College of Accountancy

Midterm examination
Acctg. 204A
Instruction:
o Sent to my messenger account the picture of the summary of answers.
Multiple Choice
1) Which of the following is incorrect regarding the Philippine Standards on Assurance
Engagements (PSAE)?
a. It provides an overall framework for assurance engagements intended to provide either
a high or moderate level of assurance.
b. It provides basic principles and essential procedures for engagements intended to
provide a moderate level of assurance.
c. When a professional accountant is engaged to perform an assurance engagement for
which specific standards exist, those standards apply.
d. If no specific standards exist for an assurance engagement, PSAE apply.
2) An assurance engagement should exhibit the following elements except
a. A three party relationship c. Appropriate professional fee
b. A conclusion d. A subject matter
Which of the following is incorrect regarding the “three-party relationship” element of
assurance engagements?
c. Professional accountants as those persons who are members of an IFAC member body,
which should be in public practice.
d. The responsible party and the intended user will often be from separate organizations
but need not be.
e. The responsible party is the person or persons, either as individuals or representatives
of an entity, responsible for the subject matter.
f. The intended user is the person or class of persons for whom the professional
accountant prepares the report for a specific use or purpose.
3) The following are assurance engagements except
a. Financial statements audit c. Review of financial statements
b. Information system reliability services d. Tax consulting
4) Engagements frequently performed by professional accountants that are not assurance
engagements include the following except
a. Agreed-upon procedures. c. Compilation
b. Compliance audit d. Management consulting.
5) The subject matter of an assurance engagement may take many forms, including
a. Data b. Systems and processes c. Behavior d. All of these
6) In all cases, audit reports must
a. Be signed by the individual who performed the audit procedures.
b. Certify the accuracy of the quantitative information which was audited.
c. Communicate the auditor’s finding to the general public.
d. Inform readers of the degree of correspondence between the quantifiable information
and the established criteria.
7) The auditor communicates the results of his or her work through the medium of the
a. Engagement letter c. Management letter.
b. Audit report d. Financial statements.
8) As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the
information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.
d. Assertions are found only in the footnotes to the financial statements.
9) The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor’s degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret ASC Statements.
10) Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit c. Financial statement audit
b. Compliance audit d. Financial audit
 11) An operational audit is designed to
a. Assess the efficiency and effectiveness of management’s operating procedures
b. Assess the presentation of management’s financial statements in accordance with
generally accepted accounting principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively
discharging its responsibility to oversee management’s operations
12) A review of any part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a (n)
a. Audit of financial statements c. Operational audit
b. Compliance audit d. Production audit
13) Internal auditors cannot be independent
a. Since they do not possess the CPA license.
b. Because they don’t audit financial statements.
c. Unless their immediate supervisor is a CPA.
d. As long as an employer-employee relationship exists.
14) To provide for the greatest degree of independence in performing internal auditing
functions, an internal auditor most likely should report to
a. Board of Directors. c. Corporate Controller.
b. Vice-President for Finance. d. Corporate Stockholders.
15) Which of the following should an auditor obtain from the
predecessor auditor prior to accepting
an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.
16) What is the responsibility of a successor auditor to communicate with the
predecessor auditor in connection with a prospective new client?
a. The successor auditor has no responsibility to contact the predecessor auditor.
b. The successor auditor should obtain permission from the prospective client to contact
the predecessor auditor.
c. The successor auditor should contact the predecessor auditor if the client authorizes
contact.
d. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.
17) If permission from client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should: a. Keep silent of the denial.
b. Disclose the fact that the permission to disclose is denied by the client.
c. Disclose adequately to proposed auditor all noncompliance made by the client.
d. Seek legal advice before responding to the proposed auditor
18) The objective and scope of the audit and the extent of the auditor’s responsibilities to
the client are best documented in
a. Independent auditor’s report c. Client’s representation letter
b. Audit engagement letter d. Audit program
19) Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the results of the engagement.
d. Arrangement concerning the involvement of other auditors or experts in some
aspects of the audit.
20) An audit engagement letter least likely includes
a. A reference to the inherent limitation of an audit that some material misstatements
may remain undiscovered.
b. Identification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client.
d. Arrangements concerning the involvement of internal auditors and other client’s staff.
21) Which of the following least likely requires the auditor to send a new engagement
letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firm’s management.
d. Legal requirements and other government agencies’ pronouncements.
22) Which of the following will most likely help the auditor 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.
23) 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. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on
financial statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in the
financial statements.
24) 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
25) Adequate planning of the audit work helps the auditor of accomplishing the following
objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.
26) The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
27) Which of the following is least likely considered by the auditor in developing the overall
audit plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial
statements
d. The general level of competence of audit assistants.
28) Which of the following is not considered by the CPA when he makes an overall audit
plan?
a. Identification of complex accounting areas including those involving accounting
estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that
are expected under the engagement.
29) Audit plan should
A B C D

A. Precede action Yes No Yes N

o
B. Be fixed Yes No No Y
e
s
C. Be cost beneficial Yes Yes Yes Y
e
s
30) Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.
31) The audit program should contain the following, except:
a. Audit objective
 b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk

32) Internal control is ineffective when computer department personnel

a.
Design documentation for computerized systems
b.
Originate changes to master files
c.
Participate in computer software acquisition decisions
d.
Provide physical security for program files
33) During consideration of internal control in a financial statement audit, an auditor, is
not obliged to
a. Search for significant deficiencies in the operation of internal control.
b. Understand the internal control environment and the information system.
c. Determine whether the controls relevant to audit planning have been placed in
operation
d. Perform procedures to understand the design of internal control
34) As the acceptable level of detection risk increases, an auditor may change the
a. Assessed level of control risk from below the maximum to the maximum level
b. Assurance provided by tests of controls by using a large sample size than
planned
c. Timing of substantive tests from year-end to en interim date
d. Nature of substantive tests from a less effective to a more effective procedure
35) Regardless of the assessed level of control risk, an auditor would perform some
a. Tests of controls to determine the effectiveness of internal controls.
b. Analytical procedures to verify the design of internal controls
c. Substantive tests to restrict detection risk for significant transaction classes
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk
36) An auditor’s flowchart of a client's accounting system is a diagrammatic representation
that depicts the auditor'
a. Program for tests of controls
b. Understanding of the system
c. Understanding of the types of fraud that are probable, given the present system
d. Documentation of the Study and evaluation of the system
37) Which of the following is not a component of an entity's internal control system?
a. Control environment
b. Control Risk
c. Risk assessment
d. Control activities
38) An internal control structure can never be regarded as completely effective. Even if
systems personnel could design an ideas system. Its effectiveness depends on the
a. Adequacy of the computer system
b. Proper implementation by management
c. Ability of the internal audit staff to maintain it
d. Competency and dependability of the people using it
39) The most important aspect of any system of control is
a. proper authorization procedures
b. competent trustworthy personnel
c. separation duties
d. regular review by top management
40) Which of the following duties would indicate a weakness in the internal control
system?
a. The accounting function is under the controller
b. The custodianship of cash is the responsibility of the treasurer's function
c. The internal auditor reports to the board of director’s
d. The custodianship of buildings and equipment is the responsibility of. the
controller's function
41) In planning an audit of certain accounts, an auditor may conclude that specific
procedures used to obtain an understanding of an entity's internal control system need not
be included because of the auditor's judgments about materiality and assessments of
a. Control risk
b. Detection risk
c. Sampling risk
 d. Inherent risk
42) One reason why an auditor makes an analytical review of the client’s operations is to
identify
a. Improper separation of accounting and other financial duties.
b. Weakness of a material nature in the system of internal accounting control
c. Unusual transactions
d. Non-compliance with prescribed control procedures
43) Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of the following
possibilities?
a. Unrecorded purchases
b. Unrecorded sales
c. Merchandise purchases being charged to selling and general expense
d. Fictitious sales
44) The auditor generally gives most emphasis to ratio and trend analysis in the
examination of the statement of:
a. Retained earnings
b. Income
c. Financial position
d. Cash flows
45) An aging analysis of accounts receivable would provide an indication as the:
a. Validity of the accounts
b. Collectibility of the accounts
c. Integrity of the credit grantors
d. Solvency of customers
46) Evidential matters supporting the financial statement consist of underlying accounting
data and corroborating information available to the auditor. An example of corroborating
information is:
a. General and subsidiary ledgers
b. Worksheets supporting cost allocation
c. Minutes of the meeting
d. Accounting manuals
47) Which of the following is an accepted audit procedure that involves the analysis of two
records independent of one another?
a. Observation
b. Statistical sampling
c. Reconciliation
d. Vouching
48) The primary difference between an audit of the balance sheet and the audit of income
statement is that the audit of the balance sheet deals more with the verification of
a. Transactions
b. Authorizations
c. Costs
d. Balances
49) In the audit of a medium sized trading company, which one of the following areas
would be expected to require the greatest amount of audit time?
a. Liabilities
b. Assets
c. Revenue
d. Owner’s equity
50) Which of the following combinations of procedures would an auditor most likely
perform to obtain about plant assets additions?
a. Inspecting documents and physically examining plant assets
b. Recalculating and obtaining written management representations
c. Observing operating activities and comparing balances to prior period balances
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.
51) Of the following procedures, which is not considered part of “obtaining an
understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer
understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.
52) The permanent file section of the working papers that is kept for each audit client
most likely contains
 a. Review notes pertaining to questions and comments regarding the audit work
performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client's legal counsel concerning pending litigation
d. Narrative descriptions of the client's internal control policies and procedures

53) Which of the following is a basic tool used by the auditor to control the audit work and
review the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.
54) As part of audit planning, CPAs should design audit programs for each individual
audit and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit met.
d. Ensure that only material items are audited.
55) Which of the following factors is most important in determining the competence of
audit evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

=================================end of examination=========================