. January 30, 2021, except as to Note X, which is dated February 5, 2021.
c. December 31, 2020, except as to Note X, which is dated February 5, 2021.
d. February 5, 2021, except for the audit completion date, for which the date is January 30,
2021.

6. prior to the audit report release date, auditors have a responsibility to management's disclosure of
subsequent events until
a. The year-end balance sheet date.
b. The auditors' report date,
c. The audit report release date.
d. The following year's balance sheet date.

7. The auditing standards regarding "subsequent discovery of facts" refers to knowledge obtained after
a. The audit report release date.
b. The auditor's report date.
c. The entity's year-end balance sheet date.
d. The date interim audit work was complete.

8. Which of the following is not required by the Philippine Standards on Auditing?

a. Management representations.
 b. Attorney letter.
c. Management letter.
d. Engagement letter.

9. Which of these persons generally does not participate in writing the management letter?
a. Client's outside attorneys.
b. Client's accounting and production managers.
c. Public accounting firm's audit team on the engagement.
d. Public accounting firm's consulting and tax experts.

10. Which of the following is ordinarily performed last in the audit examination?
a. Securing a signed engagement letter from the client.
b. Performing tests of controls.
c. Performing a review of subsequent events.
d. Obtaining signed management representations.

11. Which of the following normally occurs earliest in the audit examination?
a. Discovery of an omitted audit procedure.
b. Dual dating the auditors' report on the entity/ s financial statements for subsequent events
that exist at the balance sheet date.
c. Preparation of the management letter.
d. Review of audit documentation.

12. Which of the following procedures is least likely to be performed in conjunction with the audit of
revenue and expense accounts?
a. Analytical procedures to evaluate the overall reasonableness of revenue and expense
accounts.
b. Sampling and investigation of individual transactions affecting revenue and expense
accounts.
c. Consideration of evidence obtained in the examination of related balance sheet accounts.
d. Scanning revenue and expense accounts for large and unusual entries.

13. Which of the following statements is most likely to be included in an attorney letter?
a. "Certain representations in this letter are described as being limited to matters that are
material."
b. "If any unasserted claims or assessments are omitted from this disclosure, please provide
this information directly to our
c. "Our work enabled us to notice some actions that could enhance the profitability of the
Company,"
d. "Please furnish to our auditors such explanation, if any, that you consider necessary to
supplement the foregoing

14. If, after the audit report release date, auditors determine that an important auditing procedure was
omitted, which of the following initial courses of action is most appropriate?
a. perform the omitted procedure or an alternative procedure.
b. Notify the board of directors and regulatory agencies that are currently relying on auditors'
reports.
 c. Determine whether the omitted procedure is important in supporting the auditors' opinion on
the entity's financial statements.
d. Engage another public accounting firm to conduct a quality assurance review.

15. Which of the following statements is not true with respect to management representations?
a. The failure of management to furnish representations is a significant scope limitation,
resulting in either an adverse opinion or disclaimer of opinion.
b. Management representations must address the disclosure of all significant deficiencies in
internal control, regardless of materiality.
c. Management representations are used by auditors to corroborate information received
during the audit from the client and its employees.
d. Management representations are dated the same date as the auditors' reports,

16. Santos accepted an engagement to audit the Year I financial Statements of ABC Company. ABC
completed the preparation of the Year 1 financial statements on February 13, Year 2, and Santos
began the field work on February 17, Year 2. Santos completed gathering
sufficient appropriate evidence on March 24, Year 2, and completed the report on March 28, Year 2.
The management representations normally would be dated
a. February 13, Year 2.
b. February 17, Year 2.
c. March 24, Year 2.
d. March 28, Year 2.

17. A charge in the subsequent period to a notes receivable account from the cash disbursements
journal should alert auditors to the possibility that a
a. Contingent asset has come into existence in the subsequent period.
b. Contingent liability has come into existence in the subsequent period.
c. Provision for contingencies is required.
d. Contingent liability has become a real liability and has been settled.

18. Which of the following substantive procedures should auditors ordinarily perform regarding
subsequent events?
a. Compare the latest available interim financial statements with the financial statements being
audited.
b. Send second requests to the client's customers who failed to respond to initial accounts
receivable confirmation requests.
c. Communicate material weaknesses in internal control to the client's audit committee,
d. Review the cutoff bank statements for several months after the year-end.

19. Which of the following substantive procedures would auditor's most likely perform to obtain
evidence about the occurrence of subsequent events?
a. Recompute a sample of large-peso transactions occurring after year-end for arithmetic
accuracy.
b. Investigate changes in shareholders' equity occurring after
c. Send confirmations to vendors with whom the client normally does business but for whom no
balance in accounts payable is
d. Confirm bank accounts established after year-end.
20. The primary reason auditors request responses to attorney letters is to provide auditors
a. The probable outcome of asserted claims and pending or threatened litigation.
b. Corroboration of the information furnished by management about litigation, claims, and
assessments.
c. The attorney's opinions of the client's historical experiences in recent similar litigation.
d. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.

21. The scope of an audit is not restricted when an attorney letter limits the response to
a. Matters to which the attorney has given substantive attention in the form of legal
representation.
b. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the
entity.
c. The attorney's opinion of the entity's historical experience in recent similar litigation.
d. The probable outcome of asserted claims and pending or threatened litigation.

22. Which of the following is least likely to be considered a substantive procedure relating to payroll?
a. Investigate fluctuations in salaries, wages, and commissions.
b. Test computations of compensation under profit sharing for bonus plans.
c. Test commission earnings.
d. Test whether employee time reports are approved by supervisors.

23. Which of the following is the best way for the auditors to determine that every name on a
company's payroll is that a bona fide employee presently on the job.
a. Examine human resources records for accuracy and completeness.
b. Examine employees' names listed on payroll tax returns for agreement with payroll
accounting records.
c. Make a surprise observation of the company's regular distribution of paychecks on a test
basis.
d. Visit the working areas and verify that employees exist by examining their badge or
identification numbers.

24. As a result of analytical procedures, the independent auditors determine that the gross profit
percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The
auditors should:
a. Express an opinion that is qualified due to the inability of the client company to continue as a
going concern.
b. Evaluate management's performance in causing this decline.
c. Require note disclosure.
d. Consider the possibility of a misstatement in the financial statements.

25. When auditing the statement of cash flows, which of the following would an auditor not expect to
be a source-of receipts and payments?
a. Capitalization.
b. Financing.
c. Investing.
 d. Operations.

26. The search for unrecorded liabilities for a public company includes procedures usually performed
through the
a. Day the audit report is
b. End of the client's year.
c. Date of the auditors' report.
d. Date the report is filed with the SEC.

27. The aggregated misstatement in the financial statements is made up of:

Known Projected Other
Misstatements Misstatements Misstatements

a. Yes Yes Yes

b. Yes Yes No
c. No Yes No
d. No Yes yes

28. A possible loss, stemming from past events that will be resolved as to existence and amounts, is
referred to as a(n):
a. Analytical process.
b. Loss contingency.
c. Probable loss.
d. Unasserted claim.

29. Which of the following is most likely to be considered a Type 1 subsequent event?
a. A business combination completed after year-end, but for which negotiations began prior to
year-end.
b. A strike subsequent to year-end due to employee complaints about working conditions which
originated two years ago.
c. Customer checks deposited prior to year-end, but determined to be uncollectible after year-
end.
d. Introduction of a new line of products after year-end for which major research had been
completed prior to year-end.

30. An auditor accepted an engagement to audit the 2021 financial statements of Hero Corporation
and began the fieldwork on September 30, 2021. Hero gave the auditor the 2021 financial statements
on January 17, 2022. The auditor completed the audit on February 10, 2022, and delivered the report
on February 16, 2021. The client's representation letter normally would be dated:
a. December 31, 2021.
b. January 17, 2022.
c. February 10, 2022.
d. February 16, 2022.

31. Which of the following procedures is most likely to be included in the final review stage of an audit?
a. Obtain an understanding of internal control.
b. Confirmation of receivables.
 c. Observation of inventory.
d. Perform analytical procedures.

32. Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at
the report date that would have affected the report had the auditor then been aware of such facts.
After determining that the information is reliable, the auditor should next:
a. Notify the board of directors that the auditor's report must no longer be associated with the
financial statements.
b. Determine whether there are persons relying or likely to rely on the financial statements who
would attach importance to the information.
c. Request that management disclose the effects of the newly discovered information by
adding a footnote to subsequently issued financial statements.
d. Issue revised pro forma financial statements taking into consideration the newly discovered
information.

33. Which of the following events occurring on January 5, 2022, is most likely to result in an adjusting
entry to the 2021 financial statements?
a. A business combination
b. Early retirement of bonds payable
c. Settlement of litigation
d. Plant closure due to a strike

34. An auditor who was engaged to perform an examination of the financial statements of a nonpublic
entity has been asked by the client to refrain from performing various audit procedures and change the
nature of the engagement to a review of the financial
statements in accordance with standards established by the PICPA. The client's request was made
because the cost to complete the examination was significant. Under the circumstances the auditor
would most likely
a. qualify the auditor's report and refer to the scope limitation.
b. view the request as an indication of a possible irregularity.
c. complete the examination which was in progress.
d. honor the client's request.

35. With respect to issuance of an audit report which is dual-dated for a subsequent event occurring
after the completion of field work but before issuance of the auditor's report, the auditor's responsibility
for events occurring subsequent to the completion of field work is
a. extended to include all events occurring until the date of the last subsequent event referred
to.
b. limited to the specific event referred to.
c. limited to all events occurring through the date of issuance of the report.
d. extended to include all events occurring through the date of submission of the report to the
client.

36. An auditor's decision concerning whether or not to "dual date" the audit report is based upon the
auditor's willingness to
a. extend auditing procedures.
b. accept responsibility for subsequent events,
 c. permit inclusion of a note captioned: event (unaudited) subsequent to the date of the
auditor's report.
d. assume responsibility for events subsequent to the issuance of the auditor's report.

37. An auditor issued an audit report that was dual dated for a subsequent event occurring after the
completion of field work but before issuance of the auditor's report. The auditor's responsibility for
events occurring subsequent to the completion of field work was
a. limited to the specific event referenced.
b. limited to include only events occurring before the date of the last subsequent event
referenced.
c. extended to subsequent events occurring through the date of issuance of the report.
d. extended to include al! events occurring since the completion of field work.

38. When a CPA does not confirm material accounts receivable, but is satisfied by the application of
alternative auditing procedures, she normally should
a. issue an unmodified opinion, but disclose elsewhere in the report this departure from a
customary procedure.
b. issue an unmodified opinion with no reference to this omission but be prepared to defend the
action.
c. issue a qualified opinion or e disclaimer, depending on the materiality of the receivables.
d. issue an adverse opinion.

39. When a client declines to disclose essential information in the financial statements or notes, the
CPA shoulds
a. provide the information in the audit report, if practicable, and qualify the opinion because of a
limitation on the scope of the audit.
b. provide the information in the audit report, if practicable, and qualify the opinion because of a
departure from financial reporting standards.
c. issue a disclaimer of opinion because the client has interfered with the auditor's function of
assessing the adequacy of disclosure.
d. Issue an unmodified opinion, but inform the reader by including the omitted information in the
audit report.

40. CPA Firm A has performed most of the audit of Consolidated company's financial statements and
qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume
full responsibility for Firm BIS work. Which of the following statements is correct?
a. Such assumption of responsibility violates the profession's standards.
b. In such circumstances, when appropriate requirements have been met, Firm A should issue
a standard unmodified opinion on the financial statements.
c. In such circumstances, when appropriate requirements have been met, Firm A should issue
an unmodified opinion on the financial statements but should make appropriate reference to
the Firm B in the audit report.
d. CPA Firm A should normally qualify its audit report on the basis of the scope limitation
involved when another CPA firm is involved.
41. Which of the following is most accurate with respect to a CPA's responsibility in considering a
going concern question on audits?
a. Perform analytical procedures aimed particularly at assessing whether bankruptcy is
probable.
b. Issue a report with a "going concern" modification when failure is at least reasonably
probable.
c. Based on audit procedures performed, assess whether there is substantial doubt about the
entity's ability to continue as a going concern
d. Determine that related uncertainties are properly disclosed and make no mention in the audit
report.

VI. REPORTS ON AUDITED FINANCIAL STATEMENTS

1. When reporting under the PSAs, certain statements are required in all auditors' reports ("explicit")
and others are required only under certain conditions ("implicit"). Which combination that follows
correctly describes the auditors' responsibilities for reporting?
Standards (a) (b) (c) (d)
1. IFRS Explicit Explicit Implicit Implicit
2. Consistency Implicit Explicit Explicit Implicit
3. Disclosure Implicit Implicit Explicit Explicit
4. Opinion Explicit Explicit Implicit Implicit

2. Auditors found that the entity has not capitalized a material amount of leases in the financial
statements. When considering the materiality of this departure from financial reporting standards, the
auditors would choose between which reporting options?
a. Unmodified opinion or disclaimer of opinion.
b. Unmodified opinion or qualified opinion.
c. Emphasis paragraph with unmodified opinion or an adverse
d. Qualified opinion or adverse opinion.

3. The auditors determined that the entity is suffering financial difficulty and the going-concern status is
seriously in doubt. Assuming the entity adequately disclosed this matter in the financial statements,
the auditors must choose between which of the following auditors' report alternatives?
a. Unmodified opinion with a going-concern explanatory paragraph or disclaimer of opinion.
b. Standard report or a disclaimer of opinion.
c. Qualified opinion or adverse opinion.
d. Standard report or adverse opinion.

4. An entity accomplished an early extinguishment of debt and the auditors believe that literal
application of the financial reporting standards would cause recognition of a loss that would materially
distort the financial statements and cause them to be misleading. Given these facts, the auditors
would probably choose which reporting option?
a. Explain the situation and issue an adverse opinion.
b. Explain the situation and issue a disclaimer of opinion.
 c.. Explain the situation and issue an unmodified opinion.
d. Issue the standard report.

5. Which of these situations would require auditors to append an explanatory paragraph about
consistency to an otherwise unmodified opinion?
a. Entity changed its estimated allowance for uncollectible accounts receivable.
b. Entity corrected a prior mistake in accounting for interest capitalization.
c. Entity sold one of its and consolidated six subsidiaries this year compared to seven last year.
d. Entity changed its inventory costing method from FIFO to LIFO.

6. Ramos became the new auditor for Sunflower Corporation, succeeding Peralta, who audited the
financial statements last year' Ramos needs to report on Sunflower's comparative financial statements
and should disclose in his report an explanation about other auditors having audited the prior year
a. Only if Peralta's opinion last year was qualified.
b. Describing the prior audit and the opinion but not naming Peralta as the predecessor auditor.
c. Describing the audit but not revealing the type of opinion Peralta gave.
d. Describing the audit and the opinion but not naming Peralta as the predecessor auditor.

7. When component auditors are involved in the current audit of parts of the entity's business, the
group engagement team partner may issue a report that (two answers)
a. Mentions the component auditors, describes the extent of the component auditors' work, and
expresses an unmodified opinion.
b. Does not mention the component auditors and expresses an unmodified opinion in a
standard report.
c. Places primary responsibility for the reporting on the component auditors.
d. Names the component auditors, describes their work, and presents only the principal
auditors' report.

8. An "Key audit matters" paragraph inserted in a standard report is normally not associated with which
type of opinion?
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

9. Under which of the following conditions can a disclaimer of opinion

a. Going-concern problems are highly material and significant. not be issued?
b. The entity does not allow the auditors to have access to evidence about important accounts.
c. The auditors own stock in the entity.
d. The auditors have determined that the entity uses the NIFO (next-in, first out) inventory
costing method.

10. How is the auditor's responsibility for the audit cf the financial statements disclosed in the report?
a. Stated explicitly as a separate paragraph of the standard report.
b. Unstated but understood in the opinion paragraph of the standard report.
c. Stated explicitly in the basis for opinion paragraph of the standard report.
d. Stated explicitly key audit matters paragraph of the standard report.
11. Company X hired Tan & Tan, CPAs, to audit the financial statements of Company Y and deliver
the report to Standard Bank. Who is the client?
a. Standard Bank.
b. Tan & Tan.
c. Company X.
d. Company Y.

12. Which of the following is not included in the standard report on the financial statements?
a. An identification of the financial statements that were audited.
b. A general description of an audit.
c. An opinion that the financial statements present financial position in conformity with financial
reporting standards.
d. An emphasis paragraph commenting on the effect of economic conditions on the entity.

13. If the auditors decided to present separate reports on the entity's financial statements and internal
control over financial reporting, which of the following reports should be modified to reference the other
report.
Report on Financial Report on Internal Control
Statements over Financial Reporting
a. Yes Yes
b. Yes No
c. No Yes
d. No no

14. A material departure from financial reporting standards will result in

a. Whether to issue an adverse opinion rather than a disclaimer
b. Whether to issue a disclaimer of opinion rather than an "except for" opinion.
c. Whether to issue an adverse opinion rather than a qualified opinion.
d. Nothing, because none of these opinions is applicable to this type of exception.

15. The auditors' report should be dated as of the date the:

a. Report is delivered to the client.
b. Auditors have accumulated sufficient evidence.
c. Fiscal period under audit ends.
d. Review of the working papers is completed.

16. In the report of the group engagement team, reference to the fact that a portion of the audit was
made by a component auditor is:
a. Not to be construed as a qualification, but rather as a division of responsibility between the
two CPA firms.
b. Not in accordance with Philippine Standards on Auditing.
c. A qualification that lessens the collective responsibility of both CPA firms.
d. An example of a dual opinion requiring the signatures of both auditors.

17. Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation
given in note 6, the financial statements referred to above present fairly..." This is:
 a. An unmodified opinion.
b. A disclaimer of opinion.
c. An "except for" opinion.
d. An improper type of reporting.

18. The auditor who wishes to indicate that the entity has significant transactions with related parties
should disclose this fact in:
a. An explanatory paragraph to the auditors' report.
b. An explanatory note to the financial statements.
c. The body of the financial statements.
d. The "summary of significant accounting policies" section of the financial statements.

19. When restrictions that significantly limit the scope of the audit are imposed by the client, the auditor
should generally issue which of the following opinions?
a. Qualified.
b. Disclaimer.
c. Adverse.
d. Unmodified.

20. Which of the following does not ordinarily involve the addition Of an explanatory paragraph to an
audit report?
a. A consistency modification.
b, A qualified opinion.
c. Part of the audit has been performed by other auditors.
d. An adverse opinion.

21. An audit report for a public client indicates that the financial statements were prepared in
conformity with:
a. Applicable financial reporting framework.
b. Standards of the Oversight Board.
c. Philippine Standards on Auditing
d. Philippine Financial Reporting Standards.

22. The likely result of substantial doubt about the ability of the client to continue as a going concern is
the issuance of which of the following audit reports?
Qualified Unmodified with
Explanatory Language
a. Yes Yes
b. Yes No
c. No Yes
d. No No

23. A change in accounting principles that the auditor believe not justified is likely to result in which of
the following audit reports?
Adverse Disclaimer
a. Yes Yes
b. Yes No
 c. No Yes
d. No no

24. Which of the following is least likely to be considered as a "key audit matter" in what remains in an
unmodified audit report?
a. The company is a component of a larger business enterprise.
b. An unusually important significant event.
c. A decision not to confirm accounts receivable.
d. A risk or uncertainty.

25. PSA 700 (Revised), The Independent Auditor's Report on a Complete Set Of General Purpose
Financial Statements, provides the following basic elements of the auditor's report except
a. introductory paragraph.
b. management's responsibility for the financial statements.
C. auditor's opinion paragraph.
d. starting and completion dates of the audit.

26. The opening or introductory paragraph in the auditor's report would normally include the following,
except
a. identification of the financial statements audited.
b. reference to the summary of significant accountancy policies.
c. date and period covered by the financial statements.
d. a description of the work to be performed by the auditor.

27. The auditor's responsibility paragraph in the auditor's report would normally include the following,
except
a. statement that the audit was conducted in accordance with ISAs.
b. statement that the audit was planned and performed to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
c. statement by the auditor that the audit provides a basis for the opinion.
d. statement that the audit includes examining on a detailed basis evidence supporting the
amounts and disclosures in the financial statements.

28. Which of the following should not be the basis of dating the audit report?
a. when the audit fee is collected.
b. as of the completion date of the audit.
c. as of any date earlier than the date on which the financial statements are signed or approved
by management,
d. upon completion of the field work.

29. A CPA firm is "associated with the financial statements" of its client
a. only when it does a financial audit.
b. only when it does assurance services, such as a review or an audit.
c. even if a CPA firm only assists a client in preparing financial statements but does not do an
audit.
d. if it performs any services at all for the client.
30. The auditing profession recognizes the need for uniformity in
a. defending against capricious lawsuits.
b. upgrading the communications skills of auditors.
c. standardizing the policies of various CPA firms.
d. avoiding confusion.

31. The most common type of audit report contains

a. the adverse opinion.
b. the disclaimer of opinion.
c. the qualified opinion.
d. the unmodified opinion.

32. When the auditor knows that the financial statements may be misleading because they were not
prepared in conformity with financial reporting standards, he or she must issue
a. a qualified opinion.
b. an adverse opinion.
c. a disclaimer of opinion.
d. a qualified or an adverse opinion, depending on the materiality of the item in question.

33. Three of the following conditions must be present if the auditor is to issue the standard unmodified
opinion. Which one of the following conditions need not be present to issue such a report?
a. All statements--balance sheet, income statement, statement of changes in equity and
statement of cash with corresponding
note: flows--are included in the financial statements.
b. The PSAs have been followed in all respects on the engagement.
c. The financial statements are presented in accordance with the Philippine Standards on
Auditing.
d. Sufficient evidence has been accumulated and the auditor has conducted the engagement
in a manner that enables him/her to conclude that the PSAs have been followed.

34. Which of the following events occurring after the issuance of an auditor's report most likely would
cause the auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity's future ability to continue as a going
concern.
b. The discovery of information regarding a contingency that existed before the financial
statements were issued.
c. The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

35. As a further attempt to indicate that the auditor is independent, the addressee of the audit report is
usually
a. the client company.
b. the board of directors of client company.
c. the President and/or CEO of client company.
d. the stockholders of client company.
36. Which of the following is not a purpose of the "report on the audit of the financial statements"
paragraph in the standard unmodified report?
a. distinguish the audit report from a compilation or review report.
b. identify the financial statements which were audited, and the dates and time periods covered
by the report.
c. state the auditor's conclusion whether the financial statement are prepared in all material
respects in accordance with applicable financial reporting standard.
d. communicate the responsibilities of management in preparing the financial statements, and
to clarify the respective roles Of management and the auditor.

37. The auditor's responsibility paragraph of the standard unmodified audit report states that the audit
is designed to
a. discover all errors and/or irregularities.
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.

38. Which of the following is not a true statement? "In the opinion paragraph of the standard
unmodified report, the auditor is required to express
a. an unmodified opinion about the financial statements.
b. a conclusion whether the company followed International / Philippine Financial Reporting
Standards."
c. auditor has obtained sufficient appropriate audit evidence to support his opinion."
d. that the financial statements are presented fairly in all material respects."

39. The appropriate date for the audit report is no earlier than the date
a. of the client's fiscal year ended.
b. auditor and client entered into a contract.
c. auditor has concluded procedures in the field.
d. auditor types and delivers the report to client.

40. The audit report date is important to users because it indicates

a. the last day of the fiscal period.
b. the date on which the financial statements were filed with the Securities and Exchange
Commission.
c. the last date on which users may institute a lawsuit against either client or auditor.
d. the last day that the auditor obtained sufficient appropriate audit evidence to support his
opinion on the financial statements.

41. Three of the following conditions would, by itself, require the auditor to issue a report containing an
opinion other than the unmodified Opinion. Which one would not require such a departure?
a. Client company's financial statements show a significant net loss for each of the last three
years, including the current fiscal period.
b. The financial statements have not been prepared in accordance with the applicable financial
reporting framework.
c. The auditor is not independent during the fiscal period under audit.
 d. The scope of the auditor's examination has been restricted, although the cause of the
restriction was not the client's fault.

42. The auditor could still issue the Unmodified opinion, even though the client
a. valued ending inventory by using the replacement cost method of inventory valuation.
b. valued ending inventory by using the Next-ln- First-Out (N!FO) method of inventory
valuation.
c. valued ending inventory by using the First-ln- First-Out (FIFO) method of inventory valuation,
but also showed the replacement cost of inventory in the Notes to the Financial Statements.
d. valued ending inventory by using the last-in, first-out (LIFO) method of inventory valuation.

43. The three main types of audit opinion other than the unmodified opinion are the
a. adverse opinion, disclaimer of opinion, and qualified opinion.
b. adverse opinion, reports on unaudited financial statements, and disclaimer of opinion.
c. disclaimer of opinion, the qualified opinion, and reports on unaudited financial statements.
d. special audit reports, reports on unaudited financial statements, and adverse opinions.

44. Several types of "special audit reports" are issued by CPAs. Which one of the following
circumstances would not require the issuance of such a special report?
a. Client's financial statements are prepared using the cash basis.
b. Client's financial statements are prepared using the accrual basis.
c. The CPA has been retained to audit only the current assets.
d. The CPA has been retained to review the internal control system, not the financial
statements.

45. An adverse opinion is issued when the auditor believes that

a. some parts of the financial statements are materially misstated or misleading.
b. the financial statements will be found to be misleading or misstated, if an adequate
investigation is performed.
c. the overall financial statements are so materially misstated or misleading as a whole that
they do not present fairly the financial position or results of operations and cash flows in
conformity with PFRS.
d. the audit firm is not independent.

46. The adverse opinion report will be issued by the independent auditor when he/she
a. suspects that client has not followed Philippine Financial Reporting Standards (PFRS).
b. suspects that client's financial statements are not in conformity with the Philippine Standards
on Auditing.
c. has knowledge that the financial statements are not in conformity with Philippine Financial
Reporting Standards (PFRS).
d. has knowledge that PSAs were not followed.

47. A disclaimer is issued whenever the auditor

a. has been unable to satisfy him/herself that the overall financial statements are presented
fairly.
b. believes that the overall financial statements are not presented fairly.
c. believes that some material part(s) of the financial statements are not presented fairly.
 d. has determined that the financial statements are presented fairly.

48. The necessity to issue a disclaimer of opinion may arise because of a

a. severe limitation on the scope of the audit examination.
b. non-independent relationship between auditor and client.
c. Either a or b above.
d. None of the above.

49. The distinction between an adverse opinion and a disclaimer is

a. Clack of PFRS versus lack of PSA,
b. knowledge versus lack of knowledge.
c. the CPA's report versus the CIA's report.
d. FRSC Statements versus the PICPA Standards.

50. Both disclaimers and adverse opinions are used

a. only when the condition is highly material.
b. whether the condition is material or not.
c. irregardless of the auditor's independence,
d. irregardless of client's choice of a non-PFRS accounting method.

51. A qualified opinion report can be used only when the auditor believes that the financial statements
in all material respects are
a. fairly stated.
b. not fairly stated.
c. materially misstated.
d. materially misleading.

52, The least severe type of report for disclosing departures from an unmodified report is the
a. adverse opinion.
b. disclaimer of opinion.
c. qualified opinion.
d. report on unaudited financial statements.

53. A qualified report can not take the form of a qualification of

a. the opinion alone.
b. the scope alone.
c. both the scope and opinion.
d. all of the above.

54. A scope and opinion qualification can be issued only when the auditor
a. is not independent.
b. has not been able to accumulate all the evidence required by the Philippine Standards on
Auditing.
c. has accumulated all the evidence required by the Philippine Standards on Auditing.
d. has been restricted by client from gathering the needed information to form an opinion.

55. The use of a qualification of the opinion alone is restricted to those situations in which the
 a. scope of the auditor's examination has been restricted.
b. financial statements have not been prepared in accordance with Philippine Financial
Reporting Standards (PFRS).
c. auditor is not independent.
d. auditor was hired to do a "Review" or "Compilation".

56. Whenever an auditor issues a qualified report, he or she

a. must use the term "subject to" in the opinion paragraph.
b. may use either the terms "subject to"' or "except for" in the opinion paragraph, depending on
the nature of the qualification.
c. must use the term "except for" in the opinion paragraph.
d. must not use the terms "subject to" or "except for" in the opinion paragraph.

57. A qualified opinion is appropriate when the auditor is satisfied that the overall financial statements
are
a. fairly stated.
b. materially misstated.
c. fairly stated, but there is a material exception.
d. fairly stated, even though there is an immaterial exception.

58. If a misstatement is immaterial relative to the financial statements of the entity for the current
period and is not expected to have a material effect in future periods, it is appropriate to issue
a. an unmodified opinion.
b. a qualified opinion.
c. an adverse opinion.
d. a disclaimer of opinion.

59. A misstatement in the financial statements can be considered material if

a. it overshadows the financial statements as a whole.
b. knowledge of the misstatement would affect a decision of a reasonable user of the
statements.
c. it affects more than one account on the statements.
d. it affects only one account on the statements.

60. When a misstatement in the financial statements exists but is unlikely to affect the decisions of a
reasonable user, it would be appropriate to issue
a. an unmodified opinion.
b. a qualified opinion.
a disclaimer of opinion.
d. an adverse opinion.

61. When a misstatement in the financial statements would affect a user's decision but the overall
statements are still fairly stated, it would be appropriate to issue
a. an unmodified opinion.
b. a qualified opinion.
c. an adverse opinion.
d. a disclaimer of opinion.
62. In order to make materiality decisions when a condition requiring a departure from an unmodified
report exists, the auditor must evaluate
a. the magnitude of the error on the account involved.
b. the effect on the financial statement which contains the erroneous account.
c. the effects of the error on both the income statement and the balance sheet.
d. all effects on the financial statements.

63. When a misstatement with the highest level of materiality exists on the financial statements, the
auditor must issue
a. an adverse opinion.
b. a disclaimer of opinion.
c. either a qualified opinion or an adverse opinion, depending on which conditions exist.
d. either an adverse opinion or a disclaimer of opinion, depending on which conditions exist.

64. When determining whether an exception is highly material, the extent to which the exception
affects different parts of the financial Statements must be considered. This is referred to as
a. materiality.
b. pervasiveness.
c. financial analysis.
d. ratio analysis.

65. If the auditor is determined to lack independence, a disclaimer of opinion must be issued
a. in all cases.
b. only if it is highly material.
c. only if it is material.
d. if the client requests it.

66. The primary concern in measuring materiality when a client has failed to follow PFRS is usually
a. the total peso error in the accounts involved, compared with some base.
b. measurability of the peso error.
c. the nature of the item in error.
d. whether it can materially affect some future period.

67. Whenever there is a scope restriction, the appropriate response is to issue

a. a disclaimer of opinion.
b. an adverse opinion.
c. a qualified opinion.
d. an unmodified report, a qualification of scope and opinion, or a disclaimer of opinion,
depending on materiality.

68. When client is not following PFRS, and the auditor decides that adherence to PFRS would result in
misleading statements, the opinion paragraph of the audit report
a. must express an adverse opinion.
b. must express a qualified opinion.
c. should be unmodified except for a reference to the required explanatory paragraph,
d. should be the standard unmodified opinion.
69. Whenever the client imposes restrictions on the scope of the audit' the auditor should be
concerned about the possibility that management is trying to prevent discovery of misstated
information in such cases, the PSAs has encouraged
a. a disclaimer of opinion, in all cases.
b. a qualification of both scope and opinion, in all cases.
c. a disclaimer of opinion, whenever materiality is in question.
d. a qualification of both scope and opinion, whenever materiality is in question.

70. The most common case in which conditions beyond the client's and auditor's control cause a
scope restriction is an engagement
a. agreed upon after the client's balance sheet date.
b. where client won't allow auditor to confirm receivables for fear of offending his customers.
c. where auditor doesn't have enough staff to audit all of client's foreign subsidiaries
satisfactorily.
d. where client is going through bankruptcy.

71. When the client fails to make adequate disclosure in the body of the statements or in the related
footnotes, it is the responsibility of the auditor to
a. inform the reader that disclosure is not adequate, and to issue a qualified or an adverse
opinion.
b. inform the reader that disclosure is not adequate, and to issue an unmodified or qualified
opinion.
c. present the information in the audit report and to issue a qualified or an adverse opinion.
d. present the information in the audit report and issue an unmodified or qualified opinion.

72. Should a situation arise where all audit procedures considered necessary in the circumstances
were performed and the auditor would otherwise issue an unmodified report, and then it was
discovered that the auditor has not fulfilled the independence requirements specified by the Code of
Ethics, the audit report issued
a. may still be the unmodified opinion.
b. must be a disclaimer of opinion.
c. may be either an unmodified or disclaimer of opinion.
d. must be an adverse opinion.

73. An accountant's standard report on a compilation of a projection should not include a

a. statement that a compilation of projection is limited in scope.
b. disclaimer of responsibility to update the report for events occurring after the report's date.
c. statement that the accountant expresses only limited assurance that the results may be
achieved.
d. separate paragraph that describes the limitations on the presentation's usefulness.

74. When a material uncertainty exists, even if footnote disclosure by client is adequate, the auditor is
required to add an explanatory paragraph to the audit report under the following condition(s)
a. The uncertainty is probable and it is material.
b. The uncertainty is reasonably possible and it is material, even though its likelihood is remote.
c. The uncertainty is reasonably possible and it is material.
 d. All of the above.

75. The report modified for uncertainties are the same as the standard unmodified report. The
explanatory paragraph which describes the uncertainty is added
a. Opinion paragraph.
b. Key audit matter.
c. Basis of Opinion paragraph.
d. Responsibilities of Management paragraph

76. When a qualified or adverse opinion is issued, a separate paragraph describing all the substantive
reasons is inserted
a. In the opinion paragraph
b. In the basis for opinion paragraph
c. In the Key Audit matters paragraph
d. In the Auditor's Responsibility paragraph

77. When the auditor concludes that there is substantial doubt about the entity's ability to continue as a
going concern, he/she should issue
a. an unmodified opinion with an explanatory paragraph, provided that client has made
adequate disclosures in the statements.
b. a qualified opinion with an explanatory paragraph, regardless of the adequacy of disclosures
in the financial statements.
c. an adverse opinion, regardless of the adequacy of disclosures in the financial statements.
d. the standard unmodified report, provided that client has made adequate disclosures in the
statements.

78. Under certain circumstances, the CPA may wish to emphasize specific matters regarding the
financial statements even though he or she intends to express an unmodified opinion. Normally, such
explanatory information should be
a. In the opinion paragraph
b. In the basis for opinion paragraph
c. In the Key Audit matters paragraph
d. In the Auditor's Responsibility paragraph

79. Which of the following is not one of the group engagement team's alternatives when issuing a
report where a different CPA firm performed part of the audit?
a. Make no reference to the component auditor in the audit report, and issue the standard
unmodified opinion.
b. Issue a joint report signed by both CPA firms.
c. Make reference to the component auditor in the report by using modified wording. (A shared
opinion or report).
d. A qualified opinion or disclaimer, depending on materiality, is required if the group
engagement team is not willing to assume any responsibility for the work of the component
auditor.

80. For the report containing a disclaimer for lack of independence, the disclaimer is in the
a. "Key audit matters" paragraph.
 b. Responsibilities of Management paragraph.
c. Disclaimer of opinion paragraph.
d. Report on other legal and regulatory requirements.

81. The use of negative assurances in audit reports of historical financial statements is
a. a violation of the standards of reporting.
b. encouraged by the Philippine Institute of CPAs,
c. a help in clarifying the degree of responsibility being assumed by the auditor.
d. properly located in the opinion paragraph of the unmodified report.

82. An auditor who qualifies an opinion because of an insufficiency of evidential matter should
describe the limitations in an explanatory paragraph. The auditor should also refer to the limitation in
the
Auditor's Opinion Notes to the
Responsibility paragraph Financial statements
a. Yes No Yes
b. No Yes No
c. Yes Yes No
d. Yes Yes yes

83. An auditor may not issue a qualified opinion when

a. a scope limitation prevents the auditor from completing an important audit procedure,
b. the auditor's report refers to the work of a specialist.
c. an accounting principle at variance with financial reporting standards is used.
d. the auditor lacks independence with respect to the audited.

84. unaudited financial statements for the prior year presented in comparative form with audited
financial statements for the current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to accompany the current period report.
II. The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period's financial statements.
a. I only.
b. Il only.
c. Both I and ll.
d. Either I or ll.

85. When a publicly-held company refuses to include in its audited financial statements any of the
segment information that the auditor believes is required, the auditor should issue a(an)
a. unmodified opinion with a separate explanatory paragraph emphasizing the matter.
b. qualified opinion because of inadequate disclosure.
c. adverse opinion because of the lack of conformity with financial reporting standards.
d. disclaimer of opinion because of the significant scope limitation.

86. auditor may issue the standard audit report when the
a. auditor refers to the findings of a specialist.
b. financial statements are derived and condensed from complete audited financial statements
that are filed with a regulatory agency.
 c. financial statements are prepared on the cash receipts and disbursements basis of
accounting.
d. group engagement team partner assumes responsibility for the work of the component

87. When a group engagement team decides to make reference to a component auditor's
examination, the group engagement team's report should always indicate clearly, in the introductory,
auditor's responsibility, and opinion paragraphs, the
a. magnitude of the portion of the financial statements examined by the component auditor.
b. disclaimer of responsibility concerning the portion of the financial statements examined by
the component auditor.
c. name of the component auditor.
d. division of responsibility.

88. How are management's responsibility and the auditor's responsibility represented in the standard
auditor's report?
Management's Auditor's
responsibility responsibility
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly

89. A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion
will usually result when management
a. presents financial statements that are prepared in accordance with the cash receipts and
disbursements basis of accounting.
b. states that the financial statements are not intended to be presented in conformity with
financial reporting standards.
c. does not make the minutes of the Board of Directors' meetings available to the auditor.
d. asks the auditor to report on the balance sheet and not on the other basic financial
statements.

90. Grant Company's financial statements adequately disclose uncertainties that concern future
events, the outcome of which not susceptible of reasonable estimation. The auditor's report should
include a(an)
a. unmodified opinion.
b. "subject to" qualified opinion.
c. "except for" qualified opinion.
d. adverse opinion.

91. Sue, an independent auditor was engaged to perform an examination of the financial statements of
Barn Incorporated one month after its fiscal year had ended. Although the inventory count was not
observed by Sue, and accounts receivable were not confirmed by direct communication with debtors,
Sue was able to gain satisfaction by applying alternative auditing procedures. Sue's auditor's report
will probably contain
a. a standard unmodified opinion.
b. an unmodified opinion and an explanatory paragraph.
 c. either a qualified opinion or a disclaimer of opinion.
d. an "except for" qualification.

92. The auditor's report should be dated as of the date on which the
a. report is delivered to the client.
b. field work is completed.
c. fiscal period under audit ends.
d. review of the working papers is complete.

93. The group engagement team is satisfied with the independence and Professional reputation of the
component auditor who has audited the financial statements of a subsidiary. To indicate the division of
responsibility, the principal auditor should modify
a. only the opinion paragraph of the report.
b. only the opinion paragraph of the report and include an explanatory middle paragraph.
c. only the auditor's responsibility paragraph of the report.
d. both the auditor's responsibility and opinion paragraphs of the report.

94. Senen, CPA, is the group engagement partner for a multi-national corporation. Another CPA has
examined and reported on the financial statements of a significant subsidiary of the corporation,
Senen is satisfied with the independence and professional reputation of the other auditor, as well as
the quality of the other auditor's examination. With respect to Senen's report on the consolidated
financial statements, taken as a whole, Senen
a. must not refer to the examination of the other auditor.
b. must refer to the examination of the other auditor.
c. may refer to the examination of the other auditor.
d. may refer to the examination of the other auditor, in which case Senen must include in the
auditor's report on the consolidated financial statements a qualified opinion with respect to the
examination of the other auditor.

95. A note to the financial statements of the First National Bank indicates that all of the records relating
to the bank's business operations are stored on magnetic disks, and that there are no emergency
back-up systems or duplicate disks stored since the First National Bank and their auditors consider the
occurrence of a catastrophe to be remote. Based upon this, one would expect the auditor's report to
express
a. an adverse opinion.
b. an "except for" opinion.
c. an unmodified opinion.
d. a qualified opinion.

96. Bradley Corp. uses the weighted-average method of costing for half of its inventory and the first-in,
first-out method of costing for the other half of its inventory. Because of these recording and reporting
methods, the auditor should issue a(an)
a. standard unmodified report.
b. disclaimer of opinion.
c. "except for" qualified opinion.
d. unmodified report with an explanatory paragraph with respect to consistency.
97. which of the following requires recognition in the auditor's opinion as to consistency?
a. The correction of an error in the prior year's financial statements resulting from a
mathematical mistake in capitalizing interest.
b. The change from the cost method to the equity method of accounting for investments in
ordinary shares.
c. A change in the estimate of provisions for warranty costs.
d. A change in depreciation method which has no effect on current year's financial statements
but is certain to affect future years.

98. A company has changed its method of inventory valuation from an unacceptable one to one in
conformity with PFRS. The auditor's report on the financial statements of the year of the change
should include
a. no reference to consistency.
b. a reference to a prior period adjustment in the opinion paragraph.
c. an explanatory paragraph explaining the change.
d. a justification for making the change and the impact of the change on reported net income.

99. When the audited financial statements of the prior year are presented together with those of the
current year, the continuing auditor's report should cover
a. both years
b. Only the current year.
c. only the current year, but the prior year's report should be
d. only the current year, but the prior year's report should be referred to.

100. When financial statements of a prior period are presented on a comparative basis with financial
statements of the current period, the continuing auditor is responsible for
a. expressing dual dated opinions.
b. updating the report on the previous financial statements only if there has not been a change
in the opinion.
c. updating the report on the previous financial statements only if the previous report was
qualified and the reasons for the qualification no longer exist.
d. updating the report on the previous financial statements regardless of the opinion previously
issued.

101. A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion
will always result when management
a. engages the auditor after the year-end physical inventory count is completed.
b. fails to correct a material internal control weakness that had been identified during the prior
year's audit.
c. refuses to furnish a management representation letter to the auditor.
d. prevents the auditor from reviewing the working papers of the predecessor auditor.

102. The degree of certainty the practitioner has attained and wishes to convey is
a. an assertion.
b. assurance.
c. a conveyance.
 d. a declaration.

103. The reports issued at the conclusion of an engagement may or may not be intended for general
distribution. Which of the following types of engagements would result in a report that is intended for
only limited distribution?
a. The audit report.
b. The review report.
c. The report issued when the item is presented on a basis not in conformity with PFRS.
d. The report issued after the examination of prospective financial statements.

104. Auditors frequently audit statements which were prepared on a comprehensive basis of
accounting other than PFRS. When this occurs,
a. the Philippine Standards on Auditing do not apply to these examinations, and the reporting
requirements differ also.
b. the Philippine Standards on Auditing do not apply to this engagement, but the reporting
requirement remain the same for the CPA.
c. the Philippine Standards on Auditing do apply to these engagements, but the reporting
requirements differ.
d. the Philippine Standards on Auditing do apply to these engagements, and the reporting
requirements are the same also.

105. Reports on debt compliance and similar engagements may be issued as a separate report or as
part of a report that expresses the auditor's opinion on the financial statements. When they are issued
as a part of the auditor's report on the financial statements, it is done by
a. adding a middle paragraph before the opinion paragraph.
b. adding a paragraph after the opinion paragraph.
c. adding an additional phrase of sentence within the opinion paragraph.
d. adding a paragraph between the introductory and scope paragraphs.

106. The engagement and report on debt compliance letters should be limited to compliance matters
that the auditor is qualified to evaluate. Which of the following engagements would be inappropriate for
the CPA to attempt to evaluate?
a. Determining whether the client has properly restricted its business activities to the
requirements of an agreement.
b. Determining whether principal and interest payments were made when due.
c. Determining whether the proper limitations were maintained on dividends, working capital,
and debt ratios.
d. Determining whether the accounting records were adequate for conducting an ordinary
audit.

107. When the auditor is engaged to report on the internal control structure.
a. all areas of the structure will be included unless specifically excluded by agreement.
b. the time period coveted roust coincide with the fiscal period of the annual audit.
c. certain areas are not examined if reduced control risk in those areas is not planned.
d. all three of the above.
108. When reporting on information accompanying basic financial statements, the profession's
reporting standards require the auditor to make a clear statement about the degree of responsibility he
or she is taking for the additional information. At the present time, which of the Ning types of opinions
are allowed?
a. A positive opinion, a reasonable a level of assurance.
b. A negative opinion, indicating a medium level of assurance.
c. A negative opinion, indicating a low level of assurance.
d. All three of the above.

109. For public companies, unaudited financial statements with which the CPA is associated are
labeled as unaudited and require
a. a qualified opinion.
b. an adverse opinion.
c. a disclaimer of opinion.
d. no opinion.

110. Which of the following accounting changes requires explanatory language regarding consistency
in the auditors' report?
a. A change in the estimated useful lives of a class of fixed assets.
b. A write-off of a patent, because future benefits do not appear to exist.
c. A change from the straight-line method of depreciation to an accelerated method for a class
of fixed assets.
d. A change in calculating bad debt expense from 1 percent to 2 percent of credit sales.

111. The first paragraph of a standard unmodified audit report is referred to as the
a. introductory paragraph.
b. scope paragraph.
c. opinion paragraph.
d. explanatory paragraph.

112. A client is presenting comparative (two year) financial statements. You have audited both years.
Which of the following is correct?
a. You should issue one audit report which covers both presented years.
b. You should issue two audit reports, one on each year.
c. You should issue one audit report, but only on the most current year.
d. You may issue either one audit report on both presented years, or a report on the most
current year.

113. A scope restriction is least likely to result in a(an)

a. qualified opinion.
b. disclaimer of opinion.
c. adverse opinion.
d. standard unmodified opinion.

114. Which of the following is least likely to result in explanatory language being added to an
unmodified auditor's report on a client that sells jewelry through a retail store?
a. A decision by the auditor to emphasize that the client is a part of a larger organization.
 b. Reliance placed upon a specialist to evaluate the diamonds.
c. A change from FIFO to specific identification accounting for inventory.
d. a question as to whether the client will be able to remain a going concern.

115. Which of the following statements is correct with respect to explanatory paragraphs?
a. They always precede the opinion paragraph.
b. They always follow the opinion paragraph.
c. Sometimes they precede and sometimes they follow the opinion paragraph.
d. They always precede the scope paragraph.

116. A client has changed the salvage values of a number of its fixed assets. The auditors believe that
the salvage values are realistic. The appropriate report is
a. standard unmodified.
b. unmodified with explanatory language as to consistency,
c. qualified for consistency.
d. disclaimer.

117. which of the would be most likely to be an appropriate

a. The shareholders of the corporation whose financial statements were examined.
b. A third party who requested that a copy of the audit report be
c. The president of the corporation whose financial statements were examined.
d. The chief financial officer.

118. The term "subject to" in an audit report is

a. used in an adverse opinion.
b. used in a disclaimer of opinion.
c. no longer considered appropriate.
d. used for uncertainties.

119. The unmodified standard audit report by a CPA normally does not explicitly state that
a. the financial statements are the responsibility of the Company's management.
b. the audit was conducted in accordance with financial reporting standards.
c. the auditors believe that the audit provides a reasonable basis for their opinion.
d. an audit includes assessing the accounting principles used.

120. If audited financial statements include a balance sheet and an income statement, but do not
include a statements of cash flows
a. the auditors may still issue an unmodified opinion.
b. the auditors should issue an "except for" qualification for the departure from financial
reporting standards.
c. the auditors should issue an opinion "subject to" the information that would have been
contained in the statement of cash flows.
d. the auditors should refuse to issue an opinion on only the two financial statements.

121. Which of the following circumstances generally results in the issuance of a report that is other
than unmodified?
a. Circumstances have significantly limited the scope of the auditors' procedures.
 b. The principal auditors for the engagement are relying on the work of other auditors.
c. The financial statements depart from a standard established by the PFRSC, because the
auditors have concluded that application of the standard would result in materially misleading
financial statements.
d. The auditors have decided to emphasize the fact that the company has engaged in material
amounts of related party transactions.

122. Which of the following modifications of the auditors' report does not include an additional
paragraph?
a. The report is qualified because the financial statements contain a material departure from
financial reporting standards.
b. The report includes an emphasis of a matter.
c. The audit report indicates a division of responsibility between two CPA firms.
d. The report is qualified because the scope of the auditors' work was restricted.

123. If the predecessor auditors fail to reissue their audit report on comparative financial statements
the successor auditors should
a. express a qualified opinion on the comparative financial statements audited by the
predecessor auditors.
b. reproduce the predecessor auditors' report and include it with the new set of financial
statements.
c. have the client omit the comparative financial statements,
d. refer to the report of the predecessor auditors.

124. An audit client has refused to allow the auditors to perform a generally accepted auditing
procedure, The circumstance would normally result in the issuance of
a. a disclaimer of opinion or an "except for" qualification of the report.
b. an adverse opinion.
c. an "except for" qualification of the report.
d. an unmodified report with explanatory language.

125. If the group engagement team makes no reference to other auditors whose work they have relied
on as a part of the basis for their report, the group engagement team
a. are not required to investigate the professional reputation of the other auditors.
b. are issuing an inappropriate report.
c. are taking full responsibility for the work of the other auditors.
d. are issuing a qualified opinion.

126. After performing all necessary procedures the predecessor auditors reissue a prior-period report
on financial statements at the request Of the client without revising the original wording. The
predecessor auditors should
a. delete the date of the report.
b. dual-date the report.
c. use the reissue date.
d. use the date of the previous report.
127. When an adverse opinion is expressed, the opinion paragraph should include a direct reference
to
a. a note to the financial statements which discusses the basis
b. the auditor's responsibility paragraph which discusses the basis for the opinion rendered.
c. a separate paragraph which discusses the basis for the opinion rendered.
d. the consistency in the application of financial reporting standards.

128. Under which of the following set of circumstances might the auditors disclaim an opinion?
a. The financial statements contain a departure from financial reporting standards, the effect of
which is material.
b. The principal auditors decide to make reference to the report of another auditor who audited
a subsidiary.
c. There has been a material change between periods in the method of the application of
accounting principles.
d. There are significant scope limitations on the audit.

129. The management of Stanley Corporation has decided not to account for a material transaction in
accordance with the provisions of a recent statement of the PFRSC. They have set forth their reasons
in note "B" to the financial statements which clearly demonstrates that due to unusual circumstances
the financial statements would otherwise have been misleading. The auditors' report will probably
contain a(an)
a. qualified opinion and an explanatory paragraph with a reference to note B
b. unmodified opinion and an explanatory paragraph.
c. adverse opinion and an explanatory paragraph.
d. "except for" opinion and an explanatory paragraph.

130. The auditors include explanatory language in an otherwise unmodified report in order to
emphasize that the entity being reported upon is a subsidiary of another business enterprise. The
inclusion of this explanatory language
a. is appropriate and would not negate the unmodified opinion'
b. is considered a qualification of the report.
c. is a violation of generally accepted reporting standards if this information is disclosed in
notes to the financial statements.
d. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing
explanation."

131. It is not appropriate for the auditors' report to refer a reader to a financial statement note for
details regarding a(an)
a. change in accounting principle.
b. limitation in the scope of the audit.
c. uncertainty.
d. related party transaction.

132. Which of the following will not result in qualification of the auditors' report due to a scope
limitation?
a. Restrictions imposed by the client.
b. Reliance placed on the report of other auditors.
 c. Inability to obtain sufficient competent evidential matter.
d. Inadequacy in the accounting records.

133. For a continuing audit client, when a complete set of financial statements is presented on a
comparative basis for two years, the auditors' opinion would refer to
a. only the current year under audit.
b. either one or both years at the option of the auditors.
c. each of the two years plus the preceding year.
d. each of the years in the two year period.

134. Which of the following representations does an auditor make explicitly and which implicitly when
issuing an unmodified opinion?
Conformity With PFRS Adequacy of disclosure
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly

135. For a particular entity's financial statements to be presented fairly in conformity with financial
reporting standards, it is not required that the principles selected
a. be appropriate in the circumstances for the particular entity.
b. reflect transactions in a manner that presents the financial statements within a range of
acceptable limits.
c. present information in the financial statements that is classified and summarized in a
reasonable manner.
d. be applied on a basis consistent with those followed in the prior year.

136. In which of the circumstances would an adverse opinion be appropriate?

a. The auditor is not independent with respect to the enterprise being audited.
b. An uncertainty prevents the issuance of a standard unmodified opinion.
c. The statements are not in conformity with financial reporting standards regarding pension
plans.
d. A client-imposed scope limitation prevents the auditor from complying with the Philippine
Standards on Auditing.

137. The independent auditor has concluded that a substantial doubt remains about a client's ability to
continue in existence, but the client's financial statements have properly disclosed a!! cf its solvency
problems. The auditor would probably issue a(an)
a. unmodified opinion with an appropriate explanatory paragraph.
b. "except for" qualified opinion.
c. standard unmodified opinion.
d. adverse opinion.

138. A imitation on the scope of the audit sufficient to preclude an unmodified opinion will always result
when management
a. asks the auditor to report on the balance sheet and not on the other basic financial
statements.
 b. refuses to permit its lawyer to respond to the letter of audit inquiry.
c. discloses material related party transactions in the notes to the financial statements.
d. knows that confirmation of accounts receivable is not feasible.

VII. AUDITING IN A COMPUTERIZED INFORMATION SYSTEMS

(CIS) ENVIRONMENT
1. Which of the following statements is not correct?
a. There is no distinction between the audit concepts applicable to complex electronic data
processing and those applicable to non-complex systems.
b. When computers or other aspects of EDP systems are introduced, standards on auditing
and their interpretations, the Code of Professional Conduct, legal liability, and the basic
Concepts of evidence accumulation remain the same.
c. Most EDP-based accounting systems rely extensively on the same types of procedures for
control that are used in non-
d. The specific methods appropriate for implementing the basic auditing concepts do not
change as systems become more complex.

2. Which of the following is not a characteristic of an on-line processing system?

a. Master files are updated at the time the entry is made.
b. Output of the data files is available on request.
c. Programming is not allowed on-line and must be done separately.
d. Display terminals are used for both input and output purposes.

3. When the computing function is apportioned among CPUs spread geographically and connected by
a communications system, it is called
a. on-line processing.
b. distributed processing.
c. processing with communications systems.
d. off-line processing.

4. A data base management system

a. physically stores each element of data only once.
b. stores data on different files for different purposes, but always knows where they are and
how to retrieve them.
c. allows quick retrieval of data but at a cost of inefficient use of file space.
d. allows quick retrieval of data but it needs to update files continually.

5. Complex operating systems

a. allow different functions to be carried out simultaneously.
b. manage the application of one function at a time.
c. save energy by keeping the CPU idle while other functions are being performed.
d. are fast but at a cost of inefficiency.
6. which of the following is not advantage of from a
a. It usually centralizes data.
b. It permits higher quality controls over operations.
c. it may eliminate the control provided by division of duties of independent persons who
perform related functions and compare results.
d. It may take the record-keeping function and the document preparation function away from
those who have custody of assets and put those functions into the EDP center.

7. In comparing the control environment in complex versus non- complex EDP systems, the control
environment in complex EDP systems is
a. more critical because there is greater potential for errors and irregularities.
b. less critical because the complexity ensures that controls will be built into the system.
c. more critical because of the high degree of technical competence needed by the
programmers and operators.
d. less critical because non-experts do not have the opportunity to interact with the system and
mess it up.

8. A control which relates to all parts of the EDP system is called a(n)
a. systems control.
b. general control.
c. applications control.
d. universal control.

9. Controls which apply to a specific use of the system are called

a. systems controls.
b. general controls.
c. applications controls.
d. user controls.

10. Which of the following is not a general control?

a. The plan of organization and operation of EDP activity,
b. Procedures for documenting, reviewing, and approving systems and programs.
c. Processing controls.
d. Hardware controls.

11. Which of the following is not an example of an applications control?

a. An equipment failure causes an error message on the monitor.
b. There is a preprocessing authorization of the gales transactions.
c. There are reasonableness tests for the unit selling price of a sale.
d. After processing, all sales transactions are reviewed by the sales department.

12. Controls which are built in by the manufacturer to detect equipment failure are called
a. input controls.
b. hardware controls.
c. manufacturer's controls.
d. fail/safe controls.
13. Auditors usually evaluate the effectiveness of
a. hardware controls first.
b. sales cycle controls first.
c. general controls before applications controls.
d. applications controls first.

14. Which of the following is not an input control?

a. Proper authorization of transactions.
b. Control totals.
c. Check digits.
d. Adequate documents.

15. Controls which are designed to assure that the information processed by the computer is valid,
complete, and accurate are called
a. Input controls.
b. processing controls.
c. output controls.
d. general controls.

16. Which of the following is not a processing control?

a. Control totals.
b. Logic tests.
c. Check digits.
d. Compensations tests.

17. The most important output control is

a. distribution control, which assures that only authorized personnel receive the reports
generated by the system.
b. review of the data for reasonableness by someone who knows what the output should look
like.
c. control totals, which are used to verify that the computer's results are correct.
d. logic tests, which verify that no mistakes were made in processing.

18. The objective Of understanding that internal control structure and assessing control risk in an EDP
system is
a. to aid in determining the audit evidence that should be accumulated.
b. to gain an understanding of the computer hardware and
c. to evaluate management's efficiency in designing and using
d. to determine if the CPA firm must have an EDP auditor on the team.

19. In order to gain an understanding of client's internal control structure of the EDP system, it is
common to start by obtaining preliminary information from three major sources. Which of the following
is not one of those sources?
a. Flowcharts.
b. EDP questionnaires.
c. Error listings generated by the system.
d. Written descriptions of the system prepared by the audit team.
20. Should the auditor feel, after obtaining an understanding of the EDP internal control structure, that
control risk cannot be reduced, he or she will
a. issue a disclaimer.
b. issue an adverse opinion.
c. the sample size for tests of controls.
d. expand the substantive testing portion of the audit.

21. When client uses a computer but the auditor chooses to use only the non-EDP segment of the
internal control structure to assess control risk, it is referred to as auditing around the computer. Which
one of the following conditions need not be present in order to audit around the computer?
a. The source documents must be available in a non-machine language.
b. The documents must be fled in a manner that makes it possible to locate them.
c. Computer programs must be available in English.
d. The output must be listed in sufficient detail to enable the auditor to trace individual
transactions.

22. The auditor's objective to determine whether 'the client's computer programs can correctly handle
valid and invalid transactions as they arise is accomplished through the
a. test data approach.
b. generalized audit software approach.
c. microcomputer-aided auditing approach.
d. standards on auditing.

23. Which of the following is not a shortcoming of the test data approach?
a. Test data must include all relevant conditions the auditor desires to test.
b. The program tested by the auditor must be the program that client used throughout the year.
c. Test data must be removed from client's records after processing.
d. The auditor knows all the errors that exist in the test data.

24. In circumstances in which elimination of test data from client's records is not feasible, it is common
practice for auditor's to
a. enter only valid data that does not have to be removed.
b. enter only invalid data, realizing these tests are incomplete.
c. use all the test data and allow the fictitious data to remain in client's records.
d. change methods and just use inquiry of client.

25. The audit approach in which the auditor runs his/her own program on a controlled basis in order to
verify the client's data recorded in a machine language is
a. the test data approach.
b. the generalized audit software approach.
c. the microcomputer-aided auditing approach.
d. called auditing around the computer.

26. The auditor's computer program approach and the test data approach
a. are complementary.
b. are mutually exclusive.
 e. are incompatible.
d. must be used simultaneously.

27. The auditor can perform many different kinds of tests and other functions with the auditor's
computer program. Which of the following tests or functions could not be performed?
a. Analyze exception responses returned with confirmations received from customers.
b. Verify extensions and footings.
c. Compare data on separate files.
d. Re-sequence data and perform analyses.

28. Which of the following is not an advantage of generalized audit software (GAS) programs?
a. The audit staff can be quickly trained to use them with little formal EDP education.
b. A single program can be applied to a wide range of tasks.
c. They operate at a very efficient processing speed.
d. They often can accumulate sufficient competent evidence at a reduced cost.

29. Generalized audit software

a. is a method of verifying the client's data which is recorded in a machine language.
b. is often used even when client's data are not computerized.
c. is used when client's software is not compatible with the auditors.
d. can be used for all three of the above.

30. Many clients now have their data processed at an independent computer service center rather
than have their own computer. The difficulty the independent auditor faces when a computer service
a. gaining the permission of the service center to review their
b. finding compatible programs that will analyze the service centers programs.
c. in trying to abide by the Code of Professional Conduct to maintain the security and
confidentiality of client's data.
d. in determining the adequacy of the service center's internal

31. Internal control is ineffective when computer department personnel

a. participate in computer software acquisition decisions.
b. design documentation for computerized systems.
c. originate changes in master files.
d. provide physical security for program files.

32. Matthews Corp., has changed from a system of recording time worked on clock cards to a
computerized payroll system in which employees record time in and out with magnetic cards. The EDP
system automatically updates all payroll records. Because of this change
a. a generalized computer audit program must be used.
b. part of the audit trail is altered.
c. the potential for payroll related fraud is diminished.
d. transactions must be processed in batches.

33. Errors in data processed in a batch computer system may not be detected immediately because
a. transaction trails in a batch system are available only for a limited period of time.
b. there are time delays in processing transactions in a batch system.
 c. errors in some transactions cause rejection of other transactions in the batch.
d. random errors are more likely in a batch system than in an on- line system.

34. When EDP programs or files can be accessed from terminals, users should be required to enter
a(an)
a. parity check.
b. personal identification code.
c. self-diagnosis test.
d. echo check.

35. An auditor who is testing EDP controls in a payroll system would most likely use test data that
contain conditions such as
a. deductions not authorized by employees.
b. overtime not approved by supervisors.
c. time tickets with invalid job numbers.
d. payroll checks with unauthorized signatures.

36. Which of the following is not a major reason why an accounting audit trail should be maintained for
a computer system?
a. Monitoring purposes.
b. Analytical procedures.
c. Query answering.
d. Deterrent to irregularities.

37. Which of the following computer-assisted auditing techniques allows fictitious and real transactions
to be processed together without client operating personnel being aware of the testing process?
a. Parallel simulation.
b. Generalized audit software programming.
c. Integrated test facility.
d. Test data approach.

38. When an accounting application is processed by computer, an auditor can not verify the reliable
operation of programmed control procedures by
a. Manually comparing detail transaction files used by an edit program to the program's
generated error listings to determine that errors were properly identified by the edit program.
b. Constructing a processing system for accounting applications and processing actual data
from throughout the period through both the client's program and the auditor's program.
c. Manually re-performing, as of a point of time, the processing of input data and comparing the
simulated results to the actual results.
d. Periodically submitting auditor-prepared test data to the same computer process and
evaluating the results.

39. To obtain evidence that user identification and password controls are functioning as designed, an
auditor would most likely
a. attempt to sign-on to the system using invalid user identifications and passwords.
b. write a computer program that stimulates the logic of the client's access control software.
 c. extract a random sample of processed transactions and ensure that the transactions were
appropriately authorized.
d. examine statements signed by employees stating that they have not divulged their user
identifications and passwords to any other person.

40. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts
the auditor's
a. program for tests of controls.
b. understanding of the system.
c. understanding of the types of irregularities that are probable,
given the present system.
d. documentation of the study and evaluation of the system.

41. Computer systems are typically supported by a variety of utility software packages that are
important to an auditor because they
a. may enable unauthorized changes to data files if not properly controlled.
b. are very versatile programs that can be used on hardware of many manufacturers.
c. may be significant components of a client's application
d. are written specifically to enable auditors to extract and sort data.

42. The possibility of erasing a large amount of information stored on magnetic tape most likely would
be reduced by the use of
a. file protection rings.
b. check digits.
c. completeness tests.
d. conversion verification.

43. Which of the following is not a characteristic of a batch processed computer system?
a. The collection of like transactions that are sorted and processed sequentially against a
master file?
b. Keypunching of transactions, followed by machine processing.
c. The production of numerous printouts.
d. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

44. An auditor's investigation of a company's electronic data processing control procedures has
disclosed the following four circumstances. Indicate which circumstance constitutes a weakness in
internal control.
a. Machine operators do not have access to the complete run manual.
b. Machine operators are closely supervised by programmers.
c. Programmers do not have the authorization to operate equipment.
d. Only one generation of back-up files is stored in an off- premises location.

45. When an on-line, real-time (OLRT) electronic data processing system is in use, internal control can
be strengthened by
a. providing for the separation of duties between key punching and error listing operations.
b. attaching plastic file protection rings to reels of magnetic tape before new data can be
entered on the file.
 c. preparing batch totals to provide assurance that files updates are made for the entire input.
d. making a validity check of an identification number before a user can obtain access to the
computer files.

46. If a control total were to be computed on each of the following data items, which would best be
identified as a hash total for a payroll EDP application?
a. Net pay.
b. Department numbers.
c. Hours worked.
d. Total debits and total credits.

47. A computer programmer has written a program for updating perpetual inventory records.
Responsibility for initial testing (debugging) of the program should be assigned to the
a. EDP department control group.
b. internal audit control group.
c. programmer.
d. machine operator.

48. Parity check, read-after-write checks, and duplicate circuitry are electronic data processing
controls that are designed to detect
a. erroneous internal handling of data.
b. lack of sufficient documentation for computer processes.
c. illogical programming commands.
d. illogical uses of hardware.

49. A control feature in an electronic data processing system requires the central processing unit
(CPU) to send signals to the printer to activate the print mechanism for each character. The print
mechanism, just prior to printing, sends 3 signal back to the CPU verifying that the Proper print
position has been achieved. This type of hardware control is referred to as
a. echo control.
b. validity control.
c. signal control.
d. check digit control.

50. In an electronic data processing system, automated equipment controls or hardware controls are
designed to
a. arrange data in a logical sequential manner for processing purposes.
b. correct errors in the computer programs.
c. monitor and detect errors in source documents.
d. detect and control errors arising from use of equipment.

51. An advantage of manual processing is that human processors may note data errors and
irregularities. To replace the human element of error detection associated with manual processing, a
well-designed electronic data processing system should introduce
a. programmed limits.
b. dual circuitry.
c. echo checks.
 d. read after write.

52. An internal administrative control that is sometimes used in connection with procedures to detect
unauthorized or computer usage is
a. maintenance of a computer tape library.
b. use of file controls.
c. maintenance of a computer console tog.
d. control over program tapes.

53. An independent auditor studies and evaluates a client's electronic data processing system. The
auditor's study portion two phases: a) a review of investigation of the system and b) tests of
compliance. The latter phase might include which of the following?
a. Examination of systems flowcharts to determine they reflect the current status of the system.
b. Examination of the systems to determine whether existing procedures are satisfactory.
c. Examination of the machine room log book to determine whether control information is
properly recorded.
d. Examination of organization charts to determine whether electronic data processing
department responsibilities are properly separated to afford effective control.

54. A computer service center processes, for an auditor's client, financial data that has a material
effect on that client's financial statements. The independent auditor need not consider a review of the
service center controls if
a. the service center controls have already been reviewed by an internal audit team of the
client.
b. the service center processes data exclusively for the audit client and its subsidiaries.
c. the user controls relied upon, which are external to the service center, are adequate to
provide assurance that errors and irregularities may be discovered.
d. the service center is a partially owned subsidiary of the client company, whose financial
statements are examined by another CPA.

55. The real-time feature normally would be least useful when applied to accounting for a firm's
a. bank-account balances.
b. property and depreciation.
c. customer accounts receivable.
d. merchandise inventory.

56. Data Corporation has just completely computerized its billing and accounts receivable record-
keeping. You want to make maximum use of the new computer in your audit of Data Corporation.
Which of the following audit techniques could not be performed through a computer program?
a. Tracing audited cash receipts to accounts receivable credits.
b. Selecting on a random number basis accounts to be confirmed.
c. Examining sales invoices for completeness, consistency between different items, valid
conditions and reasonable amounts.
d. Resolving differences reported by customers on confirmation requests.

57. General and special computer programs have been developed for use in auditing EDP systems.
When considering the use of these computer-audit programs, the auditor
 a. should determine the audit efficiency of using a given computer program.
b. will find them ineffective for applications containing many records and requiring significant
time for testing.
c. should use them on a surprise basis in order for them to be effective.
d. will find them economically feasible for any size EDP system.

58. A group of related records in a data-processing system is a

a. character.
b. field.
c. cluster.
d. file.

59. An auditor obtains a magnetic tape that contains the peso amounts of all client inventory items by
style number. The information on the tape is in no particular sequence. The auditor can best ascertain
that no consigned merchandise is included on the tape by using a computer program that
a. statistically selects samples of all amounts.
b. excludes all amounts for items with particular style numbers that indicate consigned
merchandise.
c. mathematically calculates the extension of each style quantity
d. Prints on paper the information on the magnetic tape.

60. Which of the following would be least likely to suggest to an auditor that the client's management
may have overridden the internal control system?
a. Differences are always disclosed on a computer exception report.
b. Management does not correct internal control weaknesses that it knows about.
c. There have been two new controllers this year.
d. There are numerous delays in preparing timely internal financial reports.

61. What is the computer process called when data processing is performed concurrently particular
activity and the results are available soon enough to influence the particular course of action being
taken or the decision being made?
a. Real-time processing.
b. Batch processing.
c. Random access processing.
d. Integrated data processing.

62. When an auditor performs a review of interim financial statements which of the following steps
would not be part of the review?
a. Review of computer controls.
b. Inquiry of management.
c. Review of ratios and trends.
d. Reading the minutes of the stockholders' meetings.

63. A company uses the account code 669 for maintenance expense. However, one of the company
clerks often codes maintenance expense as 996. The highest account code in the system is 750.
What would be best internal control check to build into the Company's computer program to detect this
error?
 a. A check for this type of error would have to be made before the information was transmitted
to the EDP department.
b. Valid-character test.
c. Sequence check.
d. Valid-code test.

64. In a computerized system, procedure or problem-oriented language is converted to machine

language through a (an)
a. interpreter.
b. verifier.
c. compiler.
d. converter.

65. When auditing a computerized system, an auditor may use the "integrated test deck" technique,
sometimes referred to as the mini- company approach, as an audit tool. This technique
a. is more applicable to independent audits than internal audits.
b. involves using test decks.
c. is the most commonly used audit tool for "auditing through the computer."
d. involves introducing simulated transactions into a system simultaneously with actual
transactions.

66. More than one file may be stored on a single magnetic memory disc. Several programs may be in
the core storage unit simultaneously. In both cases it is important to prevent the mixing of data. One
way to do this is to use
a. file integrity control.
b. boundary protection.
c. interleaving.
d. paging.

67. The Smith Corporation has numerous small customers. A customer file is kept on disk storage. For
each customer the file contains customer name, address, credit limit, and account balance. The
auditor wishes to test this file to determine whether credit limits are being exceeded. Assuming that
computer time is available, the best procedure for the auditor to follow would be to
a. develop a test deck which would cause the account balance of certain accounts to be
increased until the credit limit was exceeded to see if the system would react properly.
b. develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.
c. ask for a printout of all account balances so that they can be manually checked against the
credit limits.
d. ask for a printout of a sample of account balances so that they can be individually checked
against the credit limits.

68. A procedural control used in the management of a computer center to minimize the possibility of
data or program file destruction through operator error included
a. control figures.
b. crossfooting tests.
c. limit checks.
 d. external labels.

69. In updating a computerized accounts receivable file, which one of the following would be used as a
batch control to verify the accuracy of the posting of cash receipts remittances?
a. The sum of the cash deposits plus the discounts less the sales returns.
b. The sum of the cash deposits.
c. The sum of the cash deposits less the discounts taken by
d. The sum of the cash deposits plus the discounts taken by customers.

70. After a preliminary phase of the review of a client's EDP controls, an auditor may decide not to
perform compliance tests related to the Control procedures within the EDP portion of the client's
internal. Which of the following would not be a valid reason for choosing to omit compliance tests?
a. The controls appear adequate.
b. The controls duplicate operative controls existing elsewhere in the system.
c. There appear to be major weaknesses that would preclude reliance on the stated procedure.
d. The time and peso costs of testing exceed the time and peso savings in substantive testing if
the compliance tests show the controls to be operative.

71. Management's responsibility in a computer system would not include

a. ensuring the documentation of the system is complete and up to date.
b. maintaining a system of transaction processing that includes an audit trail.
c. assessment of the control risk.
d. making computer resources and knowledgeable personnel available.

72. The characteristics that distinguish computer processing from manual processing would not
include
a. a decrease of management supervision of system.
b. automatic initiation and execution of transactions.
c. control procedures may be concentrated.
d. greater potential to gain unauthorized access to data.

73. When evaluating the effect of a client's computer processing in an audit of financial statements,
auditors need not consider the
a. organizational structure of the computer processing activities.
b. differences in standards for computer auditing.
c. computer-assisted audit techniques to increase the efficiency
d. need for specialized skills.

74. control risk assessment when a computer is used would not involve
a. identifying specific control procedures designed to achieve the control objectives.
b. identifying the interdependent control procedures which must function for an identified
specific control procedure to be effective.
c. evaluating the design of control procedures.to determine control risk.
d. performance of specific tests of control audit procedures.

75. In computer systems the general controls would not include

a. processing control procedures.
 b. segregation of various computer system functions.
c. documentation of the data processing system.
d. control over physical access to computer hardware,

76. In computer systems the processing controls would not include

a. run-to-run totals.
b. master file changes.
c. file and operator controls.
d. limit and reasonable tests.

77. Audit and control specifications for an audit trail need to be established at the
a. planning stage of the audit.
b. time a system is designed, leased, or purchased.
c. control risk assessment phase.
d. negotiation phase of accepting the client.

78. The data base administrator should not have the following responsibility
a. program the applications in the data base.
b. design the content and organization of the data base.
C. protect the data base and software.
d. monitor the performance of the data base management system.

79. In micro-minicomputer systems the most important aspect for auditors to consider is the
a. audit techniques.
b. computer technology.
c. control environment.
d. computer software.

80. In micro-minicomputer systems the processing control procedures would not include
a. transaction logs.
b. control risk.
c. balancing input to output.
d. on-line editing and sight verification.

81. An auditor's approach to computer systems that consists of using visible evidence such as input
source data and machine-produced error listing is referred to as auditing
a. around the computer.
b. through the computer.
c. without the computer.
d. with the computer.

82. The reprocessing of live data to test program controls is called

a. test data.
b. test deck.
c. generalized audit software,
d. parallel simulations
83. To achieve the control objective in an advanced computer environment the system would not
include the following feature
a. ability to identify fraudulent entries.
b. capability to identify each person using the system.
c. able to determine if user request is authorized.
d. capable of recoding user activity.

84. Techniques needed to select specific live data transactions of audit interest for testing would not
include
a. audit hooks.
b. test data.
c. trap data.
d. transaction tags.

85. The essential advantages of a generalized audit software package would not include
a. same software can be used in various clients' computer systems.
b. large number of GAS packages are currently available.
c. software packages are inexpensive.
d. ability to control and modify program to auditors' need.

86. Generalized audit software could not be used for the following audit task
a. test calculations and make computations.
b. evaluate control risk assessment.
c. summarize, re-sequence and reformat data.
d. compare audit evidence from manual audit procedures to company needs.

87. Comparing data on separate files can be accomplished by generalized audit software to determine
whether compatible information is in agreement. Examples of such comparisons would not include
a. payroll details with personnel records.
b. current and prior inventory to details of purchases and sales.
c. paid vouchers to disbursements.
d. observation of inventory counts.

88. The processing phase of using generalized audit software would not include
a. coding the application design into specific computer language.
b. verifying that the status of the client file has not changed.
c. obtaining a copy of the client file.
d. reviewing results and updating working papers.

89. The basic auditing application of the microcomputer as an audit tool would not include
a. spreadsheet analysis working papers.
b. sample planning, selection and evaluation.
c. continuous monitoring.
d. analytical review.

90. Methods of limiting access to computer resources to prevent computer abuse would not include
a. definition of duties.
 b. dual-person access.
c. access-code passwords.
d. analytical review of output.

91. A well prepared flowchart should make it easier for the auditor to
a. prepare audit procedure.
b. prepare detailed job descriptions
c. trace the origin arid disposition of documents.
d. assess the degree of accuracy of financial data.

92. Which of the following characteristics distinguishes computer processing from manual processing?
a. computer processing virtually eliminates occurrence of computational error normally
associated with manual processing.
b. errors of irregularities in computer processing will be detected soon after their occurrences.
c. the potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
d. most computer systems are designed so that transaction trails useful for audit purposes do
not exist.

93. Which of the following most likely represents a significant deficiency in the internal control
structure?
a. the systems analyst reviews applications of data processing and maintains systems
documentation.
b. the systems programmer designs systems for computerized applications and maintains
output controls.
c. the control clerk establishes control over data received by the EDP department and
reconciles control totals over processing.
d. the accounts payable clerk prepares data for computer processing and enters the data into
the computer.

94. Internal control is ineffective when computer department personnel

a. participate in computer software acquisition decisions.
b. design documentation for computerized systems.
c. changes in master files.
d. provide physical security for program files.

95. Which of the following activities would most likely be performed in the EDP department?
a. initiation of changes to master records.
b. conversion of information to machine-readable form.
c. correction of transactional errors.
d. initiation of changes to existing applications.

96. For control purposes, which of the following should be organizationally segregated from the
computer operations function?
a. data conversion.
b. surveillance of CRT messages.
c. systems development.
 d. minor maintenance according to a schedule.

97. Which of the following is not a major reason for maintaining an audit trail for a computer system .
a. deterrent to irregularities.
b. monitoring purposes.
c. analytical procedures.
d. query answering.

98. First Federal S & L has an outline real-time system, with terminal installed in all of its branches.
This system will not accept a customer's cash withdrawal instruction in excess of P 1,000 without the
use of a "terminal audit key". After the transaction is authorized by a supervisor, the bank teller then
processes the transaction with the audit key. This control can be strengthened by
a. on-line recording of the transaction on an audit override sheet.
b. increasing the peso amount of PI,500.
c. requiring manual, rather than on-line, recording of all such transactions.
d. using parallel simulation.

99. The use of a header label in conjunction with magnetic tape is most likely to prevent errors by the
a. computer operator.
b. keypunch operator.
c. computer programmer.
d. maintenance technician.

100. For the accounting system of Acme Company, the amounts of cash disbursements entered into
an EDP terminal are transmitted to the computer that immediately transmits the amounts back to the
terminal for display on the terminal screen. This display enables the
a. establish the validity of the account number.
b. verify the amount was entered accurately.
c. verify the authorization of the disbursement:
d. prevent the overpayment of the account.

101. When EDP programs or files can be accessed from terminals, users should be required to enter a
(an)
a. parity check.
b. personal identification code.
c. self-diagnosis test.
d. echo check.

102. The possibility of erasing a large amount of information stored on magnetic tape most likely would
be reduced by the use of
a. file protection rings.
b. check digits.
c. completeness tests.
d. conversion verification.
103. Matthews Corp. has changed from a system of recording time worked on clock cards to a
computerized payroll system in which employees record time in and out with magnetic cards. The EDP
system automatically updates all payroll records. Because of this change
a. a generalized computer audit program must be used.
b. part of the audit trail is altered.
c. the potential for payroll related fraud is diminished.
d. transactions must be processed in batches.

104. An auditor anticipates assessing control risk at a low level in a computerized environment* Under
these circumstances, on which of the following procedures would the auditor initially focus?
a. programmed control procedures.
b. application control procedures.
c output control procedures.
d. general-control procedures.

105. A flowchart is most frequently used by an auditor in connection with the

a. preparation of a generalized computer audit programs.
b. review of the client's internal controls.
c. use of statistical sampling in performing an audit.
d. performance of analytical procedures of account balances.

106. After the preliminary phase of the review of a client's EDP controls, an auditor may decide not to
perform tests of controls (compliance tests) related to the control procedures within the EDP portion of
the client's internal control structure. Which of the following would not be a valid reason for choosing to
omit such tests?
a. The controls duplicate operative controls existing elsewhere in the structure.
b. There appear to be major weaknesses that would preclude reliance on the stated procedure.
c. The time and peso costs of testing exceed the time and peso savings in substantive testing if
the tests of controls show the controls to be operative.
d. The controls appear adequate.

107. Auditing by testing the input and output of an EDP system instead of the computer program itself
will
a. not detect program errors which do not show up in the output sampled.
b. detect all program errors, regardless of the nature of the output.
c. provide the auditor with the same type of evidence.
d. not provide the auditor with confidence in the results of the auditing procedures.

108. Which of the following client electronic data processing (EDP) systems generally can be audited
without examining of directly testing the EDP computer programs of the system?
Auditing in a Computerized Information Systems (CIS) Environment
a. A system that performs relatively uncomplicated processes and produces detailed output.
b. A system that affects a number of essential master files and produces a limited output.
c. A system that updates a few essential master files and produces no printed output other than
final balances.
d. A system that performs relatively complicated processing and produces very little detailed
output.
109. Computer systems are typically supported by a variety of utility software packages that are
important to an auditor because they
a. may enable unauthorized changes to data files if not properly controlled.
b. are very versatile programs that can be used on hardware of many manufacturers.
c. may be significant components of a client's application programs.
d. are written specifically to enable auditors to extract and sort data.

110. An auditor would least likely use computer software to

a. access client data files.
b. prepare spreadsheets.
c. assess EDP control risk.
d. construct parallel simulations.

111. A primary advantage of using generalized audit software packages to audit the financial
statements of a client that uses an EDP system is that the auditor may
a. consider increasing the use of substantive tests of transactions in place of analytical
procedures.
b. substantive the accuracy of data through seif checking digits and hash totals.
c. reduce the level of required tests of controls to a relatively small amount.
d. access information stored on computer files while having a limited understanding of the
client's hardware and software features.

112. Auditors often make use of computer programs that perform routine processing functions such as
sorting and merging. These programs are made available be electronic data processing companies
and others and are specifically referred to as
a. compiler programs.
b. supervisory programs.
c. utility programs.
d. use programs.

113. Smith Corporation has numerous customers. A customer file is kept on disk storage. Each
customer file contains name, address, credit limit, and account balance. The auditor wishes to test this
file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow
would be to
a. develop test data that would cause some account balances to exceed the credit limit and
determine if the system properly detects such situations.
b. develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.
c. request a printout of all account balances so they can be manually checked against the
credit limits.
d. request a printout of a sample of account balances so they
can be individually checked against the credit limits.

114. An auditor most likely would test for the presence of unauthorized EDP program changes by
running a
a. program with test data.
 b. check digit verification program.
c. source code comparison program,
d. program that computes control totals.

115. When an auditor tests a computerized accounting system, which of the following is true of the test
data approach?
a. Test data must consist of all possible valid and invalid
b. The program tested is different from the program used throughout the year by the client.
c. Several transactions of each type must be tested.
d. Test data are processed by the client's computer programs under the auditor's control.

116. Which Of the following statements is not true to the test data approach when testing a
computerized accounting system?
a. The test need consist of only those valid and invalid conditions which interest the auditor.
b. Only one transaction of each type need be tested.
c. The test data must consist of all possible valid and invalid conditions.
d. Test data are processed by the client's computer programs under the auditor's control,

117. Which of the following is not among the errors that an auditor might include in the test data when
auditing a client's EDP system?
a. Numeric characters in alphanumeric fields,
b. Authorized code.
c. Differences in description of units of measure.
d. Illogical entries in fields whose logic is tested by programmed consistency checks.

118. An auditor who is testing EDP controls in payroll system would most likely use test data that
contain conditions such as
a. deductions not authorized by employees.
b. overtime not approved by supervisors.
c. time tickets with invalid job numbers
d. payroll checks with unauthorized signatures,

119. To obtain evidence that user identification and password controls are functioning as designed,
an auditor would most likely
a. attempt to sign on to the system using invalid user identifications and passwords.
b. write a computer program that simulates the logic of the client's access control software.
c. extract a random sample of processed transactions and ensure that the transactions were
appropriately authorized.
d. examine statements signed by employees stating that they have not divulged their user
identifications and passwords to any other person.

120. Processing data through the use of simulated files provides an auditor with information about the
operating effectiveness of control policies and procedures. One of the techniques involved in this
approach makes use of
a. controlled reprocessing.
b. an integrated test facility.
c. input validation.
 d. program code checking.

121. Which of the following computer-assisted auditing techniques allows fictitious and real
transactions to be processed together without client operating personnel being aware of the testing
process?
a. Parallel simulation.
b. Generalized audit software programming.
c. Integrated test facility.
d. Test data approach.

122. Which of the following methods of testing application controls utilizes a generalized audit software
package prepared by the
a. Parallel simulation.
b. Integrated testing facility approach.
c. Test data approach.
d. Exception report tests.

123. Using microcomputers in auditing may affect the methods used to review the work of staff
assistants because
a. supervisory personnel may not have an understanding of the capabilities and limitations of
microcomputers.
b. working paper documentation may not contain readily observable details of calculations.
c. the audit field work standards for supervisory may differ.
d. documenting the supervisory review may require assistance of management services
personnel.

124. Which of the following is not a characteristic of a batch processed computer system?
a. The collection of like transactions which are sorted and processed sequentially against a
master file.
b. Keypunching of transactions, followed by machine processing.
c. The production of numerous printouts.
d. The posting of a transaction, as it occurs, to several files, without intermediate printouts.

125. Errors in data processed in a batch computer system may not be detected immediately because
a. transaction trails in a batch system are available only for a limited period of time.
b. there are time delays in processing transactions in a batch system.
c. errors in some transactions cause rejection of other transactions in the batch,
d. random errors are more likely in a batch system thah.in an on- line system.

126. Where disk files are used, the grandfather-father-son updating backup concept is relatively
difficult to implement because the
a. location of information points on disks is an extremely time consuming task.
b. magnetic fields and other environmental factors cause off-site storage to be impractical.
c. information must be dumped in the form of hard copy if it is to be reviewed before used in
updating.
d. process of updating old records is destructive.
127. Which of the following statements most likely represents a disadvantage for an entity that keeps
microcomputer-prepared data files rather than manually prepared files?
a. Random error associated with processing similar transactions in different ways is usually
greater.
b. It is usually more difficulty to compare recorded accountability with physical count of assets.
c. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
d. It is usually easier for unauthorized persons to access and alter the files.

128. An auditor would most likely be concerned with which of the following controls in a distributed
data processing system?
a. Hardware controls.
b. Systems documentation controls.
c. Access controls.
d. Disaster recovery controls.

129. If a control total were computed on each of the following data items, which would best be
identified as a hash total for a payroll EDP application?
a. Total debits and total credits.
b. Net pay.
c. Department numbers.
d. Hours worked.

130. Which of the following is a computer test made tc ascertain whether a given characteristic
belongs to the group?
a. Parity check.
b. Validity check.
c. Echo check.
d. Limit check.

131. A control feature in an electronic data processing system requires the central processing unit
(CPU) to send signals to the printer to activate the print mechanism for each character. The print
mechanism, just flying that the proper print position has been activated. This type of hardware control
is referred to as
a. echo control.
b. validity control.
c. signal control.
d. check digit control.

132. Which of the following is an example of a check digit?

a. An agreement of the total number of employees to the total number of checks printed by the
computer.
b. An algebraically determined number produced by the other digits of the employee number.
c. A logic test that ensures all employee numbers are nine digits.
d. A limit check that an employee's hours do not exceed 50 hours per work week.
133. In a computerized system, procedure or problem-oriented language is converted to machine
language through a (an)
a. interpreter.
b. verifier.
c. compiler.
d. converter.

134. What type of EDP system is characterized by data that are assembled from more than one
location and records that are updated immediately?
a. Microcomputer system.
b. Minicomputer system.
c. Batch processing
d. On-line real-time system.

135. Which of the following controls most likely would assure that an entity can reconstruct its financial
records?
a. Hardware controls are built into the computer by the computer manufacturer.
b. Backup diskettes or tapes of files are stored away from originals.
c. Personnel who are independent of data input perform parallel simulations.
d. System flowcharts provide accurate descriptions of input and output operations.

136. Mill Company uses a batch processing method to process its sales transactions. Data on Mill's
sales transaction tape are electronically sorted by customer number and are subjected to programmed
edit checks in preparing its invoices, sales journals, and updated customer account balances. One of
the direct outputs of the creation of this tape most likely would be a
a. report showing exceptions and control totals.
b. printout of the updated inventory records.
c. report showing overdue accounts receivable.
d. Printout of the sales price master file.

137. To obtain evidence that on-line access controls properly functioning, an auditor most likely would
a. create checkpoints at periodic intervals after live data processing to test for unauthorized use
of the system.
b. examine the transaction log to discover whether any transactions were lost or entered twice
due to a system malfunction.
c. enter invalid identification numbers of passwords to ascertain whether the system rejects
them.
d. vouch a random sample of processed transactions to assure authorization.

138. An advantage of using systems, flowcharts to document information about internal control instead
of using internal control questionnaires is that systems flowcharts
a. Identify internal control weaknesses more prominently.
b. Provide a visual depiction of client's activities.
c. Indicate whether control procedures are operating effectively.
d. Reduce the need to observe client's employees performing routine task.
VIII. OTHER ASSURANCE AND NONASSURANCE SERVICES
1. Practice in connection with unaudited historical cost financial statements is conducted by
a. International accounting firms only.
b. Regional and local public accounting firms.
c. Local public accounting firms only.
d. All public accounting firms.

2. Which of the following is a general standard of generally accepted attestation standards but not a
fundamental auditing principle?
a. Appropriate competence and capability
b. Adequate knowledge in the subject matter.
c. Independence.
d. Due care.

3. In performing an attestation engagement on prospective financial information (PFI), which of the

following is not required?
a. If the basis of the PFI is different than the financial statements, a reconciliation of the two
must be provided.
b. Management must disclose all significant assumptions used.
c. Management must disclose significant accounting policies and procedures used in
generating the PFI.
d. Management must disclose the probability of obtaining the results included in the PFI.

4. To perform an attestation engagement on prospective information or pro forma information,

accountants must do all of the following except
a. Obtain knowledge about the entity's business and accounting principles.
b. Understand the internal controls used in the processes that generated the information.
c. Obtain an understanding of the process through which the information was developed.
d. Evaluate the assumptions used to prepare the information.

5. A review service engagement involving unaudited financial statements involves

a. More than a compilation and an audit.
b. Less work than an audit but more work than a compilation.
c. Less work than a compilation but more work than an audit.
d. More work than an audit but less work than a compilation.

6. When accountants are not independent, which of the following reports can nevertheless be issued?
a. Compilation report.
b. Standard unmodified audit report.
c. Examination report on a forecast.
d. Examination of internal control over financial reporting'

7. For a compliance engagement, three conditions must be met. Which of the following is not one of
the three conditions?
a. Management accepts responsibility for compliance.
 b. Management's evaluation of compliance is capable of evaluation and is measured against
reasonable criteria.
c. Sufficient evidence is available to support management's evaluation.
d. Management provides a report attesting to the satisfactory compliance.

8. Accountants are permitted to express "negative assurance" in which of the following reports?
a. Standard unmodified audit report on audited financial statements.
b. Compilation report on unaudited financial statements.
c. Review report on unaudited financial statements.
d. Adverse opinion report on audited financial statements.

9. Which of the following conditions must be met before an accountant can conduct an examination of
an entity's internal control?
a. Management presents its assertion about the effectiveness of its internal control in a written
report.
b. Management represents that there are no internal control deficiencies.
c. The accountant represents that he/she has not conducted an audit of the financial
statements.
d. The accountant has designed a significant portion of the internal controls.

10. According to auditing standards, financial statements presented on a Specific purpose framework
(SPF) should not
a. Contain a note describing the SPF.
b. Describe in general how the SPF differs from financial reporting standards.
c. Be accompanied by an audit report that gives an unmodified opinion with references to the
SPF.
d. Contain a note with quantified peso reconciliation based on the SPF with the assets based
on financial reporting standards.

11. To be useful, an audit of a service organization's controls should cover a minimum of:
a. A quarter.
b. Six months.
c. A year.
d. The user entity's fiscal period.

12. In providing assurance services to clients, public accounting firms are building on their reputations
for
a. Knowledge and integrity.
b. Objectivity and integrity.
c. Independence and due professional care.
d. Professionalism and trust,

13. An assurance service is defined as a service that

a. Provides auditing services to non financial information.
b. Reviews unadjusted financial information.
c. Improves the quality of information for decision makers.
d. Reduce the risk in management decision making.
14. Kristin is surfing the Internet and finds a great pair of rollerblades at a really low price. She has
never heard of the company and is concerned that she may not receive the product she orders. Kristin
may be more willing to place an order with this company if
a. The Web site displays the Web Trust Seal.
b. The company provides its annual report and the report of the independent auditors on its
Web site.
c. The company provides a money-back guarantee.
d. Only a partial payment is required prior to receiving the product.

15. Which of the following is not a principle of Trust Services?

a. Security
c. Privacy
b. Authentication
d. Confidentiality

16. A report on an attestation engagement should:

a. State the nature of the client's control structure.
b. State the practitioner's conclusion about the subject matter or assertion.
c. Include a reasonable limitations section pertaining to data inputs.
d. Refer to the auditor's assertion concerning the subject matter.

17. When an accountant examines a financial forecast that fails to disclose several significant
assumptions used to prepare the forecast, the accountant should describe the assumptions in the
accountant's report and issue a(n):
a. Qualified opinion.
b. Unmodified opinion with a separate explanatory paragraph.
c. Disclaimer of opinion.
d. Adverse opinion.

18. Which of the following is not an objective of a CPA's examination of a client's MD&A?
a. The presentation includes, in all material respects, the required elements of the rules and
regulations adopted by the Securities and Exchange Commission.
b. The presentation is in conformity with rules and regulations adopted by the SEC.
c. The historical amounts included in the presentation have been accurately derived; in all
material respects, from the entity's financial statements.
d. The underlying information, determinations, estimates, and assumptions provide a
reasonable basis for the disclosures contained in the presentation.

19. A CPA's report relating to a WebTrust engagement is most likely to

include:
a. An opinion on whether the site is electronically secure.
b. An opinion on management's assertion that the site meets one or more of the WebTrust
criteria.
c. Negative assurance on whether the site is electronically secure.
d. No opinion or other assurance, but a summary of findings relating to the site.
20. Which type (or types) of report is appropriate when a material weakness in internal control has
been identified in reporting on the results of an examination of a client's internal control over financial
reporting?
Disclaimer Adverse
a. Yes Yes
b. Yes No
c. No Yes
d. No No

21. When reporting on the results of a client's internal control over financial reporting, a CPA should
include a paragraph that describes
a. Documentary evidence regarding the control environment
b. Changes in internal control since the prior report.
c. Potential benefits from the CPA's suggested improvements.
d. Inherent limitations of any internal control.

22. CPA services performed under Elder Care/PrimePlus services may be:
Financial Nonfinancial
a. Yes Yes
b. Yes No
c. No Yes
d. No No

23. The performance measurement technique that attempts to measure financial and nonfinancial
dimensions of performance is the:
a. Balanced scorecard.
b. Financial/nonfinancial trust.
c. Income statement.
d. Performance View.

24. Which is least likely?

a. An assurance service that is also an attest service.
b. A service that is not an assurance service, but is an attest service.
c. A historical financial statement-related assurance service.
d. A nonhistorical financial information-related assurance service.

25. Which of the following is least likely to be the subject matter of an attestation engagement?
a. Behaviour.
b. Historical events.
c. Suitable criteria.
d. Systems or processes.

26. Which of the following is not a basic type of attestation engagement?

a. Agreed-upon procedures
b. Compilation
c. Examination
 d. Review

27. The assurance services being developed that address user and prepare needs regarding issues of
security, availability, processing integrity, online privacy, and confidentiality within e-commerce and
other systems are referred to as:
a. PrimePlus services.
b. CPA Performance View services.
c. Risk Advisory Services.
d. Trust Services.

28. Internal auditing can best be described as:

a. An accounting function.
b. A compliance function.
c. An activity primarily to detect fraud.
d. A control function.

29. The independence of the internal auditing department will most likely be assured if it reports to the:
a. Audit committee of the board of directors.
b. President.
c. Controller.
d. Treasurer.

30. When performing an operational audit, the purpose of a preliminary survey is to:
a. Determine the objective of the activity to be audited.
b. Determine the scope of the audit.
c. Identify areas that should be included in the audit program.
d. All of the above.

31. Operational auditing is primarily oriented toward:

a. Future improvements to accomplish the goals of management.
b. Ensuring the accuracy of the data in management's financial reports.
c. Determination of the fairness of the entity's financial statements.
d. Compliance with laws and regulations.

32. In a compliance attestation engagement CPAs may address an organization.

Compliance with Internal Control over
Specified Requirements Compliance with Specific
Laws and Regulations
a. Yes yes
b. Yes No
c. No Yes
d. No No

33. The portion of internal control most directly related to a CPA's engagement to attest to compliance
with laws and regulations is:
a. Internal control over compliance.
 b. Internal control over financial reporting.
c. Internal control over laws and regulations.
d. Internal control over operations.

34. When issuing an unmodified report in a compliance attestation engagement, the CPA may report
on:
Management's Assertion The Subject Matter
a. Yes Yes
b. Yes No
c. No Yes
d. No No

35. When issuing a qualified audit report in a compliance attestation engagement, the CPA may report
Management's Assertion The Subject Matter
a. Yes Yes
b. Yes No
c. No Yes
d. No No

36. Compilation services are intended to enable a CPA firm to compete with
a. management advisory service firms.
b. tax preparation businesses.
c. computer service businesses.
d. bookkeeping firms.

37. The level of assurance that is provided by the CPA on a compilation report is
a. none.
b. low.
c, medium.
d. high.

38. Which of the following is the format of compilation that would not be acceptable?
a. A compilation with full disclosures in accordance with financial reporting standards
b. A compilation that omits Substantially all disclosures, the report indicates that they are
missing, and their absence is not an intent to mislead the users.
c. A compilation with a separate paragraph warning readers that the CPA is not responsible for
exercising due care when performing this type of engagement.
d. A compilation with a separate paragraph that admits that the CPA is not independent With
respect to this client.

39. Performing inquiry and analytical procedures that provide the accountant with a reasonable basis
for expressing limited assurance that there are no material modifications that should be made to the
statements in order for them to be in conformity with financial reporting standards or if applicable, with
another comprehensive basis of accounting, is the definition of a(an)
a. compilation.
b. review.
c. audit.
 d. examination.

40. The only time that material departure failure financial reporting standards is acceptable is for a
a. review without complete disclosure.
b. review with complete disclosure.
c. Compilation without complete disclosure.
d. compilation with complete disclosure.

41. Il a review service where client has failed to follow financial reporting standards.
a. the accountant is not required to determine the effect of a departure if management has not
done so, but that fact must be disclosed in the report.
b. the accountant is required to determine the effect of a departure if management has not
done so, and that fact must be disclosed in the report.
c. the accountant's not required to determine the effect of a departure if management has not
done so, and that fact need not be disclosed in the report.
d. the accountant is required to determine the effect of a departure if management has not
done so, and that fact need not be disclosed in the report.

42. The fact that client has a material departure for failure to follow financial reporting standards would
require the accountant to disclose that fact in a separate paragraph rather than in the regular material
when the accountant is performing
a. a compilation.
b. a review.
c. either a compilation or a review.
d. neither a compilation nor a review, only an audit.

43. The standards prohibit one of the following types of engagements for prospective financial
statements from being undertaken.
a. A compilation
b. A review.
c. An examination.
d. An agreed-upon procedures engagement

44. The accountant's report on an examination of prospective financial statements should not include
a. a caveat that the prospective results may not be achieved.
b. a statement that the accountant assumes no responsibility to update the report for events
and circumstances occurring after the date of the report.
c. The accountant's opinion that the prospective financial statements are presented in
conformity with PICPA presentation guidelines and that the underlying assumptions provide a
reasonable basis for the forecast, or a reasonable basis for the projection given the
hypothetical assumptions.
d. A statement that the examination was made in accordance with the Philippine Standards on
Auditing, and a brief description of the nature of such examination.

45. An independent accountant, without auditing an entity's financial statements, may accept an
engagement to express an opinion on the entity's internal controls in effect
 As of a During a specified
specified date Period of time
a. Yes Yes
b. Yes No
c. No Yes
d. No No

46. An accountant's report expressing an opinion on an entity's internal controls should

a. briefly explain the broad objectives and inherent limitations of internal control.
b. state that the study and evaluation of the internal controls was conducted in accordance with
the Philippine Standards on Auditing.
c. clearly disclaim responsibility for the establishment and maintenance of the internal controls.
d. include an opinion concerning management's assertions about whether the cost of
correcting any material weaknesses would exceed the benefits of reducing the risk of errors
and irregularities.

47. Aa accountant has been engaged to report on an entity's internal records without performing an
audit of the financial statements. What restrictions, if any, should the accountant place on the use of
this report?
a. this report should be restricted for use by management.
b. this report should be restricted for use by the audit committee.
c. this report should be restricted for use by a specified regulatory agency.
d. the accountant does not need to place any restrictions on the use of this report.

48. Before performing a review of a nonpublic entity's financial statements, an accountant should
a. complete a series of inquiries concerning the entity's procedures for recording, classifying,
and summarizing transactions.
b. apply analytical procedures to provide limited assurance that no material modifications
should be made to the financial statements.
c. obtain a sufficient level of knowledge of the accounting principles and practices of the
industry in which the entity operates.
d. inquire whether management has omitted substantially all of the disclosures required by
financial reporting standards.

49. An auditor who conducts an examination in accordance with the Philippine Standards on Auditing
and concludes that the financial statements are fairly presented in accordance with a comprehensive
basis Of accounting other than financial reporting standards, such as the cash basis of accounting,
should issue a
a. special report.
b. disclaimer of opinion.
c. review report.
d. qualified opinion.

50. An accountant has been asked to compile the financial statements of a nonpublic company on a
prescribed form that omits substantially all the disclosures required by financial reporting standards. If
the prescribed form is a standard preprinted form adopted by the company's industry trade
association, and is to be transmitted only to such association, the accountant
a. need not advise the industry trade association of the omission of all disclosures.
b. should disclose the details of the omissions in separate paragraphs of the compilation report.
c. is precluded from issuing a compilation report when all disclosures are omitted.
d. should express limited assurance that the financial statements are free of material
misstatements,

51. An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the
financial statements do not require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may
a. Issue an "except for" qualified opinion after discussing the matter with the client's board of
directors.
b. consider the matter closed since the other information is not in the audited financial
statements.
c. disclaim an opinion on the financial statements after explaining the material inconsistency in
a separate explanatory paragraph,
d. revise the auditor's report to include a separate explanatory paragraph describing the
material inconsistency.

52. An accountant may accept an engagement to apply agreed-upon procedures to prospective

financial statements provided that
a. distribution of the report is to be restricted to the specified users involved.
b. the prospective financial statements are also examined.
c. responsibility for the adequacy of the procedures performed us taken by the accountant.
d. negative assurance is expressed on the prospective financial statements taken as a whole.

53. When an accountant performs more than one level of service (for example, a compilation and a
review, or a compilation and an audit) concerning the financial statements of a nonpublic entity, the
accountant generally should issue the report that is appropriate for
a. the lowest level of service rendered.
b. the highest level of service rendered.
c. a compilation engagement.
d. a review engagement.

54. An accountant who reviews the financial statements of a nonpublic entity should issue a report
stating that a review
a. is substantially less in scope than an audit.
b. provides negative assurance that the internal control structure is functioning as designed.
c. provides only limited assurance that the financial statements are fairly presented.
d. is substantially more in scope than a compilation.

55. An auditor has been asked to report on the balance sheet of Kane Company but not on the other
basic financial statements. The auditor will have access to all information underlying the basic financial
statements. Under these circumstances, the auditor
 a. may accept the engagement because such engagements merely involve limited reporting
objectives.
b. may accept the engagement but should claim an opinion because of an inability to apply the
procedures considered necessary.
c. should refuse the engagement because there is a client imposed scope limitation.
d. Should refuse the engagement because of a departure from standards on auditing.

56. The statement that "nothing came to our attention which would indicate that these statements are
not fairly presented" expresses which of the following?
a. disclaimer of an opinion.
b. negative assurance.
c. negative confirmation.
d. piecemeal opinion.

57. Which of the following would not be included in a CPA's report based upon a review of the financial
statements of a nonpublic entity?
a. a statement that the review was in accordance with the Philippine Standards on Auditing.
b. a statement that all information included in the financial statements is the representation of
management.
c. a statement describing the principal procedures performed.
d. a statement describing the auditor's conclusions based upon the results of the review.

58. A report based on a limited review of interim financial statements would include all of the following
elements except
a. a statement that an examination was performed in accordance with the Philippine Standards
on Auditing.
b. a description of the procedures performed or a reference to the procedures described in an
engagement letter.
c. a statement that a limited review would not necessarily disclose all matters of significance.
d. an identification of the interim financial information reviewed.

59. If, as a result of a limited review of interim financial information, a CPA concludes that such
information does not conform with financial reporting standards, the CPA should
a. insist that the management have the information conform with financial reporting standards
and, if this is not done, resign from the engagement.
b. adjust the financial information so that it conforms with generally accounting principles.
c. prepare a qualified report that makes reference to said information.
d. advise the board of directors of the respects in which the information does not conform with
financial reporting standards.

60. Negative assurance is not permissible in

a. letters required by security underwriters for data pertinent to SEC registration statements.
b. reports relating to the results of agreed upon procedures tc one or more specified elements,
accounts, or items of financial statements.
c. reports based upon a review engagement.
 d. reports based upon an audit of the interim financial statements of a closely held business
entity.

61. A CPA who is not independent may issue a

a. compilation report.
b. review report.
c. comfort letter.
d. qualified opinion.

62. The auditor's best course of action with respect to "other financial information" included in an
annual report containing the auditor's report is to
a. indicate in the auditor's report, that the "other financial information" is unaudited.
b. consider whether the "other financial information" is accurate by performing a limited review.
c. obtain written representations from management as to the materiality accuracy of the "other
financial information. "
d. read and consider the manner of presentation of the "other financial information.

63. Non-accounting data included in a long-form report have been subjected to auditing procedures.
The auditor's report should state this fact and should explain that the non-accounting data are
presented for analysis purposes. In addition, the auditor's report should state whether the non-
accounting data are
a. beyond the scope of the normal engagement and therefore, not covered by the opinion on
the financial statements.
b. within the framework of generally accepted auditing standards, which apply to the financial
statements, taken as a whole.
c. audited, unaudited, or reviewed on a limited basis.
d. fairly stated in all material respects in relation to the basic financial statements, taken as a
whole.

64. One example of a "special report" as defined by Philippine Standards on Auditing, is a report
issued in connection with
a. a feasibility study.
b. a limited review of interim financial information.
c. price-level basis financial statements.
d. compliance with a contractual agreement not related to the financial statements.

65. A CPA has been engaged to audit financial statements that were prepared on a cash basis. The
CPA
a. must ascertain that there is proper disclosure of the fact that the cash basis has been used,
the general nature of material items omitted, and the net effect of such omissions.
b. may not be associated with such statements which are not in accordance with financial
reporting standards.
c. must render a qualified report explaining the departure from financial reporting standards in
the opinion paragraph.
d. must restate the financial statements on an accrue! and then render the standard (short-
form) report.
66. In the course of an engagement to prepare unaudited financial statements, the client requests that
the CPA perform normal accounts receivable audit confirmation procedures. The CPA agrees and
performs such procedures. The confirmation procedures
a. are part of an auditing service that change the scope of the engagement to that of an audit in
accordance with the Philippine Standards on Auditing,
b. are part of an accounting service and are not performed for the purpose of conducting an
audit in accordance with the Philippine Standards on Auditing.
c. are not permitted when the purpose of the engagement is to prepare unaudited financial
statements and the work to be performed is not in accordance with the standards on auditing.
d. would require the CPA to render a report that indicates that the examination was conducted
in accordance with the Philippine Standards on Auditing but was limited in scope.

67. When making a review of interim financial information, the auditor's work consists primarily of
a. studying and evaluating limited amounts of documentation supporting the interim financial
information.
b. scanning and reviewing client-prepared, internal financial statements.
c. making inquiries and performing analytical procedures concerning significant accounting
matters.
d. confirming and verifying significant account balances at the interim date.

68. You are a CPA retained by the manager of a cooperative retirement village to do "write-up work".
You are expected to prepare unaudited financial statements with each page marked "unaudited" and
accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you
discover that there are invoices to support P 25,000 of the manager's claimed disbursements, The
manager informs you that all the disbursements are proper. What should you do?
a. submit the expected statements but omit P25,000 of unsupported disbursements.
b. include the unsupported disbursements in the statements since you are not expected to
make an audit.
c. obtain, from the manager, a written statement that you informed him of the missing invoices
and include his assurance that the disbursements are proper.
d. notify the owners that some of the claimed disbursements are unsupported and withdraw if
the situation is not satisfactorily resolved.

69. Which of the following procedures is not included in a review engagement of a nonpublic entity?
a. inquiries of management.
b. inquiries regarding events subsequent to the balance sheet date.
c. any procedures designed to identify relationships among data
that appear to be unusual.
d. a study and evaluation of internal control.

70. Hickory Company, whose financial statements are unaudited, has engaged a CPA to make a
special review and report on Hickory's internal accounting control. In general, to which of the following
will this report be least useful?
a. Hickory's management.
b. Present and prospective customers.
c. A regulatory agency having jurisdiction over Hickory.
d. The independent auditor of Hickory's parent company.
71. A CPA who is not independent and is associated with financial statements should disclaim an
opinion with respect to those financial statements. The disclaimer should
a. clearly state the specific reasons for lack of independence.
b. not mention any reason for the disclaimer other than that the CPA was unable to conduct the
examination in accordance with the Philippine Standards on Auditing.
c. not describe the reason for lack of independence but should state specifically that the CPA is
not independent.
d. include a middle paragraph clearly describing the CPA's association with the client and
explaining why the CPA was unable to gather sufficient competent evidential matter to warrant
the expression of an opinion.

72. A CPA who is associated with the financial statements of a public entity, but has not audited or
reviewed such statements, should
a. insist that they be audited or reviewed before publication.
b. read them to determine whether there are obvious material error S.
c. state these facts in the accompanying notes to the financial statements.
d. issue a compilation report.

73. A CPA should not normally refer to which one of the following subjects in a "comfort letter" to
underwriters?
a. The independence of the CPA.
b. Changes in financial statement items during a period subsequent to the date and period of
the latest financial statements in the registration statement.
c. Unaudited financial statements and schedules in the registration statement.
d. Management's determination of line of business classifications.

74. Assurance services performed for decision makers may address the
Quality of information Context of information
a. Yes Yes
b. Yes No
c. No Yes
d. No No

75. When compared to the consideration of internal control for purposes of an audit, an examination of
management's assertion about the effectiveness of an entity's internal control may be expected to
require a(n):
a. increased scope of tests of balances.
b. increased scope of tests of controls.
c. greater reliance upon analytical procedures.
d. increased emphasis on fairness of future presentation.

76. Which of the following is least likely to result in modification of an opinion on management's
assertion about the effectiveness of an entity's internal control?
a. Significant circumstance imposed scope limitation.
b. Significant management imposed scope limitation.
c. Reportable conditions that are not also material weaknesses in internal control.
 d. Material weaknesses in internal control.

77. A practitioner's unmodified opinion based upon an examination may ordinarily be on:
Subject matter Assertion
a. Yes Yes
b. Yes No
c. No Yes
d. No No

78. When a practitioner examines projected financial statements, the practitioner's report should
include a separate paragraph that:
a. describes the limitations on the usefulness of the presentation.
b. provides an explanation of the differences between an examination and a review.
c. states that the accountant is responsible for events and circumstances for a period not
exceeding one year after the report's date.
d. disclaims an opinion on whether the assumptions provide a reasonable basis for the
projection.

79. All of the following are considered special reports, except

a. an opinion on financial statements presented on the tax basis.
b. a review report on interim financial statements presented on the tax basis.
c. an opinion on net sales.
d. a report on compliance with loan covenants.

80. In which of the following types of reports do the auditors express negative assurance?
a. Reports on compliance with contractual agreements.
b. Reports on audits of financial statements on a comprehensive basis other than financial
reporting standards.
c. Reports on audits of specified accounts.
d. Reports on forecast examinations.

81. An assertion that is particularly difficult to audit with respect to personal financial statements is
a. existence.
b. rights.
c. completeness.
d. presentation and disclosure.

82. In which of the following types of reports do accountants provide no explicit assurance?
a. compilations.
b. reviews.
c. agreed-upon procedures.
d. examinations.

83. Which of the following types of services is most likely to result in limited distribution reports?
a. compilations.
b. reviews.
c. agreed-upon procedures.
 d. examinations.

84. Which of the following is not a currently acceptable form of association with prospective financial
statements?
a. compilation.
b. review.
c. agreed-upon procedures.
d. examination.

85. A "comfort letter" to an investment banking firm will normally not:

a. express negative assurance.
b. be included with the registration statement for the securities.
c. include in the CPA's opinion as to whether the audited financial statements comply in all
material respects with applicable requirements of the related securities acts.
d. include a statement as to the auditor's independence.

86. When the auditors are associated with the financial statements of a public company, but have not
audited the financial statements, they should:
a. issue a compilation report.
b. issue a disclaimer of opinion.
c. issue a qualified report.
d. not issue any report.

87. Which of the following is an appropriate form of report for auditors who have audited the financial
statements of a company when they are not independent?
a. a simple disclaimer of opinion.
b. a disclaimer of opinion, with an indication of the tack of independence.
c. an audited opinion.
d. a qualified audit opinion.

88. Which of the following does not result in a modification of a compilation report?
a. a lack of independence on the part of the auditors.
b. a departure from financial reporting standards.
c. a lack of adequate disclosure in the financial statements.
d. a lack of consistent application of financial reporting standards.

89. Which of the following results in a modification of a review report?

a. a change in accounting principles.
b. a significant uncertainty.
c. a departure from financial reporting standards.
d. a change in an accounting estimate.

90. The term "special reports" may include all of the following except reports on financial statements:
a. of a partnership which follows accounting practices used to file its tax return.
b. prepared for limited purposes such as a report that relates to certain aspects of financial
statements.
c. of an organization that has limited the scope of the author's examination.
 d. of an organization which maintains its accounts and prepares its statements on a cash or
other comprehensive basis of accounting which is materially at variance with accounting
practices customarily followed if preparing accrual-basis statements.

91. Whenever special reports, filed on a printed form designed by authorities, call upon the
independent auditors to make an assertion that the auditors believe is not justified, the auditors
should:
a. submit a short-form report with explanations.
b. reword the form or attach a separate report.
c. submit the form with questionable items clearly omitted.
d. withdraw from the engagement.

92. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial
statements contain a material departure from financial reporting standards. If management refuses to
correct the financial statements representations, the CPA should:
a. disclose the departure in a separate paragraph of the report.
b. issue an adverse opinion.
c. attach a note explaining the effects of the departure.
d. issue a compilation report.

93. The accountant's compilation report should be dated as of the date of:
a. completion of fieldwork.
b. completion of the compilation.
c. transmittal of the compilation report.
d. the latest subsequent event referred to in the notes to the financial statements.

94. When a CPA is associated with a forecast, all of the following should be disclosed except the:
a. sources of information.
b. character of the work performed by the CPR
c. major assumptions in the preparation of the forecasts
d. probability of achieving estimates.

95. A modification of the CPA's report on a review of the interim financial statements of a publicly-held
company would be necessitated by which of the following?
a. an uncertainty.
b. lack of inconsistency.
c. reference to another accountant.
d. inadequate disclosure.

96. A CPA should not normally refer to which one of the following subjects in a "comfort letter" to
underwriters?
a. the independence of the CPA.
b. changes in financial-statement items during a period subsequent to the date and period of
the latest financial statements in the registration statement.
c. unaudited financial statements and schedule in the registration statement.
d. management's determination of line of business classifications.
97. Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's
financial statements include:
a. analytical procedures designed to identify reportable conditions related to internal control.
b. inquiries concerning actions taken at meetings of the stockholders and the board of
directors.
c. analytical procedures designed to test the accounting records by obtaining corroborating
evidential matter.
d. inquiries of knowledgeable outside parties such as the client's attorneys and bankers.

98. Which of the following would not be included in a CPA's report based upon a review of the financial
statements of a nonpublic entity?
a. a statement that the review was in accordance with financial reporting standards.
b. a statement that all information included in the financial statements are the representations
of management.
c. a statement describing the nature of the procedures performed,
d. a statement describing the auditor's conclusions based upon the results of the review.

99. The objective of a review of interim financial information is to provide the accountant with a basis
for reporting whether:
a. a reasonable basis exists for expressing an updated opinion regarding the financial
statements that were previously audited.
b. material modifications should be made to conform with financial reporting standards.
c. the financial statements are presented fairly in accordance with standards of interim
reporting.
d. the financial statements are presented fairly in accordance with financial reporting standards.

100. If the auditor believes that financial statements prepared on the entity's income tax basis are not
suitably titled, the auditor should:
a. issue a disclaimer of opinion.
b. explain in the notes to the financial statements the terminology used.
c. issue a compilation report.
d. modify the auditor's report to disclose any reservations.

101. An auditor's report on financial statements prepared in accordance with a comprehensive basis of
accounting other than financial reporting standards should include all of the following except:
a. reference to the note to the financial statements that describes the basis of preparation of
the financial statements.
b. disclosure that the audit was performed in accordance with the Philippine Standard on
Auditing.
c. an opinion as to whether the basis of accounting used is appropriate under the
circumstances.
d. an opinion as to whether the financial statements are presented fairly in conformity with the
basis of accounting

102. When an auditor reports on financial statements prepared on an entity's income tax basis, the
auditor' report should:
a. disclose that the income tax basis is a comprehensive basis of
 b. accounting other than the financial reporting standards. disclaim an opinion on whether the
statements were examined in accordance with the Philippine Standards on Auditing.
c. not express an opinion on whether the statements are presented in conformity with the
comprehensive basis of accounting used.
d. include an explanation on how the results of operations differ from the cash receipts and
disbursements basis of accounting.

103. An auditor's report would be designated as special report when it is issued in connection with
financial statements that are
a. for an interim period and are subjected to a review.
b. unaudited and are prepared from a client's accounting records.
c. prepared in accordance with a comprehensive basis of accounting other than financial
reporting standards.
d. purported to be in accordance with financial reporting standards but do not include a
presentation of the statement of cash flows.

104. The underwriter of a securities offering may request that an auditor perform specified
procedures and supply certain assurances concerning unaudited information contained in a
registration statement. The auditor's response to such a request is commonly called a
a. report under security statutes.
b. comfort letter.
c. review of interim financial information.
d. compilation report for underwriters.

105. Comfort letters are ordinarily signed by the

a. client.
b. client's lawyer.
c. independent auditor.
d. internal auditor.

106. Which of the following is a prospective financial statement for general uses upon which an
accountant may appropriately report?
a. Financial projection.
b. Partial presentation.
c. Pro forma financial statement.
d. Financial forecast.

107. The party responsible for assumptions identified in the prepe\ration of prospective financial
statements is usually
a. a third-party lending institution.
b. the client's management.
c. the reporting accountant.
d. the client's independent auditor.

108. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its
knowledge and belief, an entity's expected financial position, results of operation, and changes in
financial position. Such prospective financial statements are known as
 a. pro forma financial statements.
b. financial projections.
c. partial presentations.
d. financial forecasts.

109. Which of the following circumstances requires modification of the accountant's report on a review
of interim financial information Of publicly held entity?
An Uncertainty Inadequate Disclosure
a. Yes Yes
b. Yes No
c. No No
d. No Yes

110. Which of the following statements is correct concerning both an engagement to compile and an
engagement to review a nonpublic entity's financial statements?
a. the accountant does not contemplate obtaining an understanding of the internal control
structure.
b. the accountant must be independent in fact and appearance.
c. the accountant expresses no assurance on the financial statements.
d. the accountant should obtain a written management representation letter.

111. When compiling the financial statements of a nonpublic entity, an accountant should
a. review agreements with financial institutions for restrictions on cash balances.
b. Understand-the accounting principles and practices of the entity's industry.
c. inquire of key personnel concerning related parties and subsequent events.
d. perform ratio analyses of the financial data of comparable prior periods.

112. Before issuing a report on the compilation of financial statements of a nonpublic entity, the
accountant should
a. apply analytical procedures to selected financial data to discover any material
misstatements.
b. corroborate at least a sample of the assertions management has embodied in the financial
statements.
c. inquire of the client's personnel whether the financial statements omit substantially all
disclosures.
d. read the financial statements to consider whether the financial statements are free from
obvious material errors.

113. One of the conditions required for an accountant to submit a written personal financial plan
containing unaudited financial statements to a client without complying with the requirements of PSRS
and PSRE (Compilation and Review of Financial Statements) is that the
a. client agrees that the financial statements will not be used to obtain credit.
b. accountant compiled or reviewed the client's financial statements for the immediate prior
year.
c. engagement letter acknowledges that the financial statements will contain departures from
financial reporting standards.
 d. accountant expresses limited assurance that the financial statements are free of any
material misstatements.

114. Which of the following inquiry or analytical procedures ordinarily is performed in an engagement
to review a nonpublic entity's financial statements?
a. analytical procedures designed to test the accounting records
by obtaining corroborating evidential matter.
b. inquiries concerning the entity's procedures for recording and summarizing transactions.
c. analytical procedures designed to test management's assertions regarding continued
existence.
d. inquiries of the entity's attorney concerning contingent liabilities.

115. Which of the following procedures is more likely to be performed in a review engagement of a
nonpublic entity than in a compilation engagement?
a. gaining an understanding of the entity's business transactions.
b. making a preliminary assessment of control risk.
c. obtaining a representation letter from 'the chief executive officer.
d. assisting the entity in adjusting the accounting records.

116. Which of the following procedures would most likely be included in a review engagement of a
nonpublic entity?
a. preparing a bank transfer schedule.
b. inquiring about related party transactions.
c. assessing the internal control structure.
d. performing cutoff tests on sales and purchases transactions,

117. Which of the following procedures is usually included in a review engagement of a nonpublic
entity?
a. the confirmation of accounts receivable.
b. a consideration of internal control.
c. an inquiry concerning subsequent events.
d. the observation of physical inventory counts.

118. Which of the following would the accountant most likely investigate during the review of financial
statements of a nonpublic entity if accounts receivable did not conform to a predictable pattern during
the year?
a. sales return and allowances.
b. credit sales.
c. sales of consigned goods.
d. cash sales.

119. Kent is auditing an entity's compliance with requirements governing a major financial assistance
program. Kent detected noncompliance with requirements that have a material effect on that program.
Kent's report on compliance should express a (an)
a. unmodified opinion with a separate explanatory paragraph.
b. qualified opinion or an adverse opinion.
c. adverse opinion or a disclaimer of opinion.
 d. limited assurance on the items tested.

120. A governmental audit may extend beyond an examination leading to the expression of an opinion
on the fairness of financial presentation to include
Program Compliance Economy &
Results efficiency
a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. Yes No Yes

121. Operational auditing is primarily oriented toward

a. future improvements to accomplish the goals of management.
b. the accuracy of data reflected in management's financial records.
c. the verification that a company's financial statements are fairly presented.
d. past protection provided by existing internal control.

122. A typical objective of an operational audit is to determine whether an entity's

a. internal control structure is adequately operating as designed.
b. operational information is in accordance with generally accepted government auditing
standards.
c. financial statements present fairly the results of operations.
d. specific operating units are functioning efficiently and effectively.