Holy Trinity College of General Santos City 4.

Management assertions are

College of Business Management and Accountancy a. Implied or expressed representations

Mid-term Exam in Auditing Theory
Jaypee D. Bigno, CPA
1. The auditor’s judgment concerning the
overall fairness of presentation of financial
positions results of operations, and
changes in cash flows is applied within the
framework of
a. Quality control
b. Generally accepted auditing standards
which include the concept of
materiality
c. The auditor’s evaluation of the audited
company’s internal control
about classes of transactions and the
related accounts in the financial
statements
b. Stated in the footnotes to the financial
statements
c. Explicitly expressed representations
about the financial statements
d. Provided to the auditor in the assertion
letter, but are not disclosed on the
financial statements
5. Which of the following statements is true?
a. The auditor’s objective follow and are
closely related to management
assertions

d. Generally accepted accounting b. Management’s assertions follow and

principles are closely related to the auditor’s
objectives
2. Test of details of balances are specific
procedures intended to c. The auditors primary responsibility is to
find and disclose fraudulent
a. Test for monetary errors in the
management assertions
balances in the financial statements
d. Assertions about presentation and
b. Prove that the accounts with material
disclosure deal with whether the
balances are classified correctly
accounts have been included in the
c. Prove that the trial balance is in financial statements at appropriate
balance amounts

d. Identify the details of the internal 6. Which of the following statements about
control system existence and completeness objectives is
not true?
3. Personnel shall include
a. The existence and completeness
a. Partners only objectives emphasizes opposite audit
concerns
b. Staff only
b. Existence deals with overstatements
c. Partners and staff
and completeness deals with
d. Partners, staff and client management understatements
 c. Existence deals with understatements d. Determine materiality levels
and completeness deals with
overstatements 10. Which of the following procedures would
an audit least likely perform while
d. The completeness objectives deals with obtaining an understanding of a client in a
unrecorded transactions financial statement audit?

7. Which of the following is not an assertion a. Coordinating the assistance of entity

relating to classes of transactions? personnel in data preparation

a. Accuracy b. Discussing matters that may affect the

audit with firm personnel responsible
b. Consistency for non-audit services to the entity

c. Cutoff c. Selecting a sample of vendor’s invoices

for comparison to receiving reports
d. Occurrence
d. Reading the current year’s interim
8. It is the financial reporting framework
financial statements
adopted by management and, where
appropriate, those charged with 11. On the basis of the audit evidence
governance in the preparation of financial gathered and evaluated, an auditor decides
statements that is acceptable in view of to increase the assessed level of control
the nature of the entity and the objective risk from that originally planned. To
of the financial statements or that is achieve an overall audit risk level that is
required by law or regulation. substantially the same as the planned audit
risk level, the auditor would
a. Fair presentation framework
a. Decrease substantive testing
b. Compliance framework
b. Decrease detection risk
c. Applicable financial reporting
framework c. Increase inherent risk
d. Conceptual framework d. Increase materiality levels

9. While assessing the risk of material 12. Which of the following is a function of the
misstatement auditors identify risks, relate risks of material misstatement and
risk to what could go wrong, consider the detection risk?
magnitude of risks and
a. Internal control
a. Assess risk of misstatement due to
illegal acts b. Corroborating evidence

b. Consider the complexity of the c. Quality control

transactions
d. Audit risk
c. Consider the likelihood that the risks
could result in material misstatement
13. Before assessing control risk at a level
lower than the maximum, the auditor
obtains reasonable assurance that controls
are in use and operating effectively. This
assurance is most likely obtained in part by
a. Preparing flowcharts
b. Performing substantive test
assessed level of control risk is high, an
auditor would probably
a. Insist that the client perform physical
counts of inventory items several times
during the year
b. Apply gross profit tests to ascertain the
reasonableness of the physical counts

c. Analyzing tests of trends and ratios c. Increase the extent of test of controls
of the inventory cycle
d. Inspection of documents
d. Request the client to schedule the
14. To obtain audit evidence about control physical inventory count at the end of
risk, an auditor selects tests from a variety the year
of techniques including
17. Analytical procedures used during risk
a. Inquiry assessment in audit should focus on

b. Analytical procedures a. Reducing the scope of tests of controls

and substantive tests
c. Calculation
b. Providing assurance that potential
d. Confirmation
material misstatements will be
15. Which of the following procedures identified
concerning accounts receivable would an
c. Enhancing the auditor’s understanding
auditor most likely perform to obtain
of the client’s business
evidence in support of an assessed level of
control risk below the maximum? d. Assessing the adequacy of the
available device
a. Observing an entity’s employee prepare
the schedule of past due accounts 18. The risk of incorrect acceptance and the
receivable likelihood of assessing control risk too low
relate to the
b. Sending confirmation requests to an
entity’s principal customers to verify the a. Allowable risk of tolerable
existence of accounts receivable misstatement

c. Inspecting an entity’s analysis of accounts b. Preliminary estimates of materiality

receivable for unusual balances levels

d. Comparing an entity’s uncollectible c. Efficiency of the audit

accounts expense to actual accounts
receivable d. Effectiveness of the audit

16. A client maintains perpetual inventory 19. In determining the sample size for a test of
records in both quantities and peso. If the controls, an auditor should consider the
 likely rate of deviations, the allowable risk b. It is based on the presumption that
of assessing control risk too low, and the controls are in place.

a. Tolerable deviation rate c. It can be controlled by the auditor.

b. Risk of incorrect acceptance d. External circumstances giving rise to

business risks may also influence
c. Nature an cause of deviations inherent risk.

d. Population size 23. In which of the following is inherent risk at

the least degree?
20. Which of the following is a member of
IFAC? a. Accounting involving higher
calculations
a. PICPA
b. Technological developments causing
b. BOA
obsolescence to products
c. PRC
c. Lack of sufficient working capital to
d. SEC continue operations

21. Which of the following is not correct about d. The possibility of human errors or
risks? mistakes

a. The risk of material misstatement 24. The risk of material misstatement is most
arising from fraud is considered a likely affected by the following due to
significant risk. inherent risks. Which is the exception?

b. Business risk is broader than the risk of a. Inventories that are small in size and
material misstatement of financial small in value
statements, though it includes the
b. Finance leases and bonds at amortized
latter.
cost
c. Audit risk is comprised entirely of the
c. Pensions and other employee benefits
risk of material misstatement.
computations
d. The risk of material misstatement of
d. Large amount of processed
the financial statements may arise from
error or fraud. 25. Which of the following correctly relates to
control risk?
22. Which of the following correctly relates to
inherent risks? a. It is susceptibility of an assertion about
a class of transaction, account balance
a. It is the risk that a misstatement that
or disclosure to misstatement that
could occur in an assertion will not be
could be material, before consideration
prevented, or detected and corrected,
of any related control.
on a timely basis by the entity’s internal
control.
 b. It can be eliminated by implementing a 29. The primary purpose for obtaining and
perfectly effective control environment understanding of an entity’s internal
and activities. control is to

c. It cannot be assessed in combination a. Determine the nature, timing and

with inherent risk. extent of tests to be performed in the
audit
d. Because of the inherent limitations,
control risk will always exist for some b. Provide a basis for making constructive
assertions. suggestions in a management letter

26. Control risk should be assessed in terms of c. Provide information for a

communication of internal control-
a. Specific controls related matters to management
b. Types of potential fraud d. Obtain sufficient appropriate audit
evidence from which to draw
c. Financial statement assertions
conclusion as a basis for forming an
d. Control environment factors opinion on the financial statements

27. Which of these is least likely relevant to an 30. An auditor assesses control risk assessment
auditor in performing risk assessment is correct?
procedures?
a. When controls appear reliable, control
a. Discussion with people within the risk is assessed as high.
entity
b. When auditor plans to rely on the
b. Industry-related publications controls, the auditor increases the
assessment of control risk.
c. Tour of the entity’s facilities
c. When controls are highly effective, the
d. Walk-through procedures auditor assesses a zero control risk.

28. An auditor understands the client’s d. Control risk assessment shall be

business primarily to documented, whether or not controls
are effective.
a. Assess the level of control risk
31. When combined assessed level of inherent
b. Identify transactions that may impact
and control risk is low/less than high/
the financial statements
below maximum, which is correct?
c. Develop a questioning attitude during
a. Test of controls is not required
the audit
b. More substantive procedures are
d. Make suggestions on how to improve
performed
internal control
c. Detection risk is increased
 d. Basis for assessment need not be d. Walk-through test
documented
36. If the auditor has obtained a reasonable
32. Test of controls are designed to test the level of assurance about the fair
controls presentation of the financial statements
through understanding internal control,
a. Effectiveness assessing control risk, testing controls,
substantive tests of transactions, and
b. Efficiency
analytical procedures, then the auditor
c. Effectiveness and efficiency
a. Needs to do additional tests of controls
d. Effectiveness, efficiency and perfection so that the assurance level can be
increased
33. An auditor may compensate for a
weakness in internal control by increasing b. Can significantly reduce the test of
the details of balances

a. Level of detection risk c. Can write the engagement letter

b. Extent of tests of control d. Can issue an unmodified opinion

c. Preliminary judgment about audit risk 37. Which of the following is not one of the
components of the major elements of
d. Extent of analytical procedures internal control?

34. Regardless of the assessed level of control a. Physical security

risk, an auditor would perform some
b. Control environment
a. Tests of controls to determine the
effectiveness of internal control policies c. Control activities

b. Analytical procedures to verify the d. Monitoring

design of internal control
38. Internal controls can never be regarded as
c. Substantive tests to increase risk for completely effective. Even if company
significant transaction classes personnel could design an ideal system, its
effectiveness depends on the
d. Dual-purpose tests to evaluate both the
risk of monetary misstatement and a. Adequacy of the computer system
preliminary control risk
b. Proper implementation by
35. These procedures are designed to detect management
misstatements in the financial statements
c. Ability of the internal audit staff to
a. Risks assessment procedures maintain it

b. Tests of controls d. Competency and dependability of the

people using it
c. Substantive procedures
39. Of the following, the factor not explicitly a. Incompatible duties
considered in understanding the control
environment is b. Management override

a. Organizational structure c. Mistakes in judgment

b. Personnel policies and procedures d. Collusion among employees

c. Assignment of responsibility and 43. Which of the following best describes the
authority inherent limitations that should be
recognized by an auditor when considering
d. Performance reviews the potential effectiveness of internal
control?
40. Management philosophy and operating
style most likely would have significant a. Procedures whose effectiveness
influence on an entity’s control depends on segregation of duties can
environment when be circumvented by collusion

a. The internal control auditor reports b. The competence and integrity of client
directly to management personnel provides an environment
conducive to accounting control and
b. Management is dominated by one provides assurance that effective
individual control will be achieved

c. Accurate management job descriptions c. Procedures designed to assure the

delineate specific duties execution and recording of transactions
in accordance with proper
d. The audit committee actively oversees
authorizations are effective against
the financial reporting process
irregularities perpetrated by
41. An entity’s ongoing monitoring activities management
rather than a separate evaluation often
d. The benefits expected to be derived
include
from effective internal accounting
a. Periodic audits by the audit committee control usually do not exceed the costs
of such control
b. Reviewing the purchasing function
44. When obtaining an understanding of an
c. The audit of the annual financial entity’s internal control, an auditor should
statement concentrate on the substance of controls
rather than their form because
d. Control risk assessment in conjunction
with quarterly reviews a. The controls may be operating
effectively but may not be
42. Which of these is least likely considered an
documented.
inherent limitation of the potential
effectiveness of an entity’s internal b. Management may establish
control? appropriate controls but not enforce
compliance with them.
 c. The controls may be so inappropriate c. The supervision, control and regulation
that no reliance is contemplated by the of the practice of accountancy in the
auditor. Philippines

d. Management may implement controls d. The prescription and/or adoption of a

whose costs exceed their benefits. Code of Ethics for the practice of
accountancy
45. The ultimate basis of RA 9298 is the
49. Any person who shall violate any of the
a. NIRC provision of the Act or any of its
implementing rules and regulations
b. PD 692
promulgated by the BOA subject to the
c. Revenue Regulations approval of the PRC, shall upon conviction,
be punished by
d. Philippine Constitution
a. Lethal injection
46. “The State recognizes the importance of
accountants in nation building and b. A fine of not more than P50,000
development”. This statement is included
c. Imprisonment for a period not
in what section of the Act?
exceeding two years
a. Short title
d. A fine of not less than P50,000 or by
b. Declaration of policy imprisonment for a period not
exceeding 2 years or both
c. Objectives
50. The following are qualifications of
d. Scope of practice applicants for the CPA licensure
examination, except
47. The primary duty to enforce the provision
of RA 9298 and its IRR rests with a. Must be a Filipino citizen

a. The PRC b. Must be of good moral character

b. The FRSC c. Must be a holder of the degree of BS

Accountancy
c. The BOA
d. Must be at least 21 years old
d. The AASC
51. The following documents shall be
48. Which of the following is not one of the
submitted by applicants for the CPA
main objectives of the Philippine
licensure examination, except
Accountancy Act of 2004?
a. Transcript of records with indication
a. The standardization and regulation of
therein the date of graduation and
accounting education
Special order number unless it is not
b. The examination for registration of required
certified public accountants
 b. Certificate of Live Birth in National
Statistics Office (NSO) security paper
c. Marriage contract in NSO security
paper for married female applicants
d. Baptismal certificate
52. The following statements relate to the
rating in the CPA exams. Identify the false
statement.
a. A candidate must have a general
weighted average of at least 75% with
no grades lower than 65% in any given
subjects in order to pass the CPA exam.
b. In the event a candidate obtains a
rating of 75% an above in at least
majority of the subjects, he/she shall
receive conditional credit for the
subjects passed.
c. A candidate who receives a conditional
credit shall take an examination on the
remaining subjects within 2 years from
the preceding examination.
d. A candidate who gets a conditional
credit and takes an examination on the
remaining subjects must get an average
of at least 75% on the subjects re-
examined and at least 65% in each of
the subjects re-examined.
53. Which of the following is a correct
statement?
a. The Certificate of Registration issued to
successful examinees is renewable
every three years.
b. The Professional Identification Card
issued to successful examinees shall
remain in full force and effect until
withdrawn, suspended or revoked.
c. The BOA, may after the expiration of
three years from the date of revocation
of a Certificate of Registration,
reinstate the validity of a revoked
Certificate of Registration.
d. Those who failed to renew professional
licenses for a period of five continuous
years from initial registration, or from
last renewal shall be declared
delinquent.
54. Practice of Public Accountancy shall
constitute in a person (choose exception)
a. Rendering professional services to
more than one client on a fee basis
b. Offering services for the design,
installation, review and revision of
accounting systems and controls, or the
preparation and/ or review of income
tax returns when related to accounting
and auditing procedures
c. When he/she represents his/her clients
before government agencies on tax and
accounting matters
d. When he/she represents his/her
employer before government agencies
on tax and accounting matters and such
employment or position requires that
the holder thereof must be a certified
public accountants.
55. The entire set of data from which a sample
is selected and about which the auditor
wishes to draw conclusion is
a. Population
b. Sample
c. Sampling unit
d. Database
56. The risk that the auditor’s conclusion based 60. Sampling risk that leads the auditor to
on a sample may be different from the conclude that a material misstatement
conclusion if the entire population were exists when in fact it does not is
subjected to the same audit procedure
a. Risk of assessing control risk too low
a. Sampling risk
b. Risk of assessing control risk too high
b. Non-sampling risk
c. Risk of incorrect rejection
c. Audit risk
d. Risk of incorrect acceptance
d. Detection risk
61. While performing a substantive test of
57. The risk that the auditor reaches an details during an audit, the auditor
erroneous conclusion for any reason not determined that the sample results
related to sampling risk is supported the conclusion that the
recorded account balance was materially
a. Sampling risk misstated. It was, in fact, not materially
misstated. This situation illustrates the risk
b. Non-sampling risk
of
c. Audit risk
a. Incorrect rejection
d. Detection risk
b. Incorrect acceptance
58. Which of the following does not constitute
c. Assessing control risk too low
non-sampling risk?
d. Assessing control risk too high
a. Use of inappropriate audit procedures
62. The relationship between the sampling risk
b. Misinterpretation of audit evidence
that the auditor is willing to accept and the
c. Failure to recognize a misstatement or sample size selected is
deviation
a. Inverse
d. Failure of a sample to represent the
b. Direct
population
c. Parallel
59. Sampling risk that leads the auditor to
conclude that controls are more effective d. Indeterminate
than they actually are is
63. A monetary amount set by the auditor in
a. Risk of assessing control risk too low respect of which the auditor seeks to
obtain an appropriate level of assurance
b. Risk of assessing control risk too high
that the monetary amount set by the
c. Risk of incorrect rejection auditor is not exceeded by the actual
misstatement in the population is
d. Risk of incorrect acceptance
a. Tolerable misstatement
 b. Tolerable rate of deviation b. Assesses the accounting principles used
and also evaluates the overall financial
c. Anomaly statement presentation

d. Expected misstatement c. Realizes some matters, either

64. A rate of deviation from prescribed internal
control procedures set by the auditor in
respect of which the auditor seeks to
obtain an appropriate level of assurance
that the rate of deviation set by the auditor
is not exceeded by the actual rate of
deviation in the population is
67. Which of the following best describes what
a. Tolerable misstatement
b. Tolerable rate of deviation
c. Anomaly
d. Expected misstatement
individually or in the aggregate, are
important while other matters are not
important
d. Is responsible for expressing an opinion
on the financial statements, which are
the responsibility of management
is meant by the terms generally accepted
auditing standards?
a. Rules acknowledged by the accounting
profession because of their universal
application

65. The objective of the tolerable rate in b. Pronouncements issued by AASC

sampling for tests of controls of internal
c. Measures of the quality of the auditor’s
control is to
performance
a. Determine the probability of the
d. Procedures to be used to gather
auditor’s conclusion based upon
evidence to support financial
reliance factors.
statements
b. Determine that financial statements
68. In “auditing” financial accounting data, the
taken as a whole are not materially in
primary concern is with
error.
a. Determining whether recorded
c. Estimate the reliability of substantive
information properly reflects the
test.
economic events that occurred during
d. Estimate the range of procedural the accounting period
deviations in the population.
b. Determining if fraud has occurred
66. The existence of audit risk is recognized by
c. Determining if taxable income has been
the statement in the auditor’s standard
calculated correctly
report that the auditor
d. Analyzing the financial information to
a. Obtains reasonable assurance about
be sure that it complies with
whether the financial statements are
government requirements
free of material misstatement
69. The trait that distinguishes auditors from
accountants is the
 a. Auditor’s ability to interpret accounting
principles generally accepted in the
Philippines

b. Auditor’s education beyond the

Bachelor’s degree

c. Auditor’s ability to interpret

engagement standards promulgated by
the AASC

d. Auditor’s accumulation and

interpretation of evidence related to a
company’s financial statements

70. Generally accepted auditing standards are

a. Rules imposed by the Philippine

Congress

b. Rules imposed by the SEC

c. Rules imposed by the PICPA

d. General guidelines to aid auditors