Question 1

Statement I: The auditor should obtain an understanding of relevant industry, regulatory, and
other external factors including the applicable financial reporting framework.
Statement II: The industry in which the entity operates may give rise to specific risks of material
misstatement arising from the industry of the business.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: B. Statement I is true; Statement II is false.

Question 2
Statement I: The risk of not detecting material misstatements due to fraud is higher than those
due to error, because fraud does not involve acts of concealing the material
misstatement.
Statement II: The risk of not detecting management fraud is higher than employee fraud,
because the management has the power to override or manipulate internal
controls.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true
D. Both statements are false
Answer: C. Statement I is false; Statement II is true.

Question 3
Statement I: Human resource policies and practices relate to recruitment, orientation, training,
evaluating, counseling, promoting, compensating, and remedial actions.
Statement II: Risks can arise or change due to circumstances such as corporate restructurings
and expanded foreign operations.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: A. Both statements are true.
Question 4
Statement I: An understanding of the strategies of an entity enables the auditor to understand
the classes of transactions, account balances, and disclosures to be expected in
the financial statements.

Statement II: The presentation of financial statements in conformity with the applicable
financial reporting framework includes adequate disclosure of material matters.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: C. Statement I is false; Statement II is true.

Question 5
When risk of material misstatements are present in the financial statements of the entity, the
auditor prepares a procedure on how to respond to identified or suspected risk. Which of the
following is not a response done by an auditor?
A. Overall Response
B. Responses to Risk at the Assertion Level
C. Responses to Risk Management Control Override
D. Responses to Risk of Change in Established Rules and Regulation
Answer: D. Responses to Risk of Change in Established Rules and Regulation

Question 6
Statement I: If the auditor believes that the internal control is reliable and effective, he should
perform more substantive tests.
Statement II: If the auditor believes that the internal control is not reliable and ineffective, he
should perform more tests of controls.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: D. Both statements are false.
Question 7
Statement I: Risk of material misstatement of the financial statements is broader than the
business risk.
Statement II: Financial indicators also provide information that enables management to identify
deficiencies in internal control.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: D. Both statements are false.

Question 8
Which of the following is not included in the documentation of the auditor which will not serve
as an evidence in conducting the audit?
A. Communication regarding fraud
B. Suitable criteria
C. Auditor’s responses
D. Understanding the Entity and its environment
Answer: B Suitable criteria

Question 9
Determine whether the following statement are correct or incorrect.
Statement I: Communication to regulators and authorities can be done even with ethical
requirement of confidentiality when legal responsibility of the auditor overrides
its duty of confidentiality.
Statement II: Auditors should communicate identified, suspected and allegations of material
misstatements, whether due to fraud or error to at least one level higher to those
individuals involved in misstating financial statements.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: A. Both statements are true.
Question 10
Statement I: Internal Control System is the process designed and effected by those charged
with governance, management, and other personnel to provide reasonable
assurance about the achievement of the entity’s objectives with regard to
reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.
Statement II: Internal Control means all the policies and procedures adopted by the
management of an entity to assist in achieving management’s objective of
ensuring, as far as practicable, the orderly and efficient conduct of its business,
including adherence to management policies, the safeguarding of assets, the
prevention and detection of fraud and error, the accuracy and completeness of
the accounting records, and the timely preparation of reliable financial
information.
A. Both statements are true.
B. Statement I is true; Statement II is false.
C. Statement I is false; Statement II is true.
D. Both statements are false.
Answer: D. Both statements are false