Unibersidad de Manila

College of Accountancy & Economics

Auditing Theory Dr. LRC dela Cruz

1. The Code of Professional Ethics for CPAs promulgated by the Board applies to
a. All CPAs in public practice
b. All CPAs in government
c. All CPAs in public practice and employed in private business
d. All CPAs in public practice employed in private business and industry, in the government and in education.

2. The underlying reason for a code of ethics is

a. That it provides a safeguards against unscrupulous people
b. That it is required by legislation
c. To provide the licensing agencies with a basis for measuring the performance of the practitioners
d. The need for public confidence in the quality service of the profession

3. The CPA profession deemed it necessary to establish a code of ethics and a mechanism for its enforcement because
a. The establishment of flexible ethical standards provides self-protection for CPAs
b. An ethical conduct that stresses the CPAs responsibility to clients and colleagues is a prerequisite to success
c. A requirement of law provides that CPAs establishes a code of ethics
d. Acceptance of responsibility to the public is a distinguishing mark of a profession.

4. Which of the following is not one of the characteristic of a profession?

a. A responsibility to protect exclusively the interest of a client or employer.
b. Mastery of a particular intellectual skill acquired by training and education
c. Adherence by its members to a common code of conduct
d. Acceptance of a duty to society as a whole

5. The principle of professional competence and due care imposes certain obligations on professional accountants, which of the
following is not one of those obligations required by this principle
a. To obtain professional knowledge and experience to enable them to fulfil their responsibilities
b. To act diligently in accordance with applicable technical and professional standards
c. To become aware and understand relevant technical, professional and business developments
d. To be fair, intellectually honest and free of conflict of interest

6. The essence of due care principle is that the auditor should not be guilty of
a. Negligence b. Fraud c. Bias d. Errors in judgment

7. Competence as a CPAs includes all of the following except,

a. Consulting others if additional technical information is needed
b. Having the technical qualifications to perform an engagement
c. Warranting the infallibility of the work performed
d. Possessing the ability to supervise and evaluate the quality of staff work

8. The phase of professional competence that requires a professional accountant to adopt a program designed to endure quality
control in the performance of professional services consistent with technical and professional standards is
a. Review of professional competence c. Application of professional competence
b. Attainment of professional competence d. Maintenance of professional competence

9. Professional competence should include:

Statement 1 – Attainment of professional competence
Statement 2 – Maintenance of professional competence
a. Both statements are true c. Only Statement 1 is true
b. Both statements are false d. Only Statement 2 is true

10. An auditor who accepts an audit engagement and does not possess the industry experience/ expertise of the business entity
should
a. First inform management that an unqualified opinion cannot be issued
b. Engage financial experts familiar with the nature of the business entity
c. Refer a substantial portion of the audit to another CPA who will act as a principal auditor
d. Obtain knowledge of matters that relate to the nature of the entity’s business

11. The principle of confidentiality imposes an obligation on professional accountant to refrain from
a. Responding to an inquiry or investigation conducted by the Board
b. Disclosing confidential information to another party even if the client authorises the disclosure
c. Disclosing information to defend themselves in case of litigation
d. Using confidential information acquired as a result of professional and business relationship to their personal
advantage or advantage of third parties

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12. The principle of confidentiality applies to
a. All professional accountant c. Professional accountant in government
b. Professional accountant in public practice d. Professional accountant in commerce and industry

13. Which of the following is considered a violation of rules on confidentiality

a. The CPA divulges information disclosed to him by a prospective client
b. The CPA discloses information to another CPA in compliance with a quality review conducted by the Quality
Review Committee
c. The CPA discloses information to protect his own interest in the course of legal proceedings
d. The CPA discloses information to a successor auditor after obtaining the client permission

14. The Code of Ethics for professional accountant states that a CPA shall not disclose any confidential information obtained in
the course of a professional engagement except with the consent of his client. In which of the following situations given
below would a CPA be in violation of the principle of confidentiality disclosing confidential information
a. In an investigation conducted by the PRC through the Board
b. In order to properly discharge the CPAs responsibilities in accordance with his professional standards
c. To another accountant interested in purchasing the CPAs practice
d. In compliance with a subpoena issued by a court

15. A CPA shall not disclose confidential information obtained during an audit engagement in which one of the following
situations
a. To a successor auditor without the client permission c. In defense of himself when sued by the client
b. When the security of the state requires d. With the consent of the client

16. Andy, a non-CPA has a law practice. Andres, a CPA has agreed to pay Andy 20% of the fee for services rendered by Andres
to Andy’s client. Who, if anyone, is in violation of the code of ethics?
a. Andres b. Andy c. Both Andres and Andy d. Neither Andres and Andy

17. A professional accountant name can be associated with information that

a. Contains information without any real knowledge of whether they are true or false
b. Contains a misleading statement
c. Uses estimates
d. Intentionally omits or obscures information

18. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential
information obtained during the course of a professional engagement
a. Confidential client information is made available with the client’s permission
b. The CPA is issued a summon enforceable by a court order which orders the CPA to present confidential information
c. An inquiry by the PRC and the CPA needs the disclosure to defend himself
d. A major stockholder of a client company seeks accounting information from the CPA after the management
declined to disclose the requested information

19. When a professional accountant performs services in a country other than home country and differences on specific matters
exists between ethical requirements of the two countries, the professional accountant should apply
a. The less strict ethical requirements
b. The ethical requirements of his or her home country
c. The stricter of the two ethical requirements
d. The ethical requirements of the country in which services are being performed

20. Identify the incorrect statement. “A professional accountant rendering tax services is entitled to put forward the best position
in favour of a client or an employer, provided….
a. The professional accountant assumes responsibility for the content of the tax return
b. It does not impair the accountant integrity and objectivity
c. It is consistent with the law
d. It is rendered with professional competence

21. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Comply with the generally accepted standards of fieldwork c. Become independent in mind
b. Reduce risk and liability d. Maintain public confidence in the profession

22. Independence in auditing means

a. Not having a loan to or from an assurance client
b. Not having any financial or economic relationship with the client
c. Taking an unbiased viewpoint
d. Being an advocate of the assurance client

23. One of the major differences between auditors and other professionals is that most professionals
a. Do not need confidence of the public
b. Do not have to pass rigorous examination to be administered in the profession
c. Need not be concerned about independence
d. Are not expected to act in the best interest of the public

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24. The concept of materiality would be least important to an auditor in determining
a. The effect of an auditor’s direct financial interest in a client
b. Transactions that should be reviewed
c. The extent of audit work planned for particular account
d. The need for disclosing a particular transaction or event

25. Which of the following most accurately states how objectivity has been defined by the Code of Ethics
a. Avoiding facts and circumstances that could reduce the public confidence in the professional accountant report
b. Being honest and straightforward in all professional and business relationship
c. A combination of impartiality, intellectual honesty and a freedom from conflict of interest
d. A state of mind that permits the provision of an opinion without being affected by influences that compromise
professional judgment

26. Independence is required whenever a professional accountant performs

a. Professional services b. Assurance services c. Non-assurance services d. Tax consultancy
services

27. Ultimately, the decision as to whether the CPA is independence or not, will be made by the
a. Audit Committee b. Auditor c. Public d. Client

28. It refers to the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having
knowledge of all relevant information, including safeguards applied would reasonably conclude a firm’s or a member of the
assurance team’s integrity, objectivity or professional scepticism had been compromised
a. Inherent independence c. Independence in appearance
b. Independence in fact d. Independence of mind

29. The primary factor that distinguishes a direct from an indirect financial interest is the
a. Relationship between investor and investee c. Risk associated with such investment
b. Materiality of the amount involved d. Control over investment decision

30. The network firms are required to be independent of the client

a. For non-assurance engagement
b. For assurance engagement provided to an audit client
c. For assurance engagements provided to client that are not audit client when the assurance report is expressly
restricted for use of identified users
d. For assurance engagements provided to clients that are not audit clients, when the auditor is not expressly restricted
for use by identified users.

31. Which of the following statements is not correct about independence requirements
a. For assurance engagements provided to non-audit clients, where the distribution of the assurance reports is limited
only to specified users, the firm should be independent of the client
b. For assurance engagements provided to audit client, the members of the assurance team, the firm and network firms
are required to be independent of the client
c. For assurance engagements provided to non-audit clients, where the distribution of the assurance report is limited
only to specified users, the members of the assurance team are required to be independent of the client
d. For assurance engagements provided to non-audit clients, the members of the assurance team and the firm are
required to be independent of the client.

32. The member of the assurance team and the firm should be independent of the assurance client during the period of the
assurance engagement. For this purpose, the period of the engagement
a. Starts when the engagement letter is prepared and ends when the assurance report is issued
b. Starts when the assurance team begins to perform assurance services and ends when the fieldwork is completed
c. Starts when the engagement letter is prepared and ends when the fieldwork is completed
d. Starts when the assurance team begins to perform assurance services and ends when the assurance report is issued

33. Which of the following professional services does not require independence
a. Assertion based engagements c. Tax consultancy services
b. Direct reporting engagements d. Examination of financial forecast

34. This occur when because of a close relationship, a professional accountant becomes too sympathetic to the interest of others
a. Self-interest threat b. Self-review threat c. Advocacy threat d. Familiarity threat

35. This occur as a result of the financial or other interests of a professional accountant or of an immediate or close family
member
a. Self-interest treat b. Self-review threat c. Advocacy threat d. Familiarity threat

36. This treat occurs when a member of the assurance team may be deterred from acting objectively and exercising professional
scepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client
a. Intimidation threat b. Familiarity threat c. Advocacy threat d. Self-interest threat

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37. According to the Philippine Code of Ethics, compliance with fundamentals principles is potentially affected by self-interest,
self-review, advocacy, familiarity and intimidation threats. Which of the following best described advocacy threat?
a. This occurs when a firm or a member of the assurance team, promotes or may be perceived to promote, an assurance
clients position or opinion to the point that objectivity may, or maybe perceived to be, compromised
b. This occurs when a firm or member of the assurance team could benefit from financial interest in an assurance client
c. This occur when a member for an assurance team was previously a director or officer of the assurance client
d. This occur when any product or judgment of a previous engagement needs to be re-evaluated in reaching
conclusions on the assurance engagement

38. Which of the following circumstances would least likely create self-interest threat
a. Having a close personal relationship between a member of the assurance team and the assurance client, its directors,
officers or employees
b. Contingent fees relating to assurance engagements
c. A loan or guarantee to or from an assurance client or any of its directors or officers
d. A direct financial interest or material indirect financial interest in an assurance client

39. Which of the following would most likely create a self-review threat
a. A former partner joins the assurance client
b. Financial interest in a client
c. Litigation involving professional accountant and a client
d. A former officer of a client is now a member of the assurance team

40. Which of the following would least likely create self-interest threat
a. Pressure to reduce inappropriately the extent of work performed in order to reduce fees
b. Undue dependence on total fees from an assurance client
c. Having a close business relationship with an assurance client
d. Concern about the possibility of losing the engagement

41. Which of the following is an example of an intimidation threat that may affect the independence of the professional
accountant
a. A member of the assurance team having an immediate family member or close family member who is a director or
officer of the assurance client
b. Preparation of original data used to generate financial statements or preparation of other records that are the subject
matter of the assurance engagement
c. Dealing in, or being a promoter of, share or other securities in an audit client
d. Threat of replacement over a disagreement with the application of an accounting principle

42. Which of the following circumstances would least likely create familiarity threat
a. A former director or officer of the assurance client joins the assurance team
b. A member of the assurance team having an immediate family member or close family member who is a director or
officer of the assurance team
c. A former partner of the firm being a director, officer of the assurance client or an employee in a position to exert
direct and significant influence over the subject matter of the assurance engagement
d. A member of the assurance team having an immediate family member of close family member who as an employee
of the assurance client is in a position to exert direct and significant influence over the subject matter of the
assurance engagement

43. When threat to independence that are other than those clearly insignificant are identified, the professional accountant should
a. Apply appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level
b. Assigned more experienced staff to the assurance engagement
c. Continue the assurance engagement but with heightened level of professional scepticism
d. Downgrade the nature of engagement to one that does not require independence

44. Safeguards fall into two broad categories. Safeguards created by the profession, legislation or regulation does not include
a. Documented policies regarding identification of threat to compliance with fundamental principles
b. Corporate governance regulations
c. Educational, training and experience requirements for entry into the profession
d. Continuing professional development requirements

45. The rotation of senior accounting personnel can be regarded as a safeguard

a. Created within business community c. In the work environment
b. Created by the profession d. Within the client’s system and procedures

46. Which of the following is not one of the safeguards in the work environment
a. Continuing professional education requirements
b. Using different partners and teams with separate reporting lines for the provision of non-assurance services to an
assurance client
c. Rotation of senior personnel
d. Documented internal policies and procedures requiring compliance with the fundamental principles

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47. Which of the following statements about CPAs financial interest in a client is incorrect?
a. Material indirect financial interest impairs the CPAs independence
b. Immaterial indirect financial interest impairs the CPAs independence
c. Material direct financial interest impairs CPAs independence
d. Immaterial direct financial interest impairs the CPAs independence

48. If a member of the assurance team or their immediate family member, has a direct financial interest, or a material indirect
financial interest, in the assurance client, the self-interest threat created would be so significant. Consequently, the
professional accountant should apply appropriate safeguards in order to eliminate threat or reduce it to an acceptable level.
Which of the following safeguards would not be appropriate
a. Limit the participation of the member of the assurance team
b. Dispose of the direct financial interest prior to the individual becoming a member of the assurance team
c. Dispose of the indirect financial interest in total prior to the individual becoming member of the assurance team
d. Dispose of a sufficient amount of the indirect financial interest so that the remaining interest is no longer material
prior to the individual becoming a member of the assurance team.

49. Close family members do not include

a. Parents b. Siblings c. Non-dependent child d. spouse

50. Which of the following activities would least likely impair the professional accountant independence
a. Reporting, in a management role to those charged with governance
b. Serving as an officer or director of an audit client
c. Being an honorary member of an audit client
d. Determining which recommendation of the firm should be implemented

51. The Philippine Code of Ethics requires that lead engagements partners of listed entities be rotated at least once every
a. 2 years b. 3 years c. 5 years d. 7 years

52. Which of the following would least likely be considered violation of the independence rules
a. Providing bookkeeping services to an audit client that is listed
b. Receiving a gift from an assurance client
c. Providing legal services to an assurance client in a legal dispute
d. Providing tax consultancy services to an assurance client

53. In determining estimates of fees, an auditor may take into account each of the following, except
a. Attainment of specific findings
b. Value of the service to the client
c. Degree of responsibility assumed by undertaking the engagement
d. Skills required to perform the service

54. The CPA should not undertake an engagement if his fee is to be based upon
a. A percentage of audited net income c. Per diem rates plus expenses
b. The complexity of the service rendered d. The findings of a tax authority

55. Which of the following will least likely impair independence

a. A partner or an employee of the firm receives a token gift from an assurance client
b. An immediate family member of a member of the assurance team is a director, an officer or an employee of the
assurance client in a position to exert direct and significant influence over the subject matter of the assurance
engagement
c. A partner or employee of the firm serves as an officer or as a director on the board of an assurance client
d. A member of the assurance team participates in the assurance engagement while knowing, or having reason to
believe that he or she is to , or may join the assurance client sometime in the future

56. In which of the following situations would a public accounting firm have violated the Code of Ethics in determining fees
a. A fee based on the degree of responsibility that the service entails
b. A fee which is based upon the nature of the engagement rather than upon the actual time spent on the engagement
c. A fee that will be established as a result of a bankruptcy proceedings
d. A fee based on whether or not the audit report leads to the approval of client application for bank loan

57. The approach to a potential client for the purpose of offering professional services is called
a. Indecent proposal b. Solicitation c. Encroachment d. Advertising

58. Professional accountants press and other media releases undertaken to commemorate anniversaries in public practice by
informing the public of their achievements or contribution towards nation building are
a. Not permitted in the Philippines
b. Considered to be a violation of the rules in advertising
c. Forms of solicitation
d. Not considered violation of advertising rules provided such undertaking is done only once every 5 years

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59. A successor auditor is required to communicate with the previous auditor. The primary concern in this communication is
a. To save successor auditor time and money in gathering data
b. Information which will help the successor auditor determine whether the client management has integrity
c. To learn about client by examining predecessor working paper
d. To enable successor auditor to perform a more efficient audit

60. Which of the following statements about the composition of the BOA is incorrect
a. The Board shall elect a chairman from among its members to serve for a term of one year
b. The four sectors in the practice of accountancy shall as much as possible be equitably represented in the Board
c. The Board shall be composed of a chairman and six members
d. The members of the Board shall be appointed by the President of the Philippines from a list of three recommendees
for each position and ranked by the Commission, from a list of five nominees for each position submitted by
Accredited Professional Organization

61. The following statements relate to the term of office of the chairman and the members of BOA
Statement 1 – No person who has served two successive complete terms shall be eligible for reappointment until the
lapse of one year
Statement 2 – Appointment to fill up an unexpired term is not to be considered a complete term
Statement 3 – A person may serve in BOA for eight consecutive years
Statement 4 – No person shall serve in the Board for more than 12 years
a. All statements are true c. Two statements are true
b. Three statements are true d. All statements are false

62. Which of the following is not a valid ground for suspension or removal of members of the Board
a. Being charged of crimes involving moral turpitude c. Neglect of duty or incompetence
b. Violation of RA 9298 d. Rigging the CPA licensure examination results

63. The standard setting body created by the PRC to promulgate accounting standards that will be generally accepted in the
Philippines
a. Financial Reporting Standard Council c. Accounting Standard Council
b. Auditing Standard and Practices Council d. Auditing and Assurance Standards Council

64. The Financial Reporting Standard Council shall be composed of a chairman and
a. 14 members b. 17 members c. 8 members d. 15 members

65. Which of the following best describes the function of Auditing and Assurance Standard Council
a. To undertake continuing research on both auditing and financial accounting in order to make them responsive to the
needs of the public
b. To monitor full compliance by auditors to PSA
c. To assists the BOA in conducting administrative proceedings on erring CPAs in public practice
d. To promulgate auditing standards, practices and procedures that shall be generally accepted by the accounting
profession in the Philippines

66. The following statements relate to RA 9298, which is true?

a. After 3 years, subject to certain conditions, the Board may order the reinstatement of a CPA whose certificate of
registration has been revoked
b. The PRC has the authority to remove any member of the BOA for negligence, incompetence or any other just cause
c. Insanity is not a ground for proceedings against a CPA
d. No person shall be appointed as a member of the Board unless he has been in the practice of accountancy for at least
10 years among others

67. Which of the following statements is correct

a. The refresher course should be completed within 2 years from the preceding examination
b. Any candidate who fails in 2 complete examinations will no longer be allowed to take another set of examination
c. The examination in which the candidate was conditioned and the removal examination on the subject in which s/he
failed shall be counted as two complete examinations
d. Any candidate who fails in 2 complete examinations shall be disqualified from taking another examination unless
s/he submits evidence to the satisfaction of the Board that s/he enrolled in an completed at least 24 units of subjects
given in the examination

68. The Board shall submit to the PRC the ratings obtained by each candidate within how many days
a. 10 b. 5 c. 2 d. 3

69. Which of the following shall be issued to a candidate who passes the examination
a. Certificate of full compliance and PRC Id
b. Certificate of registration and professional identification card
c. Certificate of accreditation to practice public accountancy and PRC id
d. Personal identification card and a certificate of accreditation to practice public accountancy

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70. Any person who shall violate any of the provision of RA 9298 or any of its implementing rules and regulations, subject to the
approval of the PRC, shall upon conviction, be punished by
a. A fine of not more than Php 50,000
b. Lethal injection
c. A fine of not less than Php 50,000 or by imprisonment for a period of not exceeding 2 years or both
d. Imprisonment for a period of not exceeding 2 years

71. All CPA who are considered in the practice of accountancy shall abide by the requirements, rules and regulations on
continuing professional education. For this purpose, it is required that all registered CPAs must complete a minimum of
a. 120 credit units in 3 years c. 45 credit units in 3 years
b. 30 credit units in 3 years d. 15 credit units in 3 years

72. Unless otherwise exempted, registered CPAs in the practice of accountancy who have not completed the CPE requirements
shall
a. Submit a letter addressed to the Board indicating the reasons for not complying with the CPE requirements
b. Be dropped from the roster of CPAs
c. Not be allowed to renew their professional licenses
d. Present evidence to the satisfaction of the Board that they have the necessary knowledge, skills and experience to
discharge their professional responsibility

73. Who is not permitted by RA 9298 to practice public accountancy

a. General partnership c. Sole proprietorship
b. Limited liability partnership d. Corporation, whose stockholders are all CPAs

74. According to RA 9298, if a partner in a two-member partnership dies, the surviving partner may continue to practice as an
individual under the existing firm title which includes the deceased partner’s name
a. Until the partnership pay-out to the deceased partner’s estate is terminated
b. For a period of time not to exceed 5 years
c. For a period of time not to exceed 2 years
d. Indefinitely

75. Which of the following is not one of the functions of the Board
a. To adopt an official seal of the commission
b. To supervise the registration, licensure and practice of accountancy in the Philippines
c. To issue, suspend, revoke or reinstate the certificate of registration for the practice of the accountancy profession
d. To prescribed and/or adopt a code of ethics for the practice of accountancy

76. The procedure that is necessary to achieve the objective of the audit shall be determined by the
a. Those charged with governance c. Auditor
b. Client management d. Board of Accountancy

77. Which of the following is not one of the limitation of audit

a. Scope limitation imposed by the entity c. Inadequacy of records
b. Nature of evidence obtained d. Confidentiality of information

78. One of the conditions that give rise to demand for an external audit of financial statement is expertise. Which of the following
describes the meaning of expertise?
a. As experts, auditors are expected to detect all material misstatements in the financial statement
b. Auditors usually rely on the work of an expert as a basis for evaluating some assertions embodied on the financial
statements
c. Users usually lack the necessary expertise to verify the reliability of information
d. The readers of the financial statements must possess the necessary expertise to be able to understand the financial
statements

79. Which of the following does not properly describe audit limitation
a. Many assertions of financial statements cannot be audited
b. Audit conclusions are made on the basis of examining a sample of evidence
c. Fatigue and human weakness can cause auditors to overlook pertinent evidence
d. The work undertaken by the auditor is permeated by judgment

80. Which of the following does not properly describe an element of theoretical framework of auditing
a. Audit benefits the public
b. Data to be audited can be verified
c. Auditor act on behalf of management
d. Short term conflict may exist between managers who prepare the data and auditors who examine data

81. Which of the following is incorrect about responsibility for financial statements
a. Fair presentation of financial statements is an implicit part of auditors responsibility
b. Management is responsible for fair presentation of financial statement
c. Auditor is responsible for expressing an opinion on the financial statement
d. Audit of financial statement does not reduce management responsibility

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82. Which of the following statements about independent financial statement audit is incorrect
a. The risk that the auditor will fail to uncover material misstatement is eliminated when the auditor conducted the
examination in accordance with the standards
b. The phrase use to express the auditor’s opinion is “present fairly in all material respects”
c. The term “scope of the audit” refers to audit procedures deemed necessary in the circumstances to achieve objective
of audit
d. The auditor’s opinion enhances the credibility of the financial statements

83. Which of the following is the best statements of the responsibility of the auditor with respect to audited financial statement
a. The auditor responsibility on fair presentation of financial statement is limited only up to the date of the report
b. The auditor is responsible only to his qualified opinion but not for any other type of opinion
c. The auditor responsibility is confined to the expression of opinion on the audited financial statement
d. The responsibility over the financial statement rests with the management and the auditor assumes responsibility
with respect to the notes to financial statement

84. Which of the following statements does not described a condition that creates demand for audit
a. Users can directly assess the quality information
b. Conflict between the preparer of information and the user that would result to an unbiased information
c. Expertise is often required for information preparation and verification
d. Information can have substantial economic consequences for a decision maker

85. Which of the following best describes the reason why an independent auditor reports on financial statement
a. A poorly designed internal control system maybe in existence
b. A management fraud may exist and it is more likely to be detected by independent auditors
c. Different interest may exists between the company preparing the financial statement and the person using it
d. A misstatement of account balance may exists and is generally corrected as the result of the independent audit work

86. Which one of the following is not among the conditions that give rise to a demand by external user for independent audits of
financial statement
a. Consequence for making decision
b. Remoteness of user
c. Complexity of making economic decision
d. Potential conflict of interest between user and preparer of the financial statement

87. Which of the following is not one of the general principle governing the audit of financial statement
a. The auditor should comply with the Code of Ethics
b. The auditor should plan and perform the audit with an attitude of professional scepticism
c. The auditor should conduct the audit in accordance with the standards
d. The auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be
able to draw reasonable conclusions

88. The primary reason for an audit by an independent auditor is

a. To ensure that frauds will be discovered
b. To guarantee that there are no misstatement in the financial statement
c. To satisfy regulatory bodies
d. To provide increased assurance to users as to the fairness of the financial statement

89. Which of the following is not one of the limitations of an audit

a. Nature of evidence that the auditor obtains c. Human error
b. Use of testing d. Client imposed limitation

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

a. Determines the future stewardship of the management of the company whose financial statement was audited
b. Reports on the accuracy of all information in the financial statement
c. Measures and communicates financial and business data involved in financial statement
d. Involves the objective examination of and reporting on management prepared statements

91. Bugoy was hired to audit the financial statements of XXX Corporation. The function of his opinion on XXX Corporation
financial statement
a. Serve as requirement for regulatory bodies c. Lend credibility to management representation
b. Detect fraud and abuse in operations d. Improve financial decision of management

92. Which of the following is limitation of audit

a. The risk that the auditor may not possess the training and proficiency required by the engagement
b. The possibility that management may prevent the auditor from performing necessary audit procedures
c. The fact that most audit evidence is persuasive rather than conclusive in nature
d. The likelihood that the auditor may not be able to detect material misstatement in the financial statement because the
auditor is engaged only after the client year-end

93. Professional scepticism requires that an auditor assume that management

a. Offering reasonable assurance of honesty c. Neither honest nor dishonest
b. Honest, in the absence of fraud risk factors d. Dishonest until completion of audit fees
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94. The reason why independent auditor gathers evidence is because
a. To form an opinion on the financial statement c. To detect fraud
b. To evaluate internal control d. To evaluate management

95. Which of the following statements about independent financial statement audit is true
a. The auditor opinion is not an assurance as to future viability of the entity as well as the effectiveness and efficiency
with which the management had conducted the affairs of the business
b. An audit is designed to provide limited assurance that the financial statement taken as a whole are free from material
misstatement
c. That audit of financial statements relieves management of its responsibilities for the financial statements
d. The procedures required to conduct an audit in accordance with the standards should be determined by the client
who engaged the services of the auditor

96. By providing high level of assurance on audit reports on financial statements, the auditor
a. Assures the reader that fraudulent activity have been detected
b. Guarantees the fair presentation of financial statement
c. Enhances the credibility of the financial statement
d. Confirms the accuracy of the financial statement

97. Which of the following statements is not a distinction between independent and internal auditor
a. The internal auditor span of coverage goes beyond financial statement audit to encompass operation and
performance audit
b. Independent auditor represent third party users external to the audit entity, whereas internal auditors report directly
to management
c. Although independent auditor strives for both validity and relevance of evidence, internal auditors are concerned
almost exclusively with validity
d. Internal auditors are employee of the auditee whereas independent auditors are independent contractors

98. The overall objective of internal auditing is to

a. Assists members of the organization in the effective discharge of their responsibilities
b. Attest to the efficiency with which resources are employed
c. Provide assurance that financial data have been accurately recorded
d. Ascertain that controls are cost justified

99. A typical objective of an operation audit is to determine whether an entity

a. Internal control structure is adequately operating as designed
b. Financial statements present fairly the result of operation
c. Operational information is in accordance with generally accepted accounting principles
d. Specific operating units are functioning effectively and efficiently

100.Independent auditing can be best described as a

a. Regulatory activity that prevents the issuance of improper financial information
b. Professional activity that measures and communicates financial accounting data
c. Subset of accounting
d. Professional activity that attest to the fair presentation of financial statement

101.In financial statement audit, audit process should be conducted in accordance

a. PFRS b. Audit Program c. PSA d. PAS

102.An audit involves ascertaning the degree of correspondence between assertion and established criteria. In the case of financial
statement audit, which if not a valid criterion
a. IAS b. PFRS c. PSA d. PAS

103.Broadly defined, the subject matter of any audit consists of

a. Financial statement b. Economic data c. Assertion d. Operating data

104.An audit of financial statement is conducted to determine if the

a. Organization is operating effectively and efficiently
b. Auditee is following specific procedures or rules set down by some higher authority
c. Client internal control is functioning as intended
d. Overall financial statement are stated in accordance with the applicable financial reporting framework

105.Which of the following types of auditing is performed most commonly by CPA on contractual basis
a. Internal auditing b. Income tax auditing c. Government auditing d. External auditing

106.Pronouncements of AASC does not cover

a. Review engagement b. Consultancy c. Compilation d. Agreed upon procedures

107.Which of the following provide moderate level of assurance

a. Audit b. Review c. Compilation d. Agreed upon procedures

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108.The objective of a review of financial statements is to
a. State whether anything has come to auditor attention that indicates that the financial statements are not fairly
presented
b. Express an opinion on the overall financial statements
c. Assists the client in the preparation of the financial statement
d. Carry out audit procedures agreed on with the client and other users of report

109.Which of the following is not included in a review engagement of a non-public entity

a. Study and evaluation of internal control c. Procedures designed to identify unusual fluctuations
b. Inquiries of management d. Inquiries regarding subsequent events

110.When providing limited assurance that nothing came to the CPAs attention that would indicate that the financial statements
are not in accordance with financial reporting standards, the CPA should
a. Develop and audit program
b. Obtain corroborative audit evidence to support management responses to inquiries
c. Test the accounting records that identify inconsistencies with the prior year’s financial statements
d. Understand the accounting principles of the industry in which the business entity operates

111.A review does not provide assurance that the CPA will become aware of all significant matters that would be disclosed in an
audit. However, should the CPA becomes aware that information coming to his attention is incorrect, incomplete, he should
a. Downgrade the engagement to a compilation and issue appropriate report
b. Withdraw from the engagement
c. Perform a complete audit and issue a standard audit report with appropriate qualifications
d. Perform the additional procedures he deems necessary to achieve limited assurance

112.If the CPA has reason to believe that the information subject to review may be materially misstated, the CPA should
a. Carry out additional or more extensive procedures c. Withdraw from the engagement
b. Express a qualified negative assurance d. Express an adverse opinion

113.Which of the following is true of the report based on agreed upon procedures
a. The report should state that the procedures performed are limited to analytical procedures and inquiry
b. The report is restricted to those parties who have agreed to the procedures to be performed
c. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertions presented in
the financial information
d. The report states that the auditor has not recognized any basis that requires revision of financial statements

114.Engagement to apply agreed upon procedures on certain accounts within a financial statement may be accepted provided
a. The distribution of the report is limited only to specified parties involved
b. The CPA has expressed an opinion on the financial statements taken as a whole
c. The CPA provides only a limited assurance about the reliability of the financial statements
d. The CPA takes full responsibility for the adequacy of the procedures performed

115.An engagement to apply agreed upon procedure engagement may be accepted provided
a. The adequacy of the procedures to be performed will be determined by the CPA
b. The CPA has audited the financial statements of the client
c. The distribution of the report will be limited only to specified parties involved
d. The CPA is independent with respect to the client

116.Which of the following is true of the report based on agreed upon procedures
a. The report should state that the procedures performed are limited to analytical procedures and inquiry
b. The report is restricted to those parties who have agreed to the procedures to be performed
c. The report states that the auditor has not recognized any basis that requires revision of financial statements
d. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertions presented in
the financial information

117.Which of the following procedures would an accountant most likely perform in a compilation engagement
a. Test the accounting records c. Apply analytical procedure
b. Collect, classify and summarized financial information d. Assess risk components

118.The procedures employed in doing compilation are

a. Less extensive than review procedures but more extensive than agreed upon procedures
b. Designed to enable the accountant to express a limited assurance
c. Not designed to enable the accountant to express any form of assurance
d. Designed to enable the accountant to express a negative assurance

119.Which of the following procedures is normally performed in connection with a compilation engagement
a. Collect, classify and summarize financial information
b. Inquire of management about subsequent events
c. Applying analytical review procedures
d. Making inquiries of management concerning actions taken at board meeting

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120.The use of negative assurance in audit reports on financial statements is
a. Encourage by PICPA
b. Violation of the professional standards
c. Properly located in the opinion paragraph of the unqualified report
d. A help in clarifying the degree of responsibility being assumed by the auditor

121.Which of the following is not true about reports provided a CPA

a. In a compilation engagement, no assurance is expressed and the users of financial information do not derive any
benefit from the CPAs involvement
b. In the audit engagement, the auditor provides high level of assurance that the financial information is free of
material misstatement
c. In a review engagement, the CPAs moderate assurance is expressed in the form of negative assurance
d. For agreed upon procedures, the CPA provides a report on factual; findings and no assurance is expressed

122.A CPA who is not independent may issue

a. Review report b. Compilation report c. Special report d. Report expressing a qualified opinion

123.Which of the following statements about assurance engagements is not correct

a. The Philippine Standards on Assurance Engagements issued by AASC describe the objectives and elements of
assurance engagements to provide either a high, moderate or low level of assurance
b. Assurance engagements are intended to enhance the credibility of information about a subject matter by evaluating
whether the subject matter conforms in all material respects with suitable criteria
c. Not all engagements performed by professional accountant are assurance engagements
d. The subject matter of an assurance engagement may take many forms such as data, systems and processes

124.Which of the following services provides a moderate level of assurance about client financial statements
a. Compilation b. Review c. Compliance with contractual obligations d. Forecast and projections

125.Which of the following is not one of the requirements before accepting an assurance engagements
a. The responsible party and the intended user of assurance report should be from different organization
b. The practitioner should be competent and independent
c. The practitioner should accept the engagement only if the subject matter is identifiable and in the form that can be
subjected to evidence gathering procedures
d. The practitioner should accept the engagement only if the subject matter is the responsibility of another party

126.Which of the following generalization is incorrect about the reliability of evidence gathered by practitioner
a. Evidence in the form of documents and written representation is more likely to be reliable
b. Evidence from external source is more reliable than the generated internally
c. Evidence generated internally is more reliable when subject to appropriate controls within the entity
d. Evidence obtained indirectly by the practitioner is more likely reliable than that obtained directly

127.When a CPA is associated with the preparation of forecast all of the following should be disclosed, except
a. Probability of achieving the forecast c. Character of work performed
b. Sources of information d. Major assumption used

128.Given one or more hypothetical assumption, a responsible party may prepare, to the best of its knowledge and belief, an
entity’s expected financial position, result of operations and cash flows. Such prospective financial statements are known as
a. Proforma financial statements c. Partial presentation
b. Financial projections d. Financial forecast

129.An examination of financial forecast is a professional service that involves

a. Evaluating the preparation of the financial forecast and the support underlying management assumption
b. Assembling financial forecast that is based on management assumption
c. Assuming responsibility on the financial forecast
d. Limiting the distribution of the accountant reports to management and board of directors

130.When an accountant examines financial forecast that fails to disclose several significant assumptions used to prepare the
forecast, the accountant should describe the assumption in the accountant’s report and issue an
a. Qualified opinion c. Unqualified with emphasis of a matter paragraph
b. Adverse opinion d. Disclaimer of opinion
131.Error includes
a. Engaging in complex transactions that are structured to misrepresent the financial position or financial performance
of the entity
b. Concealing or not disclosing facts that could affect the amounts recorded in the financial statements
c. An incorrect accounting estimate arising from oversight or misinterpretation of facts
d. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation and
disclosure

132.Fraud involves one or more members of management or those charge with governance is referred to
a. Management fraud c. Fraudulent financial reporting
b. Employee fraud d. Misappropriation of assets

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133.The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two type of
intentional misstatement that are relevant to the auditor, misstatement arising from fraudulent financial reporting and
misstatement arising from
a. Management fraud c. Misappropriation of asset
b. Employee fraud d. Collusion within the entity or with third parties

134.The primary responsibility for the prevention and detection of fraud rests with
a. Those charged with governance of the entity
b. Management of the entity
c. Both A and B
d. The auditor

135.Which of the following statement best describes an auditor responsibility regarding misstatement
a. An auditor should obtain reasonable assurance that the financial statement taken as a whole are free from material
misstatement whether caused by fraud or error
b. An auditor shall obtain an absolute assurance that material misstatement in the financial statements will be detected
c. An auditor is responsible to detect material errors but has no responsibility to detect material fraud that is concealed
through employee collusion or management override of internal control
d. An auditor failure to detect a material misstatement resulting from fraud is an indication of noncompliance with the
requirements of the standards

136.When obtaining an understanding of the entity and its environment, including its internal control, the auditor may identify
events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Such
events or conditions are referred to as
a. Fraud conditions b. Fraud risk factors c. Fraudulent activities d. Fraud environment

137.Opportunities to misappropriate asset increase when there

a. Known or anticipated future employee layoff
b. Promotions, compensation or other rewards inconsistent with expectations
c. Recent or anticipated changes to employee compensation or benefit plan
d. Inventory items that are small in size of high value or in high demand

138.Because of the risk of material misstatement, an audit of financial statements in accordance with standards should be planned
and performed with an attitude of
a. Impartial conservatism c. Independent integrity
b. Objective judgment d. Professional scepticism

139.When planning the audit, auditor should make inquiries of management. Such inquiries should address the following except
a. Management assessment of the risk that the financial statements maybe misstated
b. Management process for identifying and responding to the risk of fraud in the entity
c. Management consideration of how an element of unpredictability will be incorporated into the nature, timing and
extent of the audit procedures to be performed
d. Management communication if any to those charged with governance regarding its processes for identifying and
responding to the risk of fraud in the entity

140.When the auditor identifies misstatement in the financial statements, the auditor should consider whether such misstatement
may be an indicator of fraud and of there is such, the auditor should
a. Consider the implication of the misstatement in relation to other aspect of the audit
b. Withdraw from the engagement
c. Communicate the information to regulatory and enforcement authorities
d. Report the matter to the person or persons who made the audit appointment

141.Documentation standard requires the auditor to document matters which are important in providing evidence to support the
audit opinion, and state that the working papers include the auditor reasoning on all significant matter which requires the
auditor judgment, together with the auditor conclusion thereon. Which of the following should be documented by the auditor
a. Fraud risk factors identified as being present during the auditor risk assessment process
b. Auditor responses to identified risk factors
c. Both fraud risk factors identifi9ed as being present during the auditor risk assessment process and the auditor
responses to any such factors
d. The standard does not require documentation of the identified fraud risk factors and the auditor responses to them

142.The following statements relate to communication of misstatement resulting from fraud to management and to these charged
with governance. Which is false
a. The auditor need not bring to the attention of those charged with governance any material weaknesses in internal
control related to the prevention and detection of fraud
b. If the auditor has identified a fraud, whether or not it results in a material misstatement in the financial statement, the
auditor should communicate these matter to the appropriate level of management on a timely basis and consider the
need to report such matter to those charged with governance
c. If the auditor has obtained evidence that indicate that fraud may exits (even if the potential effect on the financial
statement would not be material) the auditor should communicate these matters to the appropriate level of
management on a timely basis and consider the need to report such matters to those charged with governance
d. The auditor communication with those charged with governance maybe orally or in writing
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143.According to PSA 250, the term “noncompliance” as used in the standard refers to acts of omission or commission by the
entity being audited, either intentional or unintentional which are contrary to the prevailing laws and regulations. Such do not
include
a. Transaction entered into by the entity
b. Transactions entered into the name of the entity
c. Transactions entered into on the entity’s behalf by its management or employees
d. Personal misconduct by the entity’s management or employee

144.In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable
to the entity and the industry and how the entity is complying with that framework. To obtain this understanding, the
following procedures would ordinarily be considered by the auditor except
a. Use the existing understanding of the entity industry, regulatory and other external factors
b. Inquire of management concerning the entity policies and procedures regarding compliance with laws and
regulations
c. Inquire of management as to the laws and regulations that may be expected to have a fundamental effect on the
operation of the entity
d. Inspect correspondence with relevant licensing or regulatory authority

145.Which of the following statements is incorrect concerning reporting of noncompliance

a. The auditor, as soon as practicable, either communicate with those charged with governance or obtain evidence that
they are appropriately informed, regarding noncompliance that comes to the auditor attention
b. If the auditor suspect that members of senior management including members of board of directors are involved in
non-compliance, the auditor should report the matter to the next higher level of authority, if it exists such as an audit
committee or a supervisory board
c. The auditor should, as soon as practicable communicate with those charged with governance regarding
noncompliance including matters that are clearly inconsequential; or trivial
d. If in the auditor judgment, the noncompliance is believed to be intentional and material, the auditor should
communicate the finding without delay

146.If the auditor concludes that the noncompliance has a material effect on the financial statements and has not been properly
reflected in the financial statement, the auditor should express
a. A qualified or an adverse opinion c. Disclaimer of opinion
b. Qualified or disclaimer opinion d. Qualified opinion

147.If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether non-
compliance that maybe material to the financial statement has or is likely have, occurred, the auditor should express
a. Qualified or adverse opinion c. Adverse opinion
b. Qualified or disclaimer opinion d. Adverse or disclaimer of opinion

148.Under which of the circumstances below would the auditor conclude that withdrawal from the engagement is necessary
a. The auditor concludes that the non-compliance has a material effect on the financial statements and has not been
properly reflected in the financial statement
b. The auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether non-
compliance that maybe material to the financial statements has or is likely to have
c. The auditor is unable to determine whether noncompliance has occurred because of limitations imposed by the
circumstances rather than by the entity
d. The entity does not take the remedial action that the auditor considers necessary in the circumstances

149.Under to PSA 260, those matters that arise from the audit of financial statements and in the opinion of the auditor, are both
important and relevant to those charged with governance in overseeing the financial reporting and disclosure process are
called
a. Audit matters of governance interest c. Auditor findings
b. Significant audit matters d. Material misstatement in the financial statements

150.Audit matters of governance interest to be communicated to those charged with governance ordinarily include
a. Audit adjustments whether or not recorded by the entity that have, or could have material effect on its financial
statements
b. Expected modification to the auditor report
c. Material uncertainties related to events and conditions that may cast significant doubt on the entity ability to
continue as a going concern
d. All of the above

151.Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and
frauds?
A. The auditor is responsible for the failure to detect material errors and frauds only when such failure results from the
misapplication of generally accepted accounting principles.
B. The audit should be designed to provide reasonable assurance that material errors and frauds are detected.
C. The auditor is responsible for the failure to detect material receivables or observe inventories.
D. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material
errors and frauds may exist.

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152.The auditor has considerable responsibility for notifying users as to whether or not the financial statements are properly
stared. This imposes upon the auditor a duty to
A. Be an insurer of the fairness of the presentation of the financial statements.
B. Be a guarantor of the fairness in the statements.
C. Be equally responsible with management for the preparation of the financial statements.
D. Provide reasonable assurance that material misstatements will be detected.

153.Which of the following statement best distinguishes ordinary negligence from goes negligence?
A. Failure to detect material errors, whether internal control is strong or weak, suggests gross negligence.
B. Failure to exercise reasonable care denotes ordinary negligence, whereas failure to exercise minimal care indicates gross
negligence.
C. Gross negligence is most probable when the auditor fails to detect errors that occurred under conditions of strong internal
control.
D. The more material the undetected error is, the greater the likelihood of ordinary negligence being committed.

154.The auditor’s responsibility for failure to detect fraud arises

A. When such failure clearly results from non-compliance to generally accepted auditing standards.
B. Whenever the amounts involved are material.
C. Only when the examination was specifically designed to detect fraud.
D. Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the
auditor.

155.Which of the following statements is correct concerning the auditor’s responsibility with respect to noncompliance with laws
and regulations? An auditor must design tests to:
A. Obtain reasonable assurance of detecting material direct-effect noncompliance with laws and regulations.
B. Detect both immaterial and material direct-effect noncompliance with laws and regulations.
C. Detect both direct-effect and indirect-effect noncompliance with laws and regulations.
D. Detect both material direct-effect and material indirect-effect noncompliance with laws and regulations.

156.Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the
wrong type of audit opinion is issued, the audit firm.
A. Has failed to follow Philippine standards on auditing (PSAs).
B. Deserves to lose the lawsuit.
C. Should be asked to defend the quality of the audit.
D. Should not be held responsible for the financial loss suffered by others.

157.What is the independent auditor’s responsibility prior to the completion of fieldwork when he believes that a material fraud
may have occurred?
A. Notify the appropriate law enforcements authority.
B. Investigate the persons involved, the nature of the fraud, and the amounts involved.
C. Reach an understanding with the appropriate client representatives as to the desired nature and extent of subsequent audit
work.
D. Continue to perform normal audit procedures and write the audit report in such a way to disclose adequately the
suspicions of material fraud.

158.The risk that an audit will fail to uncover a material misstatement is eliminated.
A. If client has good internal control.
B. If client follows generally accepted accounting principles.
C. When the auditor has complied with generally accepted auditing standards.
D. Under no circumstances.

159.The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of
A. The assessment of whether to accept the audit engagement.
B. Understanding the entity’s internal control structure.
C. The tests of controls.
D. The test of transactions.

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

161.A CPA is criminally liable if he

A. Refuses to turn over the schedules or working papers prepared by the client staff to the client
B. Performs an audit in a negligent manner
C. Intentionally allows an omission of a material fact required to be stated in a financial statement
D. Was not able to submit the audited financial statements on time
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162.Audit standards require an auditor to:
A. Perform procedures that are designed to detect all instances of fraud
B. Provide reasonable assurance that the financial statements are not materially misstated
C. Issue an unqualified opinion only when the auditor is satisfied that no instances of fraud have occurred
D. Design the audit program to meet financial statement users expectations concerning fraud

163.If a specific information comes to an auditor’s attention that implies the existence of possible noncompliance with laws and
regulations that could have a material, but indirect effect on the financial statements, the auditor should next
A. Apply audit procedures specifically directed to ascertaining whether a noncompliance with laws and regulations has
occurred
B. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities
C. Report the matter to an appropriate level of management at least one level about those involved
D. Discuss the evidence with the client’s audit committee, or others with equivalent authority

164.Which of the following statements is true?

A. It is usually easier for the auditor to uncover irregularities than errors
B. It is usually easier for the auditor to uncover errors than irregularities
C. It is usually equally difficult for the auditor to uncover errors or irregularities
D. Usually, none of the given statements is true

165.An auditor who believes that a material irregularity may exist should initially
A. Discuss the irregularity to the person who caused it
B. Discuss the matter with a higher level of management
C. Withdraw from the engagement
D. Consult legal counsel
The End!

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