AUDITING THEORIES AND PRINCIPLES REVIEWER

SAN MATEO MUNICIPAL COLLEGE

COLLEGE OF BUSINESS AND ACCOUNTANCY
MULTIPLE CHOICES – THEORIES

Introduction to Assurance and Non-assurance Engagements

1. Which of the following Philippine Standards are to be applied to compilation engagements,

agreed-upon procedures and other related standards as specified by the AASC?

a. PSAs b. PSREs c. PSAEs d. PSRSs

2. These are issued to provide interpretative guidance and practical assistance to professional
accountants in implementing PSAs and to promote good practice.

a. Practice statements b. PREPSs, and PRSPSs

c. PAPSs and PREPSs d. PAPSs

3. Assurance engagement

a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written

communication that expresses a conclusion about the reliability of a written assertion that is the
responsibility of another party.

b. Is a systematic process of objectively obtaining and evaluating evidence regarding assertions

about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to interested users.

c. Is an engagement in which the auditor provides a moderate level of assurance that the
information subject to the engagement is free of material misstatement.

d. Is an engagement intended to enhance the credibility of information about a subject matter by

evaluating whether the subject matter conforms in all material respects with suitable criteria,
thereby improving the likelihood that the information will meet the needs of an intended user.

4. The single feature that most clearly distinguishes auditing, attestation, and assurance is

a. Type of service. c. Training required to perform the service

b. Scope of services. d. CPA's approach to the service

5. It refers to the auditor's satisfaction as to the reliability of an assertion being made by one
party for use by another party.

a. Confidence b. Reasonableness c. Assurance d. Tolerable

6. The three types of attestation services are:

a. Audits, review, and compilations

b. Audits, compilations, and other attestation services

c. Reviews, compilations, and other attestation services

d. Audits, reviews, and other attestation services

7. Assurance engagement include the following, except

a. An engagement conducted to provide a high level of assurance that the subject matter
conforms in all material respects with identified suitable criteria.

b. An engagement conducted to provide a moderate level of assurance that the subject matter is
plausible in the circumstances.

c. An engagement in accordance with the Philippine Standard on Assurance Engagement(s)

issued by the Auditing and Assurance Standard Council as approved by the Board of
Accountancy/Professional Regulation Commission.

d. An engagement to perform agreed-upon procedures.

8. Which of the following is an objective of a review engagement?

a. Expressing a positive opinion that the financial information is presented in conformity with
generally accepted accounting principles.

b. Expressing a limited assurance to users who have agreed as to procedures that will be
performed by the CPA.

c. Reporting whether material modifications should be made to such financial statements to make
them conform with generally accepted accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the financial
position and operating results of the client.

9. Not all engagements performed by professional accountants are assurance engagements. Other
engagements frequently performed by professional accountants that are not assurance
engagements include the following, except

a. Agreed-upon procedures b. Compilation of financial or other information

c. Management consulting d. Examination of prospective financial information

10. Unlike consulting services, assurance services:

a. Make recommendations to management c. Report on quality information

b. Report on how to use information d. Are two-party contracts

11. The primary goal of the CPA in performing the attest function is to

a. Detect fraud

b. Examine individual transactions so that the auditor may certify as to their validity

c. Determine whether the client's assertions are fairly stated

d. Assure the consistent application of correct accounting procedures

12. Which of the following criteria is unique to the independent practitioner's attest function?

a. General competence c. Independence

b. Due professional care d. Familiarity with the particular industry of each

client

13. Ultimately, the decision about whether or not a practitioner is independent must be made by

a. Practitioner b. Public c. Client d. Regulators

14. With regard to independence, which of the following statements is correct?

a. In case of audits of financial statements, the Code of Ethics requires member of the assurance
team, the firm but not network firms to be independent of the client.
b. Only the engagement partner is required by the Code of Ethics to be independent from their
assurance clients.

c. Audit engagements provide assurance to a wide range of potential users; consequently, both
independence in mind and independence in appearance are of particular importance.

d. In case of audits of financial statements, the Code of Ethics requires the auditor to be
independent from their assurance team from the start of performing procedures required by the
engagement up to the issuance of the report.

15. Which of the following statements least likely a characteristic to be possessed by responsible
party?

a. may or may not be the only intended user

b. may nor may not be the engaging party to the practitioner

c. may or may not be from the same organization with the intended users

d. may be responsible to both or either the subject matter or the subject matter information

16. According to Preface on Assurance Engagements, these are the standards or benchmarks used
to evaluate or measure the subject matter of an assurance engagement:

a. Criteria c. Assertions

b. Engagement process d. Generally accepted auditing standards

17. The criteria for evaluating quantitative information vary. For example, in the audit of
historical financial statements by CPA firms, the criteria are usually

a. International accounting standards c. Regulations of the BIR

b. Generally accepted accounting principles d. Regulations of the SEC

18. The decision of whether the criteria are suitable involves considering whether the subject
matter of the assurance engagement is capable of reasonably consistent evaluation or
measurement using such criteria. Which of the following characteristics is not considered
necessary in determining whether the criteria are suitable?
a. Relevance b. Sufficiency c. Neutrality d. Reliability

19. Which of the following statements is/are correct?

Statement 1: The practitioner considers the relationship between the cost of obtaining evidence
and the usefulness of the information obtained.

Statement 2: The difficulty and the expense involved are valid basis for omitting an procedure
for which there is no alternative.

Statement 3: The practitioner relies on evidence that is persuasive rather than conclusive.

Statement 4: The practitioner uses professional judgment and exercise professional skepticism to
determine the sufficiency and appropriateness of evidence.

a. Only one statement is correct c. Only three statements are correct

b. Only two statements are correct d. All statements are correct

20. The following statements are correct, except:

a. The greater the risk of misstatement, the more evidence is likely to be required.

b. The higher the quality of evidence, the less may be required.

c. Obtaining more evidence will compensate for its poor quality.

d. The sufficiency and appropriateness of evidence are interrelated

21. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagement a practitioner is permitted to perform: a reasonable assurance engagement and a
limited assurance engagement. Which of the following is the objective of a reasonable assurance
engagement?

a. 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.

b. 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.
c. A reduction in assurance engagement risk to an acceptably low level that is acceptable in the
circumstances of the engagement as a basis for a positive 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 qualified form of the practitioner’s conclusion.

22. In an engagement to perform agreed –upon procedures, an auditor is engaged to

a. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize
financial information.

b. Carry out those procedures of an audit to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.

c. Provide a moderate level of assurance that the information is free of material misstatement.

d. Provide a high, but not absolute level of assurance that the information is free of material
misstatement.

23. Which of the following is true of the report based on agreed-upon-procedures?

a. The CPA provides the recipients of the report limited assurance as to reasonableness of the
assertion(s) presented in the financial information.

b. The report states that the auditor has not recognized any basis that requires revision of
financial statements.

c. The report is restricted to those parties who have agreed to the procedures to be performed.

d. The report should state that the procedures performed are limited to analytical procedures and
inquiry.

24. According to Philippine Standard on Auditing, the procedures employed in doing compilation
are:

a. Designed to enable the accountant to express a limited assurance.

b. Designed to enable the accountant to express a negative assurance.

c. Not designed to enable the accountant to express any form of assurance.

d. Less extensive than review procedures but more extensive than agreed-upon procedures.

25. Indicate the level of assurance provided by audit and related services.

A B C D

Audit High High Negative Absolute

Review Moderate None Moderate High

Agreed-upon procedures None None None Limited

Compilation None None None None

Introduction to Auditing

1. The expertise that distinguishes auditors from accountants is in the

a. Ability to interpret generally accepted accounting principles.

b. Requirement to possess education beyond the Bachelor's degree.

c. Accumulation and interpretation of evidence.

d. Ability to interpret FRSC Statements.

2. Identify the following as financial audit (FA), compliance audit (CA), and operational audit
(OA).

1) A supervisor is not carrying out his assigned responsibilities.

2) A company's tax return does not conform to income tax laws and regulations.

3) A municipality's financial statements correctly show actual cash receipts and disbursements.

4) A company's receiving department is inefficient.

a. CA, CA, FA, OA c. OA, CA, FA, OA

b. OA, CA, CA, OA d. CA, CA, FA, CA

3. Independent auditing can best be described as a

a. Branch of accounting

b. Discipline that attests to the results of accounting and other operations and data

c. Professional activity that measures and communicates financial and business data

d. Regulatory function that prevents the issuance of improper financial information

4. Which of the following types of audit uses as its criteria laws and regulations?

a. Operational audit b. Compliance audit c. FS audit d. Internal audit

5. An operational audit is designed to:

a. Assess the efficiency and effectiveness of management's operating procedures

b. Assess the presentation of management's financial statements in accordance with generally

accepted accounting principles

c. Determine whether management has complied with applicable laws and regulations

d. Determine whether the audit committee of the board of directors is effectively discharging its
responsibility to oversee management's operations

6. A review of any part of an organization's procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a (n)

a. FS Audit b. Operational audit c. Compliance audit d. Production audit

7. Which one of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations.

b. Compliance with government regulations.

c. Presentation of financial statements in accordance with generally accepted accounting

principles.

d. All three of the above are equally difficult.

8. A governmental audit may extend beyond an examination leading to the expression of an

opinion on the fairness of financial presentation to include
 Program results Compliance Economy and efficiency

a. Yes Yes No

b. Yes Yes Yes

c. No Yes Yes

d. No No Yes

9. An audit designed to determine the extent to which the desired results of an activity
established by the legislative or other authorizing body are being achieved is a (an)

a. Economy audit b. Efficiency audit c. Program audit d. Financial related audit

10. Which of the following best describes what is meant by the term PSA?

a. Rules acknowledged by the accounting profession because of their universal application.

b. Pronouncements issued by the Auditing Standards Board.

c. Measures of the quality of the auditor's performance.

d. Procedures to be used to gather evidence to support financial statements.

11. A financial statement audit:

a. Confirms that FS assertions are accurate. c. Assures that fraud had been detected.

b. Guarantees that FS are presented fairly. d. Lends credibility to the FS.

12. Which of the following best describes the objective of an audit of financial statements?

a. To express an opinion whether the financial statements are prepared in accordance with
prescribed criteria.

b. To express an assurance as to the future viability of the entity whose financial statements are
being audited.

c. To express an assurance about the management's efficiency or effectiveness in conducting the

operations of entity.
d. To express an opinion whether the financial statements are prepared, in all material respect, in
accordance with an identified financial reporting framework.

13. Which of the following accurately depicts the auditor's responsibility with respect to
Philippine Standards on Auditing?

a. The auditor is required to follow the guidance provided by the Standards, without exception.

b. The auditor is generally required to follow the guidance provided by Standards with which he
or she is familiar, but will not be held responsible for departing from provisions of which he or
she was unaware.

c. The auditor is generally required to follow the guidance provided by the Standards, unless
following such guidance would result in an audit that is not cost-effective.

d. The auditor is generally required to follow the guidance provided by the Standards, and should
be able to justify any departures.

14. Which of the following is responsible for an entity's financial statements?

a. The entity's management c. The entity's audit committee

b. The entity's internal auditors d. The entity's board of directors

15. The best statement of the responsibility of the auditor with respect to audited financial
statement is:

a. The audit of the financial statements relieves management of its responsibilities

b. The auditor's responsibility is confined to his expression of opinion about the audited financial
statements.

c. The responsibility over the financial statements rests with the management and the auditor
assumes responsibility with respect to the notes of financial statements.

d. The auditor is responsible only to his unqualified opinion but not for any other type of
opinion.

16. For an entity's financial statements to be presented fairly in conformity with PFRS, the
principles selected should:
a. Be applied on a basis consistent with those followed in the prior year.

b. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.

c. Reflect transactions in a manner that presents the financial statements within a range of
acceptable limits.

d. Match the principles used by most other entities within the entity's particular industry.
17. As used in auditing, which of the following statements best describes "assertions"?

a. Assertions are the representations of management as to the reliability of the information

system.

b. Assertions are the auditor's findings to be communicated in the audit report.

c. Assertions are the representations of management as to the fairness of the financial statements.

d. Assertions are found only in the footnotes to the financial statements.

18. The auditor communicates the results of his or her work through the medium of the

a. Engagement letter b. Audit report c. Management letter d. Financial statements.

19. Which of the following least likely limits the auditors ability to detect material misstatement?

a. Most audit evidences are conclusive rather than being persuasive.

b. The inherent limitations of any accounting and internal control system.

c. Audit is based on testing

d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in
detecting intentional misstatements.

20. Which of the following statements does not describe a condition that creates a demand for
auditing?

a. Conflict between an information preparer and a user can result in biased information.

b. Information can have substantial economic consequences for a decision maker.

c. Expertise is often required for information preparation and verification.

d. Users can directly assess the quality of information.

21. Because an examination in accordance with generally accepted auditing standards is

influenced by the possibility of

material errors, the auditor should conduct the examination with an attitude of

a. Professional responsiveness c. Objective judgment

b. Conservative advocacy d. Professional skepticism

22. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the
following is not a postulate of auditing?

a. No long-term conflict exists between the auditor and the management of the enterprise under
audit.

b. Economic assertions can be verified.

c. The auditor acts exclusively as an auditor.

d. An audit has a benefit only to the owners.

23. An audit can have a significant effect on

a. Information Risk c. Business Risk

b. The risk-free interest rate d. All of these

24. The main way(s) to reduce information risk include the following, except

a. To have the user verify the information

b. To have the financial statements audited

c. To have the management prepare the financial statements

d. To have the user share the information risk with management

25. Which of the following is an appraisal activity established within an entity as a service to the
entity?

a. External auditing b. Internal auditing c. Financial auditing d. Compliance auditing

26. The scope and objectives of internal auditing vary widely and depend on the size and
structure of the entity and the requirements of its management. Ordinarily, internal auditing
activities include one or more of the following:

A. B. C. D.

Establishment and review of the accounting andinternal control systems Yes Yes No No

Examination of financial and operating information Yes Yes No Yes

Review of the economy, efficiency and effectiveness of operations Yes Yes Yes Yes

Review of compliance with laws, regulations and other

external requirements Yes No Yes Yes

27. To operate effectively, an internal auditor must be independent of

a. The entity

b. The line functions of the organizations

c. The employer-employee relationship which exists for other employees in the organization

d. Internal auditor does not need to be independent of the entity and any member of the
organization

28. To provide for the greatest degree of independence in performing internal auditing functions,
an internal auditor most likely should report to
a. Board of Directors b. VP for Finance c. Controller d. Audit Committee

29. Which statement is correct regarding the relationship between internal auditing and the
external auditor?

a. Some judgments relating to the audit of the financial statements are those of the internal
auditor.

b. The external audit function's objectives vary according to management's requirements.

c. Certain aspects of internal auditing may be useful in determining the nature, timing and extent
of external audit procedures.
d. The external auditor is responsible for the audit opinion expressed, however that responsibility
may be reduced by any use made of internal auditing.

30. Which of the following statements is not a distinction between independent auditing and
internal auditing?

a. Independent auditors represent third party users external to the auditee entity, whereas internal
auditors report directly to management.

b. Although independent auditors strive for both validity and relevance of evidence, internal
auditors are concerned almost exclusively with validity.

c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.

d. The internal auditor's span of coverage goes beyond financial auditing to encompass
operational and performance auditing.

Audit Process and Evidence-Gathering Procedures

1. Set the following phases in proper order:

i. Pre-Engagement iii. Evidence-Gathering v. Post-Audit Responsibilities

ii. Internal Controls iv. Planning vi. Reporting

a. i, ii, iii, iv, v, vi b. i, iv, ii, iii, vi, v c. i, iv, iii, ii, v, vi d. i, iv, ii, iii, v, vi

2. Acts to be performed in order to obtain audit evidence.

a. Audit standards b. Audit procedures c. Audit program d. Audit strategy

3. Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control, and to assess the risks of material misstatements at the financial
statement and assertion levels.

a. Risk assessment procedures c. Tests of control

b. Substantive procedures d. Analytical procedures

4. Audit procedures to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level.

a. Risk assessment procedures c. Tests of control

b. Substantive procedures d. Analytical procedures

5. Audit procedures to detect material misstatements at the assertion level.

a. Risk assessment procedures c. Tests of control

b. Substantive procedures d. Analytical procedures

6. An auditor may achieve audit objectives related to particular assertions by:

a. Performing analytical procedures. c. Preparing audit documentation.

b. Adhering to a system of quality control. d. Increasing the level of detection risk.

7. Examining records or documents, whether internal or external, in paper form, electronic form,
or other media.

a. Inspection of records or documents c. Observation

b. Inspection of tangible assets d. Inquiry

8. Physical examination of the assets.

a. Inspection of records or documents c. Observation

b. Inspection of tangible assets d. Inquiry

9. Consists of looking at a process or procedures being performed by others.

a. Inspection of records or documents c. Observation

b. Inspection of tangible assets d. Inquiry

10. Consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.

a. Inspection of records or documents c. Observation

b. Inspection of tangible assets d. Inquiry

11. The process of obtaining a representation of information or of an existing condition directly

from third party. It is a specific type of inquiry.

a. Reperformance b. Confirmation c. Reconciliation d. Recomputation

12. Consists of checking the mathematical accuracy of documents or records.

a. Reperformance b. Recalculation c. Reconciliation d. Recomputation

13. Auditor’s independent execution of procedures or controls that were originally performed as
part of the entity’s internal

control.

a. Reperformance b. Confirmation c. Reconciliation d. Recomputation

14. Evaluation of financial information made by study of plausible relationships among both
financial and non-financial data.

a. Reperformance b. Confirmation c. Reconciliation d. Analytical procedures

15. Which of the following is the best explanation of the difference, if any, between audit
objectives and audit procedures?

a. Audit procedures and audit objectives are essentially the same.

b. Audit objectives are tailor-made for each assignment, audit procedures are generic in
application.

c. Audit procedures establish broad general goals, audit objectives specify the detailed work to be
performed.

d. Audit objectives define specific desired accomplishments; audit procedures provide the means
of achieving audit objectives.

16. Which of the following is a false statement about audit objectives?

a. Audit objectives should be developed in light of management assertions about the financial
statement components.
b. Selection of tests to meet audit objectives should depend upon the understanding of internal
control.

c. The auditor should resolve any substantial doubt about any of management's material financial
statement assertions

d. There should be a one-to-one relationship between audit objectives and procedures.

17. Management assertions are:

a. Stated in the footnotes to the financial statements

b. Explicitly expressed representations about the financial statements

c. Implied or express representations about the accounts in the financial statements

d. Provided to the auditor in the assertions letter, but are not disclosed in the financial statements
of the entity.

18. Management assertions are:

a. Directly related to PSAs c. Directly related to GAAP

b. Indirectly related to PSAs d. Indirectly related to GAAP

19. Assertions used by the auditor fall into the following categories, except:

a. Assertions about the faithful representations

b. Assertions about presentation and disclosure

c. Assertions about account balances at period end

d. Assertions about classes of transactions and events

20. Assertions about account balances at the period-end include valuation and allocation, which
means that

a. Assets, liabilities and equity interest exist.

b. All assets, liabilities and equity interests that should have been recorded have been recorded.
c. Assets, liabilities and equity interests are included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments are appropriately recorded.

d. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

21. The assertion of cut-off means that:

a. Transactions and events have been recorded in the proper accounts

b. All transactions and events that should have been recorded are recorded

c. Transactions and events have been recorded in the correct accounting period

d. Amounts and other data relating to recorded transactions and events have been recorded
appropriately

22. The assertions of occurrence means that:

a. All transactions and events that should have been recorded are recorded

b. Amounts and other data relating to recorded transactions and events have been recorded
appropriately

c. Transactions and events that have been recorded have occurred, and pertain to the entity

d. Transactions and events have been recorded in the proper accounts

23. Which description refers to the completeness assertion?

a. All disclosures that should have been included in the financial statements have been included.

b. Disclosed events, transactions and other matters have occurred and pertain to the entity.

c. Financial information is appropriately presented and described, and disclosures are clearly
expressed.

d. Financial and other information are disclosure fairly and at appropriate amounts.

24. Confirming proper title to equipment supports which of the following assertions?

a. Existence or occurrence c. Presentation and disclosure

b. Insurance coverage d. Rights and obligations

25. The auditor notices that a client’s cash-basis financial statements are prepared with accrual
basis financial titles. This situation bears on which financial statement assertion?

a. Valuation or allocation c. Rights and obligations

b. Presentation and disclosure d. Completeness

26. The process of vouching helps establish that all recorded transactions are

a. Recorded b. Complete c. Valid d. Presented properly

27. Physical examination of tangible assets is not a sufficient form of evidence when the auditor
wants to determine the:

a. Existence of the asset c. Condition or quality of the asset

b. Quantity and description of the asset d. Ownership of the asset

28. Which of the following audit procedures is used extensively throughout the audit but does
not, by itself, provide sufficient appropriate evidence?

a. Inspection of records or documents c. Inquiry

b. Observation d. Inspection of tangible assets

29. Evidence obtained directly by the auditor is more reliable than information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?

a. Inspection b. Observation c. Computation d. Inquiry

30. In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to
support which of the following assertions?

a. Pricing b. Accuracy c. Valuation d. Rights and obligations

Preliminary Engagement Activities

1. Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client?

a. The client’s financial ability.

b. The client’s standing in the business community.

c. The client’s relations with its previous CPA firm.

d. The client’s probability of achieving an unqualified opinion.

2. Auditors must not only decide whether to accept new clients; they also should periodically
review their list of current clients and remove those clients the firm no longer wants to be
associated with. Reasons for discontinuing clients might

include the following, except:

a. Difficulty in working with client personnel.

b. Inability to negotiate an acceptable increase in the audit fee.

c. Evidence indicating a client’s management has integrity.

d. Client need for specialized services the current firm is unable or unwilling to provide.

3. Management’s integrity affects all of the following risks except:

a. Business risk c. Audit risk

b. Financial Reporting risk d. All of these risks are affected

4. Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?

a. The complexity of the accounting system c. The adequacy of the accounting records

b. The existence of related-party transactions d. The operating effectiveness of control

procedures

5. Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be performed?

a. Management fails to modify prescribed internal controls for changes in information

technology.

b. Internal control activities requiring segregation of duties are rarely monitored by management.
c. Management is dominated by one person who is also the majority stockholder.

d. There is a substantial risk of intentional misapplication of accounting principles.

6. Prior to the acceptance of an audit engagement with a client who has terminated the services
of the predecessor auditor, the CPA should

a. Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstances leading to the termination 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.

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.

7. Which of the following factors most likely would cause a CPA to not accept a new audit
engagement?

a. The prospective client has already completed its physical inventory count.

b. The CPA lacks an understanding of the prospective client's operations and industry.

c. The CPA is unable to review the predecessor auditor's audit documentation.

d. The prospective client is unwilling to make all financial records available to the CPA.

8. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected?

a. The details of most recorded transactions are not available after a specified period of time.

b. Internal control activities requiring the segregation of duties are subject to management
override.
c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the
financial statements.

d. Management has a reputation for consulting with several accounting firms about significant
accounting issues.

9. If the prospective client refuses to permit the predecessor to respond or limits the
predecessor’s response, the successor should:

a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of
management

b. Accept the engagement but only after an equitable increase in the professional fee

c. Inquire as to the reasons and consider the implications in deciding whether to accept the
engagement

d. Issue a disclaimer of opinion because the limited response of the predecessor auditor
constitutes a significant scope limitation

10. A firm has obtained information that would have caused it to decline an engagement had the
information been available earlier. Actions available to the auditor would include the following,
except:

a. Reporting the information and its implications to the person/s who appointed the CPA

b. Withdraw from the engagement

c. Withdraw from the client relationship

d. Issue a disclaimer of opinion

11. According to PSA 210, the auditor and the client should agree on the terms of engagement.
The agreed terms would need to be recorded in a(n)

a. Client representation letter c. Engagement letter

b. Memo placed in the working papers d. Comfort letter

12. An engagement letter is best described as

a. A letter from the company to the auditors specifying management’s expectations for
completion of the audit on a timely basis and the fees.

b. A letter from the auditors to company management specifying that management is responsible
for the financial statements, and the auditors will issue an opinion on the financial statements.

c. A letter from the auditors to company management that specifies the responsibilities of both
the company and the auditors in completing the audit and the timing for its completion.

d. A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor
has been engaged to perform the audit and the fees to be paid.

13. An engagement letter is prepared with the interest(s) of __________.

a. The auditor only c. The public

b. The client only d. Both the client and the auditor

14. Engagement letters are widely used in practice for:

a. Audits only c. Assurance engagements only

b. Professional engagements of all types d. Related services only

15. The primary purpose of the engagement letter is to:

a. Satisfy the requirements of the CPA’s liability insurance policy

b. Remind management that the primary responsibility for the financial statements rests with
management

c. Provide a written record of the agreement with the client as to the services to be provided

d. Provide a starting point for the auditor’s preparation of the preliminary audit program

16. Engagement letter that documents and confirms the auditor’s acceptance of the engagement
would normally be sent to the client.

a. Before the auditor report is issued c. At the end of the fieldwork

b. After the audit report is issued d. Before the commencement of the engagement
17. An auditor's engagement letter most likely would include a statement regarding:

a. Management's responsibility to provide certain written representations to the auditor.

b. Conditions under which the auditor may modify the preliminary judgment about materiality.

c. Internal control activities that would reduce the auditor's assessment of risk.

d. Materiality matters that could modify the auditor's preliminary assessment of fraud risk.

18. An audit engagement letter least likely include:

a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some
material misstatements may remain undiscovered

b. Description of any letters or reports that the auditor expects to submit to the client

c. Identification of specific audit procedures that the auditor needs to undertake

d. Basis on which fees are computed and any billing arrangements

19. An engagement letter should ordinarily include information on the objectives of the
engagement and

A B C D

• CPA’s responsibilities Yes Yes Yes No

• Client’s responsibilities Yes No No No

• Limitations of engagement Yes Yes No No

20. Which of the following is (are) valid reasons why an auditor sends to his client an
engagement letter?

A B C D

• To avoid misunderstanding with respect to management Yes Yes No No

• To confirm the auditor’s acceptance of the appointment Yes Yes Yes No

• To document the objective and scope of the audit Yes Yes Yes Yes
• To ensure CPA’s compliance to PSA Yes No No Yes

21. The form and content of the audit engagement letters may vary for each client, but they
would generally include reference to except:

a. Management’s responsibility for all the financial statements.

b. The scope of the audit, excluding reference to applicable legislation, regulations, or

pronouncements of professional bodies to which the auditor adheres.

c. The form of any reports or any communication of results of engagement.

d. Unrestricted access to whatever records, documentation and other information requested in

connection with the audit.

22. In making arrangements for an audit, there should be a clear understanding between the
auditor and the client as to the following except:

a. Assurance of auditor’s independence c. Terms of settlement for audit services

b. The type of audit to be performed d. Official to whom audit report shall be addressed

23. An auditor's engagement letter most likely would include a statement that:

a. Lists potential significant deficiencies discovered during the prior year's audit.

b. Explains the analytical procedures that the auditor expects to apply.

c. Describes the auditor's responsibility to evaluate going concern issues.

d. Limits the auditor's responsibility to detect errors and fraud.

24. Which of the following statements is/are correct?

Statement 1: On recurring audits, the auditor should consider whether circumstances require the
terms of the engagement to be revised and whether there is a need to remind the client of the
existing terms of engagement.

Statement 2: The auditor should send a new engagement letter each year to an established client.

a. Only statement 1 is correct c. Both statements are correct

b. Only statement 2 is correct d. Both statements are incorrect

25. On recurring audit engagements, the auditor may decide not to send a new engagement letter
each period. In which of the following situations will there be no need to send a new letter?

a. Revisions or special terms of the engagement

b. Significant change in nature or size of the client’s business

c. Indications of misunderstanding of the objective and scope of the audit

d. Recent change of middle management and rank and file organizational structure

26. A client’s insistence that the audited results are reported quickly after the fiscal year end is of
concern to auditors because:

a. Many uncertainties inherent in the financial statements cannot be resolved until several months
after the year-end closing of the books.

b. The financial statements are less reliable because the period covered by the review for
subsequent events is shortened

c. Many clients have December 31 year ends and it is difficult to complete the audit when many
of the client’s personnel are on holidays.

d. Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in
the performance of audit procedures.

27. If the auditor concludes that there is reasonable justification for the change in engagement,
the report to be issued would

a. Be that appropriate for the revised terms of the engagement

b. Include reference to the original engagement

c. Include reference to any procedures that may have been performed in the original engagement

d. Not include reference to any procedures that may have been performed, particularly when the
new engagement is to undertake agreed-upon procedures
28. If a change in the type of engagement from higher to lower of assurance is not justified, the
auditor should:

a. Qualify the report on the original engagement.

b. Continue with the revised engagement, but make explicit reference about the original
engagement.

c. Refuse to agree to management’s request on the change of engagement and continue with the
original engagement.

d. Withdraw from the engagement.

29. Which of the following helps prevent misunderstandings during audit planning?

a. Auditor involvement in the preparation of the client’s financial records.

b. Client involvement in determining specific audit planning issues.

c. A preliminary meeting conference with the client to discuss fees, timing, client assistance and
related issues.

d. Involvement of the client’s internal auditors in setting materiality levels and determining the
scope of audit tests.

30. One of the first things that the auditor will do after accepting a new client is:

a. Communicate with the predecessor auditor.

b. Contact the client’s attorney to discover legal obligations.

c. Study the client’s internal control structure.

d. Tour the client’s facilities.

Audit Planning and Risk Assessment Procedures

1. Which of the following statements is/are correct?

Statement 1: The client should plan the audit work so that the audit will be performed in an
effective manner.
Statement 2: The auditor should conduct the audit with an attitude of professional skepticism.

Statement 2: The auditor should develop and document an overall audit plan describing the scope
and conduct of the audit.

a. Only one statement is correct c. All statements are correct

b. Only two statements are correct d. All statements are incorrect

2. It involves establishing the overall audit strategy for the engagement and developing an audit
plan in order to reduce audit risk to an acceptably low level.

a. Reporting b. Planning c. Field work d. Organizing

3. Adequate planning of the audit work helps the auditor of accomplishing the following
objectives, except:

a. Gathering of all corroborating audit evidence.

b. Ensuring that appropriate attention is devoted to important areas of the audit.

c. Identifying the areas that need a service of an expert.

d. The audit work is completed efficiently.

4. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective
manner.

b. Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit plan, in order to reduce audit risk to an acceptably low level.

c. Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of the
planning process.

d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit and
continues until the finalization of the audit program.
5. The extent of planning will vary according to any of the following, except:

a. Size of the audit client.

b. Auditor's experience with the entity and knowledge of the business.

c. The nature and complexity of the audit engagement

d. The assessed level of control risk.

6. Which of the following activities shall not be included in preplanning an audit?

a. Understanding the client’s reason for obtaining an audit

b. Investigating the client’s background

c. Determining the likelihood of issuing an unqualified audit opinion on the client’s financial
statements

d. Communicating with the prospective client’s prior auditor to inquire about any disagreements
with the client

7. The auditors plan should

ABCD

• Precede action Yes No Yes No

• Be flexible Yes No No Yes

• Be cost-beneficial Yes Yes Yes Yes

8. Which of the following statements is/are correct?

Statement 1: The overall audit plan and the audit program should not be revised during the
course of the audit.

Statement 2: The auditor should develop and document an audit program setting out the nature,
timing and extent of planned audit procedures required to implement the overall audit plan.

a. Only statement 1 is correct c. Both statements are correct

b. Only statement 2 is correct d. Both statements are incorrect

9. Which of the following statements is/are correct?

Statement 1: According to PSA 300, the auditor may discuss elements of planning with those
charged with governance and the entity's management.

Statement 2: The audit plan sets the scope, timing and direction of the audit guides the
development of the more detailed overall audit strategy.

Statement 3: The overall audit strategy is more detailed than the audit plan and includes the
nature, timing and extent of audit procedures to be performed engagement team members to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

a. Only 1 statement is correct c. All statements are correct

b. Only 2 statements are correct d. All statements are incorrect

10. Which of the following matters should be considered by the auditor in developing the overall
audit strategy?

a. Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit

b. Conditions requiring special attention, such as the existence of the related parties

c. The setting of materiality level for audit purposes

d. All of the above

11. The timing of the audit and nature of communications required include the following, except:

a. The organization of meetings with management, and those charged with governance, to
discuss the nature, extent and timing of the audit work.

b. The discussion with management and those charged with governance regarding the expected
type and timing of reports to be issued and other communications.

c. Audit areas where there is a higher risk of material misstatement.

d. The entity’s timetable for reporting, such as interim and final stages.
12. In developing the overall audit strategy, the focus of the engagement team’s efforts is
considered. Which of the following is not appropriately classified as a factor affecting the focus
of the team’s efforts?

a. The financial reporting framework on which the financial information to be audited has been
prepared, including any need for reconciliation to another reporting framework.

b. Setting materiality for planning purposes.

c. Audit areas where there is a higher risk of material misstatement.

d. Volume of transactions, which may determine whether it is more efficient for the auditor to
rely on internal control.

13. In developing an overall audit strategy, an auditor should consider:

a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.

b. Findings from substantive tests performed at interim dates.

c. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not
disclosed in the financial statements.

d. Preliminary evaluations of materiality, audit risk, and internal control.

14. This serves as the set of instructions to assistants involved in the audit and as a means to
control and record the proper execution of the work of the personnel involved in the service.

a. Audit procedures b. Audit plan c. Audit program d. Audit risk model

15. The auditor should design the written audit program, so that:

a. All material transactions will be selected for substantive testing.

b. Substantive tests prior to the balance sheet date will be minimized.

c. The audit procedures selected will achieve specific audit objectives.

d. Each account balance will be tested under either tests of controls or tests of transactions.

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

a. Provide for a standardized approach to the audit engagement

b. Serve as a tool for planning, directing and controlling the audit work

c. Document an auditor’s understanding of the internal control

d. Delineate the audit risk accepted by the auditor

17. The auditor should document the overall audit strategy and the audit plan, including
significant changes made during the audit engagement. Which of the following statements on
documentation is incorrect?

a. Documentation of the overall audit strategy may be made in the form of a memorandum that
contains key decisions regarding the overall scope, timing and conduct of the audit.

b. The auditor may use standard audit programs or audit completion checklists, but such
programs and checklists need to be tailored to the particular client.

c. The auditor’s documentation of any significant changes to the originally planned overall audit
strategy and to the detailed audit plan need not include the reasons for the significant changes.

d. The form and extent of documentation depend on such matters as the size and complexity of
the entity, materiality, the extent of other documentation, and the circumstances of the specific
engagement.

18. An audit program is ordinarily prepared for an audit engagement because:

a. It documents the auditor’s understanding of the client’s internal control.

b. It aids in instructing assistants in the work to be done.

c. It is required by generally accepted auditing standards.

d. It explains any weaknesses noted in the evaluation of the client’s existing internal control.

19. The audit program usually cannot be finalized until the

a. Consideration of the entity’s internal control has been completed.

b. Engagement letter has been communicated to the audit committee.

c. Reportable conditions have been communicated to the audit committee.

d. Search for unrecorded liabilities has been performed and documented.

20. The audit program should contain the following, except:

a. Audit objective

b. Time budget for the various audit areas

c. Set of planned audit procedures

d. The combined assessed level of inherent and control risk

21. Audit procedures may be classified as risk assessment procedures and further audit
procedures. Which of the following best describes risk assessment procedures?

a. These procedures test the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.

b. These procedures are used detect material misstatements at the assertion level.

c. These are procedures for obtaining an understanding of the entity and its environment,
including its internal control, to assess the risks of material misstatement at the financial
statement and assertion levels.

d. These procedures include tests of details of classes of transactions, account balances, and
disclosures and analytical procedures.

22. In performing an audit of financial statements, the auditor should obtain a sufficient
knowledge of a client’s business and industry to

a. Develop an attitude of professional skepticism concerning management’s financial statements

assertions.

b. Make constructive suggestion concerning improvements causes the financial statements taken
as a whole to be materially misstated.

c. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect on the client’s financial
statements.
23. Which of the following procedures is not performed as a part of planning an audit
engagement?

a. Reviewing working papers of the prior year c. Designing an audit program

b. Performing analytical procedures d. Test of controls

24. Which of the following procedures not normally performed as part of obtaining an
understanding of the client’s environment?

a. Reading trade publications to gain a better understanding of the client’s industry

b. Studying the internal controls over cash receipts and disbursements

c. Confirming customer accounts receivable for existence and valuation

d. Touring the client’s facilities

25. Which of the following procedures would an auditor least likely perform in planning a
financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation.

b. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.

c. Selecting a sample of vendor’s invoices for comparison to receiving reports.

d. Reading the current year’s interim financial statements.

26. Audit risk has three components: inherent risk, control risk and detection risk. Which of the
following statements is correct?

a. Detection risk is a function of the efficiency of an audit procedure.

b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent
risk.

c. The risk that material misstatement will not prevent or detected on a timely basis by internal
control can be reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the
discretion of the auditor.

27. Which of the following audit risk components maybe assessed in quantitative terms?

Inherent Risk Control Risk Detection Risk

a. Yes No Yes

b. Yes Yes Yes

c. No No No

d. No No Yes

28. Some accounts balances, such as those for retirement benefits and finance lease, are the
results of complex calculations. The susceptibility to material misstatements in these types of
accounts is referred to as

a. Audit risk b. Detection risk c. Control risk d. Inherent risk

29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk
are:

a. Elements of audit risk while detection risk is not.

b. Changes at the auditor’s discretion while detection risk is not.

c. Functions of the client and its environment while detection risk is not.

d. Considered at the individual account balance level while detection risk is not.

30. There is an inverse relationship that exist between the acceptable level of detection risk and
the

a. Risk of misapplying audit process c. Risk of falling to discover material misstatement

b. Assurance provided by substantive tests d. Preliminary judgments about materiality levels

31. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk, and therefore the risk of material misstatement, from that originally
planned. To achieve an overall audit risk level that is substantially the same as the planned audit
risk level, the auditor would:

a. Increase inherent risk c. Decrease substantive testing

b. Increase materiality levels d. Decrease detection risk

32. Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality?

a. The anticipated sample size of the planned substantive tests.

b. The entity’s annualized interim financial statements.

c. The results of the internal control questionnaire.

d. The contents of the management representation letter.

33. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level
of misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve
both quantitative and qualitative judgments.

d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs

of a reasonable person who will rely on the financial statements.

34. In considering materiality for planning purposes, Munda, auditor believes that misstatements
aggregating P60,000 would have material effect on an entity’s income statement, but that
misstatements would have to aggregate P40,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate:

a. P40,000 b. P50,000 c. P60,000 d. P100,000

35. Which of the following statements concerning materiality thresholds in incorrect?

a. Materiality thresholds may change between the planning and review stages of the audit. These
changes may be due to quantitative and/or qualitative factors.

b. 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.

c. In general, the more misstatements the auditor expects, the higher should be the aggregate
materiality threshold.

d. Aggregate materiality thresholds are a function of the auditor’s preliminary judgment

concerning audit risk.

36. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review their work. Which of the following statements is
incorrect regarding direction, supervision and review?

a. The auditor plans the nature, timing, and extent of direction and supervision of engagement
team members based on the assessed risk of material misstatement.

b. As the assessed risk of material misstatement increases, for the area of audit risk, the auditor
ordinarily increases the extent and timeliness of direction and supervision of engagement team
members.

c. As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor
performs a more detailed review of their work.

d. The auditor plans the nature, timing and extent of the review of the team’s work based on the
capabilities and competence of the individual team members performing the audit work.

37. Which of the following matters would an auditor most likely consider when establishing the
scope of the audit?

a. The expected audit coverage, including the number and locations of the entity’s components to
be included.

b. The entity’s timetable for reporting, such as at interim and final stages.
c. The discussion with the entity’s management concerning the expected communications on the
status of audit work throughout the engagement and the expected deliverables resulting from the
audit procedures.

d. Audit areas where there is a higher risk of material misstatement.

38. In connection with the planning phase of an audit engagement, which of the following
statements is always correct?

a. Observation of inventory count should be performed at year-end.

b. An engagement should not be accepted after the client’s financial year-end

c. Final staffing decisions must be made prior to completion of the planning stage.

d. A portion of the audit of a continuing audit client can be performed at interim dates.

39. A retailing entity uses the Internet to execute and record its purchase transactions. The
entity's auditor recognizes that the documentation of details of transactions will be retained for
only a short period of time. To compensate for this limitation, the auditor most likely would:

a. Compare a sample of paid vendors' invoices to the receiving records at year-end.

b. Perform tests several times during the year, rather than only at year-end.

c. Plan for a large measure of tolerable misstatement in substantive tests.

d. Increase the sample of transactions to be selected for cutoff tests.

40. Which of the following matters would an auditor least likely to consider when setting the
direction of the audit?

a. The availability of client personnel and data.

b. The selection of the engagement team and the assignment of audit work to the team members.

c. The engagement budget which includes consideration of the appropriate amount of time to
allot for areas where there may be higher risks of material misstatement.
d. The manner in which the auditor emphasizes to engagement team members the need to
maintain a questioning mind and to exercise professional skepticism in the gathering and
evaluation of audit evidence.

Internal Control Consideration

1. It is a process, effected by those charged with governance, management, and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives in the
following categories:

• Effectiveness and efficiency of operations

• Reliability of financial reporting

• Compliance with applicable laws and regulations

a. Internal auditing b. Internal control c. Business strategy d. Accounting process

2. Which of the following best describes an internal control system?

a. All the policies and procedures adopted by the management of an entity to assist in achieving
management's objective of ensuring, as far as practicable, orderly and efficient conduct of its
business, including adherence to management policies; safeguarding of assets; prevention and
detection of fraud and error; accuracy and completeness of the accounting records; and timely
preparation of reliable financial information.

b. The series of tasks and records of an entity by which transactions are processed as a means of
maintaining financial records. Such systems identify, assemble, analyze, calculate, classify,
record, summarize and report transactions and other events.

c. This includes, but is not limited to, plan of organization and the procedures and records that
are concerned with the decision processes leading to management’s authorization of transactions.
It promotes operational efficiency and adherence to managerial policies.

d. This comprises the plan of organization and the procedures and records that are concerned
with the safeguarding of assets and the reliability of financial records. It involves systems of
authorization and approval controls over assets. internal audit and all other financial matters.

3. Which of the following is not one of the essential concepts of internal controls?
a. It is a process

b. It is effected by those charged with governance, management, and other personnel in an entity

c. It is a means or tool used by management to achieve the entity’s objectives

d. It can be expected to absolute assurance regarding that the achievement of the entity’s
objectives

4. A reason to establish internal control is to:

a. Have a basis for planning the audit

b. Provide reasonable assurance that the objectives of the organization are achieved

c. Encourage compliance with organizational objectives

d. Ensure the accuracy, reliability and timeliness of information

5. Internal controls are not designed to provide reasonable assurance that

a. Transactions are executed in accordance with management’s authorization

b. Irregularities will be eliminated

c. Access to assets is permitted only in accordance with management’s authorization

d. The recorded accountability for assets is compared with the existing assets at reasonable
intervals

6. Internal control can only provide reasonable, not absolute, assurance of achieving entity
control objectives. One of the factors limiting the likelihood of achieving those objectives is that:

a. The auditor’s primary responsibility is the detection of fraud.

b. The board of directors is active and independent.

c. The cost of internal control should not exceed its benefits.

d. Management monitors internal control.

7. Which of the following is an example of an inherent limitation in a client’s internal control

system?
a. The effectiveness of procedures depends on the segregation of employee duties.

b. Procedures are designed to assure the execution and recording of transactions in accordance
with management’s authorization.

c. In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment.

d. Procedures for handling large numbers of transactions are processed by information

technology (IT) equipment.

8. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity

b. Cannot be circumvented by management

c. Is unaffected by changing circumstances and conditions encountered by the entity

d. Reduces the need for management the review exception reports on a day-to-day basis

9. This internal component is the foundation for all other components. It set the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees.

a. Control activities c. Control environment

b. Monitoring of control d. Entity's risk assessment process

10. Which of the following statements best describes “control environment”?

a. The entity’s process for identifying business risks relevant to financial reporting objectives and
deciding about actions to address those risks, and the results thereof.

b. The system for transferring information from transaction processing systems to the general
ledger or the financial reporting system.

c. Policies and procedures that help ensure that management directives are carried out.
d. This includes the governance and management functions and the attitudes, awareness, and
actions of those charged with governance and management concerning the entity’s internal
control and its importance to the entity.

11. Which of the following considered control environment elements?

Commitment Detection Organizational

To competence Risk Structure

a. Yes No Yes

b. Yes Yes Yes

c. No No No

d. No No Yes

12. The information system consists of the following:

A B C D

• Infrastructure (physical and hardware components) Yes Yes No Yes

• Software Yes Yes Yes Yes

• People No Yes No No

• Procedures and inputs No Yes Yes No

13. An entity’s risk assessment process includes how management:

A B C D

• Identifies risk Yes Yes No Yes

• Assesses significance and likelihood of occurrence

of these identified risks Yes Yes Yes No

• Decides upon actions to manage these risks Yes No Yes No

14. Risks can arise or change due to circumstances such as the following, except:
a. There is a change in the regulatory or operating environment (i.e. a new law has been passed
which prohibits the use of a chemical which is a main ingredient of the company’s major
product).

b. New employees have been hired by the company.

c. The company switched from manual information systems to a computerized system.

d. The accounting and financial reporting framework has remained stable for the past five years,
and no new pronouncements have been made.

15. Under PSA 315, monitoring of controls is an internal control component that involves a
process of assessing the quality of internal control performance over time. It involves assessing
the design and operation of controls on a timely basis and taking necessary corrective actions.
Monitoring of controls is accomplished through ongoing monitoring activities,

separate evaluations, or a combination of the two. An entity's ongoing monitoring activities often
include

a. Periodic reporting by the entity's internal auditors about the functioning of internal control

b. Reviewing the purchasing account

c. Periodic audits by the audit committee

d. The audit of the annual financial statements

16. Control activities constitute one of the five components of internal control. Which of the
following is not included in this internal control component?

a. Segregation of duties c. An internal audit function

b. Performance reviews d. Authorization

17. Which of the following is a management control method that most likely could improve
management's ability to supervise company activities effectively?

a. Monitoring compliance with internal control requirements imposed by regulatory bodies.

b. Limiting direct access to assets by physical segregation and protective devices.

c. Establishing budgets and forecasts to identify variances from expectations.

d. Supporting employees with the resources necessary to discharge their responsibilities.

18. PSA 315 requires the auditor to obtain an understanding of the client’s internal controls

a. For every audit c. For first-time audits

b. Sufficient to find any frauds which may exist d. Whenever it would be appropriate

19. In planning the audit, the auditor obtains a sufficient understanding of the existing internal
control. Which one of the following is not among the auditor's primary objectives for obtaining
such knowledge?

a. Identify types of material misstatements.

b. Consider the factors that affect the risk of material misstatement.

c. Make constructive suggestions to the client for improvement.

d. Design effective substantive tests.

20. The primary purpose of the auditor’s consideration of internal control is to provide a basis for

a. Determining whether procedures and records that are concerned with the safeguarding of
assets are reliable.

b. Constructive suggestions to clients concerning deficiencies in internal control.

c. Determining the nature, timing and extent of audit tests to be applied.

d. The expression of an opinion.

21. When obtaining knowledge about an entity's internal control, it is important for the auditor to
consider the competence of its employees, because their competence bears directly and
importantly upon the

a. Cost-benefit relationship of internal control

b. Comparison of recorded accountability with assets

c. Achievement of the objectives of internal control

d. Timing of substantive tests to be performed

22. Obtaining an understanding of internal control involves:

ABCD

• Evaluating the design of a control Yes Yes Yes No

• Determining whether the control has been implemented Yes Yes No Yes

• Testing the effectiveness of a control No Yes Yes Yes

23. Which of the following statements best describes the phrase, “evaluating the design of a
control”?

a. Considering whether the control, individually or in combination with other controls, is capable
of effectively preventing, or detecting and correcting, material misstatements.

b. Determining whether the control exists and that the entity is using it.

c. Expressing an opinion as to the effectiveness of a control.

d. Observing the application of specific controls.

24. When obtaining an understanding of the accounting and internal control system the auditor
may trace a few transactions through the accounting system. This technique is:

a. Reperformance b. Walk-through c. Control test d. Validity Test

25. When obtaining an understanding of an entity’s internal control, an auditor should

concentrate on the substance of controls rather than their form because:

a. The controls may be operating effectively but may not be documented.

b. Management may establish appropriate controls but not act on them.

c. The controls may be so inappropriate that no reliance is contemplated by the auditor.

d. Management may implement controls with costs in excess of benefits.

26. After obtaining an understanding of an entity’s internal control structure and assessing
control risk, an auditor may next:
a. Perform tests of control to verify management’s assertions that are embodied in the financial
statements.

b. Apply analytical procedures as substantive tests to validate the assessed level of control risk.

c. Consider whether evidential matter is available to support a further reduction in the assessed
level of control risk.

d. Evaluate whether the internal control structure policies and procedures detected material
misstatements in the financial statements.

27. After obtaining an understanding of internal control and assessing control risk, an auditor
decided to perform tests of controls. The auditor most likely decided that

a. Additional evidence to support a further reduction in control risk is not available.

b. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.

c. An increase in the assessed level of control risk is justified for certain financial statement
assertions.

d. There were many internal control weaknesses that could allow errors to enter the accounting
system.

28. Tests of controls are used to test whether controls are:

a. Operating effectively c. Properly incorporated in the financial statements

b. Placed in operation or implemented d. Properly documented by the client

29. Which of the following is the auditor’s purpose of further testing internal control procedures?

a. Provide a basis for reducing the assessed level of control risk below that which resulted from
the auditor’s initial understanding of internal control.

b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are
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 proper segregation of functions.

d. Provide assurance that transactions are recorded as necessary to permit the preparation of the
financial statements in accordance with PFRS.
30. Which of the following procedures most likely would provide an auditor with evidence about
whether an entity's internal control activities are suitably designed to prevent or detect material
misstatements?

a. Reperforming the activities for a sample of transactions.

b. Performing analytical procedures using data aggregated at a high level.

c. Vouching a sample of transactions directly related to the activities.

d. Observing the entity's personnel applying the activities.

31. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess
the risks of material misstatement at the financial statements level, and at the assertion level for
classes of transactions, account balances, and disclosure. Some of these risks, in the auditor's
judgment, require special audit consideration, such as those that involve fraud or complex
transactions. Such risks are called

a. Business risks b. Audit risks c. Significant risks d. Material risks

32. 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 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
33. Which of the following statements is correct?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.

b. Tests of controls are necessary if the auditor plans to assess the level of control risk at a HIGH
(maximum) level.

c. The auditor can simultaneously obtain an understanding of internal control and perform tests
of controls.

d. After performing tests of controls, the auditor will always assess control risk at a HIGH level.

34. Tests of controls may include the following, except:

a. Reperformance of internal control procedures

b. Inquiries about, and observation of, internal controls which leave no audit trail

c. Analytical procedures involving comparison of operating expenses with budget amount

d. Inspection of documentary support to transactions evidencing authorization

35. Evidence of the performance of control risk assessment procedures includes all of the
following except

a. Flowcharts b. Questionnaires c. Lead Schedule d. Memoranda

36. Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct?

a. Documentation must include flowcharts.

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.

37. When control risk is assessed at HIGH for all financial statements assertions, an auditor
should document the auditor’s
 ABCD

• Understanding of the entity’s internal control structure Yes Yes No Yes

• Conclusion that control risk is HIGH No Yes Yes Yes

• Basis for concluding that control risk is HIGH No No Yes Yes

38. A control that reduces the risk that an existing or potential control weakness will result in a
failure to meet a control objective is referred to as:

a. Compensating control b. Non-routine control c. Conditional control d. Offset control

39. When a compensating control exists, a weakness in the system:

a. Is no longer a concern because the potential for misstatement has been sufficiently reduced.

b. Is reduced but it is not removed; therefore, it is still of concern to the auditor.

c. Could cause a material loss, so it must be tested using substantive procedures.

d. Is magnified and must be removed from the sampling process and examined in its entity.

40. If no changes have occurred since the controls were last tested, a CPA should

a. Rely on the prior year audit’s assessment of internal controls and use this assessment in the
current year.

b. Test the operating effectiveness of such controls at least once in every fourth audit.

c. Rely entirely on the performance of substantive audit procedures.

d. Test the operating effectiveness of such controls at least once in every third audit

Other Matters Related to Internal Controls

1. This refers to person(s) or organization(s) (e.g., a corporate trustee) with responsibility for
overseeing the strategic direction of the entity and obligations related to the accountability of the
entity. This includes overseeing the financial reporting process.

a. Top level management c. Those charged with governance

b. Management d. Audit Committee

2. Matters to be communicated to those charged with governance may include the following,
except

a. The auditor’s responsibilities in relation to the financial statement audit

b. Significant findings from the audit

c. Auditors independence

d. Planned audit opinion

3. Which of the following statements is correct concerning an auditor’s required communication

with those charged with governance of an audit client?

a. This communication is required to occur before the auditor’s report on the financial statements
is issued.

b. This communication should include discussion of any significant disagreements with

management concerning the financial statements.

c. Any significant matter communicated to the audit committee also should be communicated to
management.

d. Significant audit adjustments proposed by the auditor and recorded by management need not
be communicated to those charged with governance.

4. Which of the following statements is correct about an auditor’s required communication with
those charged with governance of an audit client?

a. Any matters communicated to the entity’s audit committee also are required to be
communicated to the entity’s management.

b. The auditor is required to inform those charged with governance about significant
misstatements discovered by the auditor and subsequently corrected by management.

c. Disagreements with management about the application of accounting principles are required to
be communicated in writing to those charged with governance.

d. Weaknesses in internal control previously reported to those charged with governance need not
be recommunicated.
5. Which of the following best describes reportable conditions?

a. A significant deficiency (or combination of significant deficiencies) that results in a reasonable

possibility of a material misstatement which will not be prevented or detected.

b. A situation in which the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect
material misstatements on a timely basis.

c. A control deficiency that is less severe than a material weakness, but important enough to
merit attention by those responsible for oversight of the company's financial reporting.

d. It refers to significant deficiencies in the design or operation of the internal control structure
that could adversely affect the organization’s ability to record, process, summarize, and report
financial data consistent with the assertions of management in the financial statements.

6. Reportable conditions are matters that come to an auditor's attention and that should be
communicated to an entity's audit committee because they represent

a. Material irregularities or illegal acts perpetrated by management.

b. Significant deficiencies in the design or operation of internal control.

c. Flagrant violations of the entity's documented conflict of interest policies.

d. Intentional attempts by client personnel to limit the scope of the auditor's work.

7. In general, a material weakness in internal control may be defined as a condition in which

material errors or irregularities may occur and not be detected within a timely period by

a. An independent auditor during tests of controls.

b. Employees in the normal course of performing their assigned functions.

c. Management when reviewing interim financial statements and reconciling account balances.

d. Outside consultants who issue a special-purpose report on internal control structure.

8. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee?
a. Management's failure to renegotiate unfavorable long-term purchase commitments.

b. Recurring operating losses that may indicate going concern problems.

c. Evidence of a lack of objectivity by those responsible for accounting decisions.

d. Management's current plans to reduce its ownership equity in the entity.

9. Which of the following statements concerning material weaknesses and significant

deficiencies is correct?
a. An auditor should not identify and communicate material weaknesses separately from
significant deficiencies.

b. Compensating controls may limit the severity of a material weakness or significant deficiency.

c. Upon discovery an auditor should immediately report all material weaknesses and significant
deficiencies identified during an audit.

d. All significant deficiencies are material weaknesses.

10. The development of constructive suggestions to clients for improvements in internal control
is

a. A requirement of the auditor’s consideration of internal control.

b. A desirable by-product of an audit engagement.

c. Addressed by the auditor only during a special engagement.

d. As important as establishing a basis for reliance upon the internal control structure.

11. A third-party organization (or segment of a third-party organization) that provides services to
user entities that are part of those entities’ information systems relevant to financial reporting.

a. Service organization c. Service organization’s system

b. Subservice organization d. Third-party organization

12. This refers to controls that the service organization which assumes, in the design of its
service, will be implemented by user entities, and, if necessary to achieve control objectives, are
identified in the description of its system.
a. Complementary user entity controls c. Primary user entity controls

b. Complementary service entity controls d. Primary service entity controls

13. When obtaining an understanding of the user entity in accordance with PSA 315 (Redrafted),
the user auditor shall obtain an understanding of how a user entity uses the services of a service
organization in the user entity’s operations, including:

a. b. c. d.

• The nature of the services provided by the service organization and the

significance of those services to the user entity, including the effect thereof

on the user entity’s internal control

Yes Yes Yes Yes

• The nature and materiality of the transactions processed or accounts or

financial reporting processes affected by the service organization Yes Yes Yes Yes

• The degree of interaction between the activities of the service organization

and those of the user entity Yes No No Yes

• The nature of the relationship between the user entity and the service

organization, including the relevant contractual terms for the activities

undertaken by the service organization.

No No Yes Yes

14. Type 1 report on service organization includes a report on Description of controls Design of
controls Operating effectiveness of controls

a. Yes No Yes

b. Yes Yes Yes

c. No No No
d. Yes Yes No

15. If the user auditor is unable to obtain a sufficient understanding from the user entity, the user
auditor shall obtain understanding from any other procedures. Which of the following is least
likely procedure that will be used by the auditor?

a. Obtaining a type 1 or type 2 report, if available

b. Contacting the service organization, through the user entity, to obtain specific information

c. Visiting the service organization and performing procedures that will provide the necessary
information about the relevant controls at the service organization

d. Contacting law enforcement agencies to force the user entity to provide the necessary
information relevant to understanding by the user auditor.

16. Which of the following is the least concern of the client auditor in reviewing the report of
service organization auditor on suitability of internal control design of the service organization?

a. The accuracy of description of the service organization's accounting and internal control
systems, ordinarily prepared by the management of the service organization.

b. The systems' controls have been placed in operation.

c. The accounting and internal control systems are suitably designed to achieve their stated
objectives.

d. The type of documentation of the understanding of the service organization's control system.

17.AAA Company processes payroll transactions for schools. Raymund, CPA, is engaged to
report on AAA’s policies and procedures implemented as of a specific date. These policies and
procedures are relevant to the schools’ internal control, so Raymund’s report will be useful in
providing the schools’ independent auditors with information necessary to plan their audits.
Raymund’s report expressing an opinion on AAA’s policies and procedures implemented as of a
specific date should contain a(n)
a. Description of the scope and nature of Raymund’s procedures.

b. Statement that AAA’s management has disclosed to Raymund all design deficiencies of which
it is aware.
c. Opinion on the operating effectiveness of AAA’s policies and procedures.

d. Paragraph indicating the basis for Raymund’s assessment of control risk.

18. Which of the following is correct on reporting by the user auditor?

a. The user auditor should never refer to the work of a service auditor.

b. The user auditor can only refer to the work of the service auditor if it will issue modified
opinion.

c. When reference to the service auditor work is required by law or regulation, the user auditor’s
report shall indicate

that the reference does not diminish the user auditor’s responsibility for the audit opinion.

d. The user auditor should not issue unmodified opinion when using the work of a service
auditor.

19.AAA Company processes payroll transactions for a retailer. Francis, CPA, is engaged to
express an opinion on a description of AAA’s internal controls implemented as of a specific date.
These controls are relevant to the retailer’s

internal control, so Francis’s report may be useful in providing the retailer’s independent auditor
with information necessary to plan a financial statement audit. Francis’s report should

a. Contain a disclaimer of opinion on the operating effectiveness of AAA’s controls.

b. State whether AAA’s controls were suitably designed to achieve the retailer’s objectives.

c. Identify AAA’s controls relevant to specific financial statement assertions.

d. Disclose Francis’s assessed level of control risk for AAA.

20. Which of the following is correct on reporting by the user auditor?

a. The user auditor should never refer to the work of a service auditor.

b. The user auditor can only refer to the work of the service auditor if it will issue modified
opinion.
c. When reference to the service auditor work is required by law or regulation, the user auditor’s
report shall indicate that the reference does not diminish the user auditor’s responsibility for the
audit opinion.

d. The user auditor should not issue unmodified opinion when using the work of a service
auditor.

21. In comparison to the external auditor, an internal auditor is more likely to be concerned with

a. Internal control. c. Cost accounting procedures.

b. Operational auditing. d. Reviewing interim financial statements.

22. The objectives of internal audit functions vary widely and depend on the size and structure of
the entity and the requirements of management and, where applicable, those charged with
governance. The activities of the internal audit function may include one or more of the
following, except

a. Monitoring of internal control.

b. Examination of financial and operating information.

c. Review of compliance with laws and regulations.

d. Issuing opinion as to whether internal controls are effective.

23. The independent auditor should acquire an understanding of the internal audit function as it
relates to the independent auditor’s consideration of internal control because

a. The audit programs, working papers, and reports of internal auditors can often be used as a
substitute for the work of the independent auditor’s staff.

b. The procedures performed by the internal audit staff may eliminate the independent auditor’s
need for an extensive consideration of internal control.

c. The work performed by internal auditors may be a factor in determining the nature, timing and
extent of the independent auditor’s procedures.

d. The understanding of the internal audit function is an important substantive test by the
independent auditor.
24. If the independent auditors decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditor’s

a. Competence and objectivity. c. Efficiency and experience.

b. Independence and review skills. d. Training and supervisory skills.

25. If the independent auditor decides that the work performed by internal auditors may have a
bearing on the independent auditor’s own procedures, the independent auditor should consider
the objectivity of the internal auditors. One method of judging objectivity is to

a. Review the recommendation made in the reports of internal auditors.

b. Examine, on a test basis, documentary evidence of the work performed by internal auditors.

c. Inquire of management about the qualification of the internal audit staff.

d. Consider the client’s practices for hiring, training, and supervising the internal audit staff.

MULTIPLE CHOICES – PROBLEMS

1.

ANSWER KEYS:

Introduction to Assurance and Non-assurance Engagements

1. D
2. D
3. D
4. B
5. C
6. D
7. D
8. C
9. D
10. C
11. D
12. D
13. A
14. D
15. B
16. B
17. B
18. B
19. C
20. C
21. C
22. B
23. D
24. D
25. A

Intro to Auditing

1. C
2. C
3. B
4. B
5. A
6. B
7. B
8. C
9. C
10. D
11. D
12. D
13. D
14. A
15. B
16. C
17. D
18. B
19. B
20. D
21. D
22. D
23. A
24. C
25. B
26. D
27. B
28. D
29. C
30. B

Audit Process and Evidence-Gathering Procedure

1. B
2. B
3. B
4. C
5. B
6. A
7. A
8. B
9. C
10. D
11. B
12. B
13. A
14. D
15. D
16. D
17. D
18. C
19. A
20. C
21. C
22. C
23. A
24. D
25. B
26. C
27. D
28. C
29. D
30. C

Preliminary Engagement Activities

1. D
2. C
3. D
4. C
5. D
6. D
7. D
8. D
9. D
10. D
11. C
12. C
13. D
14. B
15. C
16. D
17. B
18. D
19. A
20. A
21. B
22. A
23. D
24. A
25. D
26. D
27. B
28. D
29. D
30. D

Audit Planning and Risk Assessment Procedure

1. B
2. B
3. A
4. D
5. D
6. D
7. A
8. B
9. A
10. D
11. C
12. A
13. D
14. C
15. D
16. C
17. C
18. C
19. A
20. D
21. C
22. D
23. D
24. D
25. D
26. C
27. C
28. D
29. C
30. B
31. D
32. B
33. B
34. A
35. D
36. C
37. B
38. D
39. B
40. A

Internal Control Consideration

1. B
2. A
3. D
4. C
5. B
6. C
7. C
8. D
9. C
10. C
11. B
12. B
13. A
14. D
15. B
16. C
17. C
18. A
19. C
20. D
21. D
22. A
23. A
24. B
25. B
26. C
27. B
28. A
29. A
30. D
31. C
32. C
33. D
34. C
35. C
36. D
37. B
38. A
39. A
40. D

Other Matters Related to Internal Controls

1. D
2. D
3. B
4. B
5. D
6. B
7. B
8. C
9. C
10. C
11. B
12. B
13. D
14. D
15. D
16. D
17. B
18. D
19. B
20. C
 21. B
22. D
23. C
24. A
25. A

MULTIPLE CHOICES – THEORIES

1.

MULTIPLE CHOICES – PROBLEMS

1.