AUDITING THEORY

Auditing Concepts

1. Which of the following categories is included in generally accepted auditing standards?

a. Standards of review.
b. Standards of planning.
c. Standards of fieldwork.
d. Standards of evidence.

2. Which of the following statements is correct regarding a review engagement of a nonpublic company's financial
statements performed in accordance with the Statements on Standards for Accounting and Review Services
(SSARS)?
a. An accountant must establish an understanding with the client in an engagement letter.
b. An accountant must obtain an understanding of the client's internal control when performing a review.
c. A review provides an accountant with a basis for expressing limited assurance on the financial
statements.
d. A review report contains an accountant's opinion of the financial statements taken as a whole.

3. Which of the following procedures does a CPA normally perform first in a review engagement in accordance with
Statements on Standards for Accounting and Review Services (SSARS)?
a. Inquiry regarding the client's principles and practices and the method of applying them.
b. Inquiry concerning the effectiveness of the client's system of internal control.
c. Inquiry to identify transactions between related parties and management.
d. Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.

4. Which of the following describes how the objective of a review of financial statements differs from the objective of a
compilation engagement?
a. The primary objective of a review engagement is to test the completeness of the financial statements prepared,
but a compilation tests for reasonableness.
b. The primary objective of a review engagement is to provide positive assurance that the financial statements are
fairly presented, but a compilation provides no such assurance.
c. In a review engagement, accountants provide limited assurance, but a compilation expresses no
assurance.
d. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are
fairly presented, but a compilation provides limited assurance.

5. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
b. Training required in performing the service.
c. Scope of services.
d. CPA’s approach to the service.

6. The primary goal of the CPA in performing the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

7. Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency, effectiveness, and
a. Internal control. c. Accuracy.
b. Evaluation. d. Compliance

8. 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 concentrates on implementing financial and accounting control in a newly organized company.
c. It attempts and is designed to verify the fair presentation of a company's results of operations.
d. It concentrates on seeking out aspects of operations in which waste would be reduced by the
introduction of controls.
9. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations,
and changes in financial position is applied within the framework of
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

10. Which of the following is not considered an assertion as formulated by the Auditing Standards Board?
a. Valuation or allocation. c. Rights and obligations.
b. Mathematical accuracy. d. Presentation and disclosure.

11. Which of the following is not a distinguishing feature of risk-based auditing?

a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

12. To maximize independence, the director of internal auditing should report to the
a. Audit committee. c. Chief financial officer.
b. Controller. d. Director of information systems.

13. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter. c. Audit report.
b. Management letter. d. Financial statements.

14. The best description of the scope of internal auditing is that it encompasses
a. Primarily operational auditing.
b. Both financial and operational auditing.
c. Primarily the safeguarding of assets and verifying the existence of such assets.
d. Primarily financial auditing.

15. A typical objective of an operational audit is to determine whether an entity's

a. Financial statements fairly present financial position and cash flows.
b. Financial statements present fairly the results of operations.
c. Financial statements fairly present financial position, results of operations, and cash flows.
d. Specific operating units are functioning efficiently and effectively.

16. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the
a. Scope paragraph of the auditor’s report. c. Management letter.
b. Opinion paragraph of the auditor’s report. d. Engagement letter.

17. The four major steps in conducting an audit are:

a. Testing internal controls c. Planning
b. Audit report d. Testing transactions and balances
The proper sequence in applying the above steps is:
a. cadb c. bcda
b. cdab d. adcb

18. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

19. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
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.

20. Which of the following statements is not a distinction between independent auditing and internal auditing?
 a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors report
directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing.

21. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve
misunderstandings between CPA and 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 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.

22. In assessing audit risk, the CPA needs to do all of the following except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the client.
d. Understand the entity and the industry in which it operates.

23. Which of the following tasks should be performed prior to the final audit?
a. Determining the fairness of property, plant, and equipment.
b. Confirming accounts receivable.
c. Testing internal control.
d. Collecting and evaluating evidence supporting the fairness of inventory values.

24. The primary purpose of an independent audit of financial statements is to

a. provide a basis for assessing management’s performance.
b. comply with laws and regulations.
c. assure management that the financial statements are unbiased and free from material misstatements.
d. provide users with an unbiased opinion about the fairness of information presented in the financial
statements.

25. Which of the following statements best describes a review service?

a. A review engagement focuses on providing assurance on the assertions contained in the financial statements
of a public company.
b. A review engagement focuses on providing assurance on the internal controls of a public company.
c. A review engagement focuses on providing limited assurance on financial statements of a private
company.
d. A review engagement focuses on providing advice in a three-party contract.

26. Professional skepticism dictates that when management makes a statement to the auditors, the auditors should
a. disregard the statement because it ranks low of the evidence quality scale.
b. corroborate the evidence with other supporting documentation whenever possible.
c. require that the statement be put in writing.
d. believe on the statement in order to maintain the professional client-auditor relationship.

27. In performing a financial statement audit, which of the following would an auditor least likely consider?
a. Internal control. c. Quality of managements' business
b. Compliance with GAAP. decisions.
d. Fairness of the financial statement amounts.

28. The level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Absolute assurance. c. Negative assurance.
b. High assurance. d. Reasonable assurance.

29. An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the case
of financial statement audit, which of the following is not a valid criterion?
a. Accounting standards generally accepted in the Philippines.
 b. International Accounting Standards.
c. Authoritative financial reporting framework.
d. Philippine Standards on Auditing.

30. Which of the following statements is (are) true regarding the provision of assurance services?

I. The third party who receives the assurance generally pays for the assurance received.
II. Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.
III. Assurance services can be provided either on information or processes.

a. I and II. c. III only.

b. I and III. d. I, II, and III.

31. Which of the following is least likely an objective of an assurance engagement?

a. The engagement is intended to prevent the issuance of materially misleading information.
b. The engagement is intended to enhance the credibility of information about a subject matter.
c. An assurance engagement is intended for a professional accountant to express a conclusion that provides the
intended users with a level of assurance about the subject matter.
d. The engagement is intended to provide a level of assurance to be issued by a professional accountant about
the information of being in conformity, in all material respects, with suitable criteria.

32. The broad range of assurance engagements includes all, but which of the following?

1) Engagements intended to provide high or moderate levels of assurance.

2) Preparation of tax returns, though no conclusion is expressed.
3) Attest and direct reporting engagements.
4) Engagement to report externally, but not internally.
5) Engagements in the private and public sector.
6) Agreed-upon procedure engagement.

a. 2, 4, 5 c. 2, 5, 6
b. 2, 4, 6 d. 4, 6

33. Which statement does not accurately describe an assurance engagement?

a. The objective of an assurance engagement is for a professional accountant to evaluate or measure a subject
matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion
that provides the intended user with a level of assurance about that subject matter.
b. Not all engagements performed by professional accountants are assurance engagements.
c. A particular engagement, to be an assurance engagement, depends upon whether it exhibits all the
following elements: a two- party relationship, a subject matter, suitable criteria, and a conclusion.
d. An engagement in form of agreed-upon procedures result in the expression of factual findings.

34. Which of the following is not an element of an assurance engagement?

a. A subject matter. c. A conclusion.
b. Suitable criteria. d. A two-party relationship.

35. A draft of statement, studies or standards should be discussed by the Council en banc. How many members of AASC
are required to approve the draft for exposure?
a. Majority c. Eight
b. Ten d. Twelve

36. Theoretically, it is possible to provide an infinite range of assurance from a very low level of assurance to an absolute
level of assurance. In practice, the professional accountants cannot provide absolute assurance because of the
following, except:
a. The professional accountants employ testing process.
b. The internal control has its inherent limitations.
c. The use of judgment in gathering evidence and drawing conclusions based on that evidence.
d. The lack of expertise of the professional accountants in doing a systematic engagement process.

37. Which is not true of the intended user?

 a. The intended user is the person or class of persons for whom the professional accountant prepares the report
for a specific use or purpose.
b. The intended user(s) is (are) always limited to the addressee of the professional accountant’s report.
c. The responsible party may also be one of the intended users.
d. The intended user(s) may not be the addressee of the professional accountant’s report.

38. Which of the following is least likely a subject matter of an assurance engagement?
a. Data. d. Degree of loyalty of employees to their
b. Systems and processes. employer.
c. Compliance with regulations.

39. The practitioner’s report on an assurance engagement should always include the following, except:
a. A description of the engagement and identification of the subject matter.
b. Identification of the standards under which the engagement was conducted.
c. Reference to the work of an expert.
d. Identification of the criteria.

40. Some or all of the following are planning considerations:

I. Criteria to be used.
II. Nature and extent of involvement of the experts.
III. Possible sources of evidence.
IV. Type of conclusion to be issued.
V. Preliminary judgment about materiality and engagement risk.
VI. Content of the management letter.

Which of the foregoing are matters that need to be considered in planning an assurance engagement?
a. All of them. c. II, III, IV, VI.
b. I, II, III, V. d. I, III, V, VI.

41. How many members of AASC are needed to approve the exposed draft as Philippine Standards on Auditing?
a. Majority of the regular members c. At least ten
b. At least eight d. At least twelve

42. Which of the following is required if the professional accountant uses experts who are not professional accountants?
a. The ultimate responsibility for the professional service is assumed by the expert who is not a professional
accountant.
b. The professional accountant is discouraged to engage the services of experts who are not a professional
accountant.
c. The professional accountant must take steps to see that such experts are aware of the ethical
requirements of the profession.
d. Experts who are not professional accountants need not be informed of ethical requirements because they are
not members of the Accountancy profession.

43. Which of the following is expected of AASC to do?

a. AASC should normally expose a proposed interpretation of statements.
b. AASC should normally expose its opinion on specific queries from a practicing CPA.
c. When it is deemed necessary to expose a statement for a comment on proposed interpretations of statements,
the exposure period is understandably shorter than those of the regular drafts of standards.
d. To make the statements on Philippine Standards on Auditing operative, the final statement shall be
submitted to the Board of Accountancy for approval.

44. Which one of the following is not a key attribute that is essential to perform an assurance service?
a. subject matter knowledge c. established criteria or standards
b. independence d. accounting skills

45. As it relates to an audit, materiality is

a. not taken into consideration.
b. related only to the sufficiency of procedures performed.
c. based upon audit fees.
d. determined based upon the importance to a user of the financial statements.
46. The suitability of the criteria to which the professional accountant will base his evaluation of the subject matter partly
depends on:
A B C D
Relevance YES YES YES NO
Reliability YES YES YES YES
Understandability YES NO YES NO
Neutrality NO NO YES YES

47. How did the framework of Philippines Standards on Auditing conceptually describe an assurance?
a. It refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use
by another party.
b. The level of assurance that may be provided is determined by the reporting objective.
c. An assurance is expressed positively in the report.
d. Because of the inherent limitation in an audit, the assurance is of limited one.

48. It provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must
have if it is to be useful.
a. Materiality c. Relevance
b. Reliability d. Misstatement

49. The difference between what the public expects to get from the audited financial statements and what the public is
actually getting is known as:
a. Credibility gap c. Expectation gap
b. Audit gap d. Level of assurance gap

50. Which of the following statements does not properly describe an element of the theoretical framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between the managers who prepare the data and the auditors who examine them.
c. Auditors act on behalf of management.
d. An audit benefits the public.

51. An audit of financial statements is conducted in order to determine if the

a. organization is operating efficiently and effectively.
b. auditee is following specific procedures or rules set down by some higher authority.
c. overall financial statements are stated in accordance with specified criteria.
d. client entity prescribes a good internal control system

52. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Conflict between an information provider and a user can result in biased information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

53. Why does a company choose to have an independent auditor report on its financial statements?
a. Independent auditors will always detect management fraud.
b. The company’s management preparing the statements may have a vested interest in reporting certain
results.
c. Independent auditors guarantee the accuracy of the financial statements.
d. An independent audit is designed to search for deficiencies in the company's internal controls.
54. Which of the following criteria is unique to the independent auditor’s attest function?
a. general competence.
b. familiarity with the particular industry in which each client operates.
c. due professional care.
d. independence.

55. Which of the following best describes the main reason why the independent auditors report on an entity's financial
statements?
a. A management fraud may exist, and it is likely to be detected by independent auditors.
b. The management that prepares the statements and the persons who use the statements may have
conflicting interests.
c. Misstated account balances may be corrected as a result of an independent audit work.
 d. The management that prepares the statements may have overlooked a poorly designed system of internal
control

56. Information risk refers to the risk that

a. the client's financial statements may be materially false and misleading.
b. the auditor may express an unqualified opinion on financial statements that are materially misstated.
c. the client entity may not be able to remain in business.
d. errors and frauds would not be detected by the auditor's procedures.

57. Which of the following is responsible for an entity's financial statements?

a. The entity's management. c. The entity's internal auditors.
b. The entity's audit committee. d. The entity's board of directors.

58. A typical objective of an operational audit is for the auditor to

a. determine whether the financial statements fairly present the client entity’s operations.
b. evaluate the feasibility of attaining the client entity’s operational objectives.
c. make recommendations to client for improving its performance.
d. report on the entity’s relative success in maximizing its profits.

59. Which of the following types of audit is performed in order to determine whether an entity’s financial statements are
fairly stated, in all material respects, in conformity with the generally accepted accounting principles?
a. Operational audit c. Compliance audit
b. Financial statement audit d. Performance audit

60. An independent audit is important to the readers of financial statements because it

a. provides a measure of management’s stewardship function.
b. measures and communicates the financial data included in the financial statements.
c. objectively examines and reports on management’s financial statements.
d. reports on the accuracy of information in the financial statements.

61. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational audit c. Compliance audit
b. Financial statement audit d. Financial audit

62. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
a. Internal auditing c. BSP bank audit
b. Government auditing d. External auditing

63. The primary goal of the CPA in performing the attest function is to
a. detect fraud.
b. examine individual transactions so that the auditor may certify as to their validity.
c. determine whether the client's assertions as embodied in the financial statements are fairly stated.
d. assure the consistent application of correct accounting procedures.

64. An independent audit aids in the communication of economic data because the audit
a. confirms the accuracy of management’s financial representation.
b. lends credibility to the financial statements.
c. guarantees that financial data are fairly presented.
d. assures the readers of financial statements that any fraudulent activity has been detected and its effect has
been corrected.

65. Which of the following best describes the attest process?

a. Proving the accuracy of the books and records.
b. Gathering sufficient evidence about specific and known assertions.
c. Assisting management in the successful operations of the company.
d. Assembling and filing tax returns and related supplemental information.

66. The assumption underlying an audit of financial statements is that they will be used by
a. the regulatory agencies to verify information that is relevant to their supervisory functions.
b. the board of directors as basis of declaring cash dividends.
c. the general public in making investment decisions.
d. different groups for different purposes.
67. Which of the following is an example of an assertion made by the management in an entity’s financial statements?
a. the financial statements are prepared in an unbiased manner.
b. the reported inventory balances reflect all related transactions for the period.
c. the reported accounts receivable do not include any uncollectible accounts.
d. the scope of the auditor’s investigation is not limited in any way by management.

68. A CPA certificate is an evidence of

a. recognition of independence. c. culmination of the education process.
b. basic competence at the time the d. membership in the PICPA.
certificate is granted.

69. An audit can have a significant effect on

a. information risk. c. the risk-free interest rate.
b. business risk. d. all of these.

70. Which of the following is a cause of information risk?

a. Voluminous data.
b. Biases and motives of the provider of information.
c. Remoteness of the provider of the information.
d. Each of these is a cause of information risk.

71. The main way(s) to reduce information risk is to have

a. the user verify the information. c. audited financial statements provided.
b. the user share the information risk with d. all of these.
management.

72. The predominant type of attestation service performed by CPAs is

a. audit. c. compilation.
b. review. d. management consulting.

73. Upon completion of a typical audit, the auditor has

a. total assurance that all material errors and irregularities have been found.
b. high level of assurance that all material errors and irregularities have been found.
c. a low level of assurance that all material errors and irregularities have been found.
d. no assurance that all material errors and irregularities have been found.

74. The single feature that most clearly distinguishes auditing, attestation, and assurance is the
a. type of service being rendered. c. scope of services.
b. training required to perform the service. d. CPA’s approach to the service.

75. Which of the following attributes is more closely associated with assurance services performed by a CPA firms than
with other lines of professional work?
a. Integrity
b. Competence
c. Independence
d. Keeping informed on current professional developments

76. An investor, while reading the financial statements of Silver Corporation, learned that the statements are
accompanied by an unqualified auditor’s report. From this the investor may conclude that:
a. Any disputes over significant accounting issues have been settled to the auditor’s satisfaction.
b. The auditor is satisfied that Silver is operationally efficient.
c. Informative disclosures in the financial statements but not necessarily in the notes to financial statements are to
be regarded as reasonably adequate.
d. The auditor has ascertained that Silver’s financial statements have been prepared accurately.

77. A CPA should maintain objectivity and be free of conflicts of interest when performing:
a. Audits, but not any other professional services
b. All attestation services, but not other professional services
c. All attestation and tax services, but not other professional services
d. All professional services
78. A summary of findings rather than assurance is most likely to be issued on which engagement?
a. Agreed-upon procedures c. Examination
b. Compilation d. Review

79. Which of the following professional has primary responsibility for the performance of an audit?
a. The managing partner of the firm
b. The senior assigned to the engagement
c. The manager assigned to the engagement
d. The partner in charge of the engagement

80. Which of the following services provides the highest level of assurance to third parties about a company’s financial
statements?
a. Audit.
b. Review.
c. Compilation.
d. Each of the above provides the same level of assurance.

QUIZZER QUESTIONS ( Answer the following questions in 30 - 45 minutes)

1. The most common type of audit report contains a(n):

a. adverse opinion. c. qualified opinion.
b. disclaimer of opinion. d. unqualified opinion.

2. The auditor’s judgment concerning the overall fairness of presentation of financial position, results of operation, and
changes in cash flow is applied within the framework of
a. quality control
b. generally accepted auditing standards which include the concept of materiality
c. the auditor’s evaluation of the audited company’s internal control.
d. Philippine Financial Reporting Standard

3. In “auditing” accounting data, the auditor is concerned with

a. determining whether recorded information properly reflects the economic events that occurred during
the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complied with government requirement.

4. In all cases, audit reports must

a. be signed by the individual who performed the audit procedures.
b. certify the accuracy of the quantitative information which was audited.
c. inform readers of the degree of correspondence between the quantifiable information and the
established criteria.
d. communicate the auditor’s findings to the general public.

5. Which one of the following is an example of management expectations from the independent auditors?
a. An expert providing a written communication as the product of the engagement.
b. Individuals who perform day-to-day accounting functions on behalf of the company.
c. An active participant in management decision-making.
d. An internal source of expertise on financial and other matters.

6. When providing consulting services, the CPA acts primarily as a(n):

a. independent accountant.
b. expert on compliance with industry standards.
c. technology specialist.
d. objective advisor on how to use the information.

7. In performing attestation services, a CPA will normally:

a. improve the quality of information, or its context, for better use of the decision makers.
b. recommend how to use the information.
c. perform market analyses and cost estimates.
 d. states a conclusion about a written assertion.

8. Which of the following best describes an operational audit?

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

9. Evidence is defined as any information used by the auditor to determine whether the quantifiable information being
audited is stated in accordance with the established criteria. Evidence takes many different forms, including
a. oral representation (testimony) from the client management.
b. written communication (confirmation) with outsiders.
c. observations made by the auditor.
d. all of these.

10. Because the client company pays the external auditor a professional fee, he
a. is absolutely independent and may conduct an audit.
b. may be sufficiently independent to conduct an audit.
c. is never considered to be independent.
d. must receive approval of the Securities and Exchange Commission before conducting an audit.

11. A typical objective of an operational audit is to determine whether an entity's

a. financial statements fairly present financial position and cash flows.
b. financial statements present fairly the results of operations.
c. financial statements fairly present financial position, results of operations, and cash flows.
d. specific operating units are functioning efficiently and effectively.

12. Which of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations.
b. Compliance with applicable government regulations.
c. Presentation of financial statements in accordance with the applicable financial reporting criteria.
d. All the given criteria are equally difficult to evaluate objectively.

13. An audit which is undertaken in order to determine whether the auditee is following specific procedures or rules laid
down by some higher authority is classified as a(n)
a. audit of financial statements. c. operational audit.
b. compliance audit. d. production audit.

14. Assurance services involve which of the following?

a. Relevance as well as reliability.
b. Non-financial information as well as traditional financial statements.
c. Electronic databases as well as printed reports.
d. All of these.

15. Which of the following is a difference between attestation and auditing standards?
a. Attestation standards cover attest engagements other than those involving GAAP financial statements.
b. Attestation standards do not require independence in mental attitude.
c. Auditing standards apply only to CPAs while attestation standards apply to all accountants.
d. Attestation standards do not include standards of reporting.

16. Which of the following pertains to the reliability of audit evidence?

a. The independence of the source of evidence.
b. The expertise level of the auditor who obtains the evidence.
c. Whether the audit client uses a manual or computerized accounting system.
d. The quantity of the evidence obtained.

17. The audit committee of the board of directors of a company is responsible for:
a. hiring the auditor.
b. preparing the financial statements.
c. the audit workpapers.
 d. independence and obtaining evidence.

18. Which of the following statements is true concerning a compliance audit?

a. Compliance audits are only performed by government auditors.
b. Risks such as inherent risk, control risk, and detection risk are not appropriate in the planning and performance
of a compliance audit.
c. Materiality is difficult to measure in a compliance audit.
d. A report on compliance can only include negative assurance.

19. Audits of financial statements include an expression of a conclusion about which of the following financial statement
characteristics?
a. Governance. c. Relevance.
b. Reliability. d. Timeliness.

20. A review of a company's financial statements by a CPA firm:

a. is significantly less in scope than an audit and results in a report which provides positive assurance, although
not absolute assurance.
b. is similar in scope to an audit and adds similar credibility to the statements.
c. concludes with the issuance of a report expressing the CPA's opinion as to the fairness of the statements.
d. is designed to provide only limited or moderate assurance.

21. The attest function:

a. is an essential part of every engagement performed by a CPA.
b. requires a complete review of all transactions during the period under examination.
c. requires a review of a sample of transactions during the period under examination.
d. includes the preparation of a written report about the CPA's conclusion.

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

a. assertions. c. financial statements.
b. operating data. d. economic data.

23. The expertise that distinguishes auditors from accountants is in terms of the
a. ability to interpret generally accepted accounting principles.
b. requirement to possess education beyond the Bachelor’s degree.
c. accumulation and interpretation of evidence.
d. ability to interpret accounting standards.

24. Most of the independent auditor’s work in formulating an opinion on financial statements consists of
a. studying and evaluating internal control.
b. obtaining and examining evidential matter.
c. examining cash transactions.
d. comparing recorded accountability with physical existence of property.

25. Attestation risk is limited to a low level in which of the following engagement(s)?
a. Both examination and review
b. Examination but not review
c. Review but not examination
d. Neither examination nor review

26. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as
a(n):
a. Peer review engagement c. Quality assurance engagement
b. Quality control engagement d. Attestation engagement

27. 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. Has similar scope as an audit and adds similar credibility to the statements
d. Culminates in issuance of a report expressing the CPA’s opinion as to the fairness of the statements

28. The risk associated with a company’s survival and profitability is referred to as:
a. Business risk b. Information risk
 c. Detection risk d. Control risk

29. As guidance for measuring the quality of the performance of an auditor, the auditor should refer to
A. Statements of Financial Accounting Standards Board.
B. Philippine Standards on Auditing.
C. Interpretations of Rules of Conduct.
D. Statements on Quality Control Standards.

30. Generally Accepted Auditing Standards (GAAS) and Philippine Standards on Auditing (PSA) should be looked upon
by practitioners as
A. ideals to work for, 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. benchmarks to be used on all audits, reviews, and compilations.

31. The auditor’s responsibility for the detection of client’s noncompliance with laws and regulations is:
A. Greater than for errors or fraud.
B. Less than for errors or fraud.
C. Restricted to information that comes to his attention.
D. The same as it is for errors or fraud.

32. Reasonable assurance means:

A. Gathering of all available corroborating evidence for the auditor to conclude that there are no material
misstatements in the financial statements, taken as a whole.
B. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements, taken as a
whole, are free from any misstatements.
C. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements are free of
material unintentional misstatements.
D. Gathering of the audit evidence necessary for the auditor to conclude that there are no material
misstatements in the financial statements, taken as a whole.

33. Required auditor communication to the Audit Committee concerning noncompliance with laws and regulations that
were detected includes:
A. All material items.
B. All those which are not adequately addressed by management.
C. All those that constitute management fraud.
D. Any of such acts.

34. An auditor who accepts an audit engagement but does not possess the industry expertise of the business entity,
should
A. Engage financial experts familiar with the nature of the business entity.
B. Obtain a knowledge of matters that relates to the nature of the entity's business.
C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D. First inform the client management that an unqualified opinion cannot be issued.

35. Auditors focus on

A. areas where the risk of material errors and irregularities is least.
B. areas where the risk of material errors and irregularities is greatest.
C. all areas equally.
D. a random selection of all areas.

36. The decision as to how much evidence to be accumulated for a given set of circumstances is.
A. provided by following the generally accepted accounting principles.
B. one requiring professional judgment
C. determined by statistical analysis
D. provided in the Philippines Standards on Auditing.

37. Which of the following statements best describes the primary purpose of Philippine Standards on Auditing?
A. They are guides intended to set forth auditing procedures that are applicable to a variety of situations.
B. They are procedural outlines which are intended to narrow down the areas of inconsistency and divergence of
auditor’s opinion.
 C. They are authoritative statements, enforced through the Code of Professional Conduct, that are intended to
limit the degree of the auditor’s judgment.
D. They are interpretations which are intended to clarify the meaning of “generally accepted auditing
standards”.

38. An auditor need not abide by a Philippines Standard on Auditing if the auditor believes that
A. the amount is insignificant.
B. the requirement of the PSA is impractical to perform.
C. the requirement of the PSA is impossible to perform.
D. any of the given three choices is correct.

39. Auditing standards are

A. Statutory in nature.
B. rules imposed by the Securities and Exchange Commission.
C. rules imposed by the PICPA.
D. general guidelines to help the auditors.

40. Though PSAs do not provide "hard and fast rules," they provide subjective guidance which allow the auditors to:
A. Tailor their audit to procedures requested by management.
B. Only apply those standards that are important to the audit.
C. Accurately interpret the profession's Code of Professional Conduct.
D. Use adequate professional judgment when applying the standards.

41. Every independent audit engagement involves both auditing standards and auditing procedures. The relationship
between the two may be illustrated by how they apply from engagement to engagement. The best representation of
this application is that, from one audit engagement to the next,
A. Both auditing standards and auditing procedures are applied uniformly.
B. Auditing standards are applied uniformly but auditing procedures may vary.
C. Auditing standards may vary but auditing procedures are applied uniformly.
D. Auditing standards are applied uniformly but auditing procedures are optional.

42. Philippine Financial Reporting Standards (PFRS) are distinguished from generally accepted auditing standards
(GAAS) in that:
A. PFRS are the principles for presentation of financial statements and underlying transactions, while
GAAS are the standards that the auditors should follow when conducting an audit.
B. PFRS are the principles auditors follow when conducting an audit, while GAAS are the standards for
presentation of financial statements and underlying transactions.
C. PFRS are promulgated by the SEC, while GAAS are promulgated by the FRSC.
D. When PFRS are violated, sufficiently strong GAAS may make up for most PFRS deficiencies.

43. The Philippine Standards on Auditing issued by the Auditing and Assurance Standards Council (AASC)
A. are interpretations of generally accepted auditing standards
B. are the equivalent of laws for audit practitioners.
C. must be followed in all situations.
D. are optional guidelines which an auditor may choose not to follow when conducting an audit.

44. Competence as a certified public accountant includes all of the following except
A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise and evaluate the quality of staff work.
C. Warranting the infallibility of the work performed.
D. Consulting others if additional technical information is needed.

45. In any case in which the incoming accountant is not qualified to perform the work, a professional obligation exists to
A. acquire the required level of knowledge and skills.
B. recommend someone else who is qualified to perform the work.
C. decline the engagement.
D. any of the given choices.

46. Ultimately, the decision about whether or not an auditor is independent must be made by the
A. auditor C. client
B. audit committee D. public
47. To be independent, the auditor:
A. cannot place any reliance on the client's verbal and written assertions.
B. is responsible only to third-party users of the financial statements.
C. cannot perform any other professional services for an audit client.
D. must be impartial when dealing with the client.

48. What is the meaning of the generally accepted auditing standard that requires that the auditor be independent?
A. the auditor must be without bias with respect to the client entity
B. the auditor must adopt a critical attitude during the audit
C. the auditor’s sole obligation is to third parties
D. the auditor may have a direct ownership interest in the client’s business if it is not material

49. A CPA, while performing an audit, strives to achieve independence in appearance in order to
A. Reduce risk and liability.
B. Comply with the generally accepted standards of field work.
C. Become independent in fact.
D. Maintain public confidence in the profession.

50. Which of the following best describes why publicly-traded corporations follow the practice of having the outside auditor
appointed by the board of directors or elected by the stockholders?
A. To comply with the regulations of the Financial Reporting Standards Council.
B. To emphasize the auditor’s independence from the management of the client entity.
C. To encourage a policy of rotation of the independent auditor.
D. To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing
firm selected by the directors.

51. Practitioner’s independence:

A. minimizes risk.
B. helps achieve public confidence
C. defends against professional liability
D. achieves compliance with the standards of fieldwork.

52. If the client refuses to accept an audit report that is qualified due to a known existence of noncompliance to laws and
regulations, the auditor should:
A. Issue an adverse opinion if management agrees to fully disclose the matter.
B. Withdraw from the engagement and communicate the reasons to the audit committee in writing.
C. Withdraw from the engagement and communicate the reasons to the Securities and Exchange Commission or
other regulatory body in writing.
D. Issue an unqualified opinion if management agrees to fully disclose the matter.

53. Which of the following is not required by the Generally Accepted Auditing Standard that states that due professional
care is to be exercised in the performance of the audit?
A. Observance of the standards of field work and reporting.
B. Critical review of the audit work performed at every level of supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment.

54. The standard of due audit care requires the auditor to

A. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a
decision.
B. Ensure that the financial statements are free from error.
C. Make perfect judgment decisions in all cases.
D. Possess skills clearly above the average for the profession.

55. Which of the following mostly describes the function of AASC?

A. To promulgate auditing standards, practices and procedures that shall be generally accepted by the
accounting profession in the Philippines.
B. To monitor full compliance by all auditors to PSAs.
C. To assist the Board of Accountancy in conducting administrative proceedings on erring CPAs in audit practice.
D. To undertake continuing research on both auditing and financial accounting in order to make them responsive
to the needs of the public.
56. The exercise of due professional care requires that an auditor
A. Examine all available corroborating evidence.
B. Critically review the judgment exercised at every level of supervision.
C. Reduce control risk below the maximum.
D. Attain the proper balance of professional experience and formal education.

57. Which of the following best describes the reference to the expression “taken as a whole” in the fourth generally
accepted auditing standard of reporting?
A. It applies only to a complete set of financial statements.
B. It applies equally to each item in each financial statement.
C. It applies equally to each material item in each financial statement.
D. It applies equally to a complete set of financial statements and to each individual financial statement.

58. The Philippine Standards on Auditing issued by AASC

A. apply to independent examination of financial statements of any entity when such an examination is
conducted for the purpose of expressing an opinion.
B. must not apply to other related activities of auditors.
C. need to be applied on all audit-related engagements.

**** END ****