Auditing Theory: (Test Bank) Gerardo S. Roque

AUDITING
THEORY
(Test Bank)
Gerardo S. Roque
ARANAS, Katrina Mae | ARBOTANTE, Charris Mae | AQUINO, Nir

Noel | DIONISIO, Dewy | JOSE, Maeric Therusse | MANALO, Jaya |
OCAMPO, Kris Anne | SANCHEZ, Vera Marie | SUNDIANG, Renier |
UMALI, Pamela
Chapter 1 An Introduction to Assurance, Auditing, and
Related Services
1. Which of the following statements best describes assurance services?
a. Independent professional services that are intended to enhance credibility of information
to meet the needs of an intended user.
b. Services designed to express an opinion on the fairness of historical financial statements based
on the results of an audit.
c. The preparation of financial statements or the collection, classification, and summarization of
other financial information.
d. Services designed for the improvement of operations, resulting in better outcomes.
2. Which of the following is not an assurance service?

a. Examination of prospective financial information
b. Audit of historical financial statements
c. Review of financial statements
d. Compilation of financial information
3. What level of assurance is provided by the auditor in an audit engagement?

a. Absolute
b. High, but not absolute
c. Moderate
d. No assurance
4. In an engagement to perform agreed-upon procedures, an auditor is engaged to

a. Carry out those procedures of an audit to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
b. Use accounting expertise as opposed to auditing expertise to collect, classify and summarize
financial information.
c. Provide a moderate level of assurance that the information is free of material misstatement.
d. Provide a high, but not absolute, level of assurance that the information is free of material
misstatement.
5. The purpose of an audit of financial statements is to

a. Relieve management or those charged with governance of the responsibility for the preparation
and presentation of the financial statements.
b. Obtain an absolute level of assurance that the financial statements as a whole are free from
material misstatement.
c. Enhance the degree of confidence of intended users in the financial statements.
d. Assure the future viability of the entity by expressing an opinion on the entity’s financial
statements.
6. The primary reason for a financial statement audit by an independent CPA is to

a. Provide increased assurance to users as to the fairness of the financial statements.
b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud
will be discovered.
c. Satisfy governmental regulatory requirements.
d. Relieve management of responsibility for the financial statements.
7. A pervasive characteristic of a CPA’s role in a consulting services engagement is that of being a (an)
a. Independent practitioner
b. Computer expert
c. Confidential reviewer
d. Objective adviser
8. Before an effectiveness audit can be performed, there must be

a. Specific criteria developed to define effectiveness
b. A compliance audit performed by a government auditor
c. A review performed by either an independent or internal auditor
d. A financial statement audit by an independent auditor
9. Which of the following elements does not relate to audit quality?

a. Audit competence
b. Audit fees
c. Independence
d. Due diligence
10. In some assurance engagements, the evaluation or measurement of the subject matter is performed
by the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users. These engagements are called
a. Direct reporting engagements
b. Assertion-based engagements
c. Non-assurance engagements
d. Recurring engagements
11. Which of the following professional services would be considered an assurance engagement?
a. A management consulting engagement to provide IT advice to a client.
b. An engagement to report on compliance with statutory requirements.
c. An income tax engagement to prepare tax returns.
d. A compilation of financial statements from a client’s accounting records.
12. How many separate parties are involved in an assurance engagement?

a. 2
b. 3
c. 4
d. 5
13. The Philippine Framework for Assurance Engagements

a. Contains basic principles, essential procedures, and related guidance for the performance of
assurance engagements.
b. Defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which PSAs, PSREs, and PSAEs apply.
c. Provides a frame of reference for CPAs in public practice when performing audits, reviews, and
compilations of historical financial information.
d. Establishes standards and provides procedural requirements for the performance of assurance
engagements.
14. Which of the following statements is correct concerning an auditor’s responsibilities regarding
financial statements?
a. An auditor’s responsibilities for audited financial statements are confined to the
expression of the auditor’s opinion.
b. The fair presentation of audited financial statements in accordance with an applicable financial
reporting framework is an implicit part of the auditor’s responsibilities.
c. Making suggestions that are adopted about the form and content of an entity’s financial
statements impairs an auditor’s independence.
d. The auditor’s report should provide an assurance as to the future viability of the entity.
15. A financial statement audit aids in the communication of economic data because the audit
a. Assures the readers of financial statements that any fraudulent activity has been corrected.
b. Guarantees that financial data are fairly presented.
c. Lends credibility to the financial statements.
d. Confirms the accuracy of management’s financial representations.
16. Which of the following is the most appropriate action to be taken by a CPA who has been asked to
perform a consulting services engagement concerning the analysis of a potential merger if he/she
has little experience with the industry involved?
a. Accept the engagement but he/she should conduct research or consult with others to
obtain sufficient competence.
b. Decline the engagement because he/she lacks sufficient knowledge.
c. Accept the engagement and issue a report that contains his/her opinion on the achievability of
the results of the merger.
d. Accept the engagement and perform it in accordance with Philippine Standards in Auditing
(PSAs).
17. The form of communication with a client in a consulting services engagement should be
a. Either written or oral.
b. Written, and a copy should be sent to management alone.
c. Oral, with appropriate documentation in working papers.
d. Written, and copies should be sent to both management and the boards of directors.
18. Governmental auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and
also
a. Accuracy
b. Compliance
c. Evaluation
d. Internal Control
19. The auditor is required to comply with all PSAs relevant to the audit of an entity’s financial
statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist.
a. I only
b. II only
c. Either I or II
d. Both I and II
20. Which of the following statements is true concerning evidence in an assurance engagement?
a. Sufficiency is the measure of the quantity of evidence.
b. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
c. The reliability of evidence is influenced not by its nature but by its source.
d. Obtaining more evidence may compensate for its poor quality.
21. In assertion-based assurance engagements, the evaluation or measurement of the subject matter
against criteria is performed by the
a. Intended users
b. Responsible party
c. Practitioner
d. AASC
22. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter
against criteria is called
a. Subject matter of information
b. Subject matter
c. Assurance
d. Conclusion
23. For assurance engagements regarding historical financial information, reasonable assurance
engagements are called
a. Audits
b. Reviews
c. Compilations
d. Examinations
24. When performing an assurance service, professional accountants use standards or benchmarks to
evaluate or measure the subject matter of an assurance engagement. These are referred to in the
Framework as
a. Criteria
b. Norms
c. Conditions
d. Gauges
25. In an assurance engagement, the responsible party and the intended users
a. Should be from different entities.
b. Should be from the same entity.
c. May be from the same entity or different entities.
d. Are both responsible for determining the nature, timing and extent of the procedures to be
performed.
26. Which of the following best describes the objective of an assurance engagement?
a. Improve the company’s outcomes.
b. Compare the company’s information and policies with those of other entities.
c. Enhance the credibility of information in order to improve the likelihood that the
information will meet the needs of an intended user.
d. Assist in preparing the company’s financial statements.
27. Assurance services differ from consulting services in that they

I. Focus on providing advice.
II. Involve monitoring of one party by another.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
28. Which of the following best describes the reason why an independent auditor reports on financial
statements?
a. A poorly designed internal control system may be in existence.
b. Different interests may exist between the company preparing the statements and the
persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as the result of the
independent auditor’s work.
d. A management fraud may exist and it is more likely to be detected by independent auditors.
29. The primary responsibility for the adequacy of disclosure in the financial statements rests with the
a. Partner assigned to the audit engagement.
b. Management of the company.
c. Securities and Exchange Commission.
d. Auditor in charge of the field work.
30. The following statements relate to internal auditing? Which is incorrect?

a. Internal auditing is carried out within an entity by employees of the entity or by personnel
contracted for the purpose.
b. Internal auditing has become a function that evaluates and improves an organization’s risk
management, control and governance processes to add value to the organization.
c. The internal auditor’s judgements are subordinated to those of management.
d. Internal auditing has evolved into a highly professional activity that extends beyond the
appraisal of the efficiency and effectiveness of an entity’s operations.
31. The term “efficiency” in performance auditing refers to

a. Using resources to maximize output for a given input, or to minimize input for any given
quantity and quality of output.
b. The achievement of intended results of operations, programs or activities.
c. The achievement of objectives within a specified time frame.
d. The acquisition of resources at appropriate times and within a specified time frame.
32. The objective of governmental effectiveness or program auditing is to determine if the desired
results of a program are being achieved. What is the first in conducting such an audit?
a. Identify of the legislative intent of the program being audited.
b. Collect quantifiable data on the program’s success or failure.
c. Determine the time frame to be audited.
d. Evaluate the system used to measure results.
33. CPA’s in public practice who perform assurance engagements are governed by the following, except
a. Philippine Framework for Assurance Engagements
b. Code of Ethics for Professional Accountants in the Philippines
c. Philippine Standards on Related Services
d. Philippine Standards on Quality Control
34. Relevant criteria contribute to conclusions that are

a. Free from bias.
b. Clear and comprehensive.
c. Subject to different interpretations.
d. Useful for decision making.
35. Which of the following statements is not true in respect of internal auditor?
a. The scope of audits performed by the internal auditor is primarily in respect of financial
report audits.
b. An internal auditor does not require a license to practice.
c. Internal auditors are usually employed by companies and government units.
d. Primary responsibility of the internal auditor is to the board of directors.
36. Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of
experts that follow a transparent due process are called
a. Suitable criteria
b. Established criteria
c. Specifically developed criteria
d. General criteria
37. Reports on agreed-upon procedures are intended to be distributed

a. To only the involved parties, who are aware of the reasons for the procedures.
b. Only to the stockholders of the entity.
c. To any party to whom the client wishes.
d. Only to the entity's management.
38. The internal auditing department's responsibility for deterring fraud is to

a. Establish an effective internal control system.
b. Maintain internal control.
c. Examine and evaluate the system of internal control.
d. Exercise operating authority over fraud prevention activities.
39. In conducting an appraisal of the economy and efficiency with which company resources are used,
an internal auditor's responsibility is to
a. Verify the accuracy of asset valuation.
b. Review the reliability of operating information.
c. Verify the existence of assets.
d. Determine whether operating standards have been established.
40. Internal auditors should review the means of physically safeguarding assets from losses arising
from
a. Exposure to the elements.
b. Underusage of physical facilities.
c. Misapplication of accounting principles.
d. Procedures that are not cost justified.
41. What is the proper organizational role of internal auditing?

a. To serve as an independent, objective assurance and consulting activity that adds value to
operations.
b. To assist the external auditor in order to reduce external audit fees.
c. To perform studies to assist in the attainment of more efficient operations.
d. To serve as the investigative arm of the audit committee of the board of directors.
42. Which of the following activities would generally account for a significant proportion of an internal
auditor's time?
a. Checking the company is complying with all of its rules and regulations of operation.
b. Verifying all invoices before payment is made.
c. Ensuring the company is operating within budget.
d. Evaluating the effectiveness and efficiency of all phases of an entity's operations.
43. Which is not one of the three phases in an operational audit?

a. Evidence accumulation and evaluation
b. Planning
c. Reporting and follow-up
d. Training and supervising employees
44. In performing an operational audit, the auditor primarily relies on which of the following
procedures?
a. Physical inspection
b. Analytical procedures
c. Inquiry and observation
d. Tracing and vouching
45. Which of the following can be significantly affected by a financial statement audit?
a. Business Risk
b. Information Risk
c. Inherent Risk
d. The risk-free interest rate
46. Independent auditing can best be described as

a. A branch of accounting.
b. A professional activity that measures and communicates financial and business data.
c. A discipline which attests to the results of accounting and other functional operations and
data.
d. A regulatory function that prevents the issuance of improper financial information.
47. The internal auditing profession has advanced primarily as a result of

a. Increased interest by BSA graduates and experienced auditors.
b. Job qualification specifications that include added emphasis on background knowledge
and skills.
c. The limitation of financial statement audit scope.
d. Increased complexity and sophistication of business operations.
48. Which of the following actions would be an appropriate response by companies to improve the
public's perception of their financial reporting?
a. Increased adoption of audit committees.
b. Keeping external and internal auditing work separated to maintain independence.
c. Requiring internal auditors to report all significant findings of fraud and illegal activity to the
company president.
d. None of the above.
Chapter 2 The Accountancy Profession
1. Which of the following is not an objective of the Philippine Accountancy Act of 2004?
a. The standardization and regulation of accounting education.
b. The examination for registration of certified public accountant.
c. The supervision, control and regulation of the practice of accountancy in the Philippines.
d. The development and improvement of accounting standards that will be generally
accepted in the Philippines.
2. The practice of Accountancy includes:

I. Practice of Public Accountancy
II. Practice in Commerce and Industry
III. Practice in Education/Academe
a. I and II only
b. II and III only
c. I and III only
d. I, II and III
3. The BOA shall be composed of a chairman and ____ members to be appointed by the ____.
a. 6, President of the Philippines
b. 5, President of the Philippines
c. 6, Professional Regulation Commission
d. 5, Philippine Institute of CPAs.
4. The BOA shall be under the supervision and administrative control of the
a. Professional Regulation Commission
b. Philippine Institute of CPAS
c. Association of CPAs in Public Practice
d. Office of the President of the Philippines.
5. If the PICPA fails to submit to the PRC its own nominees within 60 days prior to the expiry of the
term of an incumbent chairman or member of the Board of Accountancy (BOA), the PRC in
consultation with the BOA shall submit to the President a list of how many nominees for each
vacant position?
a. 2
b. 3
c. 4
d. 5
6. A member of the BOA shall, at the time of his/her appointment, possess which of the following
qualifications?
a. Must be a Natural Born Citizen of the Philippines.
b. Must be a Filipino citizen.
c. Must be a citizen and a resident of the Philippines.
d. Must be a natural born citizen and a resident of the Philippines.
7. The Chairman and members of the BOA shall hold officer for a term of
a. 2 years.
b. 3 years.
c. 4 years.
d. 5 years.
8. According to section 7 of the IRR, no person who has served two successive complete terms as
chairman or member of the BOA shall be eligible for reappointment as chairman or member until
the lapse of
a. 1 year
b. 2 years.
c. 3 years.
d. 4 years.
9. According to section 7 of the IRR, no person shall serve in the BOA for more than
a. 3 years.
b. 5 years.
c. 10 years.
d. 12 years.
10. Which of the following is a function of the BOA?

I. To prescribe and adopt the rules and regulations necessary for carrying out the provision of the
Philippine Accountancy Act of 2004.
II. To supervise the regulation, licensure, and practice of accountancy in the Philippines.
III. To issue, suspend, revoke or reinstate the certificate of registration for the practice of
accountancy profession.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
11. The BOA shall elect a vice chairman from among its members for a term of
a. One (1) year.
b. Two (2) years.
c. Three (3) years.
d. Five (5) years.
12. According to section 9(A) of the IRR, the Commission, upon the recommendation of the Board,
shall create an accounting standard setting body to be known as the
a. Accounting Standards Council
b. Financial Reporting Standards Council
c. Accounting Standards Board
d. Financial Reporting Standards Board
13. According to section 9(A) of the IRR, the Commission, upon the recommendation of the Board,
shall create an auditing standard setting body to be known as the
a. Auditing and Assurance Standards Council (AASC)
b. Auditing Standards Practices Council (ASPC)
c. Auditing Standards Board
d. Auditing Standards Council
14. This standard setting body shall have a chairman who had been or presently a senior accounting
practitioner in any of the scope of accounting practice
a. AASC
b. FRSC
c. PICPA
d. ACPAPP
15. The chairman and the members of the FRSC and AASC shall have a term of
a. 3 years.
b. 5 years.
c. 6 years.
d. 7 years.
16. Which of the following is not represented in the AASC?

a. Bangko Sentral ng Pilipinas
b. Board of Accountancy
c. Bureau of Internal Revenue
d. Securities and Exchange Commission
17. Who has the power to suspend or remove any member of the BOA?
a. The chairman of the FRSC
b. The chairman of the PRC
c. The chairman of the AASC
d. The President of the Philippines
18. An applicant for the CPA licensure examination should be

I. A Filipino citizen
II. Of good moral character
III. A holder of the degree of Bachelor of Science in Accountancy
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
19. The following documents shall be submitted by the applicants for the CPA licensure examination,
except
a. Certificate of Live Birth in National Statistics Office (NSO) Security Paper
b. Marriage contract in NSO security paper for married male applicants
c. NBI Clearance
d. Transcript of records with indication therein of date of graduation and Special-Order number
unless it is not required.
20. Section 16 of the IRR states that to be qualified as having passed the license examination for
accountants, a candidate date must obtain a
a. General average of seventy-five percent (75%), with no grades lower than sixty percent (60%)
in any given subject.
b. General average of seventy-five percent (75%), with no grades lower than sixty-five
percent (65%) in any given subject.
c. General average of seventy percent (70%), with no grades lower than sixty percent (60%) in
any given subject.
d. General average of seventy percent (70%), with no grades lower than sixty-five percent (65%)
in any given subject.
21. A candidate who obtains rating of seventy – five percent (75%) and above in at least a majority of
the subjects shall receive a conditional credit for the subjects passed. He/she shall take an
examination in the remaining subjects within how many years from the preceding examination?
a. 1
b. 2
c. 3
d. 5
22. Any candidate who fails in two (2) complete CPA Board Examinations shall be disqualified from
taking another set of examinations unless he/she has completed at least how many units of subjects
given in the licensure examination?
a. 4
b. 8
c. 16
d. 24
23. The BOA shall submit to the PRC the ratings obtained by each candidate within how many calendar
days after the examination?
a. 1
b. 2
c. 5
d. 10
24. Which part of the Code of Ethics applies to professional accountants in public practice?
a. Part A
b. Part B
c. Part C
d. Part D
25. Competence as a certified public accountant includes all of the following except
a. Having the technical qualifications to perform an engagement
b. Possessing the ability to supervise and to evaluate the quality of staff work
c. Warranting the infallibility of the work performed
d. Consulting others if additional technical information is needed
26. Which of the following fundamental ethical principles prohibits association of professional
accountants with reports, returns, communications or other information that is believed to contain a
materially false or misleading statement?
a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
27. The principles of professional competence and due care imposes which of the following obligations
on professional accountants?
a. To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service.
b. To refrain from disclosing confidential information obtained as a result of professional right or
duty to disclose.
c. To comply with relevant laws and regulation and avoid any situation that may bring discredit to
the profession.
d. Not to compromise professional or business judgment because of bias conflict of interest or
undue influence of others.
28. The Code of Ethics provides a Conceptual Framework for applying the fundamental ethical
principles. This framework requires a professional accountant to
I. Identify threats to compliance with the fundamental principles
II. Evaluate the significance of the identified threats.
III. Apply safeguards to eliminate the threats or reduces them to an acceptable level.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
29. Which of the following threats to compliance with the fundamental principles may occur as a result
of the financial or other interests of a professional accountant of an immediate or close family
member?
a. Self-interest
b. Self-review
c. Advocacy
d. Familiarity
30. Which of the following may be considered by a professional accountant to eliminate or reduce
identified threats to an acceptable level?
I. Safeguards created by the profession, legislation or regulation.
II. Safeguards in the work environment.
III. Resign from the client or employer.
IV. Decline or discontinue the professional engagement.
a. I and II only
b. III and IV only
c. I and IV only
d. II and III only
31. The Code of Ethics allows an auditor to perform which of the following services for an audit client
that is not a public interest entity?
a. Performance of bookkeeping services for the client.
b. Authorization of transactions for the client.
c. Preparation of client source documents.
d. Preparation and posting of journal entries without client’s approval.
32. A CPA provides audit services to a large company. Almost eighty five percent of the CPA’s revenues
come from this client. Which statement is most like to be true?
a. Appearance of independence may be lacking
b. The CPA firm does not have competence to perform the audit
c. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the
audit
d. The auditor should provide an “other matter paragraph” to his/her audit report adequately
disclosing this information and then it may issue an unmodified opinion.
33. Safeguards created by the profession, legislation or regulation include the following, except
a. Continuing professional development requirements.
b. Professional standards.
c. Firm-wide and engagement specific safeguards.
d. Educational, training and experience requirements for entry into the profession.
34. Which of the following circumstances may create self-interest threat or a professional accountant in
public practice?
a. A member of the assurance team having a direct financial interest in the assurance client.
b. Performing a service for an assurance client that directly affects the subject matter information
of thee assurance engagement.
c. Being threatened with litigation by the client.
d. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
35. The following are examples of circumstance that may create familiarity threat, except
a. The firm promoting shares in an audit client.
b. Long association of senior personnel with the assurance client.
c. A member of the engagement team having a close or immediate family member who is a
director or officer of the client.
d. A director or officer of the client or an employee in position to exert significant influence over
the subject matter of the engagement having recently served as the engagement partner.
36. The following circumstances may create intimidation threat, except

a. A firm being threatened with dismissal from a client engagement.
b. A firm being pressured to reduce inappropriately the extent of the work performed in order to
reduce fees.
c. A firm being threatened with litigation by the client.
d. A member of the assurance team being, or having recently been, a director or officer of
the client
37. A firm should establish and maintain a system of quality control to provide it with reasonable
assurance that:
I. The firm and its personnel comply with professional standards and applicable legal and
regulatory requirements.
II. Reports issued by the firm or engagement partners are appropriate in the circumstances.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
38. The firm’s system of quality control should include policies and procedures that address each of the
following elements, except
a. Monitoring
b. Control Environment
c. Relevant Ethical Requirement
d. Human Resources
39. Which of the following is an element of a CPA firm’s quality control system that should be
considered in establishing its quality control policies and procedures?
a. Considering audit risk and materiality.
b. Managing resources.
c. Using statistical sampling techniques.
d. Complying with laws and regulations.
40. Which of the following quality control element is most closely associated with the requirement to
promote a culture of quality?
a. Monitoring
b. Leadership responsibilities for quality within the firm
c. Engagement Performance
d. Human Resources
41. The statement, “Quality control policies and procedures should be relevant, adequate, effective and
complied with.” is most closely associated with what quality control element?
a. Engagement Performance
b. Leadership Responsibilities for quality within the firm
c. Monitoring
d. Relevant ethical requirements
42. This quality control element requires a firm to establish policies and procedures to provide it with a
reasonable assurance that engagements are performed in accordance with professional standards
and regulatory and legal requirements, and that the firm or the engagement partner issue reports that
are appropriate in the circumstances.
a. Ethical Requirement
b. Engagement Performance
c. Monitoring
d. Human Resources
43. The firm shall obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by relevant ethical requirements
a. At least annually
b. At least monthly
c. At least semi-annually
d. At the completion of the engagement
44. The firm shall establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with relevant ethical requirements. The Code of Ethics for
Professional Accountants in the Philippines establishes fundamental principles of professional
ethics which include the following, except
a. Integrity
b. Objectivity
c. Relevance
d. Professional Behavior
45. For audits of Financial Statements of listed entities, the engagement partner should not issue the
auditor’s report until the completion of the
a. Engagement Quality Control Review
b. Management Review
c. Engagement Team Review
d. Engagement Partner Review
46. Who should take responsibility for the overall quality control on each audit engagement?
a. Engagement Quality Control Reviewer
b. Engagement Partner
c. Engagement Team
d. CPA firm
47. The implementation of quality control procedures that are applicable to the individual engagement
is the responsibility of the
a. CPA firm
b. Engagement Quality Control Reviewer
c. Engagement Team
d. Expert contracted by the firm in connection with the audit engagement
48. A professional accountant in public practice may issue to clients or, in response to an unsolicited
request, to a non-client
I. A factual and objectively worded brochure of the service provided.
II. A directory setting out names of partners, office addresses and names and addresses of
associated firms and correspondents.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
49. What threat to independence may be created if fees due from an assurance client for professional
services remain unpaid for a long time, especially if a significant part is not paid before the issue of
the assurance report for the following year?
a. Advocacy threat
b. Self-interest threat
c. Intimidation threat
d. Self-review threat
50. These are fees calculated on a predetermined basis relation to the outcome or result of the work
performed.
a. Contingent fees
b. Fixed fees
c. Predetermined fees
d. Commissions
51. What threats to independence are created when a contingent fee is charged by a firm in respect of
an assurance engagement?
a. Self-review and intimidation threats
b. Self-interest and advocacy threats
c. Familiarity and intimidation threats
d. Self-interest and self-review threats
52. Accepting gifts or hospitality (unless inconsequential or trivial), might create

a. Self-interest and familiarity threats
b. Self-interest and advocacy threats
c. Familiarity and intimidation threats
d. Self-interest and self-review threats
Chapter 3 Philippine Standards on Auditing and Risk
Assessment
1. Which of the following factors would most likely cause an auditor to decline a new audit
engagement?
a. Concluding that the entity’s new management probably lacks integrity.
b. An inability to perform preliminary analytical procedures before assessing control risk.
c. An inadequate understanding of the entity’s internal control.
d. The close proximity to the end of the entity’s reporting period.
2. Before accepting an engagement to audit a new client, an auditor is required to:

a. Obtain a copy of the client’s financial statements.
b. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary
audit plan.
c. Make inquiries of the predecessor auditor after obtaining consent of the prospective
client.
d. Discuss the management representation letter with the client’s audit committee.
3. Which of the following conditions most likely would pose the greater risk in accepting a new audit
engagement?
a. There will be a client-imposed scope limitation.
b. The client’s financial reporting system has been in place for 10 years.
c. The firm will have to hire an expert in one audit area.
d. Staff will need to be rescheduled to cover this new client.
4. In an audit based on Philippine Standards on Auditing (PSAs), a successor auditor would normally
become satisfied with opening balances by
a. Performing analytic review procedures.
b. Reviewing the predecessor’s working papers.
c. Auditing the previous year’s working papers.
d. Interviewing client personnel.
5. Which of the following is NOT correct regarding the communications between successor/incoming
and predecessor/previous auditors?
a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the predecessor auditor.
c. The predecessor auditor may choose to provide a limited response to the successor auditor.
d. The predecessor auditor must receive his/her former client’s permission prior to disclosing
client information to the auditor.
6. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should
a. Insist on continuing the original engagement.
b. Express a qualified opinion.
c. Express and adverse opinion.
d. Withdraw from the engagement.
7. In designing written audit programs, an auditor should establish specific audit objectives that relate
primarily to the
a. Selected audit techniques.
b. Cost-benefit of gathering audit evidence.
c. Timing of audit procedures.
d. Financial statement assertions.
8. An audit program should be designed for each individual audit and should incorporate steps and
procedures to
a. Detect and eliminate fraud of any type.
b. Gather sufficient amount of management information available.
c. Provide assurances that the objectives of the audit are satisfied.
d. Insure that only material items are audited.
9. In connection with the planning phase of the audit engagement, which of the following statements
is always correct?
a. Financial staffing decisions must be made prior to completion of the planning stage.
b. Observation of inventory count should be performed at year-end.
c. A portion of the audit of a continuing audit client can be performed at interim dates.
d. An engagement should not be accepted after the client’s financial year-end.
10. The auditor is required to determine three different levels of materiality: (1) materiality for the
financial statements as a whole, (2) performance materiality; and (3)
a. Overall materiality
b. Planning materiality
c. General materiality
d. Specific materiality
11. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to
obtain an understanding of the entity and its environment, including its internal control. These
procedures are called
a. Risk assessment procedures
b. Substantive tests
c. Tests of controls
d. Dual-purpose tests
12. In planning the audit engagement, the auditor should consider each of the following except
a. The type of opinion that is likely to be expressed.
b. The entity’s accounting policies and procedures.
c. Matters relating to the entity’s business and the industry in which it operates
d. Materiality level and audit risk.
13. What materiality level would be considered by the auditor to determine whether the proposed
adjustments are significant or not?
b. Specific materiality
c. Scoping materiality
d. Performance materiality
14. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Including in the engagement letter an estimate of the minimum and maximum audit fee.
b. Writing a conclusion in individual working papers indicating how the results of the audit will
affect the auditor’s report.
c. Performing audit work only after the entity’s books have been closed for the period under audit.
d. Including in the audit program a column for budgeted and actual time.
15. Whet materiality level is used by the auditor in determining which line items in the financial
statement are to be tested?
b. Performance materiality
c. Specific materiality
d. Individual materiality
16. ___________ is the amount set by the auditor for particular classes of transactions, account
balances or disclosures for which misstatements, well though lower that overall materiality could
reasonably be expected to influence the economic decisions of users of the financial statements.
a. Performance materiality
c. Specific materiality
d. General materiality
17. Which of the required materiality levels is calculated by multiplying a certain percentage by the
appropriate benchmark which is either an element or component of an entity’s financial statements?
c. Scoping materiality
d. Specific materiality
18. Which of the following would an auditor most likely use in determining a preliminary judgment
about materiality?
a. The contents of the management representation letter.
b. The anticipated sample size of the planned substantive tests.
c. The entity’s annualized interim financial statements.
d. The results of internal control questionnaire.
19. It is an appraisal activity established within an entity. Its function includes, among other things,
examining, evaluating and monitoring the adequacy and effectiveness of the accounting and
internal control systems.
a. External auditing
b. Internal auditing
c. Governmental auditing
d. Internal control
20. Which is not a similarity between external and internal auditors?

a. Both consider materiality and risk in their work.
b. Both use similar methodologies in performing their work.
c. Both must be competent.
d. Both must be independent of the company.
21. Internal auditing can affect the scope of the external auditor’s audit of financial statements by
a. Decreasing the external auditor’s need to perform detailed tests.
b. Eliminating the need to observe the physical inventory taking.
c. Allowing the external auditor to limit his/her audit to the performance of substantive test
procedures.
d. Limiting direct testing by the external auditor to management assertions not directly tested by
internal auditing.
22. In determining whether the work of the internal auditors is likely to be adequate for purposes of the
audit, the external auditor shall evaluate the internal auditor’s
a. Efficiency and experience
b. Independence and review skills
c. Training and supervisory skills
d. Competence and objectivity
23. In assessing the technical competence of an internal auditor, an external auditor would most likely
obtain information about the
a. Quality of working paper documentation, reports and recommendations.
b. Organizational level to which the internal auditor reports.
c. Influence of management to the internal auditor’s duties.
d. Entity’s commitment to integrity and ethical values.
24. The coordination of activities between internal and external auditors

a. Eliminates duplication of audit efforts
b. Includes the exchange of audit reports and management letters.
c. Prevents external auditors from having access to the programs used by the internal auditors.
d. Prohibits the internal auditor from using the same audit techniques as external auditors and vice
versa.
25. _________ is an individual or organization possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient
appropriate audit evidence.
a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist
26. __________ is an individual or organization possessing 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.
c. Expert
d. Specialist
27. Which of the following is not an expert upon whose work the auditor may rely?
a. An actuary.
b. In individual with expertise in complex modeling for the purpose of valuing financial
instruments.
c. An expert in taxation law.
d. An individual with expertise in applying methods of accounting for deferred income tax.
28. If the results of the expert’s work do not provide sufficient appropriate audit evidence or are not
consistent with other audit evidence, the auditor should
a. Report the matter to the appropriate regulatory agency of the government.
b. Resolve the matter.
c. Withdraw from the engagement.
d. Express an unmodified opinion with reference to the work of the expert.
29. When issuing an unmodified auditor’s report, the auditor

a. May refer to the work of an expert.
b. Should refer to the work of an expert to indicate a division of responsibility.
c. Should include in the auditor’s report the identity of the expert and the extent of the expert’s
involvement.
d. Should not refer to the expert’s work.
30. As used in PSA 600, financial statements that include the financial information of more than one
component are called
a. Component financial statements
b. Group financial statements
c. Consolidated financial statements
d. Common financial statements
31. The _____________ is the partner or other person in the firm who is responsible for the group audit
engagement and its performance, and for the auditor’s report on the group financial statements that
is issued on behalf of the firm.
a. Engagement partner
b. Component engagement partner
c. Principal auditor
d. Group engagement partner
32. An auditor who, at the request of the group engagement team, performs work on financial
information related to a component for the group audit is a
a. Group auditor
b. Component auditor
c. Component engagement team
d. Group engagement team
33. PSA 315 requires the auditor to perform risk assessment procedures at
a. The financial statement level only.
b. The assertion level only.
c. The financial statement level and the assertion level for classes of transactions, account
balances and disclosures.
d. Either the financial statement or assertion level.
34. The auditor’s risk assessment procedures should always include the following, except
a. Inquiries of management and of others within the entity.
b. Analytical procedures.
c. Observation and inspection.
d. Substantive test procedures and test of controls.
35. The risk that the auditor may give an inappropriate opinion when the financial statements are
materially misstated is called
a. Detection risk
b. Business risk
c. Audit risk
d. Inherent risk
36. Audit risk has three components: inherent risk, control risk and detection risk. Which is correct?
a. Detection risk is a function of the efficiency of an auditing procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater
inherent risk.
c. The risk that material misstatements will not be prevented or detected on a timely basis by
internal control can be reduced to zero by effective controls.
d. The existing levels of inherent risk, control risk, and detection risk can be changed at the
discretion of the auditor.
37. Which of the following audit risk components may be assessed in quantitative form?
Inherent Risk Control Risk Detection Risk
a. Yes Yes Yes
b. No No Yes
c. No No No
d. Yes Yes No
38. Some account balances, such as those for retirement benefits and finance leases, are the results of
complex calculations. The susceptibility to material misstatements in these types of accounts is
referred to as
a. Audit risk
b. Detection risk
c. Inherent risk
d. Control risk
39. When considering the factors that affect the risk of material misstatement, the auditor should
consider
I. The magnitude of misstatement that might occur.
II. The likelihood of misstatement that might occur.
III. That internal control weaknesses have some effect on the financial statements.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
40. Analytical procedures used in planning an audit should focus on

a. Enhancing the auditor’s understanding of the client’s business.
b. Evaluating the adequacy of evidence gathered concerning unusual balances.
c. Identifying significant deficiencies in internal control.
d. Testing individual account balances that depend on accounting estimates.
41. ___________ are groups of related business activities such as the acquisition of merchandise and
payment of vendors.
a. Transactions
b. Transaction cycles
c. Economic cycles
d. Business events
42. The following are transaction cycles, except

a. General ledger and reporting
b. Human resources
c. Expenditure/Disbursement
d. Revenue/Receipt
43. The collection of job time tickets or time sheets is part of which of the following transaction cycles?
a. Revenue/Receipt
b. Human resources
c. Production
d. Expenditure/Disbursements
44. Application controls are

a. Manual or automated procedures that typically operate at a business process level and
apply to the processing of transactions by individual applications.
b. Policies and procedures that relate to many applications.
c. Controls that maintain the integrity of information and security of data such as controls over
system software acquisition, change and maintenance.
d. Controls that relate to many applications and support the effective functioning of general
controls.
45. Which of the following most likely would not be considered an inherent limitation of internal
control?
a. Management override
b. Incompatible functions
c. Mistakes in judgment
d. Collusion among employees
46. Which of the following determines the extent of the auditor’s tests of control?
a. Auditor’s knowledge
b. Auditor’s initial/planned assessment of control risk
c. Resources available to the auditor
d. Management’s desire to help the auditor
47. An auditor assesses control risk in terms of

a. Types of potential fraud
b. Financial statement assertions
c. Specific control activities
d. Control environment elements
48. Which of the following activities is not part of the revenue cycle?
a. Sales order entry
b. Receiving
c. Billing
d. Shipping
Chapter 4 Risk Assessments and Internal Control
1. One advantage of pre-numbering source documents is that it helps to verify that
a. All cash has been collected.
b. No inventory has been misplaced.
c. All transactions have been recorded since the numerical sequence serves as a control.
d. Documents have been used in order.
2. Identifying and Assessing Risks of Material Misstatements through Understanding the Entity and
its Environment requires the auditor to perform risk assessment procedures at
a. The financial statement only
b. The assertion level only
c. The financial statement level and the assertion for classes of transactions, account
balances and disclosures
d. Either financial statements or assertion level
3. The auditor’s risk assessment procedures

a. By themselves, do not provide sufficient appropriate audit evidence on which to base the
audit opinion
b. Should not consider information obtained from the auditor’s previous experiences with the
entity
c. Are designed to detect material misstatements at the assertion level for classes of transactions,
account balances and disclosures
d. Are designed to test the effectiveness of the entity’s controls
4. The risk that an auditor’s substantive procedures will lead to the conclusion that a material
misstatement does not exist in an account balance or transaction when, in fact, such misstatement
does exist
a. Control risk
b. Inherent risk
c. Audit risk
d. Detection risk
5. The policies and procedures that help ensure that management directives are carried out are referred
to as the
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems
6. The existence of audit risk is recognized by the statement in the auditor’s report that the
a. Financial statements are presented fairly, in all material respects, in accordance with the
Philippine Financial Reporting Standards
b. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements
c. Auditor obtains reasonable assurance about whether the financial statements are free of
material misstatements
d. Auditor is responsible for expressing an opinion on the financial statements, which are
management’s responsibility
7. Some account balances are the results of complex calculations. The susceptibility to material
misstatements in these types of accounts is referred to as:
a. Audit risk
b. Detection risk
c. Inherent risk
d. Control risk
8. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
9. There is an inverse relationship that exists between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatements.
b. Assurance provided by substantive tests.
c. Preliminary judgements about materiality levels.
d. Risk of misapplying audit procedures.
10. An auditor must assess control risk as high when he has

a. Decided not to test the internal control system.
b. Decided on a high level of detection risk.
c. Assessed inherent risk to be high.
d. Found no significant deficiencies in the internal control system.
11. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
c. Information and communication
d. The control environment
12. The best way for an auditor obtain evidence about segregation of duties is to
a. Observe personnel performing their duties.
b. Reperform the task.
c. Inspect documents and records to ensure an independent check has been performed.
d. Discuss the performance of duties within the company with the internal auditor.
13. Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced.
b. Auditor’s give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to
whether the financial statements as a whole are fairly presented in conformity with GAAP.
14. Which of the following is not an advantage of an IT system used as part of the entity’s internal
control system?
a. Reduced amount of information is required to be reviewed manually.
b. Detection of potential problems only if computer is programmed to do so.
c. The delivery, timeliness and accuracy of information are maintained as the volume of the
transaction increases.
d. Potential fewer errors as individual calculation discrepancies are reduced.
15. The auditor documents his or her understanding of the internal control system to substantiate
a. The fairness of presentation of the financial statements.
b. Adherence to the requirements of management.
c. Compliance with PSAs.
d. Conformity of the accounting records with the applicable financial reporting framework.
16. The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted accounting principles.
b. Client is guilty of contributory negligence.
c. The audit was conducted in accordance with PSAs.
d. Issuing a representation letter to the auditor.
17. Which of the following are the two key issues that an auditor considers when obtaining an
understanding of a client’s internal controls?
a. The effectiveness and efficiency of the controls
b. The implementation and efficiency of the controls
c. The design and utilization of the controls
d. The frequency and effectiveness of the controls
18. An intentional act by one more individuals among management, employees, or third parties which
results in misrepresentation of financial statement refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
19. Which of the following statements about auditor documentation of client’s internal controls is
correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write ups.
c. Documentation is desirable but not necessary.
d. No one particular form of documentation is necessary.
20. What primarily differentiates fraud from an error

a. Materiality
b. Effect on misstatements
c. Intent
d. Frequency of occurrence
21. An auditor’s flowchart of an entity’s information system is a diagrammatic representation that

depicts the auditor’s
a. Documentation of the study and evaluation and evaluation of the internal control system.
b. Understanding of the system.
c. Understanding of the types of fraud that are probable, given the present system.
d. A program for tests of controls.
22. Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
23. Which of the following internal control components relates to an entity’s process for identifying
and responding to business risks?
a. Control activities
b. Information and communication
c. Risk assessment
d. Monitoring of controls
24. The following are subcomponents of the control environment except

a. Management’s philosophy and operating style.
b. Adequate separation of duties.
c. Organizational structure.
d. Commitment to competence.
25. Because of inherent limitations, internal control cannot be designed to provide reasonable assurance
regarding the achievement of objectives concerning
a. Effectiveness and efficiency of operations.
b. Elimination of all fraud.
c. Reliability of financial reporting.
d. Compliance with applicable laws and regulations.
26. Which of the following elements are included in an entity’s control environment?
Integrity and ethical values Assignment of Authority and Responsibility
a. YES YES
b. YES NO
c. NO YES
d. NO NO
27. When considering an entity's system of internal control, one of the auditor's major concerns is to
ascertain whether internal control is designed to provide reasonable assurance that
a. Financial statements are fairly presented.
b. The accounting manager reviews all accounting transactions.
c. Profit margins are maximized, and operational efficiency is optimized.
d. Corporate morale problems are addressed immediately and effectively.
28. Which of the following components of an entity’s internal control includes development and use of
training policies that communicate prospective roles and responsibilities of employees?
a. Monitoring of controls
c. Control environment
d. Information and communication
29. When obtaining an understanding of controls that are relevant to the audit, the auditor is required to
a. Evaluate the design of those controls.
b. Determine whether those controls have been implemented.
c. Evaluate the design of those controls and determine whether they have been implemented.
d. Evaluate the design of those controls and determine whether they have been implemented by
performing tests of controls.
30. It refers to the material (working papers) prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence
31. IT benefits an entity’s internal control by enabling an entity to

a. Reduce the risk that controls will be circumvented.
b. Process large, unusual or non-recurring transactions.
c. Rely on statements that are inaccurately processing data.
d. Allow unauthorized changes to data in master files.
32. The following are components of internal control except

a. Control activities
b. Entity’s risk assessment procedures
c. Control environment
d. Business risk
33. The inherent limitations in an entity’s internal control system include

I. Collusion among individuals
II. Breakdowns in established controls
III. Mistakes in judgement
a. I and III
b. I and II
c. II and III
d. I, II and III
34. Which of the following statements concerning internal control is incorrect?

a. Internal control is effected by people.
b. Internal control is expected to provide absolute assurance.
c. Internal control is a process.
d. Internal control is geared to achieving objectives in the overlapping categories of financial
reporting, compliance and operations.
35. It is the process designed, implemented and maintained by those charged with governance,
management, and other personnel to provide reasonable assurance about achievement of the entity’s
objectives
a. Internal auditing
b. Internal control
c. Business strategy
d. Accounting process
36. When considering an entity’s internal control system, an auditor is not required to
a. Search for significant deficiencies in the operation of the internal control system.
b. Understand the components of the entity’s internal control system.
c. Determine whether relevant controls have been placed in operation.
d. Perform procedures to understand the design of the internal control system policies.
37. The basic premise underlying analytical procedures is that

a. Plausible relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary
b. These procedures cannot replace tests of details of transactions and balances
c. Statistical tests of financial information may lead to the detection of material misstatements in
the financial statements
d. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
38. The following statements relate to the auditor’s responsibility for the detection of errors and fraud.
Identify the correct statements.
I. Due to the inherent limitation of the audit, there is a possibility that material misstatements in
the financial statements may not be detected.
II. The subsequent discovery of material misstatement of the financial information resulting from
fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles and
essential procedures of an audit.
a. I only
b. Both Statements are true
c. II only
d. Both statements are false
39. Which of the following statements concerning analytical procedures is true?

a. Analytical procedures are more efficient but not more effective, than tests of details
transactions.
b. Analytical procedures used as risk assessment procedures use data aggregated at a high
level.
c. Analytical procedures can replace tests of controls in gathering audit evidence to support the
assessed level of control risk.
d. Analytical procedures usually involve comparisons of ratios developed from recorded amounts
with ratios developed by management.
40. An auditor obtains an understanding of the nature of the entity to

a. Make constructive suggestions concerning improvements in the client’s internal control.
b. Understand the account balances, transactions and disclosures in the financial statements.
c. Develop an attitude of professional skepticism concerning management’s financial statement
assertions.
d. Evaluate whether the aggregation of known misstatements causes the financial statements taken
as a whole to be materially misstated.
41. The procedures performed to obtain an understanding of the internal control system provide an
auditor with
a. Sufficient appropriate evidence to us in forming an overall opinion on the entity’s financial
statements.
b. Enough understanding to design procedures to gather sufficient appropriate audit
evidence.
c. Enough understanding to express an opinion on the effectiveness of the entity’s internal control
systems.
d. Audit evidence to use in forming an overall opinion on the entity.
42. The purpose of an entity’s accounting information and communication system is to

Monitor transactions Record and process transactions Initiate transactions
a. NO NO NO
b. YES YES YES
c. YES NO NO
d. NO YES YES
Chapter 5 Audit Evidence and Corporate Governance
1. All the information used by the auditor in arriving at the conditions on which the audit opinion is
based is called
a. Audit information
b. Audit evidence
c. Accounting records
d. Corroborating information
2. 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.
3. Audit evidence comprise

I. Information that supports and corroborates
management’s assertions
II. Any information that contradicts management’s
assertions
a. I only
b. II only
c. Neither I or II
d. Both I and II
4. 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.
c. Auditor’s internal expert
d. Auditor’s external expert
5. If a management’s expert’s work is used to prepare the information to be used as audit evidence,
the auditor shall
I. Evaluate the competence, capabilities and objectivity of the management’s expert
II. Obtain an understanding of the work of the management’s expert
III. Evaluate the appropriateness of the management’s expert’s work as audit evidence for the
relevant assertion
a. I and II only
b. I and III only
c. II and III only
d. I, II and III
6. Which of the following statements concerning the management’s expert’s competence, capabilities,
and objectivity is correct?
a. Objectivity relates to the ability of the management’s expert to exercise the competence in the
circumstances.
b. Competence relates to the possible effects that bias, conflict of interest or business judgment
of the management’s expert.
c. Capability relates to the nature and level of expertise of the management’s expert.
d. The management’s expert competence, capabilities, and objectivity are important factors
in relation to the reliability of any information prepared by the management’s experts.
7. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s
opinion. Audit evidence is obtained by performing
I. Risk assessment procedures
II. Further audit procedures
a. I only
b. II only
c. Either I or II
d. Both I and II
8. Which of the following statements concerning audit evidence is correct?

a. Appropriateness is the measure of the quality 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 its quality and the risk of
misstatement.
d. The sufficiency and appropriateness of audit evidence are not interrelated.
9. Which of the following statements concerning audit evidence is correct?

a. An audit usually involves the authentication of documentation
b. A given set of procedures may provide audit evidence that is relevant to certain
assertions, but not others
c. Audit evidence obtained from an independent external source is always reliable
d. An entity’s accounting records can be sufficient audit evidence to support the financial
statements
10. Which of the following generalizations does not relate to the reliability of audit evidence?
a. Audit evidence is more reliable when it is obtained from independent sources outside the
entity
b. Audit evidence obtained directly by the auditor is more reliable that audit evidence obtained
indirectly or by inference
c. Audit evidence that is generated internally is more reliable when the related controls imposed
by the entity are effective
d. An auditor’s opinion, to be economically useful, is formed within reasonable time and
based on audit evidence obtained at a reasonable cost
11. Which of the following statements concerning audit evidence is false?

a. The auditor uses professional judgment and exercises professional skepticism in evaluating
the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to
support the audit opinion.
b. The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than
conclusive.
c. In forming the audit opinion, the auditor does not examine all the information available
because conclusions ordinarily can be reached using sampling approaches and other means of
selecting items for testing.
d. The difficulty and expense of obtaining audit evidence concerning an account balance is
a valid basis for omitting the test.
12. In representing that the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework, management implicitly or explicitly
makes ________ regarding the recognition, measurement, presentation, and disclosure of the
various elements of financial statements and related disclosures.
a. Assertions
b. Allegations
c. Conclusions
d. Assurance
13. The auditor is required to use assertions for classes of transactions, accounting balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of the risks of
material misstatement and the design and performance of further audit procedures. Assertions
about classes of transactions include occurrence, completeness, accuracy, cutoff and
a. Valuation and allocation
b. Rights and obligations
c. Existence
d. Classification
14. The following are assertions about account balances at the period end, except
a. Existence
c. Valuation and allocation
d. Cutoff
15. The following are assertions about presentation and disclosure, except
a. Occurrence and rights and obligations
b. Accuracy and valuation
c. Classifications and understandability
d. Existence
16. . 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 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 cut-off of transactions and events.
d. The completeness assertion deals only with whether all transactions and events that should
have been recorded have been recorded.
17. Which of the following statements concerning audit objectives is incorrect?

a. The auditor should resolve any substantial doubt about any of management’s material
financial statements assertions.
b. Selection of tests to meet audit objectives should depend upon the understanding of internal
control.
c. There should be a one-to-one relationship between audit objectives and procedures.
d. Audit objectives should be developed in light of management assertions about the financial
statements elements.
18. The primary difference between an audit of the balance sheet and an audit of the income statement
is that the audit of the income statement addresses the verification of
a. Cutoffs
b. Authorizations
c. Transactions
d. Costs
19. 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
20. Which of the following forms of documentary evidence would be considered the most reliable by
an auditor?
a. Internally generated
b. Prenumbered
c. Easily duplicated
d. Authorized by a responsible official
21. The objective of tests of details of transactions performed as substantive tests is to

a. Attain assurance about the reliability of the accounting system.
b. Evaluate whether management’s policies and procedures operated effectively.
c. Detect material misstatements in the financial statements.
d. Comply with Philippine Standards on Auditing (PSAs).
22. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Potentially unrecorded items to the financial statements.
b. Financial statements to the potentially unrecorded items.
c. Supporting evidence to the supporting evidence.
d. Accounting records to the supporting evidence.
23. In determining whether transactions have been recorded, the direction of the audit testing should
be from the
a. General journal entries
b. Original source documents
c. General ledger balances
d. Adjusted trial balance
24. Which of the following audit procedures consists of looking at a process or procedure being
performed by others?
a. Observation
b. Inspection of records and documents
c. Inspection of tangible assets
d. Inquiry
25. Which of the following elements ultimately determines the specific auditing procedures that are
necessary in the circumstances to afford a reasonable basis for an opinion?
a. Materiality
b. Audit risk
c. Auditor judgment
d. Reasonable assurance
26. The auditor should apply analytical procedures

I. As risk assessment procedures.
II. As substantive procedures.
III. In the overall review at the end of the audit.
a. I and II only
b. II and III only
c. I and III only
d. I, II, III
27. Which of the following should be considered by the auditor when designing and performing
analytical procedures as substantive procedures?
I. The sustainability of using substantive analytical procedures given the assertions.
II. The reliability of the data, whether internal or external, from which the expectation of
recorded amounts or ratios is developed.
III. Whether the expectation is sufficiently precise to identify a material misstatement at the
desired level of assurance.
IV. The amount of any difference of recorded amounts from expected values that is acceptable.
a. I, II and III only

b. I, III, and IV only
c. II, III, and IV only
d. I, II, III, and IV
28. 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 conditions 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 misstatements exists.
29. Which of the following should be considered by the auditor in determining the sustainability of
substantive analytical procedures given the assertions?
I. The assessment of the risk of material misstatements.
II. Any tests of details directed toward the same assertion.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
30. 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, III, and IV only

b. II, III, and IV only
c. I, II, and III only
31. According to PSA 520, when analytical procedures identify significant fluctuations or relationships
that are inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanations and appropriate corroborative audit
evidence. The auditor’s investigation of unusual fluctuations and relationships ordinarily begins
with inquiries of management, followed by
I. Corroboration of management’s responses.
II. Consideration of the need to apply other audit procedures based on the results of such
inquiries, if management is unable to provide an explanation or if the explanation is not
considered adequate.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
32. The following are the auditor’s principal objectives in the audit of revenues, except
a. To determine whether all cash owned by the entity at the balance sheet date is included
on the balance sheet.
b. To determine whether earned revenue has been recorded and recorded revenue has been
earned.
c. To determine whether revenues are reported in the income statement at the appropriate
amounts.
d. To determine whether revenues are properly classified, described, and disclosed in the
financial statements, including notes, in conformity with an applicable financial reporting
framework.
33. Auditors are often concerned with the possibility of overstatement of sales and receivables.
However, management may also have reasons for understating these balances. Which of the
following would explain understatement of sales and receivable?
I. To avoid paying taxes.
II. To window dress the financial statements.
III. To meet budgets and forecasts.
a. I only
b. II only
c. I and III only
d. I, II, and III
34. In the audit of which of the following general ledger accounts will tests of controls be particularly
appropriate?
a. Bank charges
b. Equipment
c. Bonds payable
d. Sales
35. Which of the following might be detected by an auditor’s review of the entity’s sales cutoff?
a. Inflated sales for the year.
b. Lapping of year-end accounts receivable.
c. Unrecorded sales discount.
d. Excessive goods returned for credit.
36. An auditor most likely would review a client’s periodic accounting for the numerical sequence of
shipping documents and sales invoices to support management’s financial statement assertion of
a. Existence
c. Completeness
d. Valuation and allocation
37. If the objective of a test of details of transactions is to detect overstatements of sales, the auditor’s
direction of testing should be from the
a. Cash receipts journal to the sales journal.
b. Accounting records to the source documents.
c. Source documents to the accounting records.
d. Sales journal to the cash receipts journal.
38. Cutoff tests designed to detect credit sales made before the end of the year the have been recorded
in the subsequent year provide assurance about management’s assertion of
a. Accuracy
b. Classification
c. Rights and obligations
d. Cutoff
39. An auditor most likely would limit substantive audit tests of sales transactions when control risk is
assessed as low for the occurrence assertion concerning sales transactions and the auditor has
already gathered evidence supporting
a. Beginning and ending inventory balances.
b. Cash receipts and account receivable.
c. Cutoffs of sales and purchases.
d. Shipping and receiving activities.
40. Tracing bills of lading to sales invoices provides evidence that

a. Invoiced sales were shipped.
b. Recorded sales were shipped.
c. Shipments to customers were recorded as sales.
d. Shipments to customers were invoiced.
41. The auditor finds a situation in which one person has the ability to collect receivables, make
deposits, issue credit memos, and record receipt of payments. The auditor suspects the individual
may be stealing cash receipts. Which of the following audit procedures would be most effective in
discovering fraud in this scenario?
a. Performs a detailed review of debits to sales discounts, sales returns and allowances, or
other debit accounts, excluding cash posted to the cash receipts journal.
b. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in
the cash receipts journal.
c. Send negative confirmations to all outstanding accounts receivables customers.
d. Send positive confirmations to a random selection of customers.
42. Which of the following most likely would give the most assurance concerning the valuation and
allocation assertion of accounts receivables?
a. Vouching amounts in the subsidiary ledger to details on shipping documents.
b. Inquiring about receivables pledged under loan agreements.
c. Assessing the allowance for bad debts for reasonableness.
d. Comparing receivable turnover ratios with industry statistics for reasonableness.
43. Which of the following is not a principal objective in auditing accounts receivable?
a. To determine whether receivables are carried at their net realizable value.
b. To determine whether receivables are properly classified, described, and disclosed in the
financial statements, including notes, in accordance with the applicable financial reporting
framework.
c. To determine whether the entity has real claims in all receivables on the balance sheet.
d. To determine whether the accounts are collected by the balance sheet date.
44. A large university has relatively ineffective internal control. To obtain assurance that all tuition
revenue has been recorded, the auditor should
a. Confirm a sample of tuition payments with the students.
b. Prepare a year-end bank reconciliation.
c. Compare business office revenue records with registrar’s office records of students
enrolled.
d. Observe tuition payment procedures on a surprise basis.
45. The process of obtaining and evaluating audit evidence through a direct communication from a
third party in response to a request for information about a particular item affecting assertions
made by management in the financial statements is called
a. Reperformance
b. External confirmation
c. Inquiry
d. Recalculation
46. The confirmation of customers’ accounts receivable rarely provides reliable evidence about the
valuation assertion because
a. Customers may not be inclined to report understatement error in their accounts.
b. Auditors typically select many accounts with low recorded balanced to be confirmed.
c. It is not practicable to ask the customer to confirm detailed information relating to its
ability to pay the account.
d. Recipients usually respond only if they disagree with the information on the request.
47. Auditor may use positive and/or negative forms of confirmation requests. And auditor most likely
will use
a. The negative form for small balances.
b. The positive form, when the combined assessed level of inherent and control risk for related
assertion is acceptably high.
c. The positive form to confirm all balances regardless of size.
d. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances.
48. The following statements relate to the use of negative confirmation requests. Which is true?
a. Negative confirmation requests are effective when detection risk is low.
b. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
c. Unreturned negative confirmation requests rarely provide significant explicit evidence.
d. Negative confirmation requests are effective when understatements of account balances are
suspected.
49. In confirming accounts receivables, an auditor decided to confirm customers’ account balances
rather than individual invoices. Which of the following most likely would be included with the
client’s confirmation letter?
a. An auditor-prepared letter explaining that a nonresponse may cause an inference that the
account balance is correct.
b. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
c. A client-prepared letter reminding the customer that a non-response will cause a second
request to be sent.
d. A client-prepared statement of account showing the details of the customer’s account
balance.
Chapter 6 Audit Sampling
1. In designing audit procedures, the auditor is required to determine appropriate means of selecting
items for testing to gather audit evidence. Which of the following is/are available to the auditor?
I. Selecting all items (100% examination).
II. Selecting specific items.
III. Audit sampling.
a. I and II only
b. III only
c. I and III only
d. I, II, and III
2. Which of the following should be considered by the auditor in deciding which means (or
combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. It will be appropriate to audit all the items that make up a class of transactions or account balance
(100% examination), except
a. When the class of transactions or account balance consists of a large number of small
value items.
b. When the class of transactions or account balance consists of a small number of large value
items.
c. When there is a significant risk of misstatement and other selection methods do not provide
sufficient appropriate audit evidence.
d. When the repetitive nature of a calculation or other process performed automatically by the
client’s computer informative system (CIS) makes a 100% examination cost effective.
4. PSA 500 states that the auditor may decide to select specific items from a population based on such
factors as the auditor’s understanding of the entity, the assessed risk of materials misstatement, and
the characteristics of the population being tested. Specific items that may be selected for testing
usually include the following except
a. Items that are of high value.
b. Items that are suspicious, unusual, risk-prone, or have a history of error.
c. All items whose values do not exceed a certain amount so as to verify only a small
proportion of the total amount of class of transactions or account balance.
d. Items that provide information about matters such as the nature of the entity, the nature of
transactions, and internal control.
5. Audit sampling involves the

a. Selection of all items over a certain amount.
b. Application of audit procedures to less than 100% of items within a class of transactions
or account balance such that all items have a chance of selection.
c. Application of audit procedures to all items that comprise a class of transactions or account
balance.
d. Application of audit procedures to all items over a certain amount and those that are unusual or
have a history of error.
6. Population, as defined in PSA 530 (Audit Sampling), means that entire set of data from which a
sample is selected and about which the auditor wishes to draw conclusions. It is important for the
auditor to ensure that the population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
7. The two general approaches to audit sampling are:

a. Stratification and value weighted.
b. Random and nonrandom.
c. Statistical and nonstatistical.
d. Precision and reliability
8. The principal methods of selecting samples are the use of

I. Random number tables or CAATs.
II. Systematic selection.
III. Haphazard selection.
a. I and II only
b. II and III only
c. I and III only
d. I, II and III
9. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps
an auditor to
a. Minimize the failure to detect errors and fraud.
b. Measure the sufficiency of the evidential matter obtained.
c. Eliminate the risk on nonsampling errors.
d. Reduce the level of audit risk and materiality to a relatively low amount.
10. The likelihood of assessing control risk too high is the risk that the sample selected to test controls
a. Does not support the tolerable error for some or all of management’s assertions.
b. Contains proportionately fewer deviations from prescribed internal controls that exist in the
balance or class as a whole.
c. Does not support the auditor’s planned assessed level of control risk when the true
operating effectiveness of internal control justifies such an assessment.
d. Contains misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances of transaction classes.
11. While performing a test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in fact,
not materially misstated. This situation illustrates the risk of
a. Assessing control risk too low
b. Assessing control risk too high
c. Incorrect acceptance
d. Incorrect rejection
12. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
a. Effectiveness of the audit
b. Efficiency of the audit
c. Tolerable misstatement
d. Preliminary estimate of materiality levels
13. Which of the following statements is true?

a. Statistical sampling is more convenient to use that non-statistical sampling.
b. Statistical sampling aids the auditor in evaluating results.
c. Statistical sampling requires the auditor to make fewer judgmental decisions.
d. Statistical sampling will be looked upon by the courts as providing superior audit evidence.
14. The following are examples of nonsampling risk, except

a. Failure to recognize an error
b. Obtaining an unprecedented sample.
c. Use of audit procedure inappropriate to achieve a given objective.
d. Failing to evaluate results properly.
15. The following are advantages of using statistical sampling, except

a. Statistical sampling provides a means for mathematically measuring the degree of risk that
results from examining only a part of a population.
b. Statistical sampling allows the auditor to greatly reduce substantive testing.
c. Statistical sampling allows the auditor to measure the sufficiency of the evidential matter
obtained.
d. Statistical sampling aids in the design of an effective sample.
16. Which of the following methods is most appropriate when performing tests of controls?
a. Stratified random sampling
b. Unrestricted random sampling with replacement
c. Variable sampling
d. Attribute sampling
17. In the audit of inventory, attribute sampling may be applied to estimate the
a. Average price of inventory items
b. Physical quantity of inventory items
c. Percentage of slow-moving inventory items
d. Peso value of inventory
18. The risk that the assessed level of control risk based on the sample is less than the true operating
effectiveness of the control policy or procedure is the risk of
a. Assessing control risk too low
b. Assessing control risk too high
c. Incorrect acceptance
d. Incorrect rejection
19. An element of sampling risk is

a. Choosing a sample size that is too small to achieve the sampling objective.
b. Choosing an audit procedure that is inconsistent with the audit objective.
c. Failing to perform audit procedures that are required by the sampling plan.
d. Failing to detect a deviation on a document inspected by the auditor.
20. Statistical sampling provides a technique for

a. Exactly defining materiality.
b. Greatly reducing the extent of substantive testing.
c. Eliminating judgment testing.
d. Measuring the sufficiency of evidential matter.
21. The distinguishing feature of statistical sampling is that it

a. Reduces the problems associated with the auditor’s judgment concerning materiality.
b. Requires the examination of a smaller number of supporting documents.
c. Is evaluated in terms of two parameters: statistical mean and random selection.
d. Provides a means for measuring mathematically the degree of uncertainty that results
from examining only part of a population.
22. Which of the following is true if certain forms are not consecutively numbered?
a. Systematic sampling may be appropriate.
b. Selection of a random sample probably is not possible.
c. Random number tables cannot be used.
d. Stratified sampling should be used.
23. In examining cash disbursements, an auditor plans to choose a sample using systematic selection
with a random start. The primary advantage of this selection technique is that population items
a. May occur more than once in the sample.
b. May occur in a systematic pattern, thus making the sample more representative.
c. That are indicative of fraud will be included in the sample.
d. Do not have to be prenumbered in order for the auditor to use the technique.
24. In attribute sampling, a 5% change in which of the following factors normally will have the least
effect on the size of a statistical sample?
a. Expected deviation rate.
b. Risk of assessing control risk too low.
c. Population size.
d. Tolerable deviation rate.
25. Given random selection, the same sample size, and the same tolerable deviation rate for the testing
of the two unequal populations, the risk of assessing control risk too low for the larger population is
a. Higher than the risk of assessing control risk too low for the smaller population.
b. Lower than the risk of assessing control risk too low for the smaller population.
c. The same as the risk of assessing control risk too low for the smaller population.
d. Indeterminable relative to the risk of assessing control risk too low for the smaller population.
26. If the size of the sample to be used in a particular test of attributes has not been determined by
utilizing statistical concepts, but the sample has been randomly chosen
a. The auditor will have to evaluate the results by reference to the principles of discovery
sampling.
b. May not use statistical evaluation.
c. The auditor has committed a nonsampling error.
d. No inferences can be drawn from the sample.
27. In determining the number of items to be selected in a sample for a particular substantive test of
details, the auditor should consider all of the following, except
a. Tolerable misstatements.
b. Characteristic of the population.
c. Deviation rate
d. Allowable risk of incorrect acceptance
28. Which of the following statements best describes the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
b. The document related to the chosen sample may not be available for inspection.
c. An auditor may fail to recognize errors in the documents examined for the chosen sample.
d. An auditor may select audit procedures that are not appropriate to achieve the specific
objective.
29. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too
high relate to the
a. Effectiveness of the audit.
b. Efficiency of the audit.
c. Audit quality controls.
d. Selection of the sample.
30. An underlying feature of random-based selection items is that each

a. Item must be systematically selected using replacement.
b. Item in the accounting population should have an opportunity to be selected.
c. Stratum of the accounting population be given equal representation in the sample.
d. Items in the accounting population be randomly ordered.
31. If certain forms are not consecutively numbered

a. Selection of a random sample probably is not possible.
b. Systematic sampling may be appropriate.
c. Random number tables cannot be used.
d. Stratified sampling should be used.
32. When performing a test of a control with respect to control over cash receipts, an auditor may use a
systematic sampling technique, with a start at any randomly selected item. The biggest
disadvantage of this type of sampling is that the items in the population
a. Must be systematically replaced in the population after sampling.
b. Must be recorded in a systematic pattern before the sample can be drawn.
c. May occur in a systematic pattern, thus destroying the sample randomness.
d. May systematically occur more than once in the sample.
33. For which of the following audit tests would an auditor most likely use attribute sampling?
a. Selecting accounts receivable for confirmation of account balances.
b. Examining invoices in support of the valuation of property, plant and equipment additions.
c. Making an independent estimate of the amount of FIFO inventory.
d. Inspecting employee time cards for proper approval by the supervisors.
34. Which of the following sampling methods would be used to estimate a numerical measurement of a
population, such as a peso value?
a. Variable sampling
b. Attribute sampling
c. Random-number sampling
d. Stop-or-go sampling
35. Which of the following factors is usually not considered in determining the sample size for a test of
controls?
a. Expected population deviation rate
b. Risk of assessing control risk too low
c. Tolerable deviation rate
d. Population size, when the population is large
36. The sample size of a test of controls varies inversely with

Tolerable Expected
Deviation Rate (TDR) Deviation Rate (EDR)
a. No No
b. Yes Yes
c. No Yes
d. Yes No
37. In planning a statistical sample for a test of controls, an auditor increased the expected population
deviation rate (EDR) from prior year’s rate because of the results of the prior year’s test of controls
and the overall control environment. The auditor most likely would then increase the planned
a. Risk of assessing control risk too low
b. Sample size
c. Allowance for sampling risk
d. Tolerable deviation rate
38. Which of the following factors does an auditor usually need to consider in planning a particular
audit sample for a test of controls?
a. Acceptable level of risk of assessing control risk too low
b. Tolerable misstatement
c. Number of sampling units in the population
d. Total peso amount of the items to be sampled
39. Which of the following statements is true concerning statistical sampling in tests of controls?
a. For a given tolerable rate, a larger sample size should be selected as the expected population
deviation rate decreases.
b. As the population size doubles, the sample size also should double.
c. The expected population deviation rate has little or no effect on determining sample size except
for very small populations
d. The population size has little or no effect on determining sample size except for very small
populations.
40. Which of the following statements is correct concerning statistical sampling in tests of controls?
a. In determining the tolerable rate, an auditor considers detection risk and the sample size.
b. Deviations from specific control activities at a given rate ordinarily result in
misstatements at a lower rate.
c. As the population size increases, the sample size should increase proportionately.
d. There is an inverse relationship between the expected population deviation rate and the sample
size.
41. Audit efficiency may be improved when the sampling unit is defined as the individual monetary
units that comprise the population. This technique is called
a. Stratification
b. Random Selection
c. Systematic selection
d. Value-weighted selection
42. Which of the following statements relating to stratification is incorrect?

a. When performing tests of details of transactions and account balances, the population is often
stratified by monetary value.
b. The results of audit procedures applied to a sample of items within a stratum can be
projected to the entire population.
c. When verifying the valuation assertion for accounts receivable, account balances may be
stratified by age.
d. Stratification reduces the variability of items within each stratum.
43. In audit sampling, ___________ involves dividing the population into discrete sub-populations
which have an identifying characteristic.
a. Value-weighted selection
b. Stratification
c. Random selection
d. Block selection
44. In systematic selection, the number of sampling units in the population is divided by the sample
size to determine the
a. Sampling interval
b. Pattern that may exist in the population
c. Sampling risk
d. Nonsampling risk
45. Which of the following sample selection methods cannot ordinarily be used in audit sampling?
a. Value-weighted selection
b. Random selection
c. Block selection
d. Systematic selection
46. Which of the following sample selection methods is not appropriate when using statistical
sampling?
a. Random Selection
b. Systematic selection
c. Monetary unit sampling
d. Haphazard selection
47. A number of factors influence the sample size for a substantive test of details of an account balance.
All other factors being equal, which of the following would lead to a larger sample size?
a. Smaller measure of tolerable misstatement
b. Smaller expected frequency of errors
c. Greater reliance on analytical procedures
d. Greater reliance on internal control
48. An auditor may decide to increase the risk of incorrect rejection when
a. The cost and effort of selecting additional sample items are low
b. Increased reliability from the sample is desired
c. Many differences (audit value minus recorded value) are expected
d. Initial sample results do not support the planned level of control risk
49. In applying variables sampling, an auditor attempts to

a. Predict a monetary population value within a range of precision
b. Estimate a qualitative characteristic of interest
c. Determine various rates of occurrence for specified attributes
d. Discover at least one instance of a critical deviation
50. In evaluating an attribute sample, the estimated range that is expected to contain the population
characteristics is the
a. Confidence level
b. Expected deviation rate
c. Precision
d. Upper deviation limit
51. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of similar errors in the population is an
a. Anomalous error
b. Isolated error
c. Scandalous error
d. Non-recurring error
52. An attribute sampling plan may be used to test the effectiveness of controls. The auditor's
evaluation of the sampling results ordinarily leads to a conclusion concerning
a. The relation of the population deviation rate to the tolerable rate.
b. Monetary precision exceeding a certain predetermined amount.
c. The population value not being misstated by more than a predetermined amount.
d. Population characteristics occurring at least once in the population
53. When planning a sample for a substantive test of details, an auditor should consider tolerable
misstatements for the sample. This consideration should
a. Not be changed during the audit process.
b. Be related to the auditor's business risk.
c. Be related to preliminary judgment about materiality levels.
d. Not be adjusted for qualitative factors.
54. In estimation sampling for variables, which of the following must be known to estimate the
appropriate sample size required to meet the auditor's needs in a given situation?
a. The estimated deviation rate in the population.
b. The qualitative aspects of misstatements.
c. The estimated population value.
d. The acceptable level of risk.
Chapter 7 Test of Controls, Substantive Test & Audit
Documentation
1. Which of the following determines the extent of the auditor’s tests of control?
a. Auditor’s knowledge
b. Auditor’s initial/planned assessment of control risk
c. Resources available to the auditor
d. Management’s desire to help the auditor
2. Tests of controls are concerned primarily with each of the following questions, except
a. By whom were the controls applied?
b. Were the necessary controls consistently performed?
c. How were controls applied?
d. Why were the controls applied?
3. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from
variety of techniques, including
a. Reperformance and observation.
b. Inquiry and analytical procedures.
c. Comparison and confirmation.
d. Inspection and verification.
4. Which of the following audit procedures consists of looking at a process or procedure being
performed by others?
a. Observation
b. Inspection of records and documents
c. Inspection of tangible assets
d. Inquiry
5. In the audit of which of the following general ledger accounts will tests of controls be particularly
appropriate?
a. Bank charges
b. Equipment
c. Bonds payable
d. Sales
6. 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.
7. An auditor intends to perform tests of control on a client’s cash disbursement procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
a. Inquiry and analytical procedures.
b. Inquiry and observation.
c. Analytical procedures and confirmation.
d. Confirmation and observation.
8. PSA 501 states that in planning attendance at the physical inventory count, the auditor considers the
risk of material misstatement related to inventory as well as the nature of the internal control related
to inventory. Which of the following items should the auditor consider?
I. Whether adequate procedures are expected to be established and proper instructions issued
for the physical inventory count.
II. The timing of the count.
III. The location at which inventories are held.
IV. Whether an expert’s assistance is to be sought.
a. I and IV only
b. II and III only
9. The following statements relate to use of audit evidence when testing the operating effectiveness of
relevant controls. Which is false?
a. An auditor who obtains sufficient appropriate evidence about the operating effectiveness
of controls during the interim period should no longer obtain additional evidence of
operating effectiveness for the remaining period.
b. An auditor may plan to use audit evidence about the operating effectiveness of controls
obtained in prior audits.
c. If an auditor plans to rely on controls that have changed since they were last tested, the auditor
should test the operating effectiveness of such controls in the current audit.
d. Audit evidence pertaining only to a point in time may be sufficient for the auditor’s purpose, for
example, when testing controls over an entity’s physical count of inventories at year-end.
10. Which of the following tests of controls would most likely be performed by an auditor to obtain
evidence about management’s assertion concerning the completeness of sales transactions?
a. Inquiries about entity’s credit granting policies and whether credit checks are consistently
applied.
b. Inspect the entity’s reports of pre-numbered shipping documents that have not been
recorded in the sales journal.
c. Compare prices on pre-numbered sales invoices to the entity’s authorized price list.
d. Verify that extensions and footings on sales invoices and monthly statements of customers’
accounts have been checked.
11. The auditor’s primary objective in obtaining an understanding of the client’s controls over the
purchasing function is to
a. Investigate the recording of unusual transactions regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function.
c. Observe the annual physical count.
d. Ascertain that raw materials paid for are on hand.
12. Which of the following is an essential control procedure to ensure the accuracy of the recorded
inventory quantities?
a. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy.
b. Testing inventory extensions.
c. Performing a gross profit test.
d. Establishing a cut-off for goods received and shipped.
13. What document is prepared to authorize the removal of the necessary quantity of raw materials
from storeroom to factory?
a. Production order
b. Materials requisition
c. Movie ticket
d. Purchase invoice
14. Which of the following misstatements or questionable practices may be uncovered if an auditor
tours an entity’s production facility?
a. Insurance coverage on the facility has lapsed.
b. Overhead has been overapplied.
c. Depreciation expense on fully depreciated machinery has been recognized.
d. Necessary facility maintenance has not been performed.
15. During the year under audit, a company has completed a private placement of a substantial amount
of bonds. Which of the following is the most important step in the auditor’s program for the audit of
bonds payable?
a. Confirming the amount issued with the bond trustee.
b. Tracing the cash received from the issue to the accounting records.
c. Examining the bond records maintained by the transfer agent.
d. Recomputing the annual interest cost and the effective yield.
16. Which of the following most likely would be the result of ineffective controls in the revenue/receipt
cycle?
a. Omission of shipping documents could go undetected, causing an understatement of
inventories.
b. Irregularities in recording transactions in the subsidiary accounts could result in a delay of
goods shipped.
c. Final authorization of credit memos by sales department personnel could permit an
employee defalcation scheme.
d. Fictitious transactions could be recorded causing an understatement of revenues and an
overstatement of receivables.
17. As a result of obtaining an understanding of an entity’s internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control. The
auditor is required to communicate this matter to
a. Those charged with governance or management.
b. Chief executive officer.
c. Securities and Exchange Commission.
d. Board of Accountancy.
18. To effectively determine whether the entity’s control activities minimize errors of failure to invoice
goods that have been shipped, the auditor should select a sample of transactions from the
population represented by the
a. Sales invoice file
b. Bill of lading file
c. Accounts receivable subsidiary ledger
d. Customer order file
19. Samantha Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing function allows goods to be shipped but not invoiced. The
inadequate controls could cause what type of misstatement in each of the following accounts?
Revenues Receivables Inventories
a. Understatement Understatement Understatement
b. Overstatement Overstatement Understatement
c. Understatement Understatement Overstatement
d. Overstatement Overstatement Overstatement
20. In a well-designed internal control, the same employee may be permitted to

a. Prepare receiving reports and also approve purchase orders.
b. Approve vouchers for payment and also have access to unused purchase orders.
c. Mail signed checks and also cancel supporting documents.
d. Mail signed checks and also prepare bank reconciliations.
21. Under which of the following circumstances would an auditor be most likely to intensify an audit of
a P20, 000 petty cash fund?
a. Petty cash vouchers are not prenumbered.
b. The custodian endorses reimbursement checks.
c. Reimbursement occurs twice each week.
d. The custodian occasionally uses the petty cash fund to cash employee checks.
22. Why is property, plant, and equipment typically considered to be one of the accounts least
susceptible to fraud?
a. Internal control on this account is inherently effective.
b. The depreciated values are always smaller than cost.
c. The inherent risk of PPE is usually low.
d. For most companies, the recorded amounts of PPE are immaterial.
23. During an audit of a publicly held company, the auditor should obtain written confirmation
regarding debenture transactions from the
a. Debenture holders
b. Client’s attorney
c. Internal auditors
d. Trustee
24. Which of the following is of least concern to an auditor in assessing the risk of material
misstatement?
a. Signed checks are distributed by the controller to approved payees.
b. Checks are signed by one person.
c. Cash receipts are not deposited intact daily.
d. Treasurer does not verify the names and addresses of check payees.
25. The audit program for long-term debt should include steps that require the
a. Verification of the existence of the bondholders.
b. Examination of any bond trust indenture.
c. Inspection of the accounts payable master file.
d. Investigation of credits to the bond interest income account.
26. The objectives of tests of details of transactions performed as substantive tests is to
a. Attain assurance about the reliability of the accounting system
b. Evaluate whether management’s policies and procedures operated effectively.
c. Detect material misstatements in the financial statements.
d. Comply with generally accepted auditing standards.
27. Which of the following should be considered by the auditor when designing and performing
analytical procedures as substantive procedures?
I. The suitability of using substantive analytical procedures given the assertions.
II. The reliability of the data, whether internal or external, from which the expectation of
recorded amounts or ratios is developed.
III. Whether the expectation is sufficiently precise to identify a material misstatement at the
designed level of assurance.
IV. The amount of any difference of recorded amounts from expected values that is acceptable.
a. I, II, and III only

b. I, II, and IV only
28. 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 conditions 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.
29. 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, III, and IV only

b. II, III, and IV only
c. I, II, and III only
30. If the objective of test of details of transactions is to detect overstatements of sales, the auditor’s
direction of testing should be from the
a. Cash receipts journal to the sales journal.
b. Accounting records to the source documents.
c. Source documents to the accounting records.
d. Sales journal to the cash receipts journal.
31. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Search for unrecorded liabilities.
b. Confirmation of accounts receivable.
c. Attendance at the physical inventory count.
d. Testing internal control over cash.
32. Which of the following is a substantive procedure that an auditor would most likely to perform to
verify the existence and valuation of recorded accounts payable?
a. Confirming accounts payable balances with known suppliers who have zero balances.
b. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are
used and accounted for.
c. Receiving the client’s mail, unopened, for a reasonable period of time after year-end to search
for unrecorded vendor’s invoices.
d. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders
and receiving reports.
33. When counting cash on hand, the auditor must exercise control over all cash and other negotiable
assets to prevent
a. Theft
b. Deposits in transit
c. Substitution
d. Irregular endorsement
34. Which of the following is the primary audit test to determine if accounts payable are valued
properly?
a. Vouching accounts payable to supporting documentation.
b. An analytical procedure.
c. Verification that accounts payable are reported as a current liability in the balance sheet.
d. Examination of cash disbursements subsequent to year-end.
35. An auditor concluded that no excessive costs for an idle plant were charged to inventory. This
conclusion most likely related to the auditor’s objective to obtain evidence about the financial
statement assertions regarding inventory, including presentation and disclosure and
a. Valuation and allocation
b. Completeness
c. Rights and obligations
d. Existence
36. Which of the following audit procedures probably provides the most reliable evidence concerning
the entity’s assertion of rights and obligation related to inventories?
a. Inspect the open purchase order file for significant commitments that should be considered for
disclosure.
b. Trace test counts noted during the entity’s physical count to the entity’s summarization of
quantities.
c. Inspect agreements to determine whether any inventory is pledged as collateral or subject
to any liens.
d. Select the last few shipping advices used before the physical count and determine whether the
shipments were recorded as sales.
37. Which of the following is the most effective audit procedure for verification of dividends earned on
investments in equity securities?
a. Reconciling amounts received with published dividend records.
b. Recomputing selected extensions and footings of dividend schedules and comparing totals to
the general ledger.
c. Comparing dividends received in the current year with that of the preceding year.
d. Tracking deposited dividend checks to the cash receipts books.
38. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Review of depreciation.
b. Analysis of the debits to accumulated depreciation account.
c. Review of insurance policy riders.
d. Review of the purchase returns and allowances account.
39. In the audit of property, plant, and equipment, the auditor tries to do all of the following except to
a. Assess the adequacy of replacement funds.
b. Obtain an understanding of internal control.
c. Determine the extent of property abandoned during the year.
d. Judge the reasonableness of the depreciation.
40. Analytical procedures include the consideration of comparisons of the entity’s financial information
with
I. Comparable information for prior periods.
II. Anticipated results of the entity
III. Similar industry information
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
41. Tracing bills of lading to sales invoices provides evidence that

a. Invoiced sales were shipped.
b. Recorded sales were shipped.
c. Shipments to customers were recorded as sales.
d. Shipments to customers were invoiced.
42. Which of the following is the most effective procedure for determining the collectability of an
account receivable?
a. Confirmation of the account.
b. Review of the subsequent cash collections.
c. Review of the authorization of credit sales to the customer and the previous history of
collections.
d. Examination of the related sales invoice(s).
43. All of the following are examples of substantive procedures to verify the valuation of net accounts
receivable, except the
a. Comparison of the allowance for bad debts with past records.
b. Recomputation of the allowance for bad debts.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Inspection of accounts for current versus noncurrent status in the statement of financial
position.
44. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertion of
a. Existence
b. Valuation and allocation
c. Completeness
d. Presentation and disclosure
45. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Reconciling vendors’ statements to the file of receiving reports to identify items received just
prior to the balance sheet date.
b. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
c. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports.
d. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to period.
46. If the perpetual inventory records show lower quantities of inventory than the physical count, an
explanation of the difference might be unrecorded
a. Purchases
b. Sales
c. Sales discounts
d. Purchase discounts
47. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry of sales personnel.
b. Inquiry of warehouse personnel.
c. Review of perpetual inventory records.
d. Physical observation of inventory.
48. Which of the following audit procedures would give the least assurance of the existence of
securities held by entity?
a. Confirmation from the custodian.
b. Simultaneous count of liquid assets.
c. Vouching all changes during the year to supporting documentation.
d. Examination of paid checks issued in payment of securities purchased.
49. An auditor is most likely to verify the interest earned on bond investments by
a. Verifying the receipt and deposit of interest checks.
b. Testing controls relevant to cash receipts.
c. Recomputing the interest earned on the basis of face amount, interest rate, and period
held.
d. Confirming the bond interest rate with the issuer of the bond.
50. As used in PSA 230, it refers to the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached.
a. Audit documentation
b. Audit file
c. Audit planning memorandum
d. Management letter
51. According to PSA 240, working papers may be in the form of data stored on paper or on electronic
or other media. Working papers
I. Assist in the planning and performance of the audit.
II. Assist in the supervision and review of the audit work.
III. Record the audit evidence resulting from the audit work performed to support the auditor’s
opinion
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
52. The following statements relate to the form and content of working papers. Which is false?
a. The auditor should prepare working papers which are sufficiently complete and detailed to
provide an overall understanding of the audit.
b. The auditor should include in the working papers information on planning the audit work; the
nature, timing, and extent of the audit procedures performed and the results of such procedures;
and the conclusions drawn from the audit evidence obtained.
c. Working papers should include documentation of every matter the auditor considers
during the audit.
d. Working papers should include the auditor’s reasoning on all significant matters which require
the exercise of judgment, together with his/her conclusion.
53. Which of the following analyses appearing in a predecessor’s working papers is the successor
auditor least likely to be interested in reviewing?
a. Analysis of income statement accounts.
b. Analysis of noncurrent assets and liabilities.
c. Analysis of current assets and liabilities.
d. Analysis of stockholders’ equity accounts.
54. The primary purpose of audit working papers is to

a. Provide evidence of the planning and execution of audit procedures performed.
b. Comply with the generally accepted auditing standards in the Philippines.
c. Document weaknesses in internal control with recommendations to management for
improvement.
d. Serve as a means for the preparation of the financial statements.
55. Working papers that record the procedures used by the auditor to gather audit evidence should be
a. Destroyed when the audited entity ceases to be a client.
b. Considered the primary support for the financial statements being audited.
c. Viewed as the connecting link between the books of accounts and the financial statements.
d. Designed to meet the circumstances of the particular engagement.
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 clients are included in the working papers.
c. Flowcharts are included in the working papers.
d. Findings are cross-referenced to supporting documentations.
57. Which of the following factors would least likely to affect the form, content, and extent of an
auditor’s working papers?
a. The content of the representation letter.
b. The identified risks of material misstatement.
c. The audit methodology and tools used.
d. The significance of the audit evidence obtained.
58. An auditor’s working papers will ordinarily be least likely to include documentation showing how
the
a. Client’s schedules were prepared.
b. Unusual matters were resolved.
c. Understanding of the client’s internal control was obtained and control risk was assessed.
d. Engagement was planned.
59. 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 underlying generally accepted
accounting principles used in preparing the financial statements
60. Audit working papers are indexed by means of reference numbers. Which of the following is the
primary purpose of indexing?
a. Determine that working papers adequately support findings, conclusions, and reports.
b. Support the audit opinion.
c. Permit cross-referencing and simplify supervisory review.
d. Eliminate the need for follow-up reviews.
61. Although the quantity and content of audit working papers vary with each particular engagement,
an auditor’s permanent files most likely include
a. Analyses of capital stock and other stockholders’ equity elements.
b. Schedules that support the current year’s adjusting entries.
c. Prior years’ accounts receivable confirmations that were classified as exceptions.
d. Documentation indicating that the audit work was adequately planned and supervised.
62. An auditor ordinarily uses a working trial balance resembling the financial statements without
footnotes, but containing columns for
a. Cash flow increases and decreases.
b. Reclassifications and adjustments.
c. Audit objectives and assertions.
d. Reconciliations and tick marks.
63. Auditors often use standardized working papers primarily because they allow working papers to be
prepared more
a. Efficiently
b. Accurately
c. Neatly
d. Professionally
64. 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 calculations.
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.
65. Audit documentation is the record of audit procedures performed, relevant audit evidence, and the
auditor’s conclusions. Which of the following statements concerning audit documentation is
incorrect?
a. Audit documentation should include superseded drafts of working papers and financial
statements.
b. Audit documentation prepared after the performance of the audit work is likely to be less
accurate than documentation prepared at the time such work is performed.
c. Audit documentation may include abstracts or copies of the entity’s records such as significant
and specific contracts and agreements.
d. Audit documentation is not a substitute for the entity’s accounting records.
66. The auditor shall assemble the audit documentation in a/an

a. Working paper
b. Workpaper
c. Audit file
d. Audit memorandum
67. 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 within which to complete the
assembly of the audit file is ordinarily
a. Not more than 30 days after the date of auditor’s report.
b. Not more than 60 days after the date of 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 the entity’s financial statements are authorized for issue.
68. Audit documentation may be recorded on paper or on electronic or other media. The following are
examples of audit documentation, except
a. Audit programs
b. Letters of confirmation and representation
c. Correspondence (including e-mail) concerning significant matters
d. The entity’s accounting records
69. The completion of the assembly of the final audit file after the date of auditor’s report does not
ordinarily involve
a. The performance of new audit procedures or the drawing of new conclusions.
b. Sorting, collating, and cross-referencing working papers.
c. Deleting or discarding superseded documentation.
d. Signing off on completion checklists relating to the file assembly process.
Chapter 8 Risk-Based Audit of Financial Statements:
Reporting
1. When a publicly held company refuses to include in its audited financial statements any of the
segment information that the auditor believes is required, the auditor should express a/an
a. Disclaimer of opinion because of the significant scope limitation.
b. Adverse opinion because of a significant uncertainty.
c. Unmodified opinion with an Emphasis of Matter paragraph emphasizing the matter.
d. Qualified opinion because of inadequate disclosure.
2. Which of the following audit procedures would most likely cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Restrictions on the disposal of principal assets are present.
b. Usual trade credit from suppliers is denied.
c. Significant related party transactions are pervasive.
d. Arrearages in principal stock dividend are paid.
3. A written management representation letter is most likely to be an auditor’s best source of

corroborative information of a client’s intention to
a. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
b. Discontinue a line of business.
c. Terminate an employee pension plan.
d. Make a public offering of its ordinary share capital.
4. The written representations shall be in the form of a representation letter addressed to the
a. Entity’s management
b. Auditor
c. Entity’s chief executive officer
d. Entity’s chief financial officer
5. In which of the following circumstances would an auditor most likely meet with the client’s legal
counsel to discuss the likely outcome of the litigation and claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between management and the entity’s legal counsel.
III. The subject matter of the litigation is complex.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
6. A client is presenting comparative (two-year) financial statements. Which of the following is

correct concerning responsibilities of a continuing auditor?
a. The auditor may issue either one audit report on both presented years, or two audit reports, one
on each year.
b. The auditor should issue one audit report, but only on the most recent year.
c. The auditor should issue two audit reports, one on each year.
d. The auditor should issue one audit report that is on both presented years.
7. The following statements relate to the date of the auditor’s report. Which is false?
a. The auditor should date the report as of the completion date of the audit.
b. The date of the auditor’s report should not be earlier than the date on which the financial
statements are signed or approved by management.
c. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management.
d. The date of the auditor’s report should always be later than the date of financial statements
(i.e., the balance sheet date).
8. 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 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.
9. When an audit is made in accordance with PSAs, the auditor should always
a. Observe the taking of physical inventory on the balance sheet date.
b. Obtain certain written representations from management.
c. Employ analytical procedures as substantive to obtain evidence about specific assertions
related to account balances.
d. Document the understanding of the client’s internal control and the basis for all conclusions
about the assessed level of control risk for financial statement assertions.
10. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless
a. Final determinations or resolutions are made of contingencies that had been disclosed in the
financial statements.
b. Information about an event that occurred after the date of the auditor’s report comes to the
auditor’s report comes to the auditor’s attention.
c. The control environment changes after issuance of the report.
d. Information, which existed at the report date and may affect the report comes to the
auditor’s attention.
11. Under PSA 580 (Written Representations), the auditor is required to obtain audit evidence that
management
I. Has fulfilled its responsibility for the fair presentation of the financial statements in
accordance with applicable financial reporting framework
II. Has provided the auditor with all relevant information and access as agreed in the terms of
the audit engagement
a. I only
b. II only
c. Both I and II
d. Neither I nor II
12. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Stock dividends replace annual cash dividends.
c. Significant related party transactions are pervasive.
d. Research and development projects are postponed.
13. 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.
14. A CPA engaged to audit financial statements observes that the accounting for a certain material is
not in accordance with the applicable financial reporting framework, although the departure is
prominently disclosed in a note to the financial statements. The CPA should
a. Express an unmodified opinion but insert an Emphasis of Matter paragraphs emphasizing the
matter by reference to the note.
b. Disclaim an opinion.
c. Not allow the accounting treatment for this item to affect the type of opinion because the
departure from the requirement of the applicable financial reporting framework was disclosed.
d. Modify the opinion because of the departure from the requirement of the applicable
financial reporting framework.
15. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity’s ability to
continue as a going concern?
a. Confirmation of bank balances.
b. Confirmation of accounts receivable from major customers.
c. Reconciliation of interest expense with debt outstanding.
d. Review of compliance with terms of debt agreements.
16. When audited financial statements are presented in a document (e.g., annual report) containing
other information, the auditor
a. Should read the other information to consider whether it is inconsistent with the audited
b. Has no responsibility for the other information because it is not part of the basic financial
statements.
c. Has an obligation to perform auditing procedures to corroborate the other information.
d. Is required to express a qualified opinion if the other information has a material misstatement of
fact.
17. When the prior period financial statements are not audited, the incoming auditor should state in the
auditor’s report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding opening balances of the
current period.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
18. An auditor should obtain evidence relevant to all of the following factors concerning third-party
litigation against a client except the
a. Jurisdiction in which the matter will be resolved.
b. Existence of a situation indicating an uncertainty as to the possible loss.
c. Probability of an unfavorable outcome.
d. Period in which the underlying cause for legal action occurred.
19. The auditor is required to perform procedures designed to obtain sufficient appropriate evidence to
identify all events that may require adjustment of, or disclosure in, the financial statements up to
the
a. Date of the auditor’s report.
b. Date of approval of the financial statements.
c. Date the financial statements are issued.
d. Date of the financial statements.
20. Which of the following phrases would an auditor most likely include in the auditor’s report when
expressing a qualified opinion because of inadequate disclosure?
a. Do not present fairly in a material respects.
b. Except for the omission of the information included in the Basis for Qualified Opinion
paragraph.
c. With foregoing explanation of these omitted procedures.
d. Subject to the departure from PFRS, as described above.
21. LEONOR CO.’s financial statements adequately disclose uncertainties that concern future events,
the outcome of which are not susceptible to reasonable estimation. The auditor’s report should
include:
a. An unmodified opinion
b. A “subject to” qualified opinion
c. An “except for” qualified opinion
d. An adverse opinion
22. The auditor should consider the status of legal matters up to the
a. Balance sheet date
b. Date of the auditor’s report
c. Date of approval of the financial statements
d. Date of issuance of the financial statements
23. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations,
a. Constitute sufficient appropriate evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk.
b. Are not part of the audit evidence considered to support the assertion.
c. Replace a low assessed level of control risk as audit evidence to support the assertion.
d. Complement, but do not replace, substantive tests designed to support the assertion.
24. Which of the following should be considered when forming an opinion on the audited financial
statements?
I. Whether sufficient appropriate evidence has been obtained.
II. Whether uncorrected misstatements are material, individually or in aggregate
III. The qualitative aspects of the entity’s accounting practices, including indicators of possible bias
in management’s judgments.
a. I only
b. I and III only
c. I and II only
d. I, II, and III
25. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to
provide the auditor with
a. A description and evaluation of litigation, claims, and assessments that existed at the balance
sheet date.
b. The attorneys’ opinion of the client’s historical experiences in recent similar litigation.
c. Corroboration of the information furnished by management about litigation, claims, and
assessments.
d. The probable outcome of asserted claims and pending or threatened litigation.
26. In which of the following circumstances would an auditor usually choose between expressing a
qualified opinion or disclaiming an opinion?
a. Departure from the requirements of the applicable financial reporting framework.
b. Unreasonable justification for a change in accounting principle.
c. Inability to obtain sufficient appropriate evidence.
d. Inadequate disclosure of accounting policies.
27. Which of the following is included in the introductory paragraph of the auditor’s report?
a. Identification of the financial statements audited, including the date of and period covered
by the financial statements
b. A statement that the financial statements are the responsibility of the entity’s management.
c. A statement that the audit was conducted in accordance with the Philippine Standards on
Auditing.
d. A statement that the responsibility of the auditor is to express an opinion on the financial
statements based on the audit.
28. Which of the following event occurring after the issuance of an auditor’s report most likely would
cause the auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity’s future ability to continue as a going
concern.
b. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit disclosed in the notes to the financial statements.
29. Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel
is most likely to lead to
a. An adverse opinion.
b. A qualified opinion or an adverse opinion.
c. An unmodified opinion.
d. A qualified opinion or a disclaimer of opinion.
30. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a
going concern for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the
adverse effects of future conditions and events, Harold most likely would consider, as a mitigating
factor, Jersamtan’s plans to
a. Postpone expenditures for research and development projects.
b. Purchase production facilities current being leased from a related party.
c. Strengthen internal controls over cash disbursements.
d. Discuss with lenders the terms of all debt and loan agreements.
31. Which of the following procedures should be performed by the auditor to determine the
completeness of information provided by those charged with governance and management
identifying the names of all known related parties?
I. Review prior year’s working papers for names of known related parties.
II. Inquire as to the affiliation of those charged with governance and officers with other entities.
III. Review minutes of the meetings of shareholders and those charged with governance.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
32. If a company’s external auditor expresses an unmodified opinion as a result of the audit of the
company financial statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financially sound and the financial statements are accurate.
c. Internal control is effective.
d. The auditor concludes that the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework.
33. If a misstatement is immaterial to the financial statements of the company for the current period, but
is expected to have a material effect in future periods, it is appropriate to express a/an
a. Qualified opinion
b. Unmodified opinion
c. Disclaimer of opinion
d. Adverse opinion
34. The auditor should review information provided by those charged with governance and
management identifying
I. The names of all known related parties.
II. Related party transactions.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
35. The responsibility for the identification and disclosure of related parties and transactions with such
parties rests with the
a. Auditor
b. Entity’s management
c. Financial Reporting Standards Council (FRSC)
d. Securities and Exchange Commission (SEC)
36. An auditor is concerned with completing various phases of the audit after the balance sheet date.
This subsequent period extends to the date of the
a. Delivery of the auditor’s report to the client.
b. Auditor’s report.
c. Final review of the audit working papers.
d. Public issuance of the financial statements.
37. The refusal of a client’s lawyer to provide a representation on the legality of a particular act
committed by the client is ordinarily
a. Proper ground to withdraw from the engagement.
b. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
c. Considered to be a scope limitation.
d. Sufficient reason to issue a “subject to” opinion.
38. The letter of audit inquiry should be

a. Prepared and sent by the auditor.
b. Prepared by management and sent by the auditor.
c. Prepared and sent by management.
d. Prepared by the auditor and sent by the management.
39. The primary source of information to be reported about litigations, claims, and assessments is the
a. Independent auditor
b. Client’s Management
c. Court records
d. Client’s lawyer
40. What type of opinion is most appropriate when management does not provide written
representations about its responsibility for the preparation of financial statements?
b. Disclaimer of opinion
c. Adverse opinion
d. Unmodified opinion
41. Whenever there is a scope limitation, the appropriate response is to issue a/an
b. Adverse opinion
c. Disclaimer of opinion
d. Unmodified report, a qualification of scope and opinion or a disclaimer, depending on
materiality.
42. To distinguish it from reports that might be issued by others, such as by officers of the entity, the
board of directors, or from the reports of other auditors who may not have to abide by the same
ethical requirements as the independent auditor, the auditor’s report should have an appropriate
a. Addressee
b. Title
c. Signature
d. Opinion
43. Which paragraphs of an auditor’s report on financial statements should refer to Philippine Financial
Reporting Standards?
a. Introductory and Opinion
b. Auditor’s Responsibility and Management’s Responsibility
c. Introductory and Auditor’s Responsibility
d. Management’s Responsibility and Opinion
44. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily
contain a/an
a. Disclaimer of opinion.
b. Adverse opinion.
c. “Subject to” qualified opinion.
d. Unmodified opinion with an Emphasis of Matter paragraph.
45. The date of the written representation shall be

a. After the date of the auditor’s report.
b. After the date of approval of the entity's financial statements.
c. Before the entity’s financial statements are issued.
d. As near as practicable to, but not after the date of the auditor’s report on the financial
statements.
Chapter 9 Computer Information System
1. IT has several significant effects on an entity. Which of the following would be important from an
auditing perspective?
I. The potential for material misstatement.
II. The visibility of information.
III. Changes in the organizational structure.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
2. The use of a computer changes the processing, storage, and communication of financial
information. A CIS environment may affect the following, except.
a. The accounting and internal control systems of the entity.
b. The overall objective and scope of an audit.
c. The auditor’s design and performance of test of control and substantive procedures to satisfy
the audit objectives.
d. The specific procedures to obtain knowledge of the entity’s accounting and internal control
systems.
3. The following are the benefits of using IT-based controls, except.

a. Ability to process large volume of transactions.
b. Over-reliance on computer-generated reports.
c. Ability to replace manual controls with computer-based controls.
d. Reduction in misstatements due to consistent processing of transactions.
4. Which of the following statements concerning the Internet is incorrect?

a. The Internet is a shared public network that enables communication with other entities and
individuals around the world.
b. The Internet is a private network that only allows access to authorized persons or entities.
c. The Internet is interoperable, which means that any computer connected to the Internet can
communicate with any other computer connected to the Internet.
d. The Internet is a worldwide network that allows entities to engage in e-commerce/e-business
activities.
5. In planning the portions of the audit which may be affected by the client’s CIS environment, the
auditor should obtain an understanding of the significance and complexity of the CIS activities and
the availability of data for use in the audit. The following relate to the complexity of CIS activities
except when
a. Transactions are exchanged electronically with other organizations.
b. Complicated computations of financial information are performed by the computer and/or
material transactions or entries are generated automatically without independent validation.
c. Material financial statement assertions are affected by the compute processing.
d. The volume of transactions is such that users would find it difficult to identify and correct
errors in processing.
6. The auditor shall consider the entity’s CIS environment in designing audit procedures to reduce risk
to an acceptably low level. Which of the following statements is incorrect?
a. The auditor’s specific audit objectives do not change whether financial information is processed
manually or by computer.
b. The methods of applying audit procedures to gather audit evidence are not influenced by
the methods of computer processing.
c. The auditor may use either manual audit procedures, computer-assisted techniques (CAATS), or
a combination of both to obtain sufficient appropriate audit evidence.
d. In some CIS environments, it may be difficult or impossible for the auditor to obtain certain
data for inspection, inquiry, or confirmation without the aid of a computer.
7. Regardless of the nature of an entity’s information system, the auditor must consider internal
control. In a CIS environment, the auditor must, at a minimum, have
a. A background in programming procedures.
b. An expertise in computer systems analysis.
c. A sufficient knowledge of the computer’s operating system.
d. A sufficient knowledge of the computer information system.
8. Who is ultimately responsible for the design and implementation of cost-effective controls in a CIS
environment?
a. The internal audit manager
b. The entity’s management
c. The CIS manager
d. The control group in the CIS department
9. Which of the following is not a hardware element in an IT environment?

a. Scanners
b. CD-ROM drive
c. Application programs
d. Modems
10. Which of the following computer hardware elements is not associated with data input?
a. Touch screen
b. Printer
c. Mouse
d. Optical scanner
11. A hardware element that takes the computer’s digital information and transforms it into signals that
can be sent over ordinary telephone lines is a/an
a. Intelligent terminal
b. Point-of-sale terminal
c. Terminal emulator
d. Modem
12. Uninterruptable power supplies are used in computer facilities to minimize the risk of
a. Crashing disk drive read-write heads
b. Dropping bits of data transmission
c. Failing control concurrent access to data
d. Losing data stored in main memory
13. In a computer system, the parts of the operating system program and language translator program
are stored in the
a. ROM
b. RAM
c. Magnetic tape drive
d. Magnetic disk drive
14. A characteristic that distinguishes computer processing from manual processing is

a. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
b. Errors or fraud in computer processing will be detected soon after their occurrences.
c. Most computer systems are designed so that transaction trails useful for audit purposes do not
exist.
d. Computer processing virtually eliminates the occurrence of computational errors
normally associated with manual processing.
15. An affordable yet powerful self-contained general purpose computer which consists typically of a
central processing unit (CPU), monitor, keyboard, disk drives, printer cables, and modems is a/an
a. Personal computer
b. Mainframe
c. On-line computer
d. Terminal
16. A CIS where two or more personal computers are linked together through the use of special
software and communication lines and allows the sharing of application software, data files, and
computer peripherals such as printers and optical scanners is a/an
a. LAN
b. On-line system
c. Batch processing system
d. WAN
17. A file server in a LAN is

a. A workstation that is dedicated to a single user on the LAN.
b. A computer that stores programs and data files for users of the LAN.
c. The cabling that physically interconnects the nodes of the LAN.
d. A device that connects the LAN to other networks.
18. Audit team members can use the same database and programs when their PCs share a hard disk and
printer on a LAN. Which of the following communication devices enables a PC to connect to a
LAN?
a. A network interface card (NIC) that plugs into the motherboard.
b. A fax modem that sends signals through telephone lines.
c. An internal modem that plugs into the motherboard.
d. An external modem with a cable connection to a serial port.
19. A computer information system that allows individual users to develop and execute application
programs, enter and process data, and generate reports in a decentralized manner is called a/an
a. Online system
b. Batch processing system
c. End-user computing
d. Networking
20. Which of the following statements most likely represents a disadvantage for an entity that maintains
data files on personal computers rather than manually prepared files?
a. It is usually more difficult to compare recorded accountability with the physical count of assets.
b. Random error associated with processing similar transactions in different ways is usually
greater.
c. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
d. It is usually easier for unauthorized persons to access and alter the files.
21. The following are risks specific to IT environment, except

a. Reduced segregation of duties.
b. Loss of data due to insufficient backup.
c. Increased human involvement.
d. Reliance on the functioning capabilities of hardware and software.
22. Most personal computers have both a CD-ROM drive and a hard disk drive. The major differences
between the two types of storage is that a hard disk
a. Is suitable for an online system, whereas a CD-ROM is not.
b. Provides an automatic audit trail, whereas a CD-ROM does not.
c. Has much larger storage capacity than a CD-ROM.
d. Is a direct-access storage medium, whereas a CD-ROM is a sequential-access storage medium.
23. What type of online computer system is characterized by data that are assembled from more than
one location and records that are updated immediately?
a. Online, batch processing system
b. Online, real-time processing system
c. Online, inquiry system
d. Online, downloading/uploading system
24. Misstatements in a batch computer system caused by incorrect programs or data may not be
detected immediately because
a. The processing of transactions in a batch system is not uniform.
b. There are time delays in processing transactions in a batch system.
c. The identification of errors in input data typically is not part of the program.
d. Errors in some transactions may cause rejection of other transactions in the batch.
25. Which of the following features is least likely to be found in an online, real-time processing
system?
a. Turnaround documents
b. User manuals
c. Preformatted screens
d. Automatic error correction
26. Which of the following is usually not a factor to consider in designing and implementing an online,
real-time system?
a. Priority allocation
b. Queues
c. Interrupts
d. Hardware diagnostics
27. Workstations or terminals are an integral component of online computer systems. Which of the
following statements concerning workstations is incorrect?
a. Workstations may be located either locally or at remote sites.
b. Both local and remote workstations require the use of telecommunications to link them to
the main computer.
c. Local workstations are connected directly to the main compute through cables.
d. Workstations may be used by different users, for different purposes, in different locations, all at
the same time.
28. Online computer systems use workstations or terminals that are located either locally or at remote
sites. There are two types of workstations: general purpose terminals and special purpose terminals.
General purpose terminals include the following, except
a. Basic keyboard and monitor
b. Point of sale devices
c. Intelligent terminal
d. Personal computers
29. The “test data approach”

a. Involves reprocessing actual entity data using the entity’s computer software
b. Involves reprocessing actual entity data using the auditor’s computer software
c. Is where dummy transactions are prepared by the auditor and processed under the
auditor’s control using the entity’s computer software
d. Is where actual transactions are prepared by the auditor
30. Which of the following is a primary example of source data automation?

a. A subsidiary ledger
b. A utility bill
c. Point-of-sale scanners in malls
d. A bill of lading
31. NAWALAN NANG, Inc. stated in one of its mission statements that “positive control of each
package will be maintained by utilizing . . . electronic tracking and tracing systems.” NAWALAN
NANG 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 the
packages
32. In a file-oriented approach to data and information, data is maintained in many separate files. This
may create problems for organizations because of
a. Multiple users
b. Multiple transaction files
c. Multiple master files which may contain redundant data
d. A lack of sophisticated file maintenance software
33. __________ refers to the combination of the database, the Database Management System (DBMS),
and the application programs that access the database through the DMS
a. Data warehouse
b. Database administrator
c. Database system
d. Database manager
34. Who is the individual responsible for the database?

a. Data coordinator
b. Database master
c. Database administrator
d. Database manager
35. Which feature of many database systems simplifies the creation of reports by allowing users to
specify the data elements desired and the format of the output?
a. Report generator
b. Report writer
c. Report printer
d. Report creator
36. Which of the following is probably the most significant effect of database technology on
accounting?
a. Quicker access to and greater use of accounting information in decision-making
b. Replacement of the double-entry system
c. Change in the nature of financial reporting
d. Elimination of traditional records such as journals and ledgers
37. An entity should have a disaster recovery plant to ensure that data processing capacity can be
restored as smoothly and quickly as possible. The following would typically be part of an adequate
disaster recovery plan, except
a. A system upgrade due to operating system software changes.
b. Backup computer and telecommunication facilities.
c. Scheduled electronic vaulting of files.
d. Uninterruptible power systems installed for key stem components.
38. Which of the following statements concerning computer program modification is incorrect?
a. After the amended program has received final approval, the change is implemented by
replacing the production version with the developmental version.
b. During the modification process, the developmental version of the program must be kept
separate from the production version.
c. When a program change is submitted for approval, a list of all required updates should be
complied an then approved by management and program users.
d. Only material program changes should be thoroughly tested and documented.
39. A collection of data that is shared and used by a number of different users for different purposes is a
a. Database
b. Memory
c. File
d. Record
40. Which of the following computer software is used to create, maintain, and operate a database?
a. Application software
b. Systems software
c. Database management system (DBMS)
d. Database administrator
41. The two important characteristics of a database system are

a. The database and the DBMS
b. Data sharing and data independence
c. The DBMS and data sharing
d. The DBMS and data independence
42. To protect the integrity of the database, data sharing by different users requires organization,
coordination, rules, and guidelines. The individual responsible for managing the database resource
is the
a. Programmer
b. Database administrator
c. User
d. CIS manager
43. An auditor who wishes to trace data through several application programs should know what
programs use the data, which files contain the data, and which printed reports display the data. In a
database system, the information could be found in a
a. Decision table
b. Data dictionary
c. Database schema
d. Data encryptor
44. Which of the following is the greatest advantage of a database system?

a. Data redundancy can be reduced.
b. Backup and recovery procedures are minimized.
c. Multiple occurrences of data items are useful for consistency checking.
d. Conversion to a database system is inexpensive and can be accomplished quickly.
45. Which of the following statements most likely represents a disadvantage for an entity that maintains
data files on personal computers rather than manually prepared files?
a. It is usually more difficult to compare recorded accountability with the physical count of assets.
b. Random error associated with processing similar transactions in different ways is usually
greater.
c. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
d. It is usually easier for unauthorized persons to access and alter the files.
46. Which of the following best describes the process called authentication?
a. The system verifies the identity of the user.
b. The user identifies himself/ herself to the system.
c. The user indicates to the system that the transaction was processed correctly.
d. The system verifies that the user is entitled to enter the transactions requested.
47. Which of the following is the purpose of input controls?

a. To ensure the authorization of access to data files.
b. To ensure the completeness, accuracy, and validity of updating.
c. To ensure the completeness, accuracy, and validity of input.
d. To ensure the authorization of access to program files.
48. If a control total were to be computed on each of the following data items, which would best be
identified as a hash total for a payroll IT application?
a. Employee numbers
b. Total debit and credit amounts
c. Gross wages earned by employees
d. Total hours worked
49. An entity uses the account code 699 for depreciation expense. However, one of the company data
input clerks often codes depreciation expense as 996. The highest account code in the company’s
system is 700. What programmed control procedure would detect this error?
a. Pre-data input check
b. Sequence check
c. Valid-code test
d. Valid-character test
50. Which of the following provides the most valuable information for detecting unauthorized input
from a terminal?
a. User error report
b. Transaction Log
c. Error File
d. Console log printout
51. When erroneous data are detected by computer program controls, such data may be excluded from
processing and printed on an error report. Who should review and follow up this error reports?
a. System Analyst
b. Data control group
c. Computer Operator
d. Computer programmer
52. Which of the following input validation checks is least likely to be appropriate in an online, real-
time system?
a. Sign Check
b. Sequence check
c. Reasonableness check
d. Redundant data check
53. A receiving clerk keyed in a shipment from a remote terminal and inadvertently omitted the
purchase order number. Which of the following controls would most likely detect this error?
a. Completeness Check
b. Compatibility Check
c. Sequence Check
d. Reasonableness Test
54. An entity’s labor distribution report requires extensive corrective each month because of labor
hours charged to inactive jobs. Which of the following data processing input controls appears to be
missing?
a. Validity Check
b. Limit Check
c. Missing data check
d. Control total
55. What is the appropriate term for the process of monitoring, evaluating, and modifying a system?
a. Feasibility Study
b. Maintenance
c. Implementation
d. Analysis
56. Program documentation is a control designed primarily to provide reasonable assurance that:
a. Programs are kept up to date and perform as intended.
b. No one uses the computer hardware for personal reasons.
c. Programs are free of syntax and logic errors.
d. Programmers have access to operational materials.
57. Which of the following groups should have the operational responsibility for the accuracy and
completeness of computer based information?
a. External Auditors
b. Internal Auditors
c. Users
d. Top Management
58. Which of the following is the best method to prevent unauthorized alteration of online records?
a. Computer Sequence Check
b. Computer Matching
c. Database access controls
d. Key verification
59. The following are database administrator’s responsibilities, except:

a. Develop application programs to access the database
b. Design the content and organization of the database
c. Protect the database and its software
d. Monitor and improve the efficiency of the database
60. The following statements are true, except:

a. The primary methods of control usually, involve application controls.
b. Centralized control over the selection and acquisition off hardware and software is a major
concern.
c. Some conventional controls such as segregation of duties may not be feasible.
d. As their use becomes more sophisticated, the degree of concern regarding physical security
increases.
61. A system analyst should have access to each of the following, except:
a. Edit Criteria
b. Source Code
c. Password identification tables
d. Users Procedures
62. The significance of hardware controls is that they

a. Ensure that run-to-run totals in application systems are consistent.
b. Reduce the incidence of user input errors in online systems.
c. Ensure the correct programming of operating system functions.
d. Assure that machine instructions are executed correctly.
63.
Chapter 10 Other Reporting Responsibilities
1. Financial statements prepared in accordance with a financial reporting framework designed to meet
the financial information needs of specific users are referred to as
a. Special purpose financial statements
b. Special purpose framework
c. General purpose financial statements
d. Specific purpose financial statements
2. When an auditor reports on financial statements prepared on an entity’s income tax basis, the
auditor’s report should
a. State the basis of presentation of the financial statements.
b. Disclaim the opinion on whether the statements were examined in accordance with Philippine
Standards on Auditing.
c. Not express an opinion on whether the statements are presented in accordance with the tax
basis of accounting used.
d. Include an explanation of how the results of operations differ from the cash receipts and
disbursements basis of accounting.
3. An auditor is reporting on a statement of cash receipts and disbursements. This statement is best
referred to in the opinion paragraph by which of the following descriptions?
a. “Results of operations arising from cash transactions”
b. “Cash receipts and disbursements”
c. “Income statement resulting from cash transactions”
d. “Statement of cash flows”
4. An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor
has disclaimed an opinion on the financial statements taken as a whole provided the
a. Report on the accounts receivable is presented separately from the disclaimer of opinion
on the financial statements.
b. Auditor also reports on the current asset portion of the entity’s statement of financial position.
c. Use of the report on the accounts receivable is restricted.
d. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the
5. Which of the following procedures is a practitioner least likely to perform during a review
engagement?
a. Comparing the financial statements with anticipated results in budgets and forecasts
b. Studying the relationships of financial statement elements expected to conform to predictable
patterns
c. Inquiring of management about actions taken at the board of director’s meetings
d. Observing the safeguards over access to and use of assets and records
6. An auditor may report on summary financial statements that are derived from complete audited
financial statements if the
a. Auditor indicates whether the information in the summary financial statements is
consistent with the audited financial statements from which it was derived.
b. Summary financial statements are distributed only to management and the board of directors.
c. Auditor describes the additional review procedures performed on the summary financial
statements.
d. Summary financial statements are presented in comparative form with the prior year’s
summarized financial statements.
7. In the auditor’s report on summary financial statements that are derived from an entity’s audited
financial statements, a CPA should indicate that the
a. CPA has audited and expressed an opinion on the complete financial statements.
b. CPA expresses limited assurance that the financial statements are presented in accordance with
PFRS.
c. Summary financial statements are not fairly presented in all material respects.
d. Summary financial statements are prepared in accordance with a special purpose financial
reporting framework.
8. Which of the following procedures should a practitioner perform during an engagement to review
an entity’s financial statements?
a. Examining cash disbursements in the subsequent period for unrecorded liabilities
b. Sending bank confirmation letters to the entity’s financial institutions
c. Obtaining a client representation letter from members of management
d. Communicating material internal control weaknesses during assessment of control risk
9. For the purpose of expressing negative assurance in the review report, the practitioner should obtain
sufficient appropriate evidence primarily through
a. Inquiry and Confirmation
b. Analytical procedures and substantive tests of details of transactions and account balances.
c. Confirmation and Test of controls
d. Inquiry and Analytical Procedures
10. Which of the following procedures ordinarily should be applied when an independent auditor
conducts a review of interim financial information of an entity?
a. Verify changes in key account balances
b. Perform cut-off test for cash receipts and disbursements
c. Read the minutes of the board of director’s meetings
d. Inspect the open purchase order file.
11. The report on agreed upon procedures engagement would contain

a. Identification of the purpose for which the agreed upon procedures were performed.
b. An expression of positive assurance based on the specific procedures performed.
c. A statement that the auditor is independent of the entity.
d. A general description of the procedures performed.
12. An accountant may accept an engagement to apply agreed upon procedures that are not sufficient to
express an opinion on one or more financial statements provided that
a. The accountant is also the entity’s continuing auditor.
b. Distribution of the accountant’s report is restricted.
c. The financial statements are prepared in accordance with a special purpose financial reporting
framework
d. The accountant’s report does not enumerate the procedures performed.
13. Which of the following is least likely to be included in an agreed-upon procedures engagement
report?
a. Identification of the purpose for which the agreed upon procedures were performed.
b. A summary of procedures performed.
c. Limited assurance on the information presented
d. Use of the report is restricted
14. When the examination of prospective financial information is affected by conditions that preclude
applications of one or more procedures considered necessary in the circumstances, the auditor
should withdraw from the engagement or
a. Disclaim the opinion
b. Express an adverse opinion
c. Express a qualified opinion
d. Issue an unmodified report
15. An entity uses the account code 699 for depreciation expense. However, one of the company data
input clerks often codes depreciation expense as 996. The highest account code in the company’s
system is 700. What programmed control procedure would detect this error?
a. Pre-data input check
b. Sequence check
c. Valid-code test
d. Valid-character test
16. An auditor who uses the work of an expert may refer to the auditor’s expert in the auditor’s report if
the
a. Expert is employed by the entity
b. Expert’s work provides the auditor greater assurance of reliability.
c. Auditor expresses a qualified opinion or an adverse opinion related to the work of the
expert.
d. Auditor indicated a division of responsibility related to the work of the expert.
17. A paragraph included the auditor’s report that refers to a matter appropriately presented or disclosed
in the financial statements that, in the auditor’s judgement, is of such importance that if it is
fundamental to user’s understanding of the financial statements is called
a. Explanatory paragraph
b. Other matter paragraph
c. Basis for Modified Opinion Paragraph
d. Emphasis of Matter paragraph
18. Which of the following terms is used in the standard to describe the effects on the financial
statements of misstatements or the possible effects of the financial statements, if any, that are
undetected due to an inability to obtain sufficient appropriate audit evidence?
a. Persuasive
b. Pervasive
c. Material
d. Extensive
19. The date of the review report should

a. Not be earlier than the date on which the financial statements were approved by
management
b. Be earlier than the date on which the financial statements were approved by management
c. Coincide with the date of the financial statements
d. Not be later than the date of the financial statements
20. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its
knowledge and belief, an entity’s expected financial position, result of operations, and cash flows.
Such prospective financial statements are
a. Partial presentations
b. Financial projections
c. Financial forecasts
d. Pro forma financial statements
21. The party responsible for assumptions identified in the preparation of prospective financial
statements is usually
a. The client’s management
b. The client’s independent auditor
c. The reporting accountant
d. A third party lending institution
22. Each page of the financial information compiled by the accountant should include the following
reference, except
a. “Unaudited”
b. “Compiled without audit or review”
c. “Refer to compilation report”
d. “Compiled; Negative Assurance Expressed”
23. Negative assurance may be expressed when an accountant is engaged to report agreed-upon
procedures to specified
I. Elements of a financial statement
II. Accounts of a financial statement
a. I only
b. II only
c. Both I and II
d. Neither I nor II
24. When the accountant believes that the presentation and disclosure of the prospective financial
information is not adequate, the auditor should
I. Express a qualified or adverse opinion
II. Withdraw from the engagement
a. I only
b. II only
c. Either I or II
d. Neither I nor II
25. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February
2008, applies to
a. Reviews of any historical financial information of an audit client.
b. Reviews of any historical financial information by a practitioner other than the entity's
auditor.
c. Reviews of historical financial or other information by a practitioner other than the entity's
auditor.
d. Reviews of historical financial or other information of an audit client.
26. An auditor may accept an engagement to perform specified procedures on the specific subject
matter of specified elements, accounts, or items of a financial statement if
a. The report does not list the procedures performed.
b. The financial statements are prepared in accordance with a special purpose framework.
c. Use of the report is restricted.
d. The auditor is also the entity's continuing auditor.
27. The distribution of which of the following types of reports is unrestricted?

a. Audits and reviews
b. Reviews and agreed-upon procedures
c. Examinations and agreed-upon procedures
d. Audits, examinations, reviews, and agreed-upon procedures
28. When performing a compilation engagement, the accountant is required to

a. Assess internal controls.
b. Make inquiries of management to assess the reliability and completeness of the information
provided.
c. Verify matters and explanations.
d. Obtain a general knowledge of the business and operations of the entity.
29. When providing limited assurance that the financial statements of an entity require no material
modifications to be in accordance with Philippine Financial Reporting Standards the practitioner
should
a. Confirm with the entity's lawyer that material loss contingencies are disclosed.
b. Understand the accounting principles of the industry in which the entity operates.
c. Develop audit programs to determine whether the entity's financial statements are fairly
presented.
d. Assess the risk that material misstatements could occur in a financial statement assertion.
30. Which of the following would not be included in a practitioner's report based upon a review of an
entity's financial statements?
a. A statement that the financial statements are the responsibility of the company's management.
b. A statement describing the principal procedures performed.
c. A statement that the review was conducted in accordance with PSA.
d. A statement describing the practitioner's conclusions based upon the results of the review.
31. An agreed-upon procedures engagement may involve the auditor in performing certain procedures
concerning
I. Individual items of financial data
II. A financial statement
III. A complete set of financial statements
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

Auditing Theory: (Test Bank) Gerardo S. Roque

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Auditing Theory: (Test Bank) Gerardo S. Roque

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AUDITING

ARANAS, Katrina Mae | ARBOTANTE, Charris Mae | AQUINO, Nir

2. Which of the following is not an assurance service?

3. What level of assurance is provided by the auditor in an audit engagement?

4. In an engagement to perform agreed-upon procedures, an auditor is engaged to

5. The purpose of an audit of financial statements is to

6. The primary reason for a financial statement audit by an independent CPA is to

8. Before an effectiveness audit can be performed, there must be

9. Which of the following elements does not relate to audit quality?

12. How many separate parties are involved in an assurance engagement?

13. The Philippine Framework for Assurance Engagements

27. Assurance services differ from consulting services in that they

30. The following statements relate to internal auditing? Which is incorrect?

31. The term “efficiency” in performance auditing refers to

34. Relevant criteria contribute to conclusions that are

37. Reports on agreed-upon procedures are intended to be distributed

38. The internal auditing department's responsibility for deterring fraud is to

41. What is the proper organizational role of internal auditing?

43. Which is not one of the three phases in an operational audit?

46. Independent auditing can best be described as

47. The internal auditing profession has advanced primarily as a result of

2. The practice of Accountancy includes:

10. Which of the following is a function of the BOA?

16. Which of the following is not represented in the AASC?

18. An applicant for the CPA licensure examination should be

36. The following circumstances may create intimidation threat, except

52. Accepting gifts or hospitality (unless inconsequential or trivial), might create

2. Before accepting an engagement to audit a new client, an auditor is required to:

20. Which is not a similarity between external and internal auditors?

24. The coordination of activities between internal and external auditors

29. When issuing an unmodified auditor’s report, the auditor

40. Analytical procedures used in planning an audit should focus on

42. The following are transaction cycles, except

44. Application controls are

47. An auditor assesses control risk in terms of

3. The auditor’s risk assessment procedures

10. An auditor must assess control risk as high when he has

20. What primarily differentiates fraud from an error

21. An auditor’s flowchart of an entity’s information system is a diagrammatic representation that

24. The following are subcomponents of the control environment except

31. IT benefits an entity’s internal control by enabling an entity to

32. The following are components of internal control except

33. The inherent limitations in an entity’s internal control system include

34. Which of the following statements concerning internal control is incorrect?

37. The basic premise underlying analytical procedures is that

39. Which of the following statements concerning analytical procedures is true?

40. An auditor obtains an understanding of the nature of the entity to

42. The purpose of an entity’s accounting information and communication system is to

3. Audit evidence comprise

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

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

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

17. Which of the following statements concerning audit objectives is incorrect?

21. The objective of tests of details of transactions performed as substantive tests is to

26. The auditor should apply analytical procedures

a. I, II and III only

a. I, III, and IV only

40. Tracing bills of lading to sales invoices provides evidence that

5. Audit sampling involves the

7. The two general approaches to audit sampling are:

8. The principal methods of selecting samples are the use of

13. Which of the following statements is true?

14. The following are examples of nonsampling risk, except