COMPREHENSIVE REVIEWER

AUDITING THEORY

1. In determining the primary responsibility of the external auditor for an

audit of a company‟s financial statements, the auditor owes primary
allegiance to:
A. the management of the audit client because the auditor is hired and
paid by management.
B. the audit committee of the audit client because that committee is
responsible for coordinating and reviewing all audit activities within
the company. C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it determines
auditing standards and auditor‟s responsibility.

2. Which of the following would not represent one of the primary problems
that would lead the users to demand for independent audits of a
company‟s financial statements?
A. Management bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
D. The remoteness of the user from the organization and thus the
inability of the user to directly obtain financial information from the
company.

3. Assurance services involve all the following except:

A. improving the quality of information for decision purposes.
B. improving the quality of the decision model used.
C. improving the relevance of information.
D. implementing a system that improves the processing of information.

4. Which of the following is the broadest and most inclusive concept? A.

Audits of financial statements.
B. Internal control audit.
C. Assurance services.
D. Compilation services.

5. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of the
client‟s
assertions.
B. A review provides positive assurance by attesting the reliability of the
client‟s assertions.
C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.

6. Unlike consulting services, assurance services:

A. make recommendation to management
B. report on how to use information C. report on the quality of
information
D. are two-party contracts.

7. Financial statements audits: A. reduce the cost of capital

B. report on compliance with laws and regulations
C. assess management„s efficiency
D. overlook information risk

8. A summary of findings rather than assurance is most likely to be

included in a(n):
 A. Agreed-upon procedures report
B. Compilation report
C. Examination report
D. Review report

9. The risk associated with a company's survival and profitability is referred

to as:
A. Business Risk
B. Information Risk
C. Detection Risk
D. Control Risk

10. An engagement in which a CPA firm arranges for a critical review of its
practices by another CPA firm is referred to as a(n):
A. Peer Review Engagement
B. Quality Control Engagement
C. Quality Assurance Engagement
D. Attestation Engagement
11. Attestation risk is limited to a low level in which of the following
engagement(s)?
A. Both examinations and reviews
B. Examinations, but not reviews
C. Reviews, but not examinations
D. Neither examinations nor reviews

12. .An operational audit differs in many ways from an audit of financial
statements. Which of the following is the best example of one of these
differences?
A. The usual audit of financial statements covers the four basic
statements, whereas the operational audit is usually limited to either
the balance sheet or the income statement
B. The boundaries of an operational audit are often drawn from an
organization chart and are not limited to a single accounting period
C. Operational audits do not ordinarily result in the preparation of a
report D. The operational audit deals with pre-tax income

13. The review of a company's financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit
B. Requires detailed analysis of the major accounts
C. Is of similar scope as an audit and adds similar credibility to the
statements
D. Culminates in issuance of a report expressing the CPA's opinion as to
the fairness of the statements

14. When performing an engagement to review a nonpublic entity's financial

statements, an accountant most likely would:
A. Obtain an understanding of the entity's internal control.
B. Limit the distribution of the accountant's report.
C. Confirm a sample of significant accounts receivable balances.
D. Ask about actions taken at board of directors' meetings.

15. Which of the following professionals has primary responsibility for the
performance of an audit?
A. The managing partner of the firm
B. The senior assigned to the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement
16. Assurance services may include which of the following?
A. attesting to financial statements
B. examination of the economy and efficiency of governmental operations
C. evaluation of a division's performance for management
D. all of the given choices

17. The auditor of financial statements must make very difficult

interpretations regarding authoritative literature. Additionally, the
auditor must
A. proceed beyond PFRS to assess how the economic activity is portrayed
in the financial statements.
B. force management to make certain decisions regarding their financial
statements.
C. disregard independence in order to find the underlying truth of the
evidence.
D. establish new criteria by which financial statements may be compared.

18. Which one of the following is not a part of the attest process?
A. gathering evidence about assertions
B. proving the accuracy of the books and records
C. evaluating evidence against objective criteria
D. communicating the conclusions reached

19. Which one of the following is not a reason why the users of financial
statements desire for an independent assessment of the financial
statement presentation?
A. complexity of transactions affecting the financial statements
B. lack of criteria on which to base information
C. remoteness of the user from the organization
D. all of them are potential reasons

20. Independent professional services that are provided on financial or other

information that improve the quality of decision making are known as A.
internal auditing.
B. financial auditing.
C. assurance services.
D. attestation services.

21. An audit which determines whether organizational policies are being

followed and whether external mandates are being met is known as A. a
financial audit.
B. a compliance audit.
C. an operational audit.
D. none of the above

22. May a CPA hire for the CPA‟s public accounting firm a non-CPA systems
analyst who specializes in developing computer systems? A. Yes,
provided the CPA is qualified to perform each of the specialist‟s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate
the specialist‟s end product.
C. No, because non-CPA professionals are not permitted to be associated
with CPA firms in public practice.
D. No, because developing computer systems is not recognized as a service
performed by public accountants.

23. Which of the following services may a CPA perform in carrying out a
consulting service for a client?
 I. Analysis of the client‟s accounting system
II. Review of the client‟s proposed business plan
III. Preparation of information for obtaining financing

A. I and II only B. I and III only

C. II and III only
D. I, II, and III

24. Which of the following describes how the objective of a review of financial
statements differs from the objective of a compilation engagement?
A. The primary objective of a review engagement is to test the
completeness of the financial statements prepared, but a compilation
tests for reasonableness.
B. The primary objective of a review engagement is to provide positive
assurance that the financial statements are fairly presented, but a
compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance, but a
compilation expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive
assurance that the financial statements are fairly presented, but a
compilation provides limited assurance.

25. Which of the following factors most likely would cause a CPA to decline a
new audit engagement?
A. The CPA does not understand the entity's operations and industry.
B. Management acknowledges that the entity has had recurring operating
losses.
C. The CPA is unable to review the predecessor auditor's working papers.
D. Management is unwilling to permit inquiry of its legal counsel.

26. When a firm or a member of the assurance team holds a direct financial
interest or a material indirect financial interest in the assurance client as
a trustee, a self-interest threat may be created by the possible influence
of the trust over the assurance client. Accordingly, such an interest
cannot be held when:
A. The member of the assurance team, an immediate family member of
the member of the assurance team, and the firm are beneficiaries of
the trust.
B. The interest held by the trust in the assurance client is not material to
the trust.
C. The trust is not able to exercise significant influence over the
assurance client.
D. The member of the assurance team or the firm does not have
significant influence over any investment decision involving a financial
interest in the assurance client.

27. An inadvertent violation of the Independence rules as it relates to a

financial interest in an assurance client would not impair the
independence of the firm, the network firm or a member of the assurance
team when:
A. The firm, and the network firm, has established policies and
procedures that require all professionals to report promptly to the firm
any breaches resulting from the purchase, inheritance or other
acquisition of a financial interest in the assurance client.
B. The firm, and the network firm, promptly notifies the professional that
the financial interest should be disposed of.
C. The disposal occurs at the earliest practical date after identification of
the issue, or the professional is removed from the assurance team. D.
All of the given choices.
28. If a firm, or a network firm, has a direct financial interest in a financial
statement audit client of the firm, the appropriate safeguard against the
self-interest threat created would be: A. Dispose the entire financial
interest.
B. Dispose of a sufficient amount of the financial interest so that the
remaining interest is no longer material.
C. Any of the two is appropriate.
D. None of the two is appropriate.

29. If a firm, or a network firm, has a material financial interest in an entity

that has a controlling interest in a financial statement audit client, the
self interest threat created is so significant. The audit firm can only
perform the engagement if it: I. Dispose of the entire financial interest.
II. Dispose of a sufficient amount of the financial interest so that the
remaining interest is no longer significant.
A. Either I or II
B. Neither I nor II
C. I only
D. II only

30. Which of the following safeguards is inappropriate if a firm has a

material financial interest in an entity that has a controlling interest in a
financial statement audit client?
A. Discuss the presence of self-interest threat with the client‟s board of
directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the
financial interest in total.

31. The retirement benefit plan of a firm, or a network firm, has a financial
interest in a financial statement audit client. If the self-interest threat
that is created by the financial interest is significant, the firm that
intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no
longer material.
B. Discuss the matter with the audit committee of the financial statement
audit client.
C. Refer the audit of the stockholders‟ equity of the financial statement
audit client to other CPA.
D. Either dispose of the financial interest in total or a sufficient amount
so that the remaining amount is no longer material.

32. The following loans and guarantees would not create a threat to
independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a
bank or a similar institution, to the firm, provided the loan is made
under normal lending procedures, terms and requirements and the
loan is immaterial to both the firm and the assurance client.
B. A loan from, or a guarantee thereof by, an assurance client that is a
bank or a similar institution, to a member of the assurance team or
their immediate family, provided the loan is made under normal
lending procedures, terms and requirements.
C. Deposits made by, or brokerage accounts of, a firm or a member of the
assurance team with an assurance client that is a bank, broker or
similar institution, provided the deposit or account is held under
normal commercial terms.
D. 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.
33. Examples of close business relationships that may create self-interest
and intimidation threat least likely include:
A. Having a material financial interest in a joint venture with the
assurance client or a controlling owner, director, officer or other
individual who performs senior managerial functions for that client.
B. Arrangements to combine one or more services or products of the firm
with one or more services or products of the assurance client and to
market the package with reference to both parties.
C. Distribution or marketing arrangements under which the firm acts as
a distributor or marketer of the assurance client‟s products or
services, or the assurance client acts as the distributor or marketer of
the products or services of the firm.
D. The purchase of goods and services from an assurance client by the
firm (or from an audit client by a network firm) or a member of the
assurance team, provided the transaction is in the normal course of
business and on an arm‟s length basis.

34. When a firm or a member of the assurance team and the audit client or
one of its officers hold interest in a closely-held entity, a threat to
independence is not created, except:
A. The relationship is clearly insignificant to the firm or a member of the
assurance team and the audit client.
B. The relationship is other than insignificant which is acceptable for
indirect financial interest.
C. The interest held is immaterial to the investor or group of investors.
D. The interest does not give the investor, or group of investors, the ability
to control the closely-held entity.

35. When an immediate family member of a member of the assurance team

is a director or an officer of the assurance client in a position to exert
direct and significant influence over the subject matter information of the
engagement, the threat to independence can only be reduced to an
acceptable level, aside from withdrawing from the engagement, by: A.
Removing the individual from the assurance team.
B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family
member of the professional to go on forced vacation leave.

36. Which of the following relationships is most likely to impair a CPA‟s

independence with respect to a particular audit client on which the CPA
works as a member of the engagement team?
A. A close relative has a material investment in that client of which the
CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA
is not aware.
C. The CPA‟s father is the president of the audit client.
D. The CPA‟s spouse participates in a savings plan sponsored by the
client.

37. An inadvertent violation of the rules on family and personal relationships

would not impair the independence of a firm or a member of the
assurance team when:
A. The firm has established policies and procedures that require all
professionals to report promptly to the firm any breaches resulting
from changes in the employment status of their immediate or close
family members or other personal relationships that create threats to
independence.
 B. Either the responsibilities of the assurance team are re-structured so
that the professional does not deal with matters that are within the
responsibility of the person with whom he or she is related or has a
personal relationship, or, if this is not possible, the firm promptly
removes the professional from the assurance engagement. C.
Additional care is given to reviewing the work of the professional.
D. All of the given choices.

38. If a member of the assurance team, partner or former partner of the firm
has joined the assurance client, the significance of the self-interest,
familiarity or intimidation threats created is least likely affected by
A. The position the individual has taken at the assurance client.
B. The amount of any involvement the individual will have with the
assurance team.
C. The length of time that the individual was a member of the assurance
team or firm.
D. The former position of the individual within the assurance team or
firm.

39. Using the same senior personnel on an assurance engagement over a

long period of time may create a familiarity threat. The significance of
the threat will least likely depend upon A. The length of time that the
individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.

40. A small CPA firm provides audit services to a large local company.
Almost 80 percent of the CPA firm‟s revenues come from this client.
Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical
negative assurance care in the audit.
D. The auditor should provide an “emphasis of a matter paragraph‟ to his
audit report adequately disclosing this information and then it may
issue an unqualified opinion.

41. A professional accountant has been the partner-in-charge of a particular

audit client for the past eight years. This situation could result to the
following threat to professional independence:
A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity

42. Which statement is incorrect regarding long association of senior

personnel with audit clients that are listed entities?
A. Using the same lead engagement partner on an audit over a prolonged
period may create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined
period, normally no more than six years.
C. A partner rotating after a pre-defined period should not participate in
the audit until a further period of time, normally two years, has
elapsed.
D. When audit client becomes a listed entity the length of time the lead
engagement partner has served the audit client in that capacity should
be considered in determining when the partner should be rotated.
43. The professional accountant who has been the lead engagement partner
for an audit engagement for a prolonged period of time may continue to
serve as the lead engagement partner before rotating off the engagement
for how many years after the audit client becomes a listed entity?
A. One year
B. Three years
C. Two years
D. Four years

44. While the lead engagement partner should be rotated after such a pre-
defined period, some degree of flexibility over timing of rotation may be
necessary in certain circumstances. Examples of such circumstances
include:
A. Situations when the lead engagement partner‟s continuity is especially
important to the audit client, for example, when there will be major
changes to the audit client‟s structure that would otherwise coincide
with the rotation of the lead engagement partner.
B. Situations when, due to the size of the firm, rotation is not possible or
does not constitute an appropriate safeguard. C. Both choices are
correct.
D. Both choices are incorrect.

45. A CPA can continue to be an engagement partner on the audit of

financial statements of listed entities over a prolonged period of
engagement. In order to avoid a creation of familiarity threat, subject to
transitional provisions, how many years are prescribed by the as
maximum for the CPA to continue serving as engagement partner for a
listed entity?
A. Five years
B. Three years
C. Seven years
D. Ten years

46. An engagement partner who is rotated in the audit of financial

statements of listed entity can only participate in the audit engagement
for the same client after a period of:
A. Twelve months
B. Two years
C. Three years
D. Five years

47. The following activities would generally create self-interest or self-review

threats that are so significant and that only avoidance of the activity or
refusal to perform the assurance engagement would reduce the threats to
an acceptable level, except
A. Authorizing, executing or consummating a transaction, or otherwise
exercising authority on behalf of the assurance client, or having the
authority to do so. B. Determining which recommendation of the firm
should be implemented.
C. Reporting, in a management role, to those charged with governance.
D. Providing technical assistance and advice on accounting principles for
audit clients.

48. Which of the following may not create a self-review threat?

A. Supervising assurance client employees in the performance of their
normal recurring duties.
B. Preparing source documents in electronic or other form evidencing a
business transaction.
 C. Prolonged period of assignment as member of engagement team in one
particular audit engagement.
D. Performing corporate financial services for the audit client.

49. If firm, or network firm, personnel providing such assistance make

management decisions, the self-review threat created could not be
reduced to an acceptable level by any safeguards. Examples of such
managerial decisions include the following, except
A. Determining or changing journal entries, or the classifications for
accounts or transactions or other accounting records without
obtaining the approval of the audit clients
B. Authorizing or approving transactions.
C. Preparing source documents or originating data (including decisions
on evaluation assumptions), or making changes to such documents or
data.
D. Assisting an audit client in resolving account reconciliation problems.

50. The following services are considered to be a normal part of the audit
process and do not, under circumstances, threaten independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in the preparation of consolidated financial statements.
C. Drafting disclosure items.
D. Having custody of an assurance client‟s assets.

51. Which of the following will an auditor least likely discuss with the former
auditors of a potential client prior to acceptance of an audit engagement?
A. Integrity of the management
B. Fees charged for the services
C. Disagreements between the predecessor auditor and the management
regarding accounting principles
D. Reasons for changing audit firms

52. What is the most likely course of action to be taken by an auditor in

assessing management integrity?
A. Tour the plant
B. Review the minutes of the board of directors
C. Research the background and histories of officers
D. Review the bank reconciliation statements

53. An engagement letter should be written before the start of an audit

because
A. it may limit the auditor‟s legal liability by specifying the auditor‟s
responsibilities.
B. it specifies the client‟s responsibility for preparing schedules and
making the records available to the auditor.
C. it specifies the basis for billing the audit for the upcoming year. D. All
of the choices given are correct

54. When a CPA is approached to perform an audit for the first time, the CPA
should make inquiries of the predecessor auditor. This is a necessary
procedure because the predecessor may be able to provide the successor
with information that will assist the successor in determining whether:
A. the predecessor's work should be utilized.
B. the company follows the policy of rotating its auditors.
C. in the predecessor's opinion, internal control of the company is
satisfactory.
D. the engagement should be accepted.
55. A written understanding between the auditor and the client concerning
the auditor's responsibility for the discovery of noncompliance to laws is
usually set forth in a(an) A. client representation letter.
B. letter of audit inquiry.
C. management letter.
D. engagement letter.

56. Prior to 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 of the engagement with an 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 of the engagement.
C. not communicate with the predecessor auditor because this would in
effect be asking the auditor to violate the confidential relationship
between an auditor and the client.
D. advise the client of the intention to contact the predecessor auditor
and request a permission for the contact.

57. Before accepting an audit engagement, a successor auditor should make

specific inquiries of the predecessor auditor regarding the predecessor‟s

A. opinion of any subsequent events occurring since the predecessor‟s

audit report was issued.
B. understanding as to the reasons for the change of auditors.
C. awareness of the consistency in the application of PFRS between
periods.
D. evaluation of all matters of continuing accounting significance.

58. A successor auditor would most likely make specific inquiries of the
predecessor auditor regarding
A. specialized accounting principles being used by the client‟s industry.
B. the competency of the client‟s internal audit staff.
C. the uncertainty inherent in applying sampling procedures.
D. disagreements with management as to auditing procedures.

59. Which of the following statements concerning materiality thresholds is

incorrect?
A. Aggregate materiality thresholds are a function of the auditor's
preliminary judgment concerning audit risk.
B. In general, the more misstatements the auditor expects, the higher
should be the aggregate materiality threshold.
C. The smallest aggregate level of errors or fraud that could be considered
material to any of the financial statements is referred to as a
"materiality threshold."
D. Materiality thresholds may change between the planning and review
stages of the audit. These changes may be due to quantitative and/or
qualitative factors.

60. Which of the following concepts about materiality is incorrect?

A. Materiality is directly related to the acceptable level of detection risk.
B. Materiality does not apply if internal control is highly effective.
C. Materiality is a matter of professional audit judgment.
D. Materiality is more closely related to fieldwork and reporting standards
than to general standards.
61. Which of the following would not be a source of information about the
risk of a potential new audit client?
A. The predecessor auditor
B. Management
C. The internet
D. The new auditor‟s permanent file

62. In comparing management fraud with employee fraud, the auditor‟s risk
of failing to discover the fraud is greater for:
A. employee fraud because of the larger number of employees in the
organization. B. employee fraud because of the higher crime rate
among blue collar workers.
C. management fraud because of management‟s ability to override
existing internal controls.
D. management fraud because managers are inherently smarter than
employees.

63. Management‟s integrity affects all of the following risks except:

A. enterprise risk
B. financial reporting risk
C. engagement risk
D. all of the above risks are affected

64. The auditor is most likely to presume that a high risk of irregularities
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.

65. Which of the following audit risk components may be assessed in non-
quantitative terms?
Inherent Risk Control Risk Detection Risk
A. Yes Yes No
B. Yes No Yes C. No Yes Yes
D. Yes Yes Yes
66. Which of the following combinations of engagement risk, audit risk, and
materiality would lead the auditor to most audit work?
Engagement Risk Audit Risk Materiality
A. Low High High
B. Moderate Low Low
C. Low Moderate Low
D. High High High

67. Which of the following conditions justifies an auditor‟s decision of raising

the materiality level?
A. Internal control over revenue and receipts cycle is excellent.
B. Application of analytical procedures reveals a significant increase in
sales revenue in December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is
weak.
D. Study of the business reveals that the client recently acquired a new
company in an unrelated industry.
68. Which of the following does an auditor least likely perform in assessing
audit risk? A. Gather audit evidence in support of recorded transactions.
B. Obtain an understanding of the client's system of internal control.
C. Understand the economic substance of significant transactions
completed by the client.
D. Understand the entity and the industry in which it operates.

69. Which type of risk does the management of a company have the most
control over in the short term? A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk

70. In which of the following order would the auditors perform the following
steps?
A. Determine audit risk; assess control risk; determine detection risk; set
materiality.
B. Set materiality; determine audit risk; assess control risk; determine
detection risk.
C. Set materiality; assess control risk; determine detection risk;
determine audit risk.
D. Determine audit risk; set materiality; assess control risk; determine
detection risk.

71. If the results of the auditor's tests of controls induce the auditor to
change the assessed level of control risk for inventory from 0.2 to 0.4 and
audit risk and inherent risk remain constant, what is the effect on the
acceptable level of detection risk?
A. A change in detection risk cannot be calculated because audit risk and
inherent risk values are not given.
B. Detection risk would increase from 0.3 to 0.6.
C. Detection risk would decrease from 0.4 to 0.2.
D. Detection risk would not change since audit risk and inherent risk do
not change.

72. Which of the following may cause the management to intentionally

understate profits? A. Management wants to create "cookie jar" reserves
for a rainy day.
B. The company is under scrutiny by tax authorities.
C. The company is suffering a large loss and wants to take a
"big bath." D. All of the given choices

73. Which of the following is true?

A. Auditors are responsible for detecting all fraudulent financial
reporting.
B. Auditors must specifically consider fraud risk from overstating
liabilities.
C. Auditors must specifically consider fraud risk from management
override of controls. D. All of them are true

74. Why should the auditor plan more work on individual accounts as lower
acceptable levels of both audit risk and materiality are established?
A. To find smaller errors
B. To find larger errors
C. To increase the tolerable error in the accounts
D. To decrease the risk of overreliance

75. With respect to errors and fraud, the auditor should plan to
 A. search for errors or fraud that would have a material effect on the
financial statements.
B. discover errors or fraud that would have a material effect on the
financial statements.
C. search for errors that would have a material effect and for fraud that
would have either material or immaterial effects on the financial
statements.
D. search for fraud that would have a material effect and for errors that
would have either material or immaterial effects on the financial
statements.

76. The auditor‟s responsibility for identifying "direct-effect" non-compliance

to laws and regulations differs from their responsibility for detecting A.
errors.
B. indirect-effect non-compliance to laws and regulations.
C. fraud.
D. management fraud.

77. The element of the audit planning process most likely to be agreed upon
with the client before the implementation of the audit strategy is the
determination of the A. timing of inventory observation procedures to be
performed.
B. evidence to be gathered to provide a sufficient basis for the auditor's
opinion.
C. procedures to be undertaken to discover litigation, claims, and
assessments.
D. pending legal matters to be included in the inquiry of the client's
attorney.

78. Which of the following concepts is most useful in assessing the scope of
an auditor's program relating to various accounts?
A. Attribute sampling
B. Materiality
C. The reliability of information
D. Management fraud

79. With respect to the auditor's planning of a year-end examination, which

of the following statements is always true?
A. An engagement proposed after the fiscal year ends should not be
accepted.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of the specific audit
procedures that will be performed.
D. It is an acceptable practice to carry out substantial parts of the
examination at interim dates.

80. Which of the following is not a consideration in the development of audit

programs?
A. Internal control over the recording of plant asset additions and repairs
and maintenance expenditures is found to be weak.
B. The client constructed a major addition to its central manufacturing
facility during the year under audit.
C. The client is a private university located in Southern Philippines.
D. The members of the board of directors are elected by the stockholders
during the annual meeting.

81. An audit program provides a proof that

A. sufficient competent evidential matter is obtained.
 B. the work is adequately planned.
C. there is compliance with generally accepted standards of reporting.
D. there is a proper study and evaluation of internal control.

82. The principal reason for developing a written audit program is to help
assure that the A. audit work is properly supervised.
B. audit work is properly planned and documented.
C. audit report contains only significant findings.
D. work of different auditors is properly coordinated.

83. One of the primary uses of an audit program is to

A. serve as a tool for planning, directing, and controlling the audit work.
B. document an auditor's understanding of the internal control.
C. provide for a standardized approach to the audit engagement.
D. delineate the audit risk accepted by the auditor .
84. Which of the following questions would an auditor most likely include in
an internal control questionnaire for notes payable?
A. Are assets that collateralize notes payable critically needed for the
entity‟s continued existence?
B. Are two or more authorized signatures required on checks that repay
notes payable?
C. Are the proceeds from notes payable used for the purchase of
noncurrent assets?
D. Are direct borrowings on notes payable authorized by the board of
directors?

85. In an auditor‟s consideration of internal control, the completion of a

questionnaire is most closely associated with which of the following?
A. Separation of duties B. Flowchart accuracy
C. Understanding the system
D. Tests of controls

86. During the review of the client‟s system of internal control, the auditor
observes the client employees as they apply the operating controls in
order to A. prepare a flowchart.
B. update information contained in the organization and procedure
manuals.
C. corroborate the information obtained during the initial review of the
system.
D. determine the extent of compliance with quality control standards.

87. An auditor‟s flowchart of a client‟s internal controls is a diagram

depicting the auditor‟s
A. understanding of the internal controls.
B. program for tests of controls.
C. documentation of consideration of internal controls.
D. understanding of the types of irregularities that are probable.

88. Which of the following statements regarding the auditor‟s documentation

of the client‟s internal control structure is correct?
A. Documentation must include flow charts.
B. Documentation must include procedural write-ups.
C. No documentation is necessary although it is desirable.
D. No one particular form of documentation is necessary, and the extent
of documentation may vary.

89. Which of the following is the auditor‟s purpose of further testing the
internal control procedures?
 A. Provide a basis for reducing the assessed level of control risk.
B. Reduce the risk that error or fraud that has not been prevented or
detected by the internal control system is not detected by the
independent audit.
C. Provide assurance that transactions are executed in accordance with
management's authorization and access to assets is limited by a
segregation of functions.
D. Provide assurance that transactions are recorded as necessary to
permit the preparation of the financial statements in conformity with
PFRS.

90. Tests of controls are concerned primarily with each of the following
questions except: A. How were the controls applied?
B. Why were the controls applied?
C. Were the necessary controls consistently performed?
D. By whom were the controls applied?

91. The objective of tests of details of transactions that are being performed
as tests of controls procedures is to
A. monitor the design and use of entity documents such as pre-numbered
shipping form.
B. determine whether controls have been placed in operation.
C. detect material misstatements in the account balances in the financial
statements.
D. evaluate whether controls operate effectively.

92. Which of the following is ordinarily considered a test of internal control

procedures? A. Send confirmation letters to banks.
B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliation of bank accounts as of the balance
sheet date.
93. Auditors can use several types of audit procedures to test controls.
Which of the following type of audit procedures is least likely to be used
during tests of controls?
A. Physical examination of assets
B. Inquiries of client personnel
C. Examination of documents, records, and reports
D. Observation of control-related activities.

94. The objective of dual-purpose tests is to:

A. Evaluate whether internal controls are operating effectively.
B. Detect material misstatements in the financial statements.
C. Identify unusual trends or patterns in comparative financial
statements.
D. Test internal controls as well as transactions and balances using the
same test procedures.

95. Which of the following types of evidence will be gathered in order to test
internal controls? A. Confirmations of accounts receivable with
customers.
B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.

96. Tests of controls least likely include:

A. Inquiries of appropriate client vendors.
 B. Reperformance of a control.
C. Observation of the application of an accounting procedure.
D. Inspection of documents.

97. A procedure that would most likely be used by an auditor in performing

tests of control regarding segregation of functions on which no audit trail
is available: A. inspection.
B. observation.
C. reprocessing.
D. reconciliation.
98. The primary purpose of performing further control tests is to provide
A. a basis for reducing the assessed level of control risk below the
maximum level.
B. a basis for understanding the flow of transactions through the
accounting system.
C. assurance that transactions are properly recorded.
D. all accounting control procedures leave visible evidence.

99. Which of the following procedures most likely would be included as part
of an auditor's tests of control procedures?
A. Inspection
B. Reconciliation
C. Confirmation
D. Analytical procedures

100. Which of the following audit tests would be a test of controls?

A. Tests of the specific items making up the balance in a financial
statement account.
B. Comparing inventory prices to vendors‟ invoices.
C. Tracing signatures on canceled checks to board of directors‟
authorizations.
D. Tests of the additions to property, plant, and equipment by physical
inspections.

101. For a particular assertion, control risk is the risk that

A. controls will not detect a material misstatement that occurs.
B. audit procedures will fail to detect a weak control system.
C. the prescribed control procedures will not be applied uniformly.
D. a material misstatement will occur in the accounting process.

102. Which of the following is an incorrect statement?

A. An example of a completeness assertion would be that notes payable in
the balance sheet includes all such obligations of the entity.
B. An example of an occurrence assertion would be that sales in the
income statement represent exchanges of goods or services that
actually take place.
C. An example of a rights/obligations assertion would be that amounts
capitalized for leases in the balance sheet represent the cost of the
entity‟s rights to leased property.
D. An example of a valuation/allocation assertion would be that property,
plant, and equipment are recorded at market value.

103. A distinction must be made between general audit objectives and specific
audit objectives for each account balance. Which of the following is an
incorrect statement?
A. The general audit objectives are applicable to every account
balance on the financial statements.
 B. The specific audit objectives are applicable to every account balance on
the financial statements.
C. The general audit objectives are tailored to the engagement.
D. The specific audit objectives are tailored to the engagement.

104. Which of the following “general transaction-related audit objectives” is

not part of the valuation or allocation assertion? A. Completeness
B. Accuracy
C. Classification
D. Timing

105. Only three of the following management assertions are associated with
transaction-related audit objectives. Which one of the following is not?
A. Existence or occurrence
B. Completeness
C. Valuation or allocation D. Presentation and disclosure

106. Which of the following statements is incorrectly stated?

A. Balance-related audit objectives are applied to account balance.
B. Transaction-related audit objectives are applied to classes of
transactions.
C. Balance-related audit objectives are applied to the ending balance in
balance sheet accounts.
D. Balance-related audit objectives are applied to both beginning and
ending balances in the balance sheet accounts.

107. The detail tie-in objective is not concerned that the details in the account
balance A. agree with related subsidiary ledger accounts.
B. are properly disclosed, in accordance with PFRS.
C. foot to the total in the account balance.
D. agree with the total in the general ledger.

108. The disclosure objective is concerned that

A. the account balance is properly presented in the financial statements.
B. disclosure requirements are properly presented in the financial
statements and in the footnotes.
C. both responses are correct.
D. both responses are incorrect.

109. If a long-term note receivable is included in the account receivable

listing, there is a violation of the
A. existence objective.
B. completeness objective.
C. classification objective.
D. timing objective.

110. After the general objectives are understood, specific objectives for each
account balance on the financial statements can be developed. Which of
the following statements is true?
A. There should be at least one specific objective for each relevant general
objective.
B. There will be only one specific objective for each relevant general
objective.
C. There will be many specific objectives developed for each relevant
general objective.
D. There must be one specific objective for each general objective.
111. Which of the following is not a proper matching of auditor‟s objective
with management‟s assertion?
A. Validity matches with existence or occurrence
B. Completeness matches with completeness
C. Ownership matches with rights and obligations
D. Classification matches with presentation/disclosure

112. An audit process is a well-defined methodology for organizing an audit to

ensure that A. the evidence gathered is both sufficient and competent.
B. all appropriate audit objectives are
specified.
C. all appropriate audit objectives are
met. D. All of the responses are
correct

113. Which of the following is correct?

A. The evidence that the auditor accumulates remains the same from
audit to audit, but the general objectives vary, depending on the
circumstances.
B. The general audit objectives remain the same from audit to audit, but
the evidence varies, depending on the circumstances.
C. The circumstances may vary from audit to audit, but the evidence
accumulated remains the same.
D. The general audit objectives may vary from audit to audit, but the
circumstances remain the same.

114. Auditing standards require the auditor to accumulate sufficient

competent evidence to support the opinion issued. Because of the nature
of audit evidence, it is
A. unlikely that the auditor will be completely convinced that the opinion
is correct.
B. likely that the auditor will be completely convinced that the opinion is
correct.
C. unlikely that the auditor will arrive at a conclusion.
D. likely that the auditor would change his/her mind about the opinion if
he/she takes the time to gather additional evidence.

115. Which of the following ultimately determines the specific audit

procedures necessary to provide an independent auditor with a
reasonable basis for the expression of an opinion?
A. The audit program
B. The auditor's judgment
C. Philippine Standards on Auditing
D. The auditor's working papers

116. In the final analysis, the amount and kinds of evidential matter that are
required to support the auditor‟s opinion should be determined by
A. the audit committee.
B. auditor‟s judgment.
C. professional standards.
D. standards of auditing.

117. To adequately plan the extent of the audit evidence to gather, the
generally accepted auditing standards require the auditor to gain an
understanding of
A. the internal control structure.
B. client‟s organization charts.
C. client‟s procedural manuals.
 D. All of these

118. When unable to obtain sufficient competent evidential matter to

determine whether certain client management‟s acts are non-compliance
to laws and regulations, the auditor would most likely issue
A. an unqualified opinion with a separate explanatory paragraph.
B. either a qualified opinion or an adverse opinion.
C. either a disclaimer of opinion or a qualified opinion. D. either an
adverse opinion or a disclaimer of opinion.

119. An audit evidence is generally considered relevant when it is A. derived

through valid statistical sampling.
B. objective and unbiased.
C. factual, adequate, and convincing.
D. consistent with the audit objectives.

120. Two overriding considerations that affect an auditor‟s judgment in

accumulating evidence are:

1. Sufficient competent evidence must be accumulated to meet the

auditor‟s professional responsibility.
2. Cost of accumulating evidence should be minimized.

In evaluating these conditions,

A. the first is more important than the second.
B. the second is more important than the first.
C. they are equally important.
D. it is impossible to prioritize one.

121. Most of the independent auditor's work in formulating an opinion on the

financial statements consists of
A. studying and evaluating internal control.
B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorded accountability with assets.

122. There are four subcategories of decisions that the auditors must make in
accumulating audit evidence. Which of the following is not one of those
subcategories?
A. Audit procedures to be used
B. Reasons for deciding not to test controls
C. Sample size
D. Timing of the audit procedures

123. Evidential matter supporting the financial statements consists of the

underlying accounting data and all corroborating information available to
the auditor. Which of the following is an example of corroborating
information?
A. Minutes of meetings of the board of directors
B. General and subsidiary ledgers
C. Accounting manuals
D. Worksheets supporting cost allocations

124. Which of the following is not one of the major phases in anaudit process?
A. Plan and design an audit approach
B. Test controls and transactions
 C. Inform client of any adjustments or corrections to be made in the
financial statements D. Complete the audit and issue the report

125. Evidential matter is generally considered sufficient when

A. it is competent.
B. there is enough of it to afford a reasonable basis for an opinion on the
financial statements.
C. it has the qualities of being relevant, objective, and free from known
bias.
D. it has been obtained through random selection.

126. In making decisions about evidence for a given audit, the auditor‟s goal
is to obtain a sufficient amount of timely, reliable evidence that is
relevant to the information being verified, and to do so
A. no matter what the cost involved in obtaining such evidence.
B. only if the cost is reasonable.
C. at the lowest possible total cost.
D. at any cost because the costs are billed to the client.

127. Which of the following is not a distinguishing feature of risk-based

auditing? A. Identifying areas posing the highest risk of financial
statement errors
B. Analysis of internal control
C. Collecting and evaluating evidence
D. Concentrating audit resources in those areas presenting the highest
risk of financial statement errors

128. The competence of evidence available to an auditor is least likely affected

by
A. the relevance of such evidence to the financial statement assertion
being investigated.
B. the relationship of the source of such an evidence to the entity being
audited.
C. the timeliness of the audit evidence obtained.
D. the sampling method employed by the auditor to obtain a number of
samples as evidence.

129. Which of the following procedures would provide the auditor the most
reliable audit evidence?
A. Inquiries of the client‟s internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers
payable department.
C. Analytical procedures performed by the auditor on the entity‟s trial
balance.
D. Inspection of bank statements obtained directly from the client‟s
financial institution.

130. The most reliable forms of documentary evidence are those documents
that are A. prenumbered.
B. easily duplicated.
C. internally generated.
D. authorized by a responsible official.

131. You have been assigned to audit the maintenance department of an

organization. Which of the following is likely to produce the least reliable
audit evidence?
A. Notes on discussions with mechanics in the maintenance operation.
 B. A schedule comparing actual maintenance expenses with budgeted
expenses and those of the prior period and disclosing important
differences.
C. A narrative covering review of user reports on maintenance service.
D. An analysis of changes in certain maintenance department ratios.

132. Before applying substantive tests to the details of asset accounts at an

interim date, an auditor should assess
A. control risk at below the maximum level.
B. inherent risk at the maximum level.
C. the difficulty in controlling the incremental audit risk.
D. materiality for the accounts tested as insignificant.
133. Before applying principal substantive tests to the details of accounts at
an interim date, an auditor should
A. assess control risk as below the maximum for the assertions embodied
in the accounts selected for interim testing.
B. determine that the accounts selected for interim testing are not
material to the financial statements taken as a whole.
C. consider whether the amounts of the year-end balances selected for
interim testing are reasonably predictable.
D. obtain written representations from management that all financial
records and related data will be made available.

134. If an auditor conducts an audit of financial statements in accordance

with generally accepted auditing standards, which of the following will
the auditor most likely detect? A. Misposting of recorded transactions
B. Forgery
C. Unrecorded transactions
D. Collusive fraud

135. Which of the following best explains the difference between audit
objectives and audit procedures?
A. Audit procedures establish broad general goals; audit objectives
specify the detailed work to be performed.
B. Audit objectives are tailor-made for each assignment; audit procedures
are generic in application.
C. Audit objectives define specific desired accomplishments; audit
procedures provide the means of achieving audit objectives.
D. Audit procedures and audit objectives are essentially the same.

136. In gathering audit evidence in the performance of substantive tests, the

auditor A. should use the test month approach. B. relies on persuasive
rather than convincing evidence in the majority of cases.
C. would consider the client‟s documentary evidence more competent
than evidence gathered from observation and physical inspection.
D. would express an adverse opinion if he has substantial doubt as to any
significant assertion.

137. The auditor will not ordinarily initiate discussion with the audit
committee concerning the A. extent to which the work of internal
auditors will affect the scope of the examination.
B. extent to which a change in the company‟s organization will influence
the scope of the examination.
C. details of potential problems that the auditor believes might cause a
qualified opinion.
D. details of the procedures that the auditor intends to apply.

138. The objective of dual-purpose tests is to

 A. evaluate whether internal controls are operating effectively.
B. detect material misstatements in the financial statements.
C. identify unusual trends or patterns in comparative financial
statements.
D. test internal controls as well as transactions and balances using the
same test procedures.

139. To test for unsupported entries in the ledger, the direction of audit
testing should be from the
A. ledger entries.
B. journal entries.
C. externally generated documents.
D. original source documents.

140. The least costly form of testing is usually A. tests of controls.

B. tests of details of balances.
C. tests of details of transactions.
D. analytical procedures.

141. Tracing from source documents to journals most directly addresses

which financial statement assertion?
A. Valuation
B. Completeness
C. Existence
D. Rights

142. An auditor is examining the detailed debit and credit entries in an

account. The auditor is most likely performing
A. analytical procedures.
B. tests of details of balances.
C. tests of details of transactions.
D. tests of controls.

143. Choices about audit evidence are influenced by all of the following
except:
A. The auditor‟s understanding of the business and industry
B. Assessment of inherent and control risk
C. Comparisons of the auditor‟s expectation of the financial statements
with the client‟s books and records
D. Decisions about immaterial risk factors

144. The auditor is performing substantive tests several months before the
end of the year. This most likely means that
A. inherent risk is set at moderate to high.
B. detection risk is set at moderate to high.
C. control risk is set at maximum.
D. detection risk is set at low to very low.

145. In testing the existence assertion for an asset, an auditor ordinarily

works from the A. financial statements to the potentially unrecorded
items.
B. potentially unrecorded items to the
financial statements.
C. accounting records to the supporting
evidence. D. supporting evidence to the
accounting records.
146. WB Industries has significant information that is transmitted, processed,
maintained, and accessed electronically. The auditor has concluded that
it is not possible to reduce detection risk to an acceptable level by
performing only substantive tests for a number of financial statement
assertions. The auditor‟s alternative strategy is to
A. increase the acceptable audit risk.
B. focus audit tests on other assertions for which substantive tests prove
to be effective.
C. require management to change its information system to provide
appropriate evidence.
D. perform tests of controls to gather evidential matter to be used as basis
of assessing control risk related to those assertions.

147. The decision on the part of the auditor to perform substantive tests
during the interim period will be based upon
A. audit risk control and cost effectiveness.
B. the approach followed in the past.
C. the auditor‟s time convenience.
D. the cooperation extended by the client staff.

148. Choose the best illustration of objective audit evidence from the
following:
A. The paid invoice file containing invoices matched with receiving
reports and purchase orders.
B. Management's assertion that payment procedure requires matching of
invoice with receiving report and purchase order.
C. Clerical staff assurances that management policy regarding payment of
invoices-matching of invoice with receiving report and purchase order--
is always followed.
D. The treasurer's statement of not remembering any exceptions in which
an invoice was submitted for payment that is not accompanied by a
covering receiving report and purchase order.

149. Which of the following audit procedures best supports the valuation
objective?
A. Performing a lower of cost or market test of the client's inventories
B. Reviewing a contingent liability disclosure for proper wording C.
Searching for unrecorded liabilities
D. Observing the client's year-end physical inventory taking

150. Which of the following is not an appropriate auditing procedure

supporting the fairness of financial-statement presentation?
A. Inspecting plant asset additions for existence
B. Recalculating accrued interest on notes payable
C. Examining invoices in support of legal fees recorded during the fiscal
year D. Reviewing the client's production quality control program

151. Audit procedures are normally performed A. early in the accounting

period being examined.
B. throughout the accounting period being examined, but
with emphasis on the transactions near the end.
C. within one to three months after the close of the
accounting period. D. During all three of the above
periods

152. The auditor would unlikely perform early substantive testing of account
balances when:
A. A number of significant deviations from control policies and
procedures were detected during tests of controls.
 B. Due to economic factors, the fourth quarter activity this year is
expected to be somewhat sluggish.
C. The client uses a natural business year.
D. The taking of the client‟s inventory is performed at an early date.

153. As the acceptable level of detection risk decreases, an auditor may

change the
A. timing of substantive tests by performing them at an interim date
rather than at yearend.
B. nature of substantive tests from a less effective to a more effective
procedure.
C. timing of tests of controls by performing them at several dates rather
than at one time.
D. assessed level of inherent risk to a higher amount.

154. The auditor is concerned that a client usually fails to bill customers for
shipments. An audit procedure that would gather relevant evidence
would be to
A. select a sample of duplicate sales invoices and trace each to related
shipping documents.
B. trace a sample of shipping documents to related duplicate sales
invoices.
C. trace a sample of Sales Journal entries to Accounts Receivable
subsidiary ledger.
D. compare the total of the Schedule of Accounts Receivable with the
balance of the Accounts Receivable account in the general ledger.

155. The extent of testing normally applies

A. exclusively to the number of items to be tested.
B. to both the number of items tested and the number of tests performed.
C. exclusively to the number of substantive tests performed.
D. to both the nature of items tested and the number of tests performed.

156. Which of the following, when performed by the auditor, is not a test of
mechanical accuracy?
A. Extending sales invoices
B. Adding journals and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio

157. In the examination of the financial statements of Delta Company, the

auditor determines that in performing a test of internal control
effectiveness, the rate of error in the sample does not support the
auditor's preconceived notion of a tolerable occurrence rate when, in fact,
the actual error rate in the population does meet the auditor's notion of
effectiveness. This situation illustrates the risk of A. underassessment of
control risk.
B. overassessment of control risk.
C. incorrect rejection.
D. incorrect acceptance.

158. Several risks are inherent in the evaluation of audit evidence which has
been obtained through the use of statistical sampling. Which of the
following risks is an example of the risk of underassessment of control
risk?
A. Failure to properly define the population to be sampled.
B. Failure to draw a random sample from the population.
 C. Failure to accept the statistical hypothesis that internal control is
unreliable when, in fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not
materially misstated when the true book value is not materially
misstated.

159. As a result of tests of controls, an auditor underassessed control risk and

decreased substantive testing. This underassessment occurred because
the true occurrence rate in the population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.

160. Which of the following sampling plans would be designed to estimate

a numerical measurement of a population, such as a peso value?
A. Numerical sampling.
B. Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.

161. Which of the following statements is an advantage of classical variables

sampling?
A. If no errors are expected, classical variables sampling will result in a
smaller sample size than probability-proportional-to-size sampling.
B. A classical variables sampling plan can begin before the completed
population is available.
C. Classical variables sampling may result in a smaller sample size than
probabilityproportional-to-size sampling if there are many differences
between recorded and audited amounts.
D. Classical variables sampling does not require recorded values for
individual sampling units.

162. What is the primary objective of using stratification as a sampling

method in auditing?
A. To increase the confidence level at which a decision will be reached
from the results of the sample selected.
B. To determine the occurrence rate for a given characteristic in the
population being studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.

163. An auditor is applying PPS sampling. In determining the sample size,

which of the following is not necessary?
A. a reliability factor for overstatement errors
B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error

164. In a variable sampling plan, an auditor must generally consider each of

the following except
A. variation within the population.
B. acceptable risk of incorrect acceptance.
C. tolerable error.
D. Population.
165. When sampling methods are used in a substantive test, all of the
following factors must be considered in determining an optimum sample
size, except the A. variation in the population.
B. risk levels that the auditor is willing to accept.
C. deviation occurrence rate that the auditor expects to exist in the
sample.
D. tolerable misstatement.
166. PPS sampling is most appropriate when the auditor A. anticipates
understatement errors.
B. anticipates overstatement errors.
C. expects no errors.
D. has assessed control risk at the maximum.

167. The mean-per-unit estimation method calculates the estimated total

audited value of a population of accounts receivable as:
A. A summation of the total individual accounts values in the population.
B. The sample mean audited value multiplied by the number of items in
the population.
C. The estimated total audited value of the population multiplied by the
number of items in the sample.
D. The summation of the sample multiplied by the number of discrete
samples in the population.

168. What is the best description of "tolerable misstatement" for mean-per-

unit estimation?
A. The maximum misstatement that may exist without causing an
account to be materially misstated.
B. The "bounds" around the sample mean that we would expect the value
to fall within to be correct.
C. The "projected" misstatement in the population based upon the sample
chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which
the book value may exceed that sample mean without being materially
misstated.

169. When are the ratio estimation and difference estimation techniques most
likely to be preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all
provide similar results.
B. When differences between book and audited values are infrequent.
C. When differences between book and audited values are frequent.
D. When differences between book and projected misstatement is
estimated to be small.

170. What is one of the main advantages of the probability-proportional-to-

size sampling technique over the classical variables approach?
A. It provides a more accurate estimation of the sample mean.
B. It provides a wider range for acceptance so that less substantive
testing needs to be done.
C. It provides a smaller range for acceptance so that more errors are
discovered.
D. It often requires a smaller sample size to be selected.

171. Probability-proportional-to-size sampling will result in what type of

sample items being selected?
A. Highly representative of the population because it is wholly
randomized.
 B. A higher proportion of small value items then large value items
because of the sampling interval used.
C. A higher proportion of large value items than small value items
because of the sampling interval used.
D. A biased sample means that may not be representative of the
population.

172. While performing a substantive test of details during an audit, the

auditor determined that the sample results supported the conclusion
that the recorded account balance was materially misstated. It was, in
fact, not materially misstated. This situation illustrates the risk of A.
alpha risk.
B. assessing control risk too low.
C. beta risk.
D. assessing control risk too high.

173. The risk of incorrect acceptance relates to the: A. Effectiveness of the

audit.
B. Efficiency of the audit.
C. Preliminary estimate of materiality.
D. Allowable risk of tolerable error.

174. Sample results support the conclusion that a recorded account balance
is materially misstated but, unknown to the auditor, the account is not
misstated, suggesting the risk of A. incorrect rejection.
B. assessing control risk too high.
C. incorrect acceptance.
D. assessing control risk too low.

175. Which of the following business functions is associated with the

revenue/receipt cycle? A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of
future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.

176. Which of the following is not a common activity in the revenue/receipt

cycle?
A. Order entry
B. Receiving
C. Inventory control
D. cash collection

177. The cash account is involved in which cycle? A. Revenue and collection.
B. Acquisition and expenditure.
C. Production and conversion.
D. All of the given choices.

178. Which of the following is an appropriate audit procedure to test cancelled

checks for authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who
are authorized by the board.
C. Examine a representative sample of signed checks and trace their
signatures to the specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.
179. Which of the following is not likely a source of information about the
accounting system in the revenue area?
A. Direct inquiry of customers.
B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.

180. Which of the following gives an indication of a potential fraudulent

activity?
A. Numerous credit memoranda have been issued to the company's
biggest customer.
B. Internal auditor cannot locate several credit memoranda to support
reductions of customers' balances.
C. The year-end bank reconciliation has no outstanding checks or
deposits older than 15 days.
D. No one was absent the day the auditors handed out the paychecks.

181. Which of the following control procedures could prevent or detect errors
or frauds arising from shipments made to unauthorized parties?
A. Document policies and procedures for scheduling the shipments of
goods.
B. Establish procedures for reviewing and approving the prices and sales
terms before sale.
C. Prenumber the bills of lading and assure that the related billings are
made on a periodic basis.
D. Prepare and periodically update the lists of authorized customers.

182. Which of the following control procedures would most likely assure that
access to shipping, billing, inventory control, and accounting records is
restricted to personnel authorized by management?
A. Segregate the responsibilities for authorization, execution, and
recording, and prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and
require a daily reconciliation of cash receipts records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and
supporting documentation.
D. Periodically substantiate and evaluate the recorded account balances.

183. An entity has implemented a control procedure which requires that

authorized personnel reconcile the total of individual customer accounts
receivable with control totals. This control relates to which of the
following control objectives?
A. Sales, cash receipts, and related transactions should be recorded at the
correct amounts, in the proper period, and should be properly
classified.
B. Recorded accounts receivable balances should reflect underlying
transactions and events.
C. Billings, collections, and related adjustments transactions should be
posted accurately to individual customer accounts.
D. Access to cash and cash-related records should be restricted to
personnel authorized by management.

184. Which of the following internal control procedures most likely would
deter lapping of collections from customers?
A. Independent internal verification of dates of entry in the cash receipts
journal with dates of daily cash summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor
who is independent of credit approval.
 C. Segregation of duties between receiving cash and posting collections to
the accounts receivable ledger.
D. Supervisor‟s comparison of the daily cash summary with the sum of
the cash receipts
journal entries.

185. What sequence of steps does an auditor undertake when identifying

control procedures that are potentially reliable in assessing control risk
below the maximum?
A. Consider the errors or frauds that might occur, determine control
procedures, identify control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the
errors or frauds that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might
occur, determine control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the
errors or frauds that might occur, and identify control objectives.

186. Assuming cash receipts from credit sales have been misappropriated,
which of the following is likely to conceal the misappropriation and
unlikely to be detected? A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.

187. Which of the following is most likely to provide management with

incentives to overstate earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.

188. Under which of the following circumstances does management have

some discretion in timing the recognition of revenue?
A. The timing of revenue is not reasonably determinable and the earnings
process is not complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm‟s length.

189. After preparing a flowchart of internal control for sales and cash receipts
transactions and evaluating the design of the system, the auditor would
perform tests of controls on all control procedures
A. That are documented in the flowchart.
B. that are considered to be deficiencies that might allow errors to enter
the accounting system.
C. that are considered to be strengths that the auditor plans to rely on in
assessing control risk.
D. that would help in preventing irregularities.

190. Which of the following would the auditor consider to be an incompatible

operation if the cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary
ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.
191. Which of the following is not a universal rule for achieving control over
cash? A. Separate the cash-handling and record-keeping functions.
B. Decentralize the receiving of cash as much as possible.
C. Deposit each day‟s cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle
cash.

192. On conducting an audit in which point in an ordinary sales transaction

of a wholesaling business is a lack of specific authorization of least
concern to the auditor? A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.

193. An auditor who examines check disbursements discovers a missing

check number. Upon inquiry to the person responsible for disbursements
and reconciliation of the cash account, he is told that the check number
is missing because the check was voided. What is the auditor's next
step?
A. Prepare a bank transfer schedule to identify the check.
B. Examine the bank confirmation to determine whether the check
cleared.
C. Since the person responsible for disbursements also reconciles the
account, no additional procedures are necessary.
D. Examine the voided checks file to determine whether the check is in the
file.

194. Of the following, which procedure or document is most effective for

detecting kiting? A. A bank cut-off statement.
B. A bank statement.
C. A bank kiting statement.
D. Confirmation of bank balance.
195. Which of the following is confirmed on the standard form used for cash
balances at financial institution?
A. Factored accounts receivable.
B. Loss contingencies.
C. Loans payable.
D. Safe deposit boxes controlled by the entity.

196. When counting cash on hand, the auditor must exercise control over all
cash and other negotiable assets to prevent A. theft.
B. irregular endorsement.
C. substitution.
D. deposits in transit.

197. Which of the following is not a primary objective of the auditor in the
tests of accounts receivable?
A. Determining the approximate realizable value.
B. Determining the adequacy of internal control.
C. Establishing the validity of the receivables.
D. Determining the approximate time of collectibility of the receivables.

198. The negative form of accounts receivable confirmation request is

particularly useful except when
A. control procedures surrounding accounts receivable are considered to
be effective.
B. a large number of small balances are involved.
 C. the auditor has reason to believe the persons receiving the requests are
likely to give them consideration.
D. individual account balances are relatively large.

199. A sales cutoff test complements tests of A. sales returns.

B. Cash
C. accounts receivable
D. sales allowances

200. Most part of the audit of sales and collection cycle

A. cannot be performed until the audit of cash is completed.
B. can be performed independently of the audit of other cycles.
C. must be performed simultaneously with the audit of the purchases and
disbursements cycle.
D. must be performed first so that the audit of the other cycles can rely on
the data.

201. The audit objective: “The accounts receivable balance represents gross
claims on customers and agrees with the sum of the accounts receivable
subsidiary ledger” is derived from the assertion of
A. presentation and disclosure.
B. completeness.
C. valuation or allocation.
D. existence.

202. A shipping document used in vouching will primarily meet the:

A. completeness assertion.
B. valuation or allocation assertion.
C. rights and obligations assertion.
D. occurrence assertion.

203. A shipping document used in tracing will primarily meet the: A.

completeness assertion.
B. valuation or allocation assertion.
C. rights and obligations assertion.
D. occurrence assertion.

204. An auditor is examining accounts receivable. Which one is the most

competent type of evidence in this situation?
A. Interviewing the personnel who records accounts receivable.
B. Verifying that postings to the receivable account from journals have
been made.
C. Receipt by the auditor of a positive confirmation.
D. No response received for a request for a negative confirmation.

205. Negative confirmation of accounts receivable is less effective than positive

confirmation of accounts receivable because
A. a majority of recipients usually lack the willingness to respond
objectively.
B. some recipients may report incorrect balances that require extensive
follow-up.
C. the auditor can not infer that all nonrespondents have verified their
account information.
D. negative confirmations do not produce evidential matter that is
statistically quantifiable.
206. Although most substantive testing is performed during the final audit,
some substantive tests may be done during the interim period. Which of
the following statements concerning the timing of substantive tests is
true?
A. When internal control is weak, extensive substantive testing should be
performed during the interim audit.
B. Substantive testing should be performed during the interim audit only
under conditions of excellent internal control.
C. As a general rule, the auditor performs substantive tests of balances as
of the balance sheet date and tests of transactions during the interim
as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts
receivable as of a point in time at least one month prior to the client's
fiscal year-end.

207. Before applying principal substantive tests to the details of asset and
liability accounts at an interim date, the auditor should
A. assess the difficulty in controlling incremental audit risk.
B. investigate significant fluctuations that have occurred in the asset and
liability accounts since the previous balance sheet date.
C. select only those accounts which can effectively be sampled during
year-end audit work.
D. consider the control tests that must be applied at balance sheet date to
extend the audit conclusions reached at the interim date.

208. Confirming accounts receivable is required whenever:

A. they are material and it is practicable and reasonable to do so.
B. they are material in amount.
C. it is practicable to do so.
D. it is reasonable to do so.

209. In the processing of accounts receivable confirmations, the auditor would

not normally be expected to:
A. reconcile the information to the corresponding customer‟s account.
B. personally deposit the requests in the mail.
C. include his own return address envelope.
D. personally prepare the confirmation letter.

210. The auditor should ordinarily mail confirmation requests to all banks
with which the client has conducted any business during the year,
regardless of the year-end balance, since A. the confirmation
form also seeks information about indebtedness to the bank. B. this
procedure will detect kiting activities which would otherwise not be
detected.
C. the mailing of confirmation forms to all the client‟s depository banks is
required by
Philippine standards on auditing.
D. this procedure relieves the auditor of any responsibility with respect to
non-detection of forged checks.

211. An analysis of the aged accounts receivables is most directly related to

which substantive test objective?
A. Existence and occurrence.
B. Presentation and disclosure.
C. Rights and obligations.
D. Valuation.
212. The tests of balances to evaluate the adequacy of the allowance for
uncollectible accounts do not involve which of the following?
A. Considering the evidence concerning the collectibility of past due
amounts.
B. Testing the aging of the amounts shown in the aging categories on the
aged trial balance.
C. Considering the evidence concerning the collectibility of current
amounts.
D. Assessing the reasonableness of the percentages used to compute the
allowance component required for each aging category and the
adequacy of the overall allowance.
213. When scheduling audit work, the auditors are most likely to confirm
accounts receivable balances at an interim date if:
A. negative confirmations are being used.
B. internal control is weak.
C. internal control is strong.
D. there is a simultaneous examination of cash and accounts payable.

214. Which of the following is the best argument against the use of negative
accounts receivable confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients actually receive
them.
C. The recipients are likely to feel that in reality the confirmation is a
subtle request for payment.
D. The inference drawn from receiving no reply may not be correct.

215. Which of the following procedures least likely helps the auditors to
assess the adequacy of management's accounting estimate of the
allowance for doubtful accounts?
A. Investigate confirmation exceptions for any indication of amounts in
dispute.
B. Review the accounts which have been written off as uncollectible prior
to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful
accounts.

216. Which of the following is a proper alternative audit procedure for no

responses to positive accounts receivable confirmation requests?
A. Examination of subsequent cash receipts in payment of the receivable.
B. Mailing of negative confirmation requests to nonrespondents.
C. Expansion of the sample by the number of nonrespondents.
D. Reduction of accounts receivable by the amount of the no responses.

217. Which of the following might be detected by an auditor's review of the

client's sales cut-
off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year end accounts receivable.
D. Inflated sales for the year.

218. During the process of confirming receivables as of December 31, 2009, a

positive confirmation was returned indicating that the "balance owed as
of December 31 was paid by a customer on January 9, 2010." The
auditor would most likely
 A. determine whether there were any changes in the account between
January 1 and
January 9, 2010.
B. determine whether a customary trade discount was taken by the
customer.
C. reconfirm the zero balance as of January 10, 2010.
D. verify that the amount was received.

219. Which of the following analytical audit findings would most likely
indicate a possible
problem?
A. A material decrease in the receivables turnover.
B. A material increase in inventory turnover.
C. A material decrease in days' sales outstanding.
D. A material increase in the acid test ratio.

220. When the objective of the auditor is to evaluate the appropriateness of

adjustments to sales, the best available evidence would normally be
A. oral evidence obtained by discussing adjustment-related procedures
with controller personnel.
B. analytical evidence obtained by comparing sales adjustments to gross
sales for a period of time.
C. physical evidence obtained by inspection of goods returned for credit.
D. documentary evidence obtained by inspecting documents supporting
entries to adjustment accounts.

221. Two types of accounts receivable confirmation requests are used in

practice - positive and negative. Negative confirmations may be used
A. when internal control over sales and accounts receivable is weak.
B. only when the auditor has assessed inherent risk and control risk as
low, the auditor believes that the recipients will review the request, and
a large number of small balances are involved.
C. only when internal control over sales and accounts receivable is strong.
D. only when the auditor has assessed inherent risk and control risk as
low, the auditor believes that the recipients will review the request, and
a small number of large balances are involved.

222. An auditor has found many new assets on the plant floor, which
coincides with an increase in the equipment subsidiary ledger. However,
the auditor has noticed that lease payments are being made to an
equipment leasing company. The auditor should primarily be concerned
with which financial statement assertion? A. Rights and obligations.
B. Relevance.
C. Clerical accuracy.
D. Completeness.

223. The accuracy of perpetual inventory records may be established in part

by comparing perpetual inventory records with a. purchase requisitions.
b. receiving reports.
c. purchase orders.
d. vendor payments.

224. When auditing merchandise inventory at year end, the auditor performs
a purchase cutoff test to obtain evidence that
a. all goods purchased before year end are received before the physical
inventory count.
b. no goods held on consignment for customers are included in the
inventory balance.
 c. no goods observed during the physical count are pledged or sold.
d. all goods owned at year end are included in the inventory balance.
225. A client's physical count of inventories was higher than the inventory
quantities per the perpetual records. This situation could be the result of
the failure to record: A. sales.
B. sales discounts.
C. purchases.
D. purchase returns.

226. Which of the following audit procedures is not appropriate for addressing
the assertion of valuation?
A. verifying accounts payable trial balance
B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures.

227. When there are few property and equipment transactions during the
year, the continuing auditor usually makes a
a. complete review of the related internal controls and assesses control
risk relative to them.
b. complete review of the related internal controls and performs analytical
review tests to verify current year additions to property and equipment.
c. preliminary review of the related internal controls and performs a
thorough examination of the balances at the beginning of the year.
d. preliminary review of the related internal controls and performs
extensive tests of current year property and equipment transactions.

228. In analyzing the plant assets account, why is the examination of repairs
and maintenance records important? A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.

229. In examining the miscellaneous revenue account, an auditor discovers

income from plant assets. What should be a primary audit concern?
A. That such assets have been removed from the ledger of property owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell
them.
D. That such assets have been replaced by comparable equipment.

230. Which of the following statements is not correct concerning intangible

assets? A. Auditors review the reasonableness of the client's amortization
program.
B. A lack of physical substance.
C. Valuation is a primary audit concern.
D. Proper presentation as current assets.
231. When performing an audit of the property, plant, and equipment
accounts, an auditor should expect which of the following to be most
likely to indicate a departure from generally accepted accounting
principles?
A. A gain was recognized when a new asset was acquired at a price lower
than its listed retail price.
B. Interest has been capitalized for self-constructed equipment.
C. Assets have been acquired from affiliated corporations with the related
transactions recorded and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.
232. The auditors are least likely to learn of retirements of equipment through
which of the following?
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

233. A weakness in internal accounting control over the recording of

retirements of equipment may cause the auditor to
a. inspect certain items of equipment in the plant and trace those items to
the accounting records.
b. review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year.
c. trace additions to the "other assets" account to search for equipment
that is still on hand but no longer being used.
d. select certain items of equipment from the accounting records and
locate them in the plant.

234. When auditing inventories of raw materials, purchased parts, and/or

merchandise inventory, the auditor's most effective means for evaluating
the valuation assertion is to
a. examine recent invoices from vendors, along with freight bills and
compare with client's unit costs, as adjusted for freight and discount.
b. compare purchases with prior year and with industry averages and
account for significant fluctuations.
c. trace quantities from tags or count sheets to final inventory listings.
d. scan inventory listings for large extended amounts, and trace related
quantities to auditor's copy of the inventory tag or listing.

235. The auditor tests the quantity of materials charged to work in process by
tracing these quantities to
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.
236. Which of the following accounts would most likely be reviewed by the
auditor to gain reasonable assurance that additions to the equipment
account are not understated? a. Repairs and maintenance expense.
b. Depreciation expense.
c. Gain on disposal of equipment.
d. Accounts payable.

237. The most significant audit step in substantiating additions to the office
furniture account balance is
a. examination of vendors' invoices and receiving reports for current
year's acquisitions.
b. review of transactions near the balance sheet date for proper period
cutoff.
c. calculation of ratio of depreciation expense to gross office equipment
cost.
d. comparison to prior year's acquisitions.

238. Instead of taking a physical inventory count on the balance sheet date,
the client may take physical counts prior to the year end if internal
controls are adequate and a. computerized records of perpetual inventory
are maintained.
b. inventory is slow moving.
 c. CBIS error reports are generated for missing pre-numbered inventory
tickets.
d. obsolete inventory items are segregated and excluded.

239. Which of the following matters do auditors need not communicate to the
audit committee of a public company?
A. All critical accounting policies
B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted differences
D. Management letter comments

240. Analytical procedures are required to be performed during the: A.

planning and substantive test stages.
B. substantive test and overall review stages.
C. planning and overall review stages.
D. planning stage only.

241. Which of the following factors would least influence an auditor‟s

consideration of the reliability of data for purposes of analytical
procedures?
A. Whether the data are processed in a computer system or in a manual
accounting system
B. Whether sources within the entity are independent of those who are
responsible for the amount being audited
C. Whether the data are subjected to audit testing in the current or prior
year
D. Whether the data are obtained from independent sources outside the
entity or from sources within the entity

242. Analytical procedures are

A. substantive tests designed to evaluate a system of internal control.
B. tests of control procedures designed to evaluate the validity of
management's representation letter.
C. substantive tests designed to evaluate the reasonableness of financial
information.
D. tests of control procedures designed to detect errors in reported
financial information.

243. The auditor notices significant fluctuations in key elements of the

company's financial statements. If management is unable to provide an
acceptable explanation, the auditor should
A. consider the matter as a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting
management fraud.
D. withdraw from the engagement.

244. Who is responsible for establishing the process and controls for
preparing accounting estimates?
E. The independent auditor
F. The internal auditor
G. The management
H. The controller

245. The auditor should adopt one or a combination of the following

approaches in the audit of an accounting estimate:
 I. Review and test the process used by management to develop the
estimate.
II. Use an independent estimate for comparison with what the
management prepares. III. Review subsequent events which confirm
the estimate made.

I. Any of them
J. None of them
K. Either I or II
L. I only

246. Which of the following is not one of the primary approaches that the
auditors may use when evaluating the reasonableness of accounting
estimates?
A. Review and test management's process of developing estimates.
B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be compared to
management's estimate.
D. Review subsequent events or transactions that have bearing on the
estimate.

247. The auditor should normally concentrate on the key factors and
assumptions used by management including all of the following except
those that are M. insignificant to the accounting estimates.
N. sensitive to variations.
O. deviations from historical patterns.
P. susceptible to misstatements and biases.

248. In evaluating the assumptions on which the estimate is based, the

auditor would need to pay particular attention to assumptions which are
Q. reasonable in light of actual results in prior periods.
R. consistent with those used for other accounting estimates.
S. consistent with management‟s plans which appear appropriate.
T. subjective or susceptible to material misstatement.

249. Subsequent events refer to

A. only significant events that occur between the balance sheet date and
the date of the auditor‟s report which have been discovered by the
auditor during the same period. B. only significant events that occur
between the balance sheet date and the date of the auditor‟s report
irrespective of the date they have been discovered by the auditor.
C. only significant events that occur between the balance sheet date and
the date the audited financial statements have been released to the
client, irrespective of the date of their discovery by the auditor.
D. all significant events that occur after balance sheet date.

250. Which of the following is not correct concerning a type I and a type II
subsequent event? A. A type I may require adjustment to financial
statements while a type II would not.
B. Both a type I and a type II subsequent event may require note
disclosure.
C. A type I is an event that occurred prior to year end, but was discovered
after, while a type II is one that arises subsequent to year end.
D. A type II event may require adjustment to the financial statements and
a type I may require note disclosure.

251. Which of the following statements that relates to subsequent events is

inappropriately described?
 A. The auditor is expected to conduct a continuing review of all matters to
which previously applied procedures have provided satisfactory
conclusions.
B. The auditor should consider the effect of subsequent events on the
financial statements and on the auditor‟s report.
C. The procedures to identify events that may require adjustment of, or
disclosure in, the financial statements would be performed as near as
practicable to the date of the auditor‟s report.
D. The procedures that are designed to obtain sufficiently appropriate
audit evidence that all events up to the date of the audit report that
may require adjustment of, or disclosure in, the financial statements
are in addition to routine procedures which may be applied to specific
transactions.

252. The auditor's formal review of subsequent events normally should be

extended through the date of the
U. auditor's report.
V. next formal interim financial statements.
W. delivery of the audit report to the client.
X. mailing of the financial statements to the stockholders.

253. Which of the following appropriately describes the auditor‟s procedures

with respect to subsequent events?
A. The procedures to identity events that may require adjustments of, or
disclosure in, the financial statements would be performed as early as
practicable.
B. Those routine procedures that are applied to specific transactions
occurring after the period ends are designed to obtain sufficient
appropriate audit evidence that all events up to the date of the audit
report have been identified.
C. When a component is audited by another CPA, the auditor would
consider the other auditor‟s procedures regarding events after period
end and the need to inform the other auditor of the planned date of the
audit report.
D. The auditor is responsible to inquire regarding the financial statements
after the date of the auditor‟s report.

254. Which of the following is least likely a procedure that would be performed
by the auditor near the auditor‟s report date?
A. Reading the minutes of the meetings of shareholders, the board of
directors and audit executive committees held throughout the audit
year.
B. Reading the entity‟s latest available interim financial statements.
C. Inquiring of the client‟s legal counsel concerning litigations and
claims.
D. Reviewing the procedures that management has established to ensure
that subsequent events are identified.

255. Which of the following procedures would an auditor most likely perform
to obtain evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after
year-end.
B. Comparing the financial statements being reported on with those of
the prior period.
C. Investigating personnel changes in the accounting department
occurring after year-end.
D. Inquiring as to whether any unusual adjustments were made after
year-end.
256. Which of the following should the auditor do the least when, after the
financial statements have been issued, the auditor becomes aware of a
fact that existed at the date of the auditor‟s report?
A. Consider whether the financial statements need revisions.
B. Discuss the matter with the management.
C. Take the action appropriate in the circumstance.
D. Inform those users who are currently relying on the financial
statements about the fact that has been discovered.

257. If subsequent to the issuance of the audited financial statements, the

auditor becomes aware of material misstatements in the financial
statements that exist prior to the date of the audit report, the auditor
should
Y. notify the parties who are currently relying on the financial
statements.
Z. discuss the matter with the management, and should take the
action appropriate in the circumstances.
AA. document such information in the audit plan for succeeding audit.
BB. submit a revised copies of the financial statements and audit
report to the stockholders.

258. If, after the audited financial statements have been issued, the auditor
becomes aware that some information included in the statements is
materially misleading, he or she has
CC. no obligation to disclose it, assuming he or she acted in good faith
and without negligence in arriving at the audit opinion.
DD. an obligation to inform the board of directors of the misleading
statements.
EE. an obligation to inform all users who are relying on the financial
statements.
FF. an obligation to make certain that users who are relying on the
financial statements are informed.

259. When a new audit report is issued on financial statements because of

subsequent discovery of material misstatements on previously issued
financial statements, the audit report should include
A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the financial
statements that more extensively discusses the reason for the revision
of the previously issued financial statements.

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

261. The management should assess those events that may cast significant
doubt about the entity‟s ability to continue as a going concern for at
least
A. two years from the balance sheet date.
B. two years from the date of the audit report.
C. one year from the balance sheet date.
D. one year from the date of the audit report.

262. Which of the following is incorrect about the management‟s

responsibility to make an assessment of an entity‟s ability to continue as
a going concern?
A. In assessing whether the going concern assumption is appropriate, the
management takes into account all the available information for the
foreseeable future, which should be at least twelve months from the
balance sheet date.
B. Though there is a history of profitable operations and a ready access to
financial resources, management must make its assessment with
detailed analysis.
C. Management‟s assessment of the going concern assumption involves
making a judgment, at a particular point of time, about the future
outcomes of events or conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to continue
as a goingconcern entity.

263. Which of the following least likely indicate a potential going-concern

problem of an entity?
A. Historical negative operating cash flows
B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity
264. Which of the following is correct about the auditor‟s responsibility with
respect to the entity‟s ability to continue as a going concern?
A. The auditor is responsible to make an assessment of the entity‟s
ability to continue as a going concern.
B. The auditor‟s responsibility is to consider the appropriateness of the
management‟s use of the going concern assumption in the preparation
of the financial statements.
C. The auditor can predict future events or conditions that may cause an
entity to discontinue as a going concern.
D. The auditor may allow the management to make an assessment of its
ability to continue as a going concern if the management is believed to
be objective in doing such an assessment.

265. In evaluating the management‟s assessment of the entity‟s ability to

continue as a going concern, he should consider the following, except: A.
the independence of the management. B. the process that the
management has followed to make its assessment.
C. the assumptions on which the assessment is based and management‟s
plan for future action.
D. whether the assessment has taken into account all relevant
information of which the auditor is aware of as a result of the audit
procedures.

266. Which of the following is an appropriate procedure to test for an

indication of events or conditions that cast significant doubt on the
 entity‟s ability to continue as a going concern beyond the period
assessed by management?
A. Inspection
B. Inquiry
C. Observing
D. Analysis

267. When events or conditions have been identified to cast significant doubt
on the entity‟s ability to continue as a going concern, the auditor should
A. consider reassessing control risk at the maximum.
B. consider the issuance of disclaimer of opinion due to scope limitation.
C. review management plans for future actions based on its going-concern
assessments.
D. report the matter to the board of directors and stockholders.

268. Which of the following audit procedures would most likely assist an
auditor in identifying conditions and events that may indicate that there
could be substantial doubt about an entity‟s ability to continue as a
going concern?
A. Review compliance with the terms of debt agreements
B. Confirm accounts receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balances

269. The auditor relies on the client representation letter to:

A. confirm written representations given to the auditor.
B. document the continuing materiality of client representations.
C. guarantee the absence of management fraud.
D. reduce the possibility of misunderstanding concerning management‟s
representations.

270. The auditors are required to obtain a letter of representation from their
clients. Which of the following statements regarding the letter of
representation is correct?
GG. A letter of representation should impress upon management its
responsibility for the assertions in the financial statements.
HH. A letter of representation should be signed by a company‟s
financial officials and attorneys.
II. A letter of representation documents the responses from the
management to inquiries about various aspects of the audit.
JJ. A letter of representation is a written statement from a non-
independent party and as such should not be regarded as a valid
evidence.

271. A purpose of a management representation letter is to reduce A. audit

risk to an aggregate level of misstatement that could be considered
material.
B. an auditor‟s responsibility to detect material misstatements only to the
extent that the letter is relied on.
C. the possibility of a misunderstanding concerning management‟s
responsibility for the financial statements.
D. the scope of an auditor‟s procedures concerning related party
transactions and subsequent events.

272. Which of the following statements is true with respect to management

representations? A. Management representations are dated as of the
balance sheet date.
B. Management representations may serve as a substitute for various
types of substantive procedures.
 C. Management representations are signed by the auditor and delivered to
the client's officers.
D. Management representations are used to corroborate information
obtained during the audit.

273. When considering the use of management‟s written representations as

audit evidence about the completeness assertion, an auditor should
understand that such representations
A. complement, but do not replace, substantive tests designed to support
the assertion.
B. constitute sufficient evidence to support the assertion when considered
in combination with a sufficiently low assessed level of control risk.
C. are not part of the evidence considered to support the assertion.
D. replace a low assessed level of control risk as evidence to support the
assertion.

274. The auditor should obtain evidence that the management acknowledges
its responsibility for the fair presentation of the financial statements in
accordance with PFRS, and has approved the financial statements. The
auditor can obtain evidence of management's acknowledgment of such
responsibility and approval

I. From relevant minutes of meetings of the board of

directors or similar body.
II. By obtaining a written representation from the
management. III. By obtaining a signed copy of the
financial statements.

KK. Any of the given procedures

LL. Either I or II
MM. I only
NN. None of the procedures given

275. A management representation letter would ordinarily be dated as of the

A. date the report is delivered to the entity audited.
B. date the financial statements were approved by the client management.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney of
record.

276. A written representation from a client‟s management that, among other

matters, acknowledges its responsibility for the fair presentation of the
financial statements, should normally be signed by the
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chair of the board of directors.
C. chair of the audit committee of the board of directors.
D. chief executive officer, the chair of the board of directors, and the
client‟s lawyer.

277. If the management refuses to furnish certain written representations that

the auditor believes are essential, which of the following is appropriate?
A. The auditor can rely on oral evidence relating to the matter as a basis
for an unqualified opinion.
B. The client‟s refusal does not constitute a scope limitation that may lead
to a modification of the opinion.
C. The client‟s refusal may have an effect on the auditor‟s ability to rely
on other representations of the management.
 D. The auditor should express an adverse opinion because of
management‟s refusal.

278. For which of the following matters should an auditor obtain written
management representations?
A. Management‟s cost-benefit justifications for not correcting internal
control weaknesses.
B. Management‟s knowledge of future plans that may affect the price of
the entity‟s stock.
C. Management‟s compliance with contractual agreements that may affect
the financial statements.
D. Management‟s acknowledgment of its responsibility for employee‟s
violations of laws.

279. A written management representation letter is most likely to be an

auditor‟s best source of corroborative information of a client‟s intention
to
A. terminate an employee pension plan.
B. make a public offering of its common stock.
C. settle an outstanding lawsuit for an amount less than the accrued loss
contingency.
D. discontinue a line of business.

280. Which of the following matters would an auditor most likely include in a
management representation letter?
A. Communications with the audit committee concerning weaknesses in
the internal control structure.
B. The completeness and availability of minutes of stockholders‟ and
directors‟ meetings. C. Plans to acquire or merge with other entities in
the subsequent year.
D. Management‟s acknowledgment of its responsibility for the detection of
employee
fraud.

281. How are other reporting responsibilities addressed within the auditor‟s
report?
a. They should be addressed in a separate section that follows the opinion
paragraph.
b. They should be addressed within the introductory paragraph.
c. They should be addressed within the scope paragraph.
d. They should be addressed within the scope paragraph and separately
described in a separate paragraph.

282. Which of the following is incorrect regarding the auditor‟s signature?

A. The auditor‟s signature is either in the name of the audit firm, the
personal name of the auditor, or both, as appropriate.
B. The auditor‟s signature is either in the name of the audit firm or the
personal name of the auditor, but not both.
C. In addition to the auditor‟s signature, the auditor may be required to
declare the auditor‟s professional accountancy designation.
D. The auditor‟s report filed with the Securities and Exchange
Commission (SEC) must be manually signed.

283. Which of the following information is(are) required when an auditor‟s

report is issued on financial statements to be filed with the Securities
and Exchange Commission?

1. Audit report is manually signed.

2. Certifying partner to sign his name.
 3. Partner‟s Tax Identification Number.
4. PRC registration number
5. Accreditation with SEC

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

284. An audit report should be dated as of the

A. date the stockholders approve the audited financial statements.
B. date of management approving the audited financial statements.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney.

285. Why is the date of the auditor‟s report important?

a. To have a basis of determining the audit fees to be paid to the auditor.
b. The date of the auditor‟s report informs the readers that the auditor has
considered the effect of events and transactions of which the auditor
became aware and that occurred up to that date.
c. To emphasize completeness assertion.
d. To inform the users of the financial statements that the auditor complied
with the applicable Philippine Standards on Auditing.

286. How is the auditor‟s report on the financial statements that require final
approval by stockholders before such financial statements are issued
publicly dated?
A. The auditor‟s report should be dated coinciding the date of approval of
the financial statements by the stockholders.
B. The auditor‟s report should be dated after the approval of the financial
statements by the stockholders.
C. The date of the auditor‟s report coincides the date of approval of the
financial statements by the board of directors.
D. The audit report should be dual dated, the first date coinciding the
approval by the board of directors and the second date to coincide with
the approval by the stockholders.

287. The auditor‟s address is indicated in the auditor‟s report by:

A. naming the location in the country where the auditor practices his
profession.
B. including the complete mailing address of the auditor.
C. identifying the country from where the auditor had secured his
professional license.
D. the auditor‟s address is omitted in the report.

288. Which of the following is ordinarily true of a modification of the audit

report by adding an emphasis of matter paragraph?
A. The modification by adding an emphasis of matter paragraph is an
“except for” qualification of opinion.
B. The emphasis of matter paragraph is a “subject to” qualification of
opinion.
C. The emphasis of matter paragraph would ordinarily refer to the fact
that the auditor‟s opinion is not qualified.
D. The emphasis of matter paragraph is presented before the opinion
paragraph.
289. When additional language is added to the auditor's report without
modifying the opinion, the additional language should be included in: A.
the introductory paragraph.
B. the scope paragraph.
C. the opinion paragraph.
D. one or more additional paragraphs that follow the opinion paragraph.

290. Which of the following statements is not true?

A. A one-paragraph report is generally used when the auditor is not
independent.
B. A modification of the audit report that involves modified wordings may
contain an unqualified opinion.
C. An addition of another paragraph to an otherwise standard audit
report always requires a modification of an unqualified opinion.
D. An unqualified opinion may be issued though the audit report requires
an additional explanatory paragraph.

291. An auditor includes a separate paragraph in an otherwise unmodified

report to emphasize that the entity being reported on had significant
transactions with related parties. The inclusion of this separate
paragraph
A. is considered an “except for” qualification of the opinion.
B. violates generally accepted auditing standards if this information is
already disclosed in the footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase
“with the foregoing explanation.”
D. is appropriate and would not negate the unqualified opinion.

292. An auditor concludes that there is substantial doubt about an entity‟s

ability to continue as a going concern for a reasonable period of time. If
the entity‟s disclosures concerning this matter are adequate, the audit
report should include a(an)

Adverse opinion “Except for” qualified opinion

A. Yes Yes
B. No No
C. No Yes
D. Yes No

293. Under certain circumstances, the CPA may wish to emphasize specific
matters regarding the financial statements even though he or she intends
to express an unqualified opinion.
Normally, such an explanatory information should be
included in A. the introductory paragraph.
B. a separate paragraph following the opinion paragraph in the report.
C. the opinion paragraph.
D. A separate paragraph preceding the opinion paragraph.

294. Salmon Company‟s financial statements adequately disclose

uncertainties that concern future events, the outcome of which cannot
reasonably be estimated. The auditor‟s report should include a(an)
A. unqualified opinion
B. “except for” qualified opinion C. “subject to” qualified opinion
D. adverse opinion

295. The paragraphs of the report which is modified for uncertainties are the
same as the standard unqualified report. The explanatory paragraph as
a form of the modification to describe the uncertainty is added as the A.
first paragraph B. last paragraph
 C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last

296. An explanatory paragraph following an opinion paragraph that describes

an uncertainty is as follows:

As discussed in Note X to the financial statements, the company is a

defendant in a lawsuit alleging infringement of certain patent rights and
claiming damages. Discovery proceedings are in progress. The ultimate
outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been
made in the accompanying financial statements.

What type of opinion should the auditor express in this circumstance?

A. Unqualified
B. Disclaimer
C. Qualified
D. adverse

297. The audit report issued by Lozano and Co., CPAs, included the following
paragraph that followed the opinion paragraph:

Without qualifying our opinion we draw attention to Note 11 to the

financial statements. The Company is the defendant in a lawsuit alleging
infringement of certain patent rights
...

This paragraph is considered:

A. an inappropriate reporting practice
B. an additional information to be a part of the notes to financial
statements.
C. an emphasis of matter regarding uncertainty which is considered an
acceptable reporting practice
D. inappropriate because it contradicts the unqualified opinion issued by
the auditor

298. In extreme cases such as situations involving multiple uncertainties that

are significant to the financial statements, the auditor
A. may consider to express a disclaimer of opinion
B. may qualify his opinion instead of issuing an unqualified opinion with
emphasis of matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a “subject to” opinion because the situations related to
uncertainties

299. A client company has issues that cause substantial doubt regarding the
entity's ability to continue as a going concern. If this is the only major
audit issue, which type of opinion will the auditor usually refrain from
issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion

300. Which of the following situations, the effect of which is significant, least
likely require a decision of whether to issue a qualified or adverse
opinion?
 A. Any disagreement with entity management regarding the acceptability
of the accounting policies selected by the management. B. Limitation
on the scope of the auditor‟s work.
C. Inadequate disclosures of financial information.
D. Unjustified changes in accounting policies.

301. The auditor may continue to express unqualified opinion though there
are modifications made in the audit report. Which of the following
situations, would the auditor likely modify his opinion?
A. The existence of multiple uncertainties that are adequately described
in the notes to financial statements.
B. The prior year‟s financial statements were audited by other CPAs.
C. An important subsidiary whose financial statements were included in
the consolidated financial statements were audited by other CPAs.
D. A substantial doubt about the client‟s ability to continue as a going
concern that is
adequately disclosed in the financial statements.

302. In which of the following situations would qualified opinion be

inappropriate? A. Financial statements are materially misstated.
B. A doubt that is more than substantial about the ability of the company
to continue as a going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.

303. Which of the following is not a reason to issue a modified audit report
with opinion other than unqualified opinion?
A. The scope of the auditor‟s work is restricted by the client.
B. The amount of inventories at cost as presented in the balance sheet
significantly exceeded their market values.
C. Certain significant matter is omitted from either the financial
statements or notes to financial statements.
D. An adequately disclosed significant uncertainty, the resolution of
which is dependent upon future events and which may affect the
financial statements.

304. Which of the following situations may likely require a modified audit
report with modified wordings or an emphasis of matter paragraph?
A. A significant uncertainty, not adequately disclosed in the financial
statements.
B. An audit of inventory is restricted by the client. The auditor was
satisfied about the balance of the inventory by doing alternative audit
procedures.
C. A change in the application of generally accepted accounting principle
that is justified.
D. A less than substantial doubt regarding the ability of the entity to
continue as a going concern.

305. Which of the following circumstances may not result to a disclaimer of

opinion?
A. A significant scope limitation in auditing the existence of inventories.
The inventory amount comprises 75 percent of the total assets of the
client.
B. The auditor believes that there are multiple uncertainties that are
significant to the financial statements.
C. The accounts receivable of the client comprises 80 percent of the total
assets. The auditor was instructed by the client not to confirm
account balances. The auditor, however, was satisfied by the results
of alternative audit procedures.
 D. The auditor‟s wife owns very a few number of common shares of the
client.

306. An auditor may express a qualified opinion because of

Departure from Lack of Scope

PFRS Consistency Limitation
A. YES YES YES
B. NO YES NO
C. YES NO NO
D. NO YES YES
307. Whenever an auditor issues a qualified report, he or she
A. must use the term “subject to” in the opinion paragraph.
B. may use either the terms “subject to” or “ except for” in the opinion
paragraph, depending on the nature of the qualification.
C. must use the term “except for” in the opinion paragraph.
D. must not use the terms “subject to” or “except for” in the opinion
paragraph.

308. An explanatory paragraph may be added to the audit report while at the
same time issuing an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of
the auditor.
B. there is an immaterial departure from GAAP to ensure fair
presentation with the agreement of the auditor.
C. the audit opinion is partly based on the work of another auditor.
D. the audit work has been significantly limited by management.

309. Under which of the following sets of circumstances might an auditor

disclaim an opinion?
A. The financial statements contain a departure from PFRS, the effect of
which is material.
B. The principal auditor decides to make reference to the report of
another auditor who audited a subsidiary.
C. There has been a material change between periods in the method of
the application of accounting principles.
D. There were significant limitations on the scope of the audit.

310. If an auditor is engaged to audit a client‟s financial statements after the

annual physical inventory count was made and the accounting records
are not sufficiently reliable to enable the auditor to become satisfied as to
the year-end inventory balances, the opinion to be expressed is
A. either an “except for” qualified opinion or an adverse opinion.
B. either a disclaimer or opinion or an “except for” qualified opinion.
C. either an adverse opinion or disclaimer of opinion.
D. an unqualified opinion.