Questions

1. An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity’s operating activities in relation to specify objectives is a (n):
a. External Audit
b. Compliance Audit
c. Operational Audit
d. Financial Statement Audit

2. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational Audit
b. Financial Statement Audit
c. Compliance Audit
d. Performance Audit

3. One objective of an operational audit is to:

a. Determine whether the financial statements fairly present the entity’s operations
b. Evaluate the feasibility of attaining the entity’s operational objectives
c. Make recommendations for improving performance
d. Report on the entity’s relative success in attaining traffic maximization

4. Which one of the following is not major difference between operational and
financial auditing?
a. Purpose of the audit
b. Distribution of the report
c. Testing the effectiveness of internal controls
d. Audits of non-financial areas

5. In assessing sample risk, alpha risk relate to the

a. Efficiency of the audit
b. Selection of the sample
c. Effectiveness of the audit
d. Audit quality controls

6. One of the causes of non sampling risk is

a. Failure to draw a random sample
b. Failure to draw a representative sample
c. The use of inappropriate or ineffective audit procedures
d. The use if attributes sampling instead of variables sampling

7. One of the ways to reduce sampling risk is to

a. Increase the sample size
b. Carefully design the audit procedures to be used
c. Provide proper supervision and instruction of the audit team
d. Use variable sampling rather than attribute sampling
8. The use of ratio estimation sampling technique is most effective when
a. The calculated audit amounts are approximately proportional to the client’s book
amounts
b. A relatively small number of differences exist on the population
c. Estimating population whose record consists of quantities, but not book values
d. Large overstatement differences and large understatement differences exist in the
population

9. Which one of the auditor’s four defenses is the preferred defense in third party
lawsuits?
a. Lack of duty.
b. Non-negligent performance.
c. Contributory negligence.
d. Absence of casual connections.

10. Privity of contract exists between

a. Auditor and client.
b. Auditor and third parties.
c. Auditor and SEC.
d. All three above.

11. A common way for a CPA firm to demonstrate its defense of a lack of duty to
perform is by use of a(n)
a. Engagement letter
b. Letter of engagement
c. Confirmation letter
d. Expert witness

12. When calculating the total amount of misstatements relevant to the analysis of an
account balance, an auditor should add to the misstatement discovered in individually
significant items the following:
a. The projected likely misstatement and the additional possible misstatement
estimate.
b. The known misstatement in the sampled items.
c. The known misstatement in the sampled items, the projected likely misstatement,
and the additional possible misstatement estimate.
d. The additional possible misstatement estimate.

13. Incremental allowance for sampling risk is an allowance in PPS sampling to

incorporate risk arising from
a. Auditing the entire sampling interval.
b. Not auditing the entire sampling interval.
c. Auditing the portion of the sampling interval.
d. None of these.
14. The purpose of stratification is
a. To reduce the variability of items within a subgroup so that the auditor can
significantly reduce the required sample size.
b. To increase the variability of items within a subgroup so that the auditor can
significantly reduce the required sample size.
c. To reduce the variability of items within a subgroup so that the auditor can
significantly increase the required sample size.
d. To increase the variability of items within a subgroup so that the auditor can
significantly increase the required sample size.

15. In a probability proportional to size sample with a sampling interval of P5,000, an

auditor discovered that a selected account receivable with a recorded amount of P10,000
had an audit amount of P8,000. If this were the only error discovered by the auditor, the
projected error of this sample would be
a. P1,000
b. P2,000
c. P4,000
d. P5,000

16. The possibility that an auditor’s conclusion based on a sample may be different
from the conclusion reached if the entire population were subjected to the same
procedure is called
a. Audit Risk
b. Non-Sampling Risk
c. Sampling Risk
d. Detection Risk

17. Which of the following best illustrates the concept of sampling risk
a. A randomly chosen sample may not be representative of the population as a whole
on the characteristics of interest
b. An auditor may select audit procedure that are not appropriate to achieve the
specific objective
c. An auditor may fail to recognize errors in the documents examined for chosen
sample
d. The documents related to the chosen sample may not be available for inspection

18. One of the way to reduce sampling risk is to

a. Increase the sample size
b. Carefully design the audit procedures to be used
c. Provide proper supervision and instruction of the audit team
d. Use variable sampling rather than attribute sampling

19. One of the causes of non-sampling error is

a. Failure to draw a random sample
b. Failure to draw a representative sample
c. The use of inappropriate or ineffective audit procedures
d. The use of attributes sampling instead of variable sampling

20. Which of the following is not among the risk assessment procedures that the
auditor should perform in obtaining an understanding of the entity and its environment,
including its internal control?
a. Inquiries of management and others within the entity
b. Analytical procedures
c. Confirmation
d. Observation and inspection

21. In determining others within the entity to whom inquiries may be directed and the
extent of those inquiries, the auditor considers what information may be obtained that
would help him/her in identifying risks of material misstatement. The term “others” does
not include the
a. Controller
b. Internal auditor
c. In-house legal counsel
d. Major supplier of raw materials

23. PSA 315 (Clarified) requires that the auditor should obtain an understanding of
relevant industry, regulatory and other external factors including the applicable financial
reporting framework. Which of the following is not an example of matters relating to
regulatory environment that the auditor would usually consider?
a. Regulatory framework for a regulated industry
b. Product technology relating to the entity’s product
c. Taxation
d. Legislation and regulation significantly affecting the entity’s operation

25. In a computer system, the parts of the operating system program language
translator program are stored in the
a. Read only memory (ROM)
b. Random access memory (RAM)
c. Magnetic tape drive
d. Magnetic disk drive

26. Which of the following is not a hardware element in an IT environment?

a. Scanners
b. CD- ROM drive
c. Application programs
d. Modems

27. Express Padala, Inc. Stated in one of its mission statements that “positive control
of each package will be maintained by utilizing . . . electronic tracking and tracing
systems.” Express Padala uses what type of IT system?
a. Batch processing which features immediate updating as to the location of
packages
b. Real-time processing which features updating at fixed time periods
c. Batch processing which features updating at fixed time periods
d. Real-time processing which features immediate updating as to the location of
packages

28. What type of computer system is characterized by data that are assembled from
more than one location and records that are updated immediately?
a. Microcomputer system
b. Minicomputer system
c. Batch processing system
d. On-line, real-time system

29 . Which of the following characteristics distinguishes computer processing from

manual processing?
a. Computer processing virtually eliminates the occurrence of computational error
normally associated with manual processing
b. Errors or frauds in computer processing will be detected soon after their
occurrences
c. The potential for systematic error is ordinarily greater in manual processing that
computerized processing
d. Most computer systems are designed so that transaction trails useful for audit
purposes do not exists

30. The nature and extent of a CPA firms quality control policies and procedures
depend on
The CPA Firm's The nature of the CPA Firm's Cost-benefit
Size Practice considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
e. No No No

31. Which of the following is one of the elements of a CPA firm's quality control
system?
a. Computer assisted audit techniques
b. Leadership responsibilities
c. Control environment
d. Control activities
e. Skills and competence

32. Which of the following quality control objectives would be least important to the
auditor?
a. Engagement performance
b. Human Resources
c. Determination of Audit Fee
d. Independence
e. Leadership Responsibilities

33. A quality control that requires personnel in the firm to adhere to independence,
integrity, objectivity, confidentiality and professional behavior, relates to
a. Human resources
b. Acceptance and Continuance of Client Relationships and Specific Engagements
c. Engagement performance
d. Ethical Requirements
e. Monitoring

34. The objective of the quality control policies to be adopted by an audit firm will
ordinarily incorporate all of the following except:
a. Integrity
b. Objectivity
c. Confidentiality
d. All of the above
e. None of the above

35. Below are the five types of tests which auditors use to determine whether
financial statements are fairly stated. Which three are substantive tests?
1.risk assessment procedures
2.tests of transactions
3.tests of controls
4.analytical procedures
5.tests of details and balances

A. 1, 2, 3
B. 1, 2, 4
C. 2, 4, 5
D. 3, 4, 5

36. The primary emphasis in most tests of details of balances is on the

A. expense accounts
B. revenue accounts
C. balance sheet accounts
D. expense accounts

37. In shareholders' equity section, examining the paid checks and share certificates
for shares repurchased is the emphasis on ________ assertion.
A. existence or occurrence
B. completeness
C. valuation/measurement
D. rights and obligations
38. Which of the following statements is not correct with respect to analytical
procedures?
A. Auditing standards require the use of analytical procedures.
B. Analytical procedures may be performed as test of control.
C. Analytical procedures may be performed as substantive test.
D. Analytical procedures use comparisons and relationships to assess whether
account balances appear reasonable.

39. Which of the following is true with regard to the substantive audit procedure in
the completeness assertion in notes payable?
A. Reconcile interest expense to notes payable and compare interest expense for the
current period with the previous period
B. Recalculate the portion of notes currently due
C. Confirm notes with lenders
D. Read the loan agreement for terms and conditions that should be disclosed

40. The following are the primarily responsible for the fraud except
a. financial & other officer of an enterprise
b. external auditors
c. owner
d. managers

41. Why good governance is important to conduct an audit?

a. because, company with good governance have a independent board members.
b. because, company with good governance have a code of conduct.
c. because, company with good governance are less likely to engage in financial
engineering.
d. because, company with good governance are less risky to audit.

42. The internal auditor shall report directly to the

a. management
b. stockholders
c. audit committee
d. board of directors

43. Many audit firms are not willing to accept potential audit clients unless,
a. clients demonstrate a strong commitment to bad corporate governance.
b. clients demonstrate a weak commitment to good corporate governance.
c. clients demonstrate a strong commitment to good corporate governance.
d. clients demonstrate a low commitment to corporate governance.

44. Which of the following ethical principles does not apply to an egreed-upon
procedure engagement?
a. Independence
b. Confidentiality
c. Professional behavior
d. Professional competence and due care

45. What level of assurance does an accountant give on compilation report?

a. None
b. Moderate
c. Low
d. High

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

47. Which statement is incorrect regarding agreed-upon procedures?

a. Users of the report assess for themselves the procedures and findings reported by
the auditor and draw their own conclusions from the auditor’s work.
b. The report is restricted to those parties that have agreed to the procedures to be
performed since others, unaware of the reasons for the procedures, may misinterpret the
results.
c. The auditor should conduct an agreed-upon procedures engagement in accordance
with PSRS and the terms of the engagement.
d. Where the auditor is not independent, a statement to that effect need not be made
in the report of factual findings.

48. For an entity's financial statements to be presented fairly in conformity with the
requirements of the applicable financial reporting framework. Which of the following
need not to be complied with?
a. The financial statements adequately disclose the significant accounting policies
selected and applied.
b. The financial statements should present information that is relevant, reliable,
comparable, and understandable.
c. The financial statements should use appropriate terminology.
d. The financial statements should use principles approved by the Auditing and
Assurance Standards Council.

49. The auditor does not normally address the report to

a. Those for whom the report is prepared
b. The president of client company
c. Those charged with governance of client company
d. The stockholders of client company

50. PSA 700 requires the auditor's report to describe management's responsibility for
the financial statements. The description shall include an explanation that management is
responsible for the preparation of the financial statements and
a. For selecting and applying appropriate accounting policies
b. For such internal control as it determines necessary to enable the preparation of
financial statements that are free from material misstatement
c. For making accounting estimates that are reasonable in the circumstances
d. Preventing collusion among employees

51. The opinion expressed by the auditor when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework is
a. Qualified Opinion
b. Unmodified Opinion
c. Undeniable Opinion
d. Denial of Opinion

52. It is defined as the risk that the auditor fails to find material misstatements in the
client’s financial statements and thereby inappropriately issues an unqualified opinion on
the financial statements.
a. Audit Risk
b. Engagement Risk
c. Financial Reporting Risk
d. Business Risk

53. It is intended to inform the users that auditors do not guarantee or ensure the fair
presentation or the financial statements.
a. Free of material misstatements
b. Reasonable assurance
c. Reporting
d. Risk

54. The following are factors affecting business risk except:

a. Economic Climate
b. Technological Change
c. Competition
d. Internal Control

55. Using personal computers in auditing may affect the methods used to review the
work of staff assistants because
a. Working paper documentation may not contain readily observable details of
calculation.
b. The quality control standards may differ.
c. Documenting the supervisory review may require assistance of consulting
services personnel.
d. Supervisory personnel may not have an understanding of the capabilities and
limitations of personal computers.
56. Which of the following conditions constitutes inappropriate working paper
preparation?
a. Tick marks are explained in working papers.
b. All forms and directives used by the client are included in the working papers.
c. Flow charts are included in the working papers.
d. Findings are cross-referenced to supporting documentation.

57. Which of the following is usually included or shown in the auditor’s working
papers?
a. The procedures used by the auditor to verify the personal financial status of
members of the client’s management team.
b. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.
c. Analyses that are designed to be a part of, or a substitute for, the client’s
accounting records.
d. Excerpts from authoritative pronouncements that support the financial reporting
framework used in preparing the financial statements.

58. The audit working paper that reflects the major components of an amount
reported in the financial statements is the
a. Supporting schedule
b. Interbank transfer schedule
c. Lead schedule
d. Carryforward schedule

59. The auditor is required to complete the administrative process of assembling the
final audit file on a timely basis after the date of the auditor’s report. The time limit The
time limit within which to complete the assembly of the audit file is ordinarily
a. Not more than 30 days after the date of the auditor’s report.
b. Not more than 60 days after the date of the auditor’s report.
c. Not more than 90 days after the end of the entity’s reporting period.
d. Not more than 60 days after the date of the entity’s financial statements are
authorized for issue.

60. Which of the following is correct about Philippine Auditing Practices Statements
(PAPSs)?
a. These are issued to resolve issues relating to PSAs.
b. These statements are intended to have the authority of PSAs.
c. These statements are issued to provide practical assistance to auditors in
implementing PSAs or to promote good practice.
d. These statements are forms of interpretations issued by AASC.

61. Which of the following is NOT TRUE of Philippine Auditing Practice Statements
(PAPSs)?
a. These statements are not intended to replace PSAs.
b. These statements are intended to have the authority of PSAs.
c. These statements are issued to provide practical assistance to auditors in
implementing PSAs.
d. These are not form of interpretations issued by AASC.

62. Which of the following pronouncements issued by AASC is designed to resolve

issues relating to PSAs?
a. Philippine Auditing Practices Statements
b. Interpretations
c. Statements of Auditing Standards in the Philippines
d. Generally Accepted Auditing Standards

63. Which of the following best describes the function of Auditing and Assurance
Standards Council (AASC)?
a. To establish and promulgate generally accepted accounting principles in the
Philippines.
b. To investigate violations of Accountancy Act.
c. To promulgate auditing standards, practices and procedures that shall be generally
accepted by the accounting profession in the Philippines.
d. To determine the minimum requirements for admission in the accounting
profession.

64. The Philippine Standards on Auditing (PSA) can be described as

a. Providing very specific guidelines about the specific activities an auditor must
perform on each engagement.
b. Similar to Philippine Financial Reporting Standards (PFRS).
c. Defining the minimum standards of performance for an auditor.
d. Providing assurance that an auditor will not issue the wrong kind of opinion.

65. Which of the following procedures is not generally included in the tests of
controls?
a. Make inquiries of appropriate client personnel
b. Effectively perform client procedures
c. Examine documents, records and reports.
d. Observe control-related activities

66. Which of the following best define Tests of Controls?

a. Those activities performed by the auditor to detect material misstatement or fraud
at the assertion level.
b. Audit procedure to less than 100 percent of the items within an account balance
or class of transactions for the purpose of evaluating some characteristic of the balance or
class.
c. Audit procedure to test the effectiveness of a control used by a client entity to
prevent or detect material misstatements.
d. Any tactic used by an auditor to identify inefficiencies, reduce costs, and
otherwise achieve organizational objectives.
67. Test Controls may require the following except:
a. Understanding of Documents
b. Inquiry of Documents
c. Observation of Documents
d. Inspection of Documents