SIMULATED EXAMINATION 2

1. Which of the following best describes the reason why an

independent auditor reports on financial statements?

A. A management fraud may exist and it is more likely to be

detected by independent auditors
B. Different interests may exist between the company preparing
the statements and the persons using the statements
C. A misstatement of account balances may exist and is
generally corrected as a result of the independent auditor’s
work
D. A poorly designed internal control system may be in existence

2. Operational auditing refers to the study of business operations for

the purpose of making recommendations for which of the
following?

A. Economic and efficient use of resources

B. Compliance with rules and regulations
C. Attesting to the fairness of the financial statements
D. All of the above

3. The accuracy of information that is included in the footnotes that

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

A. stock exchange officials.

B. management.
C. lead engagement partner.
D. Securities and Exchange Commission.

4. When the professional accountant has obtained sufficient

appropriate evidence to be satisfied that the subject matter is
plausible in the circumstances, he or she can provide what level
of assurance?

A. Positive
B. High

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 C. Moderate
D. Absolute

5. The auditor’s responsibility in an audit engagement is limited to:

A. expression of an opinion on the financial statements.

B. expression of an opinion on the financial statements and
adequacy of summary of accounting policies ad other notes.
C. opinion issued and fairness of presentation of financial
statements.
D. expression of opinion and inclusion of supplementary
information, if necessary.

6. The existence of audit risk is recognized by the statement in the

scope paragraph – auditor’s responsibility of the auditor’s standard
report that the

A. auditor is responsible for expressing an opinion on the

financial statements.
B. financial statements are presented fairly, in all material
respects, in conformity with PFRS.
C. audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
D. auditor obtains reasonable assurance about whether the
financial statements are free of material misstatements.

7. Which of the following is explicitly cited in the Revised

Accountancy Law (RA 9298)?

A. The Professional Regulation Commission has the authority to

replace any member of the Board of Accountancy for
negligence, incompetence, or any other just cause
B. Insolvency is a ground for proceedings against a CPA
C. A person shall be considered to be in the professional practice
of accounting if, as an officer in a private enterprise, he makes
decisions requiring professional accounting knowledge
D. After three years, subject to certain conditions, the Board of
Accountancy may order the reinstatement of a CPA whose
certificate of registration has been revoked

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

A. Natural-born citizen of the Philippines

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

9. Individual CPAs, Firms or Partnerships of CPAs, including

partners and staff members thereof shall register with the BOA
and the PRC. If the application for registration of Arnaldo &
Associates, CPAs was approved on May 10, 2006, the registration
will expire on

A. September 30, 2008

B. December 31, 2008
C. December 31, 2009
D. May 10, 2009

10. Which of the following was a modification made to the IFAC Code
to consider Philippine regulatory requirements and
circumstances?

A. The period for rotation of the lead engagement partner was

changed from seven to five years
B. Advertising and solicitation by individual professional
accountants in public practice is allowed in the Philippines
C. When a professional accountant performs services in a
country other than the home country, the professional
accountant should always adhere to the ethical requirements
of the country in which services are being performed
D. When a professional accountant performs services in a
country other than the home country, the professional
accountant should always adhere to the ethical requirements
of the home country

11. To which principle does the following relate?

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 “The intended user needs to have confidence that the profession
accountant has no interest that creates an unacceptable risk of
bias with respect to the subject matter”.
A. Confidentiality
B. Integrity
C. Professional competence and due care
D. Objectivity

12. Which of the following is most likely a violation of the Code of

Ethics?

A. The professional accountant in public practice bills a client a

fee, lower than what previously has been charged for similar
services
B. The professional accountant makes a representation that
specific professional services in the current or future periods
will be performed for a stated fee if it is likely at the time of
representation that such fee will be substantially increased
C. The professional accountant in public practice is the one who
determines the appropriate billing rates of each professional
staff engaged in performing services
D. The professional accountant agrees to the client’s proposal for
a professional fee that is dependent to the number of service
hours rendered

13. Which of the following acts may potentially create a self-review

threat?

A. Providing advices on accounting principles for audit clients

B. Determining journal entries without obtaining the approval of
the audit client
C. Assisting an audit client in resolving account reconciliation
D. Drafting the notes to the financial statements for audit client

14. Which of the following types of loan granted to a member of the

assurance team by an assurance client that is a bank is mostly a
potential threat to independence?

A. Car loan
B. Credit card balance
C. Clean loan

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 D. Home-mortgage loan

15. The criteria are the standards or benchmarks used to evaluate

the subject matter of an assurance engagement. Among the
following criteria, which one is the least objective?

A. Philippine financial reporting standards governing the

preparation of financial statements
B. Specific agreements in a contract
C. Control policies and procedures
D. Effectiveness and efficiency in carrying out operating
procedures

16. How is the auditor’s report on the financial statements that

require final approval by stockholders before such financial
statements are issued publicly dated?

A. The auditor’s report should be dated coinciding the date of

approval of the financial statements by the stockholders
B. The auditor’s report should be dated after the approval of the
financial statements by the stockholders
C. The date of the auditor’s report coincides the date of approval
of the financial statements by the board of directors
D. The audit report should be dual dated, the first date
coinciding the approval by the board of directors and the
second date to coincide with the approval by the stockholders

17. In pursuing its quality control objectives with respect to

independence, a CPA firm may use policies and procedures such
as

A. Emphasizing independence in mental attitude in firm training

programs and in supervision and review of work
B. Prohibiting employees from owning shares of stock of
publicly- traded companies
C. Suggesting that employees conduct their banking
transactions with banks that do not maintain accounts with
client firms
D. Assigning employees who may lack independence to research
positions that do not require participation in field audit work

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18. Which of the following is an element of a CPA firm’s quality
control system that should be considered in establishing its
quality control policies and procedures?

A. Complying with laws and regulations

B. Using statistical sampling techniques
C. Assigning personnel to engagements
D. Considering audit risk and materiality

19. Before the practitioner rely on the work of the expert, he should
obtain sufficient appropriate evidence that the work of the expert
is adequate by considering the following, except:

A. the reasonableness and significance of the expert’s findings in

relation to the objective of the engagement and the conclusion
on the subject matter.
B. the professional competence, experience and objectivity of the
expert.
C. the findings of the expert support the assertion issued by the
party responsible to the subject matter.
D. the reasonableness of the assumptions, methods and source
data used by the expert.

20. Which of the following is an invalid reason why an auditor cannot

issue an absolute assurance?

A. Most audit evidences are conclusive rather than being

persuasive.
B. The inherent limitations of any accounting and internal
control system.
C. Audit is based on testing
D. Audit procedures that are effective in detecting ordinary
misstatements are ineffective in detecting intentional
misstatements.

21. The audit procedures deemed necessary in the circumstances to

achieve the objective of the audit refer to:

A. audit program.
B. audit objective.
C. substantive procedures.

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 D. scope of an audit.
22. In which of the following would the judgment of the auditor be
most critical?

A. Verification of the authenticity of the transfer certificate of

title
B. Classifying whether a liability is current or long-term
C. Verification of the cut-off of transactions
D. Assessing the reasonableness of the estimates made by
management

23. Which of the following does not require the auditor to send a new
engagement letter?

A. An indication that the client misunderstands the objective

and scope of the audit
B. A change of engagement from higher to lower level of
assurance
C. A recent change in the lead engagement partner
D. Legal requirements and other government agencies’
pronouncements

24. An auditor, who agreed for a change in the type of engagement

from higher to lower level of assurance, should issue the report
based on the revised engagement

A. but should discuss in a separate paragraph the reason for the

change.
B. and should always refer to any procedures that should have
been performed in the original engagement.
C. and should qualify the opinion due to scope limitation.
D. and should omit reference to the original engagement.

25. Which of the following is an appropriate reason why the auditor

considers the professional competence of assistants whom the
work will be delegated?

A. To assure that the assistants will be objective

B. To have reasonable assurance that such work will be
performed with due care by the audit assistant
C. To effectively reduce the working paper documentation

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 D. To eliminate detection risk

26. Detection of noncompliance, regardless of materiality, requires

considerations of the following:

I. Integrity of management.
II. Possible effect on other aspects of the audit.
III. Legal determination of the act of non-compliance.

A. A, B, C
B. A, B
C. A, C
D. C

27. The auditor should perform the following risk assessment

procedures to obtain an understanding of the entity and its
environment, including its internal control, except:

A. inquiries of management and others within the entity.

B. inquiries of the entity’s external legal counsel or of valuation
experts that the entity has used.
C. analytical procedures.
D. observation and inspection.

28. Which of the following distinctions between general audit

objectives and specific audit objectives for each account balance
is correct?

A. The general audit objectives are applicable to every account

balance on the financial statements
B. The specific audit objectives are applicable to every account
balance on the financial statements
C. The general audit objectives are stated in terms tailored to the
engagement
D. The specific audit objectives are stated in terms tailored to the
engagement

29. The risk that the audit will fail to uncover a material
misstatement is eliminated

A. if a client has strong internal controls.

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 B. if a client follows Philippine financial reporting standards
(PFRS).
C. when the auditor has complied with generally accepted
auditing standards (GAAS).
D. under no circumstances.

30. What is the relationship between materiality and the level of

control risk?

A. Direct
B. Parallel
C. Inverse
D. Positive

31. Which of the following statements about internal control is

correct?

A. Internal control system refers to all the policies and

procedures adopted by the management of an entity to assist
in eliminating material errors but not fraud
B. A strong environment, by itself, ensures the effectiveness of
the internal control system
C. The internal control system is confined to those matters which
relate directly to the functions of the accounting system
D. In the audit of financial statements, the auditor is only
concerned with those policies and procedures within the
accounting and internal control systems that are relevant to
the financial statements

32. When obtaining an understanding of the accounting and internal

control system the auditor may trace a few transactions through
the accounting system. This technique is:

A. internal control review.

B. test of transactions.
C. walk-through test.
D. validity test.

33. Which of the following least likely affects the nature, timing, and
extent of the procedures performed by the auditor to obtain an

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 understanding of the accounting and internal control systems of
an audit client?

A. Materiality considerations
B. The expected level of detection risk
C. The auditor’s assessment of inherent risk
D. The complexity of the accounting process

34. Which of the following is incorrect about internal control?

A. Accounting and internal control system provides the

management with reasonable assurance that organizational
objectives are to be achieved
B. One of the inherent limitations of accounting and internal
control systems is that the possibility that the procedures
may become inadequate due to changes in conditions, and
compliance with procedures may deteriorate
C. Most internal controls tend to be directed at routine
transactions
D. Management should not consider the costs of the accounting
and internal control systems because such a consideration
makes the system ineffective

35. Which statement is incorrect regarding the nature of tests of

controls?

A. As the planned level of assurance increases, the auditor seeks

more reliable audit evidence
B. Those controls subject to testing by performing inquiry
combined with inspection or re-performance ordinarily
provide more assurance than those controls for which the
audit evidence consists solely of inquiry and observation
C. The absence of misstatements detected by a substantive
procedure provides audit evidence that controls related to the
assertion being tested are effective
D. A material misstatement detected by the auditor’s procedures
that was not identified by the entity ordinarily is indicative of
the existence of a material weakness in internal control

36. Which statement is incorrect regarding the extent of tests of

controls?

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 A. The auditor designs tests of controls to obtain sufficient
appropriate audit evidence that the controls operated
effectively throughout the period of reliance
B. The more the auditor relies on the operating effectiveness of
controls in the assessment of risk, the lesser is the extent of
the auditor’s tests of controls
C. If the rate of expected deviation is too high, the auditor may
determine that tests of controls for a particular assertion may
not be effective
D. Because of the inherent consistency of IT processing, the
auditor may not need to increase the extent of testing of an
automated control

37. When would an auditor typically not perform additional tests of a

computer systems controls?

A. When the assessed level of control risk is at a minimum

B. When computer controls appear to be strong and risk is at a
minimum
C. When controls appear to be weak
D. When inherent risk is at a maximum

38. The evaluation of deviations that were observed upon completing

the tests of controls:

A. may require the need for doing more extensive understanding

of control.
B. may require more extensive tests of controls.
C. may not require modification of the nature, timing, and extent
of the planned substantive procedures.
D. requires a documentation of the basis of assessment of
control risk if the assessed level of control risk is assessed at
the maximum.

39. Which of the following statement is true?

A. If the auditor assesses the level of control risk at the

maximum, no documentation of the reason is necessary
B. If the auditor assesses the level control risk at less than
maximum, no documentation of the reason is necessary

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C. If the auditor assesses the level of control risk at the
maximum, documentation of the reason is necessary
D. All of the given choices

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40. Which of the following is appropriate about risk assessment?

A. The assessed level of inherent and control risk can be

sufficiently low, thus resulting to eliminating the need for
substantive tests
B. There is an inverse relationship between detection risk and
the combined level of inherent and control risks
C. Audit risk may be more appropriately determined by
assessing inherent and control risk separately
D. Detection risk is eliminated if an auditor were to examine 100
percent of the account balance or class of transactions

41. The audit risk model consists of:

AR = IR x CR x DR

The detection risk is the dependent variable. What is the

acceptable level of detection risk if the assessed level of Inherent
risk is Medium and the Control risk is Low?

A. Highest
B. Lower
C. Medium
D. Higher

42. Which of the following should the auditor not consider of having
specialized CIS skills in an audit?

A. The auditor needs to obtain a sufficient understanding of the

accounting and internal control system affected by the CIS
environment
B. The auditor needs to determine the effect of the CIS
environment on the assessment of overall risk and of risk at
the account balance and class of transactions level
C. The need of the auditor to make analytical procedures during
the completion stage of the audit
D. Design and perform appropriate tests of controls and
substantive procedures

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43. Which of the following characteristics of CIS environment should
the auditors be least concerned?

A. Lack of segregation of functions

B. Cost-benefit relationships
C. Lack of transaction trails
D. Access control

44. Which of the following is least likely a risk characteristic

associated with CIS environment?

A. Error embedded in an application’s program logic maybe

difficult to manually detect on a timely basis
B. The separation of functional responsibilities diminishes in a
computerized environment
C. Initiation of changes in the master file is exclusively handled
by respective users
D. The potential unauthorized access to data or to alter them
without visible evidence maybe greater

45. Which of the following is not one of the auditor’s major concerns
when he has to make a documentation of the internal control in a
computerized environment?

A. The organizational structure of the client’s CIS activities

B. The access controls
C. The significance and complexity of computer processing in
each significant accounting application
D. The use of software packages instead of customized software

46. Which of the following is not an advantage of a computerized

accounting system?

A. Computers process transactions uniformly

B. Computers help alleviate human errors
C. Computers can process many transactions quickly
D. Computers leave a thorough audit trail which can be easily
followed

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47. A common difficulty in auditing a computerized accounting
system is:

A. Data can be erased from the computer with no visible

evidence
B. Because of the lack of an audit trail, computer systems have
weaker controls and more substantive testing is required
C. Because of the uniform nature of transaction processing,
computer systems have strong controls and less substantive
testing is required
D. The large dissemination of entry points into the computer
system leads to weak overall reliance on information
generated by a computer

48. Which of the following should the auditor least consider in

determining the significance of service organization activities to
the client and its relevance to the audit?

A. The control policies and procedures of the client in requiring

that all payments for goods and services be supported by
receiving reports
B. The client’s internal controls that are applied to the
transactions processed by the service organization
C. The material financial statement assertions that are affected
by the use of the service organization
D. Terms of contract and relationship between the client and the
service organization

49. When the auditor considers that the service organization activities
are significantly relevant to the audit and he concludes that it
would be efficient to obtain audit evidence from tests of controls,
such evidence may be obtained by, except:

A. visiting the service organization.

B. performing tests of the client’s control over activities of the
service organization.
C. reviewing the service contract between the client and the
service organization.
D. obtaining a service organization auditor’s report that
expresses an opinion as to the operating effectiveness of the

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 service organization’s accounting and internal control systems
for the processing applications relevant to the audit.
50. Which of the following statements about the existence and
completeness objectives are not true?

A. The existence and completeness objectives emphasize

opposite audit concerns
B. Existence deals with overstatements and completeness deals
with understatements
C. Existence deals with understatements and completeness deals
with overstatements
D. The completeness objective deals with unrecorded
transactions

51. In testing for 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 the transactions are recorded in the proper period.

52. The determination of the appropriate sample size based on the

tolerable deviation rate in a test of control procedure relates to

A. sufficiency.
B. relevance.
C. validity.
D. appropriateness.

53. Which of the following least likely affect the sufficiency of the
appropriate audit evidence?

A. Nature of the accounting and internal control systems

B. Materiality of the item being examined
C. Source and reliability of information available
D. The type of sampling approach – statistical or judgmental

54. Which of the following statements that relate to the

persuasiveness of audit evidence is invalid?

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 A. The audit evidence obtained directly by the auditor is more
reliable than that one provided by the client management
B. The oral representation by the client management is invalid
evidence
C. The effectiveness of accounting and internal control adds to
the reliability of internal audit evidence
D. While internal audit evidence is considered to be acceptable,
the auditor usually prefers audit evidence form external
sources

55. The following statements are discussions about financial

assertions and audit evidence. Which of them is(are) correct?

I. When substantial doubt as to a material financial

statement assertion exists, the auditor likely attempts to
obtain sufficient appropriate audit evidence to remove such
doubt
II. The difficulty and cost involved are valid basis for
omitting a necessary procedure
III. In obtaining audit evidence, the auditor needs to
consider the relationship between the cost of obtaining it
and its usefulness
IV. When there are inconsistent evidences provided by two
different sources, the auditor may need to modify his audit
opinion

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

56. The three major categories of documentary audit evidence are:

I. Documentary audit evidence created by third parties and
held by the client entity.
II. Documentary audit evidence created and held by third
parties.
III. Documentary audit evidence created and held by the
client entity.

What is the order of their degree of persuasiveness?

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 A. 1, 3, 2
B. 3, 1, 2
C. 2, 1, 3
D. 2, 3, 1
57. The inspection of property and equipment primarily relates to
which financial assertion?

A. Ownership
B. Valuation
C. Completeness
D. Existence

58. If the reported sales for 2007 erroneously include sales that
occurred in 2008, the assertion that caused misstatements on the
2007 financial statements would be:

A. occurrence.
B. valuation or allocation.
C. completeness.
D. presentation and disclosure.

59. The completeness assertion would be violated if:

A. fictitious sales transactions were included in accounts

receivable.
B. the allowance for doubtful accounts was understated.
C. unbilled shipments had occurred during the period.
D. disclosures in the statements of pledged receivables were
inadequate.

60. According to Philippine Standards on Auditing, the auditor’s

responsibility for failure to detect fraud arises

A. when such failure clearly results from failure to comply with

generally accepted auditing standards.
B. whenever the amounts involved are material.
C. only when the examination was specifically designed to detect
fraud.

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D. only when such failure clearly results from negligence so
gross as to sustain an inference of fraud on the part of the
auditor.

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61. If an auditor believes a client may have committed illegal acts,
which of the following actions should the auditor take?

A. Consult with that the client's counsel and the auditor's

counsel to determine how the suspected illegal acts will be
communicated to the stockholders
B. Extend auditing procedures to determine whether the
suspected illegal acts have a material effect on the financial
statements
C. Make inquiries of the client's management and obtain an
understanding of the circumstances underlying the acts and
of other evidence to determine the effects of such acts on the
financial statements
D. Notify each member of the audit committee of the board of
directors about the nature of the acts and request that they
advise an approach to be taken by the auditor

62. An audit program should be sufficiently detailed to provide all of

the following except:

A. Evidential support for the audit opinion.

B. An outline of the work to be done.
C. A record of the work performed.
D. A basis for controlling the audit.

63. The primary purpose of the audit working papers is to:

A. Provide an evidence of compliance with auditing standards.

B. Provide management with an independent copy of financial
records.
C. Provide a protection against litigation.
D. Document the deficiencies in client’s policies and procedures.

64. Early substantive testing of account balances is done only when

A. the client has a natural business year.

B. evidence indicates effective control policies and procedures.
C. Internal control structure is weak.
D. The primarily substantive approach is taken.

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65. Test of details of balances generally tend to be the

A. most costly, and least effective audit procedures.

B. most costly, and most effective audit procedures.
C. least costly, yet most effective audit procedures.
D. least costly, and least effective audit procedures.

66. Which of the following analytical procedures might highlight a

possible overstatement or understatement of a balance in an
expense account? Compare:

A. gross margin percentage with previous year

B. individual expenses with previous year
C. inventory turnover ratio with previous year
D. individual asset and liability balances with previous year

67. The test of details of balances, when applied by the auditor to

examine rent and lease expense for capitalized leases, would
satisfy the audit objective of

A. Existence
B. detail tie-in
C. presentation and disclosure
D. classification

68. Negative confirmation of accounts receivable is less 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 cannot infer that all non-respondents have
verified their account information.
D. Negative confirmations do not produce evidential matter that
is statistically quantifiable.

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69. Which of the following circumstances would most likely cause an
auditor to suspect that material fraud exists in a client's financial
statements?

A. Property and equipment items are usually sold at a loss before

being fully depreciated.
B. Significantly fewer responses to a positive confirmation
requests are received than what is expected.
C. Monthly bank reconciliations usually include several in-
transit items.
D. Clerical errors are listed on an CBIS-generated exception
report.

70. Auditors examine invoices for accounts such as repairs and

maintenance primarily to determine whether

A. expenditures for fixed assets have been recorded in the proper

period
B. expenditures have been improperly authorized
C. noncapitalized expenditures have been properly expensed
D. expenditures that were expensed should have been capitalized

71. When auditing contingent liabilities, which of the following

procedures would be least effective?

A. Reading the minutes of the board of directors’ meetings.

B. Reviewing the bank confirmation letter.
C. Examining customer confirmation replies.
D. Examining invoices for professional services.

72. When obtaining an evidence regarding litigation against a client,

the CPA would be least interested in determining

A. An estimate of when the matter will be resolved.

B. The period in which the underlying cause of the litigation
occurred.
C. The probability of an unfavorable outcome.
D. An estimate of the potential loss.

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73. Banaue Company 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 the

client’s lender banks.
B. Review client minutes and obtain a representation letter.
C. Examine supporting documents for all entries in
intercompany accounts.
D. Obtain written confirmation of indebtedness from the auditor
of the affiliate.

74. Which of the following subsequent events will be least likely to

result in an adjustment to the financial statements?

A. Culmination of events affecting the realization of accounts

receivable owned as of the balance sheet date.
B. Culmination of events affecting the realization of inventories
owned as of the balance sheet date.
C. Material changes in the settlement of liabilities which were
estimated as of the balance sheet date.
D. Material changes in the quoted market price of listed
investment securities since the balance sheet date.

75. An auditor is concerned with completing various phases of the

examination after the balance sheet date. This “subsequent
period” extends to the date of the:

A. auditor’s report.
B. final review of the audit working papers.
C. issuance of the financial statements to the users.
D. delivery of the auditor’s report to the client.

76. Which of the following material events occurring subsequent to

the balance sheet date would require an adjustment to the
financial statements?

A. Sale of long-term debt or capital stock.

B. Loss of a plant as a result of a flood.

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 C. Major purchase of a business which is expected to double the
sales volume.
D. Settlement of litigation, in excess of the recorded liability.

77. Selena, CPA, is preparing an audit program for the purpose of

ascertaining the occurrence of subsequent events that may
require adjustment or disclosure essential to a fair presentation of
the financial statements in conformity with the Philippine
financial reporting standards. Which one of the following
procedures would be least appropriate for this purpose?

A. Confirm, as of the completion of the fieldwork, those accounts

receivable that have increased significantly from the year-end
date.
B. Read the minutes of the board of directors’ meetings.
C. Inquire of management concerning events which may have
occurred.
D. Obtain a lawyer’s letter as of the completion of fieldwork.

78. An auditor’s decision concerning whether or not to “dual date” the

audit report is based upon the auditor’s willingness to

A. extend auditing procedures.

B. accept responsibility for subsequent events.
C. permit inclusion of a footnote captioned event (unaudited)
subsequent to the date of the auditor’s report.
D. assume responsibility for events subsequent to the issuance
of the auditor’s report.

79. As part of an audit, a CPA often requests a representation letter

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 auditor’s responsibility for the
fairness of the financial statements.
C. To satisfy himself by means of other auditing procedures
when certain customary auditing procedures are not
performed.

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 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.

80. The risk that the auditor gives an unqualified audit opinion when
the financial statements are materially misstated refers to

A. Audit risk
B. Inherent risk
C. Detection risk
D. Control risk

81. A measure of uniformity in the form and content of the auditor’s

report is desirable because:

A. It helps the auditors avoid legal liability.

B. It helps the readers understand the report.
C. It helps the auditor identify the usual circumstances that are
expected to occur.
D. It makes the auditors more informed of their responsibilities
with respect to audit report.

82. The auditor’s report may be appropriately addressed to the

client’s:

Board of Stockholders Audit Committee

Directors
A. Yes Yes Yes
B. Yes No Yes
C. Yes Yes No
D. Yes No No

83. Which of the following is not explicitly included in the scope

paragraph of the auditor’s report?

A. Financial reporting framework

B. Reasonable assurance
C. Generally accepted auditing standards
D. Assessment of accounting estimates

84. The term “ present fairly, in all material respect,” means:

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 A. The financial statements conform with PFRS.
B. The auditor considers only those matters that are material to
the financial statements.
C. The financial statements may still be materially misstated
because the auditors may not have discovered the errors.
D. The financial statements are accurately prepared.

85. When the auditor concludes that the financial statements are
presented fairly in all material respects, in accordance with the
identified financial reporting framework, he should issue:

A. Standard unqualified opinion

B. Qualified opinion
C. Disclaimer of opinion
D. Unqualified opinion with explanatory paragraph

86. In which of the following situations does an auditor need to issue

an unqualified opinion?

A. A significant doubt about the ability of the company to

continue as a going concern; such concern is adequately
disclosed by the entity in the notes to financial statements.
B. A limitation of the scope of the audit, the possible effect of
which is material to the financial statements.
C. The auditor has disagreement with management regarding the
acceptability of the accounting policies, the effect of which is
material.
D. The omission of significant information in the financial
statement.

87. Which of the following disagreements with the management may

potentially cause the auditor to disclaim his opinion?

A. Acceptability of accounting policies

B. Method of application of accounting principles
C. Omission of certain required disclosures in the financial
statements.
D. Refusal of the client management for the auditor’s observation
of physical inventory count

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88. When the client does not disclose restrictions of future cash
dividends and the CPA discloses the omitted information in the
separate paragraph of the audit report, the opinion should be:

A. Qualified due to scope limitation

B. Qualified due to inadequate disclosure
C. Adverse
D. Unqualified opinion with an explanatory paragraph

89. When the financial statements of the prior period were audited by
another CPA, the incoming auditor’s report indicate:

A B C D
1. The dates and periods covered by
prior years’ financial statements YES YES NO NO
2. That the financial statements of
the prior periods were audited
by another CPA YES YES YES NO
3. The type of opinion issued by
another CPA and if modified, the
reason thereof YES NO YES YES

90. When the auditor’s report on the prior period, as previously

issued, included a modified opinion, the auditor’s report should
refer to the corresponding figures:

A. though the matter which gave rise to the modification of the

audit report had been subsequently resolved.
B. if the matter that gave rise to the modification of the previous
auditor’s report is unresolved and results in a modification of
the auditor’s report regarding the current figures.
C. only when the matter that gave rise to the modification is
unresolved and results to a modification of the auditor’s
report regarding the current figures.
D. in all cases where the matter which gave rise to the
modification of the previous audit report was satisfactorily
resolved and properly dealt with in the financial statements,
the current report would not refer to the previous
modification.

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91. In which of the following circumstances would a modification of
the auditor’s report on the current period not necessary?

A. If the prior period financial statements had been revised and

reissued with a new auditor’s report.
B. If the prior period financial statements had not been revised
and reissued but the matter that gave rise to the modification,
though material to the current period, is resolved.
C. If the matter that gave rise to the modification of the previous
audit report was related to an unresolved beginning balance
of property accounts.
D. The audit report of the prior period was issued by a
continuing auditor.

92. They are not presented as complete financial statements capable

of standing alone, but are an integral part of the current period.

A. Comparative financial statements

B. Corresponding figures
C. Notes of financial statements
D. Supplementary report

93. Which of the following statements applies to consultancy service

engagement?

A. A practitioner should obtain an understanding of the internal

control structure to assess control risk.
B. A practitioner is not permitted to compile a financial forecast.
C. A practitioner should obtain sufficient relevant data to
complete the engagement.
D. A practitioner is to maintain an appearance of independence.

94. Prospective financial statements are for

A. general use
B. limited use only
C. either general or limited use
D. use by internal management only

95. Given one of more hypothetical assumptions, a responsible party

may prepare, to the best of its knowledge and belief, an entity's

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 expected financial position, results of operations, and changes in
financial position. Such prospective financial statements are most
commonly known as

A. special purpose financial statements

B. financial projections
C. partial presentations
D. financial forecasts

96. When reporting on financial statements prepared on a

comprehensive basis of accounting other than Philippine financial
reporting standards, the independent auditor should include in
the report a paragraph that

A. states that the financial statements are not intended to be in

conformity with Philippine financial reporting standards.
B. states that the financial statements were not examined in
accordance with generally accepted auditing standards.
C. refers to the authoritative pronouncements that explain the
comprehensive basis of accounting being used.
D. justifies the comprehensive basis of accounting being used.

97. The objective of a review of interim financial information is to

provide the CPA with a basis for

A. expressing a limited opinion that the financial information is

presented in conformity with Philippine financial reporting
standards.
B. expressing a compilation opinion on the financial statements.
C. reporting whether material modifications should be made to
such information to make it conform with Philippine financial
reporting standards.
D. reporting limited assurance to the board of directors only.

98. Audit reports issued in connection with which of the following are
generally not considered to be special reports or special-purpose
reports?

A. Specified elements, accounts, or items of a financial

statement.

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 B. Compliance with aspects of contractual agreements related to
audited financial statements.
C. Financial statements prepared in conformity with the price-
level basis of accounting.
D. Compiled financial statements prepared in accordance with
appraised liquidation values.

99. The party that is responsible for the assumptions identified in the
preparation of prospective financial statements is usually

A. A third-party lending institution.

B. The client’s management.
C. The reporting accountant.
D. The client’s independent auditor.

100. In extreme cases such as situations involving multiple

uncertainties that are significant to the financial statements, the
auditor

A. may consider to express a disclaimer of opinion

B. may qualify his opinion instead of issuing an unqualified
opinion with emphasis of matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a “subject to” opinion because the situations
related to uncertainties

END OF SIMULATED EXAMINATION 2

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