PRELIM AUDITING

CORRECT QUESTIONS WITH ANSWERS

GOODLUCK NALANG SA BUHAY

According to PSA 200, what is the objective of an audit of financial statements?

a) To express an opinion whether the financial statements are prepared, in all material respects, in accordance with
GAAP.
b) All are correct
c) To express an opinion whether the financial statements are prepared, in all material respects, in accordance with
an identified GAAS.
d) To express an opinion whether the financial statements are prepared, in all material respects, in accordance with
an identified PSA.
e) To express an opinion whether the financial statements are prepared, in all material respects, in accordance with
an identified financial reporting framework.
According to PSA 120, a compilation presents information, in the form of financial statements, that is, the representation
of management. The accountant who prepares the compilation undertakes to express
a) limited assurance on the statements
b) no assurance on the statements
c) full assurance on the statements
d) minimal assurance on the statements

The primary reason for an audit of financial statements is to

a) Provide increased assurance to users as to the fairness of the financial statements
b) Relieve management of the responsibility for the financial statements
c) Satisfy government regulatory requirements
d) Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be detected
The primary objective of the ordinary examination of the financial statements by a CPA is the expression of an opinion on
the
a) fairness which the financial statements present financial position and results of operations
b) conformity of the financial statements with generally accepted auditing standards applied on a basis consistent
with that of the preceding year
c) competence of management in accounting matters which is implied by whether the opinion is qualified or not
d) conformity of the statements with the books of accounts

Which of the following best describes the reason why an independent auditor reports on financial statements?
a) Different interests may exists between the company preparing the statements and the persons using the
statements.
b) A poorly designed internal control system may be in existence.
c) A management fraud may exist and it is more likely to be detected by the independent auditors.
d) A misstatement of account balances may exist and is generally corrected as a result of the independent auditor's
work.
An independent audit aids in the communication of economic data because the audit:
a) Assures the readers of financial statements that any fraudulent activity has been corrected
b) Guarantees that financial data are fairly presented
c) Confirms the accuracy of management's financial representations
d) Lends credibility to the financial statements

Given the following statements:

Statement 1: An audit in accordance with PSAs is designed to provide reasonable assurance that the financial statements
taken as a whole are free from material misstatements.
Statement 2: The auditor should not represent compliance with PSAs unless he/she has complied with all of the PSAs
relevant to the audit.

a) Only statement 1 is true

b) Both statements are true
c) Both statements are false
d) Only statement 2 is true

The report issued in attestation engagement may provide positive or negative assurance to the reader. Which of the
following types of engagements would provide positive assurance?
a) a review
b) a compilation
c) an agreed-upon procedures engagement
d) an examination

A CPA's opinion on financial statements is of little value to those who relied on him unless he
a) serves his clients with professional concern for their bests interests
b) issues an unqualified opinion
c) maintains a program of continuing professional development
d) maintains independence

Which of the following procedures is not included in a review engagement of a nonpublic entity?

a) Any procedures designed to identify relationships among data that appear to be unusual
b) Inquiries regarding events subsequent to the balance sheet
c) A study and evaluation of internal control
d) Inquiries of management
The review of a company's financial statements by a CPA firm:
a) is substantially less in scope of procedures than an audit
b) requires detailed analysis of the major accounts
c) is of similar scope as an audit and adds similar credibility to the statements
d) culminates is issuance of a report expressing the CPA's opinion as to the fairness of statements

The criteria for evaluating quantitative information vary. For example, in the audit of historical financial statements by the
CPA firms, the criteria are usually
a) generally accepted auditing standards
b) acceptable financial reporting framework
c) regulations of the Securities and Exchange Commission
d) regulations of the Bureau of Internal Revenue

Although the CPA does not guarantee his findings, his opinion is nevertheless valuable to various third parties. The value
of the CPA's opinion lies in the fact that

a) He has gathered sufficient appropriate evidential matter to support his opinion

b) He has the qualifications required by law to be a CPA
c) He is under the supervision of the Board of Accountancy
d) He has followed generally accepted auditing standards

Which of the following is an incorrect phrase?

a) Auditing subjectively obtains and evaluates evidence

b) Auditing is a systematic process
c) Auditing communicates results to interested users
d) Auditing evaluates evidence regarding assertions

Which of the following can be called an assurance service?

a) Personal financial planning

b) Performance measurement
c) System design and installation
d) Tax planning
What is the essence of the external audit function?

a) To detect fraud
b) To examine individual transactions so that the auditor may certify their validity
c) To determine whether the client's financial statements are fairly stated
d) To assure the consistent application of correct accounting procedures

In determining the primary responsibility of the external auditor for the audit of a company's financial statements, the
auditor owes primarily allegiance to:

a) The audit committee of the company being audited because that committee is responsible for coordinating and
reviewing all audit activities, within the company
b) Stockholders, creditors, and the investing public
c) The Securities and Exchange Commission because it determines accounting principles and audit responsibilities
d) The management of the company being audited because the auditor is hired and paid by management
The following statements relate to audit evidence, except:

a) The competence of audit is likely improved by selecting a larger sample size or different population items.
b) The evidence obtained directly by the auditor through physical examination, computation, observation, or
confirmation is more competent than an information obtained indirectly.
c) The evidence obtained from a source outside the client entity is more persuasive than that one obtained from
within.
d) When a client’s accounting and internal controls are effective, the evidence obtained is more reliable.

Requirements for training, independence and due professional care are included in which group of the generally accepted
auditing standards?

a) Quality control.
b) Fieldwork.
c) Reporting.
d) General.

Competence as a certified public accountant includes all of the following except

a) Having the technical qualifications to perform an engagement.
b) Warranting the infallibility of the work performed.
c) Consulting others if additional technical information is needed.
d) Possessing the ability to supervise and evaluate the quality of staff work.
Which of the following statements is not a distinction between independent auditors and internal auditors?
a) Internal auditors are employees of the auditee, whereas independent auditors are independent contractors
b) The internal auditors span of coverage goes beyond financial auditing to encompass operational and performance
auditing
c) Independent auditors represent third party users external to the auditee entity, whereas internal auditors report
directly to management
d) Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned
almost exclusively with validity
Which of the following is incorrect regarding the Philippine Standards on Assurance Engagements (PSAE)?

a) It provides an overall framework for assurance engagements intended to provide either a high or moderate level of
assurance.
b) It provides basic principles and essential procedures for engagements intended to provide a moderate level of
assurance.
c) If no specific standards exist for an assurance engagement, PSAE apply.
d) When a professional accountant is engaged to perform an assurance engagement for which specific standards
exist, those standards apply.
An assurance engagement should exhibit the following elements except
a) Appropriate professional fee
b) A conclusion
c) A three party relationship
d) A subject matter

Which of the following is not required by the Generally Accepted Auditing Standards that states that due professional care
is to be exercised in the performance of the audit?

a) Critical review of the audit work performed at every level of supervision

b) Observance of the standards of field work and reporting
c) Responsibility for losses because of errors of judgment
d) Degree of skill commonly possessed by others in the profession.
The review of a company's financial statements by a CPA firm:

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

Generally Accepted Auditing Standards (GAAS) and Philippine Standards on Auditing (PSA) should be looked upon by
practitioners as:

a) Ideals to work towards, but which are not achievable

 b) Maximum standards which denote excellent work.
c) Minimum standards of performance which must be achieved on each audit engagement.
d) Benchmark to be used on all audits, reviews, and compilations.

The auditor is required to maintain professional skepticism throughout the audit. Which of the following statements
concerning professional skepticism is false?

a) Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained.
b) A belief that management and those charged with governance are honest and have integrity relieves the auditor of
the need to maintain professional skepticism.
c) Maintaining professional skepticism throughout the audit reduces the risk of in using inappropriate assumptions in
determining the nature, timing and extent of the audit procedures and evaluating the results thereof.
d) Professional skepticism is necessary to the critical assessment of audit evidence.

Which of the following describes “high level of assurance”?

a) It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the
subject matter conforms in all material respects with identified suitable criteria
b) It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be
satisfied that the subject matter is plausible in the circumstances
c) It refers to the professional accountant having obtained evidence based on procedures agreed upon between the
practitioner and the intended users to be satisfied that findings be reported to the intended users
d) it refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge
of any required modifications to be made in the financial statements in order for them to conform of prescribed
criteria

NOT SURE

There is a broad range of engagements to provide a high or moderate level of assurance. Such engagements may include
1. Engagements to report on a broad range of subject matters covering financial and non-financial information
2. Attest and direct reporting engagements
3. Engagements to report internally and externally
4. Engagements in the private and public sector

a) 1,2,3,and 4
b) 1 and 2 only
c) 2 only (WRONG)
 d) 1,2 and 3

What should be done if a CPA does not consider and apply the guidance included in a relevant practice statement of a
certain engagement?

a) Any of the choices

b) The CPA must be able to disclose the information to all parties involved in the engagement contract.
c) The CPA should be prepared to explain how the basic principles and essential procedures in the standard(s)
addressed by the practice statement(s) have been complied with.
d) This will be a ground for suspension or removal in the roster of CPAs in the Philippines, thereby, the CPA shall
immediately seek for a legal advice on the matter.(WRONG)

Which of the following is not an example of subject matter information?

a) Presentation and disclosures

b) Effectiveness
c) Capacity of a plant facility
d) All of the choices are subject matter information (WRONG)

As used in auditing, which of the following statements best describes "assertions"?

a) Assertions are the auditor's findings to be communicated in the audit report. (WRONG)
b) Assertions are the representations of management as to the reliability of the information system.
c) Assertions are the representations of management as to the fairness of the financial statements.
d) Assertions are found only in the footnotes to the financial statements.

A person is not deemed to be engaged in professional accounting practice if

a) He offers or renders bookkeeping services to more than one client.

b) He installs and revises accounting systems for more than one client.
c) He merely holds himself out as skilled in the science and practice of accounting and qualified to render services as
a CPA.
d) He merely offers to render services as a CPA to the public, but does not actually render such services.(WRONG)

Which of the following best describes the operational audit?

a) It requires the constant review by internal auditors of the administrative controls as they relate to operations of the
company
b) It attempts and is designed to verify the fair presentation of a company’s results of operations
 c) It concentrates on implementing financial and accounting control in a newly organized company
d) It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of
controls.

Which of the following types of audits are most similar?

a) Operational audits and compliance audits.

b) Independent financial statement audits and operational audits.
c) Internal audits and independent financial statement audits.
d) Compliance audits and independent financial statement audits.

A government organization engages a practitioner to perform an assurance engagement regarding a report about a private
company’s sustainability practices that the organization has prepared and is to distribute to intended users. What is the
extent of responsibility of the responsible party?

a) Subject Matter Information only

b) Subject Matter only
c) Neither subject matter nor subject matter information
d) Both subject matter and subject matter information (WRONG)

The first standard of fieldwork, which states that the work is to be adequately planned, and assistants, if any, are to be
properly supervised, recognizes that

a) Early appointment of the auditor is advantageous both to the auditor and to the client.
b) Acceptance of an audit engagement after the close of the client's fiscal year is generally not permissible.
c) Performance of substantial parts of the engagement is necessary at interim dates.
d) Appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion.
(WRONG)

For an entity's financial statements to be presented fairly in conformity with the applicable financial reporting framework,
the principles selected should

a) reflect transactions in a manner that presents the financial statements within a range of acceptable limits
(WRONG)
b) be approved by the Auditing and Assurance Standards Council (WRONG)
c) match the principles used by most other entities within the entity's particular industry (WRONG)
d) be applied on a basis consistent with those followed in the prior year
Most of the independent auditor's work in formulating an opinion on financial statements consists of:

a) Studying and evaluating internal control (WRONG)

b) Comparing recorded accountability with assets
c) Obtaining and examining evidential matter
d) Examining cash transactions

Which of the following statements is correct concerning both engagement to compile and an engagement to review an
entity's financial statements?

a) The accountant expresses no assurance on the financial statements

b) The accountant should obtain a written management representation letter
c) The accountant does not contemplate obtaining an understanding of the internal system (WRONG)
d) The accountant must be independent in fact and in appearance

AUDITING
1. Which of the following is not considered as a valid source of information about the client's processes?
a. A tour of the client’s facility
b. Review of client’s budget
c. Confirmation from third parties
d. Management Inquiry

2. Which of the following will probably do by the auditor prior to accepting a new client?
a. Perform a peer review on the potential client in accordance with the professional standards.
b. Review the working papers of the predecessor auditor with the consent of the client.
c. Prepare a draft audited financial statement of the auditee.
d. With the permission from the prospective client, contact the predecessor auditor to determine if there are any
disagreements between the client and the audit firms.

3. Auditors try to identify predictable relationships when using analytical procedures. Which of the following
accounts would most likely yield the highest level of evidence regarding relationships that involve transactions?
a. Accounts receivable
b. Advertising expense
c. Accounts payable
d. Salary expense

4. As part of audit planning, CPAs should design audit programs for each individual audit and should include
steps and procedures so
a. detect and eliminate fraud
b. ensure that only material items are audited
c. increase the amount of management information available
d. provide assurance that the objectives of the audit are met
5. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement
should NOT be accepted?
a. There are significant related party transactions that management claims occurred in the ordinary course of
business.
b. Internal control activities requiring the segregation of duties are subject to management override.
c. Management continues to employ an inefficient system of information technology to record financial
transactions.
d. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

6. Which of the following does an auditor least likely perform in assessing audit risk?
a. Understand the economic substance of significant transactions completed by the client.
b. Understand the entity and the industry in which it operates.
c. Gather audit evidence in support of recorded transactions.
d. Obtain an understanding of the client's system of internal control.

7. The following are statements for analytical procedures during the audit planning stage except:
a. flag individual transactions for further review.
b. involves comparison of financial data to arrive into a meaningful information.
c. applied to identify unusual circumstances that the auditor may need to investigate further.
d. required for audits of financial statements.

8. What is the most likely course of action to be taken by an auditor in assessing management integrity?
a. Research the background and histories of officers
b. Review the bank reconciliation
c. Review the minutes of the board of director’s meeting
d. Tour the plant

9. Which of the following is correct regarding the nature of further audit procedures?
a. The auditor is required to obtain audit evidence about the accuracy and completeness of information produced
by the entity’s information system when that information is used in performing audit procedures.
b. Certain audit procedures may be more appropriate for some assertions than other.
c. The higher the auditor’s assessment of risk, the less reliable and relevant is the audit evidence sought by the
auditor from substantive procedures.
d. The nature of further audit procedures does not refer to their purpose and their type.

10. After an auditor had been engaged to perform the first audit for a not publicly listed entity, the client
requested to change the engagement into a review. In which of the following situations would there be a
reasonable basis for the auditor to comply with the client’s request?
a. The audit is substantially complete and the auditor determined that an unqualified opinion is warranted but
there is a disagreement concerning audit fee.
b. The auditor is prohibited by the client from corresponding with the client’s legal counsel.
c. The client’s bank required an audit before committing a loan, but the client subsequently acquired alternative
financing.
d. Management refuses to sign the client representation letter.

11. Which of the following best describes the purpose of an engagement letter?
a. The engagement letter relieves the auditor of some responsibilities for the exercise of due care.
b. By clearly defining the nature of engagement, the engagement letter helps avoid and resolve
misunderstandings between the CPA and the client regarding the precise nature of the work to be performed
and the type of report to be issued.
c. The engagement letter conveys to the management the detailed steps to be applied in the audit process.
 d. The engagement letter should be signed by both the client and the CPA and should be used only for
independent audits.

12. The type of transactions that ordinarily have high inherent risk because they involve management judgment or
assumptions are referred to as
a. routine transactions
b. related party transactions
c. estimation transactions
d. nonroutine transactions

13. The risk that the auditor may unknowingly fail to appropriately modify unqualified opinion on financial
statements that are materially stated is referred to as
a. audit risk
b. detection risk
c. information risk
d. business risk

14. Which of the following statements is true? If control risk is assessed of the maximum, the
a. nature of related substantive tests should not be changed regardless whether the control risk is at the
maximum or below the maximum level
b. nature of related substantive tests should be changed from more to less effective
c. extent of related substantive tests should he changed from a larger to a smaller sample
d. timing of related substantive tests should be changed from interim date to a year-end

15. Which of the following is true?

a. Recalculation is the most important test of internal control
b. Direction of test of controls really matters on the performance of such
c. Test of control can always be ignored since it is the substantive testing which is always required
d. After identifying specific control activities, the auditor will only choose those controls from which he thinks
can be relied upon to reduce substantive testing

16. Control testing is performed in order to determine whether or not

a. The assessed level of control risk can be reduced.
b. Necessary controls are absent.
c. Incompatible functions exist.
d. Material peso errors exist.

17. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all
of the following except
a. Design substantive tests
b. Make observations
c. Make inquiries
d. Inspect documents and records

18. Test of controls are used to test whether controls are

a. Operating effectively
b. Placed in operation (implemented)
c. Properly accumulated into balance sheets totals
d. Properly documented by the client

19. In determining the effectiveness of an entity's internal controls relating to the existence or occurrence assertion
for payroll transactions, an auditor most likely would inquire about and:
 a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
b. Inspect evidence of accounting for prenumbered payroll checks.
c. Recompute the payroll deductions for employee fringe benefits.
d. Verify the preparation of the monthly payroll account bank reconciliation.

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

21. An auditor may compensate for a weakness in internal control by increasing the
a. Extent of tests of controls
b. Preliminary judgment about audit risk
c. Extent of analytical procedures
d. Level of detection risk

22. In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor
most likely would
a. Review the entity’s descriptions of inventory policies and procedures.
b. Perform test counts of inventory during the entity’s physical count.
c. Analyze the liquidity and turnover ratios of the inventory.
d. Perform analytical procedures designed to identify cost variances.

23. An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide
assurance that
a. Payments to employees are computed at authorized rates.
b. Employees work the number of hours for which they are paid.
c. Separation of duties exists between the preparation and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are operating effectively.

24. Assessing control risk at a low level most likely would involve
a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances.
c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at yearend.
d. Identifying specific controls relevant to specific assertions.

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

26. Which statement is incorrect concerning the relevance of various types of controls to a financial audit?
a. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other
controls may also be relevant.
b. An auditor needs to have understanding of entity’s controls.
c. Controls over reliability of financial reporting are of primary importance, while controls over the
safeguarding of assets and liabilities may also be relevant.
d. All controls are ordinarily relevant to an audit.
27. An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet
without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the
employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices
and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items
for testing from the file of all
a. Cash disbursements.
b. Vendors’ Invoices
c. Approved vouchers.
d. Receiving reports.

28. An auditor assesses control risk because it

a. Is relevant to the auditor's understanding of the control environment.
b. Affects the level of detection risk that the auditor may accept.
c. Indicates to the auditor where inherent risk may be the greatest.
d. Provides assurance that the auditor's materiality levels are appropriate.

29. Which of the following procedures concerning accounts receivable would an auditor most likely perform to
obtain evidence in support of an assessed level of control risk below the maximum?
a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts
receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable.

30. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections probably should be delegated to the
a. Chief Accountant
b. Treasurer
c. Cashier
d. Internal Auditor

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

32. Which of the following departments most likely would approve changes in pay rates and deductions from
employee salaries?
a. Personnel
b. Treasurer
c. Controller
d. Payroll

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

34. Which of the following procedures most likely would provide an auditor with evidence about whether an
entity's internal control activities are suitably designed to prevent or detect material misstatements?
a. Observing the entity's personnel applying the activities.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Reperforming the activities for a sample of transactions.

35. In obtaining an understanding of an entity’s internal controls relevant to audit planning, an auditor is required
to obtain knowledge about the
a. Design of the controls pertaining to internal control components.
b. Effectiveness of controls that have been implemented.
c. Controls related to each principal transaction class and account balance.
d. Consistency with which controls are currently being applied.

36. After obtaining an understanding of internal control and assessing the risk of material misstatement, an
auditor decided to perform tests of controls. The auditor most likely decided that:
a. Additional evidence to support a further reduction in the risk of material misstatement is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
c. There were many internal control weaknesses that could allow misstatements to enter the accounting system.
d. An increase in the assessed level of the risk of material misstatement is justified for certain financial
statement assertions.

37. Which of the following procedures would an auditor most likely perform to test controls relating to
management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
a. Observe the consistency of the employee's use of cash registers and tapes.
b. Inquire about employee's access to recorded but undeposited cash.
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
d. Compare the cash balance in the general ledger with the bank confirmation request.

38. During the consideration of internal control in a financial statement audit, an auditor is obligated to
a. Determine whether the control activities relevant to audit planning have been implemented.
b. Not to understand the internal control and the information system.
c. Perform procedures to find fraud from the design of internal control.
d. Search for significant deficiencies in the operation of the internal control.

39. The element of the audit planning process most likely to be agreed upon with the client before implementation
of the audit planning strategy is the determination of the
a. Procedures to be undertaken to discover litigation, claims and assessments.
b. Pending legal matters to be included in the inquiry of the client’s attorney.
c. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
d. Timing of inventory observation procedures to be performed.

40. Of the following procedures, which is the most important that an auditor should use when performing
analytical review of the income statement?
a. Ascertain that the net income amount in the statement of changes in financial position (statement of cash
flows) agrees with the net income amount in the income statement.
b. Select sales and expense items and trace amounts to related supporting documents.
 c. Obtain from the proper client representatives, inventory certificates for the beginning and ending inventory
amounts that were used to determine cost of sales.
d. Compare actual revenues and expenses with the corresponding figures of the previous year and investigate
significant differences.

41. The auditor perceives internal control over sales and cash receipts as excellent; but internal control over purchases,
inventory, and cash payments is considered weak. Which of the following most likely will be auditor’s response?
a. Rely on external evidence for the expenditure cycle, while accepting internal evidence as reliable for the
revenue cycle.
b. Raise the individual item materiality threshold.
c. Lower the individual item materiality threshold.
d. Rely on the external evidence for the revenue cycle, while accepting internal evidence as reliable for the
expenditure cycle.

42. Which of the following statements is false with regard to the relationship among audit risk, audit evidence, and
materiality?
a. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
b. There is a direct relationship between materiality and combined risks.
c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
d. Aggregate materiality thresholds should change under conditions of changing risk levels.

43. Tests of internal control revealed it to be much more effective than the auditor had perceived during the
preliminary planning stages. Which of the following most likely will be the auditor’s response?
a. Raise the individual item materiality threshold.
b. Lower the individual item materiality threshold.
c. Lower the aggregate materiality threshold
d. Raise the aggregate materiality threshold

44. Although salespersons are granted 5% commissions on all sales, the current year’s rate, based on unaudited
sales and commissions data, is 3%. Internal control over sales and cash receipts is strong. What will be the
appropriate auditor’s response?
a. Raise the individual item materiality threshold
b. Lower the individual item materiality threshold
c. Lower the aggregate materiality threshold
d. Consider internal evidence as possessing enhanced reliability

45. Which of the following is not a purpose served by the application of analytical procedures?
a. As part of audit planning to assist in locating significant changes in revenues and expenses.
b. To provide a basis for lowering materiality thresholds where significant earnings inflation is indicated.
c. To determine the economic substance of related party transactions.
d. As part of audit review to determine that all significant abnormalities have been resolved to the auditor's
satisfaction.

46. If the auditors assessed level of control risk below the maximum
a. None of the choices
b. Detection risk is at low level
c. Detection risk is at high level
d. No detection risks

47. As part of the evaluation of a client's system of internal control, to determine whether the necessary procedures
are prescribed and have been implemented satisfactorily, an auditor must
 a. obtain an understanding of internal control
b. develop questionnaires and checklists
c. evaluate administrative policies
d. perform tests of internal control procedures

48. The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control
risk are called
a. a walk-through
b. tests of transactions
c. tests of controls
d. analytical tests

49. After obtaining an understanding of an entity's internal controls and assessing control risk, an auditor may
next:
a. Evaluate whether control activities can detect material misstatements
b. Perform tests of controls to verify management's assertions that are embodied in the financial statements
c. Discontinue searching for reportable condition
d. Consider whether he can reduce the assessed level of control risk further

50. Weak internal control affects the nature, timing and extent of substantive testing. Which of the following is
false?
a. The extent of evidences from substantive test will be lesser
b. The nature of substantive test will be purely substantive.
c. None of the choices
d. The timing of the substantive test will be at year-end.

51. An audit plan is best described as:

a. generic document that auditing firms have developed to lead the process of the audit through a systematic and
logical manner.
b. document that provides an overview of the company and a general plan for the audit work to be
accomplished, timing of the work and other matters of concern to the audit. (B sagot sa net pero mali ako sa
quiz)
c. detailed plan of analytical procedures and all substantive tests to be performed in the course of the audit.
d. budget of the time that should be necessary to complete each phase of the audit procedures.

52. The primary reason why an engagement letter is submitted by audit firms prior to starting the work is that it
a. provides an insurance policy both the firm and its client.
b. defines the firm’s policies and procedures regarding new clients.
c. communicates the type of opinion that will be rendered on the engagement.
d. clarifies the responsibilities of the management and those of the audit firm.

53. Which of the is correct regarding extent of further audit procedures?

a. The extent of an audit procedure is not determined by the judgment of the auditor after considering the
materiality, the assessed risk, and the degree of assurance the auditor plans to obtain.
b. The auditor normally decreases the extent of audit procedures as the risk of material misstatement increases.
c. Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the
specific risk.
d. Extent does not include the quantity of a specific audit procedure to be performed.

54. Which of the following concepts about materiality is incorrect?

a. Materiality does not apply if internal control is highly effective.
b. Materiality is more closely related to fieldwork and reporting standards than general standards.
 c. Materiality is a matter of professional audit judgment.
d. Materiality is directly related to the acceptable level of detection risk.

55. Which of the following is incorrect on materiality?

a. Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and
presentation of financial statements.
b. All of the choices
c. One of the most important reason why materiality is not defined in the PSA is because the principle of
materiality is first and foremost a financial reporting, rather than an auditing, concept.
d. PSA 320 on materiality in planning and performing an audit clarifies the definition for materiality.

56. As the acceptable level of detection risk decreases, an auditor may

a. reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. postpone the planned timing of substantive tests from interim dates to the year-end.
c. eliminate the assessed level of inherent risk from consideration as a planning factor.
d. lower the assessed level of control risk from the maximum level to below the maximum.

57. Audit risk components consist of inherent, control and detection risks. Which of these is(are) dependent
variable(s)?
a. Inherent risk only
b. Control risk only
c. Detection risk
d. Risks of material misstatements

58. Which of the following types of risk significantly affected by the nature, timing and extent of substantive
auditing procedures?
a. Inherent risk alone
b. Control risk alone
c. Detection risk
d. Risks of material misstatement

59. These are misstatements are auditors’ best estimate of misstatements in population, involving the projection of
misstatements identified in audit samples to the entire population from which the samples were drawn.
a. Factual
b. Judgmental
c. Actual
d. Projected

60. Preplanning the audit involves several key activities. Which of the following would not be included in the
preplanning phase of an audit?
a. Determining the likelihood of issuing an unqualified audit opinion on the client’s financial statements
b. Understanding the client’s reasons for obtaining an audit
c. Investigating the client’s background
d. Communicating with the prospective client’s prior auditor to inquire about any disagreements with the client

61. Which of the following statements concerning materiality thresholds is incorrect?

a. Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning audit risk.
b. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality
threshold.
c. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial
statements is referred to as a "materiality threshold."
 d. Materiality thresholds may change between the planning and review stages of the audit. These changes may
be due to quantitative and/or qualitative factors.

62. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and
materiality?
a. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
d. Aggregate materiality thresholds should not change under conditions of changing risk levels.

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

64. Which of the following controls most likely would assure that all billed sales are correctly posted to the
accounts receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. Each shipment on credit is supported by a prenumbered sales invoice.
d. The accounts receivable ledger is reconciled daily to the control account in the general ledger.

65. Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible
employee should
a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered sales invoice.
c. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.

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

67. The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping
customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most
likely would compare the:
a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually
recorded.

68. An auditor judges an item to be immaterial when planning an audit. However, the auditor may still include the
item if it is subsequently determined that
a. miscellaneous income is affected
b. sufficient number of staff is available
c. related evidence is reliable
d. adverse effects related to the item are likely to occur
69. The auditor should determine the overall responses to address the risks of material misstatement at the
financial statement level. Such responses least likely to include:
a. Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
b. Performing substantive procedures at an interim date rather than at year-end.
c. Assigning more experienced staff or those with special skills or using experts.
d. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit
evidence.

70. Which of the following is a component of audit planning?

a. Performing recalculations on interest expense.
b. Making arrangements with the client concerning the timing of audit fieldwork and use of the client’s staff in
completing certain phases of the examination.
c. Observing the client’s annual physical inventory taking and making test counts of selected items.
d. Obtaining sufficient and appropriate audit evidence through test of entity’s internal control.

71. Which of the following is correct concerning performance materiality on an audit?

a. It should be established at beginning of an audit and not subject to any revision thereafter.
b. It should be established at separate amounts for the various financial statements.
c. It will ordinarily be less than financial statement materiality.
d. It need not be documented in the working papers.

72. Of the following procedures, which is not considered a procedure in obtaining an understanding of the client’s
environment?
a. Studying the internal control over cash receipts and disbursements
b. Reading trade publications to gain a better understanding of the client’s industry (XXX_
c. Touring the client’s manufacturing and warehousing facility to gain a clearer understanding of the entity’s
operation
d. Confirming customer accounts receivable for the existence and valuation

73. Which of the following is correct regarding analytical procedure?

a. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about
plausible relationships that are reasonably expected to exist.
b. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and
amounts, ratios, and trends that might indicate matters that have financial statement and audit implications, all
of which are from routine transactions of the auditee.
c. When such analytical procedures use data aggregated at a high level (which is often the situation), the results
of those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.
d. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts
yields unusual or unexpected relationships, the auditor does not consider those results in identifying risks of
material misstatements.

74. Which of the following is correct regarding significant risks that require special audit consideration?
a. The auditor includes the effect of identified controls related to risk to determine whether the nature of the risk,
the likely magnitude of the potential misstatement including the possibility that the risk may give rise to
multiple misstatements, and the likelihood of the risk occurring are such that require special audit
considerations.
b. Significant risks are often derived from business risks that may result in a material misstatement.
c. The auditor should not determine which of the identified risks are, in the auditor’s judgment require special
audit consideration.
 d. Routine, non-complex transactions that are subject to systematic processing are most likely to give rise to
significant risks because they have higher inherent risks.

75. Which of the following conditions does not increase inherent risk?
a. The client has entered into numerous related party transactions during the year under audit.
b. Internal control over shipping, billing, and recording of sales revenue is weak.
c. The client has lost a major customer accounting for approximately 30% of annual sales.
d. Those charged with governance approved significant amount of bonus for the Chief Executive Officer as well
as attractive share option plan.

76. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment
about materiality?
a. The results of the internal control questionnaire.
b. The anticipated sample size of the planned substantive tests.
c. The entity’s annualized interim financial statements.
d. The contents of the management representation letter.

77. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of
internal control is
a. Inherent Risk
b. Control Risk
c. Detection Risk
d. Audit Risk

78. Which of the following statements is false?

a. Detection risk is the likelihood that a material misstatement will not be prevented or detected by the used of
auditor’s-controlled procedures.
b. Control risk is the likelihood that an auditor’s procedures lead to an improper conclusion that no material
misstatement exists in an assertion when in fact such a misstatement does exist.
c. Inherent risk is assessed using various analytical techniques, available information on the company and its
industry, as well as, by using overall auditing knowledge.
d. Inherent risk and control risk differ from detection risk in that they exist independently of the audit, whereas
detection risk relates to the effectiveness of the auditor’s procedures.

79. Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when
significant risk is found to exist?
a. Apply increased professional skepticism about material transactions.
b. Increase the assessed level of dependent risk.
c. Obtain increased evidence about the appropriateness of management's selection of accounting principles.
d. Assign personnel with particular skill to areas of high risk.

80. The understanding between the client and the auditor as to the degree of responsibilities to be assumed by each
is normally set forth thru
a. comfort letter
b. engagement letter
c. representation letter
d. management letter

81. The element of the audit planning process most likely to be agreed upon with the client before the
implementation of audit strategy is the determination of the
a. pending legal matters to be included in the inquiry of the client’s legal counsel
b. methods of statistical sampling to be used in confirming accounts receivable
 c. schedules and analyses to be prepared by the client’s staff
d. evidence to be gathered to provide a sufficient basis for the auditor’s opinion

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

83. Which of the following statements is correct regarding obtaining an understanding of the entity and its
environment?
a. The depth of the overall understanding that is required by the auditor in performing the audit is at least equal
to that possessed by management in managing the entity.
b. Understanding of the entity and its environment establishes a frame of reference within which the auditor
plans the audit and exercises professional judgment about assessing risks of material misstatements in the
financial statements and not responding to those risks throughout the audit.
c. Obtaining an understanding of the entity and its environment is not an essential aspect of performing an audit
in accordance with PSAs.
d. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess
the risks of material misstatements in the financial statements and to design and perform further audit
procedures.

84. If the inherent risk is low and control risk is medium, detection risk is
a. highest
b. lower
c. medium
d. higher

85. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable
person who will rely on the financial statements.
d. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.

86. Which type of risk does the management of the company have the most control over the short term?
a. Detection risk
b. Significant risk
c. Control risk
d. Inherent risk

87. During an audit planning, which of the following is not a consideration as to the quantity, type, and content of
working papers?
a. The auditor’s preliminary assessment of control risk
b. The type of report to be issued by the auditor
c. The nature of the client’s business
d. The auditor’s preliminary evaluation of inherent risk based on the discussion with the client
88. Which of the following is the best definition of detection risk?
a. The auditor will apply more audit procedures than are required in the circumstances.
b. The auditor will fail to detect material misstatements that exist.
c. The auditor will compute audit materiality incorrectly.
d. The auditor will fail to modify the audit opinion on financial statements that are materially misstated.

89. Which of the following is false with regards to the relationship among audit risk, audit evidence, and
materiality?
a. Where inherent risk is high and control risk is low, the auditor should not ignore inherent risk.
b. Aggregate materiality thresholds may change under conditions of changing risk levels.
c. Under conditions of high combined risk, the auditor should place more emphasis on obtaining external
evidence and should reduce reliance on internal evidence.
d. The lower the inherent and control risks, the lower the aggregate materiality threshold.

90. Audit risk components consist of inherent, control and detection risks. Which of these is(are) independent
variable(s)?
a. Risks of material misstatements
b. Detection risk
c. Control risk only
d. Inherent risk only

91. Why should the auditors plan more work on individual accounts as lower acceptable levels of both audit risk
and materiality are established?
a. To find larger errors
b. To increase the tolerable error in the accounts
c. To find smaller errors
d. To decrease business risk

92. If a financial reporting framework does not provide a definition or discussion of materiality, the auditor, in his
conduct of audit planning, must
a. withdraw from the engagement, as this would be a valid reason to state that financial reporting framework
does not exist
b. Any of the choices
c. use characteristics in the relevant PSA as a frame of reference
d. withdraw from the engagement, as this would be a valid reason to state that there is a limitation on the scope
of the audit

93. Which of the following is correct on materiality relationship to other factors in audit?
a. As materiality increases, the level of audit risk increases.
b. As the level of materiality increases, the evidences to be gathered by the auditor must increase thereby
reducing the level of detection risk.
c. As materiality increases, the level of the combined risk decreases.
d. As the level materiality increases, the evidences to be gathered by the auditor must decrease thereby reducing
the level of detection risk.

94. Which of the following best describes detection risk?

a. A company’s internal control fails to identify a material misstatement on a timely basis.
b. The possibility that a material misstatement will occur in any given account before considering internal
control.
c. Auditing procedures fail to find material misstatements.
d. Auditors fail to discover a material misstatement in the course of their audit and do not modify their opinion.
95. Generally, for entities with significantly higher values in the statement of financial position compared to its
income statement, the appropriate benchmark in the determination of the auditor’s planning materiality level
would most like be
a. Total Equity
b. Net income
c. Gross or net assets
d. Gross Sales or Net Income from Operations

96. Which of the following does not describe the concept of materiality?
a. Materiality provides a cutoff point at which judgment, based on the financial statements, may be altered.
b. Materiality is typically measured as a fixed percentage of asset.
c. Materiality depends both on the nature of the company as well as auditor’s judgement.
d. Materiality is not typically measured as a fixed percentage of net income.

97. Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant asset additions and repairs and maintenance expenditures is found
to be weak
b. The client is a private university located in Northern Philippines
c. The client constructed a major addition to its central manufacturing facility during the year under audit
d. The members of the board of directors are elected by the stockholders during the annual meeting

98. Which of the following is likely to be done by the auditor during the client selection and retention phase of
planning the audit?
a. Ensure that the firm has sufficient resources to complete the engagement on a timely manner
b. Obtain and review financial information
c. Obtain an understanding of internal controls
d. Consider the need for special skills

99. When the auditor performs analytical review procedures in the completion phase of the audit:
a. the auditor accumulates audit evidences.
b. the auditor validates conclusions reached.
c. the auditor obtains an understanding of the entity and identify areas of the audit that will have significant
risks.
d. the auditor plans the nature, timing and extent of other auditing procedures.

100. Analytical procedures performed in the planning stage of an audit suggest that several accounts have
unexpected relationship. The result of these procedures most likely would indicate that
a. Additional tests of details required.
b. The communication with the audit committee should be revised.
c. Irregularities exist among the relevant account balances.
d. Internal control activities are not operating effectively.

101. Which of the following will an auditor least likely discuss with the former auditors of a potential client
prior acceptance of an audit engagement?
a. Any disagreements with the management
b. Integrity of the management
c. Fees charged for the services
d. Reasons for changing audit firms

102. In which of the following order would auditors perform the following steps?
a. Determine audit risk; assess control risk; determine detection risk; set materiality
 b. Determine audit risk; set materiality; assess control risk; determine detection risk
c. Set materiality; determine audit risk; assess control risk; determine detection risk
d. Set materiality; assess control risk; determine detection risk; determine audit risk

103. An engagement letter is best described as:

a. A letter from the Board of Directors’ audit committee to the auditor that indicates that the auditor has been
engaged to perform the audit and the fees to be paid.
b. A letter from company management to the auditors specifying management’s expectations for completion of
the audit on a timely basis and the fees.
c. A letter from the auditors to company management that specifies the responsibilities of both the company and
the auditors in completing the audit and the timing for its completion.
d. A letter from the auditors to company management specifying that management is responsible for the
financial statements and the auditors will issue an opinion on the financial statements.

104. Which of the following statements would least likely appear in an auditor’s engagement letter?
a. The fees for the services are based on the regular per diem rates, plus travel and other out-of-pocket expenses.
b. A discussion of further procedures that might be taken by the auditor after the performance of analytical
procedures.
c. The existence of risks that material errors and/or fraud, if exists, will not be detected.
d. During the course of the audit, a possible observation on economic opportunities that can improve auditees
operations.

105. This is also called as performance materiality

a. None of the choices
b. Overall materiality
c. Special materiality
d. Working materiality

106. Which of the following questions is most likely included in an auditor’s inquiry of management while
obtaining information to identify the risks of material misstatements due to fraud?
a. Are financial reporting operations controlled by and limited to one location?
b. Does it have knowledge of fraud or suspect fraud?
c. Has it reported to the employees the nature of the company’s internal control?
d. Does it have programs to mitigate cost reductions?

107. Which of the following is a function of the risks of material misstatement and detection risk?
a. Business risk
b. Audit risk
c. Insignificant risk
d. Significant risk

108. Which of the following is incorrect with respect to obtaining an understanding with a client?
a. Auditors are required to obtain an understanding with their clients.
b. Auditors must document their understanding of the engagement.
c. Auditors obtains engagement letter to avoid disagreements.
d. Auditors must obtain an understanding only if an audit is to be conducted.

109. The assessment of the risks of material misstatement at the financial statement level is affected by the
auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily lead
the auditor to:
a. Decrease the number of locations to be included in the audit scope.
b. Modify the nature of further audit procedures to obtain less persuasive audit evidence.
 c. Conduct some audit procedures at an interim date rather than year-end.
d. Have a lesser confidence in the internal control and the reliability of evidences gathered internally.

110. Inquiries directed towards those charged with governance may most likely
a. Relate to changes in the entity’s marketing strategies, sales trends, or contractual arrangements with its
customers.
b. Relate to their activities concerning the design and effectiveness of the entity’s internal control and whether
management has satisfactorily responded to any findings from these activities.
c. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting
policies.
d. Help the auditor understand the environment in which the financial statements are prepared.

111. J and N, CPAs, have been retained as the auditors of Blessed Corporation. What are J and O’s
responsibilities with regards to contacting Blessed’s predecessor auditors?
a. If Blessed Corporation had disagreement with the predecessor auditors, J and N should not contact the
predecessor auditors.
b. J and N is not required to attempt communication with the predecessor auditors under any circumstances.
c. It would be unethical for J and N to ask the predecessor auditors about the integrity of Blessed Corporation’s
management.
d. J and N should attempt communications with the predecessor auditors and ask if they had any accounting
policy disagreements with Blessed Corporation.

112. Arrange the following procedures on how analytical procedures are performed:
I. Calculate predictions and compare with the recorded amounts
II. Develop expectation
III. Investigate significant difference
IV. Define a significant difference
- II, I, IV, III
- II, III, I, IV
- II, IV, I, III
- II, IV, III, I

113. Which of the following statements is correct with respect to auditor’s use of analytical procedures?
a. Analytical procedures are powerful tools that are required during the planning and testing phases of the audit.
b. Analytical procedures are required to be used during the planning and completion phases of the audit.
c. Analytical procedures are time saving procedures that auditors may employ at their discretion.
d. Any of the choices is correct.

114. Which of the following conditions justifies an auditor’s decision of raising the materiality level?
a. Application of analytical procedures reveals a significant increase in sales revenue in December, the last
month of the fiscal year.
b. Internal control over shipping, billing, and recording of sales revenue is weak.
c. Study of the business reveals that the client recently acquired a new company in an unrelated industry.
d. Internal control over revenue and receipts cycle is excellent

115. How is the audit program best described at the beginning of the audit process?
a. Persuasive
b. Conclusive
c. Temporary
d. Optional
116. Which of the following statements describes the main purpose(s) of analytical procedures as applied at
planning, testing or completion phase of the audit?
a. Detect material misstatements at the assertion level.
b. All of the choices are main purposes of risks assessment procedures as applied at planning, testing or
completion phase of the audit.
c. Obtain understanding of the entity and its environment, including internal control, to assess the risks of
material misstatement at the financial statement and assertion levels.
d. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements
at the assertion level.

117. The auditor shall design and perform further audit procedures whose nature, timing, and extent are
responsive to the assessed risks of material misstatement at the assertion level. Which of the following is the
most important consideration in responding to the assessed risks?
a. The nature of the audit procedures
b. All of these are equally important
c. The extent of the audit procedures
d. The timing of the audit procedures

118. If the auditor sets the preliminary judgement about materiality level at a relatively high peso amount,
a. less evidence will be required than for a low level.
b. more evidence will be required than for a low level.
c. the amount of evidence required will not be affected.
d. the same amount of evidence will be required as for a low level.

119. According to PSA 200, the overall objective of the independent audit and the conduct of an audit in
accordance with Philippine Standards on Auditing clarifies that the purpose of an audit is to
a. none of the choices
b. help the auditee to eliminate fraud risk
c. enhance the degree of confidence of intended users in the financial statements
d. improve the auditee’s internal control by identifying areas by which control risk could be significant

120. An initial audit requires more audit time to complete than a recurring audit. One of the reasons for this is
that
a. the new auditors are usually assigned to an initial audit
b. the client’s business, industry, and internal control are unfamiliar to the auditor and he needs to carefully
study them
c. a larger proportion of customer accounts receivable need to be confirmed on an initial audit
d. the predecessor auditors need to be consulted

121. Prior to beginning fieldwork on a new audit engagement in which the auditor does not possess industry
expertise, the auditor should
a. design special substantive tests to compensate for the lack of industry expertise
b. obtain a knowledge of matters that relates to the nature of the entity’s business and industry
c. reduce audit risk by lowering the preliminary levels of materiality
d. engage financial experts who are familiar with the nature of the industry

122. Detection risk differ from inherent risk and control risk in that it
a. Arise from the misapplication of auditing procedures.
b. Exist independently of the financial statement audit.
c. May be assessed in either quantitative or nonquantitative terms.
d. Can be changed at the auditor’s discretion.
123. Which of the following is correct regarding business risks?
a. All business risks give rise to risks of material misstatements.
b. The risk of material misstatements in the financial statements is broader than business risk, though it includes
the latter.
c. A business risk may have an immediate consequence for the risk of misstatement for classes of transactions,
account balances, and disclosures at the assertion level or the financial statements as a whole.

d. The auditor should identify or assess all business risks.

124. If, when performing analytical procedures, an auditor observes that operating income has declined
significantly between the preceding year and the current year, the auditor should next:
a. determine management’s responsibility for the decline and discuss the issue with the audit committee.
b. inform management that a qualified opinion on the financial statements will be necessary.
c. consider the possibility that the financial statements may be materially misstated.
d. require that the decline be disclosed in the financial statements.

125. Which of the following is generally included in an auditor’s engagement letter?

a. Management’s liability for non-compliance to laws committed by its employees
b. The auditor’s responsibility to obtain negative assurance relating to the occurrence of non-compliance to laws
c. Factors to be considered in establishing preliminary judgment about materiality
d. Limitations of the engagement

126. When test of controls has been performed, which of the following is true?
a. Recalculation of interest on bonds payable might be performed
b. Any of the choices
c. Initially assessed control risk is at maximum
d. The auditor relied on the design and implementation of internal control based on his understanding

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

128. Usually, dual purpose test has been done when

a. any of the choices
b. the assessed level of control risk is at low level
c. detection risk is at low level
d. whenever the auditor wants

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

130. If the auditor assessed internal control is good, the evidences gathered from the performance of test of
control is expected to
a. show equal evidences on controls rather than those that can be accumulated on substantive testing
b. show lesser evidences on controls rather than those that can be accumulated on substantive testing
c. show more evidences on controls rather than those that can be accumulated on substantive testing
 d. show no evidences on controls but the auditor will rely only to the evidences that can be accumulated on
substantive testing

131. Which of the following is false on internal control assessment of the auditor?
a. When the auditor initially assessed the control risk at maximum, the nature of auditor’s substantive testing
will be lesser in scope
b. Final assessment of control risk can either support or not the initially assessed control risk if test of control
has been performed
c. Assessment of internal control will help the auditor to determine the nature, timing and extent of further audit
procedures
d. Test of control is an audit procedure to assess the effectiveness of entity’s internal control

132. Which of the following statements concerning control risks is incorrect?

a. When assessing control risk, an auditor should consider evidence obtained in prior audits about the operation
of controls
b. When control risk is at the maximum level an auditor is required to document the basis for that assessment
c. Control risk may be assessed sufficiently low or high to not eliminate substantive testing for significant
transaction classes
d. Assessing control risk and obtaining an understanding of an entity’s internal control maybe performed
concurrently

133. After documenting how the auditor understands the auditee’s internal control in an audit engagement, the
auditor may not perform tests on control if
a. Based on the documentation, the internal control cannot be relied upon
b. Based on the documentation, the internal control either can or cannot be relied upon
c. Based on the documentation, the internal control can be relied upon
d. Based on the documentation, the internal control is the responsibility of the management

134. After documenting how the auditor understands the auditee’s internal control in an audit engagement, the
auditor may perform tests on control if
a. Based on the documentation, the internal control is the responsibility of the management
b. Based on the documentation, the internal control can be relied upon
c. Based on the documentation, the internal control either can or cannot be relied upon
d. Based on the documentation, the internal control cannot be relied upon

135. Understanding the entity’s internal control is

a. mandatory only if the initial assessment of control risk is below the maximum
b. not part of risk assessment procedures
c. optional on the part of the auditor
d. required in every audit of financial statements

136. Test of controls are

a. optional on the part of the auditor
b. required in every audit of financial statements
c. mandatory only if the initial assessment of control risk is below the maximum
d. mandatory regardless whether the initially assessed control risk is either below or at maximum level

137. Auditors frequently use diagrams in connection with which of the following?
a. Preparation of generalized computer audit programs
b. Confirming the ending balances of accounts receivable
c. Performance of analytical review procedures for account balances
d. Review of the client's internal control procedure
138. Which of the following is a step in an auditor's decision to assess control risk at below the maximum?
a. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in
substantive testing
b. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may
indicate weak controls
c. Identify specific controls that are likely to detect or prevent misstatements
d. Perform tests of details of transactions and account balances to identify potential errors and fraud

139. Inspection of documents that can be used to gather evidences on existence or occurrence of transactions.
a. Hatching
b. Tracing
c. Vouching
d. Touching

140. The process of looking at the procedures that are being performed by the client.
a. Reperformance
b. Observation
c. Inquiry
d. Inspection

141. When the auditor assessed that the entity’s internal control if operating as it is intended
a. the auditor is not expected to perform further audit procedure
b. the auditor’s expected nature of further audit procedure will be purely substantive
c. the auditor’s timing of substantive test will be more likely at interim dates
d. the auditor is expected to accumulate more evidences on his substantive testing

142. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls
leave no audit trail of documentary evidence; the auditor most likely will test the procedures by
a. observation and inquiry
b. confirmation and observation
c. inquiry and analytical procedures
d. analytical procedures and confirmation

143. When the assessed level of control risk is below the maximum
a. there is a low level of risk of material misstatements
b. none of the choices
c. substantive testing will be performed
d. there is no need to perform substantive testing

144. The definition of which type of control deficiency explicitly includes an amount that is more than
inconsequential?
a. Strong control deficiency
b. Reportable condition
c. Significant deficiency
d. Material weakness

145. Which of the following is a test of control?

a. Recalculating the amount of interest expense on the borrowings made for the acquisition of equipment
b. Performing bank reconciliation to know discrepancies between ledger and bank balances
c. Vouching the balances of equipment to its supporting documents to know any overstatements
d. Asking the senior level management on the approval of recently acquired equipment
146. Which of the following tests of controls can be the most reliable source of evidences on the approval of the
payroll supervisor of labor usage to support occurrence assertion?
a. Vouching labor reports to time tickets authorized by the management
b. Observation of duties
c. Examine documentary evidence of supervisor approval
d. Vouching labor costs to labor reports

147. After obtaining an understanding of internal control and assessing control risk, an auditor decides not
perform additional tests of controls. The auditor least likely concludes that the
a. additional evidence to support a further reduction in control risk is not cost-beneficial to obtain
b. internal control is not properly designed and can’t be relied on
c. evidence obtainable through tests of controls would not support an increased assessment of control risk
d. assessed level of inherent risk exceeds the assessed level of control risk

148. Regardless of whether the auditor decides to test or not the controls for operating effectiveness, he/she must
fully document his or her understanding of the internal control policies and procedures obtained through
whatever means. Which of the following describe an appropriate means for documenting his/her
understanding of the control system?
a. internal control memorandum
b. internal control operations
c. internal control implementation
d. internal control deficiency

149. Which of the following is an appropriate form of documenting the auditor's understanding of a client's
internal controls?
a. Any of the choices
b. Narratives
c. Internal control questionnaires
d. Flowcharts

150. Which of the following is not a characteristic of the lower control risk approach?
a. The auditor usually plans to place considerable reliance on the controls
b. The auditor plans to perform extensive tests of controls
c. Control risk is usually assessed at maximum level
d. Substantive tests are usually restricted

151. The assessment of control risk can be made at any of the following times except:
a. Immediately after obtaining an understanding of internal control
b. After some tests of controls are performed concurrently with obtaining an understanding
c. After the performance of additional tests of controls designed to further lower the assessment of control risk
d. After performing all the necessary substantive tests

152. When the auditor account for numerical sequence of selected sales invoices of an entity, the auditor most
probably gathers evidences on what assertion?
a. Occurrence
b. Classification
c. Accuracy
d. Completeness

153. Which method provides the auditor with the best visual grasp of a system and a means for analyzing
complex operations?
 a. A decision table
b. A detailed narrative approach
c. A questionnaire approach
d. A flowcharting approach

154. It determines whether the controls over financial reporting, if operating effectively, would be expected to
prevent or detect errors or fraud that could result in a material misstatement in the financial statements.
a. Controls on design
b. Design effectiveness
c. Controls on framework
d. Design efficiency

155. Among which of the following test of control procedures will give the auditor the best evidence on the
operating effectiveness of auditee’s internal control?
a. Observation
b. Reperformance
c. Any of the choices will result to an equal level of evidence
d. Inquiry

156. After obtaining an understanding of the client's internal control, the auditor should consider whether
a. the projected degree of effectiveness of internal control is justified
b. further testing of internal control procedures is likely to permit further reduction in the assessed-level of
control risk
c. the evidential matter obtained from the study of the internal control system can provide a reasonable basis for
an opinion
d. sufficient knowledge has been obtained about the entity's entire system of internal control

157. Which of the following statements is false?

a. After performing tests of controls, the auditor may not always assess control risk at maximum
b. Tests of controls are necessary if the auditor plans to assess the level of control risk below the maximum
c. Tests of controls are necessary if the auditor plans to use the primarily substantive approach
d. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls

158. After the study and initial evaluation of a client's internal control policies and procedures has been
completed, an auditor might decide to
a. perform control testing in areas where the auditor relies upon
b. increase the extent of substantive testing in areas where internal controls are weak
c. reduce the extent of both substantive and control testing in areas where the internal control policies and
procedures are strong
d. increase the extent of substantive testing in areas where the internal control policies and procedures are strong

159. Which of the following is a characteristic of the primarily substantive approach?

a. Usually little or no reliance is placed on controls.
b. The assessment of control risk is usually below the maximum level.
c. Extensive tests of controls are performed.
d. The auditor usually gathers all or most of the evidence with tests of controls.

160. Which of the following is the logical order of performing the following auditing procedures
I. Preparation of a flowchart depicting the client's internal control system.
II. Tests of internal control procedures.
III. Substantive testing
a. II, III, I
 b. I, II, III
c. III, II, I
d. II, I, III

161. Auditors can use several types of audit procedures to test controls. Which of the following type of audit
procedures is most likely to be used during tests of controls?
a. Count and list cash on hand
b. Physical examination of assets
c. Examination of documents, records, and reports
d. Send confirmation letters to banks

162. An internal control questionnaire (ICQ) contains the following question: ¯Does a single individual receive
and list cash receipts and perform posting to sales and general ledgers?" What action should an auditor take if
the accounting manager responds "yes to the question?
a. Include it with other reportable findings in the next audit report
b. Statistically sample the response along with all other "yes?4? responses to verify their accuracy
c. No action is required because "yes" responses on an ICQ indicate the presence of good control
d. Treat it as a potential control weakness and perform appropriate testing

163. In obtaining an understanding at an entity's internal control in a financial statement audit, an auditor is
required to
a. determine whether the controls have been placed in operation
b. perform procedures to test the design of controls
c. search for significant deficiencies in the operation of internal control
d. document the control procedures to test the operating effectiveness of internal control components

164. Which of the following is inappropriate about risk assessment?

a. There is an inverse relationship between detection risk and the combined level of inherent and control risk
b. Audit risk may be more effectively determined by assessing inherent and control risk risk as combined risks
c. Detection risk is not eliminated if an auditor were to examine 100 percent of the account balance or class of
transactions
d. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need
for substantive tests

165. The auditor’s study and evaluation of internal control may not be done for all but which of the following
reasons?
a. To establish a basis for reliance on company’s payment of audit fee to the auditor
b. To provide a basis for offering the client, other value-added services designed to increase efficient and
effective operations
c. To determine the nature, timing, and extent of the meetings of those charged with the governance

d. To provide training and development for staff accountants

166. Tests of controls most likely include:
a. Recalculating the ending balance of an account
b. Performance of bank reconciliation
c. Reperformance of a control
d. Inquiries of appropriate client vendors

167. The auditor inspects whether the documents are pre-numbered and pre-printed and asking people involved
in the preparation of these documents of whom is the person authorizing these documents. The auditor also
looks into the process of where these documents will be processed until it reaches the books of accounts. The
auditor is seemingly conducting
 a. Tracing
b. Reperformance
c. Vouching
d. Recalculation

168. Which of the following audit tests would be a test of controls?

a. Tests of the specific items making up the balance in a financial statement account
b. Tests of the additions to property plant and equipment by physical inspections
c. Comparing inventory prices to vendors' invoices
d. Tracing signatures on cancelled checks to board of directors' authorizations

169. The primary purpose of performing further control tests is to provide

a. all accounting control procedures leave visible evidence
b. basis for the assessed level of control risk below the maximum level
c. assurance that transactions are properly recorded
d. basis for understanding the flow of transactions through the accounting system

170. The objective of dual-purpose tests is to:

a. Evaluate whether internal controls are operating effectively
b. Detect material misstatements in the financial statements
c. Identify unusual trends or patterns in comparative financial statements
d. Test internal controls as well as transactions and balances using the same test procedures

171. Which of the following the auditor's purpose of further testing the control procedures?
a. Reduce the risk that error or fraud that has not been prevented or detected by the internal control system is not
detected by the independent audit
b. Provide assurance that transactions are executed in accordance with management's authorization and access to
assets is limited by a segregation of functions
c. Provide a basis for reducing the assessed level of control risk
d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in conformity with PFRS

172. A procedure that involves tracing a transaction from its origination through the company's information
systems is referred to as a (n):
a. Walkthrough
b. Remediation
c. Inquiry/analysis approach
d. Re-analysis approach

173. The purpose of tests of controls is to provide reasonable assurance that the
a. Entity has complied with requirements of quality control
b. Entity has complied with disclosure requirements of PFRS
c. Control procedures are functioning as intended
d. Accounting treatment of transactions and balances is valid and proper

174. After obtaining an understanding of a client's controls, an auditor may decide to omit tests of controls.
Which of the following is an appropriate reason to omit tests of controls?
a. The effort to test controls does not exceed the effort saved by not performing substantive tests
b. Reportable conditions preclude the auditor of assessing control risk at the maximum level
c. The controls appear adequate
d. The controls duplicate other controls
175. Regardless of the assessed level of control risk, an auditor would perform some
a. tests of control policies and procedures in order to determine their operating effectiveness.
b. analytical procedures to verify the design of controls.
c. substantive tests to restrict detection risk for significant transaction classes.
d. dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

176. Which of the following statements about tests of controls is valid?

a. Any of the choices
b. Ordinarily, making inquiries provides more reliable audit evidence than doing observation when testing
segregation of functional responsibilities
c. Audit evidence obtained by doing observation does not pertains only to the point in time at which the
procedure was applied.
d. The auditor may perform inquiry and observation and gathering audit evidence about the operating
effectiveness of the control

177. An independent auditor has concluded that the client's records, procedures and representations can be
relied upon based on tests made during the year when internal control was found to be effective. The auditor
should test the records, procedures, and representations again at year-end if:
a. Client records are in a condition that facilitates effective and efficient testing
b. Unusual transactions occurred subsequent to the completion at the interim audit work
c. Comparisons of year-end balances with like balances at prior dates revealed significant fluctuations
d. Inquiries and observations lead the auditor to believe that conditions have changed significantly

178. Which of the following is (are) true on understanding the entity’s internal control?
a. All of the choices
b. The auditor’s primary consideration is whether, and how, a specific control prevents, detects and corrects,
material misstatements in classes of transactions, account balances or disclosures caused by error only.
c. To understand an entity’s control, the auditor will evaluate the operating effectiveness of internal control.
d. The heaviest emphasis of the auditors is on controls over classes of transactions rather than account balances
or disclosures.

179. Understanding the entities internal control of the auditor as part of risk assessment procedure is geared
towards
a. knowing the design of internal control and whether such is implemented
b. any of the choices
c. calculating the amount of material misstatements with the aid of materiality thresholds
d. testing whether such internal controls are operating as it is intended

180. If the auditor uses the primarily test of controls instead of the higher control risk approach
a. A lower level of understanding of internal control is required
b. The auditor plans to assess control risk at below the maximum level
c. The auditor plans a heavier reliance on substantive tests
d. The auditor plans to restrict substantive tests

181. Tracing the date of shipping document to the date of sale invoice and sale transaction is a test of control on
what assertion?
a. Classification
b. Cut-off
c. Completeness
d. Existence

182. Process of asking for an explanation from the client relating to the control process or transactions.
 a. Reperformance
b. Inquiry
c. Inspection
d. Observation

183. A procedure that would most likely be used by on auditor in performing tests of control regarding
segregation of functions on which no audit trail is available:
a. Inspection
b. Observation
c. Reconciliation
d. Reprocessing

184. Primarily, evidences gathered from observation, inquiry, inspection and reperformance on the procedures
and policies of the entity will be directed to
a. Reliability of the amounts stated in entity’s accounting records
b. Operating effectiveness of the entity’s internal control
c. Accuracy of financial information in entity’s financial statements
d. Any of the choices

185. When the assessed level of control risk reaches the maximum level from initially assessed low level,
a. The nature of the substantive will be less extensive
b. The auditor will not be performed substantive testing
c. This is not allowed and possible under PSA
d. The auditor performed test of controls

186. Which of the following questions would an auditor most likely include in an internal control questionnaire
for notes payable?
a. Are direct borrowings on notes payable authorized by the board of directors?
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used for the purchase of noncurrent assets?
d. Are assets that collateralize notes payable critically needed for the entity’s continued existence?

187. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is:
a. Test of controls, documentation of control structure, substantive tests
b. Substantive tests, test of controls, documentation of control structure
c. Documentation of control structure, substantive tests, test of controls
d. Documentation of control structure, test of controls, substantive tests

188. The auditor is studying internal control policies and procedures within the sales, shipping, and billing
subset of the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?
a. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing
of selected controls will result in a major reduction in substantive testing
b. Internal control is found to be weak with regard to shipping and billing
c. Internal control over sales, billing; and shipping appears strong but 80% of sales revenue is attributable to
three major customers
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large
number of customs

189. Tests of controls are concerned primarily with each of the following questions except:
a. Were the necessary controls consistently performed?
b. By whom were the controls applied?
c. Why were the controls applied?
 d. How were the controls applied?

190. Generally, an auditor does not evaluate the existing internal control to
a. determine the extent of substantive tests which must be performed
b. determine the timing of substantive tests which must be performed
c. ascertain whether irregularities are probable
d. determine the nature of substantive tests which must be performed

191. In considering the evidence needed to assess control risk during the period from interim to year-end, all of
the following should be considered except the:
a. Significance of the assertion being tested
b. Control risk on other assertions
c. Specific internal control policies and procedures tested during the interim period
d. Degree to which the policies and procedures were tested and the test results

AUDITING AND ASSURANCE

COMPILATION

After an auditor had been engaged to perform the first audit for a not piblicly listed entity, the client requested to change the
engagement into a review. In which of the following situations would there be a reasonable basis for the auditor to comply with the
client’s request?

A. The auditor is prohibited by the client from corresponding with the client’s leagl counsel.

B. The audit is substantially complete and the auditor determined that an unqualified opinion is warranted but there is a
disagreement concerning audit fee.

C. Management refuses to sign the client representation letter.

D. The client’s bank required an audit before committing a loan, but the client subsequently acquired alternative financing.

The primary reason why an engagement letter is submitted by audit firms prior to starting the work is that it

A. clarifies the reponsibilities of the management and those of the audit firm.

B. defines the firm’s policies and procedures regarding new clients.

C. provides an insurance policy both the firm and its client.

D. communicates the type of opinion that will be rendered on the engagement.

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

A. The anticipated sample size of the planned substantive tests.

B. The entity’s annualized interim financial statements.

C. The results of the internal control questionnaire.

 D. The contents of the management representation letter.
Which of the following is likely to be done by the auditor during the client selection and retention phase of planning the audit?

A. Obtain and review financial information

B. Obtain an understanding of internal controls

C. Ensure that the firm has sufficient resources to complete the engagement on a timely manner

D. Consider the need for special skills

NASA NET IS B, BUT “NOT TO BE DONE” ANG TANONG

The type of transactions that ordinarily have high inherent risk because they involve management judgment or assumptions are
referred to as

A. related party transactions

B. non-routine transactions

C. estimation transactions

D. routine transactions

As the acceptable level of detection risk increases, the assurance directly provided from

A. Tests of controls should increase.

B. Substantive tests should decrease.

C. Substantive tests should increase.

D. Tests of controls should decrease.

During an audit planning, which of the following is not a consideration as to the quantity, type, and content of working papers?

A. The auditot’s preliminary assessment of control risk

B. The type of report to be issued by the auditor

C. The nature of the client’s business

D. The auditor’s preliminary evaluation of inherent risk based on the discussion with the client

Which of the following types of risk significantly affected by the nature, timing and extent of substantive auditing procedrues?

A. Control risk alone

B. Detection risk
 C. Risks of material misstatement

D. Inherent risk alone

Which of the following conditions does not increae inherent risk?

A. Internal control over shipping, billing, and recording of sales revenue is weak.

B. Those charged with governance approved significant amount of bonus for the Chief Executive Officer as well as attractive
share option plan.

C. The client has entered into numerorus related party transactions during the eyar under audit.

D. The client has lost a major customer accounting for approximately 30% of annual sales.

Audit risk components consist of inherent, control and detection risks. Which of these is independent variable(s)?

A. Detection risk

B. Control risk only

C. Risks of material misstatements

D. Inherent risk only (my answer but wrong)

The purpose of tests of controls is to provide reasonable assurance that the

A. Control procedures are functioning as intended

B. Accounting treatment of transactions and balances is valid and proper

C. Entity has complied with disclosure requirements of PFRS

D. Entity has complied with requirements of quality control

Inspection of documents that can be used to gather evidences on existence or occurrence of transactions.

A. Touching

B. Vouching

C. Tracing

D. Hatching

Which of the following questions would an auditor most likely include in an internal control questionnaire for notes payable?

A. Are the proceeds from notes payable used for the purchase of noncurrent assets?

B. Are two or more authorized signatures required on checks that repay notes payable?

C. Are direct borrowings on notes payable authorized by the board of directors?

D. Are assets that collateralize notes payable critically needed for the entity‘s continued existence?
Generally, an auditor does not evaluate the existing internal control to

A. ascertain whether irregularities are probable

B. determine the extent of substantive tests which must be performed

C. determine the timing of susbtantive tests which must be performed

D. determine the nature of susbtantive tests which must be performed

After documenting how the auditor understands the auditee’s internal control in an audit engagement, the auditor may perform
tests on control if

A. Based on the documentation, the internal control cannot be relied upon

B. Based on the documentation, the internal control can be relied upon

C. Based on the documentation, the internal control is the responsibility of the management

D. Based on the documentation, the internal control either can or cannot be relied upon

Assessing control risk at a low level most likely would involve

A. Reducing inherent risk for most of the assertions relevant to significant account balances.

B. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.

C. Performing more extensive substantive tests with larger sample sizes than originally planned.

D. Identifying specific controls relevant to specific assertions.

After assessing control risk, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the
auditor would consider whether

A. It would be efficient to obtain an understanding of the entity’s information system.

B. The entity’s controls have been implemented.

C. Additional audit evidence sufficient to support a further reduction is likely to be available.

D. The entity’s controls pertain to any financial statement assertions.

Which of the following controls most likely addresses the completeness assertion for inventory?
 A. There is a separation of duties between payroll department and inventory accounting personnel.

B. Employees responsible for custody of finished goods do not perform the receiving function.

C. Work in process account is periodically reconciled with subsidiary records.

D. Receiving reports are prenumbered and periodically reconciled.

Control risk should be assessed in terms of

A. Control environment factors.

B. Types of potential fraud.

C. Specific controls

D. Financial statement assertions.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

A. Controls relating to unclaimed payroll checks are operating effectively.

B. Employees work the number of hours for which they are paid.

C. Payments to employees are computed at authorized rates.

D. Segregation of duties exist between the preparation and distribution of the payroll.

An auditor may compensate for a weakness in internal control by increasing the

A. Level of detection risk.

B. Extent of analytical procedures.

C. Extent of tests of controls.

D. Preliminary judgment about audit risk.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity’s internal control
activities are suitably designed to prevent or detect material misstatements?
 A. Performing analytical procedures using data aggregated at a high level.

B. Vouching a sample of transactions directly related to the activities.

C. Observing the entity’s personnel applying the activities.

D. Reperforming the activities for a sample of transactions.

An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in
the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

A. Daily cash summaries with the sums of the cash receipts journal entries.

B. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

C. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

D. Individual bank deposit slips with the details of the monthly bank statements.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is not required to

A. Determine the nature, timing and extent of further audit procedures based on the assessment of internal control.

B. Document the auditor’s understanding of the entity’s internal control.

C. Search for significant deficiencies in the operation of internal control.

D. Perform tests of controls when the initial assessment of control risk is low.

C or D ang sagots ko

Proper internal control over the cash payroll function would mandate which of the following?

A. A separate checking account for payroll be maintained.

B. The payroll clerk should fill the envelopes with cash and a computation of the net wages.

C. Each employee should be asked to sign a receipt.

D. Unclaimed pay envelopes should be retained by the paymaster

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use
and operating effectively. This assurance is most likely obtained in part by

A. Preparing flowcharts.

B. Analyzing tests of trends and ratios.

C. Performing substantive tests.

D. Inspection of documents.

An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbered
purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures,
an auditor most likely would select items for testing from the population of all

A. Approved vouchers

B. Receiving reports

C. Canceled checks

D. Purchase orders

Tests of internal control revealed it to be much more effective than the auditor had perceived during the preliminary planning
stages. Which of the following most likely will be auditor’s response?

A. Raise the aggregate materiality threshold

B. Lower the individual item materiality threshold

C. Lower the aggregate materiality threshold

D. Raise the individual item materiality threshold

Which of the following statements concerning materiality thresholds is incorrect?

A. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to
quantitative and/or qualitative factors.

B. Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning audit risk.

C. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is
referred to as a "materiality threshold."

D. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy
is the determination of the

A. Procedures to be undertaken to discover litigation, claims, and assessments.

 B. Pending legal matters to be included in the inquiry of the client's attorney.

C. Timing of inventory observation procedures to be performed.

D. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

The auditor perceives internal control over sales and cash receipts as excellent; but internal control over purchases, inventory, and
cash payments is considered weak. Which of the following most likely will be auditor’s response?

A. Raise the individual item materiality threshold

B. Lower the individual item materiality threshold

C. Rely on external evidence for the expenditure cycle, while accepting internal evidence as reliable for the revenue cycle

D. Rely on external evidence for the revenue cycle, while accepting internal evidence as reliable for the expenditure cycle

Which of the following is not a purpose served by the application of analytical procedures?

A. As part of audit planning to assist in locating significant changes in revenues and expenses.

B. To provide a basis for lowering materiality thresholds where significant earnings inflation is indicated.

C. To determine the economic substance of related party transactions.

D. As part of audit review to determine that all significant abnormalities have been resolved to the auditor's satisfaction.

Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and
materiality?

A. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.

B. Aggregate materiality thresholds should not change under conditions of changing risk levels.

C. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.

D. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external
evidence and should reduce reliance on internal evidence

QUIZ 1 MIDTERM

Which of the following questions is most likely included in an auditor’s inquiry of management while obtaining
information to identify the risks of material misstatements due to fraud?
A. Are financial reporting operations controlled by and limited to one location?
B. Does it have knowledge of fraud or suspect fraud?
C. Has it reported to the employees the nature of the company’s internal control? (xxx)
D. Does it have programs to mitigate cost reductions? 
Which of the following statements would least likely appear in an auditor’s engagement letter?
A. During the course of the audit, a possible observation on economic opportunities that can improve
auditees operations.
B. The fees for the services are based on the regular per diem rates, plus travel and other out-of-pocket
expenses.
C. The existence of risks that material errors and/or fraud, if exists, will not be detected.
D. A discussion of further procedures that might be taken by the auditor after the performance of
analytical procedures.

The element of the audit planning process most likely to be agreed upon with the client before the
implementation of audit strategy is the determination of the
A. schedules and analyses to be prepared by the client’s staff
B. pending legal matters to be included in the inquiry of the client’s legal counsel
C. methods of statistical sampling to be used in confirming accounts receivable
D. evidence to be gathered to provide a sufficient basis for the auditor’s opinion

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement
should not be accepted?
A. Internal control activities requiring the segregation of duties are subject to management override.
B. There are significant related party transactions that management claims occurred in the ordinary
course of business.
C. Management continues to employ an inefficient system of information technology to record financial
transactions.
D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements

In which of the following order would auditors perform the following steps?
A. Set materiality; determine audit risk; assess control risk; determine detection risk
B. Set materiality; assess control risk; determine detection risk; determine audit risk
C. Determine audit risk; set materiality; assess control risk; determine detection risk
D. Determine audit risk; assess control risk; determine detection risk; set materiality

Which of the following is incorrect about performance materiality?

A. It is usually allocated on classes of transactions rather than account balances.
B. It is usually based on the overall materiality level. (xxx)
C. It can be an allocation of the planning materiality.
D. Usually, the auditor sets low level of performance materiality to those accounts that are important.
DUNNO THIS -HULA KO LANG YONG NAKAHIGHLIGHT HAHA
Which of the following is a function of the risks of material misstatement and detection risk?
A. Business risk
B. Insignificant risk
C. Audit risk
D. Significant risk

Preplanning the audit involves several key activities. Which of the following would not be included in the
preplanning phase of an audit?
A. Understanding the client’s reasons for obtaining an audit
B. Investigating the client’s background
C. Communicating with the prospective clients prior auditor to inquire about any disagreements with the
client
D. Determining the likelihood of issuing an unqualified audit opinion on the client’s financial statements

Which of the following statements is false with regard to the relationship among audit risk, audit evidence,
and materiality?
A. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
B. Aggregate materiality thresholds should change under conditions of changing risk levels.
C. There is a direct relationship between materiality and combined risks.
D. Under conditions of high inherent and control risk, the auditor should place more emphasis on
obtaining external evidence and should reduce reliance on internal evidence.

If the inherent risk is low and control risk is medium, detection risk is
A. medium
B. higher
C. highest
D. lower

Which of the following is correct on materiality relationship to other factors in audit?

A. As the level materiality increases, the evidences to be gathered by the auditor must decrease thereby
reducing the level of detection risk.
B. As materiality increases, the level of the combined risk decreases.
C. As the level of materiality increases, the evidences to be gathered by the auditor must increase
thereby reducing the level of detection risk.
D. As materiality increases, the level of audit risk increases.

Which of the following conditions justifies an auditor’s decision of raising the materiality level?

A. Application of analytical procedures reveals a significant increase in sales revenue in December, the
last month of the fiscal year.
B. Internal control over shipping, billing, and recording of sales revenue is weak.
C. Study of the business reveals that the client recently acquired a new company in an unrelated industry.
 D. Internal control over revenue and receipts cycle is excellent.
Which of the following statements is not correct about materiality?
A. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
B. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the financial statements.
C. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
D. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.

The risk that the auditor may unknowingly fail to appropriately modify unqualified opinion on financial
statements that are materially stated is referred to as
A. audit risk
B. detection risk
C. business risk
D. information risk

Which of the following is likely to be done by the auditor during the client selection and retention phase of
planning the audit?
A. Obtian and review financial information
B. Ensure that the firm has sufficient resources to complete the engagement on a timely manner
C. Consider the need for special skills
D. Obtain an understanding of internal controls
(ang gulo ni sir dito, di niya siguro nabago choices)

The auditor should determine the overall responses to address the risks of material misstatement at the
financial statement level. Such responses least likely to include:
A. Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence.
B. Performing substantive procedures at an interim date rather than at year-end.
C. Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
D. Assigning more experienced staff or those with special skills or using experts.

Which of the following best describes the purpose of an engagement letter?

A. The engagement letter should be signed by both the client and the CPA and should be used only for
independent audits.
B. The engagement letter conveys to the management the detailed steps to be applied in the audit
process.
C. The engagement letter relieves the auditor of some responsibilities for the exercise of due care.
 D. By clearly defining the nature of engagement, the engagement letter helps avoid and resolve
misunderstandings between the CPA and the client regarding the precise nature of the work to be
performed and the type of report to be issued.

How is the audit program best described at the beginning of the audit process?
A. Temporary
B. Optional
C. Persuasive
D. Conclusive

Which of the following is a component of audit planning?

A. Obtaining sufficient and appropriate audit evidence through test of entity’s internal control.
B. Making arrangements with the client concerning the timing of audit fieldwork and use of the client’s staff in
completing certain phases of the examination.
C. Performing recalculations on interest expense.
D. Observing the client’s annual physical inventory taking and making test counts of selected items.

Which of the following is not considered as a valid source of information about the client’s processes?

A. Review of client’s budget (XXX)

B. Confirmation from third parties
C. A tour of the client’s facility
D. Management inquiry

According to PSA 200, the overall objective of the independent audit and the conduct of an audit in accordance with
Philippine Standards on Auditing clarifies that the purpose of an audit is to

A. improve the auditee’s internal control by identifying areas by which control risk could be significant (XX)
B. none of the choices
C. enhance the degree of confidence of intended users in the financial statements
D. help the auditee to eliminate fraud risk

C???? As stated in PSA 200, the objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.

Which of the following is not included in an audit engagement letter?

A. A clear explanantion of the services to be performed on the engagement
B. Objectives of the engagement
C. Management’s responsibilities
D. Representations that the financial statements were prepared in accordance with PFRS
Which of the following conditions does not increase inherent risk?

A. The client has lost a major customer accounting for approximately 30% of annual sales. (XX)
B. The client has entered into numerous related party transactions during the year under audit.
C. Those charged with governance approved significant amount of bonus for the Chief Executive Officer as well as
attractive share option plan.
D. Internal control over shipping, billing, and recording of sales revenue is weak.

If a financial reporting framework does not provide a definition or discussion of materiality, the auditor, in his conduct of
audit planning, must

A. use characteristics in the relevant PSA as a frame of reference

B. withdraw from the engagement, as this would be a valid reason to state that financial reporting framework does
not exist
C. Any of the choices
D. withdraw from the engagement, as this would be a valid reason to state that there is a limitation on the scope of
the audit

Which of the following is false with regards to the relationship among audit risk, audit evidence, and materiality?

A. Aggregate materiality thresholds may change under conditions of changing risk levels.
B. Where inherent risk is high and contrl risk is low, the audito should not ignore inherent risk.
C. Under conditions of high combined risk, the auditor should place more emphasis on obtaining external evidence
and should reduce reliance on internal evidence.
D. The lower the inherent and control risks, the lower the aggregate materiality threshold.

An initial audit requires more audit time to complete than a recurring audit. One of the reasons for this is that
A. the new auditors are usually assigned to an initial audit
B. a larger proportion of customer accounts receivable need to be confirmed on an initial audit
C. the client’s business, industry, and internal control are unfamiliar to the auditor and he needs to carefully study
them
D. the predecessor auditors need to be consulted

The risk that financial statements are likely to be misstated materialy without regard to the effectiveness of internal
control is
A. Inherent Risk
B. Control Risk
C. Audit Risk
D. Detection Risk

Which of the following will probably do by the auditor prior to accepting a new client?
A. Review the working papers of the predecessor auditor with the consent of the client.
B. Perform a peer review on the potential client in accordance with the professional standards.
C. Prepare a draft audited financial statements of the auditee.
D. With the permission from the prospective client, contact the predecessor auditor to determine if there are any
disagreements between the client and the audit firms.
Which of the following statements is false?
A. Inherent risk and control risk differ from detection risk in that they exist independently of the audit, whereas
detection risk relates to the effectiveness of the auditor’s procedures.(XX)

B. Inherent risk is assessed using various analytical techniques, available information on the company and its
industry, as well as, by using overall auditing knowledge.

C. Control risk is the likelihood that an auditor’s procedures lead to an improper conclusion that no material
misstatement exists in an assertion when in fact such a misstatement does exist. - DETECTION RISK ATA DAPAT
TO

D. Detection risk is the likelihood that a material misstatement will not be prevented or detected by the used of
auditor’s controlled procedures. (XX)

If the auditor sets the preliminary judgment about materiality level at a relatively high peso amount,

A. less evidence will be required than for a low level.

B. more evidence will be required than for a low level.
C. the amount of evidence required will not be affected.
D. the same amount of evidence will be required as for a low level.

Auditors try to identify predictable relationships when using analytical procedures. Which of the following accounts
would most likely yield the highest level of evidence regarding relationships that involve transactions?

A. Accounts receivable
B. Advertising expense
C. Accounts payable
D. Salary expense
Why should the auditors plan more work on individual accounts as lower acceptable levels of both audit risk and
materiality are established?

A. To decrease business risk

B. To increase the tolerable error in the accounts
C. To find smaller errors
D. To find larger errors (XX)

Which of the following best describes detection risk?

A. Auditing procedures fail to find material misstatements.
B. A company’s internal control fails to identify a material misstatement on a timely basis.
C. The possibility that a material misstatement will occur in any given account before considering internal control.
D. Auditors fail to discover a material misstatement in the course of their audit and do not modify their opinion.

An auditor judges an item to be immaterial when planning an audit. However, the auditor may still include the item if it
is subsequently determined that
A. related evidence is reliable
B. adverse effects related to the item are likely to occur
C. sufficient number of staff is available
D. miscellaneous income is affected
Which of the following statements is correct regarding obtaining an understanding of the entity and its environment?

A. The depth of the overall understanding that is required by the auditor in performing the audit is at least equal to
that possessed by management in managing the entity.

B. Understanding of the entity and its environment establishes a frame of reference within which the auditor plans
the audit and exercises professional judgment about assessing risks of material misstatements in the financial
statements and not responding to those risks throughout the audit. (XX)

C. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess
the risks of material misstatements in the financial statements and to design and perform further audit
procedures.

D. Obtaining an understanding of the entity and its environment is not an essential aspect of performing an audit in
accordance with PSAs.

Which of the following is incorrect with respect to obtaining an understanding with a client?

A. Auditors obtains engagement letter to avoid disagreements.

B. Auditors must document their undertanding of the engagement.
C. Auditors must obtain an understanding ony if an audit is to be conducted.
D. Auditors are required to obtain an understanding with their clients.

Which of the following is correct regarding analytical procedure?

A. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and
amounts, ratios, and trends that might indicate matters that have financial statement and audit implications, all
of which are from routine transactions of the auditee. (XX)

B. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about
plausible relationships that are reasonably expected to exist.

C. When such analytical procedures use data aggregated at a high level (which is often the situation), the results of
those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.

D. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts
yields unusual or unexpected relationships, the auditor does not considers those results in identifying risks of
material misstatements.

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

A. when the auditor has complied with the generally accepted auditing standards
B. if a client follows the relevant financial reporting framework
C. if a client has strong internal control (XX)
D. under no instances

As part of audit planning, CPAs should design audit programs for each individual audit and should include steps and
procedures so
 A. increase the amount of management information available (XX)
B. ensure that only material items are audited
C. provide assurance that the objectives of the audit are met
D. detect and eliminate fraud

c???

Inquiries directed towards those charged with governance may most likely

A. Relate to their activities concerning the design and effectiveness of the entity’s internal control and whether
management has satisfactorily responded to any findings from these activities.

B. Help the auditor understand the environment in which the financial statements are prepared.

C. Relate to changes in the entity’s marketing strategies, sales trends, or contractual arrangements with its
customers.

D. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting
policies.

Analytical procedures performed in the planning stage of an audit suggest that several accounts have unexpected
relationship. The result of these procedures most likely would indicate that
A. The communciation with the audit committee should be revised.
B. Internal control activities are not operating effectively.
C. Additional tests of details required.
D. Irregularities exist among the relevant account balances.

The auditor shall design and perform further audit procedures whose nature, timing, and extent are responsive to the
assessed risks of material misstatement at the assertion level. Which of the following is the most important
consideration in responding to the assessed risks?

A. The timing of the audit procedures

B. The nature of the audit procedures
C. The extent of the audit procedures
D. All of these are equally important

The assessment of the risks of material misstatement at the financial statement level is affected by the auditor’s
understanding of the control environment. Weaknesses in the control environment ordinarily lead the auditor to:

A. Decrease the number of locations to be included in the audit scope.

B. Modify the nature of further audit procedures to obtain less persuasive audit evidence.
C. Conduct some audit procedures at an interim date rather than year-end.
D. Have a lesser confidence in the internal control and the reliability of evidences gathered internally.

Which of the following statements describes the main purpose(s) of analytical procedures as applied at planning, testing
or completion phase of the audit?
 A. Obtain understanding of the entity and its environment, including internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
B. All of the choices are main purposes of risks assessment procedures as applied at planning, testing or
completion phase of the audit. (XX)
C. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements
at the assertion level.
D. Detect material misstatements at the assertion level.

A?

Which of the following is incorrect on materiality?

A. Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and
presentation of financial statements.
B. PSA 320 on materiality in planning and performing an audit clarifies the definition for materiality.
C. All of the choices
D. One of the most important reason why materiality is not defined in the PSA is because the principle of
materiality is first and foremost a financial reporting, rather than an auditing, concept.

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about
materiality?

A. The results of the internal control questionnaire.

B. The anticipated sample size of the planned substantive tests.
C. The entity’s annualized interim financial statements.
D. The contents of the management representation letter.

QUIZ 3

An internal control questionnaire (ICQ) contains the following question: ¯Does a single individual receive and list cash
receipts and perform posting to sales and general ledgers?" What action should an auditor take if the accounting
manager responds "yes to the question?

A. No action is required because "yes" responses on an ICQ indicate the presence of good control
B. Treat it as a potential control weakness and perform appropriate testing
C. Include it with other reportable findings in the next audit report
D. Statistically sample the response along with all other "yes?4? responses to verify their accuracy

The auditor inspects whether the documents are pre-numbered and pre-printed and asking people involved in the
preparation of these documents of whom is the person authorizing these documents. The auditor also looks into the
process of where these documents will be processed until it reaches the books of accounts. The auditor is seemingly
conducting
 A. Recalculation
B. Tracing
C. Vouching
D. Re-Performance

After obtaining an understanding of a client's controls, an auditor may decide to omit tests of controls. Which of the
following is an appropriate reason to omit tests of controls?
A. Reportable conditions preclude the auditor of assessing control risk at the maximum level
B. The effort to test controls does not exceed the effort saved by not performing substantive tests
C. The controls duplicate other controls
D. The controls appear adequate

After obtaining an understanding of an entity's internal controls and assessing control risk, an auditor may next:

A. Discontinue searching for reportable condition

B. Evaluate whether control activities can detect material misstatements
C. Perform tests of controls to verify management's assertions that are embodied in the financial statements
D. Consider whether he can reduce the assessed level of control risk further

Which of the following is false on internal control assessment of the auditor?

A. Assessment of internal control will help the auditor to determine the nature, timing and extent of further audit
procedures
B. Final assessment of control risk can either support or not the initially assessed control risk if test of control has
been performed
C. Test of control is an audit procedure to assess the effectiveness of entity’s internal control
D. When the auditor initially assessed the control risk at maximum, the nature of auditor’s substantive testing will
be lesser in scope

Understanding the entity’s internal control is

A. required in every audit of financial statements
B. mandatory only if the initial assessment of control risk is below the maximum
C. optional on the part of the auditor
D. not part of risk assessment procedure

Primarily, evidences gathered from observation, inquiry, inspection and reperformance on the procedures and policies
of the entity will be directed to

A. Any of the choices (XXX)

B. Reliability of the amounts stated in entity’s accounting records
C. Operating effectiveness of the entity’s internal control
D. Accuracy of financial information in entity’s financial statements

B? PWEDE RIN C EH UNSURE ME SINEARCH KO TO LUMALABAS IS MAY PAGKAKAPAREHO SA B AND C.

The objective of dual-purpose tests is to:

A. Identify unusual trends or patterns in comparative financial statements

B. Test internal controls as well as transactions and balances using the same test procedures
C. Evaluate whether internal controls are operating effectively
D. Detect material misstatements in the financial statements

It determines whether the controls over financial reporting, if operating effectively, would be expected to prevent or
detect errors or fraud that could result in a material misstatement in the financial statements.

A. Design efficiency
B. Design effectiveness
C. Controls on framework (XX)
D. Controls on design

B??????????

The primary purpose of performing further control tests is to provide

A. basis for understanding the flow of transactions through the accounting system
B. assurance that transactions are properly recorded
C. all accounting control procedures leave visible evidence
D. basis for the assessed level of control risk below the maximum level

The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the
revenue cycle. Which of the following conditions suggests a need for additional testing of controls?

A. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large
number of custom
B. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of
selected controls will result in a major reduction in substantive testing
C. Internal control over sales, billing; and shipping appears strong but 80% of sales revenue is attributable to three
major customers
D. Internal control is found to be weak with regard to shipping and billing

An auditor may decide to assess control risk at below the maximum level for certain assertions because he believe

A. sufficient evidential matter to support the assertions is not likely to be available

B. considering the relationship of assertions to specific account balances is not efficient
C. more emphasis on tests of controls than substantive tests is warranted (XX)
D. evaluating the effectiveness of policies and procedures cannot be relied upon

a or b

The sequence of steps in gathering evidence as the basis of the auditor‘s opinion is:

A. Test of controls, documentation of control structure,, substantive tests

 B. Documentation of control structure, substantive tests, test of controls
C. Substantive tests, test of controls, documentation of control structure
D. Documentation of control structure, test of controls, substantive tests

After obtaining an understanding of internal control and assessing control risk, an auditor decides not perform
additional tests of controls. The auditor least likely concludes that the

A. assessed level of inherent risk exceeds the assessed level of control risk
B. internal control is not properly designed and can’t be relied on
C. evidence obtainable through tests of controls would not support an increased assessment of control risk
D. additional evidence to support a further reduction in control risk is not cost-beneficial to obtain

If the auditors assessed level of control risk is below the maximum

A. none of the choices
B. no detection risk
C. detection risk is at low level
D. detection risk is at high level

Which of the following statements about tests of controls is valid?

A. Audit evidence obtained by doing observation does not pertains only to the point in time at which the procedure
was applied.
B. The auditor may perform inquiry and observation and gathering audit evidence about the operating
effectiveness of the control
C. Ordinarily, making inquiries provides more reliable audit evidence than doing observation when testing
segregation of functional responsibilities
D. Any of the choices

Regardless of the assessed level of control risk, an auditor would perform some
A. tests of control policies and procedures in order to determine their operating effectiveness.
B. substantive tests to restrict detection risk for significant transaction classes.
C. analytical procedures to verify the design of controls.
D. dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

If the auditor uses the primarily test of controls instead of the higher control risk approach

A. A lower level of understanding of internal control is required

B. The auditor plans a heavier reliance on substantive tests
C. The auditor plans to assess control risk at below the maximum level (XXX)
D. The auditor plans to restrict substantive test

B?????????
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit
trail of documentary evidence; the auditor most likely will test the procedures by

A. analytical procedures and confirmation

B. observation and inquiry
C. confirmation and observation
D. inquiry and analytical procedures

In assessing control risk, the auditor must, as a minimum

A. perform tests of all significant controls
B. obtain an understanding of the design, implementation, and operating effectiveness of the client's internal
control (XXX)
C. obtain an understanding of the design of the client's internal control
D. obtain an understanding of the design and implementation of the client's internal control

C??????????? ISAs require auditors to obtain an understanding of the internal controls relevant to the audit by
evaluating the design and implementation of those controls irrespective of the size and complexity of the client and
regardless of the audit strategy.

After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the maximum level
for some assertions because he

A. identifies internal control policies and procedures that are likely to prevent material misstatements
B. believes the internal control policies and procedures are unlikely to be effective
C. performs tests of controls to restrict detection risk to an acceptable level
D. determines that the pertinent internal control components are not well documented
B?
Which of the following is not considered a test of internal control procedures?

A. Examine signatures on checks

B. Observe the cash count
C. Send confirmation letters to banks (xxx)
D. Inquire on the prepared reconciliation of bank accounts as of the balance sheet date

A??

Tests of controls are concerned primarily with each of the following questions except:
A. Were the necessary controls consistently performed?
B. How were the controls applied?
C. By whom were the controls applied?
D. Why were the controls applied?

A procedure that involves tracing a transaction from its origination through the company's information systems is
referred to as a (n):
A. Inquiry/analysis approach
B. Re-analysis approach
C. Walkthrough
D. Remediation

After documenting how the auditor understands the auditee’s internal control in an audit engagement, the auditor may
not perform tests on control if
A. Based on the documentation, the internal control is the responsibility of the management
B. Based on the documentation, the internal control can be relied upon
C. Based on the documentation, the internal control cannot be relied upon
D. Based on the documentation, the internal control either can or cannot be relied upon

Reportable conditions are matters that come to an auditor's attention and that should be communicated to an entity's
audit committee because they represent
A. intentional attempts by client personnel to limit the scope of the auditor's work
B. significant deficiencies in the design or operation of internal control
C. material irregularities or illegal acts perpetrated by management
D. flagrant violations of the entity's documented conflict-of-interest policies

Which of the following is a test of control?

A. Vouching the balances of equipment to its supporting documents to know any overstatements (xxx)
B. Performing bank reconciliation to know discrepancies between ledger and bank balances
C. Recalculating the amount of interest expense on the borrowings made for the acquisition of equipment
D. Asking the senior level management on the approval of recently acquired equipment

B?

Which of the following is the logical order of performing the following auditing procedures
I. Preparation of a flowchart depicting the client's internal control system.
II. Tests of internal control procedures.
III. Substantive testing
A. II, I, III
B. III, II, I
C. II, III, I
D. I, II, III

Which of the following tests of controls can be the most reliable source of evidences on the approval of the payroll
supervisor of labor usage to support occurrence assertion?
A. Vouching labor reports to time tickets authorized by the management
B. Observation of duties
C. Examine documentary evidence of supervisor approval
D. Vouching labor costs to labor reports (XXX)

C? DI KO TO KNOWS ☹

Which of the following is true?

A. Direction of test of controls really matters on the performance of such (xxx)
B. After identifying specific control activities, the auditor will only choose those controls from which he thinks can
be relied upon to reduce substantive testing
C. Test of control can always be ignored since it is the substantive testing which is always required
D. Recalculation is the most important test of internal control
B???

Which of the following is an indicator of control by the management to ensure that events have been properly recorded
in the correct accounting period?
A. Documents ae prenumbered and numerical sequence reviewed
B. Entries are reviewed by person independent of preparation
C. Reports are prepared monthly and transmitted to the cost accounting department
D. Expenses by department are compared to actual expenses

Which of the following the auditor's purpose of further testing the control procedures?
A. Reduce the risk that error or fraud that has not been prevented or detected by the internal control system is not
detected by the independent audit
B. Provide assurance that transactions are executed in accordance with management's authorization and access to
assets is limited by a segregation of functions
C. Provide a basis for reducing the assessed level of control risk
D. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in conformity with PFRS

An independent auditor has concluded that the client's records, procedures and representations can be relied upon
based on tests made during the year when internal control was found to be effective. The auditor should test the
records, procedures, and representations again at year-end if:
A. Inquiries and observations lead the auditor to believe that conditions have changed significantly
B. Comparisons of year-end balances with like balances at prior dates revealed significant fluctuations
C. Unusual transactions occurred subsequent to the completion at the interim audit work
D. Client records are in a condition that facilitates effective and efficient testing
A procedure that would most likely be used by on auditor in performing tests of control regarding segregation of
functions on which no audit trail is available:
A. observation
B. reconciliation
C. reprocessing
D. inspection

To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except
A. Design substantive tests
B. Inspect documents and records
C. Make observations
D. Make inquiries

In obtaining an understanding at an entity's internal control in a financial statement audit, an auditor is required to
A. perform procedures to test the design of controls
B. search for significant deficiencies in the operation of internal control
C. document the control procedures to test the operating effectiveness of internal control components (XXX)
D. determine whether the controls have been placed in operation

b or d?

Auditors frequently use diagrams in connection with which of the following?

A. Preparation of generalized computer audit programs
B. Confirming the ending balances of accounts receivable
C. Review of the client's internal control procedure
D. Performance of analytical review procedures for account balances

When the assessed level of control risk is below the maximum

A. there is a low level of risk of material misstatements
B. there is no need to perform substantive testing
C. none of the choices
D. substantive testing will be performed

An auditor is least likely to test for on internal control that provides for
A. segregation of the functions of recording disbursements and reconciling the bank account (XXX)
B. classification of revenue and expense transactions by product
C. approval of the purchase and sale at marketable securities
D. comparison of receiving reports and vendors‘ invoices with purchase orders
MATCHING

56. Indicate by letter the appropriate auditor’s response to each of the

listed audit environments. More than one response may be applicable to
each environment.

____ 1. The auditor assesses control risk at a high level and

suspects earnings inflation in the form of premature
revenue recognition.
- Lower the individual item materiality threshold
- Lower the aggregate materiality threshold
- Increase reliance on external evidence

____ 2. Although the auditor has found internal control to be

highly effective, analytical procedures suggest that
repairs and maintenance expenses may have been
debited to plant asset accounts, thereby materially
overstating net income.
- Lower the individual item materiality threshold
- Consider internal evidence as possessing enhanced reliability

____ 3. The auditor perceives internal control over sales and

cash receipts as excellent; but internal control over
purchases, inventory, and cash payments is considered weak.
- Lower the aggregate materiality threshold
- Rely on external evidence for the expenditure cycle, while
accepting internal evidence as reliable for the revenue cycle

____ 4. Debits to the account, “Construction in Progress”

have increased dramatically during the year under
audit; during the same period, however, “Repairs and
Maintenance Expense”, as well as “Research and
Development” have experienced significant declines.
Internal control is considered good in all areas.
- Lower the individual item materiality threshold

____ 5. Although salespersons are granted 5% commissions on

all sales, the current year’s rate, based on unaudited sales
and commissions data, is 3%. Internal control
over sales and cash receipts is strong.
- Lower the individual item materiality threshold

____ 6. Based on past experience and analytical procedures

applied to unaudited data, the auditor suspects that the
controller has understated net income to reduce the company’s tax
liability. Internal control for the company is weak in all
areas.
- Raise the individual item materiality threshold
- Lower the aggregate materiality threshold
- Increase reliance on external evidence
____ 7.Tests of internal control revealed it to be much more
effective than the auditor had perceived during the
preliminary planning stages.
- Raise the aggregate materiality threshold
- Consider internal evidence as possessing enhanced reliability

a. Lower the individual item materiality threshold

b. Raise the individual item materiality threshold
c. Lower the aggregate materiality threshold
d. Raise the aggregate materiality threshold
e. Increase reliance on external evidence
f. Consider internal evidence as possessing enhanced
reliability
g. Rely on external evidence for the expenditure cycle,
while accepting internal evidence as reliable for the
revenue cycle
h. Rely on external evidence for the revenue cycle, while
accepting internal evidence as reliable for the
expenditure cycle

SOLUTION:

1. a,c,e
2. a,f
3. c,g
4. a
5. a
6. b,c,e
7. d,f