1. Which of the following AASC (Auditing and
In determining which controls to implement
Assurance Standards Council) Engagement
Standard applies on engagements to apply
agreed-upon procedures to information?
A. PSAs
B. PSREs
C. PSAEs
D. PSRSs
2. The auditor shall obtain written
representations from management
regarding to the following except:
A. It has disclosed to the auditor the results of
its assessment of the risk that the financial
statements may be materially misstated as
a result of fraud.
B. It acknowledges its responsibility for the
design, implementation and maintenance
of audit procedures to prevent and detect
fraud.
C. It has disclosed to the auditor its knowledge
of fraud or suspected fraud affecting the
entity.
D. It has disclosed to the auditor its knowledge
of any allegations of fraud, or suspected
fraud, affecting the entity’s financial
statements communicated by employees,
former employees, analysts, regulators or
others.
3. According to PSA 240- The Auditor’s
Responsibility to Consider Fraud in an Audit
of Financial Statements, which of the
following concepts related to the risk of
fraud is true?
A. Material misstatement due to fraudulent
financial reporting relating to revenue
recognition often results from an
understatement of revenues.
B. The presumption that there are risks of fraud
in revenue recognition cannot be rebutted.
C. Management may make judgments on the
nature and extent of the controls it chooses
to implement, and the nature and extent of
the risks it chooses to assume.
D.
to prevent and detect fraud, management
cannot consider the risk that the financial
statements may be materially misstated as
a result of fraud.
4. Which of the following is true about
assurance:
A. For agreed-upon procedures, the auditor
provides a report of the factual findings,
moderate assurance is expressed.
B. In a review management, the auditor
provides a moderate level of assurance
that the information is free of material
misstatement. This is expressed in the form
of positive assurance.
C. In a compilation report, although users of
the compiled information derive some
benefit from the accountant’s involvement,
no assurance is expressed in the report.
D. In an audit engagement, the auditor
provides a low reasonable level of
assurance that the information subject to
audit is free of material misstatement.
5. In conducting an audit in accordance with
PSAs the auditor shall (choose one that
doesn’t apply)
A. Obtain sufficient appropriate audit
evidence to reduce inherent risk to an
acceptably low level.
B. Comply with all PSAs relevant to audit.
C. Exercise professional judgment in planning
and performing an audit of financial
statement.
D. Comply with relevant ethical requirements.
6. PSQC (Philippine Standards on Quality
Control) are to be applied to services
falling under:
A. Standards applied to assurance
engagements dealing with subject matters
other than historical financial information.
B. AASC’s engagement standards.
C. Audit of historical financial information.
D. Engagements related to agreed-upon
procedures.
7. It would be appropriate for the payroll
accounting department to be responsible
for which of the following functions?
A. Approval of employee time record.
B. Maintenance of records of employment,
discharge, and pay increase.
C. Preparation of periodic governmental
reports as to employee’s earnings and
withholding taxes.
D. Temporary retention of unclaimed
employee paychecks.
8. 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 a 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 that
will be performed.
D. It is an acceptable practice to carry out
substantial parts of the examination at
interim dates.
9. Of the following control environment
characteristics, identify the one that
contributes most to effective internal
control.
A. The audit committee consists of the
president, two vice-presidents, and the
corporate controller.
B. The company does not have a centralized
human resources information.
C. The company has an effective internal
audit staff that monitors controls on a
continuous basis.
D. The company routinely transacts business
with related parties.
10. An auditor plans to examine a sample of 20
purchase orders for proper approval as
prescribed by the clients internal control
procedures. One of the purchase orders
cannot be found, and the auditor is unable
to use alternative procedures to test
whether that purchase was properly
approved. The auditor should
A. Choose another purchase order to replace
the missing purchase order sample.
B. Consider this test of control invalid and
proceed with substantive test since internal
control cannot be relied upon.
C. Treat the missing purchase order as a
deviation for the purpose of evaluating the
sample.
D. Select a completely new set of 20 purchase
orders.
11. The auditor shall identify and assess the risks
of material misstatement at the financial
statement and the assertion level for classes
of transactions, account balances and
disclosures. For this purpose, the auditor
shall consider the following except:
A. Identify risks throughout the process of
obtaining an understanding of the entity
and its environment, including relevant
controls that relate to the risks, and by
considering the classes of transactions,
account balances, and disclosures in the
financial statements.
B. Assess the identified risks, and evaluate
whether they relate more pervasively to the
financial statement as a whole and
potentially affect many assertions.
C. Relate the identified risks to what can go
wrong at the financial statement level,
taking account of relevant controls that the
auditor intends to test.
D. Consider the likelihood of misstatement,
including the possibility of multiple
misstatements, and whether the potential
misstatement is of a magnitude that could
result in a material misstatement.
12. Which of the following is not a nature of
PSA?
A. The PSA deal with the specific
responsibilities of the auditor, as well as the
auditor’s further considerations relevant to
the application of those specific topics.
B. The scope, effective date and any specific
limitation of the applicability of a specific
PSA is made clear in the PSA. Unless
otherwise stated in the PSA, the auditor is
permitted to apply a PSA before the
effective date specified therein.
C. In performing an audit, the auditor may be
required to comply with legal or regulatory
requirements in addition to the PSAs.
D. The auditor may also conduct the audit in
accordance with both PSA’s and auditing
standards of a specific jurisdiction or
country.
13. Your client, a merchandising concern, has
annual sales of P30,000,000 and a 40% gross
profit rate. Test reveals that 2% of the peso
amount of purchases do not get into
inventory pilferage by employees. The
company estimates that these losses could
be reduced to 0.5% of purchases by
designing and implementing certain
controls costing approximately P350,000.
Should the control be designed and
implemented?
A. Yes, regardless of cost-benefit
consideration, because the situation
involves employee theft.
B. Yes, because the ideal system of internal
control is the most extensive one.
C. No, because of designing and
implementing the added controls exceed
the project savings.
D. Yes, because the expected benefits to be
derived exceed the cost added to the
controls.
14. An auditor concludes that there is material
inconsistency in the other information in an
annual report to shareholders containing
audited financial statements. The auditor
believes that the financial statements do
not require revision, but the client is
unwilling to revise or eliminate the material
inconsistency in the other information.
Under these circumstances, what action
would the auditor most likely take?
A. Consider the situation closed because the
other information is not in the financial
statements.
B. Issue and “except for” qualified opinion
after discussing the matter with the clients
audit committee.
C. Disclaim an opinion on the financial
statements after explaining the material
inconsistency in a separate “other matter”
paragraph.
D. Revise the auditor’s report to include a
separate “other matter” paragraph
describing the material inconsistency.
15. Which of the following test controls most
likely would help assure auditors that goods
shipped are properly billed?
A. Scan sales journal for sequential and
unusual entries.
B. Examine shipping documents for matching
sales invoice.
C. Compare the accounts receivable ledger
to daily sales summaries.
D. Inspect unused sales invoices for
consecutive pre-numbering.
16. The basic concept of internal control which
recognizes that the cost of internal control
should not exceed the benefits expected
to be derived is known as
A. Management by exception.
B. Management responsibility.
C. Limited liability.
D. Reasonable assurance.
17. With respect to errors and fraud, the auditor
should plan to
A. Search for errors and fraud that would have
a material effect on the financial
statements.
B. Discover errors or fraud that would have a
material effect on the financial statements.
C. Search for errors and fraud that would have
a material effect and for fraud that would
have either material or immaterial effects
on the financial statements.
D. Search for fraud that would have a
material effect and for errors that would
have either material or immaterial effects
on the financial statements.
18. Which of the following auditing procedures
most likely would assist an auditor in
identifying related party transactions?
A. Inspecting correspondence with lawyers for
evidence for unreported contingent
liabilities.
B. Vouching accounting records for recurring
transactions recorded just after the
balance sheet date.
C. Reviewing confirmation of loan receivables
and payable for indications of guarantees.
D. Performing analytical procedures for
indications of possible financial difficulties.
19. Cedie Company uses its sales invoices for
posting perpetual inventory records. The
inadequate controls could cause what
type of misstatement in each of the
following accounts?
Revenues Receivables Inventories
A. Under Under Under
B. Over Over Over
C. Under Under Over
D. Over Over Over
20. Two overriding considerations affect the
many ways an auditor can accumulate
evidence:
*Sufficient appropriate evidence must be
accumulated to meet auditor’s
professional responsibility.
*Cost of accumulating evidence should be
minimized.
In evaluating these considerations:
A. The first is more important than the second.
B. The second is more important than the first.
C. They are equally important.
D. It is impossible to prioritize them.
21. Independent auditing is considered
necessary because managers and
stockholders have attitudes toward
financial reporting.
22. In a recurring audit, the best source of
business and the industry information may
be found in the __________?
23. The assertion stating that no assets, equities,
or transactions have been omitted from the
financial is known as the
_____________assertion.
24. Which of the following tasks should be
performed prior to the final audit?
A. Determining the fairness of property, plant,
and equipment.
B. Confirming accounts receivable.
C. Testing internal control.
D. Collecting and evaluating evidence
supporting the fairness of inventory values.
25. Auditors apply analytical procedures to the
client’s operations in order to identify
A. Improper separation of accounting and
other financial duties.
B. Weaknesses of a material nature in the
client’s internal control.
C. Unusual transactions. D. Reissue prior years report and add an
emphasis of matter paragraph that
D. Noncompliance with the prescribed control
specifically refer to “substantial doubt” and
procedures.
“going concerns”

26. After determining that a related party

29. The external auditor should obtain a
transaction has, in fact, occurred an
sufficient understanding of the internal
auditor should
audit function because
A. Substantiate that related party transactions
A. The understanding of the internal audit
were consummated on terms equivalent to
function is an important substantive test to
those that prevail in arms-length
be performed by the external auditor.
transactions.
B. The audit programs, working papers, and
B. Perform analytical procedures to verify
reports of internal controls may often be
whether similar transactions have occurred,
used a substitute for the work of the
but were not recorded.
external auditor’s staff.
C. Obtain an understanding of the purpose of
C. The procedures performed by the internal
the transaction.
auditing staff may eliminate the external
D. Determine whether a particular transaction auditors need for considering internal
would have occurred if the parties had not control.
been related.
D. The work performed by the internal auditor
may be a factor in determining the nature,
27. Which of the following workpapers would timing and extent of the external auditor’s
one normally expect to find in the procedures.
permanent file?
A. A copy of a long-term bond indenture. 30. An auditor who accepts an audit
B. The working trial balance. engagement and does not possess the
industry expertise of the business entity ,
C. An analysis of additions and disposals should
relating to marketable securities.
A. Engage in financial experts familiar with the
D. A workpaper analyzing customer replies to nature of the business entity.
confirmation requests.
B. Obtain knowledge of matters that relate to
the nature of the entity’s business.
28. When an auditor concludes that there is C. Refer a substantial portion of the audit to
substantial doubt about continuing clients another CPA who will act as the principal
ability as a going concern for a reasonable auditor.
period of time, the auditor’s responsibility is
to D. First inform management that an
unqualified opinion cannot be issued
A. Consider the adequacy of disclosure about
the clients possible inability to continue as a
going concern
B. Issue a qualified or adverse opinion,
depending upon the materiality due to
possible effects on the financial statements.
C. Report to the client’s audit committee that
management accounting estimates may
need to be adjusted.
31. During an engagement review the financial
statements of an entity, a practitioner
becomes aware of a material departure
from PFRS. If the practitioner decides to
modify the review report because the
management will not receive the financial
statements , the practitioner should
A. Express negative assurance on accounting
principles not conforming with PFRS.
B. Express positive assurance on accounting
principles conforming with PFRS.
C. Express a qualified opinion.
D. Express a qualification of negative
assurance provided.
32. The third general standard states that due
care is to be exercised in the performance
of the examination. This standard means
that a CPA who undertakes an
engagement assumes a duty to perform
audit.
A. As a professional possessing the degree of
skill commonly possessed by others in the
field.
B. In conformity with the generally accepted
accounting principles.
C. With reasonable diligence and without fault
or error.
D. To the satisfaction of governmental
agencies and investors who rely upon the
audit.
33. Which of the following statements about
internal control is true?
A. Internal control, no matter how effective,
can provide an entity with only reasonable
assurance about achieving the entity’s
financial reporting objectives.
B. Controls cannot be circumvented by the
collusion of two or more people or
inappropriate management override of
internal control.
C. In designing and implementing controls,
auditors may make judgments on the
nature and extent of the controls it chooses
to implement, and the nature and extent of
the risks it chooses to assume.
D. The way in which internal control is
designed, implemented and maintained is
the similar with an entity’s on same business
line.
34. The permanent file section of the working
papers is kept for each audit client most
likely contains
A. Review notes pertaining to questions and
comments regarding the audit work
performed.
B. A schedule of time spent on the
engagement by each individual auditor.
C. Correspondence with the client’s legal
counsel concerning pending litigation.
D. Narrative descriptions of the client’s internal
control policies and procedure.
35. When inherent risk is high, there will be need
to
A lower assessment of audit risk
More evidence accumulated by the
auditor
A. YES YES
B. NO NO
C. YES NO
D. NO YES
36. An auditor is examining accounts
receivable. What is the most competent
type of evidence in this situation?
A. Interviewing the personnel who record
accounts receivable.
B. Verifying that postings to the receivable
account from the journals have been
made.
C. Receipt by the auditor of a positive
confirmation.
D. No response received for a request for a
negative confirmation.
37. The procedures specifically outlined in an
audit program are primarily designed to
A. Protect the auditor in the event of litigation.
B. Detect errors of fraud.
C. Test internal evidence.
D. Gather evidence.
38. Morgan, CPA, is the principal auditor of a
multi-national corporation. Another CPA
has examined and reported on the
financial statements of a significant
subsidiary of the corporation. Morgan 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 Morgan’s
report on the consolidated financial
statements, taken as a whole , Morgan
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 auditor.
D. May refer to the examination of the other
auditor, in which case Morgan must include
in the auditor’s report on the consolidated
financial statements a qualified opinion
with respect to the examination of the
other auditor.
39. Soon after Boyd’s audit report was issued,
Boyd learned of a certain related party
transactions that occurred during the year
under audit. These transactions were not
disclosed in the notes to the financial
statements. Boyd should
A. Plan to audit the transactions during the
next engagement.
B. Recall all copies of the audited financial
statements.
C. Determine whether the lack of disclosure
would affect the auditor’s report.
D. Ask the client to disclose the transactions in
subsequent interim statements.
40. The auditor issued a qualified opinion
covering the financial statements of Client
A for the year ended December 31, 2002.
The reason for the qualification was a
departure from GAAP. In presenting
comparative statements for the years
ended December 31, 2002 and 2003, the
client revised the 2002 financial statements
to correct the previous departure from
GAAP. The auditor’s 2003 report on the
12/31/02 and 12/31/03 comparative
financial statements will
A. Express a qualified opinion on the 2002
financial statements and an unqualified
opinion on the 2003 statements.
B. Express unqualified opinions on both the
2002 and 2003 financial statements.
C. Retain the qualified opinion covering the
2002 statements, but add an explanatory
paragraph describing the correction of the
prior departure from GAAP.
D. Render qualified audit opinions for both
2002 and 2003 financial statements given
the 2003 carryover effect of the 2002 error.
41. A set of control procedures referred to as
“periodic inventories and comparisons;”
provides effective monitoring of
accountability. Although the term
inventories” is broadly defined for this
purpose, which of the following does not fit
the definition of periodic inventories and
comparisons?
A. Bank accounts are reconciled monthly by
persons independent of cash custody and
cash recording.
B. Cash receipts are deposited intact daily
and the receipted deposit ticket is
obtained directly from the bank and
compared with the recorded cash receipts
by a person independent of cash custody
and cash recording.
C. Perpetual inventory records are maintained
for major classes of materials and finished
goods and monthly counts and
comparisons are made on test basis.
D. The treasurer reviews all documentation
before signing disbursement checks. The
checks are then mailed directly to the
vendors and the documents are effectively
canceled.
42. An audit report contains the following
paragraph: “Because of the inadequacies
in the company’s accounting records
during the year ended June 30,2003, it was
not practicable to extend our auditing
procedures to the extent necessary to
enable us obtain certain evidential matter
as it relates to classification of certain items
in the consolidated statements of
operations.” This paragraph most likely
describes
A. A material departure from GAAP requiring
a qualified audit opinion.
B. An uncertainty that should not lead to a
qualified opinion.
C. A matter that the auditor wishes to
emphasize and that does not lead to a
qualified audit opinion.
D. A material scope restriction requiring a
qualification of the audit opinion.
43. When considering the effectiveness of the
internal control, the auditor should
recognize that inherent limitations do exist.
Which of the following is an example of an
inherent limitation in a client’s internal
control?
A. The effectiveness of procedures depend on
the segregation of employee duties.
B. Procedures are designed to assure the
execution and recording of transactions in
accordance with the management’s
authorization.
C. In the performance of most control
procedures, there are possibilities of errors
arising from mistakes in judgment.
D. Procedures for handling large numbers of
transactions are processed by electronic
data equipment.
44. Alpha Company uses its sales invoices for
posting perpetual inventory records.
Inadequate internal control procedures
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, receivables,
and an understatement of inventory.
C. Understatement of revenues, receivables,
and an overstatement of inventory.
D. Overstatement of revenues, receivables
and inventory.
45. Which of the following activities represents
both an appropriate human resources
function and a deterrent to payroll fraud?
A. Distribution of paychecks.
B. Authorization of overtime.
C. Authorization of additions to and deletions
from payroll.
D. Collection and retention of unclaimed
paychecks.
46. A limitation on the scope of the auditor’s
examination sufficient to preclude an
unqualified opinion will always result when
management
A. Ask 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 footnotes to the financial statements.
D. Knows that confirmation of accounts
receivable is not feasible.