Let’s Check – Answer Key

EXERCISE 1
Link the correct definition to each term.
a. Accountable i. Qualified Opinion
b. Steward j. Persuasiveness of Evidence
c. Practitioner k. Compilation
d. True l. Agreed-upon procedures
e. Fair m. Auditing
f. Materiality o. Criteria
g. Assertion-based assurance report p. Reasonable Assurance
h. Disclaimer of Opinion

1. An expression of the relative significance or importance of a particular matter in the context of the
financial statements as a whole. Materiality
2. A person employed to provide a particular service. Practitioner
3. Evidence that is generated internally is more reliable when the related controls are effective.
Reasonable Assurance
4. Factual and conforming with reality. In conformity with relevant standards and law and correctly
extracted from accounting records. True
5. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive.
Persuasiveness of Evidence
6. Benchmarks used to evaluate or measure the subject matter. Criteria
7. A person employed to manage other people's property. Steward
8. Unable to obtain sufficient appropriate audit evidence on which to base the opinion. Disclaimer of
Opinion
9. Free from discrimination and bias and in compliance with expected standards and rules. Reflecting
the commercial substance of underlying transactions. Fair
10.Applies accounting and financial reporting expertise to assist management in the preparation and
presentation of financial information. Compilation
11.Being required or expected to justify actions and decisions. Accountable
12.In our opinion the responsible party’s assertion that internal control is effective, in all material
respects, based on XYZ criteria, is fairly stated”. Assertion-based assurance report

EXERCISE 2
TRUE OR FALSE

1. The practitioner expresses reasonable assurance in a negative form of opinion.

FALSE – Reasonable assurance is a positive form of opinion.
2. The practitioner must not issue an oral conclusion about a subject matter based
on the identified suitable criteria and the evidence obtained. TRUE
3. Consulting services help enhance the credibility of the subject matter
information.
FALSE – Consulting services is a non-assurance engagement.
4. The objective of a reasonable assurance engagement is a reduction in assurance
engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a
negative form of expression of the practitioner’s conclusion.
FALSE – It should be positive form of expression.
5. Moderate level of assurance 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.
FALSE – Reasonable level of assurance, not moderate.
6. In compilation, the practitioner expresses his or her conclusion on the subject
matter information.
FALSE – It should be audit, not compilation.
7. A limited assurance engagement, the practitioner expresses either a positive
form of opinion or the negative form of opinion, depending on the circumstance.
FALSE – Limited assurance expresses a negative form of opinion only.
8. Philippine Framework for Assurance Engagement provides a frame of reference
for the Auditing and Assurance Standards Council in its adoption of International Standards on
Auditing, International Standards on Review Engagements and International Standards on Assurance
Engagements for application in the Philippines. TRUE
9. Assurance Engagement is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to ascertain the degree
of correspondence between those assertions and established criteria and communicating the results
to interested users. TRUE
10. Assertions are the representations of management as to
the reliability of the information system. TRUE

Let’s Analyze – Answer Key

Multiple Choice Questions

11. Which of the following is not one of the major categories of practitioner’s
services?
a. Compilation engagement.
b. Assurance engagements on subject matters other than historical financial information.
c. Related service framework.
d. Compilation engagement.
Compilation is a specific non-assurance engagement.

12. An example of an assurance engagement is

a. Labor data for union contact negotiation.
b. Audit of financial statements of a medium size company.
c. Regulator’s questionnaire on business ethics and conduct.
d. Insurance claims data.

13. Which of the following is not one of the five elements exhibited by assurance
engagements?
a. The subject matter.
 b. Suitable criteria.
c. Sufficient appropriate evidence
d. A multi-party relationships.

14. What does an auditor do?

a. Provide a guarantee on the ongoing viability of a company.
b. Provide an independent opinion on the financial report.
c. Help management to produce the financial report.
d. Ensure that the financial report contains no fraud or error.

15. Which of the following is an accurate statement regarding assurance services?

a. Assurance services improve the quality of information for decision makers.
b. Assurance services must be performed by a CPA.
c. An attestation service is not a type of assurance service.
d. Assurance services can only be performed on financial data.

16. Subject matter and subject matter information of an assurance engagement can
take all of the following, except:
a. Physical characteristics.
b. Non-financing performance or conditions.
c. Litigation planning.
d. Financial performance or conditions.

17. Assurance services differ from consulting services in that they

Involved Monitoring of
Focus on Outcomes One Party by Another
a. Yes Yes
b. Yes No
c. No Yes
d. No No

18. What is the type of assurance engagement that has as its subject matter a non-
historical financial information?
a. Special purpose engagement.
b. Agreed-upon procedures.
c. Review of financial statements.
d. Prospective financial information.

19. The following statements relate to assurance engagements. Choose the

incorrect statements.
1. The objective of an assurance engagement is for a professional accountant to evaluate or
measure a subject matter that is the responsibility or another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level of
assurance about the subject matter.
2. Assurance engagements performed by professional accountants are intended to enhance
the credibility of information about a subject matter.
 3. Assurance engagements involve two parties: a professional accountant and an intended
user.
4. The subject matter of an assurance engagement is limited to historical or prospective
financial information.
5. The intended user in an assurance engagement is the person or class of persons for whom
the professional accountant prepares the report for a specific use or purpose.

a. 2, 3 ,4, and 5
b. 2, 4 and 5
c. 3 and 4
d. 1, 2, 3, and 4

20. How does the related services framework differ from the assurance framework?
a. Related services claim compliance with PSAs.
b. Related services engagements do not result in an opinion.
c. Related services enhance the degree of confidence intended users can have.
d. Related services claim compliance with PSAEs.

21. Which of the following is not true about the subject matter of an assurance
engagement?
a. It is the topic about which the assurance is conducted.
b. It could be information such as financial statements, statistical information and non-financial
performance indicators.
c. It could be the Philippine Financial Reporting Standards.
d. It could be systems and processes or behavior.

22. A responsible party does each of the following, except:

a. Selects the audit procedures.
b. Determines the subject matter.
c. Selects criteria.
d. Engages the practitioner.

23. The characteristics for assessing whether criteria are suitable are all the
following, except
a. Reliability.
b. International acceptance.
c. Understandability
d. Neutrality

24. Sufficiency of evidence is

a. Evidence which is adequate.
b. The measure of the quality of evidence.
c. The measure of the quantity of evidence.
d. Evidence which is material.

25. In a limited assurance engagement, the practitioner

a. Has obtained sufficient appropriate evidence to reduce assurance engagement risk to an
acceptably low level.
 b. Expresses the conclusion in a positive form.
c. Expresses the conclusion in the negative form.
d. Conveys reasonable assurance.

26. Professional judgement is the application of relevant training, knowledge and

experience, within the context provided by ____________, in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit engagement.
a. Philippine Financial Reporting Standards.
b. Philippine Standards on Auditing.
c. The Code of Professional Ethics of an Accountants.
d. Auditing, accounting and ethical standards.

27. The Philippine Framework for Assurance Engagements

a. Establishes standards and provides procedural requirements for the performance of assurance
engagements.
b. Contains basic principles, essential procedures, and related guidance for the performance of
assurance engagements.
c. Provides a frame of reference for CPAs in public practice when performing audits, reviews, and
compilations of historical financial information.
d. Defines and describes the elements and objectives of an assurance engagement, and identifies
engagements to which PSAs, PSREs, and PSAEs apply.

28. The auditor is required to prepare audit documentation sufficient to enable an

experienced auditor, having no previous connection with the audit, to understand the ________ in
reaching conclusions on significant matters arising during the audit.
a. Confirmation letters.
b. Significant professional judgments made.
c. The total evidence gathered.
d. The interviews conducted with employees and management.

29. Absolute assurance is generally not attainable as a result of various factors, such
as
a. The use of sampling in performing tests of controls and substantive tests.
b. Internal control systems are subject to the risk of collusion and management override. No
system is fool-proof.
c. There are some assertions for which the only evidence comes from management
representations, such as the completeness of minutes of meetings of the board of directors.
d. All of these.

30. An assurance report

a. Provides reasonable assurance to the responsible party.
b. Has a format that is uniquely different from PSA audit opinions.
c. Is prepared by the responsible party.
d. Provides a written report containing a conclusion that conveys the assurance obtained about the
subject matter information.

Let’s Analyze – ANSWER KEY

Multiple Choice

1. Which statement is incorrect regarding evaluation of the sufficiency and appropriateness of audit
evidence obtained?
a. Based on the audit procedures performed and the audit evidence obtained, the auditor should
evaluate whether the assessments of the risks of material misstatement at the assertion level
remain appropriate.
b. As the auditor performs planned audit procedures, the audit evidence obtained may cause the
auditor to modify the nature, timing, or extent of other planned audit procedures.
c. In developing an opinion, the auditor considers only the audit evidence which corroborate the
assertions in the financial statements.
d. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should
express a qualified opinion or a disclaimer of opinion.

2. Which of the following would least likely affect the appropriateness of evidence available to an
auditor?
a. The sampling method employed by the auditor to obtain a sample of such evidence.
b. The relevance of such evidence to the financial statement assertion being verified.
c. The relationship of the preparer of such evidence to the entity being audited.
d. The timeliness of such evidence.

3. Which of the following statements concerning the auditor’s use of assertions is correct?
a. The auditor may combine the assertions about transactions and events with the assertions
about account balances.
b. In every audit engagement, the auditor should use the assertions as described in PSA 500, i.e.
the assertions should always fall into three categories: assertions about classes of transactions
and events, account balances, and presentation and disclosure.
c. There should always be a separate assertion related to cutoff of transactions and events.
d. The completeness assertion deals only with whether all transactions and events that should
have been recorded have been recorded.

4. One of the requirements of the auditing standards is sufficient and appropriate evidential
matter should be obtained. The term “appropriate” refers primarily to:
a. Quality of evidence
b. Source of the evidence
c. Quantity of evidence
d. Evaluation of the evidence

5. The reliability of data is influenced by its source and by its nature and is dependent on the
circumstances under which it is obtained. Which of the following should the auditor consider in
determining whether data is reliable for purposes of designing substantive analytical procedures?
I. Source of the information available.
II. Comparability of the information available.
III. Nature and relevance of the information available.
IV. Controls over the preparation of the information.
a. I, II and IV only.
 b. I, II and III only.
c. II, III and IV only.
d. I, II, III and IV

6. The following statements relate to the use of analytical procedures as substantive procedures.
Which is false?
a. Substantive analytical procedures are applicable when there is only a small volume of
transactions.
b. The application of substantive analytical procedures is based on the expectation that
relationships among data exist and continue in the absence of known condition to the contrary.
c. The presence of relationships among data provides evidence as to the completeness, accuracy,
and occurrence of transactions captured in the information produced by the entity’s information
system.
d. Reliance on the results of substantive analytical procedures will depend on the auditor’s
assessment of the risk that the analytical procedures may identify relationships as expected
when, in fact, a material misstatement exists.

7. As defined in PSA 500, ____________ is an individual or organization possessing the expertise in a

field other than accounting or auditing, whose work in that field is used by the entity to assist the
entity in preparing the financial statements.
a. Auditor’s expert.
b. Management’s expert.
c. Auditor’s internal expert.
d. Auditor’s external expert.

8. In performing an audit, which one of the following procedures would be considered a “substantive
test”?
a. Comparing last year’s interest expense with this year’s interest expense.
b. Comparing signatures on checks with the signatures of authorized check signers.
c. Reviewing initials on receiving documents.
d. Reviewing procedures, followed in receiving, depositing, and disbursing of cash.

9. 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.

10. An entity’s accounting records generally include the records of initial entries and supporting
records including
a. Confirmations from third parties.
b. Information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection.
c. Worksheets and spreadsheets supporting cost allocations.
 d. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.

11. Which of the following statements concerning audit evidence is correct?

a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence, that is, its relevance and reliability.
c. The quantity of audit evidence needed is affected by the risk of misstatement and also by the
quality of such audit evidence.
d. The sufficiency and appropriateness of audit evidence are not interrelated.

12. In gathering evidence in the performance of substantive tests, the auditor

a. Should use the test month approach.
b. Relies on persuasive rather than convincing evidence in the majority of cases.
c. Would consider the client’s documentary evidence more competent than evidence gathered
from observation and physical inspections.
d. Would express an adverse opinion if (s) he has substantial doubt as to any assertion of material
significance.

13. Which of the following is the best explanation of the difference, if any, between audit objectives and
audit procedures?
a. Audit procedures establish broad general goals; audit objectives specify the detailed work to be
performed.
b. Audit objectives are tailor-made for each assignment; audit procedures are generic in
application.
c. Audit objectives define specific desired accomplishments; audit procedures provide the means
of achieving audit objectives.
d. Audit procedures and audit objectives are essentially the same.

14. Which of the following is the most objective type of evidence?

a. A letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits.
b. The physical count of securities and cash.
c. Inquires of the credit manager about the collectibility of noncurrent accounts receivable.
d. Observation of cobwebs on some inventory bins.

15. An auditor should be able to collect and evaluate documentary evidence. When evaluating and
interpreting evidence, the auditor must be concerned about drawing unwarranted conclusions. An
example of a valid conclusion is
a. Correct inventory valuation determined from observation of physical inventory counts.
b. Proper accounts payable cutoff at year-end determined from a review of raw materials
requisition.
c. Existence of a company car determined from the examination of a paid invoice.
d. Client ownership determined from outside inquiries about consigned goods.

16. Which of the following is the least persuasive documentation in support of an auditor’s opinion?
a. Schedules of details of physical inventory counts conducted by the client.
b. Notation of inferences drawn from ratios and trends.
 c. Notation of appraisers’ conclusions documented in the auditor’s working papers.
d. Lists of negative confirmation request for which no response was received by the auditor.

17. The most reliable type of audit evidence that an auditor can obtain is
a. Physical examination by the auditor.
b. Calculations by the auditor from company records.
c. Confirmations received directly from third parties.
d. External documents.

18. What is the risk being addressed by vouching and tracing transactions, respectively?
a. Overstatement, understatement
b. Understatement, Overstatement
c. Understatement, Understatement
d. Overstatement, Overstatement

19. To verify that all sales transactions have been recorded, a test of transactions should be completed
on a representative sample drawn from
a. Entries in the sales journal.
b. The billing clerk’s file of sales orders.
c. A file of duplicate copies of sales invoices for which all prenumbered forms in the series have
been documented.
d. The shipping clerk’s file of duplicate copies of shipping documents.

20. S1 – The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the financial statement have been
identified.
S2 – The auditor has an obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report.
a. True; False b. False; True c. True; True d. False; False

21. Which of the following statements concerning the auditor’s attendance at the physical inventory
count is incorrect?
a. A financial statement audit should always include attendance at the physical inventory count.
b. If the auditor is unable to attend the physical inventory count on the date planned due to
unforeseen circumstances, he/she should take or observe some physical counts on an
alternative date and, when necessary, perform audit procedures on intervening transactions.
c. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that reference to a scope
limitation need not be made.
d. Inventories that are under the custody and control of third parties (for example, inventories
located in public warehouses) may be verified by obtaining direct confirmation from the
custodians, provided that, depending on the materiality of the amount involved, additional
procedures should be applied as deemed necessary.
22. When outside firms of nonaccountants specializing in the taking of physical inventories are used to
count, list, price, and subsequently compute the total peso amount of inventory on hand at the
date of the physical count, the auditor will ordinarily
a. Consider the reduced audit effort with respect to the physical count of inventory as a scope
limitation.
b. Make or observe some physical counts of the inventory, recompute certain inventory
calculations, and test certain inventory transactions.
c. Consider the report of the outside inventory-taking firm to be an acceptable alternative
procedure to the observation of physical inventories.
d. Not reduce the extent of work on the physical count of inventory.

23. PSA 501 states that when inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by attendance at
physical inventory counting unless impracticable. Which of the following statements concerning
this audit procedures is incorrect?
a. Regardless of the inventory system operated by the client, an annual physical count must be
made of each item in the inventory, and test counts must be made by the auditor.
b. Inventories located in public warehouses may be verified by direct confirmation in writing from
the custodians, provided that, depending on the materiality of these inventories, additional
procedures are applied as deemed necessary.
c. When the well-kept perpetual inventory records are checked by the client periodically by
comparisons with physical counts, the auditor’s observation procedures usually can be
performed either during or after the end of the period under audit.
d. The independent auditor, when asked to audit financial statements covering the current
period and one or more periods for which he/she had not observed or made some physical
counts, may be able to become satisfied as to such prior inventories through appropriate
alternative procedures.

24. According to PSA 501, when inventories are under the custody and control of a third party, the
auditor would ordinarily obtain direct confirmation from the third party as to the quantities and
condition of inventories held on behalf of the entity. Which of the following would the auditor also
consider?
I. The integrity and independence of the third party.
II. Observing, or arranging for another auditor to observe, the physical inventory count.
III. Obtaining another auditors report on the adequacy of the third party’s internal control for
ensuring that inventories are correctly counted and adequately safeguarded.
IV. Inspecting documentation regarding inventories held by third parties (for example,
warehouse receipts) or obtaining confirmation from other parties when such inventories
have been pledged or collateral.
a. I, II, and IV only. c. II, III, and IV only
b. I, III, and IV only. d. I, II, III and IV

25. A client makes test counts on the basis of a statistical plan. The auditor observes such counts as are
deemed necessary and is able to become satisfied as to the reliability of the client’s procedures. In
reporting on the results of the audit, the auditor
a. Must qualify the opinion if the inventories were material.
b. Can express an unmodified opinion.
 c. Must comment in an emphasis of matter paragraph as to the inability to observe year-end
inventories.
d. Is required to disclaim an opinion if the inventories were material.

26. The auditor’s primary means of obtaining corroboration of management’s information concerning
litigation is a
a. Letter of audit to the client’s lawyer.
b. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation.
c. Confirmation of claims and assessments from the other parties to the litigation.
d. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.

27. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, excess of the recorded liability

28. The audit inquiry letter to the client`s legal counsel should be mailed only by the:
a. Client after the auditor has reviewed it for appropriate content.
b. Auditor after preparation by the client and review by the auditor.
c. Auditor`s attorney after preparation by the client and review by the auditor.
d. Client after review by the auditor`s attorney.

29. Which of the following is a customary audit procedure for the verification of the legal ownership of
real property?
a. Examinations of correspondence with the corporate counsel concerning acquisition matters.
b. Examination of ownership documents registered and on file with the Register of Deeds.
c. Examination of corporation minutes and resolutions concerning the approval to acquire
property, plant and equipment
d. Examination of deeds and title guaranty policies on hand.

30. The auditor’s attendance to client’s physical inventory count would not enable him to
a. Physically inspect inventory items
b. Review the accuracy of pricing the inventory items
c. Observe compliance with the prescribed procedures for recording and controlling the results
of the count.
d. Provide evidence as to reliability of management procedures

31. The primary source of information to be reported about litigation, claims, and assessments is the
a. Client’s lawyer
b. Client’s managements.
c. Court records
d. Independent auditor

32. Which of the following is an audit procedure that an auditor most likely would perform concerning
litigation, claims, and assessments?
 a. Request the client’s lawyer to evaluate whether the client’s pending litigation, claims, and
assessments indicate a going concern problem.
b. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims,
and assessments to which the lawyer has devoted substantive attention.
c. Discuss with management its policies and procedures adopted for evaluating and accounting
for litigation, claims, and assessments.
d. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been
recorded or disclosed in the financial statements.

33. Which of the following is not an audit procedure that the independent auditor would perform with
respect to litigation, claims, and assessments?
a. Inquire of and discuss with management the policies and procedures adopted for litigation,
claims, and assessments.
b. Obtain from management a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.
c. Obtain assurance from management that if has disclosed all asserted claims that the lawyer
has advised are probable of assertion and must be disclosed.
d. Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.

34. In relation to opening balances, which of the following may cause the auditor to disclaim his
opinion?
a. The opening balances contain misstatements that could materially affect the current period’s
financial statements and such misstatements have not been corrected.
b. The current period’s accounting policies have not been consistently applied in relation to
opening balances and the effect of such change is not properly accounted for or disclosed.
c. The inability of the auditor to obtain sufficient appropriate audit evidence concerning opening
balances.
d. The assessed substantial doubt about the entity’s ability to continue as a going concern as
indicated by consistent negative cash flows.

35. Which of the following statements is correct?

a. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
b. Where attendance at physical inventory count is impracticable, the auditor should consider
expressing a qualified opinion or a disclaimer of opinion.
c. When inventory is situated in several locations, the auditor would consider at which locations
attendance is appropriate, taking into account the materiality of the inventory and the
assessment of inherent and control risk at different locations.
d. In planning attendance at the physical inventory count, the auditor would consider whether an
expert’s assistance is needed.

Let’s Analyze
Multiple Choice Questions

1. During the performance of risk assessment procedures, Leslie, CPA, noted a change in
accounting
principle has been effected by the client. In this case, Leslie should plan to evaluate the change to
satisfy herself that:
a. The newly adopted principle is a generally accepted accounting principle
b. The method of accounting for the effects of the change is in conformity with generally
accepted accounting principles
c. Management’s justification for the change is reasonable
d. All of the answers

2. During the initial planning for an audit, a CPA obtains a level knowledge of the client’s
business to
help him evaluate :
a. Whether to accept the engagement or not
b. The reasonableness of estimates, such as valuation of inventories and allowances for doubtful
accounts
c. The nature of the audit report will issue
d. The profitability of the business

3. In financial statement audit, audit risk represents the probability that

a. Internal control fails and the failure is not detected by the auditor’s procedures
b. The auditor unknowingly fails to modify and opinion on materiality misstated financial
statements
c. Inherent and control risk cause errors that could be material to the financial statements
d. The auditor is not retained to conduct financial statement audit in the succeeding year

4. According to PSA 315, an example of the matters that the auditor may consider to obtain an
understanding of the nature of the entity is conduct of operations. Conduct of operations include
the following, except:
a. Stages and methods of production
b. Business segments
c. Alliances, joint ventures, and outsourcing activities
d. Details of declining or expanding operations

5. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Documents material weakness in accounting and internal control systems.
c. Identifying and understand events, transactions and practices that may have effect on
financial statements.
d. Have an overall education of whether financial assertions are fairly present in the financial
statements.

6. A knowledge of the business is a frame of references within which the auditor exercises
professional judgment. This assists the auditor in carrying out the following objectives, except:
a. Assessing risk and identifying problems.
b. Evaluation audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

7. Throughout the course of the audit, the auditors make judgment about many matters where
knowledge of the business is important. These procedures do not include:
a. Evaluating accounting estimates and management representation.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

8. Which of the following helps the auditor most to identify and understand the events,
transactions
and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.

9. The auditor is not expected to have

a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.

10. The auditor obtain knowledge of client’s business

ABCD
Prior to acceptance of engagement No No Yes Yes
Planning stage of the audit Yes Yes Yes No
Testing of transaction stage No Yes Yes Yes

11. Understanding the business and using this information appropriately assists the auditor in,
except
a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.

12. Which of the following is irrelevant to the auditor’s knowledge about the business
a. Developing of the overall audit plan.
b. Determining audit evidence.
c. Identifying areas where special audit consideration and skills may be necessary.
d. Whether to use nonstatistical or statistical sampling.

13. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affect the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

14. The audit risk against which the auditor and those who rely on his/her opinion require
reasonable
protection is a combination of three separate risks at the account-balance or class-of-transaction
level. The first risk is inherent risk. The second risk is that material misstatements will not be
prevented or detected by internal control. The third risk is that
a. The auditor will reject a correct account balances is incorrect.
b. Material misstatements that occur will not be detected by the audit.
c. The auditor will apply in appropriate audit procedure.
21
d. The auditor will apply an inappropriate measure of audit materiality.

15. Control risk should be assessed in terms of

a. Specific controls
b. Financial statement assertions
c. Types of potential fraud
d. Control environment factors

16. After obtaining a sufficient understanding of internal control, the auditor assesses
a. The need to apply GAAS
b. Detection risk to determine the acceptable level of inherent risk
c. Detection risk and inherent risk to determine the acceptable level of control risk
d. Control risk to determine the acceptable level of detection risk

17. An auditor uses the knowledge provided by the understanding of internal control and the
assessed
level of control risk primarily to
a. Determine whether procedures and records concerning the safeguarding of assets are reliable
b. Ascertain whether the opportunities to allow my any person to both perpetrate and conceal
fraud are minimized
c. Modify the initial assessments of inherent risk and preliminary judgments about materiality
levels
d. Determine the nature, timing and extent of substantive tests for financial statement
assertions

18. A conceptually logical approach to the auditor’s evaluation of internal accounting control
consists
of the following four steps:
I. Determine whether the necessary procedures are prescribed and are being followed
satisfactorily
II. Consider the types of errors and irregularities that could occur
III. Determine the internal control procedures that should prevent or detect errors and
irregularities
IV. Evaluate any weaknesses to determine its effect in the nature, timing, or extent of
auditing procedures to be applied and suggestions to be made to the client
What should be the order in which these four steps are performed?
a. III, IV, I, II
b. II,III, I, IV
c. III, I, II, IV
d. II, I, III, IV

19. An auditor obtains knowledge about a new client’s business and its industry to
a. Make constructive suggestions concerning improvements in the client’s internal control
structure
b. Develop an attitude of professional skepticism concerning management’s financial
statements assertions
c. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated
d. Understand the events and transactions that may have an effect on the client’s financial
statements.

20. Which of the following is most likely the first step an audit perform after accepting an initial
audit
engagement
a. Prepare a rough draft of the financial statements and of the auditor report
b. Assess control risks for the assertions embodied in the financial statements
c. Tour the client’s facilities and review the general records
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management

21. Segregation of incompatible duties is normally tested by

I. Inquiry
II. Analytical Procedures
III. Observation
a. I only b. II only c. I and II only d. I and III only

22. What is the implication of the existence of inherent limitations of internal controls?
a. That inherent risk will often be .
b. That detection risk must be greater than zero.
c. That control risk cannot be zero.
d. That the work of internal auditors rarely if ever affects the external auditor`s assessment of
control risk.

23. Which of the following components of internal control would be considered the foundation
for
the other components?
a. Information and communication.
b. Risk assessment.
c. Control environment.
d. Control activities.
24. Which of the following factors would most likely influence the form and extent of the
auditor’s
documentation of an entity’s internal control environment?
a. Complexity and size of the entity.
b. Amount of audit work performed at an interim date.
c. Amount of audit work performed by the internal auditor.
d. Results of verifying material account balances.

25. If the auditor obtain an understanding of an entity’s information and communication

component
of internal control, which of the following factors should the auditor assess?
a. The integrity and ethical values of top management.
b. The philosophy and operating style of management to promote effective internal control over
financial reporting.
c. The classes of transactions in the entity’s operations that are significant to the entity’s
financial statements.
d. The oversight responsibility over financial reporting and internal control by the board or audit
committee.

26. A consideration of internal control made during an audit is usually not sufficient to express
an
opinion on an entity’s controls because
a. Weaknesses in the system may go undetected during the audit engagement.
b. A consideration of the internal control is not necessarily made during an audit engagement.
c. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated.
d. Controls can change each year.

27. Internal control should provide reasonable (but not necessarily absolute) assurance, which
means
that
a. Internal control is management’s not the auditor’s responsibility.
b. An attestation engagement about management’s internal control assertions may not
necessarily detect all material control weaknesses.
c. The cost of control activities should not exceed the benefits.
d. There is always a risk that material weaknesses may result in material misstatements.

28. A secondary result of the auditor’s considerations of internal control is that the consideration
may
a. Provide a basis for determining the nature, timing, and extent of audits tests.
b. Assure the management’s procedures to detect fraud are properly functioning.
c. Bring to the auditor’s attention possible significant deficiencies in the design or operation of
internal control.
d. Develop evidence to support the assessed level of control risk.

29. A CPA’s consideration of internal control in an audit

a. Is generally more limited than that made in connection with an engagement to express an
opinion on internal control.
b. Is generally more extensive than that made in connection with an engagement to express an
opinion on internal control.
c. Will generally be identical to that made in connection with an engagement to express an
opinion on internal control.
d. Will generally result in the CPA expressing an opinion on the internal control.

30. Which of the following is a correct statement about internal control?

a. The cost-benefit relationship is a primary criterion that should be considered in designing
internal control.
b. The auditor can eliminate substantive tests on significant account balances and classes of
transactions for an entity that has exceptionally strong internal control.
c. The internal auditor has the responsibility to establish and maintain internal control.
d. Properly maintained internal control reasonably ensures that collusion among employees
cannot occur.

1. The risk of fraudulent financial reporting increases in the presence of

a. Incentive systems based on operating income.
b. Improved control systems.
c. Substantial increases in sales.
d. Frequent changes in suppliers.

2. Which of the following might be considered a "red flag" indicating possible fraud in a large
manufacturing company with several subsidiaries?
a. The existence of a financial subsidiary.
b. A consistent record of above average return on investment for all subsidiaries.
c. Complex sales transactions and transfers of funds between affiliated companies.
d. Use of separate bank accounts for payrolls by each subsidiary.

3. With respect to errors and fraud, the auditor should plan to

a. Search for errors or fraud that would have a material effect on the financial statements.
b. Discover errors or fraud that would have a material effect on the financial statements.
c. Search for errors that would have a material effect and for fraud that would have either
material or immaterial effects on the financial statements.
d. Search for fraud that would have a material effect and for errors that would have either
material or immaterial effects on the financial statements.

4. Which of the following statements best describes the auditor's responsibility regarding the
detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results
from nonperformance of audit procedures specifically described in the engagement letter.
b. The auditor should design audit procedures that will provide reasonable assurance that the
financial statements are free from material misstatement due to errors and/or fraud.
c. The auditor must extend auditing procedures to actively search for evidence of fraud where
the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is
issued.

5. Warning signs that cause the auditor to question management integrity must be taken seriously
and pursued vigorously. Which of the following may lead the auditor to suspect management
dishonesty?
a. The president and chief executive officer of the client corporation has held numerous
meetings with the controller for the purpose of discussing accounting practices that will
maximize reported profits.
b. The client has been named as a defendant in a product liability suit.
c. The client has experienced a decrease in revenue from increased import competition.
d. A new federal regulation making customer licenses more difficult to obtain may adversely
affect the client's operations.

6. Given that an audit in accordance with generally accepted auditing standards is influenced by
the
possibility of material errors and fraud, the auditor should conduct the audit with an attitude of
a. Professional responsiveness.
b. Conservative advocacy.
c. Objective judgment.
d. Professional skepticism.

7. Which of the following is an indicator of possible fraudulent financial reporting for the
purpose of
inflating earnings?
a. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold
increases
of 25 percent.
b. A ratio analysis discloses: (1) sales of $50 million and (2) cost of goods sold of $25 million.
c. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of
goods sold to sales is .4 and (2) the industry average ratio of cost of goods sold to sales is .5.
d. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of
goods sold to sales is .5 and (2) the industry average ratio of cost of goods sold to sales is .4.

8. Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered an indicator of
possible fraud?
a. Managers regularly assuming subordinates' duties.
b. Managers dealing in matters outside their profit center's scope.
c. Managers not complying with corporate directives and procedures.
d. Managers subject to formal performance reviews on a regular basis.

9. An internal auditor would be concerned about the possibility of fraud if

a. Only one person has access to the petty cash fund.
b. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in
the bank daily.
c. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records.
d. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.

10. Which of the following is a false statement concerning fraud?

a. Fraud generally involves incentive or pressure to commit fraud, a perceived opportunity to do
so, and some rationalization of the act.
b. Two types of misstatements relevant to the auditor include material misstatements arising
from fraudulent financial reporting and material misstatements arising from misappropriation
of assets.
c. Fraud involves actions of management but excludes the actions of employees or third parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go undetected
by the auditor.

11. Which of the following statements best describe an auditor’s responsibility to detect fraud?
a. The auditor is responsible for failing to detect fraud when the failure clearly results from not
performing audit procedures described in the engagement letter.
b. The auditor must extend auditing procedures to search actively for fraud.
c. The auditor must assess the risk that material fraud may exist.
d. The auditor is responsible for failing to detect fraud only when an unqualified opinion is
issued.

12. Certain management characteristics may heighten the auditor’s concern about the risk of
material
misstatements. The characteristics that is least likely to cause concern is that management
a. Operating and financing decisions are made by numerous individuals.
b. Commits to unduly aggressive forecasts.
c. Has an excessive interest in increase the entity’s stock price through use of unduly aggressive
accounting practices.
d. Is interested in inappropriate methods of minimizing earnings for tax purpose.

13. Fraud refers to an intentional act by one or more individuals among management, employees,
or
third parties, which results in a misrepresentation of financial statements while errors refers to
unintentional mistakes in financial statements. Fraud may involve.
1. Manipulation, falsification or alteration of records or documents.
2. Misappropriation of assets.
3. Mathematical or clerical mistakes in the underlying records and accounting data.
4. Suppression or omission of the effects of transactions from records or documents.
5. Oversight or misinterpretation of facts
6. Recording of transactions without substance.
7. Misapplication of accounting policies.
a. 1, 2, 4, 6 and 7
b. 1, 2, 3, 4, 6 and 7
c. 1, 2, 3, and 6
d. 1, 2, 4, 5, and 6

14. Which of the following best describes the practice of charging less than market audit rates for
new
clients?
a. Highballing.
b. Lowballing.
c. Midballing.
d. Debailing.
Lowballing is the practice of charging less than the market rate for an audit for a new client. This
is not considered ethically wrong to charge a low price for an audit in itself. However, the
auditor
must ensure that they carry out an audit of the quality demanded by auditing standards and that
cut-price audit fee does not call their independence into question.

15. An independent auditor has the responsibility to design the audit to provide reasonable
assurance
of detecting errors and fraud that might have a material effect on the financial statements. Which
of the following, if material would be a fraud as defined in PSA 240?
a. Misappropriation of an asset or group of assets.
b. Clerical mistakes in the accounting data underlying the financial statements.
c. Mistakes in the application of accounting principles.
d. Misinterpretation of facts that existed when the financial statements were prepared.

16. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be
detected for all of the following, except:
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
d. Professional skepticism.

17. Which of the following is ordinarily considered to be a fraud risk factor?

a. Management regularly informs investors of forecast information.
b. The company has experienced increasing earnings over the previous five years.
c. The company’s president is included as a member of the board of directors.
d. The company’s financial statements include a number of last minute material adjustments.

18. When planning an audit, the auditor must take steps to provide reasonable assurance that any
material frauds will be detected. This level of assurance is less than that provided for the
detection
of non-fraudulent material misstatements because:
a. Auditors face less liability for failure to detect fraud.
b. Frauds are extremely rare and therefore a lower level of assurance is appropriate.
c. Most frauds are detected by means other than the audit.
d. Those committing frauds usually take steps to prevent the detection of the frauds.
19. The risk that the assertion contains material misstatements that, when aggregated with
misstatements in other assertions, could make the entire financial statements materially
misstated, is known as:
a. Individual detection risk
b. Inherent risk
c. Fraud involving management
d. Noncompliance with contractual agreements

20. Which of the following circumstances would an auditor most likely consider a risk factor
relating
to misstatements arising from fraudulent financial reporting?
a. Several members of management have recently purchased additional shares of the entity’s
stocks.
b. Several members of the board of directors have recently sold shares of the entity’s stock.
c. The entity distributes financial forecasts to financial analysts that predict conservative
operating results.
d. Management is interested in maintaining the entity’s earnings trend by using aggressive
accounting pract

Related Parties
1. The existence of a related party transaction may be indicated when
another entity
a. Sells real estate to the corporation at a price that is comparable to its appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals the current market rate.
d. Lends to the corporation at a rate of interest, which equals the current market rate.

2. The existence of related parties and transactions between such parties are considered ordinary
features of business. Which of the following statements concerning the need for the auditor to
become aware of them is incorrect?
a. The applicable financial reporting framework may require disclosure in the financial statements
of certain related party relationships and transactions.
b. A greater degree of reliance should be placed on audit evidence that is obtained from or created
by related third parties.
c. The existence of related parties and related party transactions may affect the financial
statements.
d. A related party transaction may be motivated by other than ordinary business considerations
such as profit sharing or fraud.

3. Which statements is incorrect regarding the auditor’s responsibilities and audit procedures
regarding related parties and transactions with such related parties?
a. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements.
 b. An audit cannot be expected to detect all related party transactions.
c. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties.
d. The auditor needs to have a level of knowledge of the entity’s business and industry that will
enable identification of the events, transactions and practices that may have a material effect on
the financial statements.

4. The auditor needs to be aware of the existence of related parties and transactions between such
parties. Which of the following is the least likely reason?
a. GAAP in the Philippines require disclosure in the financial statements of certain related party
relationships and transactions.
b. Related parties and transactions between such parties are considered unusual features of
business.
c. The source of audit evidence affects the auditor’s assessment of its reliability.
d. A related party transaction may be motivated by other than ordinary business considerations.

5. The auditor determined that Jade Company occupies the 2 nd floor of an office building for which it
pays no rent. The most likely explanation is
a. They got lucky the landlord has not noticed the lack of payment.
b. Landlord has weak internal control over billings.
c. Related party transaction in which a major shareholder owns the building.
d. Jade Company is engaging in fraudulent activities.

6. Which of the following least likely indicates the existence of previously unidentified related parties?
a. Transactions which have abnormal terms of trade, such as unusual prices, interest rates,
guarantees, and repayment terms.
b. Transactions which lack an apparent logical business reason for the occurrence.
c. Transactions in which substance does not differ from form.
d. Unrecorded transactions such as the receipt or provision of management services at no charge.

7. Which of the following events most likely indicated the existence of related parties?
a. Which Borrowing a large sum of money at a variable rate of interest.
b. Selling real estate at a price that differs significantly from its book value.
c. Making a loan without scheduled terms for repayment of the funds.
d. Discussing merger terms with a company that is a major competitor.

8. The following statements relate to the auditor’s responsibilities regarding related parties and
transactions with such parties. Which is incorrect?
a. Management is required to implement adequate internal control to ensure that transactions
with related parties are appropriately identified in the information system and disclosed in the
financial statements.
b. The auditor should have a sufficient understanding of the entity and its environment to identify
events, transactions, and practices that may result in a risk of material misstatement regarding
related parties and transactions with such parties.
c. A financial statement audit cannot be expressed to detect all related party transactions.
 d. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties.

9. Which of the following would not necessarily be a related party transaction?

a. A purchase from another corporation that is controlled by the corporation’s chief shareholder.
b. A loan from the corporation to a major shareholder.
c. Sale of land to the corporation by the spouse of a director.
d. A sale to another corporation with a similar name.

10. Which of the related party transactions, an auditor places primary emphasis on
a. Confirming the existence of the related parties.
b. Verifying the valuation of the related party transactions.
c. Evaluating the disclosure of the related party transactions.
d. Ascertaining the rights and obligations of the related parties.

11. Which of the following auditing procedures most likely would assist an auditor in identifying related
party transactions?
a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
b. Vouching accounting records for recurring transactions recorded just after the balance sheet
date.
c. Reviewing confirmations of loans receivable and payable for indications of guarantees.
d. Performing analytical procedures for indications of possible financial difficulties.

12. Which of the following most likely would indicate the existence of related parties?
a. Writing down obsolete inventory just before year-end.
b. Failing to correct previously identified internal control deficiencies.
c. Depending on a single product for the success of the entity.
d. Borrowing money at an interest rate significantly below the market rate.

13. After determining that a related party transaction has, in fact, occurred an auditor should
a. Substantiate that related party transactions were consummated on terms equivalent to those
prevail in arm’s-length transactions.
b. Perform analytical procedures to verify whether similar transactions have occurred, but were
not recorded.
c. Obtain an understanding of the purpose of the transaction.
d. Determine whether a particular transaction would have occurred if t6he parties had not been
related.

14. A division, branch, subsidiary, joint venture, associated company or other entity whose financial
information is included in financial statements audited by the principal auditor.
a. Company group c. component
b. Business combination d. Related party
15. Parties are considered to be related if:
a. If a breach of covenants has occurred, and if on or before balance sheet date, one party has
obtained a grace period of at least twelve months after balance sheet data during which said
party can rectify the breach, and the other party has agreed not to demand payment for the
term of the grace period.
b. One party has the ability to control the other party and exercise significant influence over the
other party in making financial and operating decisions.
c. If one party discounts a note receivable or another party and the discounting is without
recourse.
d. Is a transaction is processed in an unusual manner due to errors on the accounting and internal
control system.

16. Which of the following statements is true about related party transactions?
a. In the absence of evidence to the contrary, related party transactions should be assumed to be
outside the ordinary course of business
b. An auditor should determine whether a particular transaction would have occurred if the parties
had not been related
c. An auditor should substantiate that related party transactions were consummated on terms
equivalent to those that prevail in aim’s length transactions
d. The audit procedures directed toward identifying related party transactions should include
considering whether transactions are occurring but are not being given proper accounting
recognition

17. The primary concern of the auditor regarding related party transaction is that
a. Their effects are eliminated from the financial statements.
b. Their existence and significance be adequately disclosed.
c. Their form be emphasized rather than their economic substance.
d. They are reported to proper regulatory authorities because they are illegal.

18. Which of the following does PAS not identify as a related party?
a. Affiliated companies
b. Line employees of the company
c. Principal owners of the company
d. Members of company management

19. Which of the following auditing procedures is most likely to assist an auditor in identifying related
party transactions?
a. Retesting ineffective controls previously reported to the audit committee.
b. Sending second request for unanswered positive confirmations of accounts receivable.
c. Inspecting communications with law firms for evidence of unreported contingent liabilities.
d. Reviewing information provided by management identifying related parties and being alert for
other material related party transactions.

20. The least effective method of identifying related parties would be

a. A review of SEC filings.
b. An inquiry of management.
c. A review of the purses and sales journals for the period under audit.
d. An examination of stockholders’ listings to identify principal stockholders.
Subsequent Events

1. Which of the following procedures should an auditor ordinarily perform regarding subsequent
events?
a. Review the cutoff bank statements for several months after the year-end.
b. Compare the latest available interim financial statements with the financial statement being
audited.
c. Send second requests to the client’s customers who failed to respond to initial accounts
receivable confirmation requests.
d. Communicate material weakness in internal control to the client’s audit committee.

2. An event not covered by the auditor’s responsibility is an event

a. Occurring between the financial statement date and report date known to the auditor.
b. Occurring between the financial statement date and report date not known to the auditor.
c. Occurring after report date known to the auditor.
d. Occurring after the report date not known to the auditor.

3. Which of the following procedures can be performed only in the subsequent period?
a. Examination of data to determine that a proper cut off has been made.
b. Tests of details of balances
c. Tests of the details of transactions.
d. Reading of the minutes of the board of directors’ meetings.

4. Under PSA 560, subsequent events are defined as events which occurs subsequent to the
a. Reporting date but prior to the date of the financial statement was authorized for issue.
b. Date of the auditor’s report.
c. Reporting date but prior to the date of the auditor’s report.
d. Date of the auditor’s report and concern contingencies which are not reflected in the financial
statements.

5. Which of the following statements concerning the auditor’s responsibility regarding subsequent
events is incorrect?
A. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events up to the date of the auditor’s report that may require adjustment of,
or disclosure in, the financial statements have been identified.
B. The audit procedures identify events that may require adjustment of, or disclosure in, the
financial statements should be performed as near as practicable to the date of issuance of the
audited financial statements.
C. When the auditor should consider the events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements.
D. The auditor does not have any responsibility to perform audit procedures or make inquiry
regarding the financial statements after the date of the auditor’s report.
6. If the statement of financial position of a company is dated December 31, 2015, the audit reported
dated February 18, 2016, and both are released on February 25, 2016, this indicates that the auditor
has searched for subsequent events that occurred up to:
A. December 31, 2015.
B. January 1, 2016.
C. February 18, 2016.
D. February 25, 2016.

7. The adverse effects of event causing an auditor to believed there is substantial doubt about an
entity’s ability to continue as a going concern would most likely be mitigated by evidence relating to
the
a. Ability to expand operations into new product lines in the future.
b. Feasibility of plans to purchase leased equipment at less than market value.
c. Marketability of assets that management plants to sell
d. Committed arrangements to convert preference shares to long-term debt.

8. Which is true about facts after the date of the auditor`s report but before the financial statements
are issued?
a. Auditor should inform the management about such facts
b. Those charged with governance should inform the management about such facts
c. Management should inform the auditor about such facts
d. The auditor has an active duty to search for such facts

9. The appropriate date for the client to specify as the effective date in the audit inquiry to legal
counsel is
a. As close to the date of the auditor’s report as possible.
b. The date of the auditor inquiry itself.
c. Seven working days after the request is received by legal counsel.
d. The end of the reporting period.

10. Which type of subsequent event requires consideration by management and evaluation by the
auditor?
a. Subsequent events that have a direct effect on the financial statements and require
adjustments.
b. Subsequent events that have no direct effect on the financial statements but for which
disclosure is advisable.
c. Both A and B.
d. Neither A nor B.

11. A major customer of an audit client suffers a fire just prior to completion of year-end field work. The
audit client believes that this event could have a significant effect on the financial statements. The
auditor should
a. Advise management to disclose the event in notes to the financial statements.
b. Disclose the event in the auditor’s report until the extent of the direct effect on the financial
statements is known.
 c. Withhold submission of the auditor’s report until the extent of the direct effect on the financial
statements is known.
d. Advise management to adjust the financial statements.

12. Subsequent events affecting the realization of assets ordinarily will require adjustment of the
financial statements under examination because such events typically represent:
a. The culmination of conditions that existed at the balance sheet date.
b. The final estimates of losses relating to casualties occurring in the subsequent events period.
c. The discovery of new conditions occurring in the subsequent events period.
d. The preliminary estimate of losses relating to new events that occurred subsequent to the
balance sheet date.

13. Which of the following statements best expresses the auditor’s responsibility with respect to events
occurring in the subsequent events period?
a. The auditor has no responsibility for events occurring in the subsequent period unless these
events affect transactions recorded on or before the end of the reporting period.
b. The auditor is responsible for determining that a proper cutoff has been made and for
performing a general review of events occurring in the subsequent period.
c. The auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the date of the auditor’s report.
d. The auditor’s responsibility is to determine that transactions recorded on or before the end of
the reporting period actually occurred.

14. The letter of audit inquiry to the client’s legal counsel should be mailed only by the
a. Client after the auditor has reviewed it for appropriate content.
b. Auditor after preparation by the client and review by the auditor.
c. Auditor’s attorney after preparation by the client and review by the auditor.
d. Client after review by the auditor’s attorney.

15. Subsequent events refer to

a. Only significant events that occur between the balance sheet date and the date of the
auditor’s report that have been discovered by the auditor during the same period.
b. Only significant events that occur between the balance sheet date and the date of the
auditor’s report irrespective of the date they have been discovered by the auditor.
c. Only significant events that occur between the balance sheet date and the date the audited
financial statements have been released to the client, irrespective of the date of their discovery
by the auditor.
d. All significant events that occur after balance sheet date.

16. Which of the following statements that relate to subsequent events is inappropriately described?
a. The auditor is expected to conduct a continuing review of all matters to which previously
applied procedures have provided satisfactory conclusions.
b. The auditor should consider the effect of subsequent events on the financial statements and
on the auditor’s report.
c. The procedures to identify events that may require adjustment of, or disclosure in, the
financial statement would be performed.
 d. The procedures that are designed to obtain sufficiently appropriate audit evidence that all
events up to the date of the audit report that may require adjustment of, or disclosure in, the
financial statements are in addition to routine procedures which may be applied to specific
transactions.

17. Which of the following not appropriately describes the auditor’s procedures with respect to
subsequent events?
a. The procedures to identify events that may require adjustments of, or disclosure in, the financial
statements would be performed as early as practicable
b. Those routine procedures that are applied to specific transactions occurring after period end are
design to obtain sufficient appropriate audit evidence that all events up to the date of the audit
report have been identified
c. When a component is audited by another CPA, the auditor would consider the other auditor’s
procedures regarding events after period end and the need to inform the other auditor of the
planned date of the audit report
d. The auditor is responsible to inquire regarding the financial statements after the date of the
auditor’s report.

18. Which of the following should do last when, after the financial statements have been issued, the
auditor becomes aware of a fact that existed at the date of the auditor’s report?
a. Consider whether the financial statements need revisions.
b. Discuss the matter with management.
c. Take the action appropriate in the circumstance.
d. Inform those users who are currently relying on the financial statements.

19. When a fact, that existed before the date of the report is discovered and the management revises
previously issued audited financial statements, the following are appropriate except:
a. A new auditor’s report should include an emphasis of a matter paragraph that refers to a note
to the financial statements that discusses the reason for the revision of the financial statements
and to the earlier report issued by the auditor.
b. The new auditor’s report should contain the original date.
c. The performance of the procedures that are designed to obtain sufficient evidence as to
subsequent events would ordinarily be extended to the date the revised financial statements
are approved by the entity’s management.
d. The auditor is permitted to restrict the audit procedures regarding the financial statements to
the effects of the subsequent event that necessitated the revision.

20. When a fact is discovered after the date of the report but before the financial statements are issued
and the client amends the financial statements, would the following procedures or actions be
necessary?
A B C D
*Procedures to obtain evidence with
Respect to subsequent events are extended Yes Yes No No
*An emphasis of a matter paragraph is
Required Yes No No Yes