AUDITING THEORY TESTBANKS /
Which assertion would this test
REVIEWERS
1. When an auditor believes that an
understanding with the client has not been
established, he or she should ordinarily
a. Perform the audit with increase
professional skepticism.
b. Decline to accept or perform the audit.
c. Assess control risk at the maximum
level and perform a primarily substantive
audit.
d. Modify the scope of the audit to reflect
an increased risk of material
misstatement due to fraud.
2. An auditor should design the written audit
program so that
a. All material transactions will be selected
for substantive testing.
b. Substantive tests prior to the balance
sheet date will be minimized.
c. The audit procedures selected will
achieve specific audit objectives.
d. Each account balance will be tested
under either tests of controls or tests of
transactions.
3. Which of the following fraudulent activities
most likely could be perpetrated due to the
lack of effective internal controls in the
revenue cycle?
a. Fictitious transactions may be recorded
that cause an understatement of
revenues and overstatement of
receivables.
b. Claim received from customers for
goods returned may be intentionally
recorded in other customer’s accounts.
c. Authorization of credit memos by
personnel who receive cash may permit
the misappropriation of cash.
d. The failure to prepare shipping
documents may cause an
overstatement of inventory balances.
4. Accepting an engagement to examine an
entity’s financial projection most likely would
be appropriate if the projection were to be
distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a
prospectus or a registration statement.
c. A bank with which the entity is
negotiating for a loan.
d. All stockholders of record as of the
report date.
5. In assessing control risk for purchases, an
auditor vouches a sample of entries in the
voucher register to the supporting
documents.
of controls most likely support?
a. Completeness
c. Valuation or allocation
b. Existence or occurrence
d. Rights and obligations
6. Which of the following comparisons would an
auditor most likely make in evaluating an
entity’s costs and expenses?
a. The current year’s accounts receivable
with the prior year’s accounts
receivable.
b. The current year’s payroll expense with
the prior year’s payroll expense.
c. The budgeted current year’s sales with
the prior year’s sales.
d. The budgeted current year’s warranty
expense with the current year’s
contingent liabilities.
7. An auditor is planning an audit engagement
for a new client in a business that is
unfamiliar to the auditor. Which of the
following would be the most useful source of
information for the auditor during the
preliminary planning stage, when the auditor
is trying to obtain a general understanding of
audit problems that might be encountered?
a. Client manuals of accounts and charts
of accounts.
b. Industry Audit Guides.
c. Prior year documentation of the
predecessor auditor.
d. Latest annual and interim financial
statements issued by the client.
8. An auditor’s report on financial statements
prepared in accordance with the financial
reporting provisions of a contract (that is, a
special purpose framework) to comply with
the provisions of that contract should include
all of the following, except
a. An opinion as to whether the financial
statements are presented fairly, in all
material respects, in accordance with
the financial reporting provisions of the
contract.
b. A statement that indicates the basis of
accounting used.
c. An opinion as to whether the basis of
accounting used is appropriate under
the circumstances.
d. Reference to the note to the financial
statements that describes the basis of
presentation.
9. An entity’s management is responsible for
the preparation and fair presentation of the
financial statements. Its responsibility
includes the following, except
 a. Designing, implementing, and b. Workpaper
maintaining internal control relevant to d. Audit
the preparation and presentation of memorandum
financial statements.
b. Making accounting estimates that are 13. The auditor is required to complete the
reasonable in the circumstances. administrative process of assembling the
c. Selecting and applying appropriate final audit file on a timely basis after the date
accounting policies. of the auditor’s report. The time limit within
d. Assessing the risks of material which to complete the assembly of the audit
misstatement of the financial file is ordinarily
statements. a. Not more than 30 days after the date of
the auditor’s report.
10. Which of the following statements best b. Not more than 60 days after the date of
expresses the objective of the traditional the auditor’s report.
audit of financial statements? c. Not more than 90 days after the end of
a. To express an opinion on the fairness the entity’s reporting period.
with which the statements present d. Not more than 60 days after the date the
financial position, financial performance, entity’s financial statements are
and cash flows in accordance with authorized for issue.
Philippine Financial Reporting
Standards. 14. According to Section 9(A) of the IRR, the
b. To express an opinion on the accuracy Commission upon the recommendation of
with which the statements present the Board, shall create an auditing standard
financial position, financial performance, setting body to be known as the
and cash flows in accordance with a. Auditing and Assurance Standards
Philippine Financial Reporting Council (AASC)
Standards. b. Auditing Standards and Practices
c. To make suggestions as to the form or Council (ASPC)
content of the financial statements or to c. Auditing Standards Board (ASB)
draft them in whole or in part. d. Auditing Standards Council (ASC)
d. To assure adoption of sound accounting
policies and the establishment and 15. The following documents shall be submitted
maintenance of internal control. by applicants for the CPA licensure
examination, except
11. Which of the following statements a. Certificate of Live Birth in National
concerning related party transactions is Statistics Office (NSO) security paper.
correct? b. Marriage contract in NSO security paper
a. In the absence of evidence to the for all married applicants.
contrary, related party transactions c. Marriage contract in NSO security paper
should be assumed to be outside the for married female applicants.
ordinary course of business. d. Transcript of records with indication
b. The audit procedures directed toward therein of date or graduation and
identifying related party transactions Special Order number unless it is not
should include considering whether required.
transactions are occurring but are not
being given proper accounting 16. The following documents are to be submitted
recognition. by a foreign applicant whose letter/document
c. An auditor should determine whether a and the copy of the law on foreign reciprocity
particular transaction would have of his/her country/state are satisfactory to the
occurred if the parties had not been BOA, except
related. a. Certificate of Religious Affiliation.
d. An auditor should substantiate that b. Original or authenticated copy of
related party transactions were transcript of records or equivalent
consummated on terms equivalent to document of the course for licensure
those that prevail in arm’s-length examination where he/she studied, duly
transactions. authorized or accredited by his/her
country/state.
12. The auditor shall assemble the audit c. The original or certified copy of any
documentation in a/an official documents issued by the Bureau
a. Working paper of Immigration and Deportation allowing
c. Audit file the applicant to enter and reside in the
Philippines.
 d. Certificate of Registration or its
equivalent stating that the foreign
applicant is duly registered or licensed
CPA or its equivalent in his/her
country/state.
17. Which part of the Code of Ethics applies to
professional accountants in public practice?
a. Part A
c. Part C
b. Part B
d. Part D
18. 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 c.
Professional competence and due care
b. Objectivity
d. Confidentiality
19. 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.
20. On which of the following safeguards a
professional accountant in public practice
cannot rely solely to reduce threats to an
acceptable level?
a. Safeguards created by the profession,
legislation or regulation.
b. Firm-wide safeguards.
c. Engagement specific safeguards.
d. Safeguards within the client’s systems
and procedures.
21. If the fee quoted for a professional service is
so low, it may be difficult for the CPA to
perform the engagement in accordance with
applicable technical and professional
standards for that price. This situation may
create a self-interest threat to
a. Professional competence and due care
c. Integrity
b. Objectivity
d.
Professional behavior
22. Which of the following is not a contingent
fee?
a. A fee that is dependent upon the
approval of the assurance client’s loan
application
b. An audit fee that is based on 5% of the
client’s adjusted net income for the
current year
c. A fee that is fixed by a court or other
public authority
d. An arrangement whereby no fee will be
charged unless a specified finding or
result is attained
23. A self-interest threat would be created if the
firm, or a member of the assurance team,
makes a loan to an assurance client that is
not a bank or similar institution, or
guarantees such an assurance client’s
borrowing. The self-interest threat created
would be so significant that no safeguard
could reduce the threat to an acceptable
level unless the loan or guarantee is
a. Made under normal lending terms,
procedures and requirements
b. Immaterial to the firm or the member of
the assurance team
c. Immaterial to both or the member of the
assurance team and the assurance
client
d. Made under normal lending terms,
procedures and requirements and the
loan or guarantee is immaterial to both
the firm or the member of the assurance
team and the assurance client
24. 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 tests of
controls
25. 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
experience with entity
c. Are designed to detect material
misstatement at the assertion level of
classes of transactions, account
balances and disclosures
d. Are designed to test the effectiveness of
the entity’s controls
26. Which of the following statements
concerning audit risk and its components is
incorrect?
a. Regardless of the assessed levels of
inherent and control risks, the auditor
 should always perform some
substantive procedures for material
account balances and classes of
transactions
b. The higher the assessment of inherent
and control risks, the more evidence the
auditor should obtain from the
performance of substantive procedures
c. The assessed level of inherent risk need
not be considered in determining the
nature, timing, and extent of substantive
procedures required to reduce audit risk
to an acceptably low level
d. After obtaining an understanding of the
accounting and internal control systems,
the auditor should make a preliminary
assessment of control risk, at the
assertion level, for each material
account balance or class of transactions
27. The following are components of internal
control
a. Control activities
c. Control environment
b. The entity’s risk assessment process
d. Business risk
28. An entity’s internal control system contains
manual elements and often contains
automated elements. Manual elements in
internal control may be less reliable than
automated elements because
a. Manual control elements can be more
easily bypassed, ignored, or overridden
and they also more prone to simple
errors and mistakes
b. Manual control elements facilitate the
additional analysis of information
c. Consistency of application of manual
control elements can always be
assumed
d. Manual control elements include
reliance on systems or programs that
are inaccurately processing data,
processing inaccurate date, or both
29. Which of the following components of an
entity’s internal control includes development
and use of training policies that
communicate prospective roles and
responsibilities to employees?
a. Monitoring of controls
c. Control
environment
b. Control activities
d. Information and
communication
30. Control activities relate to the following,
except
a. Segregation of duties
b. Performance reviews
c. An internal audit function
d. Authorization
31. Internal control should be designed to
provide reasonable assurance that
a. Management’s planning, organizing,
and directing processes are properly
evaluated
b. Management’s plans have not been
circumvented by employee collusion
c. Material errors or fraud will be
prevented, or detected and corrected
within a timely period by employees in
the course of performing their assigned
duties
d. The internal auditing department’s
guidance and oversight of
management’s performance is
accomplished economically and
efficiently
32. An audit is conducted on the premise that
management and, where appropriate, those
charged with governance, have
acknowledged and understand that they
have responsibilities that are fundamental to
the conduct of an audit in accordance with
PSAs. Which of t6he following is not one of
those responsibilities?
a. The preparation of financial statements
in accordance with relevant
pronouncements issued by the ASCC
b. The establishment and maintenance of
an adequate internal control system that
is necessary to enable the preparation
of financial statements that are free from
material misstatement, whether due to
fraud or error
c. To provide the auditor with access to all
information that is relevant to the
preparation of the financial statements
such as records, documentation, and
other matters
d. To provide the auditor with unrestricted
access to persons within the entity from
which the auditor determines it
necessary to obtain evidence
33. In performing an audit of financial
statements, the auditor should obtain a
sufficient knowledge of a client’s business
and industry to
a. Develop an attitude of professional
skepticism concerning management’s
financial statement assertions
b. Make constructive suggestions
concerning improvements to the client’s
internal control
c. Evaluate whether the aggregation of
known misstatements causes the
financial statements taken as a whole to
be materially misstated
 d. Understand the events and transactions
that may have an effect on the client’s
financial statements
34. The establishment of an overall audit
strategy involves
I. Determining the characteristics of the
engagement that define its scope
II. Ascertaining the reporting objectives of
the engagement to plan the timing of the
audit and the nature of the
communications required
III. Considering the important factors that
will determine the focus of the
engagement team’s efforts.
a. I and II only
c. I and III only
b. II and III only
d. I, II and III
35. Which of the following should be included in
the audit plan?
I. The nature, timing and extent of planned
risk assessment procedures, as
determined under PAS 315 (Identifying
and Assessing the Risks of Material
Misstatements trough Understanding
the Entity and its Environment)
II. The nature, timing and extent of planned
further audit procedures at the assertion
level, as determined under PSA 330
(The Auditor’s Responses to Assessed
Risks)
b. I only
c. Both I and II
c. II only
d. Neither I nor II
36. Which of the following matters would an
auditor most likely consider when
establishing the scope of the audit?
a. The expected audit coverage, including
the number and locations of the entity’s
components to be included
b. The entity’s timetable for r4epoting,
such as at interim and final stages
c. The discussion with the status of audit
work throughout the engagement and
the expected deliverables resulting from
the audit procedures
d. Audit areas where there is a higher risk
of material misstatement
37. Audit programs are modified to suit the
circumstances of particular engagements. A
complete audit progr5am usually should be
developed
a. When the engagement letter is prepared
b. After obtaining an understanding of the
control environment and control
activities components of the entity’s
internal control
c. After the auditor has obtained an
understanding of the entity and its
environment, including its internal
control and assessed the risks of
material misstatement
d. Prior to beginning the actual audit work
38. In connection with the planning phase of an
audit engagement, which of the following
statements is always correct?
a. Final 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
39. An adequate system of internal controls is
most likely to detect a fraud perpetrated by a
a. Group of employees in collusion
b. Single employee
c. Group of managers in collusion
d. Single manager
40. Controls should be designed to provide
reasonable assurance that
a. Organizational objectives and goals will
be achieved economically and efficiently
b. Management’s plans have not been
circumvented by worker collusion
c. The internal audit activity’s guidance
and oversight of management’s
performance is accomplished
economically and efficiently
d. Management’s planning, organizing,
and directing processes are properly
evaluated
41. 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
c. Specifically
developed criteria
b. Established criteria
d. General criteria
42. In an assurance engagement, the outcome
of the evaluation or measurement of a
subject matter against criteria is called
a. Subject matter information
c. Assurance
b. Subject matter
d. Conclusion
43. The following are characteristics of “direct
reporting” assurance engagements, except
a. The subject matter information is in the
form of an assertion by the responsible
party that is made available to the
intended users
b. The subject matter information is
provided to the intended users in the
assurance report
c. The practitioner either directly performs
the evaluation or measurement of the
subject matter or obtains a persuasive rather than conclusive
representation from the responsible
party that has performed the evaluation
or measurement
d. The representation of the responsible
party that has performed the evaluation
or measurement of the subject matter is
not available to the intended users
44. What type of assurance engagement is
involved when the practitioner expresses a
negative form of conclusion?
a. Reasonable assurance engagement
b. Negative assurance engagement
c. Assertion-based assurance engagement
d. Limited assurance engagement
45. Assurance engagement risk is the risk
a. That the practitioner expresses an
inappropriate conclusion when the
subject matter information is materially
misstated
b. Of expressing an inappropriate
conclusion when the subject matter
information is not materially misstated
c. Through loss from litigation, adverse
publicity, or other events arising in
connection with a subject matter
reported on
d. Of expressing an inappropriate
conclusion when the subject matter
information is either materially misstated
or not materially misstated
46. The following statements relate to the
performance of an assurance engagement
other than an audit or review of historical
financial information covered by PSAs and
PSREs. Which is incorrect?
a. Those persons who are perform the
engagement should collectivity possess
the necessary professional competence
b. The practitioner is not allowed to use the
work of persons from other professional
disciplines
c. The practitioner should consider
materiality and assurance engagement
risk when planning and performing an
assurance engagement
d. The assurance report should be in
writing and should contain a clear
expression of the practitioner’s
conclusion about the subject matter
information
47. Reducing assurance engagement risk to
zero is very rarely attainable or cost
beneficial as a result of the following factors,
except
a. The use of selective testing
b. The fact that much of the evidence
available assurance knowledge is
c. The practitioner may not have the
required assurance knowledge and
skills to gather and evaluate evidence
d. The use of judgment in gathering and
evaluating evidence and forming
conclusions based on that evidence
48. The Philippine Standards on Quality Control
(PSQCs) are to be applied to
a. Assurance engagements only
b. Review engagements only
c. Compilation and review engagements
only
d. All services that fall under the AASC’s
engagement standards
49. The overall objectives of the auditor in
conducting an audit of financial statements
are
I. To obtain reasonable assurance about
whether the financial statements as a
whole are free from material
misstatements, whether caused by fraud
or error
II. To report on the financial statements
III. To obtain conclusive rather than
persuasive evidence
IV. To detect all misstatements, whether
due to fraud or error
a. I and II only
c. I, II and III only
b. II and IV only
d. I, II, III and IV
50. The auditor is required to maintain
professional skepticism throughout the audit.
Which of the following statements
concerning professional skepticism is false?
a. A belief that management and those
charged with governance are honest
and have integrity relieves the auditor of
the need to maintain professional
skepticism
b. Maintaining professional skepticism
throughout the audit reduces the risk of
using inappropriate assumptions in
determining the nature, timing and
extent of the audit procedures and
evaluating the results thereof
 c. Professional skepticism is necessary to
the critical assessment of audit evidence
d. Professional skepticism is an attitude
that includes questioning contradictory
audit evidence obtained
51. Professional judgment
a. Should be exercised in planning and
performing an audit of financial
statements but need not be documented
b. Can be used as the justification for the
decisions made by the auditor that are
not supported by the facts and
circumstances of the engagement
c. Is necessary in the evaluation of
management’s judgments in applying
the entity’s applicable financial reporting
framework
d. Is not used in making decisions about
materiality and audit risk
52. The internal auditing profession has
advanced primarily as a result of
a. Increased interest by Bachelor of
Science in Accountancy (BSA)
graduates and experienced auditors
b. Job qualification specifications that
included added emphasis on
background knowledge and skills
c. The limitation of financial statement
audit scope
d. Increased complexity and sophisticated
of business operations
53. As defined in PSA 500, _________ is an
individual or organization possessing the
expertise in a field other than accounting or
auditing, whose work in that field is used by
the entity to assist the entity in preparing the
financial statements
a. Auditor’s expert
c. Auditor’s internal expert
b. Management’s expert
d. Auditor’s external
expert
54. 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
the influence of others may have on the
professional 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’s
competence, capabilities and objectivity
are important factors in relation to the
reliability of any information prepared by
the management’s expert
55. 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
56. 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 timeless of such evidence
57. 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 generally accepted auditing
standards
58. In determining whether transactions have
been recorded, the direction of the audit
testing should be from the
a. General journal entries
c. General ledger
balances
b. Original source documents
d. Adjusted trial balance
59. 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
c. Auditor judgment
b. Audit risk
d. Reasonable
assurance
60. An auditor who uses the work of an expert
may refer to and identify the 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 indicates a division of
responsibility related to the work of the
expert
61.) When an auditor increases the assessed
level of control risk because certain control
procedures were determined to be ineffective, the
auditor would most likely increase the
a.) Tests of controls b.) Extent of tests of
details c.) Tolerable risk d.) Population size
62.) Xavier, CPA is currently auditing the financial
statements of the Polk Corporation. At the
moment, Xavier is assessing the control risk
surrounding the recognition of sales revenue.
The CPA has become concerned that revenues
are understated. The CPA thinks the company
may be shipping merchandise to false customers
with no sales invoice (or other record) being
prepared. If true, company employees are using
this scheme to steal goods from the company. In
assessing the possibility of this problem, which of
the following is the auditor most likely to do?
a) Take a sample of sales invoices and
match those documents to the appropriate
bill of lading or other shipping document.
b) Take a sample of receiving reports and
match those documents to the appropriate
sales invoice.
c) Take a sample of cash receipts and
match those payments to the appropriate
sales invoice.
d) Take a sample of bills of lading (or
other shipping document) and match
those documents to the appropriate sales
invoice.
63.) An auditor is assessing the level of inherent
risk in an audit engagement and finds that it is
higher than expected. Which of the following
results is most likely?
a) The acceptable level of audit risk
should be raised.
b) The desired level of detection risk
should be reduced
c) The acceptable level of audit risk
should be lowered
d) The desired level of control risk should
be reduced.
64.) Epptons, CPA, is auditing the financial
statements of a small rural municipality. The
receivable balances represent residents'
delinquent real estate taxes. The internal control
structure at the municipality is weak. To
determine the existence of the accounts
receivable balances at the balance sheet date,
Epptons would most likely
a) Send negative confirmation requests.
b) Send positive confirmation requests.
c) Inspect the internal records such as
copies of the tax invoices that were mailed to
the residents.
d) Examine evidence of subsequent cash
receipts
**Confirmation of receivables is a generally
accepted auditing procedure. The use of positive
confirmation requests is preferable when
individual account balances are relatively large or
when there is reason to believe that there may be
a substantial number of accounts in dispute or
with inaccuracies or irregularities. The negative
form is useful when internal control surrounding
accounts receivable is considered to be effective.
In this case, although the individual accounts
may not be relatively large, the internal control
structure is weak and the balances, since they
are delinquent, may be in dispute
65.) Which of the following computer-assisted
auditing techniques allows fictitious and real
transactions to be processed together without
client operating personnel being aware of the
testing process?
a)Parallel simulation.
b)Generalized audit software programming.
c) Test data approach.
d) Integrated test facility.
An integrated test facility is a method of testing
programmed controls by creating a small
subsystem within the regular EDP system.
Dummy files and records are appended to
existing client files and fictitious test transactions,
specifically coded to correspond with the dummy
files and records, are introduced into a system
together with actual real transactions.
66.) Tests of controls may include which of the
following types of evidence?
a) Inquiry.
b) Observation.
c) Inspection.
d) All of the above.
67.) In accordance with SAS No. 105, which of
the following correctly denotes the revised
wording of the first general standard of auditing?
a) The audit must be performed by a
person or persons with a college degree
in accounting.
b) The audit must be performed by a
person or persons who are partners in a
CPA firm.
c) The audit must be performed by
a person or persons having adequate
 technical training and proficiency as
an auditor.
d) The audit should be performed by
a person or persons having adequate
technical training and proficiency as an
auditor.
68.) When control risk is assessed as low for
assertions related to payroll, substantive tests of
payroll balances most likely would be limited to
applying analytical procedures and
a) Recalculating payroll accruals.
b) Observing the distribution of
paychecks.
c) Footing and cross footing the
payroll register.
d) Inspecting payroll tax returns.
**When the auditor determines that the internal
control structure is effective and thus the control
risk is assessed as low, the auditor may alter the
nature, timing, and extent of substantive tests
performed. In the case of assertions related to
payroll, the auditor may decide to limit
substantive tests to performing analytical
procedures, which would evaluate the
reasonableness of payroll-related amounts for
the year, and recalculating payroll accruals,
which would provide some assurance that the
year-end adjustments are proper.
69.) Which of the following procedures would be
most effective in reducing attestation risk?
a) Discussion with responsible
individuals.
b) Examination of evidence.
c) Inquiries of senior management.
d) Analytical procedures.
**Examination of evidence is the most effective
procedure. AT 101.53 states that "…in the
hierarchy of available attest procedures, those
that involve search and verification, particularly
when using independent sources outside the
entity, are generally more effective in restricting
attestation risk than those involving internal
inquiries and comparison of internal information.
70.) Significant deficiencies and material
weaknesses in internal control of a public
company must be reported to which of the
following?
a) Members of management who
are responsible for the related area of
the company.
b) Audit Committee of the
company's board of directors
c) The Public Company Accounting
Oversight Board.
d) None of the above is correct.
71.) An auditor most likely would assess control
risk at the maximum if the payroll department
supervisor is responsible for
a) Comparing payroll registers
with original batch transmittal data.
b) Authorizing payroll rate
changes for all employees.
c) Examining authorization
forms for new employees.
d) Hiring all subordinate payroll
department employees.
** Authorization and recording are incompatible
functions that should be assigned to different
individuals. In this case, authorization of payroll
changes, which is typically the responsibility of
the human resources department, should be
segregated from recording payroll, which is the
responsibility of the payroll department. If the
payroll department supervisor is responsible for
these two functions, the entity's internal control
structure may be inadequate to prevent or detect
material misstatements in the payroll area. Thus,
the auditor would assess control risk at the
maximum.
72.) In the early stages of an audit engagement,
the independent CPA must obtain a general
understanding of internal control. Which of the
following is not studied as part of that step in the
audit process?
a) Control environment
b) Risk assessment
c) Control activities
d) Internal independence
** The five areas to be studied in gaining a
general understanding of internal control are the
control environment, risk assessment, control
activities, information and communications, and
monitoring.
73.) Which of the following best describes proper
internal control over payroll?
a) The payment of cash to
employees should be replaced with
payment by checks.
b) The confidentiality of employee
payroll data should be carefully
protected to prevent fraud.
c) The duties of hiring, payroll
computation, and payment to
employees should be segregated.
d) The preparation of the payroll
must be under the control of the
personnel department.
** The authorization of transactions, record
keeping, and custodial functions should be
segregated.
74.) The primary purpose of an auditor's
consideration of internal control is to provide a
basis for
a) Determining whether procedures
and records that are concerned with the
safeguarding of assets are reliable.
 b) Constructive suggestions to clients
concerning improvements in internal
control.
c) Determining the nature, extent,
and timing of audit tests to be
applied.
d) To express an opinion.
** The second standard of fieldwork requires, "A
sufficient understanding of internal control is to
be obtained to plan the audit and to determine
the nature, timing, and extent of tests to be
performed."
75.) Which of the following matters would an
auditor most likely consider to be a significant
deficiency to be communicated to management
and those in charged with governance?
a) Management's failure to
renegotiate unfavorable long-term
purchase commitments.
b) Recurring operating losses that
may indicate going concern problems.
c) Evidence of a lack of objectivity
by those responsible for accounting
decisions.
d) Management's current plans to
reduce its ownership equity in the entity.
** A significant deficiency is a control deficiency
or combination of control deficiencies that
adversely affect the entity's ability to summarize,
authorize, record, process or report financial data
in accordance with GAAP, such that a material
misstatement of the entity's financial statements
will not be prevented or detected. Thus, a lack of
objectivity by those responsible for accounting
decisions would affect management's ability to
produce financial statement free from material
errors.
76.) In an audit of financial statements in
accordance with generally accepted auditing
standards, an auditor is required to
a) Determine whether control
procedures are suitably designed to
prevent or detect material
misstatements.
b) Perform tests of controls to
evaluate the effectiveness of the entity's
accounting system.
c) Search for significant deficiencies
in the operation of the internal control
structure.
d) Document the auditor's
understanding of the entity's internal
control structure
** The auditor is required to document the
auditor's understanding of the entity's internal
control structure. The form and extent of
documentation may be influenced by the size and
complexity of the entity, but in all audits this
understanding must be documented.
77.) A CPA is performing an audit examination of
Malfoy, Inc. The CPA has already done the work
necessary to gain a general understanding of the
company’s internal control. The CPA is now
looking at the internal control policies and
procedures within the accounting system
specifically for accounts receivable. The CPA has
decided to perform test of controls in this area.
Which of the following is least likely to be true?
a) The system contains an excess
number of possible problems so that
testing is required.
b) The internal control system
appears to be well designed.
c) The CPA hopes to reduce the
necessary amount of substantive
testing.
d) The CPA hopes to reduce overall
audit time.
** Once a general understanding of internal
control has been obtained, the auditor only needs
to test specific controls if it is efficient to do so. If
the general internal control system appears to be
well designed, testing specific controls to verify
their efficiency can lead to a reduction in the
assessed level of control risk. Hopefully, the
amount of substantive testing can then be
reduced because the desired level of detection
risk does not need to be so low. This decrease in
substantive testing can lead, possibly, to an
overall reduction in the time and cost of
performing the audit. Conversely, if the internal
control appears to be weak, no benefit is gained
by testing those controls further. It is not likely
that those weaknesses can be overcome.
78.) Mr. A makes a 3,000 payment on Monday to
Acme Company. The money is stolen by one of
Acme’s employees. On Friday, Ms. B makes a
3,000 payment to Acme Company. The same
employee credits this payment to Mr. A’s account
(rather than to Ms. B’s account) so that a second
bill will not be sent to him. Several days later, a
payment is received from Mr. C and it is posted
to Ms. B’s account. What is this type of theft
known as?
a) Posting Fraud
b) Reconciliation Shortage
c) Lapping
d) Receivable Management
Deficiency (RMD)
** The term “lapping” has long referred to the
coverage of theft by using amounts received from
one customer to cover earlier balances received
from other customers and then stolen. If lapping
is not performed, the original customer will
receive a second invoice and any subsequent
complaint by the customer will alert management
to the problem.
79.) Effective internal control over purchases
generally can be achieved in a well-planned
organizational structure with a separate
purchasing department that has
a) The authority to make purchases
of requisitioned materials and
services.
b) A direct reporting responsibility to
the controller of the organization.
c) The responsibility of reviewing
purchase orders issued by user
departments
d) The ability to prepare payment
vouchers based on the information on a
vendor's invoice.
** Purchasing agent has authority to purchase,
not authority to initiate purchases.
80.) An auditor uses the assessed level of control
risk to
a) Determine the acceptable level
of detection risk for financial
statement assertions.
b) Evaluate the effectiveness of the
entity's internal control policies and
procedures.
c) Identify transactions and account
balances where inherent risk is at the
maximum.
d) Indicate whether materiality
thresholds for planning and evaluation
purposes are sufficiently high.
** According to the audit risk model, acceptable
detection risk is a function of allowable audit risk,
inherent risk, and control risk. This question is
concerned with control risk, which is defined as
the risk that a material misstatement that could
occur in an assertion will not be prevented or
detected on a timely basis by an entity's internal
control structure policies or procedures, and
detection risk, which is defined as the risk that
the auditor will not detect a material misstatement
that exists in an assertion. The auditor uses the
assessed level of control risk to determine the
acceptable level of detection risk for financial
statement assertions.
81.) In reporting on an entity's internal control
structure over financial reporting, a practitioner
should include a paragraph that describes the
a) Inherent limitations of any
internal control structure.
b) Documentary evidence regarding
the control environment factors.
c) Changes in the internal control
structure since the prior report.
d) Potential benefits from the
practitioner's suggested improvements.
** A practitioner's report on an examination of
management's assertion about the effectiveness
of the entity's internal control structure should
include a paragraph stating that, because of
inherent limitations of any internal control
structure, errors or irregularities may occur and
not be detected.
82.) An auditor uses the knowledge provided by
the understanding of internal control and the
assessed level of control risk primarily to
a) Determine whether procedures
and records concerning the
safeguarding of assets are reliable.
b) Determine the nature, timing,
and extent of substantive tests for
financial statement assertions.
c) Modify the initial assessments of
inherent risk and preliminary judgments
about materiality levels.
d) Ascertain whether the
opportunities to allow any person to both
perpetrate and conceal irregularities are
minimized.
** The second standard of field work states
that, "The auditor should obtain a sufficient
understanding of the internal control
structure to plan the audit and to determine
the nature, timing and extent of tests to be
performed." These tests are the substantive
tests for financial statement assertions
83.) The auditor should use the risk
assessment to determine:
a) Whether to accept the
engagement.
b) The type of opinion to issue in the
Audit Report.
c) The size of the audit team.
d) The nature, timing, and extent
of further audit procedures to be
performed.
84.) After obtaining an understanding of an
entity's internal control and assessing control risk,
an auditor may next
a) Perform tests of controls to verify
management's assertions that are
embodied in the financial statements.
b) Apply analytical procedures as
substantive tests to validate the
assessed level of control risk.
c) Evaluate whether the internal
control structure policies and
procedures detected material
misstatements in the financial
statements.
d) Consider whether evidential
matter is available to support a
further reduction in the assessed
level of control risk.
** After the auditor assesses control risk, the
auditor may desire a further reduction in the
assessed level of control risk for some
assertions. The auditor would then decide if it is
likely that additional evidential matter could be
obtained to support a lower assessed level of
control risk for these assertions. If yes, and it is 91.) The primary emphasis by auditors by auditor
likely to be efficient to obtain such evidential when assessing internal control is on controls
matter, the auditor would then perform additional over:
tests of controls. Next, whether the auditor a) Account balances.
performed additional tests of controls or not, the b) Classes of transactions.
auditor would document the basis for conclusions c) Both A and B, because they are
about the assessed level of control risk and equally important.
design substantive tests. d) Both A and B, because they vary
from client to client.
85.) Which of the following is not a component of ** Auditors emphasize internal control over
an entity's internal control? classes of transactions rather than account
a) The control environment. balances because the accuracy of accounting
b) Risk assessment. system outputs (account balances) depends
c) Information and communication. heavily on the accuracy of inputs and processing
d) Control risk. (transactions).

86.) Which of the following is responsible for 92.) Narrative, flowcharts, and internal control
establishing internal controls for a public questionnaires are three common methods of:
company? a) Documenting the auditor's
a) Management. understanding of internal controls.
b) Management and auditors. b) Designing the audit manual and
c) Committee on Sponsoring procedures.
Organizations. c) Testing the internal controls.
d) Financial statement auditors. d) Documenting the auditor's
87.) The auditor's study of a public company's understanding of the client's
internal control is: organizational structure.
a) Recommended by the PICPA.
b) Required by GAAS. 93.) In obtaining an understanding of a
c) Required by PICAP. manufacturing entity's internal control concerning
d) Required by the Sarbanes- inventory balances, an auditor most likely would
Oxley Act. a) Perform test counts of inventory
88.) The auditor's study of a private company's during the entity's physical count.
internal control is: b) Analyze inventory turnover
e) Recommended by the PICPA. statistics to identify slow-moving and
f) Required by GAAS. obsolete items.
g) Required by PICAP. c) Review the entity's descriptions
h) Required by the Sarbanes-Oxley of inventory policies and procedures.
Act. d) Analyze monthly production
89.) Which of management's concerns with reports to identify variances and unusual
respect to implementing internal controls is the transactions.
auditor primarily concerned? ** An auditor is required to obtain an
a) Reliability of financial reporting. understanding of a client's internal control
b) Efficiency of operations. structure. Reviewing policies and procedures
c) Compliance wit applicable laws manuals that describe a client system such as
and regulations. inventory and the related controls is a standard
d) Effectiveness of operations. audit step in obtaining that understanding.
90.) When an auditor attempts to understand the
operation of the accounting system by tracing a 94.) The auditor who becomes aware of a
few transactions through the accounting system, reportable condition in internal control is required
the auditor is said to be: to communicate this to the
a) Testing controls. a) Senior management and board of
b) Vouching. directors.
c) Tracing. b) Board of directors and internal
d) Performing a walk-through. auditors.
** In a walk-through, the auditor selects one or a c) Internal auditors and senior
few documents of a transaction type and traces management.
them from initiation through the entire accounting d) Audit committee or its
process. Walk-through conveniently combines equivalent.
observation, documentation, and inquiry. ** The audit committee is the appropriate
recipient of communication regarding internal
control related matters.
95.) After obtaining an understanding of internal
control and assessing control risk, an auditor
decide to perform tests of controls. The auditor
most likely decided that
a) It would be efficient to perform
tests of controls that would result in
a reduction in planned substantive
tests.
b) There were many internal control
structure weaknesses that could allow
errors in the accounting systems.
c) Additional evidence to support a
further reduction in control risk is not
available.
d) An increase in the assessed level
of control risk is justified for certain
financial statement assertions.
** Auditing authoritative sources state that after
obtaining an understanding of internal control, the
auditor considers if it is sufficient to perform tests
of controls that would result in a reduction in
planned substantive tests.
96.) When management is evaluating the design
of internal control, management evaluates
whether the control can do all but which of the
following?
a) Correct material misstatements.
b) Prevent material misstatements.
c) Detect material misstatements.
d) None of the above is correct.
**Controls are designed to prevent and detect
errors; corrections of errors involve human
intervention.
97.) Which of the following may increase risk to
an organization?
a) Quality of personnel.
b) Presence of new information
technologies.
c) Geographic dispersion of the
company operations.
d) All of the above.
98.) Risk assessment for financial reporting is
management’s process for identifying, analyzing,
and responding to risks relevant to the
preparation of financial statements in conformity
with:
a) Generally Accepted Accounting
Standards
b) Generally Accepted Auditing
Standards.
c) PCAOB Auditing Standards.
d) Generally Accepted Accounting
Principles
99.) An auditor is currently assessing control risk
and finds that it is lower than had been
anticipated. How does this discovery impact the
work of the auditor?
a) The acceptable level of audit
risk can be raised.
b) The acceptable level of
inherent risk can be lowered.
c) The acceptable level of audit
risk can be lowered.
d) The acceptable level of
detection risk can be raised.
100.) Risk assessment involves considering
threats to the organization’s objectives in the
areas of:
a) Marketing, financial reporting and
compliance.
b) Operations, financial reporting
and compliance with laws and
regulations.
c) Financial reporting, performance
and marketing.
d) Compliance with laws and
regulations, operations and
performance.
101.) To obtain an understanding of the entity
and its environment, including its internal control,
the auditor should perform each of the following
risk assessment procedures except:
a) Inquiries of management and
others within the entity.
b) Analytical procedures.
c) Attribute Sampling.
d) Observation and inspection.
102.) In assessing control risk for purchases, an
auditor vouches a sample of entries in the
voucher register to the supporting documents.
Which assertion would this test of controls most
likely support?
a) Valuation or allocation.
b) Rights and Obligations
c) Existence or occurrence.
d) Completeness.
**Assertions about existence or occurrence deal
with whether assets or liabilities of the entity exist
at a given date and whether recorded
transactions have occurred during a given period.
For example, management asserts that finished
goods inventories in the balance sheet are
available for sale, or management asserts that
sales in the income statement represent the
exchange of goods or services with customers for
cash or other consideration.
103.) The ultimate purpose of assessing control
risk is to contribute to the auditor's evaluation of
the risk that
a) Material misstatements may
exist in the financial statements.
b) Entity policies may be overridden
by senior management.
c) Specified controls requiring
segregation of duties may be
circumvented by collusion.
 d) Tests of controls may fail to
identify procedures relevant to
assertions.
**Control risk is defined as the risk that a material
misstatement that could occur in an assertion will
not be prevented or detected on a timely basis by
an entity's internal control structure policies or
procedures. The auditor assesses control risk as
part of his overall evaluation of the risk that
material misstatements may exist in the financial
statements.
104.) An auditor assesses inherent risk in an
engagement. An auditor assesses control risk in
an engagement. Then, based on those two
assessments, the auditor does enough
substantive testing to reduce detection risk so
that overall audit risk drops to an acceptably low
level. That is the structure of an audit. In
assessing control risk, the auditor starts by
learning the design of the control system and
then considers whether to perform tests of
individual controls. If the design of the control
system is viewed as weak, which of the following
is most likely to be true?
a) The auditor will be likely to test the
controls because of the weakness.
b) The auditor is likely to do
additional substantive testing.
c) The auditor will likely reduce the
assessment of inherent risk.
d) An unqualified opinion cannot be
issued.
**When the design of internal control is weak,
there is no reason to do any testing of those
controls. Properly operating within a weak system
does not make it any less weak. Instead, the
auditor will probably assess control risk as high
which is likely to force the auditor to do additional
(or better) substantive testing in order to
compensate for this problem. Detection risk has
to be quite low to make up for the weakness in
internal control. The assessment of inherent risk
is independent from the assessment of control
risk and is not affected. Finally, as long as the
auditor eventually reduces overall audit risk to an
appropriately low level, an unqualified opinion
can be given even though the control system is
weak.
105.) An independent CPA is assessing the level
of control risk present at a company that is
currently being audited. This company has an
internal audit department and the independent
CPA is evaluating the objectivity of that
department. Which of the following is a sign that
the department has proper objectivity?
a) The size of the department has
grown from 7 people to 19 over the last
three years.
b) In order to be promoted within this
department, the employee must have
become a CPA.
c) The head of the department
meets privately with the chair of the
board of directors each quarter.
d) The head of the department had
seven years of experience with an
international accounting firm before
taking this position with the company.
**The independent CPA is interested in both the
competence and objectivity of the internal audit
department because of the key function that it
plays in the company. Answers A, B, and D all
relate to competence. These relate to the
question: Is there evidence that the people doing
the work are capable of doing it properly?
Objectivity concerns the internal auditor’s
independence so that the department can do the
work that is necessary. That is usually shown by
having a direct line of communication to an
authority figure outside of management (usually
the board of directors or the audit committee of
the board of directors).
106.) One of the components of internal control
that an independent auditor must come to
understand about each audit client is “information
and communication.” What is meant by this term?
a) The ability of the management of
the company to communicate its
priorities to the appropriate staff levels
within the organization.
b) The ability of the accounting
system to generate reliable
information and convey it in a timely
manner to those parties within the
organization that needs it.
c) The ability of employees in a
company to warn the independent
auditor of fraudulent actions within the
organization.
d) The ability of the internal auditor to
communicate information about the
various systems to people within the
organization at an appropriate level of
authority.
**Internal control includes any policies and
procedures within the company designed to
ensure that the accounting systems are
functioning effectively as designed by the
management of the company. One general goal
is to make sure that the information produced by
the accounting system is reliable and reaches the
correct party in time to be used in making
appropriate decisions. In looking at a particular
system and its internal control, the auditor
evaluates the ability to generate information and
then communicate it to the parties who can make
use of it.
107.) A CPA firm is beginning the audit of
Panasian Corporation. One of the staff auditors
has been assigned to gain and then document
her understanding of the internal controls
designed to be in place in the company’s payroll
system. At the end of the day, the staff auditor
has created a series of flowcharts,
questionnaires, and narrative descriptions based
on the understanding she has obtained. Which
of the following is correct?
a) The questionnaire approach is
preferred.
b) The flowchart approach is
preferred.
c) She was correct in using all three
of these techniques to fulfill this
assignment.
d) She only needed to use one of
these techniques.
**The auditor’s goal was to establish her
understanding of the design of the controls that
were supposed to be in place in this payroll
system. All three of these techniques
(questionnaire, flowchart, or narrative) can
accomplish this purpose successfully.
Therefore, only one is necessary although
sometimes the techniques are grouped together
if the system is particularly complex.
108.) Jane Simpson works for Shadowline
Corporation and is paid $30 per hour. She
typically works 28 hours per week but always
reports that she works 32 hours per week so that
she can receive additional wages from the
company. Which of the following internal
control activities is most likely to prevent this type
of theft?
a) The company’s payroll program is
tested each month with test data to
ensure that it operates properly.
b) A separate paymaster delivers the
checks each pay period to Jane
Simpson after verifying her identity.
c) The supervisor for Jane
Simpson must review her time sheet
each period and indicate approval.
d) Any paychecks that are printed but
not picked up must be turned over to an
independent group for subsequent
handling.
**Each of these four is an internal control activity
frequently found in a company’s payroll system.
However, they are each designed to prevent or
discover frauds of a specific type. Here, the
problem is extra hours claimed by an employee
so that unearned money can be received. Test
data is used to verify that the payroll program is
working as intended. The paymaster hands out
checks to make certain that checks are being
prepared for actual individuals who work for the
company. That is also the case for following up
on checks that are not claimed at the appropriate
time. The approval by the supervisor is correct
here because the supervisor is the person most
likely to know how many hours the employee
actually did work. That person is in a position to
verify that the number of hours listed is correct.
109.) Which of the following audit procedures
would an auditor most likely perform to test
controls relating to management's assertion
concerning the completeness of sales
transactions?
a) Inspect the entity's reports of
prenumbered shipping documents
that have not been recorded in the
sales journal.
b) Inquire about the entity's credit
granting policies and the consistent
application of credit checks.
c) Compare the invoiced prices on
prenumbered sales invoices to the
entity's authorized price list.
d) Verify that extensions and footings
on the entity's sales invoices and
monthly customer statements have
been recomputed.
110.) An auditor uses the assessed level of
control risk to
a) Determine the acceptable level
of detection risk for financial
statement assertions.
b) Evaluate the effectiveness of the
entity's internal control policies and
procedures.
c) Identify transactions and account
balances where inherent risk is at the
maximum.
d) Indicate whether materiality
thresholds for planning and evaluation
purposes are sufficiently high.
111.) Cutoff tests designed to detect purchases
made before the end of the year that have been
recorded in the subsequent year most likely
would provide assurance about management's
assertion of
a) Presentation and disclosure.
b) Existence or occurrence.
c) Completeness.
d) Valuation or allocation.
112.) Internal control procedures are
strengthened when the quantity of merchandise
ordered is omitted from the copy of the purchase
order sent to the
 a) Purchasing agent.
b) Accounts payable department.
c) Receiving department.
d) Department that initiated the
requisition.
**The receiving department copy of the
purchase order should be "blind" (i.e.,
quantities omitted). This ensures that the
receiving department personnel count the
incoming merchandise. Thus the company
will end up paying only for what was
received, which may not be what was billed
by the vendor.
113.) While observing a client's annual physical
inventory, an auditor recorded test counts for
several items and noticed that certain test counts
were higher than the recorded quantities in the
client's perpetual records. This situation could be
the result of the client's failure to record
a) Sales returns.
b) Sales.
c) Purchase returns.
d) Purchase discounts.
114.) To best ascertain that a company has
properly included merchandise that it owns in its
ending inventory, the auditor should review and
test the
a) Terms of the open purchase
orders.
b) Purchase cut-off procedures.
c) Purchase invoices received on or
around year end.
d) Contractual commitments made
by the purchasing department.
**Purchase cutoff procedures are designed to
determine that items actually received in
inventory have been included in the proper
period.
115.) Which of the following would most likely be
an internal control procedure designed to detect
errors and irregularities concerning the custody of
inventory?
a) Periodic reconciliation of work in
process with job cost sheets.
b) Independent comparisons of
finished goods records with counts
of goods on hand.
c) Approval of inventory journal
entries by the storekeeper.
d) Segregation of the functions
between general accounting and cost
accounting.
116.) An increased extent of the tests of controls
is most likely to occur when:
a) It is a first-time audit.
b) Controls are ineffective and the
preliminary control risk assessment is
high.
c) Controls are effective and the
preliminary control risk assessment is
low.
d) The auditor is performing a fraud
audit.
**If the auditors determine that the client's
internal control is effective at preventing or
detecting misstatements, they will assess the
control risk low. They can then accept a higher
level of detection risk, and the substantive testing
can be decreased.
117.) Which of the following is a control
procedure that most likely could help prevent
employee payroll fraud?
a) The personnel department
promptly sends employee
termination notices to the payroll
supervisor.
b) Total hours used for determination
of gross pay are calculated by the
payroll supervisor.
c) Salary rates resulting from new
hires are approved by the payroll
supervisor
 d) Employees who distribute payroll
checks forward unclaimed payroll
checks to the absent employees'
supervisors.
**Payroll fraud could involve fictitious employees
and/or fictitious salary rates. In order to prevent
these frauds, new hires, terminations of
employees, and salary rates should be approved
by the personnel department, which in turn
should keep the payroll department and
employee supervisors informed on a timely basis.
118.) Transaction authorization within an
organization may be either specific or general. An
example of a specific transaction authorization is
the
a) Setting of automatic reorder points
for material or merchandise.
b) Approval of a detailed
construction budget for a warehouse.
c) Establishment of requirements to
be met in determining a customer's
credit limits.
d) Establishment of sales prices for
products to be sold to any customer.
119.) Which of the following internal control
activities most likely would prevent direct labor
hours from being charged to manufacturing
overhead?
a) Use of time tickets to record
actual labor worked on production
orders.
b) Periodic independent counts of
work in process for comparison to
recorded amounts.
c) Comparison of daily journal
entries with approved production orders.
d) Reconciliation of work-in-process
inventory with periodic cost budgets
**Time tickets should be designed to keep track
of hours worked, by whom, and on what
production orders. After approval by a production
supervisor, time tickets provide the information
on number of hours worked directly on specific
production orders. If time tickets are properly
used to record actual hours worked on orders,
approval and/or review of these cards should
prevent direct labor hours from being incorrectly
charged to manufacturing overhead.
120.) Which of the following is ordinarily
considered a test of controls?
a) Send confirmation letters to banks.
b) Count and list cash on hand.
c) Examine signatures on checks.
d) Obtain or prepare reconciliations
of bank accounts as of the balance
sheet date.
**Examine signatures on checks is a test of
controls; the control is requiring signatures on
checks in place and functioning properly.
121.) An auditor vouched data for a sample of
employees in a payroll register to approved clock
card data to provide assurance that
a) Internal controls relating to
unclaimed payroll checks are operating
effectively.
b) Segregation of duties exist
between the preparation and distribution
of the payroll.
c) Payments to employees are
computed at authorized rates.
d) Employees work the number of
hours for which they are paid.
122.) An auditor would consider internal control
over a client's payroll procedures to be ineffective
if the payroll department supervisor is
responsible for
a) Updating employee earnings
records.
b) Hiring subordinate payroll
department employees.
c) Applying pay rates to time tickets.
d) Having custody over unclaimed
paychecks.
**The payroll accounting department has a
recording responsibility and as such it should not
have custody of unclaimed payroll checks
(custody of an asset). If the payroll accounting
department had custody of payroll checks, its
employees could add a fictitious employee to the
payroll and subsequently obtain the check.
123.) Which of the following procedures in the
cash disbursements cycle should not be
performed by the accounts payable department?
a) Canceling supporting
documentation after payment.
b) Signing the voucher for payment
by an authorized person.
c) Verifying the mathematical
accuracy of the vendor's invoice.
d) Comparing the vendor's invoice
with the receiving report.
**The supporting documentation should be
canceled by the check signer (usually the
treasurer) and not the accounts payable
department.
124.) Which of the following tests of controls
most likely would help assure an auditor that
goods shipped are properly billed?
a) Compare the accounts receivable
ledger to daily sales summaries.
b) Examine shipping documents
for matching sales invoices.
c) Inspect unused sales invoices for
consecutive prenumbering.
d) Scan the sales journal for
sequential and unusual entries.
125.) Which of the following internal control
procedures is not usually performed in the
vouchers payable department?
a) Approving vouchers for payment
by having an authorized employee sign
the vouchers.
b) Indicating the asset and expense
accounts to be debited.
c) Matching the vendor's invoice with
the related receiving report.
d) Accounting for unused
prenumbered purchase orders and
receiving reports.
**The unused forms should be accounted for by
the department in which the forms are prepared -
purchase orders in the purchasing department
and receiving reports in the receiving department.
126.) Internal control over cash receipts is
weakened when an employee who receives
customer mail receipts also
a) Prepares bank deposit slips for all
mail receipts.
b) Maintains a petty cash fund.
c) Prepares initial cash receipts
records.
d) Records credits to individual
accounts receivable.
**There is a control weakness because the
employee has both custody of an asset (cash)
and the accounting record (accounts receivable
subsidiary ledgers).
127.) Which of the following internal control
activities most likely would justify a reduced
assessed level of control risk concerning plant
and equipment acquisitions?
a) Periodic physical inspection of
plant and equipment by the internal
audit staff.
b) Comparison of current-year plant
and equipment account balances with
prior-year actual balances.
c) The review of prenumbered
purchase orders to detect unrecorded
trade-ins.
d) Approval of periodic depreciation
entries by a supervisor independent of
the accounting department.
**The internal audit procedure of the periodic
inspection of physical equipment and comparison
to what is recorded by the internal would allow for
a reduction in the scope of the auditor's tests of
asset acquisitions.
128.) A customer buys some furniture from a b) Marketing, financial reporting, and
company and must be billed for the Php879 sales compliance.
price. The company’s billings department
prepares a sales invoice which is properly c) Financial reporting, performance,
approved. Which of the following does not and marketing.
receive a copy of this sales invoice?
d) Compliance with laws and
a) The billings department retains a regulations, operations, and
copy for its records. performance

b) The inventory management 131.) To obtain an understanding of the entity

department gets a copy to update the and its environment, including its internal control,
perpetual records. the auditor should perform each of the following
risk assessment procedures except:
c) The customer receives a copy.
a) Inquiries of management and
d) The accounts receivable others within the entity.
department is sent a copy.
b) Sampling for variables.
**The company should have created a shipping
document at the time the furniture left the c) Observation and inspection.
warehouse to be used to update the perpetual
inventory records. The sales invoice is not used
for that purpose. The billings department and d) Analytical procedures.
accounts receivable should both have a copy and
one is mailed to the customer in hopes of 132.) In accordance with the standards, the
bringing in a cash payment. second standard of audit fieldwork is expanded
from "internal control" to:
129.) The Waynesboro Corporation has recently
installed a new computer payroll processing a) The entity and management
program. Before the program is used to assertions, including internal control
compute actual payroll checks for the employees,
test data is going to be run through the computer b) The entity and its environment,
to see how it would be processed. Which of the including its internal control
following is least likely to be tested in this
manner?
c) The entity and its business model,
including internal control.
a) Two checks requested for the
same employee
d) The entity, including internal
control.
b) A check requested for an
employee who quit two months earlier.
133.) Which of the following is the basic
fundamental concept that underlies the audit
c) A check requested for an process?
employee working more than 60 hours
per week.
a.) Skepticism .b.) Materiality. c.) Risk. d.) All of
the above.
d) A check requested for an
employee paid an hourly rate of $12
per hour. 134.) Management must disclose material
weaknesses in internal control:
130.) Risk assessment involves considering
threats to the organization’s objectives in the a) Only if the auditor disclose the
areas of: weakness as significant.

a) Operations, financial reporting, b) Whenever the weakness is

and compliance with laws and significant to the overall financial
regulations. reporting objectives.
 c) Whenever the weakness is
deemed significant to a single class of
transactions.
d) If the weakness exist at the end
of the year.
**Management must disclose material
weaknesses in internal control that exist at year
end, since material weaknesses result in a more
than remote likelihood that internal control will not
prevent or detect material financial statement
misstatements.
135.) A weakness in internal control over
recording retirements of equipment may cause
an auditor to
a) Trace additions to the "other
assets" account to search for
equipment that is still on hand but
no longer being used.
b) Select certain items of
equipment from the accounting
records and locate them in the
plant.
c) Review the subsidiary ledger
to ascertain whether depreciation
was taken on each item of
equipment during the year.
d) Inspect certain items of
equipment in the plant and trace
those items to the accounting
records.
**A weakness in controls over recording
equipment retirements increases the risk that
equipment which is removed from the plant is not
removed from the accounting records. When the
auditor selects items in the accounting records
and tries to locate them in the plant, he may
discover retired equipment that is still in the
accounting records.
136.) An effective system of control procedures
over the payroll function would include
a) Preparation of payroll transaction
journal entries by an employee who
reports to the supervisor of the
personnel department.
b) Verification of agreement of job
time tickets with employee clock card
hours by a payroll department
employee.
c) Custody of rate authorization
records by the supervisor of the payroll
department.
d) Reconciliation of totals on job time
tickets with job reports by employees
responsible for those specific jobs.
137.) For an appropriate segregation of duties,
journalizing and posting summary payroll
transactions should be assigned to
a) The treasurer's department.
b) General accounting.
c) Payroll accounting.
d) The internal accounting
department.
138.) In a well-designed internal control system,
the same employee may be permitted to
a) Mail signed checks, and also
cancel supporting documents.
b) Prepare receiving reports, and
also approve purchase orders.
c) Approve vouchers for payment,
and also have access to unused
purchase orders.
d) Mail signed checks, and also
prepare bank reconciliations.
**By canceling the supporting documents, the
person in authority ensures that the documents
are not presented for payment again.
139.) When considering internal control, an
auditor must be aware of the concept of
reasonable assurance which recognizes that
a) The employment of competent
personnel provides assurance that the
objectives of internal control will be
achieved.
b) The establishment and
maintenance of internal control is an
 important responsibility of the
management and not of the auditor.
c) The cost of internal control
should not exceed the benefits
expected to be derived from internal
control.
d) The segregation of incompatible
functions is necessary to obtain
assurance that the internal control is
effective.
140.) Which of the following internal controls
most likely would reduce the risk of diversion of
customers’ receipts by an entity's employees?
a) A bank lockbox system.
b) Prenumbered remittance advices.
c) Monthly bank reconciliations.
d) Daily deposit of cash receipts.
**A bank lockbox system assures
accountability control as cash enters the
client's cash receipts system.
141.) Reportable conditions are matters that
come to an auditor's attention, which should be
communicated to an entity's audit committee
because they represent
a) Off-balance sheet transactions
that are not fully disclosed in the
financial statements.
b) Conditions which may result in a
disclaimer of an opinion on the financial
statements.
c) Significant deficiencies in the
design or operation of the internal
control structure
d) Material irregularities or illegal acts
perpetrated by high-level management.
142.) Which of the following statements is correct
concerning reportable conditions in an audit?
a) Reportable conditions generally
lead to an adverse audit opinion.
b) An auditor is required to search for
reportable conditions during an audit.
c) All reportable conditions are also
considered to be material weaknesses.
d) An auditor may communicate
reportable conditions during an audit
or after the audit's completion.
143.) Which of the following conditions is
necessary for a practitioner to accept an attest
engagement to examine and report on an entity's
internal control structure over financial reporting?
a) Management presents its written
assertion about the effectiveness of
the internal control structure.
b) The practitioner is a continuing
auditor who previously has audited the
entity's financial statements.
c) The practitioner anticipates
relying on the entity's internal control
structure in a financial statement audit.
d) The practitioner is hired by the
audit committee to specifically audit
internal control in accordance with
generally accepted auditing standards.
**A practitioner may examine and report on
management's assertion about the effectiveness
of an entity's internal control structure if the
following conditions are met: Management
accepts responsibility for the effectiveness of the
entity's internal control structure, management
evaluates the effectiveness of the entity's internal
control structure, and presents its written
assertion about the effectiveness of the entity's
internal control structure.
144.) Which of the following is an inherent
limitation in internal control?
a) Incompatible duties.
b) Lack of segregation of duties.
c) Faulty human judgment.
d) Lack of an audit committee.
145.) Significant deficiencies are matters that
come to an auditor's attention and should be
communicated to an entity's audit committee
because they represent:
a) Intentional attempts by the client
personnel to limit the scope of the
auditor's fieldwork.
b) Flagrant violations of the entity's
documented conflict-of-interest policies.
c) Material fraud perpetrated by
high-level management.
d) Internal control deficiencies that
could adversely affect a company's
ability to initiate, record, process, or
report external financial statements
reliably.
146.) How must significant deficiencies and
material weaknesses be communicated to those
charged with governance?
a) Oral communication is
required.
b) Written communication is
required.
c) Either oral or written
communication is acceptable.
d) None of the above is correct.
147.) In determining whether transactions have
been recorded, the direction of the auditing
testing should be from the
a) General ledger balances.
b) Adjusted trial balances.
c) Original source document.
d) General journal entries.
148.) Which of the following is the best example
of a substantive test?
a) Flowcharting of the client's cash
disbursement system.
b) Confirmation of balances of
accounts receivable.
c) Examining a sample of cash
disbursements to test whether expenses
have been properly approved.
d) Comparison of signatures on
checks to an authorized list of signers.
**Confirmation of balances of accounts
receivable will provide a test of ending account
balance and is therefore a detail test of a
balance, a type of substantive test. Examining
approval of cash disbursements and comparing
signatures on checks with authorized signers are
examples of tests of controls; flowcharting is an
example of an auditor's documentation of his/her
understanding of a process.
149.) The objective of tests of details of
transactions performed as substantive tests is to
a) Evaluate whether management's
policies and procedures operated
effectively.
b) Attain assurance about the
reliability of the accounting system.
c) Detect material misstatements
in the financial statements.
d) Evaluate whether management
internal control operates effectively.
150.) To determine whether accounts payable
are complete, an auditor performs a test to verify
that all merchandise received is recorded. The
population of documents for this test consists of
all
a) Receiving reports.
b) Vendor's invoices.
c) Purchase orders.
d) Canceled checks.
151.) Which of the following is a substantive test
that an auditor most likely would perform to verify
the existence and valuation of recorded accounts
payable?
a) Investigating the open purchase
file to ascertain that prenumbered
purchase orders are used and
accounted for. changes in long-term
debt occurring after year end.
 b) Receiving the client's mail,
unopened, for a reasonable period of
time after the year end to search for
unrecorded vendor's invoices.
c) Vouching selected entries in
the accounts payable subsidiary
ledger to purchase orders and
receiving reports.
d) Confirming accounts payable
balances with known suppliers who
have zero balances.
152.) Independent auditors have carried out
analytical procedures on an audit client and
determined that the reported liabilities at the end
of Year One are significantly lower than
expected. Which of the following is most likely to
have created this situation?
a) Purchases received during the
last few days of Year One were
recorded in Year Two.
b) Sales made during the first few
days of Year Two were recorded in Year
One.
c) Cash payments made during the
last few days of Year One were
recorded in Year Two.
d) Cash collections made during the
first few days of Year Two were
recorded in Year One.
**Sales and cash collections are unlikely to have
an impact on the amount of reported liabilities.
However, purchases and cash payments do
affect the liability balance. By not recording the
purchases in Year One, the liability was
incorrectly omitted and would be too low at the
end of the year. By not recording the cash
payments in Year One, the liability (although
paid) incorrectly remains on the books and is too
high.
153.) The CPA firm of Terry & Francona is
auditing the financial statements of Fenway
International Corporation. Fenway owns a
number of unique investments where the market
value is difficult to determine. The CPA firm hires
a specialist in investment analysis to help
determine the market value of these assets.
Which of the following statements is true?
a) This investment analyst must be
independent of the client company.
b) The hiring of this analyst means
that the firm must provide a qualified
audit opinion.
c) The hiring of this analyst means
that the firm must add an extra
paragraph to the end of the audit report
to alert readers to the work of the
specialist.
d) The firm must assess the
qualifications of the specialist as part
of the audit process.
**The CPA firm is required to ensure that the
specialist is truly capable of making the
assessments that are being asked. The
qualifications must be assessed carefully. If the
analyst is not independent, the CPA firm can still
make use of the information provided by the
specialist but should consider carefully the impact
of the relationship with the client in making that
assessment. Finally, use of a specialist is a
normal audit technique and does not require any
change in the audit report. However, the CPA
firm does have the right to make mention that a
specialist was used if that information is viewed
as helpful.
154. Auditing standards differ from auditing
procedures in that procedures relate to
a) Measure of performance.
b) Audit principles.
c) Acts to be performed.
d) Audit judgments.
155. The independent auditor of 1900 differs
from the auditor of today in that the 1900
auditor was more concerned with the
a) Validity of the income statement.
b) Determination of fair presentation of
financial statements.
c) Improvement of accounting systems.
d) Detection of irregularities.
156. The first general standard of generally
accepted auditing standards which states, in
part, that the examination is to be performed
by a person or persons having adequate
technical training, requires that an auditor
have
a) Education and experience in the field
of auditing.
b) Ability in the planning and supervision of
the audit work.
c) Proficiency in business and financial
matters.
d) Knowledge in the areas of financial
accounting.
157. The first standard of field work, which
states that the work is to be adequately
planned, and assistants, if any, are to be
properly supervised, recognizes that
a) Early appointment of the auditor is
advantageous to the auditor and the
client.
b) Acceptance of an audit engagement after
the close of the client's fiscal year is
generally not permissible.
c) Appointment of the auditor subsequent to
the physical count of inventories requires a
disclaimer of opinion.
d) Performance of substantial parts of the
examination is necessary at interim dates.
158. An independent audit aids in the
communication of economic data because
the audit
a) Assures the reader of financial statements
that any fraudulent activity has been
corrected.
b) Confirms the accuracy of management's
financial representations.
c) Lends credibility to the financial
statements.
d) Guarantees that financial data are fairly
presented.
159. A CPA is most likely to refer to one or
more of the three general auditing standards
in determining
a) Whether the CPA should undertake an
audit engagement.
b) The nature of the CPA's report
qualification.
c) The scope of the CPA's auditing
procedures.
d) Requirements for the review of internal
control.
160. The first standard of field work
recognizes that early appointment of the
independent auditor has many advantages
to the auditor and the client. Which of the
following advantages is least likely to occur
as a result of early appointment of the
auditor?
a) The auditor will be able to complete the
audit work in less time.
b) The auditor will be able to perform the
examination more efficiently.
c) The auditor will be able to better plan for
the observation of the physical inventories.
d) The auditor will be able to plan the audit
work so that it may be done expeditiously.
161. Which of the following best describes
the reason why an independent auditor
reports on financial statements?
a) A management fraud may exist and is
more likely to be detected by independent
auditors.
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) Poorly designed internal control may exist.
162. What is the general character of the
three generally accepted auditing standard
classified as general standards?
a) Criteria for content of the F/S and the
auditor's report.
b) Criteria of audit planning and supervision
and evidence gathering.
c) The need to maintain an independence in
mental attitude in all matters relating to the
assignments.
d) Criteria for competence, independence
and professional care of individuals
performing the audit.
163. A CPA, while performing an audit,
strives to achieve independence in
appearance in order to
a) Reduce risk and liability.
b) Comply with the generally accepted
standards of field work.
c) Become independent in fact.
d) Maintain public confidence in the
profession.
164. The "generally accepted auditing
standards" are standards which
a) Are sufficiently established so that
independent auditors generally agree on
their existence.
b) Are generally accepted based upon a
pronouncement of the Financial Accounting
Standards Board.
c) Are generally accepted in response to the
changing needs of the business community.
d) Are generally accepted as a
consequence of approval of the AICPA
membership.
165. The primary objective of the ordinary
examination of financial statement by a CPA
is the expression of an opinion on
a) The competence of management in
accounting matters which is implied by
whether the opinion is qualified or not.
b) The conformity of the statements with the
book of account.
c) The conformity of the financial statements
with generally accepted auditing standards
applied on a basis consistent with that of the
prior year.
d) The fairness with which the financial
statements present cash flows and
results of operations.
166. The primary responsibility for the
adequacy of disclosure in the financial
statements of a publicly held company rests
with the
a) Partner assigned to the engagement.
b) Auditor in charge of field work.
c) Management of the company.
d) Securities & Exchange Commission.
167. A CPA should comply with applicable
GAAS on every engagement
a) Without exception.
b) Except in examinations that result in a
qualified report.
c) Except in engagements where the CPA is
associated with unaudited F/S.
d) Except in examinations of interim financial
statements.
168. Which of the following best describes
what is meant by GAAS?
a) Audit objectives generally determined on
audit engagements.
b) Acts to be performed by the auditor.
c) Measures of the quality of the auditor's
performance.
d) Procedures to be used to gather evidence
to support financial statements.
169. The first general standard recognizes
that regardless of how capable an individual
may be in other fields, the individual can not
meet the requirements of the auditing
standards without the proper
a) Business and finance course.
b) Quality control and peer review.
c) Education & experience in auditing.
d) Supervision and review skills.
170. The first general standard requires that
the examination of F/S is to be performed by
a person having adequate technical training
and
a) Independence with respect to the F/S and
supplementary disclosures.
b) Exercising professional care as judged by
peer reviewers.
c) Proficiency as an auditor which likely
has been acquired from previous
experience.
d) Objectivity as an auditor as verified by
proper supervision.
171. Due professional care requires
a) A critical review of the work done at
every level of supervision.
b) The examination of all corroborating
evidence available.
c) The exercise of error free judgment.
d) A study and review of the I/C's that
include tests of controls
172. The third general standard states that
due care is to be exercised in the
performance of the examination. This
standard means that a CPA who undertakes
an engagement assumes a duty to perform
each audit
a) As a professional possessing the
degree of skill commonly possessed by
others in the field.
b) In conformity with generally accepted
accounting principles.
c) With reasonable diligence and without
fault or error.
d) To the satisfaction of governmental
agencies and investors who rely upon the
audit.
173. According to court decision, GAAS
established by the AICPA applies
a) Only to AICPA members.
b) To all CPA's.
c) Only to those who choose to follow them.
d) Only when conducting audits subject to
the AICPA jurisdiction.
174. Which of the following best describes
the reason why an independent auditor
reports on financial statements?
a) A management fraud may exist and is
more likely to be detected by independent
auditors.
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) Poorly designed internal control may exist.
(Yes, this is the same as #8, ask me why!!!)
175. The independent audit is important to
readers of F/S because it
a) Determines the future stewardship of the
management of the company whose
financial statements are audited.
b) Measures and communicates financial
and business data in the F/S.
c) Involves the objective examination of,
and reporting on, management-prepared
statements.
d) Reports on the accuracy of all information
in the F/S.
176. Independent auditing can best be
described as
a) A branch of accounting.
b) A discipline that attests to the results
of accounting and other functional
operations and data.
c) A professional activity that measures and
communicates financial and business data.
d) A regulatory function that prevents the
issuance of improper financial information.
177. What is the meaning of the GAAS that
requires the auditor to be independent?
a) The auditor must be without bias with
respect to the client under audit.
b) The auditor must adopt a critical attitude
during the audit.
c) The auditor's sole obligation is to third
parties.
d) The auditor may have a direct ownership
interest in the client's business if it is not
material.
178. The primary purpose of a management
advisory services engagement is to help the
client
a) Become more profitable by relying upon
the CPA's existing personal knowledge
about the client's business.
b) Improve the use of its capabilities and
resources to achieve its objectives.
c) Document and quantify its future plans
without impairing the CPA's objectivity or
allowing the CPA to assume the role of
management.
d) Obtain benefits that are guaranteed
implicitly by the CPA.
179. Operational auditing is primarily
oriented toward
a) Future improvements to accomplish
the goals of management.
b) The accuracy of data reflected in
management's financial records.
c) The verification that a company's financial
statements are fairly presented.
d) Past protection provided by existing
internal control.
180. Because an examination i/a/w GAAS is
influenced by the possibility of material
errors, the auditor should conduct the
examination with an attitude of
a) Professional responsiveness.
b) Conservative advocacy.
c) Objective judgment.
d) Professional skepticism.
181. The exercise of due professional care
requires that an auditor
a) Use error-free judgment.
b) Consider the internal control structure,
including tests of controls.
c) Critically review the work done at every
level of supervision.
d) Examine all corroborating evidence
available.
182. CPA firms should establish quality
control policies and procedures for personnel
management in order to provide reasonable
assurance that
a) Employees promoted possess the
appropriate characteristics to perform
competently.
b) Personnel will have the knowledge
required to fulfill responsibilities
assigned.
c) The extent of supervision and review in a
given instance will be appropriate.
d) All of the above are reasons.
183. The least important evidence of a CPA
firm's evaluation of its system of QC would
concern the CPA firm's policies and
procedures for
a) Employment (hiring).
b) Confidentiality of audit engagements.
c) Assigning personnel to audit
engagements.
d) Determination of audit fees.
184. A CPA establishes QC policies and
procedures for deciding whether to accept a
new client or continue to perform services for
a current client. The primary purpose for
establishing such policies is to
a) Enable the auditor to attest to the integrity
or reliability of a client.
b) Comply with the quality control standards
established by regulatory bodies.
c) Minimize the likelihood of association
with clients whose management lacks
integrity.
d) To lessen the exposure to litigation
resulting from failure to detect irregularities in
client financial statements.
185. In pursuing its quality control objectives
with respect to acceptance of a client, a CPA
firm is not likely to
a) Make inquiries of the proposed client's
legal counsel.
b) Review financial statements of the
proposed client.
c) Make inquiries of previous auditors.
d) Review the personnel practices of the
proposed client.
186. Within the context of quality control, the
primary purpose of continuing professional
education and training activities is to enable
a CPA firm to provide personnel within the
firm with
a) Technical training that assures proficiency
as an auditor.
b) Professional education that is required in
order to perform with due professional care.
c) Knowledge required to fulfill assigned
responsibilities and to progress within
the firm.
d) Knowledge required in order to perform a
peer review.
187. In pursuing a CPA firms' quality control
objectives, a CPA firm may maintain records
indicating which partners or employees of
the CPA firm were previously employed by
the CPA firm's clients. Which quality control
objective would this be most likely to satisfy?
a) Acceptance of client.
b) Supervision.
c) Independence.
d) Monitoring.
188. In pursuing its quality control objectives
with respect to independence, a CPA firm
may use policies and procedures such as
a) Emphasizing independence of mental
attitude in firm training programs and in
supervision and review of work.
b) Prohibiting employees from owning stock
of public companies.
c) Suggesting that employees conduct their
banking transactions with banks that do not
maintain accounts with client firms.
d) Assigning employees who may lack
independence to research positions that do
not require participation in field audit work.
189. Which of the following is an element of
quality control?
a) Supervision
b) Inspection
c) Personnel management
d) Consultation
190. In connection with the element of
monitoring, a CPA firm's system of quality
control should ordinarily provide for the
maintenance of
a) A file of minutes of staff meetings.
b) Updated personnel files.
c) Documentation to demonstrate
compliance with its policies and
procedures.
d) Documentation to demonstrate
compliance with peer review directives.
191. One element of the personnel
management quality control standard is
professional development. The primary
reason why a CPA firm establishes policies
and procedures for professional
development of staff accountants is to
a) Comply with the continuing educational
requirements imposed by various states for
all staff accountants in CPA firms.
b) Establish, in fact as well as in
appearance, that staff accountants are
increasing their knowledge of accounting
and auditing matters.
c) Provide a forum for staff accountants to
exchange their experiences and views
concerning firm policies and procedures.
d) Provide reasonable assurance that
staff personnel will have the knowledge
required to enable them to fulfill
responsibilities.
192. Which of the following is a quality
control standard?
a) Peer review.
b) Administrative control.
c) Engagement performance.
d) Time studies.
193. What is the responsibility of a
successor auditor (SA) with respect to
communicating with the predecessor auditor
(PA) in connection with a prospective new
client?
a. The SA has no responsibility to contact
the PA.
b. The SA should obtain permission from
the prospective client to contact the PA.
c. The SA should contact the PA regardless
of whether the prospective client authorizes
contact.
d. The SA need not contact the PA if the
successor is aware of all available relevant
facts.
194. A CPA firm's personnel partner
periodically studies the CPA firm's personnel
advancement experience to ascertain
whether individuals meeting stated criteria
are assigned increased degrees of
responsibility. This is evidence of the CPA
firm's adherence to prescribed standards of
a) Quality control.
b) Due professional care.
c) Supervision and review.
d) Field work.
195. Quality control for a CPA firm as
referred to in Statements on Quality Control
Standards, applies to
a) Auditing services only.
b) Auditing and management advisory
services.
c) Auditing and tax services.
d) Auditing and accounting and review
services.
196. A prospective client's refusal to grant a
CPA permission to communicate with the
predecessor auditor will bear directly on the
CPA's ability to
a) Determine appropriate pricing of the audit.
b) Determine the integrity of
management.
 c) Determine the beginning balances of the
current year's financial statements.
d) Establish consistency in application of
GAAP between years.
197 . Prior to the acceptance of an audit
engagement with a client who has
terminated the services of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without
advising the prospective client and request a
complete report of the circumstances leading
to the termination with the understanding
that all information disclosed will be kept
confidential.
b. Accept the engagement without contacting
the predecessor auditor since the CPA can
include audit procedures to verify the reason
given by the client for the termination.
c. Not communicate with the predecessor
auditor because this would, in effect, be
asking the auditor to violate the confidential
relationship between auditor and client.
d. Advise the client of the intention to
contact the predecessor auditor and
request permission for the contact.
198. Before accepting an audit engagement,
a successor auditor should make specific
inquiries of the predecessor auditor
regarding the predecessor's
a. Awareness of the consistency in the
application of GAAP between periods.
b. Evaluation of all matters of continuing
accounting significance.
c. Opinion of any subsequent events
occurring since the predecessor's audit
report was issued.
d. Understanding as to the reasons for
the change of auditors.
199. The single feature that most clearly
distinguishes auditing, attestation, and assurance
is
a. Type of service.
b. Training required performing the
service.
c. Scope of services.
d. CPA’s approach to the service.
200. The auditor's judgment concerning the
overall fairness of the presentation of
financial position, results of operations,
and changes in financial position is applied
within the framework of
a. Generally accepted accounting
principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.
201. The auditor communicates the results of his
or her work through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.
202. The four major steps in conducting an audit
are:
a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances
The proper sequence in applying the above
steps is:
a. cadb b. cdab
c. bcda d.
adcb
203.) Which of the following best describes the
purpose of the engagement letter?
a. The engagement letter relieves the
auditor of some responsibility for the
exercise of due care.
b. By clearly defining the nature of the
engagement, the engagement letter
helps to avoid and resolve
misunderstandings between CPA and
client regarding the precise nature of the
work to be performed and the type of
report to be issued.
c. The engagement letter conveys to
management the detailed steps to be
applied in the audit process.
d. The engagement letter should be signed
by both the client and the CPA and
should be used only for independent
audits.
204. Which of the following is
mandatory if the auditor is to comply with
generally accepted auditing standards?
a. Possession by the auditor of adequate
technical training.
b. Use of analytical review on audit
engagements.
c. Use of statistical sampling whenever
feasible on an audit engagement.
d. Confirmation by the auditor of material
accounts receivable balances.
205. Which of the following
statements best describes why the CPA
profession has deemed it essential to
promulgate ethical standards and to
establish means for ensuring their
observance?
a. A requirement for a profession is the
establishment of ethical standards that
stress primarily a responsibility to clients
and colleagues.
 b. A requirement of most state laws calls
for the profession to establish a code of
ethics.
c. An essential means of self-protection for
the profession is the establishment of
flexible ethical standards by the
profession.
d. A distinguishing mark of a profession is
its acceptance of responsibility to the
public.
206. Pursuant to the AICPA
rules of conduct, the auditor's responsibility
to the profession is defined by
a. The AICPA Code of Professional
Conduct.
b. Federal laws governing licensed
professionals who are involved in
interstate commerce.
c. Statements on Auditing Standards.
d. The Bylaws of the AICPA.
207. The exercise of due
professional care requires that an auditor
a. Examine all available corroborating
evidence.
b. Critically review the judgment exercised
at every level of supervision.
c. Reduce control risk below the
maximum.
d. Attain the proper balance of professional
experience and formal education.
208. In determining estimates
of fees, an auditor may take into account
each of the following, except the
a. Value of the service to the client.
a. Degree of responsibility assumed by
undertaking the engagement.
b. Skills required to perform the service.
c. Attainment of specific findings.
Choose the following actions with the Code of
Conduct rule violated by the action. No rule is
used more than once. Briefly explain why the
action is a violation of the rule cited.
a. Independence
b. Integrity and objectivity
c. General standards
d. Compliance with standards
209. Brianna Lopez, CPA,
agreed to review loan applications for First
Charter Bank, an audit client. The bank
granted or denied the loans on the basis of
Lopez’ recommendations.
A 215.
210. In defense of a lawsuit
alleging negligence, Melissa Franklin, CPA,
explained that she was not an expert in
commodities trading and therefore did not
detect the accounting fraud perpetrated by
her client, a commodities broker.
C
211. In reviewing the corporate
tax return for Eager Turnstiles, Inc., Abba
Shah, CPA, discovered that Eager’s
controller had incorrectly reported a
P500,000 purchase of painting equipment as
repairs expense. When Shah informed the
controller of the tax code violation, she
refused to correct the return. Shah signed
the return as preparer.
D
212. Ben Williams, CPA, issued
an unqualified opinion on a set of financial
statements, even though he felt
uncomfortable about an accounting practice
applied by the client. Although the practice
in question was in accordance with GAAP,
it increased net income significantly above a
level that Williams considered reasonable.
B
Choose the following actions with the Code of
Conduct rule violated by the action. No rule is
used more than once. Briefly explain why the
action is a violation of the rule cited.
a. Accounting principles
b. Confidential client information
c. Contingent fees
d. Acts discreditable
213. Juanita Garcia, CPA,
refused to be associated with a client’s
financial statements after the client declined
to correct a material misstatement. Garcia
later contacted James Jordan, CPA, retained
by the client to replace Garcia, and informed
Jordan of the misstatement.
B
214. Rudy Boesch, CPA,
accepted an audit engagement for a fixed
fee of P27,000 plus 1% of audited net
assets. C
Jones Transfer Company
wishes to defer charging certain research
and development expenditures to current
income on the basis that the expenditures
are virtually certain to benefit future
 operations. For this reason, Jack Risher,
CPA and Jones’ auditor, agrees with the
proposed accounting treatment.
A would ordinarily be considered by the
216. The following are
examples of the type of information that may
come to the auditor’s attention which might
indicate that noncompliance with laws or
regulations has occurred. One of them is not.
Identify the exception:
a. Media comment
b. Industry is regulated by various
government agencies
c. Unusual payments in cash, purchases in
the form of cashier’s checks payable to
bearer or transfers to numbered bank
accounts
d. Payments without proper exchange
control documentation
217. As used in PSA 250
(Consideration of Laws and Regulations in
an Audit of Financial Statements), this term
refers to acts of omission or commission by
the entity being audited, either intentional or
unintentional, which are contrary to
prevailing laws or regulations.
a. Noncompliance
c. Erotic acts
b. Illegal acts
d. Unforgivable acts
218. According to PSA 250, the
term “noncompliance” as used in the
standards refers to acts of omission or
commission by the entity being audited,
either intentional or unintentional, which are
contrary to the prevailing laws or regulations.
Such acts do not include
a. Transactions entered into by the entity.
b. Transaction entered into in the name of
the entity.
c. Transaction entered into on the entity’s
behalf by its management or
employees.
d. Personal misconduct (unrelated to the
entity’s business activities) by the
entity’s management or employees.
219. The responsibility for the
prevention and detection of noncompliance
rest with
a. The auditor.
c. The auditor’s lawyer.
b. Management
d. The client’s lawyer.
220. PSA 250 states that in
order to plan the audit, the auditor should
obtain a general understanding of the legal
and regulatory framework applicable to the
entity and the industry and how the entity is
complying with that framework. To obtain
this understanding, the following procedures
auditor, except
a. Use the existing understanding of the
entity’s industry, regulatory, and other
external factors.
b. Inquire of management concerning the
entity’s policies and procedures
regarding compliance with laws and
regulations.
c. Inquire of management as to the laws
and regulations that may be expected to
have a fundamental effect on the
operation of the entity.
d. Inspect correspondence with relevant
licensing or regulatory authorities.
221. Which of the following
statements is incorrect concerning reporting
of noncompliance?
a. The auditors, as soon as practicable,
either communicate with those charged
with governance, or obtain evidence that
they are appropriately informed,
regarding noncompliance that comes to
the auditor’s attention.
b. If the auditor suspects that members of
senior management, including members
of the board of directors, are involved in
noncompliance, the auditor should
report the matter to the next higher level
of authority at the entity, if it exists, such
as an audit committee or a supervisory
board.
c. The auditor should, as soon as
practicable, communicate with those
charged with governance regarding
noncompliance, including matters that
are clearly inconsequential or trivial.
d. If in the auditor’s judgment, the
noncompliance is believed to be
intentional and material, the auditor
should communicate the finding without
delay.
222. If the auditor concludes
that the noncompliance has a material effect
on the financial statements, and has not
been properly reflected in the financial
statements, the auditor should express
a. A qualified or an adverse opinion.
c. A disclaimer of opinion.
b. A qualified opinion or a disclaimer of
opinion. d. A qualified opinion.
223. If the auditor is precluded
by the entity from obtaining sufficient
appropriate audit evidence to evaluate
whether noncompliance that may be material
 to the financial statements, ha, or is likely to
have, the auditor should express
a. A qualified or an adverse opinion.
c. An adverse opinion.
b. A qualified opinion or a disclaimer of
opinion. d. An adverse opinion or a
disclaimer of opinion.
224. Under which of the
circumstances below would the auditor
conclude that withdrawal from the
engagement is necessary?
a. The auditor concludes that the
noncompliance has a material effect on
the financial statements and has not
been properly reflected in the financial
statements.
b. The auditor is precluded by the entity
from obtaining sufficient appropriate
audit evidence to evaluate whether
noncompliance that may be material to
the financial statements, has, or is likely
to have, occurred.
c. The auditor is unable to determine
whether noncompliance has occurred
because of limitations imposed by the
circumstances rather than by the entity.
d. The entity does not take the remedial
action that the auditor consider
necessary in the circumstances.
than the average. The prudent auditor is
expected to
a. Assign more experienced auditors to the
engagement
b. Assign a more members to the
engagement
c. Make a more extensive test of controls
d. Raise the materiality level
227. A type of fraud in which an
employee takes assets from an organization
for personal gain.
a. Fraudulent financial reporting
b. Defalcation
c. Window dressing
d. Secret reserve
228. Which of the following is
least likely a factor that increases potential
for fraud?
a. Operating, financing and investing
decisions are dominated by a single
person.
b. Operating results are highly sensitive to
outside economic conditions.
c. Audit client has been in the business
and the leader of the industry for more
than a decade.
d. Organization is decentralized without
adequate monitoring

225. Detection of 229. In assessing potential for

noncompliance, regardless of materiality
requires considerations of the following
fraud, the following are either likely or
unlikely to increase risk of misstatements of
financial statements. Which of the following
combinations
a best describes the likelihood of
potential .for fraud?

A B
C b D
Many contentious
. or difficult accounting
issues
are present
c Likely Likely
Likely . Unlikely
Significant and unusual related-party
transactions
are present
d
. Likely Unlikely
Integrity of management Unlikely Unlikely
Yes Yes Direction of change in entity’s industry is
Yes No declining
Possible effect on other aspects of the audit with many businesses
Yes Yes Likely Likely
No Yes Unlikely Likely
Legal determination of the act of non-
compliance Yes No 230. Which of the following is
Yes No an incorrect statement?
a. The amount of audit work should vary
226. The auditor-in-charge of inversely with the likelihood of material
engagement assesses risk of fraud higher misstatements existing in the accounting
records.
 b. The better the organization’s control
structure, the less likely it is that material
misstatements will be present
c. Complex or unusual transactions are
more likely to be recorded in error than
recurring or routine transactions are
d. If misstatements are likely to occur in
the recording process, the auditor
should develop procedures to detect
misstatements.
231. In the regular audit of X
Company, B, CPA, discovered a material
fraud being perpetrated by the cashier.
What do you expect most of B, CPA to do?
a. Report the incident to the SEC
b. Communicate the existence and details
of the fraud to the audit committee of the
board of directors and to management
at least one level above that where the
fraud has occurred.
c. Advice the shareholders of the client
company regarding the fraud.
d. Make an extensive investigation in order
to account for the extent of the fraud.
232. How do auditing standards
consider the auditor’s responsibilities for
detecting fraud and errors?
a. Auditing standards make no distinction
between the auditor’s responsibilities for
searching for errors and fraud.
b. The difficulty of detecting fraud changes
the auditor’s responsibility from
reasonable to limited assurance.
c. The auditor should plan to discover
material errors and all forms of fraud
d. Auditing standards provide an implicit
responsibility for the auditor to discover
material misstatement due to fraud.
233. What should the auditor do
first when in an audit of a client entity, an
illegal act has been identified?
a. Consider the effects of the illegal act on
the financial statements
b. Communicate the matter with the audit
committee of the board of directors
c. Submit a confidential report to the SEC
d. Consult the client’s legal counsel about
the matter
234. Lapping is
a. Making the financial statements indicate
a more favorable position by giving
effect to tr5ansactions is a period other
than that in which these actually
occurred
b. Done to inflate the cash position or
cover the theft of cash by depositing at
the end of the accounting period a
check drawing on one bank account in
another bank account without making
the necessary deduction in the balance
of the first bank
c. An irregularity that conceals cash
shortages by a delay in recording cash
collections, retaining a customer’s
payment on credit sales and covering up
the shortage with subsequent cash
receipts
d. A kind of fraud committed by making
entry of fictitious payments or failure to
enter receipts
235. In general, material fraud
perpetrated by which of the following are
most difficult to detect
a. Cashier
c. Internal auditor
b. Keypunch operator
d. Controller
236. Certain management
characteristics may heighten the auditor’s
concern about the risk of material
misstatements. The characteristic that is
least likely to cause concern is that
management
a. Operating and financing decisions are
made by numerous individuals
b. Commits to unduly aggressive forecasts
c. Has an excessive interest in increasing
the entity’s stock price through use of
unduly aggressive accounting practices
d. In interested in inappropriate methods of
minimizing earnings for tax purposes
237. In a financial statements
audit, the auditor should consider categories
of fraud risk factors. The auditor is most
likely to presume that a high risk of a
declaration exists if
a. The client is a multinational company
that does business in numerous foreign
countries
b. The client does business with several
related parties
c. Inadequate segregation of duties places
an employee in a position to perpetrate
and conceal thefts
d. Inadequate employee training results in
lengthy EDP exception reports each
month
238. Which of the following
characteristics most likely would heighten an
auditor’s concern about the risk of intentional
manipulation of financial statements?
a. Turnover of senior accounting personnel
is low
b. Insiders recently purchased additional
shares of the entity’s stock
 c. Management places substantial
emphasis on meeting earnings
projection
d. The rate of change in the entity’s
industry is slow
239. Under Section 2 of RA
9298, the State recognizes the importance of
accountants in nation building and
development. Hence, it shall develop and
nurture competent, virtuous, productive and
well rounded professional accountants
whose standards of practice and service
shall be excellent, qualitative, world class
and globally competitive through
a. Inviolable, honest, effective
and credible licensure
examinations
b. Regulatory measures,
programs and activities that
foster their professional growth
and development
a. I only b. II only c. I and II
d. Neither I nor II
240. The objectives of the
Philippine Accountancy Act of 2004 are the
following, except:
a. Standardization and regulation of
accounting education.
b. Integration of accountancy profession.
c. Examination for registration of certified
public accountants.
d. Supervision, control and regulation of
the practice of accountancy.
241. Practice of Public
Accountancy shall constitute in a person:
a. When involved in decision making
requiring professional knowledge in the
science of accounting, as well as the
accounting aspects of finance and
taxation.
b. When he/she is appointed in an
accounting professional group in
government or in a government-owned
and/or controlled corporation, including
those performing proprietary functions,
where decision-making requires
professional knowledge in the science of
accounting.
c. When he or she is involved in teaching
of accounting, auditing, management
advisory services, accounting aspect of
finance, business law, taxation and
other technically related subjects.
d. When a person is skilled in the
knowledge, science and practice of
accounting and as a qualified person to
render professional services as a CPA.
242. Any position in any
business or company in the private sector
which requires supervising the recording of
financial transactions, preparation of
financial statements, coordinating with the
external auditors for the audit of such
financial statements and other related
functions shall be occupied only by a duly
registered CPA. Provided
a. That the business or company
where the above position exists
has a paid-up capital of at least
P10,000,000 and/or annual
revenue of at least P5,000,000.
b. The above provision shall
apply only to persons to be
employed after the effectivity of
the Implementing Rules and
Regulations of RA 9298.
c. The above provision shall not
result to deprivation of the
employment of incumbents to
the position.
a. I, II, and III
c. II and III
b. I and II
d. I and III
243. The following statements
relate to the Board of Accountancy. Which
statement is incorrect?
a. The Board consists of a Chairman and
six members
b. The Chairman and members are
appointed by the President of the
Philippines upon recommendation of
PRC
c. No person shall be appointed a member
of the Board unless he is natural-born
citizen of the Philippines, a duly
registered CPA and has been in the
practice of accountancy for at least ten
years
d. The Professional Regulation
Commission may remove from the
Board any member whose certificate to
practice has been removed or
suspended
244. The APO shall submit its
nominations with complete documentation to
the Commission not later than ____ prior to
the expiry of the term of an incumbent
chairman or member.
a. 30 days b. 60 days
c. 90 days
d. 120 days
245. Which of the following is
incorrect regarding the qualifications of
members of the Board of Accountancy?
 a. Must be a natural-born citizen and
resident of the Philippines
b. Must be a duly registered Certified
Public Accountant with at least fifteen
(15) years of work experience in any
scope of practice of accountancy
c. Must be a good moral character and
must not have been convicted of crimes
involving moral turpitude
d. Must not have any pecuniary interest,
directly or indirectly, in any school,
college, university where review classes
in preparation for the licensure
examination are being offered or
conducted
246. Which of the following
statements is incorrect according to Section
7 of the Philippine Accountancy Act of 2004
(RA 9298)?
a. The Chairman and the members of the
Professional Regulatory Board of
Accountancy (PRBOA) shall hold office
for a term of three (3) years.
b. No person who has served two(2)
successive terms shall be eligible for
reappointment until the lapse of one (1)
year.
c. Any vacancy occurring within the term of
a member shall be filled up for the
unexpired portion of the term only.
d. Appointment to fill up an unexpired term
is considered as a complete term.
247. The following statements
relate to CPA examination ratings. Which
statement is incorrect?
a. To pass the examination, candidates
should obtain a general weighted
average of 75% and above, with no
rating in any subject less than 65%.
b. Candidates who obtain a rating of 75%
and above in at least four subjects shall
receive a conditional credit for the
subjects passed.
c. Conditioned candidates shall take an
examination in the remaining subject
within three years from the preceding
examination.
d. Candidates who fail in two (2) complete
CPA examinations may be allowed to
take examinations a third time provided
he or she will comply with Sec. 18 of this
Act.
248. The Board shall submit to
the Commission the ratings obtained by
each candidate within ten (10) calendar days
after the examination, unless extended for
just cause
Any candidate who fails in two (2) complete
Certified Public Accountant Board
Examination shall be disqualified from taking
another set of examinations unless he/she
submits evidence to the satisfaction of the
Board that he/she enrolled in and completed
at least twenty-four (24) units of subject
given in the licensure examination.
a. True, True b. True, False
c. False, False d.
False, True
249. Which statement is(are)
correct regarding CPE requirements for
renewal of professional license?
a. The total CPE credit units
required for CPAs shall be sixty
(60) units for three (3) years,
provided that a minimum of
fifteen (15) credit units shall be
earned in each year.
b. Any excess credit units in one
year may be carried over to the
succeeding years within the
three-year period.
c. Excess credit units earned
shall not be carried over to the
next three-year period without
exception.
d. A registered professional who
is working abroad shall be
temporarily exempted from
compliance with CPE
requirement during his/her stay
abroad, provided that he/she is
has been out of the country for
at least one year immediately
prior to the date of renewal.
a. I, II and III only
c. I , II and IV only
b. I and II only
d. I , II, III and IV
250. Which statement is
incorrect regarding CPE requirements for
renewal of professional license?
a. The total CPE credit units required for
CPAs shall be sixty (60) units for three
(3) years, provided that a minimum of
fifteen (15) credit units shall be earned
in each year.
b. A registered professional shall be
permanently exempted from CPE
requirements upon reaching the age of
65 years old.
c. A registered professional who is working
abroad shall be temporarily exempted
from compliance with CPE requirement
during his/her stay abroad, provided that
he/she is has been out of the country for
at least one year immediately prior to
the date of renewal.
 d. Those who failed to renew professional
licenses for a period of five (5)
continuous years from initial registration,
or from at last renewal shall be declared
delinquent.
251. How many credit units per
hour is (are) earned by a CPA who serves as
a resource speaker at a CPE seminar?
a. 1 CU per hour
c. 3 CU per hour
b. 5 CU per hour
d. 2 Cu per hour
252. Generally, the decision to notify parties
outside the client’s organization of an illegal
act is the responsibility of the
a. Independent auditor
c. Outside legal
counsel
b. Management
d. Internal auditors
253. An audit should be designed to achieve
reasonable assurance of detecting material
a. Errors
b. Errors and irregularities with a direct
effect on financial statement amounts
c. Errors, irregularities and those illegal
acts with a direct effect on financial
statement amounts and presentation
d. Errors, irregularities and illegal acts
254. Which of the following statements reflects an
auditor’s responsibility for detection fraud
and error?
a. An auditor is responsible for detecting
employee errors and simple fraud, but
not for discovering fraud involving
employee collusion or management
override
b. An auditor should plan the audit to
detect errors and fraud that are caused
by departures from GAAP
c. An auditor is not responsible for
detecting errors and fraud unless the
application of GAAS would result in
such detection
d. An auditor should design the audit to
provide reasonable assurance of
detecting errors and fraud that are
material to the financial statements
255. Which of the following is not an example of
an error?
a. Client personnel make mistakes in
gathering or processing accounting data
from which financial statements are
prepared
b. Client personnel after accounting
records from which financial statements
are prepared
c. Client personnel overlook or misinterpret
facts, causing accounting estimates to
be incorrect
d. Client personnel make mistakes in the
application of accounting principles
256. Under PSA 260, this term is used to describe
the role of persons entrusted with the
supervision, control, and direction of an
entity.
A. Oversight
C. Direction
B. Governance
D. Control
257. According to PSA 260, those matters that
arise from the audit of financial statements
and, in the opinion of the auditor, are both
important and relevant to those charged with
governance in overseeing the financial
reporting and disclosure process are called
A. Audit matters of governance interest.
C. Auditor’s findings.
B. Significant audit matters.
D. Material misstatements in
the financial statements.
258. Which of the following statements relating to
communication of audit matter of
governance interest is incorrect?
A. Audit matters of governance interest
include only those matters that have
come to the attention of the auditor as a
result of the performance of the audit.
B. In an audit in accordance with PSAs, the
auditors should design audit procedures
for the specific purpose of identifying
matters of governance interest.
C. The auditor should identify relevant
persons who are charged with
governance and with whom audit
matters of governance interest are to be
communicated.
D. The auditor’s communications with
those charged with governance may be
made orally or in writing.
259. While performing professional services for
their clients, CPAs have always had a duty
to exercise a level of care which is best
described as:
a. Greater than average
c. Infallible
b. Superior
d. Reasonable
260. S1: Integrity is attribute that most clearly
differentiates a CPA who audits
management’s financial statements as
contrasted to management.
S2. Not all engagements require integrity
 a. True, True
c. False, true
b. True, false
d. False, false
261. Karen Corporation has engaged Gelai, CPA,
to issue a report on the accuracy of product
quality specifications included in trade sales
agreements. This is an example of a(n):
a. Attestation service.
c. Compliance audit.
b. Financial statement audit.
d. Operational audit.
262. One of the general principles of an audit is
compliance with Philippine Standards on
Auditing (PSAs). As a consequence of his
failure to adhere to PSAs in the course of his
examination of the Mariz Combined
Machinery, Inc., Eric, CPA, did not detect the
embezzlement of a material amount of funds
by Ubebe Gandarita, the company’s
controller. As a matter of common law, to
what extent would Eric be liable to Mariz
Combined Machinery, Inc., for losses
attributable to the theft?
a. Eric would be liable for losses
attributable to his negligence.
b. Eric would be liable only if it could be
proven that he committed gross
negligence.
c. Eric would have no liability because
privity of contract is lacking.
d. Eric would have no liability, since the
ordinary examination cannot be relied
upon to detect embezzlement.
263. The following, except one, is always present
in attest engagements. Select the exception:
a. The issuance of a written report.
b. The consideration of internal control.
c. The presence of written assertions
which is the responsibility of another
party.
d. Independence of mind and in
appearance on part of the auditor.
264. A technique for regularly and systematically
appraising a unit of function and its
effectiveness against corporate and industry
standards with the objective of assuring
management that its aims are being carried
out and/or identifying conditions that provide
an opportunity for improvement:
a. Financial audit
c. Compliance audit
b. Operational audit
d. management audit
265. Lotlot, CPA, has issued a report with the
following wordings: “In our opinion, the
schedule presents, in all material
respects…”. In this situation, Lotlot’s report is
likely to be:
a. A standard audit report.
b. An audit report with a qualified opinion.
c. An attestation with a qualified opinion.
d. An attestation report.
266. An audit should be designed to achieve
reasonable assurance of detecting material:
a. Errors.
b. Errors and irregularities.
c. Errors, irregularities, and those illegal
acts with a direct effect on financial
statement amounts.
d. Errors, irregularities and illegal acts,
regardless of whether it has a direct or
indirect effect on financial statement
amounts.
267. Evidence gathering in a scientific experiment
is most similar to which phase of the audit?
a. Planning and supervising an
engagement.
b. Hypothesizing that financial statements
are present fairly.
c. Evaluating whether the financial
statements are fairly presented.
d. Assessing risks and designing audit
procedures to address these risks.
268. The review of a company’s financial
statements by a CPA firm:
a. Culminates in issuance of a report
expressing the CPA’s opinion as to the
fairness of the statements.
b. Is substantially less in scope of
procedures than an audit.
c. Is of similar scope as an audit and adds
similar credibility to the statements.
d. Requires detailed analysis of the major
accounts.
269. Berto, CPA, discovered an illegal act during
the audit of UBE Corporation, a publicly held
company. Accordingly, which of the following
would be the best response by Berto?
a. Berto shall notify the Securities and
Exchange Commission regarding the
illegal act.
b. Berto should determine who was
responsible for the illegal act.
c. Berto shall report the act to the audit
committee and high level personnel
within Ube Corporation.
d. Berto shall intensity the examination to
identify all illegal acts.
270. In determining estimates of fees, an auditor
may take account each of the following,
except the:
a. Value of the service to the client.
 b. Degree of responsibility assumed by
undertaking the engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.
271. Cruz, Del Rosario, CPAs, was hired by Ariel
Rivera Company to give an opinion on
recently prepared, but still unaudited,
financial statements. The statement that best
describes this engagement is:
a. The CPA is performing an examination
of the financial statements rather than
an accounting service.
b. The financial statements are
representations of both management
and the CPA.
c. The CPA is performing and accounting
service rather than an examination of
the financial statements.
d. The CPA may prepare the statements
from the books, but may not assist in
adjusting and closing the books.
272. During planning, one of the auditor’s
considerations is the presence of fraud risk
factors. Which of the following factors would
most likely heighten an auditor’s concern
about the risk of fraudulent financial
reporting?
a. Presence of large amounts of liquid
assets that are readily convertible into
cash.
b. Low growth and profitability ratios as
compared to other entities within the
same industry.
c. An overly complex organizational
structure involving unusual lines of
authority.
d. Top management’s admission of
responsibility for the establishment and
maintenance of internal controls.
273. The following are required audit procedures
in every audit engagement:
A b c d
Risk assessment procedures
Yes Yes Yes Yes
Tests of controls
Yes No Yes No
Substantive tests
Yes Yes No No
274. Which of the following statements is not
correct?
a. Objectively requires that internal
auditors have an independent mental
attitude.
b. Internal auditors should be independent
of the activities they audit.
c. It is acceptable for internal auditors to
recommend changes in operations and
to install and implement the operating
systems, as long as they do not have
the responsibility for operating them
throughout the year.
d. The internal auditor should not be
responsible for correcting deficiencies
when ineffective or inefficient operations
are found.
275. Which of the following phrases is generally
included in an audit engagement letter?
a. “The following are factors considered in
setting a preliminary judgment about
materiality…”
b. “These are the procedures that the audit
team intends to undertake…”
c. “The auditors are responsible to search
for significant deficiencies in internal
control…”
d. “Company management is responsible
for the entity’s compliance with
applicable laws, rules and regulations…"
276. The financial reporting framework adopted
by management in preparing the financial
statements that the auditor has determined
is acceptable in view of the nature of the
entity and the objective of the financial
statements, or that is required by law or
regulations.
a. Applicable financial reporting
framework.
b. Generally accepted accounting
principles.
c. Philippine standards on auditing.
d. Other comprehensive basis of
accounting.
277. Which of the following factors most likely
would influence an auditor’s determination of
the auditability of an entity’s financial
statements?
a. The adequacy of the underlying
accounting records.
b. The existence of related parties and
related party transactions.
c. The complexity of the accounting
system.
d. The operating effectiveness of control
procedures and the control environment.
278. Which of the following factors is least likely
considered when an auditor is performing
acceptance/continuance procedures?
a. The auditor’s independence of mind and
in appearance.
b. Professional competence and ability to
provide services to the client.
c. Ability of the client to achieve an
unqualified opinion.
d. Integrity of the client’s management and
those charged with governance.

279. In an audit in accordance with generally
accepted auditing standards, the auditor’s
must test compliance with those laws and
regulations that have:
a. A direct and material effect on the
financial statements.
b. A direct and material effect on major
government programs.
c. A material direct or indirect effect on the
financial statements.
d. A material effect on major or non-major
audit programs.
280. Professional experience is an important
aspect of the training and proficiency of the
junior assistant just entering upon an
auditing career. Professional experience
should be obtained:
a. Through a thorough study of the
generally accepted auditing standards.
b. With proper supervision and review of
work by a more experienced supervisor.
c. By completing a number of continuing
professional education courses each
year.
d. By taking appropriate professional
certification exams.
281. The following matters, would be considered
by the auditor in planning for an audit of
financial statements (select the exception):
a. Preliminary judgment about materiality
levels for audit purposes.
b. Anticipated reliance in internal controls.
c. Financial statement items that possess
great risk of material misstatement.
d. The kind of opinion (unqualified,
qualified, or adverse) or disclaimer of
opinion, likely to be given.
282. An audit program is usually prepared after
establishing the audit strategy and
developing the audit plan. The procedures
specifically outlined in an audit program are
primarily designed to:
a. Test all material transactions.
b. Gather corroborating evidence.
c. Serve as protection of the auditor in
case of litigation regarding negligence.
d. Detect errors or irregularities.
283. Which of the following circumstances most
likely would cause an auditor to believe that
material misstatements may exist in an
entity’s financial statements?
a. ABC Company told its auditor that “audit
trails of computer-generated
transactions exist only for a short time”.
b. Jeff Hong, chief financial officer of DEF
Manufacturing, does not want to sign
the management representation letter
until the last day of the auditor’s field
work.
c. The management of XYZ Enterprises
consults with other accountants about
significant accounting matters.
d. The accounts receivable of Jess Inc.
were circularized, and the procedure
yielded significantly fewer responses
than expected.
284. By common agreement, the audit team
assigned to Irah Mae Company decided to
set the preliminary judgment about
materiality at P100,000 or 10% of total
assets. In addition, the team decided to
allocate the P100,000 to the balance sheet
accounts. How will the allocation be
implemented?
a. Allocate the P100,000 based on the
relative carrying values of each balance
sheet account.
b. Allocate the P100,000 based on
professional judgment.
c. Allocate the P100,000 according to the
specific formula required in PSA 320,
Audit materiality.
d. 10% of the account or P100,000,
whichever is lower.
285. An item is considered material to a
company’s financial statements if the item:
a. Exceeds 5% of reported income from
operations before interest and income
taxes, or P10,000, whichever is lower.
b. Causes the company’s statement of
comprehensive income to fall short of
the expectations of external financial
analysis.
c. In substance reflects a new class of
transactions or events during the period
under audit.
d. Alters the total mix of information
significantly.
286. Considering the work of experts is one of the
factors of audit planning. Which of the
following statements is incorrect concerning
the use of the work of experts?
a. An expert under employ by the client
cannot be used for purposes of the
auditor’s work because doing so would
the rules on objectivity and
independence.
b. An auditor may use an expert in the
determination of physical characteristics
relating to inventories.
c. In the context of PSAs, an expert is a
person possessing a high degree of skill
or knowledge in fields outside auditing
and accounting.
 d. Professional competence and reputation
are some of the major considerations in
selecting an expert.
287. The auditor faces a risk that the examination
will not detect material misstatements in the
financial statements. In regard to minimizing
this risk, the auditor primarily relies on:
a. Substantive tests. c.
Internal control.
b. Tests of controls. d.
Statistical analysis.
288. Early appointment of the independent auditor
will enable:
a. A more thorough examination to be
performed.
b. A proper study and evaluation of internal
control to be performed.
c. Sufficient, appropriate evidential matter
to be obtained.
d. A more efficient examination to be
planned.
289. In an audit situation, communication
between the successor and predecessor
auditors should be:
a. Authorized in an engagement letter.
b. Acknowledged in a representation letter.
c. Either written or oral.
d. Written and included in the working
papers.
290. A professional accountant who does not
consider and apply the guidance included in
a relevant Practice Statement should be
prepared to:
a. Explain to the Board of Accountancy
tribunal why the practice statement was
not complied with.
b. Bear the consequences of such non-
compliance, such as suspension of
revocation of license, plus imprisonment
of not more than two (2) years.
c. Face the shareholders of the entity, and
explain in the meeting why such practice
statement was not complied with,
provided that the explanation is also put
in writing, and signed in the presence of
the Chairperson of the Auditing and
Assurance Council.
d. Explain how the basic principles and
essential procedures in the Engagement
Standards addressed by the Practice
Statements have been complied with.
291. Which of the following documentation is
required for an audit in accordance with
generally accepted auditing standards?
a. An internal control questionnaire.
b. A client engagement letter.
c. A planning memorandum or checklist.
d. A client representation letter.
292. Which statement is correct relating to a
potential successor auditor’s responsibility
for communicating with the predecessor
auditors in connection with a prospective
new audit client?
a. The successor auditors have no
responsibility to contact the predecessor
auditors.
b. The predecessor auditors should obtain
permission from the prospective client to
contact the successor auditors.
c. The successor auditors should contact
the predecessor regardless of whether
the prospective client authorizes
contact.
d. Refusal by the prospective client to
authorize communication between
successor auditor and predecessor
auditor may lead the successor auditor
to question the integrity of the
prospective client’s management.
293. An external auditor is determining how the
client’s internal auditor could provide direct
assistance in the engagement. Accordingly,
the internal auditor may provide direct
assistance to the external auditor in:
a. Obtaining an understanding of internal
control systems
b. Performing tests of controls
c. Performing substantive controls
d. All of the answers
294. An engagement in which an auditor is
engaged to carry out those procedures of an
audit nature to which the auditor and the
entity and any appropriate third parties have
agreed and to report on factual findings.
a. Special audit engagement.
b. Agreed-upon procedures engagement.
c. Examination of prospective information.
d. Engagement to compile information.
295. An increase in the reliance on substantive
tests usually mean that the reliance placed
on internal controls:
a. Also increases
c. Remains the same
b. Decreases
d. Cannot be
determined
296. Which of the following are considered further
audit procedures that may be designed after
assessing the risks of material
misstatement?
a
b
c
 a. To prescribe and adopt the rules and
regulations necessary for carrying out
d the provisions of RA 9298.
Tests of controls Yes b. To supervise the registration, licensure
No Yes No and practice of professions in the
Substantive tests Yes Philippines
Yes No No c. To administer oaths in connection with
the administration of RA 9298
297. The susceptibility of an account balance to d. To revoke of licenses of violators of RA
error that could be material, assuming there 9298
are no related controls, is referred to as:
a. Intangible risk 303. Which of the following best describes the
c. Inherent risk most important stage of an auditor’s
b. Detection risk statistical analysis of significant ratios and
d. Control risk trends?
a. Computation of significant ratios and
298. Which of the following ultimately determines trends
the specific audit procedures necessary to b. Interpretation of significant variations
provide an independent auditor with a and unusual relationships
reasonable basis for the expression of an c. Reconciliation of statistical data to the
opinion? client’s accounting records
a. The audit program. d. Comparison of statistical data to prior
c. GAAS. year statistics and to similar data
b. The auditor’s judgment. published by governmental and private
d. The audit sources.
documentation.
304. The probability that an auditor will give an
299. An auditor should obtain sufficient inappropriate opinion on financial statements
knowledge of an entity’s information system is:
to understand the: a. Audit risk
a. Process used to prepare significant c. Control risk
accounting estimates. b. Inherent risk
b. Controls used to assure proper d. Detection risk
authorization of transactions.
c. Safeguards used to limit access to IT 305. One of the factors affecting the control
facilities. environment is management philosophy and
d. Controls used to detect the concealment operating style. This factor most likely would
of fraud. have a significant influence on an entity’s
control environment when:
300. An auditor evaluates the existing system of a. Management is dominated by one
internal control in order to: individual
i. Determine the extent of substantive b. Accurate management job descriptions
tests which must be performed delineate specific duties
ii. Determine the extent of compliance c. The audit committee actively oversees
tests which must be performed the financial reporting process
iii. Ascertain whether irregularities are d. The internal auditor reports directly to
probable management
iv. Ascertain whether any employees have
incompatible functions 306. Which of the following would be of least
interest to the auditors on considering
301. This refers to a professional who acts as internal control?
discussion leader or lecturer in a convention a. Procedures that are concerned with the
or seminar or similar gathering: decisio9n processes leading to
i. Resource speaker management’s authorization of
c. CPE provider transactions
ii. Peer reviewer b. Procedures restricting access to assets
d. Panelist/reactor c. Procedures related to recording
transactions
302. The following are the more significant d. Policies concerning the reconciliation of
powers and functions of the Board of accounting records to existing assets
Accountancy select the exception)
307. As used in Annex C of the implementing
Rules and Regulations to RA 9298, this
refers to a guarantee degree in accountancy,
business, or related field from a recognized
school, college or university.
a. Masteral degree
c. BSA
b. Doctoral degree
d. MSA
308. This refers to the ownership of intellectual
property which includes technical or
professional books, instructional materials
and the like
a. Authorship
c. Patent
b. Copyright
d. Professional
journalism
309. Ten credit hours as participant of a
Continuing Professional Education (CPE)
program, activity or source shall be
equivalent /to:
a. 10 credit units
c. 3 credit units
b. 5 credit units
d. 1 credit units
310. Which of the following is an advantage of
describing internal control through the use of
a standardized questionnaire?
a. Questionnaires highlight weakness in
the system
b. Questionnaires are more flexible than
other methods of describing internal
control
c. Questionnaires usually identify
situations in which internal control
weaknesses are compensated for by
other strengths in the system
d. Questionnaires provide a clearer, more
specific portrayal of a client’s system
than other methods of describing
internal control
311. An auditor generally obtains evidence
regarding the segregation of duties related to
inventory by:
a. Test counts and cur-off procedures
b. Analytical procedures and invoice
recomputation
c. Document inspection and reconciliation
d. Personal inquiry and observation
312. A well designed system of internal control
that is functioning effectively is most likely to
detect an irregularity arising from:
a. The fraudulent action of several
employees
b. The fraudulent action of an individual
employee
c. Information deviations from the official
organization chart
d. Management fraud
313. The most6 important aspect of any system of
controls is:
a. Proper authorization procedures
b. Competent, trustworthy personnel
c. Separation of duties
d. Regular review by top management
314. Obtaining an understanding of an entity’s
internal control, an auditor is required to
obtain knowledge about the:
a. b. c.
d.
Operating effectiveness of controls
Yes No Yes
No
Design and operation of controls
Yes Yes No
No
315. In a small Company that employs
inadequate number of employees to permit
proper division of responsibilities, effective
internal control can best be strengthen by:
a. Delegation of full clear cut responsibility
to each employee for the functions
assigned to each
b. Employment of temporary personnel to
aid in the separation of duties
c. Direct participation by the owner of the
business in the record keeping activities
of the business
d. Affirm in writing management’s approval
of limitation on the scope of the audit
316. The following statements relates to RA 9298.
Which statement is correct?
a. The Professional Regulation
Commission has the authority to remove
after due process, any member of the
Board of Accountancy for negligence,
incompetence or any other just cause
b. The functions of the Board of
Accountancy include the preparation of
the content of the CPA licensure
examination but not the rating of
examination papers
c. After two years, subject to certain
conditions, the Board of Accountancy
must order the reinstatement of a CPA
whose certificate of registration has
been revoked.
d. Insanity is ground for issuing a
certificate of registration to a successful
CPA candidate
317. The principal purpose in conducting a study Account balances No
and evaluation of existing internal control Yes Yes
system is Yes
a. For independent auditor to maintain a Classes of transactions Yes
statement of independence in mental Yes Yes
attitude in all matters relating the audit No
b. To assure compliance with GAAP Disclosures Yes
c. To enable independent auditor to No Yes
assess and be assured of No
management’s efficiency and effectivity
d. To develop an audit plan and determine 322. Which of the following should be the focus of
the nature, timing and extent of audit analytical procedures in the context of
work required planning an audit engagement?
a. Enhancing the auditor’s understanding
318. Procedures directed toward obtaining of the entity and its environment
evidential matter concerning the b. Providing assurance that potential
effectiveness of the deign or operation of an material misstatements will be identified
internal control structure policy or c. Reducing the scope of tests of controls
procedures are referred to as: and substantive tests
a. Compliance tests d. Assessing the sufficiency and
b. Substantive tests appropriateness of audit evidence
c. Tests of controls
d. Test of internal control structure 323. There are three categories of financial
elements statement assertions: Assertions pertaining
to account balances at period end,
319. S1 The basic components operations and assertions pertaining to classes of
the primary subject matter of internal transactions and events during the period,
accounting control are transactions and assertions pertaining to presentation
S2 Narratives, flowcharts, and internal and disclosure. Which of the following is a
control questionnaires are three commonly financial statement assertion that is common
used methods for documenting the auditor’s to all three categories?
understanding of the internal control a. Existence
structure. c. Completeness
Which of the above statements is correct? b. Classifications
a. S1 only d. Occurrence
c. Both S1 and S2
b. S2 only 324. What type of analytical procedure would an
d. Neither are correct auditor most likely use in developing
relationships among balance sheet accounts
320. Which of the following parts of the audit is when reviewing the financial statements of a
described by this statement? “the auditor non public entity?
examines and evaluates processes that a. Trend analysis
produce the numbers and disclosures in the c. Ratio analysis
financial statements.” b. Regression analysis
a. Planning d. Risk analysis
b. Studying and testing internal control
c. Performing substantial tests 325. Analytical procedures are required in which
d. Issuing the audit report phases of the audit engagement?
a.
321. Financial statement assertions are
established for:
a. b.

b. c.

d.
c. Planning No
Yes Yes
Yes
d.
 Substantive testing Yes
Yes Yes
No
Audit completion Yes
No Yes
Yes
326. In auditing accounts receivable and accounts
payable, the auditor’s procedures most likely
would focus primarily on which of the
following assertions?
a. Completeness (AR) and existence (AP)
b. Existence (AR) and completeness (AP)
c. Cut-off and occurrence (AR and AP)
d. Existence and occurrence (AR and AP)
327. Philippine Auditing Practice Statements
(PAPSs):
a. Are intended to replace Philippine
Standards on Auditing (PSAs)
b. Are intended to have the same authority
as the PSAs
c. Are issued to provide practical
assistance to auditors in implementing
PSAs.
d. Are interpretations of PSAs as issued by
the Auditing and Assurance Standards
Council
328. The following statements relate to RA 9298
and its IRR. Which statement is incorrect?
a. A person shall be considered to be in
the professional practice of accounting
if, as an officer of a private enterprise,
he makes decisions requiring
professional accounting knowledge
b. When a CPA represents his/her client
before government agencies o tax and
other matters related to accounting, the
CPA is engaged in public accountancy
c. A registered professional shall be
permanently exempted from CPE
requirements upon reaching the age of
65 years old
d. The total CPE credit units required for
CPAs shall be sixty (60) units for three
years, provided that a maximum of
fifteen (15) credit units shall be earned
in each year
329. Which of the following is not an underlying
condition that creates a demand by users for
reliable information?
a. Transactions that are numerous and
complex
b. Decisions are not time sensitive
c. Financial decisions that are important to
investors and users
d. Users separated from accounting
records by distance and time
330. During the performance of risk assessment
procedures, Andoy, CPA, noted a change in
accounting principle has been effected by
the client. In this case, Andoy should plan to
evaluate the change to satisfy himself that:
a. The newly adopted principle is a
generally accepted accounting principle
b. The method of accounting for the effects
of the change is in conformity with
generally accepted accounting
principles
c. Management’s justification for the
change is reasonable
d. All of the answers
331. In a review engagement the public
accountant provides negative assurance in
the report which is issued. This can best be
described by the phrase:
a. Nothing has come to my attention
b. The financial statements present fairly
c. We are unable to express an opinion
d. Except for the issues explained above
332. Gina Dizon, CPA, is performing pre-
engagement activities. Which of the following
must Gina obtain from her predecessor, prior
to the acceptance of the engagement?
a. Analysis of income statement accounts
b. Analysis of balance sheet accounts
c. Facts that might bear on the integrity of
management
d. All matters of continuing accounting
significance
333. Which of the following best describes due
care?
a. Tact in avoiding legal liability
c.
Reasonable infallibility
b. Requisite skill and diligence
d. Freedom
from undue influence
334. The audit risk model consists of: AR = IR X
CR X DR
The detection risk is the dependent variable.
What is the acceptable level of detection risk
if the assessed level of Inherent Risk is High
and the Control risk is Low?
a. Highest b. Lower c.
Medium d. Higher
335. This refers to the audit procedures deemed
necessary in the circumstances to achieve
the objective of the review
a. Scope of an audit c.
Audit program
b. Scope of a review d.
Scope limitation
336. A certificate under seal, issued by the
Commission upon the recommendation by
the Board of Accountancy pursuant to the
revised IRR, attesting that individual CPAs
(including the staff members thereof), firms
(including the sole proprietors and the staff
members thereof) and partnerships of CPAs
(including the partners and the staff
members thereof) are duly accredited to
practice public accountancy in the
Philippines
a. Certificate of registration
c. Certificate of Identification
b. Certificate of accreditation
d. Certificate of Quality Review

337. If the auditor concludes that there is

reasonable justification to change the
engagement and if the audit work performed
complies with the PSAs applicable to the
changed engagement, the report issued
would b e that appropriate for:
a. The original engagement, without
reference to the original engagement
b. The revised terms of engagement,
without reference to the original
engagement
c. The revised terms of engagement, with
reference to the original engagement
d. The original engagement, with reference
to the original engagement

338. Which of the following services provides the

highest level of assurance to third parties
about a company’s financial statements?
a. Audits b. Reviews
c. Compilation d.
Write-up work