INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING.

STRICTLY
NO ERASURE ALLOWED.

1. To reduce the risks associated with accepting e-mail responses to requests for confirmation of
accounts receivable, an auditor most likely would

A. Examine subsequent cash receipts for the accounts in question.

B. Consider the e-mail responses to the confirmations to be exceptions.
C. Mail second requests to the e-mail respondents.
D. Request the senders to mail the original forms to the auditor.

2. Which of the following procedures is ordinarily performed by an accountant during an

engagement to compile the financial statements of an entity?

A. Make inquiries of the employees and senior management regarding transactions with related
parties.
B. Determine whether there is substantial doubt about the entity’s ability to continue as a going
concern.
C. Scan the entity’s records for the period just after the balance sheet date to identify subsequent
event requiring disclosure.
D. Consider whether the financial statements are free from obvious material mistakes in the
application of accounting principles.

3. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to supporting documents. Which assertion would this test of controls most likely support?

A. Completeness C. Valuation
B. Occurrence D. Rights and obligations

4. Observation

A. Consists of seeking information of knowledgeable persons, both financial and nonfinancial,

throughout the entity or outside the entity.
B. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
C. Consists of looking at a process or procedure being performed by others.
D. Is the process of obtaining a representation of information or of an existing condition directly
from a third party.

5. After containing a sufficient understanding of the entity, its environment, and internal control
in an audit of the financial statements, the auditor assesses

A. The need to apply auditing standards.

B. Detection risk to determine the acceptable level of inherent risk.
C. Detection risk and inherent risk to determine the acceptable level of control risk.
D. Control risk and inherent risk to determine the acceptable level of detection risk.
6. A substantive strategy is typically used to audit stockholders’ equity because

A. Controls over stockholders’ equity transactions typically are weak.

B. A reliance strategy is most efficient.
C. The number of transactions is small.
D. A substantive strategy likely was used in prior years.

7. The engagement partner should be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and specific audit engagements have been
followed, and that conclusions reached in this regard are appropriate and have been
documented. Acceptance and continuance of client relationships and specific audit
engagements include considering:

I. The integrity of the principal owners, key management, and those charged with
governance of the entity.
II. Whether the engagement team is competent to perform the audit engagement and has
the necessary time and resources.
III. Whether the firm and the engagement team can comply with ethical requirements.
A. I only. C. II and III only.
B. I and II only. D. I, II, and III.

8. Which of the following conditions and events may most likely indicate the existence of risks
of material misstatement?

A. Having personnel with appropriate accounting and financial reporting skills.

B. Constraints on the availability of capital and credit.
C. Accounting measurements that involve simple processes.
D. Significant amount of routine or systematic transactions.

9. Which of the following procedures would best detect a liability omission by

management?

A. Review purchase contracts and other legal documents.

B. Inquiry of senior support staff and recently departed employees.
C. Review and check mathematical accuracy of financial statements.
D. Review articles of incorporation and corporate bylaws.

10. After testing a client’s internal control activities, an auditor discovers a number of
significant deficiencies in the operation of a client’s internal controls. Under these
circumstances the auditor most likely would

A. Issue a disclaimer of opinion about the internal controls as part of the auditor’s
report.
B. Increase the assessment of control risk and increase the extent of substantive tests.
C. Issue a qualified opinion of this finding as part of the auditor’s report.
D. Withdraw from the audit because the internal controls are ineffective.
11. Which statement is incorrect regarding external confirmation?

A. External confirmation is the process of obtaining and evaluating audit evidence

through a direct communication from a third party in response to a request for
information about a particular item affecting assertions made by management in the
financial statements.
B. External confirmation of an account receivable provides strong evidence regarding
the valuation of the account as at a certain date.
C. The auditor should tailor external confirmation requests to the specific audit
objective.
D. The auditor may use positive or negative external confirmation requests or a
combination of both.

12. Which of the following steps should an auditor perform first to determine the existence of
related parties?

A. Request a list of related parties from management.

B. Examine invoices, contracts, and purchase orders.
C. Review the company’s business structure.
D. Review proxy and other materials filed with the SEC.

13. Reviewing notes paid or renewed after the balance sheet date to determine if there are
unrecorded liabilities at year-end can be used to test the assertion of.

A. Existence C. Rights and obligations

B. Completeness D. Valuation and allocation

14. Which of the following statements relating to the appropriateness 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 an auditor must be both valid and relevant to be considered
appropriate.

15. If the auditor is unable to agree to a change of the engagement and is not permitted to
continue the original engagement, the auditor should

A. Insist on continuing the original engagement.

B. Withdraw from the engagement.
C. Express a qualified opinion.
D. Express an adverse opinion.
16. Which of the following is an element of a CPA firm’s quality control policies and
procedures applicable to the firm’s accounting and auditing practice?

A. Engagement performance C. Technology selection

B. Information processing D. Professional skepticism

17. The most reliable procedure for an auditor to use the test the existence of a client’s
inventory at an outside location would be to:

A. Trace the total on the inventory listing to the general ledger inventory account.
B. Obtain a confirmation from the client from the client indicating inventory ownership.
C. Observe physical counts of the inventory items.
D. Analytical compare the current-year inventory balance to the prior-year balance.

18. The auditor is required to complete the administrative process of assembling the final
audit file on a timely basis after the date of the auditor’s report. The time limit within
which to complete the assembly of the audit file is ordinarily

A. Not more than 30 days after the date of the auditor’s report
B. Not more than 60 days after the date of the auditor’s report.
C. Not more than 90 days after the end of the entity’s reporting period.
D. Not more than 60 days after the date the entity’s financial statements are authorized
for issue.

19. A purchasing agent places an order for inventory whenever a requisition is received from
the warehouse. The warehouse clerk issues requisitions based on periodic physical counts
because no perpetual records are maintained. Numerous duplicate orders have been
placed for goods previously ordered but not received. To prevent this excess ordering, the
firm should

A. Count goods in the warehouse less often

B. Use prenumbered purchase orders
C. Not use purchase requisitions
D. Keep an adequate record of open purchase orders and review it before ordering.

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

A. Study of relationships of the financial information with relevant nonfinancial

information.
B. Comparison of the financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of the financial information with budgeted amounts.
D. Comparison of recorded amounts of major disbursements with appropriate invoices.
21. The principle of professional competence and due care imposes which of the following
obligations on professional accountants?

A. To refrain from disclosing confidential information obtained as a result of

professional and business relationships without proper and specific authority unless
there is a legal or professional right or duty disclose.
B. To comply with relevant laws and regulations and avoid any situation that may bring
discredit to the profession.
C. Not to compromise professional or business judgement because of bias, conflict of
interest or undue influence of others.
D. To maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service.

22. Which of the following statements concerning detection risk is incorrect?

A. Detection risk is a function of the effectiveness of an auditing procedure and its

application.
B. Detection risk arises partly from uncertainties that exist when the auditor does not
examine 100 percent of the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor
were to examine 100 percent of the population.
D. Detection risk exists independently of the audit of the financial statements.

23. An audit client failed to maintain copies of its procedure manuals and organizational
flowcharts. What should the auditor do in an audit of financial statements?

A. Issue a qualified opinion on the basis of a scope limitation.

B. Document the auditor’s understanding of internal controls.
C. Assess control risk at the maximum level.
D. Restrict the auditor’s responsibility to assess the effectiveness of controls in the audit
engagement letter.

24. Which of the following is most likely to be an example of fraud?

A. Defalcations occurring due to invalid electronic approvals.

B. Mistakes in the application of accounting principles.
C. Mistakes in processing data.
D. Unreasonable accounting estimates arising from oversight.

25. Which of the following fraudulent activities most likely could be perpetrated due to the
lack of effective internal controls in the revenue cycle?

A. Fictitious transactions may be recorded that cause an understatement of revenues and

overstatement of receivables.
 B. Claims received from customers for goods returned may be intentionally recorded in
other customers’ accounts.
C. Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash.
D. The failure to prepare shipping documents may cause an overstatement of inventory
balances.

26. An auditor noted that the accounts receivable department is separate from other
accounting activities. Credit is approved by a separate credit department. Control
accounts and subsidiary ledgers are balanced monthly. Similarly, accounts after 1 year, or
sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda
are prenumbered and must correlate with receiving reports. Which of the following areas
could be viewed as an internal control weakness of the above organization?

A. Write-offs of delinquent accounts.

B. Credit approvals
C. Monthly aging of receivables
D. Handling of credit memos.

27. Engagement letters include all of the following except

A. A list of additional services that will be provided

B. A list of adjusting journal entries
C. Information about the audit fee
D. Arrangements involving the use of experts.

28. In performing an audit, which one of the following procedures would be considered a
“substantive test”?

A. Comparing last year’s interest expense with this year’s interest expense.
B. Comparing signatures on checks with the signatures of authorized check signers.
C. Reviewing initials on receiving documents.
D. Reviewing procedures, followed in receiving, depositing, and disbursing cash.

29. Which of the following statements is correct regarding internal control system?

A. Internal control system refers to all the policies and procedures adopted by the
auditor to assist in achieving management’s objectives.
B. A strong control environment, by itself, ensures the effectiveness of the internal
control system.
C. 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.
D. The internal control system is confined to those matters which relate directly to the
functions of the accounting system.

30. Which of the following procedures would an auditor most likely perform prior to the
balance sheet date?
 A. Review subsequent events.
B. Perform search for unrecorded liabilities
C. Send inquiry letter to client’s legal counsel
D. Review detail and test significant travel and entertainment expenses.

31. Professional skepticism requires that an auditor assume that management is

A. Honest, in the absence of fraud risk factors.

B. Dishonest until completion of audit tests.
C. Neither honest nor dishonest.
D. Offering reasonable assurance of honesty.

32. The Auditing and Assurance Standards Council (AASC) was established by the

A. Professional Regulation Commission (PRC) upon the recommendation of the Board

of Accountancy (BOA)
B. Philippine Institute of Certified Public Accountants (PICPA)
C. PICPA and the Association of CPA’s in Public Practice (ACPAPP)
D. International Federation of Accountants (IFAC)

33. A document that details what the auditor will do to gather sufficient, appropriate evidence
is the

A. Audit strategy C. Audit procedure

B. Audit program D. Audit risk model

34. 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 and cash flows 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 is not likely to be
considered objective with respect to its own financial statements.
D. It is a customary courtesy that all shareholders of a company receive an independent
report on management’s stewardship in managing the affairs of the business.

35. Which of the following questions would not be appropriate for an internal control
questionnaire concerning inventory?
 A. Are goods stored in locked storage areas?
B. Are disbursement vouchers approved before payment?
C. Is access to the storeroom limited to authorized personnel?
D. Are there independent, periodic comparisons of inventory records with goods on
hand?

36. The form and content of working papers are affected by matters such as the

I. Nature of the engagement.

II. Form of the auditor’s report
III. Nature and complexity of the business
IV. Nature and condition of entity’s accounting and internal control systems.
V. Needs in the particular circumstances for direction, supervision, and review of
work performed by assistants.
VI. Specific audit methodology and technology used in the course of the audit.

A. All of the above. C. I, II, and III only

B. All except V and VI D. All except VI

37. An auditor is determining if internal control relative to the revenue cycle of a wholesaling
entity is operating effectively in minimizing the failure to prepare sales invoices. The
auditor most likely would select a sample of transactions from the population represented
by the.

A. Cash receipts file. C. Customer order file.

B. Shipping document file. D. Sales invoice file.

38. 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.

39. The following statements relate to the auditor’s responsibilities regarding related parties
and transactions with such parties. Which is incorrect?

A. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties.
B. Management is required to implement adequate internal control to ensure that
transactions with related parties are appropriately identified in the information system
and disclosed in the financial statements.
C. The auditor should have a sufficient understanding of the entity and its environment
to identify events, transactions, and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
 D. A financial statement audit cannot be expected to detect all related party transactions.

40. If inherent risk is increased to medium from low, tests of details of balances can be
reduced.
The extent of tests of details of balances cannot be reduced when transaction-related audit
objectives have been satisfied by tests of controls or substantive tests of transactions.

A. True; False C. True; True

B. False; True D. False; False

41. An auditor who accepts an audit engagement and does not possess expertise with respect
to the business entity’s industry, 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 a 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.

42. The frequency of the comparison of recorded accountability with assets (for the purpose
of safeguarding assets) should be determined by

A. The amount of assets independent of the cost of the comparison

B. The nature and amount of the asset and the cost of making the comparison.
C. The cost of the comparison and whether the susceptibility to loss results from errors
or fraud.
D. The auditor in consultation with client management.

43. Control activities relate to the following, except

A. Segregation of duties C. An internal audit function

B. Performance reviews D. Authorization

44. Which of the following describes how the objective of a review of financial statements
differs from the objective of a compilation engagement?

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

financial statements prepared, but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide positive assurance that
the financial statements are fairly presented, but a compilation provides NO such
assurance.
C. In a review engagement, accountants provide limited assurance, but a compilation
expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive assurance that
the financial statements are fairly presented, but a compilation provides limited
assurance.
45. A classification of fraud where the perpetrator causes a company to pay too much for
ordered goods, or to pay for goods never ordered is called

A. Payroll fraud C. Cash receipts fraud

B. Disbursement fraud D. Inventory fraud

46. As part of its purchasing system, an entity’s receiving department receives copies of
purchase orders for use in identifying and recording goods received. The purchase orders
list the name of the vendor and the quantities of the materials ordered. A possible error
that this system could allow is

A. Payment for unauthorized purchases

B. Payment to unauthorized vendors
C. Overpayment of partial deliveries
D. Delay in recording purchases

47. The auditor would design which of the following audit tests to detect possible monetary
errors in the financial statements?

A. Control tests
B. Analytical procedures
C. Risk assessment procedures
D. Tests of operating effectiveness of controls over revenue and cash

48. Which of the following statements about the study of auditing is NOT true?

A. The study of auditing can be valuable to future accountants and business decision
makes whether or not they plan to become auditors.
B. The study of auditing focuses on learning the analytical and logical skills necessary
to evaluate the relevance and reliability of information.
C. The study of auditing focuses on learning the rules, techniques, and computations
required to analyze financial statements.
D. The study of auditing begins with the understanding of a coherent logical framework
and techniques useful for gathering and analyzing evidence about others’ assertions.

49. The objective of quality control mandates that a public accounting firm should establish
policies and procedures for professional development that provide reasonable assurance
that all entry-level personnel.

A. Prepare working papers that are standardized in form and content.

B. Have the knowledge required to enable them to fulfill responsibilities assigned.
C. Will advance within the organization.
D. Develop specialties in specific areas of public accounting.

50. The auditor’s risk assessment procedures

A. By themselves, do not provide sufficient appropriate audit evidence on which to base

the audit opinion.
B. Should not consider information obtained from the auditor’s previous experience
with the entity.
 C. Are designed to detect material misstatements at the assertion level for classes of
transactions, account balances and disclosures.
D. Are designed to test the effectiveness of the entity’s controls.

51. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy
with the client’s management. Which of the following matters do the auditor and
management agree upon at this time?

A. The appropriateness of the entity’s plans for dealing with adverse economic
conditions.
B. The determination of the fraud risk factors that exist within the client’s operations.
C. The control weaknesses to be included in the communication with those charged with
governance.
D. The coordination of the assistance of the client’s personnel in data preparation.

52. Fraudulent financial reporting involves intentional misstatements including omissions of

amounts or disclosures in financial statements to deceive financial statement users. It may
be accomplished in a number of ways, including

A. Embezzling receipts
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or supporting
documentation from which the financial statements are prepared.

53. The following statements relate to the auditor’s use of the work of an expert:

1. The auditor should assess the appropriateness of the expert’s work as audit evidence
regarding the financial statement assertion being considered.
2. If the results of the expert’s work do not provide sufficient appropriate audit evidence
or if the results are not consistent with other audit evidence, the auditor should
resolve the matter.
3. When issuing an unmodified auditor’s report, the auditor should not refer to the work
of an expert.
Statement 1 Statement 2 Statement 3
A. True True True
B. True False True
C. False True False
D. False False True

54. Which of the following is not a factor that relates to opportunities to misappropriate
assets?

A. Inadequate internal controls over assets.

B. Presence of large amounts of cash on hand.
C. Inappropriate segregation of duties or independent checks on performance.
D. Adverse relationships between management and employees.
55. The party responsible for 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.

56. Performance materiality is

A. The amount or amounts set by the auditor at less than materiality for the financial
statements as a whole.
B. Determined by applying a percentage to a chosen benchmark such as an element of
the financial statements.
C. The amount or amounts set by the auditor at more than materiality for the financial
statements as a whole.
D. Determine by applying a simple mechanical calculation and does not involve the
exercise of professional judgement.

57. The auditor’s risk assessment procedures should always include the following, except

A. Inquiries of management and of within the entity.

B. Analytical procedures.
C. Observation and inspection.
D. Substantive test procedures and tests of controls.

58. An auditor’s engagement letter most likely would include a statement that:

A. Lists potential significant deficiencies discovered during the prior year’s audit.
B. Explains the analytical procedures that the auditor expects to apply.
C. Describes the auditor’s responsibility to evaluate going concern issues.
D. Limits the auditor’s responsibility to detect errors and fraud.

59. Which of the following fundamental ethical principles prohibits association of

professional accountants with reports, returns, communications or other information that
is believed to contain a materially false or misleading statement?

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

60. When considering internal control an auditor must be aware of the concept of reasonable
assurance, which recognizes that

A. Employment of competent personnel provides assurance that the objectives of

internal control will be achieved.
B. Establishment and maintenance of internal control is an important responsibility of
the management and not of the auditor.
C. Cost of internal control procedures should not exceed the benefits expected to be
derived from the control.
 D. Segregation of incompatible functions is necessary to ascertain that the control
procedures are effective.

61. Who is most likely to perpetrate fraudulent financial reporting?

A. Production employees. C. Members of the board of directors

B. The internal auditors. D. Management of the company.

62. Compilations provide which of the following types of assurance about the fair
presentation of financial statements?

A. No Assurance. C. Limited assurance.

B. Negative assurance. D. Reasonable assurance.

63. A proposed assurance engagement can be accepted when the practitioner’s preliminary
knowledge about the engagement circumstances indicates that relevant ethical
requirements will be satisfied and

I. The subject matter of the engagement is appropriate.

II. The criteria to be used are suitable and are available to the intended users.
III. The practitioner has access to sufficient appropriate evidence to support the
conclusion.
IV. The conclusion is to be contained in a written report.
V. There is a rational purpose for the engagement.

A. I, II, and III only C. I, II, III, and IV only

B. I, II, IV, and V only D. I, II, III, IV, and V

64. An entity’s management is responsible for the preparation and fair presentation of the
financial statements. Its responsibility includes the following, except

A. Designing, implementing, and maintaining internal control relevant to the preparation

and presentation of financial statements.
B. Making accounting estimates that are reasonable in the circumstances.
C. Selecting and applying appropriate accounting policies.
D. Assessing the risks of material misstatement of the financial statements.

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

A. The CPA does not understand the entity’s operations and industry.
B. Management acknowledges that the entity has had recurring operating losses.
C. The CPA is unable to review the predecessor auditor’s working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
66. 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 is not allowed to use the work of persons from other professional
disciplines.
C. The practitioner should consider materiality and assurance engagement risk when
planning and performing an assurance engagement.
D. The assurance reports should be in writing and should contain a clear expression of
the practitioner’s conclusion about the subject matter information.

67. The following statements relate to the performance of tests of control and assessment of
control risk. Which statement is correct?

A. The auditor should obtain audit evidence through tests of control to support any
assessment of control risk that is less than high.
B. The higher the assessment of control risk, the more support the auditor should obtain
that accounting and internal control systems are suitably designed and operating
effectively.
C. When obtaining evidence about the effective operation of internal controls, the
auditor considers why they were applied, by whom they were applied, and the
consistency with which they were applied during the period.
D. The preliminary assessment of control risk for a financial statement assertion should
be low unless the auditor is able to identify internal controls relevant to the assertion
which are likely to prevent or detect and correct a material misstatement and plans to
perform tests of control to support the assessment.

68. Narratives, flowcharts, and internal control questionnaires are three common methods of

A. Documenting the auditor’s understanding of internal controls.

B. Designing the audit manual and procedures.
C. Documenting the auditor’s understanding of a client’s organizational structure.
D. Testing the internal controls.

69. In connection with the examination of financial statements by an independent auditor, the
client suggests that 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
judgement 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 for accounts receivable and sales.
D. Determination of the adequacy of the allowance for doubtful accounts.

70. Which of the following statements best describes a positive request for confirmation of
an accounts receivable balance?

A. The customer will be asked to indicate to the auditor the current balance in the
account.
B. The customer will be asked to respond to the confirmation request only if the balance
indicated in the request is incorrect.
C. The customer will be asked to inform the auditor whether the balance indicated in the
request is correct and to respond regardless of whether such stated balance is correct.
D. The customer will be asked to indicate to the auditor the balance in his/her account
only if it is possible (i.e., greater than zero).

--- END OF EXAMINATION ---