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TEST BANK 1
AUDITING THEORY
82102017
1. Under the PRC BOA Resolution No. 2-2016, which of the following shall be
submitted by the individual CPA, firms, and partnerships of CPAs engaged in
the practice of public accountancy to the Professional Regulation Commission
thru the Standards and Inspection Division?
A. Engagement Reports.
B. Engagement Budgets.
C. Engagement Letters.
D. Engagement Contracts.

2. The following information shall be included in the Engagement Report (ER),

except
A. Type of engagement
B. Engagement fee
C. Start date and completion date of engagement.
D. Audit opinion rendered, if the type of engagement rendered is Compilation
of Financial Statements.

3. Which of the following shall be prepared and signed by the CPA who is tasked
to assist management in the preparation and presentation of financial
information of an entity in accordance with an applicable financial reporting
framework?
A. Auditor’s Report.
B. Practitioner’s Review Report.
C. Certificate on the Compilation Services for Preparation of Financial
Statements
D. Review Report

4. BOA Resolution No. 263 Series of 2015 approves the adoption of

_________________ (subject to changes of certain provisions) as the Code of
Ethics for Professional Accountants in the Philippines.
A. IFAC 2010 Code of Ethics for Professional Accountants
B. IFAC 2012 Code of Ethics for Professional Accountants
C. IFAC 2013 Code of Ethics for Professional Accountants
D. IFAC 2015 Code of Ethics for Professional Accountants

5. When an audit client becomes a Public Interest Entity (PIE), the length of time
the individual has served the audit client as a key audit partner before the
client becomes a PIE shall be taken into account in determining the timing of
the rotation. If the individual has served the audit client as a key audit partner
for five (5) years or less when the client becomes a PIE, the number of years
the individual may continue to serve the client in that capacity before rotating
off the engagement is
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years

6. If the individual has served the audit client as a key audit partner for six (6) or
more years when the client becomes a PIE, the partner may continue to service
in that capacity for ________________ before rotating off the engagement.
A. Seven (7) years
B. Seven (7) years less the number of years served
C. Maximum of two (2) additional years
D. Five (5) years

7. Professional Accountant refers to an individual who holds a valid Certificate of

Registration and current Professional Identification Card issued by the Board of
Accountancy (i.e., CPA) and the Professional Regulation Commission (PRC) if
he/she is in
A. Public practice or education only.
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B. Public practice or industry or commerce only.

C. Public practice or public sector only.
D. Public practice, industry or commerce, public sector, or education.

8. PSA 700 (Revised) states that the first section of the auditor’s report shall
have the heading
A. Opinion
B. Basis for Opinion
C. Responsibilities for the Financial Statements
D. Auditor’s Responsibilities for the Audit of the Financial Statements

9. PSA 700 (Revised) states that the Opinion section of the auditor’s report shall
also identify the entity whose financial statements have been audited and
A. State that the financial statements have been audited and identify the title
of each statement comprising the financial statements.
B. Specify the date of, or period covered by, each financial statement
comprising the financial statements.
C. Refer to the notes, including summary of significant accounting policies.
D. All of the above

10. PSA 700 (Revised) states that for audits of complete sets of general purpose
financial statements of listed entities, the auditor shall communicate
______________ in the auditor’s report.
A. Significant deficiencies in the entity’s internal control system.
B. Matters of interest to those charged with governance.
C. Other non-assurance services performed
D. Key audit matters

11. One common type of CAAT is the use of audit software to process data of audit
significance from the entity’s information system. An audit software that has
widespread popularity because it is easy to use and requires little computer
background on the part of the auditor; it can be used on both mainframe and
PC systems; it allows the auditor to perform his/her tests independent of the
entity’s computer processing personnel; and it can be used to audit the data in
most file formats and structures is called a
A. Customized program
B. Purpose-written program
C. Utility program
D. Package or generalized audit software (GAS)

12. Which of the following factors is most relevant when an auditor considers the
client's organizational structure in the context of control risk?
A. Management's attitude toward information processing and accounting
departments.
B. The organization's recruiting and hiring practices.
C. Physical proximity of the accounting function to upper management.
D. The suitability of the client's lines of reporting.

13. An auditor who uses the work of an expert may refer to the expert in the
auditor's report if the:
A. Auditor believes that the expert's findings are reasonable in the
circumstances.
B. Expert's findings support the related assertions in the financial statements.
C. Auditor modifies the report because of the difference between the client's
and the expert's valuations of an asset.
D. Expert's findings provide the auditor with greater assurance of reliability
about management's representations.

14. In attribute sampling, a 25% change in which of the following factors will have
the smallest effect on the size of the sample?
A. Tolerable rate of deviation.
B. Number of items in the population.
C. Degree of assurance desired.
D. Planned assessed level of control risk.
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15. Which of the following is an analytical procedure that an auditor most likely
would perform during the final review stage of an audit?
A. Comparing each individual expense account balance with the relevant
budgeted amounts and investigating any significant variations.
B. Testing the effectiveness of internal control procedures that appear to be
suitably designed to prevent or detect material misstatements.
C. Reading the financial statements and considering whether there are any
unusual or unexpected balances that were not previously identified.
D. Calculating each individual expense account balance as a percentage of
total entity expenses and comparing the results with industry averages.

16. A CPA firm is completing the fieldwork for an audit of Sweden Co. for the
current year ended December 31. The manager in charge of the audit is
performing the final steps in the evidence accumulation phase of the audit and
notes that there have been several changes in Sweden during the year under
audit. Which of the following items would indicate there could be substantial
doubt about Sweden's ability to continue as a going concern for a reasonable
period of time?
A. Cash infusion by a venture capital firm.
B. Recurring working capital shortages.
C. A lack of significant contracts with new customers.
D. Term debt refinanced with a new bank.

17. An accountant agrees to the client's request to change an engagement from a

review to a compilation of financial statements. The compilation report should
include:
A. No reference to the original engagement.
B. Reference to a departure from PSAs.
C. Scope limitations that may have resulted in the change of engagement.
D. Information about review procedures already performed.

18. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.

19. Which of the following fraudulent activities most likely could be perpetrated
due to the lack of effective internal controls in the revenue cycle?
A. Fictitious transactions may be recorded that cause an understatement of
revenues and overstatement of receivables.
B. Claims received from customers for goods returned may be intentionally
recorded in other customers’ accounts.
C. Authorization of credit memos by personnel who receive cash may permit
the misappropriation of cash.
D. The failure to prepare shipping documents may cause an overstatement of
inventory balances.

20. The Philippine Framework for Assurance Engagements identifies two types of
assurance engagements a practitioner is permitted to perform: a reasonable
assurance engagement and a limited assurance engagement. Which of the
following is the objective of a limited assurance engagement?
A. A reduction in assurance engagement risk to a very low level in the
circumstances of the engagement as a basis for a disclaimer of the
practitioner’s conclusion.
B. A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement as a basis for a positive form of
expression of the practitioner’s conclusion.
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C. A reduction in assurance engagement risk to a level that is acceptable in

the circumstances of the engagement as a basis for a negative form of
expression of the practitioner’s conclusion.
D. A reduction in assurance engagement risk to a level that is acceptable in
the circumstances of the engagement as a basis for a modified form of
expression of the practitioner’s conclusion.

21. A firm of CPAs may use policies and procedures such as notifying professional
personnel as to the names of audit clients having publicly held securities and
confirming periodically with such personnel that prohibited relations do not
exist. This is done to achieve effective quality control in which of the following
areas?
A. Acceptance and continuance of clients.
B. Human resources.
C. Ethical requirements.
D. Leadership responsibilities for quality within the firm.

22. If the auditor believes that the financial statements are not fairly stated or is
unable to reach a conclusion because of insufficient evidence, the auditor
A. Should withdraw from the engagement.
B. Should request an increase in audit fees so that more resources can be used
to conduct the audit.
C. Has the responsibility of notifying financial statement users through the
auditor’s report.
D. Should notify regulators of the circumstances.

23. Which of the following statements best describes the auditor’s responsibility
regarding the detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such
failure clearly results from non-performance of audit procedures specifically
described in the engagement letter.
B. The auditor is required to provide reasonable assurance that the financial
statements are free of both material errors and fraud.
C. The auditor may extend auditing procedures to actively search for evidence
of fraud where examination indicates that fraud may exist.
D. The auditor is responsible for the failure to detect fraud only when an
unmodified opinion is issued.

24. For audit evidence to be compelling to the auditor it must be sufficient and
appropriate. Which statement below is not correct regarding the
appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it
provides the auditor about the reliability of financial reporting by the client.
B. An auditor’s opinion to be economically useful and profitable to the auditing
firm needs to be formed within a reasonable time and based on evidence
obtained that assures profits for the auditing firm.
C. Evidence obtained from independent sources outside the entity is generally
more reliable than evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through
inquiry, observation and inspection, is generally more persuasive than
information obtained indirectly.

25. Which of the following is not a correct use of the terminology in relation to
audit evidence?
A. Evidence obtained from an independent source outside the client
organization is more reliable than that obtained from within.
B. Documentary evidence is more reliable when it is received by the auditor
indirectly rather than directly.
C. Documents that originate outside the company are considered more reliable
than those that originate within the client’s organization.
D. External evidence, such as communications form banks, is generally
regarded as more reliable than answers obtained from inquiries of the
client.
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26. The audit team gathers information about a new client’s business and industry
in order to obtain
A. An understanding of the client’s internal control system for financial
reporting.
B. An understanding of how economic events and transactions have an effect
on the company’s financial statements.
C. Information about engagement risk.
D. Information regarding whether the company is engaging in financial
statement fraud.

27. When performing planning analytical procedures for a client, the auditor
detected that the gross profit percentage had declined by 50% from the
previous year to the year currently under audit. The auditor should
A. Investigate the possibility the client may have made an error in their cost of
goods sold computation.
B. Assist management in developing greater cost efficiencies in their product
line.
C. Prepare a going concern opinion for the client.
D. Advise the client to have extensive disclosure to alleviate investor concerns.

28. The auditor’s primary purpose in auditing the client’s system of internal control
over financial reporting is
A. To prevent fraudulent financial statements from being issued to the public.
B. To evaluate the effectiveness of the company’s internal controls over all
relevant assertions in the financial statements.
C. To report to management that the internal controls are effective in
preventing misstatements from appearing on the financial statements.
D. To efficiently conduct the audit of financial statements.

29. A company is concerned with the theft of cash after the sale has been
recorded. One way in which fraudsters conceal the theft is by a process called
“lapping.” Which of the following best describes lapping?
A. Reduce the customer’s account by recording a sales return.
B. Write off the customer’s account.
C. Reduce the customer’s account by recording a sales allowance.
D. Apply the payment from another customer to the customer’s account.

30. An important characteristic of IT is uniformity of processing. Therefore, a risk

exists that
A. Auditors will not be able to access data quickly.
B. Auditors will not be able to determine if data is processed consistently.
C. Erroneous processing can result in the accumulation of a great number of
misstatements in a short period of time.
D. All of the above.

31. Which of the following statements is not true?

A. Analytical procedures emphasize the overall reasonableness of transactions
and balances.
B. Tests of controls are concerned with evaluating whether controls are
sufficiently effective to justify reducing control risk and thereby reducing
analytical procedures.
C. Substantive tests of transactions emphasize the verification of transactions
recorded in the journals and then posted in the general ledger.
D. Tests of details of balances emphasize the ending balances in the general
ledger.

32. Accepting an engagement to examine an entity’s financial projection most

likely would be appropriate if the projection were to be distributed to
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration
statement.
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.
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33. In many audits of sales transactions, substantive tests of transactions can be

reduced in determining the completeness objective because
A. Understatements of assets and income are a greater concern than
overstatements.
B. Overstatements of assets and income are a greater concern than
understatements.
C. It doesn’t matter if income is understated because the savings on income
tax offsets the reduced revenue and net income is correct.
D. The unrecorded sales cause a reduction of accounts receivable; therefore,
the ratios of the two financial statements will not be misleading.

34. To determine if a sample is truly representative of the population, an auditor

would be required to
A. Conduct multiple samples of the same population.
B. Never use sampling because of the expense involved.
C. Audit the entire population.
D. Use systematic sample selection.

35. The most important test of details of balances to determine the existence of
recorded accounts receivable is
A. Tracing details of sales invoices to shipping documents.
B. Tracing the credits in accounts receivable to bank deposits.
C. Tracing sales returns entries to credit memos issued and receiving room
reports.
D. The confirmation of customers’ balances.

36. Which of the following is the most effective control procedure to detect
vouchers that were prepared for the payment of goods that were not received?
A. Count goods upon receipt in storeroom.
B. Match purchase order, receiving report, and vendor’s invoice for each
voucher in accounts payable department.
C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.

37. If the client fails to record disposals of property, plant, and equipment, both the
original cost of the asset account and the net book value will be incorrect.
What will the effect be of this misstatement on the original cost and the book
value?
A. Both will be overstated indefinitely.
B. The original cost will overstated indefinitely, and the net book value will be
overstated until the asset is fully depreciated.
C. The original cost will be overstated indefinitely, and the net book value will
be understated indefinitely.
D. The original cost will be overstated indefinitely, and the net book value will
be understated until the asset is fully depreciated.

38. You are gathering evidence for the audit objective that existing inventory items
are included in the inventory listing schedule. The audit procedure that would
provide you with the best evidence to confirm this objective is
A. Trace from inventory tags to the inventory listing schedule and make sure
the inventory tag is included.
B. Trace the inventory totals to the general ledger.
C. Perform tests of lower-cost-or-net realizable value.
D. Account for unused tags shown in the auditor’s documentation to make sure
no tags have been added.

39. Which of the following is not an objective of the auditor’s examination of notes
payable?
A. To determine whether internal controls are adequate.
B. To determine whether client’s financing arrangements are effective and
efficient.
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C. To determine whether transactions regarding the principal and interest of

notes are properly authorized.
D. To determine whether the liability for notes and related interest expense
and accrued liabilities are properly stated.

40. Which of the following errors would be least likely to be discovered during the
tests of the bank reconciliation?
A. Payment was made to an employee for more hours than he worked.
B. Cash received by the client subsequent to the balance sheet date was
recorded as cash receipts in the current year.
C. Payments on notes payable debited directly to the bank balance by the
bank were not entered in the client’s records.
D. Deposits were recorded in the cash receipts records near the end of the
year, deposited in the bank, and were included in the bank reconciliation as
a deposit in transit.

41. Assurance provided by a review is substantially less than an audit. Which of

the following statements is true regarding these services?
A. A review requires more substantive evidence than an audit.
B. An audit requires less evidence related to internal control than a review.
C. A review requires less evidence than an audit.
D. None of the above statements is true.

42. When expressing an unmodified opinion, the auditor who evaluates the audit
findings should be satisfied that the
A. Amount of known misstatement is documented in the management
representation letter.
B. Estimate of the total likely misstatement is less than a material amount.
C. Amount of known misstatement is acknowledged and recorded by the
client.
D. Estimate of the total likely misstatement includes the adjusting entries
already recorded by the client.

43. Reyes Merchandising Co. maintains a staff of three full-time internal auditors.
If the work of the internal auditors is relevant to the audit, it is efficient to
consider how that work may affect the audit, and the internal auditors are
found to be competent and objective, the independent auditor most likely will
A. Nevertheless need to make direct tests of assertions about material
financial statement amounts for which the risk of material misstatement is
high.
B. Decrease the extent of the tests of controls needed to restrict detection risk
to the acceptable level.
C. Increase the extent of the procedures needed to reduce control risk to an
acceptable level.
D. Not evaluate and test the work performed by the internal auditors.

44. A client who recently installed a new accounts payable system assigned
employees a user identification code (UIC) and a separate password. Each UIC
is a person’s name, and the individual’s password is the same as the UIC.
Users are not required to change their passwords at initial log-in nor do
passwords ever expire. Which of the following statements does not reflect a
limitation of the client’s computer-access control?
A. Employees can easily guess fellow employees’ passwords.
B. Employees are not required to change passwords.
C. Employees can circumvent procedures to separate duties.
D. Employees are not required to take regular vacations.

45. On January 2, 2017, the TANYA CO. received a notice from its primary suppliers
that effective immediately all wholesale prices would be increased 10%. On
the basis of the notice, TANYA revalued its December 31, 2016, inventory to
reflect the higher costs. As a result, the statement of financial position reflects
inventory stated at an amount higher than its net realizable value. The
inventory constituted a material proportion of total assets; however, the effect
of the revaluation was material to current assets but not to total assets or net
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income. In reporting on the company’s financial statements for the year ended
December 31, 2016, in which inventory is valued at the adjusted amount, the
auditor would most likely
A. Express an unmodified opinion provided the nature of the adjustment and
the amounts involved are disclosed in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.

46. An auditor’s report on financial statements prepared in accordance with the

financial reporting provisions of a contract (that is, a special purpose
framework) to comply with the provisions of that contract should include all of
the following except
A. An opinion as to whether the financial statements are presented fairly, in all
material respects, in accordance with the financial reporting provisions of
the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under
the circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.

47. An auditor’s report on financial statements prepared in accordance with the

financial reporting provisions of a contract (that is, a special purpose
framework) to comply with the provisions of that contract should include all of
the following, except
A. An opinion as to whether the financial statements are presented fairly, in all
material respects, in accordance with the financial reporting provisions of
the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under
the circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.

48. When an auditor reports on financial statements prepared on an entity’s

income tax basis, the auditor’s report should
A. State the basis of presentation of the financial statements.
B. Disclaim an opinion on whether the statements were examined in
accordance with Philippine Standards on Auditing (PSAs).
C. Not express an opinion on whether the statements are presented in
accordance with the tax basis of accounting used.
D. Include an explanation of how the results of operations differ from the cash
receipts and disbursements basis of accounting.

49. When an auditor is requested to express an opinion on the rental and royalty
income of an entity, the auditor may
A. Accept the engagement provided the auditor will comply with relevant
ethical requirements, including those pertaining to independence, relating
to financial statement audit engagements and all PSAs relevant to the
audit.
B. Accept the engagement provided distribution of the auditor’s report is
limited to the entity’s management.
C. Not accept the engagement unless also engaged to audit the full financial
statements of the entity.
D. Not accept the engagement because to do so would be tantamount to
agreeing to express a piecemeal opinion.
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50. An auditor has identified the controller’s review of the bank reconciliation as a
control to test. In connection with this test, the auditor interviews the controller
to understand the specific data reviewed on the reconciliation. In addition, the
auditor verifies that the bank reconciliation is properly prepared by the
accountant and reviewed by the controller as evidenced by their respective
sign-offs. Which of the following types of audit procedures do these actions
illustrate?
A. Observation and inspection of records.
B. Confirmation and reperformance.
C. Inquiry and inspection of records.
D. Analytical procedures and reperformance.

51. An auditor established a P180,000 tolerable misstatement for an asset with an

account balance of P3,000,000. The auditor selected a sample of every 20 th
item from the population that represented the asset account balance and
discovered a net overstatement of P10,500 (P11,100 overstatements minus
P600 understatements). Under these circumstances, the auditor most likely
would conclude that
A. The asset account is fairly stated because the tolerable misstatement
exceeds the net of projected actual overstatements and understatements.
B. The asset account is fairly stated because the total projected misstatement
is less than the tolerable misstatement.
C. There is an unacceptably high risk that the actual misstatements in the
population exceed the tolerable misstatement because the total projected
misstatement exceeds the tolerable misstatement.
D. There is an unacceptably high risk that the tolerable misstatement is more
than the sum of actual overstatements and understatements.

52. In an audit of special purpose financial statements, the auditor shall obtain an
understanding of
I. The purpose for which the financial statements are prepared.
II. The intended users.
III. The steps taken by management to determine that the applicable
financial reporting framework is acceptable in the circumstances.
A. I and III only C. I, II, and III
B. II and III only D. I and II only

53. An auditor may express an opinion on an entity’s accounts receivable balance

even if the auditor has disclaimed an opinion on the financial statements taken
as a whole provided the
A. Report on the accounts receivable is presented separately from the
disclaimer of opinion on the financial statements.
B. Auditor also reports on the current asset portion of the entity’s balance
sheet.
C. Use of the report on the accounts receivable is restricted.
D. Report on the accounts receivable discloses the reason for the disclaimer of
opinion on the financial statements.

54. An auditor may accept an engagement to report on summary financial

statements in accordance with PSA 810 only when
A. The auditor has been engaged to conduct an audit in accordance with PSAs
of the financial statements from which the summary financial statements
are derived.
B. Summary financial statements are distributed only to management and the
board of directors.
C. Auditor describes the additional review procedures performed on the
summary financial statements.
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D. Summary financial statements are presented in comparative form with the

prior year’s summary financial statements.

55. A successor auditor's inquiries of the predecessor auditor should include

questions regarding:
A. The predecessor's evaluation of audit risk and judgment about materiality.
B. Subsequent events that occurred since the predecessor's audit report was
issued.
C. The predecessor's understanding as to the reasons for the change in
auditors.
D. The predecessor's knowledge of accounting matters of continuing
significance.

56. Which of the following most likely would cause an auditor to consider whether
a client's financial statements contain material misstatements?
A. Management did not disclose to the auditor that it consulted with other
accountants about significant accounting matters.
B. The chief financial officer will not sign the management representation
letter until the last day of the auditor's field work.
C. Audit trails of computer-generated transactions exist only for a short time.
D. The results of an analytical procedure disclose unexpected differences.

57. Which of the following actions should the auditor take in response to
discovering a deviation from the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation.
B. Assume that the deviation is an isolated occurrence without audit
significance.
C. Report the matter to the next higher level of authority within the entity.
D. Increase sample size of tests of controls.

58. The auditor should perform tests of controls when

A. Substantive procedures alone do not provide sufficient appropriate audit
evidence at the relevant assertion level.
B. Tests of details and substantive analytical procedures provide sufficient
appropriate audit evidence to support the assertion being evaluated.
C. The auditor is not able to obtain an understanding of internal controls.
D. The owner-manager performs virtually all the functions of internal control.

59. An auditor who has confirmed accounts receivable may discover that the sales
journal was held open past year end if
A. Positive confirmations sent o debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a
larger balance than the amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a
smaller balance than the amount being confirmed.

60. Which of the following procedures would best detect a liability omission by
management?
A. Inquiry of senior support staff and recently departed employees.
B. Review and check mathematical accuracy of financial statements.
C. Review articles of incorporation and corporate bylaws.
D. Review purchase contracts and other legal documents.

61. The risk of material misstatement refers to

A. Control risk and acceptable audit risk.
B. Inherent risk.
C. The combination of inherent risk and control risk.
D. Inherent risk and audit risk.

62. In a financial statement audit, inherent risk is evaluated to help an auditor

assess which of the following?
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A. The internal audit department’s objectivity in reporting a material

misstatement of a financial statement assertion it detects to the audit
committee.
B. The risk the internal control system will not detect a material misstatement
of a financial statement assertion.
C. The risk that the audit procedures implemented will not detect a material
misstatement of a financial statement assertion.
D. The susceptibility of a financial statement assertion to a material
misstatement assuming there are no related controls.

63. Related party transactions may be indicated when another company

A. Subsidizes certain operating expenses of the company.
B. Purchases its securities at their fair value.
C. Loans to company at market rates.
D. Has had a distributor relationship with the company for 10 years.

64. An auditor should examine minutes of the board of directors’ meetings

A. Through the date of the financial statements.
B. Through the date of the audit report.
C. Only at the beginning of the audit.
D. On a test basis.

65. If the auditor were responsible for making certain that all of management’s
assertions in the financial statements were absolutely correct
A. Bankruptcies could no longer occur.
B. Bankruptcies would be reduced to a very small number.
C. Audits would be much easier to complete.
D. Audits would not be economically practical.

66. Which of the following statements is true?

A. Auditors have generally found that the most effective and efficient way to
conduct an audit is to obtain some assurance for each class of transaction
and for the ending balance of the related account.
B. Management’s assertion follow and are closely related to the audit
objectives.
C. The auditor’s primary responsibility is to find and disclose fraudulent
management assertions.
D. Assertions about presentation and disclosure deal with whether the
accounts have been included in the financial statements at appropriate
amounts.

67. Which of the following statements about the existence and completeness
assertions is not true?
A. The existence and completeness assertions emphasize different audit
concerns.
B. Existence deals with overstatements and completeness deals with
understatements.
C. Existence deals with understatements and completeness deals with
overstatements.
D. The completeness assertion deals with unrecorded transactions.

68. In testing for cutoff, the objective is to determine

A. Whether all of the current period’s transactions are recorded.
B. Whether transactions are recorded in the correct accounting period.
C. The proper cutoff between capitalizing and expensing expenditures.
D. The proper cutoff between disclosing items in notes to the financial
statements or in account balances.

69. Determine which of the following is most correct regarding the reliability of
audit evidence?
A. Information that is indirectly obtained from external sources is the most
reliable audit evidence.
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B. Reliability of audit evidence is dependent upon the evidence being

convincing.
C. Reliability of evidence refers to the amount of evidence obtained.
D. An effective internal control system provides more reliable audit evidence.

70. Which of the following is not a factor that relates to opportunities to

misappropriate assets?
A. Inadequate internal controls over assets.
B. Presence of large amounts of cash on hand.
C. Inappropriate segregation of duties or independent checks on performance.
D. Adverse relationships between management and employees.

71. A control that relates to all parts of the IT system is called a/an
A. General control.
B. Systems control.
C. Universal control.
D. Applications control.

72. The auditor would design which of the following audit tests to detect possible
monetary errors in the financial statements?
A. Control tests.
B. Analytical procedures.
C. Risk assessment procedures.
D. Tests of operating effectiveness of controls over revenue and cash.

73. A document that details what the auditor will do to gather sufficient,
appropriate evidence is the
A. Audit strategy.
B. Audit program.
C. Audit procedure.
D. Audit risk model.

74. An auditor noted that the accounts receivable department is separate from
other accounting activities. Credit is approved by a separate credit
department. Control accounts and subsidiary ledgers are balanced monthly.
Similarly, accounts are aged monthly. The accounts receivable manager writes
off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual
circumstances are involved. Credit memoranda are prenumbered and must
correlate with receiving reports. Which of the following areas could be viewed
as an internal control weakness of the above organization?
A. Write-offs of delinquent accounts.
B. Credit approvals.
C. Monthly aging of receivables.
D. Handling of credit memos.

75. A purchasing agent places an order for inventory whenever a requisition is

received from the warehouse. The warehouse clerk issues requisitions based
on periodic physical counts because no perpetual records are maintained.
Numerous duplicate orders have been placed for goods previously ordered but
not received. To prevent this excess ordering, the firm should
A. Keep an adequate record of open purchase orders and review it before
ordering.
B. Count goods in the warehouse less often.
C. Use prenumbered purchase orders.
D. Not use purchase requisitions.

76. Which of the following is not a category of assertions that management makes
about the accounting information in the financial statements?
A. Assertions about classes of transactions for the period under audit.
B. Assertions about account balances at period end.
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C. Assertions about the quality of source documents used to prepare the

financial statements.
D. Assertions about presentation and disclosure.

77. The refusal of a client’s lawyer to provide a representation on the legality of a

particular act committed by the client is ordinarily
A. Sufficient reason to issue a “subject to” opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditor’s report because of the lawyer’s
obligation of confidentiality.
D. Proper grounds to withdraw from the engagement.

78. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is
required to submit an audited statement of financial position but not the related
statements of income, changes in equity, or cash flows. Maasim would like to
engage a CPA to audit only its statement of financial position. Under these
circumstances, the CPA
A. May not audit only Maasim’s statement of financial position if the amount of the
loan is material to the financial statements taken as a whole.
B. May not audit only Maasim’s statement of financial position if Maasim is not a
listed entity.
C. May audit only Maasim’s statement of financial position if the CPA disclaims an
opinion on the other financial statements.
D. May audit only Maasim’s statement of financial position if access to the
information underlying the basic financial statements is not limited.

79. In evaluating the reasonableness of an entity’s accounting estimates, an auditor

normally would be concerned about assumptions that are
A. Susceptible to bias. C. Insensitive to variations.
B. Consistent with prior periods. D. Similar to industry guidelines.

80. When CPA firms do an audit of historical financial statements, part of the audit
usually consists of identifying operational problems and making
recommendations that may benefit the audit client. The recommendations can
be made orally but they are typically made by use of a
A. Letter of representations. C. Management letter.
B. Engagement letter. D. Client letter.

81. When the auditor issues an erroneous opinion as the result of an underlying
failure to comply with the requirements of standards on auditing, it results in
A. Business failure. C. Audit risk.
B. Audit failure. D. All of the above.

82. Which of the following statements is false?

A. The firm should obtain written confirmation of compliance with its policies
and procedures on independence from all firm personnel required to be
independent by the Code of Ethics.
B. The firm should establish policies and procedures designed to provide it
with reasonable assurance that the firm and its personnel comply with
relevant ethical requirements.
C. The firm’s quality control policies and procedures need not be documented
and communicated to the firm’s personnel.
D. The firm should establish policies and procedures requiring appropriate
documentation to provide evidence of the operations of each element of its
system of quality control.

83. Criteria need to be available to the intended users in an assurance

engagement to allow them to understand how the subject matter has been
evaluated or measured. Which of the following is not among the ways by
which these criteria could be made available to the intended users?
A. Publicly
B. Through inclusion in a clear manner in the presentation of the subject
matter information.
C. Through inclusion in the firm’s office policy manual.
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D. Through inclusion in a clear manner in the assurance report.

84. An auditor concludes that the omission of a substantive procedure considered

necessary at the time of the examination may impair the auditor’s present
ability to support the previously expressed opinion. The auditor need not apply
the omitted procedure if
A. The risk of adverse publicity litigation is low.
B. The results of other procedures that were applied tend to compensate for
the procedure omitted.
C. The auditor’s opinion was qualified because of a departure from financial
reporting standards.
D. The results of the subsequent period’s tests of controls make the omitted
procedure less important.

85. The auditor’s risk assessment procedures should always include the following,
except
A. Inquiries of management and of others within the entity.
B. Analytical procedures.
C. Observation and inspection.
D. Substantive test procedures and tests of controls.

86. The auditor should obtain an understanding of the entity’s objectives and
strategies, and those business risks that may result in risks of material
misstatement. Which of the following statements concerning the entity’s
business risk is incorrect?
A. Business risk is broader than the risk of material misstatement of the
financial statements, though it includes the latter.
B. An understanding of the business risks facing the entity increases the
likelihood of identifying risks of material misstatement.
C. The auditor has a responsibility to identify or assess all business risks.
D. Business risk may arise from the development of new products or services
that may fail.

87. Which of the following statements concerning audit risk and its components is
incorrect?
A. Regardless of the assessed levels of inherent and control risks, the auditor
should always perform some substantive procedures for material account
balances and classes of transactions.
B. The higher the assessment of inherent and control risks, the more evidence
the auditor should obtain from the performance of substantive procedures.
C. The assessed level of inherent risk need not be considered in determining
the nature, timing, and extent of substantive procedures required to reduce
audit risk to an acceptably low level.
D. After obtaining an understanding of the accounting and internal control
systems, the auditor should make a preliminary assessment of control risk,
at the assertion level, for each material account balance or class of
transactions.

88. When obtaining an understanding of controls that relevant to the audit, the
auditor is required to
A. Evaluate the design of those controls.
B. Determine whether those controls have been implemented.
C. Evaluate the design of those controls and determine whether they have
been implemented.
D. Evaluate the design of those controls and determine whether they have
been implemented by performing tests of controls.

89. Which of the following statements related to application controls is correct?

A. Application controls relate to various aspects of the IT function including
software acquisition and the processing of transactions.
B. Application controls relate to various aspects of the IT function including
physical security and the processing of transactions in various cycles.
C. Application controls relate to all aspects of the IT function.
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D. Application controls relate to the processing of individual transactions.

90. An entity’s management is responsible for the preparation and fair

presentation of the financial statements. Its responsibility includes the
following, except
A. Designing, implementing, and maintaining internal control relevant to the
preparation and presentation of financial statements.
B. Making accounting estimates that are reasonable in the circumstances.
C. Selecting and applying appropriate accounting policies.
D. Assessing the risks of material misstatement of the financial statements.

91. The following statements relate to the use of analytical procedures as

substantive procedures. Which is false?
A. Substantive analytical procedures are applicable when there is only a small
volume of transactions.
B. The application of substantive analytical procedures is based on the
expectation that relationships among data exist and continue in the
absence of known conditions to the contrary.
C. The presence of relationships among data provides evidence as to the
completeness, accuracy, and occurrence of transactions captured in the
information produced by the entity’s information system.
D. Reliance on the results of substantive analytical procedures will depend on
the auditor’s assessment of the risk that the analytical procedures may
identify relationships as expected when, in fact, a material misstatement
exists.

92. The confirmation of customers’ accounts receivable rarely provides reliable

evidence about the valuation assertion because
A. Customers may not be inclined to report understatement errors in their
accounts.
B. Auditors typically select many accounts with low recorded balances to be
confirmed.
C. It is not practicable to ask the customer to confirm detailed information
relating to its ability to pay the account.
D. Recipients usually respond only if they disagree with the information on the
request.

93. Which of the following items is not requested on a standard bank account
balance confirmation form?
A. The principal amount paid on a direct liability.
B. Maturity date of a direct liability.
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.

94. An internal auditor would be concerned about the possibility of fraud if

A. Only one person has access to the petty cash fund.
B. Cash receipts, net of the amounts used to pay petty cash-type
expenditures, are deposited in the bank daily.
C. The monthly bank statement reconciliation is performed by the same
employee who maintains the perpetual inventory records.
D. The accounts receivable subsidiary ledger and accounts payable subsidiary
ledger are maintained by the same person.

95. When using confirmations to provide evidence about the completeness

assertion for accounts payable, the appropriate population most likely is
A. Amounts recorded in the accounts payable subsidiary ledger.
B. Vendors with whom the entity has previously done business.
C. Invoices filed in the entity’s open invoice file.
D. Payees of checks drawn in the month subsequent to the balance sheet date.

96. When outside firms of nonaccountants specializing in the taking of physical

inventories are used to count, list, price, and subsequently compute the total
peso amount of inventory on hand at the date of the physical count, the
auditor will ordinarily
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A. Consider the reduced audit effort with respect to the physical count of
inventory as a scope limitation.
B. Make or observe some physical counts of the inventory, recompute certain
inventory calculations, and test certain inventory transactions.
C. Consider the report of the outside inventory-taking firm to be an acceptable
alternative procedure to the observation of physical inventories.
D. Not reduce the extent of work on the physical count of inventory.

97. The following statements relate to the form and content of working papers.
Which is false?
A. The auditor should prepare working papers which are sufficiently complete
and detailed to provide an overall understanding of the audit.
B. The auditor should include in the working papers information on planning
the audit work; the nature, timing, and extent of the audit procedures
performed and the results of such procedures; and the conclusions drawn
from the audit evidence obtained.
C. Working papers should include documentation of every matter the auditor
considers during the audit.
D. Working papers should include the auditor’s reasoning on all significant
matters which require the exercise of judgment, together with his/her
conclusion thereon.

98. The following are examples of special purpose frameworks, except

A. A tax basis of accounting for a set of financial statements that accompany
an entity’s tax return.
B. The cash receipts and disbursements basis of accounting for cash flow
information that an entity may be requested to prepare for creditors.
C. Philippine Financial Reporting Standards (PFRS) promulgated by the
Financial Reporting Standards Council (FRSC).
D. The financial reporting provisions of a contract (for example, a financing
agreement).

99. Which of the following statements is correct with respect to an auditor’s report
expressing an opinion on a specific element on a financial statement?
A. The auditor who has expressed an adverse opinion on the financial
statements as a whole can never express an unmodified opinion on a
specific element in these financial statements.
B. The materiality determined for a specific element of a financial statement
may be lower than the materiality determined for the entity’s complete set
of financial statements.
C. Such a report can only be issued if the auditor is also engaged to audit the
entire set of financial statements.
D. The attention devoted to the specific element is usually less than it would
be if the financial statements as a whole were audited.

100. Which of the following statements concerning the auditor’s use of assertions is
correct?
A. The auditor may combine the assertions about transactions and events with
the assertions about account balances.
B. In every audit engagement, the auditor should use the assertions as
described in PSA 500, i.e., the assertions should always fall into three
categories: assertions about classes of transactions and events, account
balances, and presentation and disclosure.
C. There should always be a separate assertion related to cutoff of
transactions and events.
D. The completeness assertion deals only with whether all transactions and
events that should have been recorded have been recorded.
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