Professional Documents
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700pages AuditTheory
700pages AuditTheory
https://drive.google.com/file/d/1ZphB59EHnSDmm3Q0345yhhdLj0_hq0MI/view
FS Audit Process
● Definition of Auditing
● Complete Set of FS
● Objective of an audit and an auditor
● Responsibilities of Mgmt (5)
● Basic Concepts
● FS Audit Process
B. Complete Set of FS
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to the Financial Statement (within the scope of audit)
D. Responsibilities of Management
1. Identifying your financial reporting framework
2. Preparation and presentation of FS (responsibility of the management, not the auditor; the
responsibility of the auditor is the auditor report)
3. Implementing and effective internal control structure
4. Selecting accounting policies
5. Making accounting estimates
E. Basic Concepts
1. Auditor independence — the auditor must not be easily influenced; their decision must not be
easily subordinated to that of other
● Mind - only the auditor himself can determine if he is independent
● Appearance - whenever you look independent in the eyes of the public
3. Conduct of Audit — As a general rule, it must comply with the PSA and the practice statement
● Exceptions: If the auditor is belatedly appointed then chances are the client would
request that the confirmation letters to be no longer be sent because the client would
argue that by the time that the auditor would receive the confirmation reply, then the FS
has already been released. If that would be the case, sending of confirmation letters is
a required procedure under the PSA but the auditor would have no choice but to again
permit the client but what would be the remedy?
○ We have to perform alternative procedures and what could that be?
■ Tracing the collection in the subsequent cash receipts.
4. Scope of the Audit — laws, rules and regulations are superior to the PSAs
5. Audit Evidence
● Accounting records – General Journal, Special Journal, General Ledger
● Other Information
○ all evidence gathered by the auditor that has not formed part of the accounting
records
○ minutes, third party confirmation and the controls manual
7. Audit Risk — the risk or likelihood that an auditor will issue an inappropriate opinion
- general type of information risk is audit risk
● Quantitative – usually at certain percentage (Ex: 8% of total assets)
● Non-quantitative – setting audit risk at either low, medium or high
● Formula: Inherent risk x Control risk x Detection risk
○ Inherent risk and control risk are components of risk of material misstatements
● Inherent risk and control risk are independent components - we cannot alter and modify
them but we can only respond through by setting the detection risk
○ The relationship between the risk of material misstatement and detection risk
is inverse
■ Whenever you have high risk of material misstatement, the lower the
detection level you should set
■ Lower risk - higher level of detection risk
■ Reason: because we want to achieve efficiency and effectiveness of
our audit
○ Detection risk - risk that the misstatement that is not detected by the auditor
F. FS Audit Process
1. Pre-engagement
2. Audit planning
3. Consideration of internal controls
4. Evidence gathering or substantive testing
5. Completing the audit
6. Issuance of the audit report
7. Post-audit responsibilities
Pre Engagement
● Contents of Engagement Letter
● When to send a separate engagement letter (audit of a component)
● When to send a new engagement letter to a recurring client
● Change in terms of Engagement
Audit Planning
1. Obtaining an understanding of the client and its environment
2. Determining the need for experts
3. Establishing materiality and assessing risk
4. Assessing the possibility of non compliance
5. Identifying related parties
6. Performing preliminary analytical procedure
7. Development of overall audit strategy and detailed audit plan; preparation of preliminary
audit program
7. Development of overall audit strategy and detailed audit plan; preparation of preliminary audit program
● Audit plan - summary of the procedures from the start to the end of the audit
○ Perform risk assessment procedures
■ Inquiry: weakest procedures, supported by another procedures (observation)
■ Inspection: supported by another procedures (observation)
■ Observation
■ Analytics
● Audit program - procedure on an account or per transaction cycle (to do list)
- Study of internal control is always required but evaluation of internal control is not always required.
- You only evaluate if the strategy that you’re going to adapt is the reliance approach.
Substantive Testing
● Description of Substantive Test
● Reporting of Audit Findings
● Resolution of Audit Differences
1. Report to client
● Accepts the proposal – there is no problem (issue unqualified opinion)
● Does not accept the proposal – the client decided to stick to the original amounts in the
financial statements then the auditor has no choice but to modify the report
2. Added feature of services
● Recommendation letter
● Communicate to the client the different areas of internal control that need improvement
● Do your final review of the financial statements to ensure that all required disclosures are actually there in
the Financial Statements
Based on the above, the following are the major audit planning activities:
1. Obtaining an understanding of the client and its environment
2. Assessing the possibility of non compliance
3. Establishing materiality and assessing risk
4. Identifying related parties
5. Performing preliminary analytical procedure
6. Determining the need for experts
7. Development of overall audit strategy and detailed audit plan
8. Preparation of preliminary audit program
Understanding the entity and its environment and using this information appropriately assists the auditor in
assessing risk and identifying problems and in planning and performing the audit effectively and efficiently.
3. The entity's selection and application of accounting policies, including the reasons for changes thereto
● The auditor should obtain an understanding of the entity's selection and application of accounting
policies and consider whether they are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the relevant industry.
4. Objectives and strategies and the related business risks that may result in risks of material misstatement
● To respond to industry, regulatory and other internal and external business factors, entity
management and those charged with governance define objectives.
● Strategies are the operational approaches by which management intends to achieve its
objectives.
● Business risks result from significant conditions, events, circumstances, actions or inactions
that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or
through the setting of inappropriate objectives and strategies.
○ Business risk is broader than the risk of material misstatement of the financial statements,
though it includes the latter.
○ Business risk particularly may arise from change or complexity, though a failure to
recognize the need for change may also give rise to risk.
● Change may arise, for example, from the development of new products that may fail from an
inadequate market, even if successfully developed; or from flaws that may result in liabilities and
reputational risk.
● An understanding of business risks increases the likelihood of identifying risks of material
misstatement. However, the auditor does not have a responsibility to identify or assess all business
risks.
● Most business risks will eventually have financial consequences and, therefore, an effect on the
financial statements. However, not all business risks give rise to risks of material misstatement.
● A business risk may have an immediate consequence for the risk of misstatement of the financial
statements, and a longer-term consequence (for example, an effect on the going concern
assumption).
5. Measurement and review of the entity's financial performance.
● Performance measures and their review indicate to the auditor aspects of the entity's performance
that management and others consider to be of importance.
● Performance measures, whether external or internal, create pressures on the entity that, in turn,
may motivate management to take action to improve the business performance or to misstate the
financial statements.
● Obtaining an understanding of the entity's performance measures assists the auditor in considering
whether such pressures result in management actions that may have increased the risks of
material misstatement.
6. Internal control
● This refers to the process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity's
objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations.
Related Parties
● The auditor needs to have a sufficient understanding of the entity and its environment to enable identification
of the events, transactions and practices that may result in a risk of material misstatement regarding related
parties and transactions with such parties.
● A related party transaction is transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.
While the existence of related parties and transactions between such parties are considered ordinary features of
business, the auditor needs to be aware of them because:
1. The applicable financial reporting framework may require disclosure in the financial statements of
certain related party relationships and transactions, such as those required by PAS 24;
2. The existence of related parties or related party transactions affect the financial statements.
● For example, the entity's tax liability and expense may be affected by the tax laws in various
jurisdictions which require special consideration when related parties exist;
3. The source of audit evidence affects the auditor's assessment of its reliability. Generally a greater degree
of reliance may be placed on audit evidence that is obtained from or created by unrelated third parties; and
4. A related party transaction may be motivated by other than ordinary business considerations, for example,
profit sharing or even fraud.
● The basic premise underlying the application of analytical procedure is that relationships among
data may reasonably be expected to exist and to continue to exist in the absence of known
conditions to the contrary.
● Particular conditions that can cause variations in these relationships include, for example, specific
unusual transactions or events, accounting changes, business changes, random fluctuations or
misstatements.
● Analytical procedures may be helpful in identifying the existence of unusual transactions or events,
and amounts, ratios, and trends that might indicate matters that have financial statement and audit
implications.
● In performing analytical procedures as risk assessment procedures, the auditor develops
expectations about plausible relationships that are reasonably expected to exist.
● When comparison of those expectations with recorded amounts or ratios developed from recorded
amounts yields unusual or unexpected relationships, the auditor considers those results in
identifying risks or material misstatement.
● However, when such analytical procedures use data aggregated at a high level (which is often the
situation), the results of those analytical procedures only provide a broad initial indication about
whether a material misstatement may exist.
● Accordingly, the auditor considers the results of such analytical procedures along with other
information gathered in identifying the risks of material misstatement.
Audit strategy, Detailed audit plan, Audit program, and Timing of Audit Work
● The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of
the more detailed audit plan.
● The establishment of the overall audit strategy involves:
1. Determining the characteristics of the engagement that define its scope;
2. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required; and
3. Considering the important factors that will determine the focus or direction of the engagement
team's efforts.
● Many audits of small entities involve the audit engagement partner working with one engagement team
member.
● With a smaller team, coordination and communication between team members are easier.
● Establishing the overall audit strategy for the audit of a small entity need not be a complex or
time-consuming exercise.
● A brief memorandum prepared at the completion of the previous audit, based on a review of the working
papers and highlighting issues identified the audit just completed, updated and changed in the current period
based on discussions with the owner-manager, can serve as the basis for working for planning the current
audit engagement.
Bobadilla- Compilation
MODULE 1
AUDITING CONCEPTS
A. disregard the statement because it ranks low of the evidence quality scale.
B. corroborate the evidence with other supporting documentation whenever
possible.
C. require that the statement be put in writing.
D. believe on the statement in order to maintain the professional client-auditor
relationship.
A. Internal control
B. Compliance with GAAP
C. Quality of managements‘ business decisions
D. Fairness of the financial statement amounts
A. Absolute assurance.
B. High assurance.
C. Negative assurance
D. Reasonable assurance.
I. The third party who receives the assurance generally pays for the
assurance received.
II. Assurance services always involve a report by one person to a third party
on which an independent organization provides assurance.
III. Assurance services can be provided either on information or processes.
A. I and II.
B. I and III.
C. III only.
D. I, II, and III.
9. The broad range of assurance engagements includes all, but which of the
following?
A. 2, 4, 5
B. 2, 4, 6
C. 2, 5, 6
D. 4, 6
A. A subject matter.
B. Suitable criteria.
C. A conclusion.
D. A two-party relationship.
A. Majority
B. Ten
C. Eight
D. Twelve
A. The intended user is the person or class of persons for whom the professional
accountant prepares the report for a specific use or purpose.
B. The intended user(s) is (are) always limited to the addressee of the
professional accountant‘s report.
C. The responsible party may also be the one of the intended users.
D. The intended user(s) may not be the addressee of the professional
accountant‘s report.
A. Data.
B. System and processes.
C. Compliance and regulations.
D. Degree of loyalty of employees to their employer.
16. The practitioner‘s report on an assurance engagement should always include the
following, except:
I. Criteria to be used.
II. Nature and extent of involvement of the experts.
III. Possible sources of evidence.
IV. Type of conclusion to be issued.
V. Preliminary judgment about materiality and engagement risk.
VI. Content of the management letter.
A. All of them.
B. I, II, III, V
18. How many members of the AASC are needed to approve the exposed draft as
Philippine Standards on Auditing?
19. Which of the following is required if the professional accountant uses experts
who are not professional accountants?
21. Which one of the following is not a key attribute that is essential to perform an
assurance service?
23. The suitability of the criteria to which the professional accountant will base his
evaluation of the subject matter partly depends on:
A B C D
Relevance YES YES YES NO
Reliability YES YES YES YES
Understandability YES NO YES NO
Neutrality NO NO YES YES
24. How did the framework of Philippine Standards on Auditing conceptually describe
assurance?
25. It provides a threshold or cutoff point rather than being a primary qualitative
characteristic which information must have if it is to be useful.
A. Materiality
B. Reliability
C. Relevance
D. Misstatement
QUIZZERS
1. The difference between what the public expects to get from the audited financial
statements and what the public is actually getting is known as:
A. Credibility gap
B. Audit gap
C. Expectation gap
D. Level of assurance gap
2. Which of the following statements does not properly describe an element of the
theoretical framework of auditing?
4. Which of the following does not describe a condition that creates a demand for
auditing?
A. General competence
B. Familiarity with the particular industry in which each client operates
C. Due professional care
D. Independence
7. Which of the following best describes the main reason why the independent
auditor‘s report on an entity‘s financial statements?
A. determine whether the financial statements fairly present the client entity‘s
operations.
B. evaluate the feasibility of attaining the client entity‘s operational objectives.
C. make recommendations to client for improving its performance.
D. report on the entity‘s relative success in maximizing its profits.
11. Which of the following types of audit is performed in order to determine whether
an entity‘s financial statements are fairly stated, in all material respects in
conformity with the generally accepted accounting principles?
A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Performance audit
13. Which of the following types of audit uses laws and regulations as its criteria?
A. Operational audit
B. Financial statements audit
C. Compliance audit
D. Financial audit
14. Which of the following types of auditing is performed most commonly by CPAs
on a contractual basis?
A. Internal auditing
B. Government auditing
C. BSP bank audit
D. External auditing
15. The primary goal of the CPA in performing the attest function is to
A. detect fraud.
B. examine individual transactions that the auditor may certify as to their
validity.
C. determine whether the client‘s assertions as embodied in the financial
statements are fairly stated.
D. assure the consistent application of correct accounting procedures.
16. An independent audit goal aids in the communication of economic data because
the audit
D. assures the readers of financial statements that any fraudulent activity has
been detected and its effect has been corrected.
18. The assumption underlying an audit of financial statements is that they will be
used by
A. recognition of independence.
B. basic competence at the time the certificate is granted.
C. culmination of the education process.
D. membership in the PICPA.
A. information risk.
B. business risk.
C. the risk-free interest rate.
D. all of these.
A. voluminous data.
B. biases and motives of the provider of information.
A. audit.
B. review.
C. compilation.
D. management consulting.
A. total assurance that all material errors and irregularities have been found.
B. high level of assurance that all material errors and irregularities have been
found.
C. a low level of assurance that all material errors and irregularities have been
found.
D. no assurance that all material errors and irregularities have been found.
26. The single feature that most clearly distinguishes auditing, attestation, and
assurance is the
27. Which of the following attributes is more closely associated with assurance
services performed by a CPA firm than with other lines of professional work?
A. Integrity
B. Competence
C. Independence
D. Keeping informed on current professional developments.
A. Any disputes over significant accounting issues have been settled to the
auditor‘s satisfaction.
B. The auditor is satisfied that Silver‘s operationally efficient.
C. Informative disclosures in the financial statements but not necessarily in the
notes to financial statements are to be regarded as reasonably adequate.
D. The auditor has ascertained that Silver‘s financial statements have been
prepared accurately.
29. A CPA should maintain objectively and be free of conflicts of interest when
performing:
30. A summary of findings rather than assurance is most likely to be issued n which
engagement?
A. Agreed-upon
B. Compilation
C. Examination
D. Review
31. Which of the following professional has primary responsibility for the
performance of an audit?
32. Which of the following services provides the highest level of assurance to third
parties about a company‘s financial statements?
A. Audit
B. Review
C. Compilation
D. Each of the above provides the same level of assurance
A. Adverse opinion
B. Disclaimer of opinion
C. Qualified opinion
D. Unqualified opinion
A. Quality control
B. Generally accepted auditing standards which include concept of materiality
C. The auditor‘s evaluation of the audited company‘s internal control
D. Philippine Financial Reporting Standards
37. Which one of the following is an example of management expectations from the
independent auditor?
38. When providing consulting services, the CPA acts primarily as a(n):
A. independent accountant.
B. expert on compliance with industry standards.
C. technology specialist.
D. objective advisor on how to use the information.
A. improve the quality of information, or its context, for better use of the
decision makers
B. recommend how to use the information.
C. perform market analysis and cost estimates.
D. states a conclusion about a written assertion.
42. Because the client company pays the external auditor a professional fee, he
49. The audit committee of the board of directors of a company is responsible for:
A. Governance
B. Reliability
C. Relevance
D. Timeliness
A. assertions.
B. operating data.
C. financial statements.
D. economic data.
55. The expertise that distinguishes auditors from accountants is in terms of the
57. Attestation risk is limited to a low level in which of the following engagement(s)?
58. An engagement in which a CPA firm arranges for a critical review of its practices
by another CPA firm is referred to as a(n):
60. The risk associated with a company‘s survival and profitability is referred to as:
A. Business risk
B. Information risk
C. Detection risk
D. Control risk
61. An operational audit differs in many ways from an audit of financial statements.
Which of the following is the best example of these differences?
A. The unusual audit financial statement covers the four basic financial
statements whereas the operational audit is usually limited either the balance
sheet or the income statement.
B. The boundaries of an operation audit are often drawn from an organization
chart and are not limited to a single accounting period.
62. The audit of historical financial statements should be conducted by the CPA
professionals in accordance with
A. the management of the audit client because the auditor is hired and paid by
management.
B. the audit committee to the audit client because that committee is responsible
for coordinating and reviewing all audit objectives within the company.
C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it determines
auditing standards and auditor‘s responsibility.
66. Which of the following would not represent one of the primary problems that
would lead the users to demand for independent audits of a company‘s financial
statements?
68. Which of the following is the broadest and most inclusive concept?
B. Compilation report
C. Examination report
D. Review report
73. The risk associated with a company‘s survival and profitability is referred to as:
A. Business risk
B. Information risk
C. Detection risk
D. Control risk
74. An engagement in which a CPA firm arranges for a critical review of its practices
by another CPA firm is referred to as a(n):
75. Attestation risk is limited to a low level in which of the following engagement(s)?
76. An operational audit differs in many ways from an audit of financial statements.
Which of the following is the best example of these differences?
A. The unusual audit financial statement covers the four basic financial
statements whereas the operational audit is usually limited either the balance
sheet or the income statement.
B. The boundaries of an operation audit are often drawn from an organization
chart and are not limited to a single accounting period.
C. Operation audits do not ordinarily result in preparation of a report.
D. The operational audit deals with pre-tax income.
79. Which of the following professionals has primary responsibility for the
performance of an audit?
81. The auditor of financial statements must make very difficult interpretations
regarding authoritative literature. Additionally, the auditor must
82. Which one of the following is not a part of the attest process?
83. Which one of the following is not a reason why the users of financial statements
desire for an independent assessment of the financial statement presentation?
A. Internal auditing
B. Financial auditing
C. Assurance services
D. Attestation services
85. An audit which determines whether organizational policies are being followed nd
whether external mandates are being met is known as
A. A financial audit
B. A compliance audit
C. An operational audit
D. None of the above
87. May a CPA hire for the CPA‘s public accounting firm a non CPA system analyst
who specializes in developing computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist‘s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate the
specialist‘s end product.
C. No, because non CPA professionals are not permitted to be associated with
CPA firms in public practice.
D. No, because developing computer systems is not recognized as a service
performed by public accountants.
88. Which of the following services may a CPA perform in carrying out a consulting
service for client?
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
89. Which of the following describes how the objective of a review of financial
statements differs from the objective of a compilation engagement?
90. Which of the following factors most likely would cause a CPA to decline a new
audit engagement?
A. The CPA does not understand the entity‘s operations and industry.
B. Management acknowledges that the entity has had recurring operating
losses.
C. The CPA is unable to review he predecessor auditor‘s working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
MODULE 2
AUDITING STANDARDS
3. The auditor‘s responsibility for the detection of client's noncompliance with laws
and regulation is
6. An auditor who accepts an audit engagement but does not possess the industry
expertise of the business entity should
A. Engage financial experts familiar with the nature of the business entity.
B. Obtain a knowledge of matters that relates to the nature of the entity's
business.
C. Refer a substantial portion of the audit to another CPA who will act as the
principal auditor
D. First inform the Client management that on unqualified opinion cannot be
issued.
7. Auditors focus on
A. They are guides intended to set forth auditing procedures that are applicable
to a variety of situations.
B. They are procedural outlines which are intended to narrow down the areas of
inconsistency and divergence of auditor‘s opinion.
C. They are authoritative statements, enforced through the Code of
Professional Conduct, that are intended to limit the degree of auditor's
judgment.
D. They are interpretations which are intended clarify the meaning of "generally
accepted auditing standards.‖
10. An auditor need not abide by, a Philippines Standard on Auditing if the auditor
believes that
A. statutory in nature
B. rules imposed by the securities exchange commission
C. rules imposed by the picpa
D. general guidelines to help the auditors.
12. Though PSAs do not provide ―hard and fast rules‖ they provide subjective
guidance which allow the auditors to:
13. Every independent audit engagement involves both auditing standards and
auditing procedures. The relationship between the two may be illustrated by how
they apply from management to engagement. The best representation of this
application is that, from one audit engagement to the next.
C. PFRS are promulgated by the SEC, while GAAS are promulgated by the
FRSC
D. When PFRS are violated sufficiently strong GAAS may make up for most
PFRS deficiencies
15. The Philippine Standards on Auditing issued by the Auditing and Assurance
Standards Council (AASC).
16. Competence as a certified public accountants includes all of the following except
17. In any case in which the incoming accountant is not qualified to perform the work,
a professional obligation exists to
18. Ultimately, the decision about whether or not an auditor is independent must be
made by the
A. auditor
B. audit committee
C. client
D. public
A. cannot place any reliance on the client's verbal and written assertion
B. is responsible only to third-party users of the financial statements.
C. cannot perform any other professional services for an audit client
D. must be impartial when dealing with the client
20. What is the meaning of the generally accepted auditing standard that requires
that the auditor the auditor be independent?
A. the auditor must be without bias with respect to the client entity.
B. the auditor must adopt a critical attitude during the audit.
C. the auditor‘s sole obligation is to third parties.
D. the auditor may have a direct ownership in the client‘s business if it is not
material.
22. Which of the following best describes why publicly-traded corporations follow the
practice of having the outside auditor appointed by the board of directors or
elected by the stockholders?
A. minimizes risk.
B. helps achieve public confidence
C. defends against professional liability
D. achieves compliance with the standards of fieldwork
24. If the client refuses to accept an audit report that is qualified due to a known
existence of noncompliance to laws and regulation, the auditor should:
25. Which of the following is not required by the Generally Accepted Auditing
Standard that states that due professional care is to be exercised in the
performance of the audit?
29. Which of the following best describes the reference to the expression ―taken as a
whole‖ in the fourth generally accepted auditing standard of reporting?
31. Which of the following is required by the Generally Accepted Auditing Standard
that states that du professional care is to be exercised in the performance of an
audit?
32. A CPA who has been retained by a client that operates in an industry that is
totally new to him.
33. Which of the following is the best statement concerning the concept of
materiality?
34. The first standard of field work, which states that the work is to be adequately
planned and assistants, if any, are to be properly supervised, recognizes that
35. Which of the following underlies the application of generally accepted auditing
standards, particularly the standards of fieldwork and reporting?
A. The attestation standards provide a framework for the attest function beyond
historical financial statements.
B. The requirement that the practitioner be independent in mental attitude is
omitted from the attestation standard
C. The attestation standards do not permit an attest engagement to be part of a
business acquisition study or a feasibility study
D. None of the standards of fieldwork in generally accepted auditing standards
are included in the attestation standards.
38. The auditor‘s judgment concerning the overall fairness of the presentation of
financial position, results of operations, and changes in financial position is
applied within the framework of
39. The auditor communicates the results of his or her work through the issuance of:
A. Engagement letter
B. Management letter
C. Audit report
D. Financial statements
A. III, I, IV, II
B. III, IV, I, II
C. II, III, IV, I
D. I, IV, III, II
MODULE 3
1. The revised Code of Ethics is mandatory for all CPAs and is applicable to professional
services performed in the Philippines on or:
2. Which of the following is not explicitly referred to in the Code of Ethics as source of technical
standards?
A. Parent
B. Sibling
C. Non-dependent child
D. Spouse
A. Parent
B. Sibling
C. Non-dependent child
D. Spouse
7. The term professional accountant in public practice includes the following except:
A. A professional accountant in public practice to whom the existing has referred tax
engagement.
B. A professional accountant in public practice to whom the client of the existing accountant
has referred audit engagement.
C. A professional accountant in public practice who is consulted in order to meet the needs
of the client.
D. A professional accountant in public practice currently holding an audit appointment or
carrying out accounting, taxation, consulting or similar professional services for a client.
9. Related entity is an entity that has any of the following relationships with the client, except:
A. An entity that has direct or indirect control over the client provided that the client is
material to such entity.
B. An entity with a direct financial interest in the client even though such entity has no
significant influence over the client provided the interest in the client is material to such
entity.
C. An entity over which the client has direct or indirect control.
D. An entity which is under common control with the client (referred to as a ―sister entity‖)
provided the sister entity and the client are both material to the entity that controls both
the client and sister entity.
10. A primary purpose for establishing a code of ethics within a professional organization is to:
11. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in
the Philippines?
A. Professional accountants refer to persons who are registered in the PRC AS Certified
Public Accountants (CPA) and who hold a valid certificate issued by the Board of
Accountancy.
B. Where a national statutory requirement is in conflict with a provision of the IFAC Code,
the IFAC Code requirement prevails.
C. The Code of Ethics for Professional Accountants in the Philippines is mandatory for all
CPAs and is applicable to professional services performed in the Philippines on or after
June 30, 2008.
D. Professional accountants should consider the ethical requirements as the basic
principles, which they should follow in performing their work.
12. The communication to the public of facts about a professional accountant, which are not
designed for the deliberate promotion of that professional accountant.
A. Publicity
B. Indirect Promotion
C. Advertising
D. Solicitation
A. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.
B. The approach to a potential client for the purpose of offering professional services.
C. The communication to the public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring professional
business.
D. Any of the given choices.
14. The following bodies develop and or issue technical and professional standards for
implementation:
I. Board of Accountancy
II. II. National Economic Development Authority
III. Financial Reporting Standards Council
IV. Securities and Exchange Commission
V. Auditing and Assurance Standards Council
VI. Cooperative Commission of the Philippines
According to the revised code of ethics for CPAs, which of the foregoing are sources of
technical and professional standards in the Philippines?
A. I, III, IV, V
B. I, III, IV, V, VI
C. I, III, IV
D. All of them
What should be the logical pattern of the foregoing development for a professional accountant?
16. Which of the following is least likely the basis of determining audit fees?
A. The skill and knowledge required for the type of work involved.
B. The degree of responsibility ad urgency that the work entails.
C. The expected outcome of the engagement.
D. The required level of training and experience of the persons engaged on the work.
17. Which of the following is not allowed by the revised code of ethics?
18. How frequent can a professional accountants have press and other media releases
commemorating their anniversaries in public practice by informing the public of their
achievements or accomplishments in contributing toward nation building or enhancing the
image r standards of the accounting profession?
A. 2 years
B. 3 years
C. 5 years
D. 6 years
19. Which of the following is not allowed to be included in a website of a firm of professional
accountants?
20. In their fiduciary role, the professional accountants owe their primary loyalty to:
A. A drive to excellence
B. Acceptance of the responsibility to act in the public interest
C. Professional objectivity
D. Professional skepticism
22. Which statement is incorrect regarding the Code of Ethics for Professional Accountants in
the Philippines?
A. The objectives as well as the fundamental principles are of a general nature and are not
intended to be used to solve a professional accountant‘s ethical problems in a specific
case.
B. The code is divided in two parts, part A and part B.
C. Part A applies to all professional accountants unless otherwise specified.
D. Part B applies only to those professional accountants in public practice.
23. A professional accountant should comply with relevant laws and regulations and should
avoid any action that discredits the profession. This is a fundamental principle of:
A. Objectivity
B. Professional competence and due care
C. Professional behavior
D. Integrity
24. The IFAC Code of Professional Conduct will ordinarily be considered to have been violated
when the member represents that specific consulting services will be performed for a stated fee
and it is apparent at the time of the representation that the
25. Which of the following is not one of the fundamental principles of ethical conduct for
professional accountants?
A. Integrity
B. Confidentiality
C. Loyalty
D. Professional competence and due care
26. To what fundamental principle does the following statement best fit? A professional
accountant is likened to a prudent father to his son.
A. Objectivity
B. Professional behavior
C. Confidentiality
D. Integrity
28. Which of the following is required to comply with the fundamental principle of professional
competence and due care?
A. A professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgment.
B. A professional accountant should act diligently and in accordance with technical and
professional standards when providing professional services.
C. A professional accountant should comply
D. The accountant should observe fair dealings and truthfulness.
29. ―A professional accountant should be straight-forward and honest in all his professional and
business relationships.‖ This description appropriately describes the fundamental principle of:
A. Integrity
B. Objectivity
C. Confidentiality
D. Professional Behavior
30. It is essential that uses of the audited financial statements regard CPA firms as
A. Competent
B. Unbiased
C. Technically proficient
D. All of the given choices
31. The Code of Professional Ethics states, in part, that a CPA should maintain integrity and
objectivity. Objectivity refers to the CPA‘s ability to
32. Which of the following values is not necessary for a professional accountant?
A. Honesty
B. Objectivity
C. Integrity
D. A primary commitment to self-interest
33. Which of the following is not a fundamental principle in codes of ethics for professional
accountants?
34. Which of the following statements about conceptual framework of the code of ethics is
incorrect?
A. It is impossible to define every situation that creates specific threats and and specify the
appropriate mitigating action.
B. A professional accountant should take qualitative but not quantitative factors into
account when considering the significance of a threat.
C. A professional accountant should take quantitative but not qualitative factors into
account when considering the significance of a threat.
D. All inadvertent violations of the code of Ethics, irrespective of their nature and
significance, always compromise compliance with the fundamental principles
A. The professional accountant may be deterred from acting objectivity by threats, actual or
perceived.
B. Because of a close relationship, a professional accountant becomes too sympathetic to
the interest of others.
C. The professional accountant should provides a position or opinion to the point that
subsequent objectivity may be compromised.
D. The professional accountant needs to be reevaluate his previous judgment.
37. A threat that prevents the professional accountant from acting objectively by threats, actual
or perceived.
A. Self-interest
B. Familiarity
C. Intimidation
D. Advocacy
38. A form of threat which may occur when a previous judgment needs to be reevaluated by the
professional accountant who is responsible for that judgment.
A. Self-interest threat
B. Self-review threat
C. Familiarity threat
D. Advocacy threat
40. It occurs when a firm or member of the assurance team could benefit from a financial
interest in, or other self-interest conflict with, an assurance client.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat
41. A financial interest beneficially owned through a collective investment vehicle, estate, trust
or other intermediary over which the individual or entity has no control.
A. Any bank account which is sued solely for the banking of clients‘ monies.
B. Any monies received by a professional accountant in public practice to be held or paid
out on the instruction of the person from whom or on whose behalf they are received.
C. A financial interest beneficially owned through a collective investment vehicle, estate,
trust or other intermediary over which the individual or entity has no control.
D. An equity interest or other security, debenture, loan or other debt instrument of an entity,
including rights and obligations to acquire such an interest and derivatives directly
related to such interest.
A B C D
control
44. Occurs when any product or judgment of a previous assurance engagement or non-
assurance engagement needs to be re-evaluated in reaching conclusions on the assurance
engagement or when a member of the assurance team was previously a director or officer of
the assurance client, or was an employee in a position to exert direct and significance influence
over the subject matter of the assurance engagement.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat
46. Safeguards created by the profession, legislation or regulation, include the following, except:
A. Educational, training and experience requirements for entry into the profession.
B. Continuing education requirements.
C. Legislation governing the independence requirements of the firm.
D. Policies and procedures that emphasize the assurance client‘s commitment to fair
financial reporting.
A. Advising partners and professional staff of those assurance clients and related entities
from which the must be independent.
B. Consulting an independent third party, such as committee of independent directors, a
professional regulatory body or another professional accountant.
C. Policies and procedures that will enable the identification of interests or relationships
between the firm or members of engagement teams and clients.
D. External review by a legally empowered third party of the reports, returns,
communications or information produced by a professional accountant.
48. Which of the following is not a safeguard created by the profession, legislation or regulation?
A. Professional standards
B. Professional and procedures to implement and monitor quality control of engagements.
C. Continuing professional development requirements
D. Educational, training and experience requirements for entry into the profession.
49. Safeguards may eliminate or reduce threats to an acceptable level. The following are
examples of these safeguards:
Which of the foregoing examples of safeguards is/ are classified firm-wide safeguards in the
work environment?
A. All of these
B. I and II
C. II and III
D. I and III
A. Integrity
B. Competence and due professional care
C. Objectivity
D. Professional behavior
51. Safeguards may eliminate or reduce threats to an acceptable level. The following are
examples of these safeguards:
Which of the foregoing examples of safeguards that can be applied is(are) created by the
profession, legislation or regulation?
A. I and III
B. II and Iv
C. I and IV
D. II and III
52. Which of the following examples of safeguards that may effectively reduce threats to
compliance with the fundamental of principles is created by the profession, legislation or
regulation?
54. As a resolution of the conflict in the application of fundamental principles, the auditor, after
considering the ethical issues and relevant facts may do any of the following except:
A. Integrity implies not merely honesty but fair dealing and truthfulness.
56. If a professional accountant is billing an audit client a number of hours greater than those
actually worked, which of the following fundamental principles is likely violated?
A. Objectivity
B. Integrity
C. Professional due care
D. Confidentiality
59. The underlying reason for a code of professional conduct for any profession is
A. the need for public confidence in the quality of service of the profession.
B. that it provides a safeguard to keep unscrupulous people out.
C. that it is required by the congress.
D. that it allows Professional Regulation Commission to have a yardstick to measure
deficient performance.
61. There are fundamental principles that the professional accountant has to observe when
performing assurance engagements. The requirement of which principle is of particular
importance in an assurance engagement in ensuring that the conclusion of the professional
accountant has value to the intended user?
A. Integrity
B. Confidentiality
C. Professional competence
D. Objectivity
62. If a professional accountant is auditing a public company and he receives from his client its
shares of stock as payment for his audit services, he will be violating the fundamental principle
of:
A. Integrity
B. Professional due care
C. Objectivity
D. Confidentiality
63. Which of the following is least likely an indication that the CPA violates the Integrity
principle? The CPA is associated with reports or information that:
A. The CPA issues a qualified opinion due to scope limitation because he fails to arrive at a
clear-cut conclusion.
B. Contains a materially false or misleading statement.
C. Omits or obscures information required to be included when such omission or obscurity
would make the information misleading,
D. Contains statements or information furnished recklessly.
64. Which of the following is the least required in attaining professional competence?
66. A professional accountant is auditing Maiden Company and providing consulting services to
Widow Company. Both clients are in the same industry. IF the professional accountant uses
specific information from Maiden‘s audit to prepare a business plan for Widow, he will be
violating the principle of:
A. Integrity
B. Professional behavior
C. Objectivity
D. Confidentiality
67. Which of the following statements is incorrect about the principle of confidentiality?
69. Which of the following may not be a professional duty to disclose confidential information?
70. The professional accountant has a professional duty or right to disclose confidential
information in each of the following, except
71. What kind of threat to noncompliance to fundamental principles is created if the professional
if the professional fees due from a financial statement audit client remain unpaid for a long time?
72. A CPA in public practice shall not disclose any confidential client information without the
specific consent of the client. The confidentiality rule is violated if the CPA discloses information
without a client‘s consent as a result of a
A. subpoena or summons
B. peer review
C. complaint filed with the trial board of the Board of Accountancy.
D. request from a client‘s largest stockholder.
73. The confidential relationship will be violated if, without the client‘s permission, the CPA
provides working papers about the client to
A B C D
77. If the firm is involved in the preparation of accounting records or financial statements and
those financial statements are subsequently the subject matter of an audit engagement of the
firm, this will most likely create
A. self-interest threat
B. self-review threat
C. intimidation threat
D. familiarity threat
78. Examples of circumstances that may create self-review threat least likely include
79. Family and personal relationships between a member of the assurance team and a director,
an officer or certain employees, depending on their role, of the assurance client, least likely
create
A. self-interest threat
B. self-review threat
C. intimidation threat
D. familiarity threat
80. A director, an officer or an employee of the assurance client in a position to exert direct and
significant influence over the subject matter of the assurance engagement has been a member
of the assurance team or partner of the firm. This situation least likely create
A. self-interest threat
B. advocacy threat.
C. intimidation threat.
D. familiarity threat.
81. A former officer, director or employee of the assurance client serves as a member of the
assurance team. This situation will least likely create
A. self-interest threat.
B. self-review threat.
C. intimidation threat.
D. familiarity threat.
83. The provision of services by a firm or network firm to an audit client that involve the design
and implementation of financial information technology systems that are used to generate
information forming part of a client's financial statements may most likely create
A. self-interest threat.
B. self-review threat.
C. intimidation threat.
D. familiarity threat.
84. Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance client's position or opinion to the point that objectivity may, or may be
perceived to be, compromised. Such may be the case if a firm or a member of the assurance
team were to subordinate their judgment to that of the client.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat.
D. Familiarity threat
85. A CPA-lawyer, acting as a legal counsel to one of his audit client, is an example of
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat
87. Occurs when, by virtue of a close relationship with an assurance client, its directors, officers
or employees, a firm or a member of the assurance team becomes too sympathetic to the
client‘s interests.
A. Self-interest threat
B. Self-review threat
C. Advocacy threat
D. Familiarity threat
88. Examples of circumstances that may create familiarity threat least likely include
A. a member of the assurance team having an immediate family member or close family
member who is a director or officer of the assurance client.
B. a member of the assurance team having an immediate family member or close family
member who, as an employee of the assurance client, is in a position to exert direct and
significant influence over the subject matter of the assurance engagement.
C. a former partner of the firm being a director, officer of the assurance client or an
employee in a position to exert direct and significant influence over the subject matter of
the assurance engagement.
D. dealing in, or being a promoter of, share or other securities in an assurance client.
89. Consideration of the nature of the safeguards to be applied will be affected by matters such
as the
A B C D
90. The safeguards available to eliminate the threats or reduce them to acceptable level include
A B C D
91. Safeguards within the firm's own systems and procedures, include the following, except:
A. Firm leadership that stresses the importance of independence and the expectation that
members of assurance teams will act in the public interest.
B. External review of a firm's quality control system.
C. Policies and procedures to implement and monitor quality control of assurance
engagements.
D. Policies and procedures that will enable the identification of interests or relationships
between the firm or members of the assurance team and assurance clients.
92. Safeguards within the assurance client, include the following, except
93. In determining estimates of fees, an auditor may take into account each of the following,
except the:
94. The Code of Professional Conduct would be violated if a member accepted a fee for
services and the fee was
95. In the marketing and promotion of themselves and their Work professional accountants
should:
98. For assurance engagements provided to an audit client, the following should be
independent of the client:
A B C D
99. Using partners who do not report to the audit partners for the provision of non-assurance
services to an audit client is an example of:
A. Safeguards reducing the risk of conflict of interest created by the profession, legislation,
or regulation.
B. Safeguards reducing the risk of conflict of interest within a client.
C. Safeguards reducing the risk of conflict of interest within a professional accounting firm.
D. All of these.
100. The recommendation for the appointment of the external auditors by the audit committee is
an example of:
A. Safeguards reducing the risk of conflict of interest created by the profession, legislation,
or regulation.
B. Safeguards reducing the risk of conflict of interest between an auditor and the
management.
C. Safeguards reducing the risk of conflict of interest within a professional accounting firm's
own systems and procedures.
D. All of these
101. For assurance engagements provided to clients that are not clients, when the report is not
expressly restricted for by identified users, the following should be independent of the client:
A B C D
A B C D
104. The firm should be independent of the client in the following engagements:
A B C D
105. When the safeguards available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or
interest creating the threat, the only course of action available will be the
A. The period of the engagement starts when the tesurance team begins to perform
assurance services and ends when the assurance report is issued, except when the
assurance engagement is of a recurring nature.
B. If the assurance engagement is expected to recur, the period of the assurance
engagement ends with the notification by either party that the professional relationship
has terminated or the issuance of the final assurance report, whichever is earlier.
C. In the case of an audit engagement, the engagement period includes the period covered
by the financial statements reported on by the firm.
D. When an entity becomes an audit client during or after the period covered by the
financial statements that the firm will report on, the firm should consider whether any
threats to independence may be created by previous services provided to the audit
client.
107. If a member of the assurance team, or their immediate family member, has a direct
financial interest, or a material indirect financial interest, in the assurance client, the self-interest
threat created would be so significant that the only safeguards available to eliminate the threat
or reduce it to an acceptable level would be to (choose the incorrect one)
A. dispose of the direct financial interest prior to the individual becoming a member of the
assurance team.
B. dispose of the indirect financial interest in total prior to the individual becoming a
member of the assurance team.
C. dispose of a sufficient amount of the indirect financial interest so that the remaining
interest is no longer material prior to the individual becoming a member of the assurance
team.
D. limit the participation of the member of the assurance team.
108. If a member of the assurance team, or their immediate family member receives, by way of,
for example, an inheritance, gift or, as a result of a merger, a direct financial interest or a
material indirect financial interest in the assurance client, a self-interest threat would he created.
The following safeguards should be applied to eliminate the threat or reduce it to acceptable
level:
109. When a member of the assurance team knows that his or her close family member has a
direct financial interest or a material indirect financial interest in the assurance client, a self-
interest threat may be created. Safeguards least likely include:
A. The close family member disposing of all or a sufficient portion of the financial interest at
the earliest practical date.
B. Discussing the matter with those charged withgovernance, such as the audit committee.
C. Involving a professional accountant who took part in the assurance engagement to
review the work done by the member of the assurance team with the close family
relationship or otherwise advice as necessary
D. Removing the individual from the assurance engagement.
110. When a firm or a member of the assurance team holds a direct financial interest or a
material indirect financial interest in the assurance client as a trustee a self-interest threat tray
created by the possible influence of the trust over the assurance client. Accordingly, such an
interest cannot be held when:
A. The member of the assurance team, an immediate family member of the member of the
assurance team, and the firm are beneficiaries of the trust.
B. The interest held by the trust in the assurance client is not material to the trust.
C. The trust is not able to exercise significant influence over the assurance client.
D. The member of the assurance team or the Jinn does not have significant influence over
any investment decision involving a financial interest in the assurance client.
A. The firm, and the network firm, has established policies and procedures that require all
professionals to report promptly to the firm any breaches resulting from the purchase,
inheritance or other acquisition of a financial interest in the assurance client.
B. The firm, and the network firm, promptly notifies the professional that the financial
interest should be disposed of.
C. The disposal occurs at the earliest practical date after identification of the issue, or the
professional is removed from the assurance team.
D. All of the given choices.
112. The following self-interest threat created would be so significant no safeguard could reduce
the threat to an acceptable level, except
A. If a firm, or a network firm, has a direct financial interest in an audit client of the firm.
B. If a fir, or a network firm, has a material indirect financial interest in an audit client of the
firm.
C. If a firm, or a network firm, has a material financial interest in an entity that has a
controlling interest in an audit client.
D. If the retirement benefit plan of a firm, or network firm, has a financial interest in an audit
client
113. If a firm, or a network firm, has a direct financial interest in an audit client of the firm, the
self-interest threat created would be so significant no safeguard could reduce the threat to an
acceptable level. The action appropriate to permit the firm to perform the engagement would be
to
114. If a firm, or a network firm, has a. direct financial interest in a financial statement audit
client of the firm, the appropriate safetuard against the self-interest threat created would be-
115. If a firm, or a network firm, has a material financial interest in an entity that has a controlling
interest in a financial statement audit client, the self interest threat created is so significant. The
audit firm can only perform the engagement if it:
A. Either I or II
B. Neither I or II
C. I only
D. II only
116. Which of the following safeguards is inappropriate if a firm has a material financial interest
in an entity that has a controlling interest in a financial statement audit client?
A. Discuss the presence of self-interest threat with the client's board of directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the financial interest in
total.
117. The retirement benefit plan of a firm, or a network firm, has a financial interest in a financial
statement audit client. If the self-interest threat that is created by the financial interest is
significant, the firm that intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no longer material
B. Discuss the matter with the audit committee of the financial statement audit client.
C. Refer the audit of the stockholders' equity of the financial statement audit client to other
CPA.
D. Either dispose of the financial interest in total or a sufficient amount so that the
remaining amount is no longer material.
118. The following loans and guarantees would not create a threat to independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures, terms
and requirements and the loan is immaterial to both the firm and the assurance client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
C. Deposits made 1* or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the deposit
or account is held under normal commercial terms.
D. If the firm, or a member of the assurance team, makes a loan to an assurance client that
is not a bank or similar institution, or guarantees such an assurance clients‘ borrowings
119. Examples of close business relationships that may create self_ interest and intimidation
threat least likely include:
120. When a firm or a member of the assurance team and the audit client or one of its officers
hold interest in a closely-held entity, a . threat to independence is not created, except:
A. The relationship is clearly insignificant to the member of the assurance team and the
audit client.
B. The relationship is other than insignificant acceptable for indirect financial interest.
C. The interest held is immaterial to the investors or group of investors.
D. The interest does not give the investor, or group the ability to control the closely-held
entity.
121. When an immediate family member of a member of the assurance team is a director or an
officer of the assurance client in a position to exert diret and siginficant infuence over the subject
matter information of the engagement, the threat to independence can only be reduced to an
acceptable level, aside from withdrawing from the engagement, by:
122. Which of the following relationships is most likely to impair a CPA's independence with
respect to a particular audit client on which the CPA works as a member of the engagement
team?
A. A close relative has a material investment in that client of which the CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA is not aware.
C. The CPA's father is the president of the audit client.
D. The CPA's spouse participates in a savings plan sponsored by the client.
123. An inadvertent violation of the rules on family and personal relationships would not impair
the independence of a firm or a member of the assurance team when:
A. The firm has established policies and procedures that require all professionals to report
promptly to the firm any breaches resulting from changes in the employment status of
their immediate or close family members or other personal relationships that create
threats to independence.
B. Either the responsibilities of the assurance team are re-structured so that the
professional does not deal with matters that are within the responsibility of the person
with whom he or she is related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.
124. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats created is
least likely affected by.
125. Using the same senior personnel on an assurance engagement over a long period of time
may create a familiarity threat. The significance of the threat will least likely depend upon.
A. The length of time that the individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.
126. A small CPA firm provides audit services to a large local company. Almost 80 percent of
the CPA firm's revenues come from this client. Which statement is most likely to be true?
127. A professional accountant has been the partner-in-charge of a particular audit client for the
past eight years. This situation could result to the following threat to professional independence:
A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity
128. Which statement is incorrect regarding long association of senior personnel with audit
clients that are listed entities?
A. Using the same lead engagement partner on an audit over a prolonged period may
create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined period, normally no
more than six years.
C. A partner rotating after a pre-defined period should not participate in the audit until a
further period of time, normally two years, has elapsed.
D. When audit client becomes a listed entity the length of time the lead engagement partner
has served the audit client in that capacity should be considered in determining when the
partner should be rotated.
129. The professional accountant who has been the lead engagement partner for an audit
engagement for a prolonged period of time may continue to serve as the lead engagement
partner before rotating off the engagement for how many years after the audit client becomes a
listed entity?
A. One year
B. Three years
C. Two years
D. Four years
130. While the lead engagement partner should be rotated after such a pre-defined period,
some degree of flcxibihty over timing of rotation may be necessary in certain circumstances.
Examples of such circumstances include:
A. Situations when the lead engagement partner's continuity is especially important to the
audit client, for example, when there will be major changes to the audit client's structure
that would otherwise coincide with the rotation of the lead engagement partner.
B. Situations when, due to the size of the firm, rotation ip not possible or does not constitute
an appropriate safeguard.
C. Both choices are correct.
D. Both choices are incorrect.
131. A CPA can continue to be an engagement partner on the audit financial statements of
listed entities over a prolonged petioci Of engagement. In order to avoid a creation of familiarity
threat of subject to transitional provisions, how many years are prescribed by the as maximum
for the CPA to continue serving as engagement partner for a listed entity?
A. Five years
B. Three years
C. Seven years
D. Ten years
132. An engagement partner who is rotated in the audit of financial statements of listed entity
can only participate in the audit engagement for the same client after a period of:
A. Twelve months
B. two yen
C. Three years
D. Five years
133. While the engagement partner for an audit of financial statements of listed entities should
be rotated after a predefined period, some degree of flexibility over the timing of rotation maybe
necessary. How many years are allowed as transitional period for the rotation?
A. Six months
B. One year
C. Two years
D. Three years
134. The following activities would generally create self-interest or self-review threats
that are so significant and that only avoidance of the activity or refusal to perform the
assurance engagement would reduce the threats to an acceptable level, except
136. If firm, or network firm, personnel providing such assistance make management decisions,
the self-review threat created could not be reduced to an acceptable level by any safeguards.
Examples of such managerial decisions include the following, except
137. The following services are considered to be a normal part of the audit process and do not,
under circumstances, threaten independence, except
138. If the firm is involved in the preparation of accounting records or financial statements and
those financial statements are subsequently the subject matter of an audit engagement of the
firm, this will most likely create
A. Self-interest threat
B. Intimidation threat
C. Self-review threat
D. Familiarity threat
139. The firm, or a network firm, may provide an audit client that is not a listed entity with
accounting and bookkeeping services, including payroll services, of a routine or mechanical
nature, provided any self-review threat created is reduced to an acceptable level. Examples of
such services least likely include:
A. Recording transactions for which the audit client has determined or approved the
appropriate account classification.
B. Posting coded transactions to the audit client's general ledger.
C. Preparing financial statements based on information in the trial balance.
D. Determining and posting journal entries without obtaining the approval of the audit client.
140. The safeguards necessary to reduce the threat created by providing accounting and
bookkeeping services to an audit client that is not a listed entity to an acceptable level might
include the following, except:
A. Making arrangements so that such services are not performed by a member of the
assurance team.
B. Implementing policies and procedures to prohibit the individual providing such services
from making any managerial decisions on behalf of the audit client.
C. Requiring the source data for the accounting entries to be orignated by the assurance
team
D. Obtaining audit client approval for any proposed journal entries or other changes
affecting the financial statements.
141. The provision of accounting and bookkeeping senrs of a routine or mechanical nature to
divisions or subsidiariesice of listed audit clients would not be seen as impairing independence
with respect to the audit client provided that the following conditions are met, except:
B. The divisions or subsidiaries for which the service is provided are collectively immaterial
to the audit client.
C. The services provided are collectively immaterial to the division or subsidiary. D. The
fees to the firm, or network firm, from such services are collectively significant.
142. The provision of accounting and bookkeeping services to audit clients in emergency or
other unusual situations, when it is impractical for the audit client to make other arrangements,
would not be considered to pose an unacceptable threat to independence provided:
A. The firm, or network firm, does not assume any managerial role or make any managerial
decisions.
B. The audit client accepts responsibility for the results of the work.
C. Personnel providing the services are not members of the assurance team.
D. All of the given choices.
143. If the valuation services involves the valuation of matters material to the financial
statements and the valuation involves a significant degree of subjectivity, the self-review threat
created (choose the incorrect one)
144. The following would generally create a significant threat to independence, except:
A. When a firm, or a network firm, performs a valuation service for an audit client for the
purpose of making a filing or return to a tax authority.
B. The firm provides formal taxation opinions and assistance in • the resolution of tax
disputes to an audit client.
C. The firm renders internal services involving an extension of the procedures required to
conduct an audit in accordance with Philippine Standards on Auditing to an audit client.
D. When a firm, or a network firm, provides assistance in the performance of a client's
internal audit activities or undertakes the outsourcing of some of the activities.
145. Which of the following may least likely create a self-review threat?
146. Which of the following is least likely considered to create a threat to independence?
A. The provision of services by a firm or network firm to an audit client which involve either
the design or the implementation of financial information technology systems that are
used to generate information forming part of a client's financial statements.
B. The provision of services in connection with the assessment, design and implementation
of internal accounting controls and risk management controls.
C. The lending of staff by a firm, or network firm, to an. audit client when the individual is in
a position to influence the preparation of a client's accounts or financial statements.
D. The provision of litigation support services to an audit client which include the estimation
of the possible outcome and thereby affects the amounts or disclosures to be reflected in
the financial statements.
147. The lending of staff by a firm to a financial statement audit client may be made only on the
understanding that the firm's personnel will not be involved in the following, except:
148. Which of the following is not a factor to evaluate the effect of litigation support services
rendered by a firm to an audit client?
150. The provision of legal services to financial statement auait clients most likely di edit a(an).
A. Familiarity threat
B. Self-interest threat
C. Advocacy threat
D. Intimidation threat
151. When the firm provides legal services to support a financial statement audit client in the
execution of corporate restructuring the threat created can be reduced to an acceptable level
provided that:
A. Members of the assurance team who are involved in providing the services are given
reduced participation in providing assurance service.
B. The advice provided was of the assurance team
C. The staff who makes ultimate decision is not a member of the
D. In relation to the advice provided, the audit client makes the ultimate decision.
A. Acting for an audit client in the resolution of a dispute or litigation in such circumstances
when the amounts involved are material in relation to the financial statements of the
audit client.
B. When a firm is asked to act in an advocacy role for an audit client in the resolution of a
dispute or litigation in circumstances when the amounts involved are not material to the
financial statements of the audit client.
C. The appointment of a partner or an employee of the firm or network firm as General
Counsel for legal affairs to an audit client.
D. None of them.
153. The recruitment of senior management for an such as those in a position to affect the
subject of the assurance engagement may least likely create:
A. Self-interest threat
B. Intimidation threat
C. Advocacy threat
D. Familiarity threat
154. Which of the following corporate finance services create advocacy or seif-review threats
cannot be reduced to an acceptable level?
A. The total fees generated by an assurance client represent a large proportion of a firm's
total fees.
B. Fees due from an assurance client for professional services remain unpaid for a long
time.
C. A firm obtains an assurance engagement at a significantly lower fee level than that
charged by the predecessor firm, or quoted by other firms.
D. A court or other public authority is the one that established the fees.
156. A client company has not paid its 2008 audit fees. According to the Code of Professional
Conduct, for the auditor to be considered independent with respect to the 2009 audit, the 2008
audit fees must be paid before the
157. When a firm obtains an assurance engagement at a significantly lower professional fee
than that charged by the predecessor firm, or quoted by other firms, a(an):
158. Fees calculated on a predetermined basis relating to the outcome or result of a transaction
or the result of the work preformed.
A. Contingent fees
B. Flat sum fees
C. Retainer fees
D. Per diem fees
A. The fees generated by the assurance client represent a large proportion of the revenue
of an individual partner.
B. The firm charges a contingent fee to an assurance client.
C. Accepting gifts or hospitality, the value of which is clearly insignificant, from an
assurance client.
D. When litigation takes place, or appears likely, between the firm or a member of the
assurance team and the assurance client.
160. Which of the following does not create a self-interest threat to independence?
A. An audit of an insurance company is engaged by the assurance client based upon the
instruction from the Office of Insurance Commission. The audit fee is contingent upon
the assessment by the Office of Insurance Commission of the liquidity of the company.
B. An audit fee on an assurance client that is outstanding for two years.
C. An assurance engagement with a fee significantly lower than the fee quoted by other
firm.
D. A litigation between the firm and the assurance client that relates to a prior assurance
engagement involving a breach of contract.
161. When litigation takes place between the firm and the assurance client, the firm and the
client management may be placed in adversarial positions and the firm may face a self-interest-
threat. Which of the following is least likely a factor in determining the Significance of the threat
created by this litigation?
162. When independence is threatened by litigation between the member of the assurance
team and the client management, the following safeguards that can reduce the effect to an
acceptable level may be applied, except:
A. Involve an additional professional accountant in the firm who is not a member of the
assurance team to review the work done.
B. Disclose to the audit committee, or others charged with governance, the extent and the
nature of the litigation.
C. Remove the particular member of the assurance team who is involved in litigation hum
cite engagement.
D. Submit a new engagement letter.
163. Which of the following threats to independence is least likely considered a result of the
firm's service of recruiting senior managers for an assurance client?
A. Self-interest threat
B. Familiarity threat
C. Intimidation threat
D. Self-review threat
164. Which of the following combination of threats to independence is most likely to occur as a
result of the provision of corporate finance services advice or assistance to an assurance client?
165. Which of the following is not allowed to be included in a website of a firm of professional
accountants?
166. The set of rules and regulations promulgated in 2004 for the "supervision, control and
regulation" of the practice of Accountancy in the Philippines.
167. The objectives of the Philippine Accountancy Act of 2004 are the following except:
168. A document under seal issued to an individual by the Professional Regulation Commission
signifying that he has complied with all the legal and procedural requirements for such issuance
including the passing of the licensure examination for Certified Public Accountants.
A. Certificate of Accreditation
B. Professional Identification Card
C. Certificate of Registration
D. Professional Seal
A. The Professional Regulation Commission has the authority to remove any member of
the Board of Accountancy for negligence, incompetence, or any other just cause.
B. Insanity is not a ground for proceeding against a CPA.
C. A person shall be considered to be in the professional practice of accounting if, as an
officer in a private enterprise, he makes decisions requiring professional accounting
knowledge.
D. After three years, subject to certain conditions, the Board of Accountancy may order the
reinstatement of a CPA whose certificate of registration has been revoked.
171. The president of the Philippines appoints the members of the Board of Accountancy based
on the recommendation submitted to the office of the president. Which of the following is an
incorrect statement about the submission of nominations?
A. The Accredited National Professional Organization of CPAs shall submit the names of its
nominees to the PRC not later than 60 days prior to the expiry of the term of an
incumbent chairman or member.
B. There should be an adequate documentation to show the qualifications and primary field
of professional activity of each nominee
C. The Accredited National Professional Organization of CPAs shall submit the names of its
nominees to the PRC not later than days prior to the expiry of the term of an incumbent
chairrn or member.
D. If the Accredited National Professional Organization of CPAs failsto submit its own
nominee(s) to the PRC within the prescribed period, the PRC, in consultation with the
Board of Accountancy shall submit to the president of the Philippines a list of three
nominees for each position.
172. Which of the following is not a qualification of a member of the Board of Accountancy?
173. The following statements relate to the term of office of the chairman and members of the
Board of Accountancy. Which of them is incorrect?
A. The chairman and members of the Board of Accountancy shall hold office for a term of
three years.
B. Any vacancy occurring within the term of a member shall be filled up for the unexpired
portion of the term only.
C. Appointment to fill up an expired term is not to be considered as a complete term.
D. The Board of Accountancy member who has served two successive complete terms as
chairman or member shall be eligible for reappointment until the lapse of three years.
174. No person shall serve the Professional Regulatory Board of Accountancy for more than
A. 3 years
B. 6 years
C. 9 years
D. 12 years
175. Which of the following is not a function of the Board of Accountancy as specified in the
Philippine Accountancy Act of 2004?
A. To investigate violations of the Accountancy Law and the rules and regulations
promulgated therewith.
B. To look from time to time into the conditions affecting the practice of the accountancy
profession.
C. To create and direct accrediting agencies that are entrusted the functions of reviewing
higher educational institutions' policies and practices leading to
accreditation/reaccreditation of BSA program.
D. To determine and prescribe minimum requirements leading to the admission of
candidates to the CPA licensure examination.
176. The following are represented both to the Financial Reporting Standards Council (FRSC)
and Auditing and Assurance Standards Council (AASC), except:
177. All of the following are represented to the Financial Reporting Standards Council, except:
178. The Financial Reporting Standards Council which is the accounting standards setting body
is composed of a chair and:
A. Fourteen members
B. Fifteen members
C. Sixteen members
D. Seventeen members
179. The chairman and the members of both Financial Repo standards Council and Auditing
and Assurance Standard: Council have a renewable term of:
A. 4 years
B. 2 years
C. 3 years
D. 5 years
180. Which of the following is not a requisite in applying for the CPA licensure examinations?
A. Candidates who fails to obtain a general average of 75% but obtains a rating of at least
75% in at least four subjects shall receive a conditional credit for the subjects passed.
B. To successfully pass the licensure examination, the candidates should obtain a general
weighted average of at least 75% with no rating lower than 65% in any subject.
C. Conditional candidates shall take an examination in the conditional subject(s) within two
years from the preceding examination.
D. Candidates who failed in three complete examinations must enroll in refresher course
consisting of twenty-four units of the subjects given in the licensure examination.
182. Which of the following is one of the reasons for not issuing a certificate of registration to a
successful examinee? The individual:
A. Is of unsound mind.
B. Had been guilty of immoral and dishonorable conduct.
C. Had been convicted by a court of a criminal offense involving moral turpitude. D. All of
the given choices.
184. The Philippine Accountancy Act of 2004 provides that all working papers made during an
audit shall be the property of the auditor. These working papers shall include the following,
except:
185. Who are required to apply for accreditation with the Professional Regulation Commission if
the applicant is a partnership of Professional Accountants?
186. Which of the following is not included in the seal of a professional accountant?
187. The body mandated by law to promulgate rules and regulations affecting the practice of
Accountancy.
188. Individual CPAs, Finns or Partnerships of CPAs, including partners and staff members
thereof shall register with the 130A and the PRC. If the accreditation of Alano and Co. CPAs,
was renewed on September 30, 2008, the next renewal must be on or before:
189. How many CPE credit units must be accumulate-1 by a registered accounting professional
within the 3-year period?
A. 15 credit units
B. 45 credit units
C. 60 credit units
D. 90 credit units
190. The APO shall renew its Certificate of Accreditation once every how many years after the
date of the Resolution granting the petition for re-accreditation and the issuance of the said
certificate upon submission of the requirements?
A. 2 years
B. 3 years
C. 4 years
D. 6 years
191. Engagement letters are widely used in practice for professional engagements of all types.
The primary purpose of the engagement letter is to
A. remind management of its primary responsibility over the financial statements. B. satisfy
the requirements of the Code of Professional Conduct for CPAs.
B. provide a starting point for the auditor's preparation of the peliwirtaly audit program.
C. provide a written record of the agreement with the client as to the services to be
provided.
192. The accuracy of information included in the footnotes that accompany the audited financial
statements of a company whose shares are traded on a stock exchange is the primary
responsibility of the:
193. Which of the following is not likely a quality control procedure on consultation?
194. According to Philippine Standards on Auditing, because there are inherent limitations in an
audit that affect the auditor's ability to detect material misstatements, the auditor is:
195. The objective of an ordinary examination by the independent auditor is the expression of
an opinion on the:
196. When a CPA expresses an opinion on the financial statements, his responsibilities extend
to
197. The working papers prepared by a CPA in connecction with an audit engagement are
owned by the CPA, subject to certain limitations. The rationale for this rule is to
198. The responsibility for adopting sound accounting policies, maintaining adequate internal
control, and making fair representations in the financial statements rests
A. Management fraud
B. Defalcation
C. Theft of assets
D. Employee Fraud
200. The ordinary examination of financial statements is not primarily designed to disclose
defalcations and other irregularities although their discovery may result. Normal audit
procedures are more likely to detect a fraud arising from
A. materiality.
B. intent.
C. whether it is peso amount or a process.
D. whether it is a caused by the auditor or the client.
203. If specific information comes to an auditor's attention that implies the existence of possible
noncompliance with laws and regulations that could have a material, but indirect effect on the
financial statements, the auditor should next
205. The auditor should not assume that management is but the possibility of dishonesty must
be considered." This is an example of
A. expectation gap.
B. an attitude of professional skepticism.
C. due diligence.
D. an ethical requirement.
207. Should the auditor uncover circumstances that may cause suspicions of management
fraud, the auditor must
208. Generally, the decision to notify parties outside te client‘s organization regarding a
noncompliance with laws and regulations is the responsibility of the
A. independent auditor.
B. management.
A. c. outside legal counsel.
C. internal auditors.
209. An audit made in accordance with Philippine Standards on Auditing generally should
A. be expected to provide assurance that noncompliance with laws and regulations will be
detected if the internal control is effective.
B. be relied upon to disclose indirect-effect noncompliance with laws and regulations.
C. encompass a plan to search actively for noncompliance with laws and regulations which
relate to operating aspects.
D. not be relied upon to provide assurance that all noncompliance with laws and regulations
will be detected.
210. An auditor who believes that a material irregularity may exist should initially
A. discuss the matter with those believed to be involved in the perpetration of material
irregularity.
B. discuss the matter with a higher level of management.
211. When management refuses to disclose in the financial statements noncompliance to laws
and regulations which are identified by the independent auditor, the CPA may be charged with
unethical conduct for
212. In discovering material management fraud and an equally material error, the audit plan
213. An auditor who finds that the client has committed noncompliance with laws and
regulations would most likely withdraw from the engagement when the
A. noncompliance with laws and regulations affects the auditor's ability to rely on
management representations.
B. noncompliance with laws and regulations has material financial statement implications.
C. noncompliance with laws and regulations has received widespread publicity.
D. auditor cannot reasonably estimate the effect of the noncompliance with laws and
regulations on the financial statements.
214. When the auditor knows that a noncompliance with laws and regulations has occurred, the
auditor must
A. recommend that the client pursue the suspected fraud to a conclusion that is agreeable
to the auditor.
B. extend normal audit procedures in an attempt to detect the full extent of the suspected
fraud.
C. reach an understanding with the proper client representative as to whether the auditor or
the client is to make th e investigation necessary to determine if a fraud has in Met
occurred.
D. determine whether the fraud, if .in fact it does exist, might.be of such a magnitude as to
affect the auditor's report on the financial statements
QUIZZERS
1. A procedure n which a quality control partner periodically tests the application of quality
control procedures is most directly related to which quality control element?
A. Engagement performance
B. Independence, integrity, and objectivity
C. Monitoring
D. Personnel management
2 The work of each assistant needs to be reviewed by personnel of at least equal competence.
Which of the following is not one of the objectives of this requirement?
A. The conclusions expressed are consistent with the result of the work performed and
support the opinion.
B. The work performed and the results obtained have been adequately documented.
C. The audit objectives have been achieved.
D. All available evidences have been obtained, evaluated and documented.
3. Which of the following acts is prohibited by the Code of Professional Ethics for CPAs?
A. The use of a firm name which includes the name of a retired partner.
B. An announcement in a newspaper of the opening of a public accounting office. C.
Engaging in civic activities during business hours.
C. Accepting an engagement or employment which one cannot reasonably expect to
complete or discharge with professional competence.
4. Which of the following is a violation of the code of professional ethics for certified public
accountants?
A. A CPA permits his name to be used in a client's advertising as having verified financial
data and/or statistical facts with respect to client‘s products.
B. Based on information obtained in an audit, a CPA reports a noncompliance with laws
and regulations of his client to government authorities.
C. Three years after a partner has retired, the remaining partners continue to practice
under a firm name that includes the name of the retired partner. The retired partner has
severed all connections with the CPA firm.
D. A CPA running for public office uses the professional designation "CPA" after his name
on posters employed in connection with his election campaign.
5. Which of the following is incorrect regarding the professional accountants' tax practice?
C. A professional accountant may hold out to a client or an employer the assurance that the
tax return prepared and the tax advice offered by him are beyond challenge.
D. Professional accountants should ensure that the client or the employer is aware of the
limitations attaching to tax advice and services so that they do not misinterpret an
expression-of opinion as an assertion of fact.
A. The auditor does not consider representations from management as substitute for
obtaining sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
B. In planning and performing an audit, the auditor assumes that management is dishonest.
C. The auditor is alert to audit evidence that contradicts or brings into question the reliability
of documents or management representations.
D. The auditor makes a critical assessment, with a questioning mind, of the validity of audit
evidence obtained.
7. Prior to beginning the field work on a new audit engagement in which a CPA does not
possess expertise in the industry in which the client operates, the CPA should
A. reduce audit risk by lowering the preliminary levels of materiality. special substantive
tests to compensate for the lack of
B. design industry expertise.
C. engage financial experts who are familiar with the nature of the industry.
D. obtain a knowledge of matters that relates to the nature of the entity's business.
8. Which of the following statements is true when the CPA has been engaged to do an
attestation engagement?
A. The CPA firm is engaged and paid by the client; therefore, the firm has primary
responsibility to be an advocate for the client.
B. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit
are the statement users.
C. Should a situation arise where there is no convincing authoritative standard available,
and there is a choice of actions, which could impact client's financial statements either
positively or negatively, the CPA is free to endorse the choice which is best in the client's
interest.
D. As long as CPA firms are competent, it is not required that they remain unbiased.
9. One difference between auditors and other professionals is that most professionals
11. For which of the following services is a CPA professional not required to be independent?
12. Which of the following will impair the independence of a CPA in public practice?
A. He has his name and address listed on a one-page section of the telephone book.
B. He obtained a loan from a bank under the normal lending procedures, terms and
requirements of the bank.
C. He holds one share of the client's capital stock.
D. He failed to disclose a client's departure from GAAP.
13. When CPAs are able to maintain an independent attitude in fulfilling their responsibility, it is
referred to as independence in
A. fact.
B. appearance.
C. conduct.
D. total.
14. When the users of financial statements have confidence in the independence of the CPA, it
is referred to as in independence in
A. fact.
B. appearance.
C. conduct.
D. total.
15. Which of the following statements is incorrect? CPAs lose their independence if they:
A. in all circumstances.
B. only for direct ownership.
C. only for indirect ownership.
D. under no circumstances.
17. A successor auditor is required to communicate with the previous auditor. The primary
concern in this communication is
A. information which will help the successor auditor determine whether the client
management has integrity.
B. to learn about client by examining predecessor's working papers.
C. to enable successor auditor to perform a more efficient audit.
D. to save successor auditor time and money in gathering data.
18. When a. CPA firm is requested to provide a written or oral opinion on the application of
accounting principles or the type of audit opinion that would be issued for a specific or
hypothetical transaction relating to an audit client of another CPA firm, primary among the
requirements set forth is that
20. Which of the following best describes the paccing of confidential information from a client to
its auditor? The information:
C. Can only be released for peer reviews after receiving permission from the client.
D. Should be conveyed to the public if it affects the "correctness" of the financial
statements.
21. The CPA must not subordinate his or her professional judgment to that of others in every
A. engagement.
B. audit engagement.
C. engagement except tax services.
D. engagement except management advisory services.
A. The auditor believes that accounts receivable may not be collectible, but accepts
management's opinion without an independent evaluation.
B. In preparing client:s. tax return, the CPA encourages client to take a deduction which tile
CPA believes is valid, but for which there is some but not complete support.
C. Both are violations.
D. Neither would be a violation
23. Several months after an unqualified audit report was issued, the auditor discovers that the
financial statements were materially misstated. The client's chief executive officer agrees that
the statements are misstated, but refuses to issue a correction, and claims that "confidentiality"
prevents the CPA from informing anyone.
24. A member in public practice may perform for a contingent fee any professional services for a
client for whom the member or member's firm performs
A. an audit.
B. a review.
C. a compilation used only by management.
D. an audit of prospective financial information.
D. Attestation services.
26. Solicitation consists of the various means that CPA firms use to engage new clients. Which
one of the following would not be an example of solicitation?
27. If requested to perform a review engagement for a nonpublic entity in which an accountant
has an immaterial direct financial interest, the accountant is
A. independent because the financial interest is immaterial and therefore, may issue a
review report.
B. not independent and, therefore, may not he associated with the financial statements.
C. not independent and, therefore, may not issue a review report.
D. not independent and, therefore, may issue c review report, but may not issue an
auditor's opinion.
28. Which of the following most completely describes how independence has been defined by
the CPA profession?
29. To emphasize auditor independence from management, many corporations follow the
practice of
30. In determining independence with respect to any engagement, the ultimate decision as to
whether or not the auditor is independent must be made by the
A. auditor.
B. client.
C. audit committee.
D. public.
31. When a CPA who is not independent is associated with financial statements, he would be
precluded from expressing an opinion because any audit engagement, the auditor is
independent
A. the public would be aware of his lack of independence and would place little or no faith
on his opinion.
B. he would place himself in the position of suffering an adverse decision in a possible
liability suit.
C. he would be in the position of auditing his own work.
D. any auditing procedures he might perform would not be in accordance with generally
accepted auditing standards.
32. Which of the following statements best describes why the profession of certified public
accountants has deemed it essential to promulgate a code of ethics and to establish a
mechanism for enforcing observance of the code?
33. In which of the following circumstances would a CPA be bound by ethics to refrain from
disclosing any confidential information obtained during the course of a professional
engagement?
A. The CPA is issued a summons enforceable by a court that orders the CPA to present
confidential information.
B. A major stockholder of a client company seeks accounting information from the CPA
after the management declined to disclose the requested information.
C. Confidential client information is made available as part of a quality review of the CPA's
practice by a peer review team authorized by the PICPA.
D. An inquiry by a in disciplinary body of PICPA requests confidential client information.
34. Which of the following best describes why publicly-traded corporations follow the practice of
having the outside auditor appointed by the board of directors or elected by the stockholders?
35. A violation of the ethical standards would most likely have occurred when a CPA
A. made arrangement with a bank to collect notes issued by a client in payment of fees
due.
B. joined an accounting firm made up of three non-CPA practitioners.
C. issued an unqualified opinion on the 2009 financial statements when fees for the 2008
audit were unpaid.
D. purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees
received over a three-year period.
36. The concept of materiality would be least important to an auditor when considering the
37. Which of the following is a violation of Confidentiality rule of the 37. code of Professional
Conduct?
38. An auditor who accepts an audit engagement and does not possess the industry expertise
of the business entity, should
A. engage financial experts familiar with the nature of the business entity.
B. obtain a knowledge of matters that relates to the nature of the entity's business.
C. refer a substantial portion of the audit to another CPA who will act as the principal
auditor.
D. first inform management that an unqualified opinion cannot be issued.
39. A CPA, while performing an audit, strives to achieve independence in appearance in order
to
40. In which of the following instances would the independence of the CPA not be considered to
be impaired? The CPA has been retained as the auditor of a brokerage firm
A. which owes the CPA audit fees for more than one year.
B. in which the CPA has a large active margin account.
C. in which the CPA's brother is the controller.
D. which owes the CPA audit fees for services in the current year and has just filed a
petition for bankruptcy.
41. Which of the following fee arrangements is in violation of the Code of Professional Conduct?
A. A fee based on whether the CPA's report on the client's financial statements results in
the approval of a bank loan.
B. A fee based on the outcome of a bankruptcy proceeding.
C. A fee based on the nature of the service rendered and the CPA's particular expertise
instead of the actual time spent on the engagement.
D. A fee based on the fee charged by the prior auditor.
A. negligence.
B. bad faith.
C. dishonesty.
D. errors of judgment.
43. When the auditor issues an erroneous opinion as a consequence of an underlying failure to
comply with the requirements of generally accepted auditing standards, it results to
A. business failure.
B. audit failure.
C. audit risk.
D. all of them
45. The auditor gives an audit opinion on the fair presentation of the financial statements and
associates his or her name with them when, on the basis of adequate evidence, the auditor
concludes that the financial statements are unlikely to mislead
A. a prudent user.
B. management.
C. the reader.
D. investors.
46. When preparing the financial statements, it is acceptable .for the auditor to prepare
47. Which of the following statements best describes the auditor's responsibility regarding the
detection of material errors and frauds?
A. The auditor is responsible for the failure to detect material errors and frauds only when
such failure results from the misapplication of generally accepted accounting principles.
B. The audit should be designed to provide reasonable assurance that material error and
frauds are detected.
C. The auditor is responsible for the failure to detect material errors and frauds only when
the auditor fails to confirm receivables or observe inventories.
D. Extended auditing procedures are required to detect unrecorded transactions even if
there is no evidence that material errors and frauds may exist.
48. The auditor has considerable responsibility for notifying users as to whether or not the
financial statements are properly stated. This imposes upon the auditor a duty to
49. Which of the following statements best distinguishes ordinary negligence from gross
negligence?
A. Failure to detect material errors, whether internal control is strong or weak, suggests
gross negligence.
B. Failure to exercise reasonable care denotes ordinary negligence, whereas failure to
exercise minimal care indicates gross negligence.
C. Gross negligence is most probable when the auditor fails to detect errors that occurred
under conditions of strong internal control.
D. The more material the undetected error is, the greater the likelihood of ordinary
negligence being committed.
A. when such failure clearly results from non-compliance to generally accepted auditing
standards.
B. whenever the amounts involved are material.
C. only when the examination was specifically designed to detect fraud.
D. only when such failure clearly results from negligence so gross as to sustain an
inference of fraud on the part of the auditor.
51. Which of the following statements is correct concerning the auditor‘s responsibility with
respect to noncompliance with laws and regulations? An auditor must design tests to:
52. Most accounting and auditing professionals agree that when an . audit has failed to uncover
material misstatements, and the wrong type of audit opinion is issued, the audit firm.
53. What is the independent auditor's responsibility prior to the completion of fieldwork when he
believes that a material fraud may have occurred?
54. The risk that an audit will fail to uncover a material misstatement is eliminated
55. The auditor's evaluation of the likelihood of material employee fraud is normally done initially
as a part of
56. A CPA establishes quality control policies and procedures for deciding whether to accept a
new client or continue to perform services for a current client. The primary purpose for
establishing such policies and procedures is to
A. A member of the engagement team has a close relative who is a receptionist for the
client.
B. The father of the audit senior holds a material financial interest in the client of which the
senior is unaware.
C. The spouse of a member of the audit team has an immaterial common stock investment
in the audit client.
D. The partner in charge of the office's compensation is affected by office profitability, a
portion of which arises from this audit.
58. While performing services for their clients, professionals have always had a duty to provide
a level of care which is
A. reasonable.
B. greater than average.
C. superior
D. guaranteed to be free from error.
59. The existence of extreme or unusual negligence, even though 0. there was no intent to
deceive or do harm, is a(n)
A. fraud.
B. gross fraud.
C. constructive fraud.
D. ordinary fraud.
60. The failure of the auditor to meet generally accepted auditing standards is
A. an accepted practice.
B. a suggestion of negligence.
C. an evidence of negligence.
D. tantamount to criminal behavior.
62. Which of the following, if present, would support a finding of constructive fraud on the part of
a CPA?
A. Privity of contract
B. Intent to deceive
C. Reckless disregard
D. Ordinary negligence
63. In rare cases auditors have been held liable for criminal acts. A criminal conviction against
an auditor can result only when it is demonstrated that the auditor
A. was negligent.
B. was grossly negligent.
C. intended to deceive or harm others.
D. caused financial loss to an innocent third party.
64. The principal issue to be resolved in cases involving alleged negligence is usually
A. the amount of the damages suffered by the users of the financial statements.
B. whether to impose punitive damages on defendant.
C. the level of care required to be exercised.
D. whether defendant was involved in fraud.
65. "Absence of reasonable care that can be expected of a person in a set of circumstances" is
the description of
A. ordinary negligence.
B. constructive fraud.
C. gross negligence.
D. fraud.
66. A CPA firm is considered independent when it performs which of the following services for a
publicly-traded audit client?
A. privity of contract.
B. contributory liability.
C. statutory liability.
D. common law liability.
68. As a consequence of his failure to adhere to generally accepted auditing standards in the
course of his examination of the s Corporation, Herman, CPA, did not detect the embezzlement
of a material amount of funds by the company's controller. As a matter of common law, to what
extent would Herman be liable to Leis Corporation for losses attributable to the theft?
A. He would have no liability, since the ordinary examination A' cannot be relied upon to
detect defalcations.
A. B.He would have no liability because privity of contract is lacking.
B. He would be liable for losses attributable to his negligence.
C. He would be liable only if it could be proven that he was grossly negligent.
69. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if
A. refuses to turn over the schedules or working papers prepared by the client staff to the
client.
B. performs an audit in a negligent manner.
C. intentionally allows an omission of a material fact required to be stated in a financial
statement.
D. was not able to submit the audited financial statements on time.
71. The auditor's defense of contributory negligence is most likely to prevail when
B. the auditor fails to detect fraud resulting from management override of the control
structure.
C. the client has privately held as contrasted with a public company.
D. undetected errors have resulted in materially misleading financial statements.
72. Ana and Associates, CPAs, issued an unqualified opinion on the financial statements of
Seral Corp. for the year ended December 31, 2010. It was determined later that Seral's
treasurer had embezzled P300,000 from Seral during 2010. Seral sued Ana because of Ana's
failure to discover the embezzlement. Ana was unaware of the embezzlement. Which of the
following is Ana‘s best defense?
73. The factor that distinguishes constructive fraud from actual fraud is
A. materiality.
B. quality of internal control.
C. type of error or irregularity.
D. intent.
74. If a CPA recklessly abandons standards of due care and diligence while performing an
audit, he or she may be held liable to unknown third parties for:
A. Fraudulent misconduct.
B. Gross misconduct.
C. Gross negligence.
D. Contributory negligence.
75. Salve Corp. orally engaged Rex & Co., CPAs, to audit its financial statements. The
management of Salve informed Rex that it suspected that the accounts receivable were
materially overstated. Although the financial statements audited by Rex did, in fact, include a
materially overstated accounts receivable balance, Rex issued an unqualified opinion. Salve
relied on the financial statements in deciding to obtain a loan from City Bank to expand its
operations. City Bank relied on the financial statements in making the loan to Salve. As a result
of the overstated accounts Salve has defaulted on the loan and has incurred a substantial loss.
If Salve sues Rex for negligence in failing to discover the overstatement, Rex‘s best defense
would be that
76. In a common law action against an accountant, the lack of privity is a viable defense if the
plaintiff
78. Marcia Corporation orally engaged Legaspi and Lopez, CPAs, to audit its year-end financial
statements. The engagement was to be completed within two months after the close of Marcia's
fiscal year for a fixed fee of PI25,000. Under these circumstances, what obligation is assumed
by Legaspi and Lopez?
79. A third party sues a public accounting firm for negligence under common law on the basis of
materially false financial statements. Which of the following is the firm's defense?
A. Lack of privity
B. Lack of reliance
C. Lack of intent
D. Contributory negligence
A. YES YES
B. YES NO
C. NO YES
D. NO NO
81. A CPA firm issues an unqualified opinion on financial statements that were not prepared in
accordance with GAAP. The CPA firm would have acted with fraud or its equivalent in all the
following circumstances except where the firm
82. Conflict between financial statement users and auditors often arises because of the
84. A CPA should not be liable to any party if he performs his services with:
A. Ordinary negligence
B. Regulatory providence
C. Due professional care
D. Good faith
85. If a CPA recklessly departs from the standards of due care when conducting an audit, the
CPA will be liable to third parties who are
A. Ordinary negligence
B. Gross negligence
C. Strict liability
D. Criminal deceit
MODULE 4
AUDIT REPORT
5. The auditor‘s judgment regarding whether the financial statements give a ―true and
fair view‖ or ―are presented fairly‖ on all material respects, is made in the context of:
A. the auditor should evaluate the conclusion drawn from the audit evidence
obtained during the course of the audit
B. the auditor evaluates whether there is a reasonable assurance about whether
the financial statements are free from any misstatements
C. the auditor evaluates whether sufficiently appropriate audit evidence has been
obtained to eliminate the risk of material misstatements
D. the auditor verifies that all errors that misstate the financial statements have
been corrected by the client
7. In evaluating whether the financial statements have been prepared and presented in
accordance with the specific requirements of the applicable financial reporting
framework for particular classes of transactions, account balances and disclosures, the
auditor should consider:
A. that the accounting estimates made by the management are reasonable in the
circumstances
B. that the information presented in the financial statements, including accounting
policies id relevant, reliable, comparable, and understandable
C. that the accounting policies selected and applied are consistent with the
financial reporting framework
D. All of the choices given are to be considered
8. Which of the following is least likely considered by the auditor when he has to
evaluate the fair presentation of the financial statements?
9. If the auditor encounters circumstances that lead him to conclude that the compliance
with a specific requirement results to financial statements that are misleading, the
auditor:
11. The auditing profession recognizes the need for uniformity in reporting as means of
12. What is the descriptive word in the title of an audit report issued on a complete set
of general purpose financial statement which affirms that the auditor has met all of the
relevant ethical requirements?
A. Audit
B. Opinion
C. Independent
D. Report
13. The auditor‘s standard report should always include in its tittle the word:
A. Standard
B. Independent
C. Opinion
D. Audit
14. The auditor‘s report may be addressed to any of the following, except the client‘s
A. Stockholders
B. Chief executive officer
C, Board of directors
D. Partners
15. The introductory paragraph of the standard audit report may include the following:
Which of the foregoing are specifically required by the applicable standards on auditing
to be included or referred to in the introductory paragraph of the standard audit report?
A. A, B, D, F, G
B. A, B, C, E, F, G
C. A, B, C, E, F
D. B, C, E, F
16. The purpose of the introductory paragraph in the standard unqualified report is
17. The complete set of general purpose financial statement that are prepared in
accordance with PFRS comprise of:
18. When an entity presents, together with the financial statements, supplementary
information that cannot be clearly differentiated from the financial statements because
of its nature and how it is presented, such supplementary information
A. The auditor‘s opinion may or may not cover the supplementary information
B. It is important for the auditor to be satisfied that any supplementary
information that is not covered by the financial statements
C. The supplementary information that cannot be differentiated from the financial
statements is covered by the auditor‘s opinion
D. Supplementary information that is presented as an integral part of the financial
20. Which of the following is not specifically referred to in the second paragraph of the
standard audit report as management‘s responsibilities?
22. Which paragraph(s) of the standard auditor‘s report affirms the responsibility of the
management with respect to the entity‘s financial statements?
A. First paragraph
B. Second paragraph
C. Second and Third paragraphs
D. Third paragraph
23. How are management‘s responsibility and the auditor‘s responsibility represented in
the applicable paragraph(s) of the standard auditor‘s report?
Management Auditor
A. Explicit Explicit
B. Implicit Implicit
C. Implicit Explicit
D. Explicit Implicit
25. The existence of audit risk is recognized by the statement in the scope paragraph -
auditor‘s responsibility of the auditor‘s standard report that the
26. The standard audit report explains that a financial audit includes all of the following
except
A. Examining support for the amounts and disclosure in the financial statements
B. Assessing the level of control risk
C. Assessing the accounting principles used and significant estimates made by
the management
D. Evaluating the overall financial statement presentation
27. Which of the following statements is a basic element of the standard audit report?
28. The auditor‘s report should describe an audit by addressing some concerns that
may include:
by management
C) Evaluating the overall presentation of the financial statements
D) An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements
E) The procedures selected depend on the auditor‘s judgment
A. A, B, C, D, E
B. A, B, C
C. A, C, E
D. A, B, D
29. The audit report date is important to users of financial statements because it
indicates
30. The standard audit report refers to GAAS and PFRS in which paragraphs?
GAAS PFRS
A.Scope only Opinion only
B.Introductory only Scope and opinion only
C.Introductory and scope only Opinion
D.Introductory only All paragraphs
31. The auditor‘s judgment of whether financial statements are fairly presented is made
within the context oof:
32. The auditor‘s standard report states that the financial statements are presented
fairly
A. with reasonable assurance
B. in all material respects
C. without significant errors
D. on a consistent basis
33. How are other reporting responsibilities addressed within the auditor‘s report?
A. The auditor's signature is either in the name of the audit firm, the personal
name of the auditor, or both, as appropriate
B. The auditor's signature is either in the name of the audit firm or the personal
name of the auditor, but not both
C. In addition to the auditor's signature, the auditor may be required to declare
the auditor's professional accountancy designation
D. The auditor's report filed with the Securities and Exchange Commission (SEC)
must be manually signed
35 Which of the following information is(are) required when an auditor's report is issued
on financial statements to be filed with the Securities and Exchange Commission?
A. 1, 2, 3, 4, 5
B. 2, 4, 5
C. 1, 3, 1, 5
D. 2, 3, 4, 5
38. How is the auditor's report on the financial statements that require final approval by
stockholders before such financial statements are issued publicly dated?
A. The auditor's report should be dated coinciding the date of approval of the
financial statements by the stockholders
B. The auditor's report should be dated after the approval of the financial
statements by the stockholders
C. The date of the auditor's report coincides the date of approval of the financial
statements by the board of directors
D. The audit report should be dual dated, the first date coinciding the approval by
the board of directors and the second date to coincide with the approval by the
stockholders
A. naming the location in the country where the auditor practices his profession
B. including the complete mailing address of the auditor
C. identifying the country from where the auditor had secured his professional
license
D. the auditor's address is omitted in the report
40. Which of the following is ordinarily true of a modification of the audit report by
adding an emphasis of matter paragraph?
41. When additional language is added to the auditor's report without - modifying the
opinion, the additional language should be included in:
A. the introductory paragraph
B. the scope paragraph
C. the opinion paragraph
D. one or more additional paragraphs that follow the opinion paragraph.
44. An auditor concludes that there is substantial doubt about an entity's ability to
continue as a going concern for a reasonable period of time. If the entity's disclosures
concerning this matter are adequate, the audit report should include a(an)
B. No No
C. No Yes
D. Yes No
45. Under certain circumstances, the CPA may wish to emphasize specific matters
regarding the financial statements even though he or she intends to express an
unqualified opinion. Normally, such an explanatory information should be included in
A. unqualified opinion
B. except for qualified opinion
C. "subject to" qualified opinion
D. adverse opinion
47. The paragraphs of the report which is modified for uncertainties are the same as the
standard unqualified report. The explanatory Paragraph as a form of the modification to
describe the uncertainty is added as the
A. first paragraph
B. last paragraph
C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last
A. Unqualified
B. Disclaimer
C. Qualified
D. adverse
49. The audit report issued by Lozano and Co., CPAs, included the following paragraph
that followed the opinion paragraph: Without qualifying our opinion we draw attention to
Note 11 to the financial statements. The Company is the defendant in a lawsuit alleging
infringement of certain patent rights
This paragraph is considered:
50. In extreme cases such as situations involving multiple uncertainties that are
significant to the financial statements, the auditor
51. A client company has issues that cause substantial doubt regarding the entity's
ability to continue as a going concern. If this is the only major audit issue, which type of
opinion will the auditor usually refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion
52. Which of the following situations, the effect of which is significant, least likely require
a decision of whether to issue a qualified or adverse opinion?
53. The auditor may continue to express unqualified opinion though there are
modifications made in the audit report. Which of the following situations, would the
auditor likely modify his opinion?
55. Which of the following is not a reason to issue a modified audit report with opinion
other than unqualified opinion?
56. Which of the following situations may likely require a modified audit report witn
modified wordings or an emphasis of matter paragraph?
57. Which of the following circumstances may not result- to a disclaimer of opinion?
60. An explanatory paragraph may be added to the audit report while at the same time
issuing an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of the
auditor
61. Under which of the following sets of circumstances might an auditor disclaim an
opinion?
A. The financial statements contain a departure from PFRS, the effect of which is
material
B. The principal auditor decides to make reference to the report of another
auditor who audited a subsidiary
C. There has been a material change between periods in the method of the
application of accounting principles
D. There were significant limitations on the scope of the audit.
62. If an auditor is engaged to audit a client's financial statements after the annual
physical inventory count was made and the accounting records are not sufficiently
reliable to enable the auditor to become satisfied as to the year-end inventory balances,
the opinion to be expressed is
A. Adverse opinion
B. Qualified opinion
C. Unqualified with explanatory paragraph
D. Disclaimer of opinion.
65. The auditor would most likely disclaim his opinion because of
66. Whenever the client imposes restrictions on the scope of the audit, the auditor
should be concerned about the possibility that management is trying to prevent
discovery of misstated information. In such cases, PSA 701 has encouraged the auditor
to issue a:
67. An explanatory paragraph or modified wordings may be added to the audit report
while at the same time issuing an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of the
auditor
B. there is an immaterial departure from PFRS to ensure fair presentation with
the agreement of the auditor
C. the audit opinion is partly based on the work of another auditor
D. the audit work has been materially limited by management.
68. The most common case in which conditions beyond the client's and auditor's control
cause a scope restriction is an engagement
C. where auditor does not have enough staff to audit all of client's foreign
subsidiaries satisfactorily
D. where client is going through a bankruptcy
69. An audit report contains the following paragraph: "Because of the inadequacies in
the company's accounting records during the year ended June 30, 2008, it was not
practicable to extend our auditing procedures to the extent necessary to enable us to
obtain certain evidential matter as it relates to classification of certain items in the
consolidated statements of operations." This paragraph most likely describes
70. Which of the following circumstances least likely result to either a qualified opinion
or an auditor disclaiming his opinion?
72. When the scope of the auditor's work has been limited, the audit report should
contain a(n):
73. When there is a limitation on the scope of the auditor's work that requires a
modification of the audit report:
74. Which of the following least likely requires an expression of unqualified opinion with
modified wordings or an emphasis of the matter paragraph?
A. The financial statements of prior period, which are presented for comparative
purposes, were audited by as 'Gillet CPAs
B. The auditors have substantial doubt about the ability of the entity to continue
as a going concern
C. The entity changed the measurement of certain significant transaction from
one GAAP to another GAAP
D. The auditors failed to observe physical inventory count. however, the auditor
was satisfied that the inventory amount was fairly presented by doing alternative
audit procedures.
75. When there is a limitation in the scope of the audit that results to a disclaimer of
opinion, the following paragraphs are modified, except:
A. Introductory paragraph
B. Management's responsibility for the financial statements
C. Auditor's responsibility
D. Auditor's opinion.
76. The expression of a qualified opinion means that the financial statements, taken as
a whole, in all material respects, are
A. materially misstated
B. materially misleading
C. presented fairly
D. do not present fairly
77. When the auditor cannot perform certain required procedures and the amounts are
so material that a disclaimer of opinion rather than a qualified opinion is required
A. The financial statements do not present fairly in all material respects, the
financial position, results of operations, and cash flows in conformity with PFRS
B. The auditor does not express an opinion on the financial statements
C. The financial statements present fairly, in all material respects, the financial
position, results of operations, and cash flows in conformity with PFRS
D. Except for the effects of a matter, the financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows in
conformity with PFRS
79. An auditor who qualifies an opinion because of his inability to obtain sufficient
evidential matter should describe the limitation in an explanatory paragraph that is
inserted between the scope -responsibility of the auditor and opinion paragraphs. The
auditor should also refer to the limitation in the:
80. Which of the following circumstances requires the auditor to omit the sentence
stating the responsibility of the auditor in the auditor's report?
81. When the client is not following PFRS, and the auditor believes that adherence to
PFRS would result to misleading statements, the opinion paragraph of the audit report
82. In which of the following conditions is an unqualified audit opinion least likely
issued?
A. The auditor believes that a substantial doubt about the entity's ability to
continue as a going concern exists
B. The auditor believes that inventory is valued at market values that accurately
reflect market conditions and materially exceed cost
C. The audit is conducted with no circumstance or imposed scope limitation
D. PFRS are not consistently applied from year to year
83. Once the auditor has determined that an exception is material enough to warrant a
qualification of his auditor's report, he must then determine if the exception is sufficiently
material to negate an overall opinion. If the auditor is applying this decision process to
an exception based on a departure from Philippine financial reporting standards, he is
deciding
A. Whether to issue an adverse opinion rather than a disclaimer of opinion
B. Whether to issue a disclaimer of opinion rather than a qualified opinion
C.Whether to issue an adverse opinion rather than a qualified opinion
D. Nothing because such a decision process is not applicable to this type of
exception.
84. An auditor who is reporting on financial statements that contain a material departure
PFRS should include in his audit report a separate explanatory paragraph and
85. When the auditor knows that the financial statements may be misleading because
they are not prepared in conformity with Philippine financial reporting standards, he
must issue a(n)
A. a qualified opinion
B. an adverse opinion
C. a disclaimer of opinion
D. a qualified or an adverse opinion, depending on the materiality of the item in
question.
86. An auditor should disclose the substantive reasons for expressing an adverse
opinion in an explanatory paragraph
87. A qualified opinion report can be used only when the auditor believes that the
overall financial statements are
A. fairly stated
B. not fairly stated
C. materially misstated
D. materially misleading.
88. If the auditor believes that a required material disclosure is omitted from the financial
statements, the auditor should decide between issuing a(n)
90. In which of the following situation would a decision of selecting between a qualified
or adverse opinions be inappropriate?
91. When the auditor qualifies his opinion due to his disagreement with the client in
applying accounting policies, the auditor modifies:
92. Which of the following circumstances requires the modification of both the auditor's
responsibility, and the auditor's opinion paragraphs of the auditor's report?
93. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor did not observe the entity's physical inventory and is unable to be
satisnea about its balance by other auditing procedures
B. Conditions that cause the auditor to have substantial doubt about the entity's
ability to continue as a going concern are not disclosed
C. There has been a change in accounting principles, the material effect on the
comparability of the entity's financial statements has been properly disclosed in
the financial statements
D. The auditor is unable to apply necessary procedures concerning an investor's
share on an investee's earnings recognized on the equity method
94. How should the auditor address the comparatives that are presented as
corresponding figures?
A. The comparatives are specifically identified in the audit report because the
auditor's opinion on the current period financial statements applies also to the
corresponding figures
B. The comparatives are specifically identified in the introductory paragraph and
in the opinion paragraph
C. The comparatives are not specifically identified because the auditor's opinion
applies to the current period financial statements as a whole, including the
corresponding figures
D. The comparatives are referred to in the opinion paragraph as the auditor
applies to both the current year's financial statements and the corresponding
figures.
A. A significant uncertainty that may affect the financial statements of the future
period is adequately disclosed in the financial statements
B. The auditor agrees with the client for a change in accounting policy that
significantly affects the financial statements
C. An insignificant scope limitation in the work of the auditor
D. The successor auditor reports on the current year's financial statements. The
prior-years financial statements that were presented as comparatives were
audited by another CPA
96. When management prepares financial statements on the basis of a going concern
and the auditor believes the company may not continue as a going concern, the auditor
should issue a(n)
A. qualified opinion
B. unqualified opinion with an explanatory paragraph
C. disclaimer of opinion
D. adverse opinion
97. If an amendment is necessary in the other information and the entity refuses to
make the amendment, the auditor, depending on particular circumstance, may do any of
the following, except:
98. An auditor concludes that there is a substantial doubt about an entity's ability to
continue as a going concern for a reasonable period of time. If the entity's financial
statements adequately disclose these financial difficulties, the auditor's report is
required to include an explanatory paragraph that specifically mentions
99. When there is uncertainty about a company's ability to continue as a going concern,
the auditor's concern is the possibility that the client may not be able to continue its
operations or meet its obligations for a "reasonable period of time." For this purpose, a
reasonable period of time is considered not to exceed
100. When the auditor concludes that there is a substantial doubt the entity's ability to
continue as going concern, he should issue a(n)
QUIZZERS
1. Which of the following representations does an auditor make explicitly and implicitly
when issuing an unqualified opinion?
2. Materiality is:
A. "except for..."
B. "nothing came to our attention..."
C. The financial statements do not present fairly...'
D. None of these represents a disclaimer of opinion.
4. An auditor issued an audit report that was dual dated for a subsequent event
occurring after the management's approval of the financial statements but before
issuance of the auditor's report. The auditor's responsibility for events occurring
subsequent to the completion of fieldwork was
5. An auditor has been asked to report on the balance sheet of Jane company but not
on the other basic financial statements. The auditor will have access to all information
underlying the basic financial statements. Under these circumstances, the auditor
A. May accept the engagement but should disclaim an opinion because of his
inability to apply the procedures that are considered necessary in the
circumstance.
B. May accept the engagement because such engagements merely involve
limited reporting objective.
C. Should refuse the engagement because there is a client-imposed scope
limitation.
D. Should refuse the engagement because of a departure from generally
accepted auditing standards.
6. The use of a negative assurance in the audit reports for historical financial statements
is
7. Which of the following is true of the notes to financial statements that are prepared in
accordance with PFRS?
A. Notes are not required, but are typically included by all companies.
B. Notes are not required, since they only give additional information contained in
the financial statements.
C. Notes are an integral part of the financial statements.
D. Notes are not encompassed in the auditors' opinion of the financial statements
since they are supplementary information.
8. If the balance sheet of a publicly-held company is dated December 31, 2010, the
audit report is dated March 6, 2011, and both are released to the public on March 15,
2011, this indicates that the auditor has searched for material subsequent transactions
and events that occurred up to
D. None of these
9. The three main types of audit opinion other than the unqualified report are the
10. In the scope - responsibility of the auditor paragraph of the audit report, the use of
the term "material misstatements" conveys that auditors are responsible to search for
A. minor misstatements.
B. significant misstatements.
C. fraudulent misstatements.
D. all misstatements.
11. The guidelines which enable auditors to decide when something is immaterial,
material, or highly material are provided by
12. When financial statements of prior period are presented on a comparative basis with
financial statements of the current period, the continuing auditor is responsible for
13. If a principal auditor decides to assume responsibility for another auditor's work, the
principal auditor should consider performing all of the following procedures except:
14. When the audited financial statements of the prior year are presented together with
those of the current year, the continuing auditor's report should cover
A. both years.
B. only the current year.
C. only the current year, but the prior year's report should be : presented.
D. only the current year, but the prior year's report should be referred to.
15. As a further attempt to appear that the auditor is independent, the addressee of the
audit report is usually the:
A. client company.
B. board of directors of client company.
C. President and/or CEO of client company.
D. stockholders of client company.
16. Which of the following is not a true statement? "In the opinion paragraph of the
standard unqualified report, required to state
17. In the auditor's responsibility - scope paragraph of the audit report, the use of the
term "reasonable assurance" is intended to indicate that
A. A disclaimer of opinion.
B. Adverse.
C. Qualified.
D. Unqualified.
19. Most auditors believe that the financial statements are "presented fairly" when the
statements are in accordance with Philippine financial reporting standards, but it is also
necessary to
20. Whenever an auditor issues an unqualified opinion, the implication is that the auditor
A. adverse opinion.
B. disclaimer of opinion.
C. qualified opinion.
D. unqualified opinion.
22. When a misstatement in the financial statements exists, but is unlikely to affect the
decisions of a reasonable user, it would be appropriate to issue a(n)
A. unqualified opinion.
B. qualified opinion.
C. disclaimer of opinion.
D. adverse opinion.
24. If a misstatement is immaterial relative to the financial statements of the entity for
the current period and is not expected to have a. material effect in future periods, it is
appropriate to issue a(n)
A. unqualified opinion.
B. qualified opinion.
C. adverse opinion.
D. disclaimer of opinion.
25. The only unqualified reports which use modified wording are those involving
27. A principal auditor decides not to take responsibility for the work of another CPA
who audited a wholly-owned subsidiary of the principal auditor's client. The total assets
and revenues of the subsidiary represent 30% and 24% of the related con s3lidated
totals. What type of opinion should the auditor generally issue?
A. Unqualified opinion.
B. Adverse opinion.
C. Qualified opinion.
D. Disclaimer of opinion.
28. When a principal auditor decides to make reference to the examination of another
auditor, the principal auditor's report should clearly indicate the
29. The principal auditor is satisfied with the independence and professional reputation
of the other auditor who has audited a subsidiary but wants to indicate the division of
responsibility. The principal auditor should modify
30. Francis and Company, CPAs, acted as the principal auditor. However, since Francis
and Company, CPAs, did not have the resources, it hired other CPA firm to audit a
subsidiary of the client located in Bukidnon. If Francis is willing to take the responsibility
for the work of other CPA firm, which type of audit report is Francis and Company most
likely to issue?
D. Disclaimer of opinion.
31. When the report of a principal auditor makes reference to the examination made by
another auditor, the other auditor may be named if an expressed permission to do so is
given and:
A. The report of the principal auditor names the other auditor in both the scope
and opinion paragraphs. B. The principal auditor accepts responsibility for the
work of the other auditor.
C. The report of the other auditor is presented together with the report of the
principal auditor.
D. The other auditor is not an associate or correspondent firm whose work is
done at the request of the principal auditor.
32. When a client declines to disclose essential information in the financial statements
or their accompanying notes, the auditor should?
A. Provide the information in the audit report, if practicable, and qualify his
opinion because of a scope limitation.
B. Provide the information in the audit report, if practicable, and quality his
opinion because of a departure from PFRS.
C. Issue a disclaimer of opinion because the client has interfered with the
auditor's function of assessing the adequacy of disclosure.
D. Issue an unqualified opinion but inform the readers by including the omitted
information in an emphasis of matter paragraph.
33. Magsombol, CPA, is the principal auditor for a multi-national corporation. Another
CPA has examined and reported on the financial statements of a significant subsidiary
of the corporation. Magsombol is satisfied with the independence and professional
reputation of the other auditor, as well as the quality of his examination. With respect to
Magsombol's report on the consolidated financial statements, taken as a whole,
Magsombol
34. If a company's financial statements violate PFRS for an immaterial item which is
expected to become material in the future, the auditor is likely to issue:
35. In performing an audit, the auditor found that the client had changed the estimated
useful life of its assets. The auditor believed that the change in useful lives of the assets
is realistic. The appropriate report is:
36. In which of the following circumstances would the auditor likely issue an unqualified
opinion?
A. Client company's financial statements show a significant net loss for each of
the last three years, including the current fiscal period.
B. The financial statements have not been prepared in accordance with
Philippine financial reporting standards.
C. The auditor is not independent during the fiscal period under audit.
D. The scope of the auditor's examination has been restricted due to
circumstances which are beyond the control of either the auditor or the client.
37. Comparative financial statements include the prior-year statements that were
audited by a predecessor auditor whose report is not presented. If the predecessor's
report was unqualified, the successor should:
38. The "unqualified report with explanatory paragraph" and the 'unqualified report with
modified wording'
A. Emphasis of a matter.
B. Reports involving other auditors.
C. Auditor disagrees with client's departure from PFRS.
D. Lack of consistent application of PFRS.
40. When determining whether an exception is highly material, the extent to which the
exception affects different parts of the financial statements must be considered. This is
referred to as
A. materiality.
B. pervasiveness.
C. financial analysis.
D. ratio analysis.
41. In order to make materiality decisions when a condition requiring a departure from
an unqualified report exists, the auditor must evaluate
A. The auditor wishes to emphasize that the entity had significantly lost a market
share.
B. The auditor decides not to refer to the report of another auditor as a basis, in
part, for the auditor's opinion.
C. The entity issues financial statements that present financial position and
results of operations, but omits the required notes to financial statements.
D. At the client's request, the client's attorney has refused to respond to the
auditor's inquiries about ongoing litigation.
43. A report other than an unqualified report must be issued whenever any of the three
conditions requiring a departure from an unqualified report
A. exists
B. exists and is material
C. exists, is material, and is within management's control
D. exists, is material, and is within either management's or the auditor's control
45. Which of the following opinion is appropriate if a company has a probable and
material loss contingency, and the company has accrued the loss in the financial
statements?
A. Adverse opinion.
B. Qualified opinion.
C. Standard unqualified opinion.
D. Unqualified opinion with explanatory language.
46. Which of the following conditions most likely requires the auditor to consider issuing
a going concern modification?
47. Which of the following, by itself, would not cause uncertainty about the ability of a
company to continue as a going concern?
48. JJ, CPA, has performed most of the audit of Macmood Company's financial
statement and qualifies as the principal auditor, RT, CPA did the remainder of the work.
JJ wishes to assume f responsibility for RT's work. Which of the following correct?
49. Which of the following is a change which does not affect consistency and therefore
does not require an explanatory paragraph?
50. If an auditor is not independent of a client, the auditor should issue a(n):
51. Whenever an auditor issues an adverse opinion, the implication is that the auditor
52. When a misstatement in the financial statements would affect a user's decision but
the overall statements are fairly stated, it would be appropriate to issue a(n):
A. unqualified opinion.
B. qualified opinion.
C. adverse opinion.
D. disclaimer of opinion.
53. Which of the following is most accurate with respect to a CPA's responsibility in
considering a going concern question on financial statement audits?
55. The auditor's best course of action with respect to "other financial information"
included in an annual report containing the auditor's report is to
56. A CPA is not able to confirm a large account receivable, but he has satisfied himself
as to the proper statement of the receivable by means of alternative auditing
procedures. The auditor's report on the financial statements should include
D. NO NO
A. A disclaimer of opinion indicates that the auditor is not able to gather enough
evidence to render an opinion on the financial statements, while an adverse
opinion indicates that the financial statements are materially misstated.
B. A disclaimer of opinion indicates that the financial statements are materially
misstated, while an adverse opinion indicates that, the auditor is not able to
gather enough evidence to render an opinion on the financial statements.
C. The opinions are generally equivalent, except on adverse opinion includes a
going concern paragraph.
D. Adverse opinion indicates that the financial statements are materially
misstated, while a disclaimer indicates that the financial statement are "so
pervasively erroneous" that no opinion can be given.
60. A departure from PFRS with a material effect on the financial statements is most
likely to result in a (n):
A. Disclaimer of opinion.
B. Qualified opinion.
C. Standard unqualified opinion.
D. Unqualified opinion with explanatory language.
61. When a CPA has concluded that an action should be taken to prevent future
reliance on his report, he should
A. Advise his client to make appropriate disclosure of the newly discovered facts
and their impact on the financial statements to persons who are known to be
currently relying or who are likely to rely on the financial statements and the
related report.
B. Recall the financial statements and issue revised statements and include an
appropriate opinion.
C. Advise the client and others not to rely on the financial statements and make
appropriate disclosure of the correction in the statements of a subsequent period.
D. Recall the financial statements and issue a disclaimer of opinion which should
generally be followed by revised statements and a qualified opinion.
A. The chief executive officer refuses the auditor's access to minutes of the board
of directors' meetings.
B. Tests of controls show that the client's internal control is so ineffective that it
cannot be relied upon.
C. The financial statements are not in conformity with the FRSC Statements
regarding the capitalization of leases.
D. Information comes to the auditor's attention than raises substantial doubt
about the client's ability to continue as a going concern.
64. The opinion paragraph of a CPA's report states: "In our opinion, with the exception
of the effects of not observing inventory in one of the client's Mactan warehouses, as
discussed in the preceding paragraph, the financial statements present fairly, in all
material respects,..." This paragraph expresses a (n)
A. unqualified opinion.
B. adverse opinion due to scope limitation
C. qualified opinion due to scope limitation.
D. opinion modified because of an uncertainty.
65. Which of the following subsequent events will be least likely to result to an
adjustment on the financial statements?
66. An auditor was unable to obtain sufficient competent evidential matter concerning
certain transactions because a fire burned down the client's office building destroying all
the company's records. Given these circumstance, the auditor would choose between a
(n)
68. In his Letter to Stockholders in the annual report, the president of Better Vision's
states that this year was the most profitable year in the company‘s history Actually the
company did better, profit-wise, last year according to the audited financial statements.
What type of opinion should the auditor issue?
70. Soon after Patricia's audit report was issued, Patricia learned of certain related party
transactions that occurred during the year under audit. These transactions were not
disclosed in the notes to the financial statements. Patricia should
71. When an auditor mentions consistency in the audit report, a reader of the financial
statements may infer
A. that PFRS have not been consistently observed in the current period in
relation to the preceding period.
B. that a material departure from PFRS has been detected.
C. that a reclassification of items or change in classifications has occurred.
D. nothing about application of accounting principles within the period.
A. the financial statements have not been prepared in accordance with PFRS.
B. the scope of the audit has been restricted by circumstances beyond either the
client's or auditor's control.
C. the auditor has lost independence.
D. the scope of the audit has been restricted.
A. is unable to satisfy himself that the overall financial statements arc presented
fairly.
B. believes that the overall financial statements are not presented fairly.
C. believes that some material parts of the financial statements are not presented
fairly.
D. has determined that the financial statements are presented fairly.
74. Management of Blue Company has decided not to account for a material transaction
in accordance with the provisions of an FRSC standard. In setting forth its reasons in a
note to the financial statements, management has clearly demonstrated that due to
unusual circumstances had the financial statements been presented in accordance with
the PFRS, they would be misleading. The auditor's report should include an explanatory
separate paragraph and contain a(an)
A. adverse opinion.
B. unqualified opinion.
C. "except for" qualified opinion.
D. "subject to" qualified opinion.
75. In the ―management discussion and analysis (MD&A)‖ contained in the 2008 annual
report of Concorde Corporation, the management started that the total sales were P4.95
billion and net profit was P500 million. The audited sales and net profit, however,
wereP3.8 billion and P450 million respectively. The financial statements, contained in
the annual report, reflected the audited figures and the CPA planned to issue an
unqualified opinion. Upon noting the inconsistencies between the data in the annual
report and the audited financial statements, however, the CPA should
A. refer to the inconsistency in the audit report and issue a qualified audit
opinion.
B. issue an unqualified opinion without an explanatory paragraph, because the
MD&A is not covered in the audit report.
C. issue an unqualified audit opinion with an explanatory paragraph describing
the inconsistency.
D. render an adverse opinion on the basis that management had intentionally
misrepresented reported sales and net profit.
76. The adverse opinion report will be issued by the independent auditors when they
A. suspect that the client has not followed Philippine financial reporting
standards.
B. suspect that the client's financial statements are not in conformity with
generally accepted auditing standards.
C. have knowledge that the financial statements are not in conformity with
Philippine financial reporting standards (PFRS).
D. have knowledge that generally accepted auditing standards (GAAS) were not
followed.
77. A post-audit review, conducted by another audit partner, revealed that the audit
team had failed to examine or confirm securities held in safekeeping. The amounts
involved were material in relation to reported net assets. The unqualified audit report,
along with the audited financial statements, had been released two-months earlier.
Based on this information, the audit team should
79. The least severe type of report for disclosing departures from an unqualified report
is the
A. adverse opinion
B. qualified opinion
C. disclaimer of opinion
D. report on unaudited financial statements
80. Which of the following statements is correct with respect to explanatory paragraphs
in report on an audit of financial statements?
D. Sometimes they precede and sometimes they follow the opinion paragraph.
81. Of the two major categories of scope restrictions, (1) those caused by client and (2)
those caused by conditions beyond the control of either the client or auditor; the effect
on the auditor's judgment is
82. Whenever an auditor issues a qualified opinion, the implication is that the auditor
83. Whenever an auditor issues a disclaimer of opinion, the implication is that the
auditor
84. Which of the following best describes the auditor's responsibility for "other
information" that is, together with the audited financial statements and the auditor's
report, included in the annual report to stockholders?
85. If the inventory comprises the largest balance on the financial statements, a large
misstatement that is so material would cause the auditor to issue a(n):
A. unqualified opinion.
B. adverse opinion.
C. qualified opinion.
D, disclaimer of opinion.
86. When a known or suspected misstatement with highest level of materiality exists on
the financial statements, the auditor must issue
A. an adverse opinion.
B. a disclaimer of opinion.
C. either a qualified opinion or an adverse opinion, depending on which condition
exist.
D. either an adverse opinion or a disclaimer of opinion, depending on which
conditions exist.
88. Under which of the following circumstances would an unqualified audit opinion,
followed by an explanatory paragraph, not be appropriate?
A. The auditor wishes to emphasize that the client has entered into material
transactions with related parties. The substance of the related party transactions
is properly disclosed in the audited financial statements.
B. The client has completed material transactions with related parties and the
auditor is unable to persuade management to properly reflect the economic
substance of the transactions in the financial statements.
C. The client has used a method of revenue recognition that is at variance with
promulgated accounting standards. The auditor, however, agrees with the
departure on the basis that the use of the promulgated standard would make the
financial statements materially misleading.
D. The auditor believes that substantial doubt exists concerning the ability of the
client to continue as a going concern.
A. in all cases.
B. Only if it is highly material.
C. Only if it is material.
D. If the client requests it.
A. immaterial.
B. Slightly material.
C. Material.
D. Highly material.
91. When comparing misstatements with a measurement base, the auditor must
consider the pervasiveness of the misstatement. An example of a pervasive
misstatement would be
93. The peso amount of some e misstatements cannot 9 measured. If, for example, the
client is unwilling existing lawsuit, the materiality question that the evaluate in such a
situation is
A. a disclaimer of opinion.
B. an adverse opinion.
C. a qualified opinion.
D. an unqualified report, a qualification of scope and opinion, or a disclaimer,
depending on materiality.
95. The adverse effects of events causing an auditor to believe there is substantial
doubt about an entity's ability to continue as a going concern would most likely be
mitigated by evidence relating to the
97. A client company has changed its method of inventory, valuation from an
unacceptable one to one in conformity with Philippine financial reporting standards. The
auditor's report on the financial statements in the year of the change should include
A. no reference to consistency.
B. a reference to a prior period adjustment in the opinion paragraph.
C. an explanatory paragraph explaining the change.
D. a justification for making the change and the impact of the change on reported
net income.
98. The client has presented all the required financial statements with the exception of
the statement of cash flows. The auditor has completed the audit and is satisfied that
everything, with the exception of the missing statement, is presented fairly. Accordingly,
the auditor
99. An audit report contained the following wording: "In our opinion, except for the
omission of the segment information referred to in the preceding paragraph…‖ The
excerpt was taken from a(n)
100. For the report containing a disclaimer for lack of independence, the disclaimer is in
the
101. Should a situation arise where all audit procedures considered " necessary in the
circumstances were performed and the auditor would otherwise issue an unqualified
report, and then it was discovered that the auditor has not fulfilled the independence
requirements specified by the Code of Ethics, the audit report issued
105. If client has been inconsistent in applying PFRS from year one to year two and the
auditor does not concur with the appropriateness of the change, the auditor will issue a
(n)
A. disclaimer.
B. qualified opinion.
C. adverse opinion.
D. unqualified opinion.
A. The correction of an error in the prior year's financial statements resulting from
a mathematical mistake in capitalizing interest.
B. The change from the cost method to the equity method in accounting for
investment in common stock.
C. A change in the estimate of provisions for warranty costs.
D. A change in depreciation method which has no effect on current year's
financial statements but is certain to affect future years.
108. Items that materially affect the comparability of financial statements generally
require disclosure in the footnotes. If the client refuses to properly disclose the item, the
auditor may require to issue
A. the disclaimer.
B. a qualified opinion.
C. an unqualified opinion.
D. an adverse opinion.
109. A statement in a report such as "Nothing came to our attention that would lead us
to question the fairness of the presentations" is referred to as
110. An auditor may issue the standard audit report when the
111. Several types of "special audit reports" are issued by CPAs. Which one of the
following circumstances would not require the issuance of such a special report?
112. In which of the following situation would an auditor ordinarily, issue an unqualified
audit opinion without an explanatory paragraph?
A. The auditor wishes to emphasize that the entity had significant related party
transactions.
B. The auditor decides to make reference to the report of another auditor as a
basis, in part, for the auditor's opinion.
C. The entity issues financial statements that present financial position, the
results of operations, and the changes in stockholders' equity but intentionally
omits the statement of cash flows.
D. The auditor has substantial doubt about the entity's ability to continue as a
going concern, but the circumstances are fully disclosed in the financial
statements.
113. Comparative financial statements include the financial statements of the prior year
that were audited by a predecessor auditor whose report is not presented. If the
predecessor's report was qualified, the successor should
114. Which of the following events occurring after the issuance of an auditor's report
most likely would cause die auditor to make further inquiries about the previously issued
financial statements?
115 A principal auditor decides not to refer to the audit by another CPA who audited a
subsidiary of the principal auditor's client. After making inquiries about the other CPA's
professional reputation and independence, the principal auditor most likely would
116. The Fragile Company's financial statements contained a departure from Philippine
financial reporting standards because, due to unusual circumstances, the statements
would have otherwise been misleading. The auditor should express an opinion that is
117. When a predecessor auditor reissues the report on the prior period's financial
statements at the request of the former client, the predecessor auditor should
A. indicate ill tile introductory paragraph of the reissued report that the financial
statements of the subsequent period were audited by another CPA.
B. obtain an updated management representation letter and compare it to that
obtained during the prioi period audit.
C. add an explanatory paragraph to the reissued report stating that the
predecessor has not performed additional auditing procedures concerning the
prior period's financial statements.
D. Review the current year's financial statements for reasonableness.
118. Miller Company uses the first-in, first-out method of costing for its international
subsidiary's inventory and the last-in, first-out method of costing for its domestic
inventory. Under these circumstances, Miller should issue an auditor's report with an
119. When the audited financial statements are presented in a client's document
containing other information, the auditor should
D. read the other information to determine that it is consistent with the audited
financial statements.
120. When an auditor qualifies an opinion because of inadequate disclosure, the auditor
should describe. the nature of the omission in a separate explanatory paragraph and •
modify the respective paragraphs
121. If an accounting change has no material effect on the financial statements in the
current year but the change is reasonably certain to have a material effect in later years,
the change should be
122. When comparative financial statements are presented, the fourth reporting
standard, which refers to financial statements "taken as a whole", should be considered
to apply to the financial statements of the
123. An auditor's report includes a statement that "the financial statements do not
present fairly the financial position in conformity with Philippine financial reporting
standards." This auditor's report was probably issued in connection with financial
statements that were
C. misleading.
D. condensed.
A. predict whether the entity will be in business one year from the balance sheet
date.
B. evaluate whether there is substantial doubt about the entity's ;ability to
continue as a going concern.
C. weigh mitigating factors against contrary information about the entity's ability
to continue as a going concern.
D. report the entity's ability to continue as a going concern to senior management
and to the board of directors.
125. An auditor is unable to determine the amounts associated with illegal acts
committed by a client. The auditor would most likely issue
MODULE 5
AUDIT PLANNING
PSA-BASED QUESTIONS
a. Professional responsiveness
b. Conservative advocacy
c. Objective judgment
d. Professional skepticism
2. With respect to errors and fraud, which of the following should be a part of an
auditor‘s planning in an audit engagement?
a. Planning to search for error or fraud that would have a material or immaterial
effect on the financial statements
b. Planning to discover errors or fraud that are either material or immaterial
c. Planning to discover errors or fraud that are material
d. Planning to consider factor affecting the risk of material misstatements both at
the financial statement and the account balance level
3. The risk that the auditor may unknowingly fail to appropriately modify the
unqualified opinion on financial statements that are materially misstated is
referred to as
a. Audit risk
b. Detection risk
c. Information risk
d. Business risk
4. The risk the financial statements are likely to be misstated materially without
regard to the effectiveness of internal control is which type of risk?
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
5. The type of transactions that ordinarily have a high inherent risk because they
involve management judgment or assumptions are referred to as
a. Estimation transactions
b. Nonroutine transactions
c. Routine transactions
d. Related-party transactions
a. The client has entered into numerous related party transactions during the
year under audit.
b. Internal control over shipping, billing, and recording of sales revenue is weak
c. The client has lost a major customer accounting for approximately 30% of
annual revenue
d. The board of directors approved a substantial bonus for the president and
chief executive officer, and also approved an attractive stock option plan for
themselves
a. Detection risk
b. Control risk
c. Inherent risk
d. Audit risk
9. The risk that the audit will fail to uncover a material misstatement is eliminated
10. Audit risk components consist of inherent, control and detection risks. Which of
them is (are) the dependent variable(s)?
a. Inherent risk
b. Control risk
c. Detection risk
d. Inherent and control risks
11. The probability that an auditor‘s procedures leading to the conclusion that a
material error does not exist in an account balance when, in fact, such error does
exist is referred to as
a. Prevention risk
b. Inherent risk
c. Control risk
d. Detection risk
a. Detection risk
b. Business risk
c. Control risk
d. Inherent risk
14. Which of the following types of risk is significantly affected by the nature, amount
and timing of substantive auditing procedures?
a. Inherent risk
b. Control risk
c. Detection risk
d. Sufficiency risk
15. The understanding between the client and the auditor as to the degree of
responsibilities to be assumed by each is normally set forth in a(an)
a. Representation letter
b. Engagement letter
c. Management letter
d. Comfort letter
16. After an auditor had been engaged to perform the first auditor for a non-public
entity, the client requested to change the engagement to a review.in which of the
following situations would there be a reasonable basis for the auditor to comply
with the client‘s request?
a. the client‘s bank required an audit before committing to a loans, but the client
subsequently acquired alternative financing
b. the auditor is prohibited by the client from corresponding with the client‘s legal
counsel
c. management refuses to sign the client representation letter
d. the audit is substantially complete and the auditor determined that an
unqualified opinion is warranted but there is a disagreement concerning the
audit fee
19. The primary reason why an engagement letter is submitted by audit fism prior to
starting the work is that it
a. Clarifies the responsibilities of the management and those of the audit firm
b. Defines the firm‘s policies and procedures regarding new clients
c. Provides an insurance policy for both the firm and its client
d. Communicated the type of opinion that will be rendered on the engagement
20. Which of the following best describes the purpose of an engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the
exercise of due care
b. By clearly defining the nature of the engagement, the engagement letter helps
avoid and resolve misunderstandings between the CPA and the client
regarding the precise nature of the work to be performed and the type of
report to be issued
c. The engagement letter conveys to the management the detailed steps to be
applied in the audit process
d. The engagement letter should be signed by both the client and the CPA and
should be used only for independent audits
22. Which of the following statement would least likely appear in an auditor‘s
engagement letter?
a. The fees for our serviced are based on our regular per diem rates, plus travel
and other out-of-pocket expenses
b. During the course of our audit, we may observe opportunities for economy in,
or improved controls over, your operations
c. Our engagement is subject to the risk that material errors, fraud, and
defalcations, if they exist, will not be detected
d. After performing our preliminary analytical procedures we will discuss with
you the other procedures we consider necessary to complete the
engagement
23. Which of the following is not done during the client selection and retention phase
of planning?
26. The primary difference between financial statement errors and fraud is that
29. Which of the following should the auditors normally interview as part of their
assessment of fraud risk?
a. Senior management
b. Audit committee
c. Various employees whose duties do not include normal financial reporting
responsibilities
d. All of the given choices
30. Which of the following characteristics most likely would heighten an auditor‘s
concern about the risk of intentional manipulation of financial statements?
31. When planning the audit, if the auditor has no reason to believe that
noncompliance to laws and regulations exist, he should
33. What will an auditor who has been proposed for an audit engagement usually do
prior to accepting a new client?
34. Philippine Standards on Auditing reacquire auditors to assess the risk of material
misstatements due to fraud
35. If, when performing analytical procedures, an auditor observes that operating
income has declined significantly between the preceding year and current year,
the auditor should next
37. If the auditor sets the preliminary judgment about materiality level at a relatively
low peso amount
38. Which of the following statement is true with regard to the relationship among
audit risk, audit evidence, and materiality?
a. The lower the inherent risk and control risk, the lower the aggregated
materiality threshold
b. Under conditions of high inherent and control risk, the auditor should place
more emphasis on obtaining external evidence and should reduce reliance on
internal evidence
c. Where inherent risk is high and control risk is low, the auditor may safely
ignore inherent risk
d. Aggregated materiality thresholds should not change under conditions of
changing risk levels
39. Which of the following is most likely to be an overall response to fraud risks
identifies in an audit?
a. Supervise members of the audit team less closely and rely more upon
judgment
b. Use less predictable audit procedures
c. Use only certified public accountants on the engagement
d. Place increased emphasis on the audit of objective transactions rather than
subjective transactions
41. The purpose of analytical procedures during the audit planning stage is to
42. Which of the following represents a procedure that the auditor may use because
plausible relationships among financial statement balances are expected to
exist?
a. Attributes testing
b. Enterprise risks assessment
c. Inherent tests of control
d. Analytical review
47. Inquiries directed towards those charged with governance may most likely
48. Which statement is incorrect regarding significant risks that require special audit
consideration?
a. The auditor should determine which of the identified risks are, in the auditor‘s
judgment, require special audit consideration
b. The auditor excludes the effect of identified controls related to the risks to
determine whether the nature of the risk, the likely magnitude of the potential
misstatement including the possibility that the risk may give risk to multiple
misstatements, and the likelihood of the risk occurring are such that they
require special audit consideration
49. The assessment of the risks of material misstatement at the financial statement
level is affected by the auditor‘s understanding of the control environment.
Weaknesses in the control environment ordinarily will lead the auditor to
a. Have more confidence in internal control and the reliability of audit evidence
generated internally within the entity
b. Conduct some audit procedures at an interim date rather than at period end
c. Modify the nature of audit procedures to obtain more persuasive audit
evidence
d. Decrease the number of locations to be included in the audit scope
50. The auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such responses least likely include
51. Which statement is incorrect regarding the nature of further audit procedures?
a. The nature of further audit procedures refers to their purpose and their type
b. Certain audit procedures may be more appropriate for some assertions then
others
c. The higher the auditor‘s assessment of risk, the less reliable and relevant is
the audit evidence sought by the auditor from substantive procedures
d. The auditor is required to obtain audit evidence about the accuracy and
completeness of information produced by the entity‘s information system
when that information is used in performing audit procedures
52. Which statement is incorrect regarding the extent of further audit procedures?
53. The auditor should design and perform further audit procedures whose nature,
timing and extent are responsive to the assessed risks of material misstatement
at the assertion level. Which of the following is the most important consideration
in responding to the assessed risk?
54. While assessing the risk of material misstatement, the auditor identify risks,
relate risk to what could go wrong, consider the magnitude of risks and:
55. Which of the following would heighten an auditor‘s concern about the risk of
fraudulent financial reporting?
a. Inability to generate positive cash flows from operations while reporting large
increases in earning
b. Management‘s lack of interest in increasing the dividend paid on common
stock
c. Large amount of liquid assets that are easily convertible into cash
d. Inability to borrow necessary capital without obtaining waivers on debt
covenants
56. Which of the following is least likely considered a financial statement audit risk
factor?
57. Which of the following is most likely to be considered a risk factor relating to
fraudulent financial reporting?
59. Which of the following factors most likely would heighten an auditor‘s concern
about the risk of fraudulent financial reporting?
a. Large amounts of liquid assets that are easily convertible into cash
b. Low growth and profitability as compared to other entity‘s in the same industry
c. Financial management‘s participation in the initial selection of accounting
principles
d. An overly complex organizational structure involving unusual lines of authority
60. Which of the following is most likely to be an overall response to fraud risks
identified in an audit?
QUIZZERS
1. As part of audit planning, CPAs should design audit programs for each individual
audit and should include audit steps and procedures to
2. Preplanning the audit involves several key activities. Which of the following would
not be included in preplanning an audit?
3. During audit planning, which of the following is not a factor that affects the
auditor‘s judgment as to the quantity, type and content of working papers?
4. Which one of the following is not considered a valid source of information about
the client‘s processes?
5. The element of the audit planning process most likely to be agreed upon with the
client before the implementation of audit strategy is the determination of the
a. Observing the client‘s annual physical inventory taking and making test
counts of selected items
b. Making arrangement with the client concerning the timing of audit fieldwork
and use of the client‘s staff in completing certain phases of the examination
c. Obtaining an understanding of the business
d. Developing audit program
7. R & O, CPAs, have been retained as the auditors of City Corporation. What are
the R & O‘s responsibilities with regards to contracting City Corporation‘s
predecessor auditors?
8. An initial audit requires more audit time to complete than a recurring audit. One
of the reasons for this is that
9. Prior to beginning the fieldwork on a new audit engagement in which he does not
possess industry expertise, the CPA should
10. Which of the following will an auditor least likely discuss with the former auditors
of a potential client prior to acceptance of an audit engagement?
11. What is the most likely course of action to be taken by an auditor in assessing
management integrity?
12. An engagement letter should be written before the start of an audit because
13. When a CPA is approached to perform an audit for the first time, the CPA should
make inquiries of the predecessor auditor. This is a necessary procedure
because the predecessor may be able to provide the successor with information
that will assist the successor in determining whether:
14. A written understanding between the auditor and the client concerning the
auditor‘s responsibility for the discovery of noncompliance to laws is usually set
forth in a(an):
15. Prior to acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and
request a complete report of the circumstances leading to the termination of
the engagement with an understanding that all information disclosed will be
kept confidential
b. Accept the engagement without contacting the predecessor auditor since the
CPA can include audit procedures to verify the reason given by the client for
the termination of the engagement
c. Not communicate with the predecessor auditor because this would in effect
be asking the auditor to violate the confidential relationship between an
auditor and the client
d. Advise the client of the intention to contact the predecessor auditor and
request a permission for the contact
16. Before accepting an audit engagement, a successor auditor should make specific
inquiries of the predecessor auditor regarding the predecessor‘s
17. A successor auditor would most likely make specific inquiries of the predecessor
auditor regarding
20. Which of the following would not be a source of information about the risk of a
potential new audit client?
21. In comparing management fraud with employee fraud, the auditor‘s risk of failing
to discover the fraud is greater for:
a. Enterprise risk
b. Financial reporting risk
c. Engagement risk
d. All of the above risks are affected
23. The auditor is most likely to presume that a high risk of irregularities exists if
24. Which of the following audit risk components may be assessed in nonquantitaive
terms?
25. Which of the following combinations of engagement risk, audit risk, and
materiality would lead the auditor to most audit work?
26. Which of the following conditions justifies an auditor‘s decision of raising the
materiality level?
27. Which of the following does an auditor least likely perform in assessing audit
risk?
28. Which type of risk does the management of a company have the most control
over in the short term?
a. Inherent risk
b. Control risk
c. Detection risk
d. Sufficiency risk
29. In which of the following order would the auditors perform the following steps?
a. Determine audit risk; assess control risk; determine detection risk; set
materiality
b. set materiality; determine audit risk;assess control risk; determine detection
risk
c. set materiality; assess control risk;determine detection risk; determine audit
risk
d. Determine audit risk;set materiality;assess control risk;determine detection
risk
30. If the results of the auditor‘s tests of controls induce the auditor to change the
assessed level of control risk for inventory from 0.2 to 0.4 and audit risk and
inherent risk remain constant, what is the effect on the acceptable level of
detection risk?
31. Which of the following may cause the management to intentionally understate
profits?
33. Why should the auditor plan more work on individual accounts as lower
acceptable levels of both audit risk and materiality are established?
34. With respect to error and fraud, the auditor should plan to
a. Search for errors or fraud that would have a material effect on the financial
statements
b. Discover errors or fraud that would have a material effect on the financial
statement
c. Search for errors that would have a material effect and for fraud that would
have either material or immaterial effects on the financial statement
d. Search for fraud that would have a material effect and for errors that would
have either material or immaterial effects on the financial statements
a. Errors
b. Indirect-effect non-compliance to laws and regulations
c. Fraud
d. Management fraud
36. Which of the following might be considered a ―red flag‖ that may indicate possible
fraud in a large manufacturing company with several subsidiaries?
37. Experience has shown that certain conditions in an organization are symptoms of
possible management fraud. Which of the following conditions would not be
considered an indicator of possible fraud?
38. Warning signs that cause the auditor to question management integrity must be
taken seriously and pursued vigorously. Which of the following may lead the
auditor to suspect management dishonesty?
a. The president/CEO of the client corporation has held numerous meetings with
the controller for the purpose of discussing accounting practices that will
maximize reported profits
b. The client has been names as a defendant in a product liability suit
39. Which of the following methods may be used to commit fraudulent financial
reporting?
a. Overstate revenues
b. Understate liabilities
c. Fail to provide adequate disclosure
d. Each of the given choice can be used to commit fraudulent financial reporting
40. Which of the following internal control policies, when absent, would increase the
opportunity for fraud?
41. Whom should the auditors contact when they suspect a fraud?
a. Senior management
b. Expected perpetrators of the fraud
c. Audit committee of the board of directors
d. Either the senior management or the audit committee
42. Analytical procedures performed in the planning stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures
most likely would indicate that:
44. Which of the following statements is correct with respect to the auditor‘s use of
analytical procedures?
a. Analytical procedures are time saving procedures that auditors may employ at
their discretion
b. Analytical procedures are powerful tools that are required to be used during
the planning and testing phases of the audit
c. Analytical procedures may be used to identify misstatements in a client‘s
accounts
d. Analytical procedures are required to be used during the planning and
completion phases of the audit.
45. Which of the following is not an information source for developing analytical
procedures used in the audit?
46. Which of the following results from analytical procedures might indicate obsolete
inventory?
47. Auditors try to identify predictable relationship when using analytical procedures.
Which of the following accounts would most likely yield the highest level of
evidence regarding relationships that involve transactions?
a. Accounts payable
b. Accounts receivable
c. Payroll expense
d. Advertising expense
a. Ratio analysis
b. Trend analysis
c. Internal control analysis
d. Vertical analysis
50. How is the audit program best described at the beginning of the audit process?
a. Temporary
b. Conclusive
c. Confirmed
d. Optional
51. After discovering that a related-party transaction exists, the auditor should be
aware that the
52. In which of the following would the auditor most likely find information about
compensation of corporate officers?
a. Corporate charter
b. Corporate by-laws
c. Corporate minutes
d. Audit engagement letter
56. Of the following procedures, which one is not considered a purl "obtaining an
understanding of the client's environment?"
57. The element of the audit planning process most likely to be agreed upon with the
client before the implementation of the audit strategy is the determination of the
58. Which of the following concepts is most useful in assessing the scope of an
auditor's program relating to various accounts?
a. Attribute sampling
b. Materiality
59. With respect to the auditors planning of a year-end examination, which of the
following statements is always true?
a. An engagement proposed after the fiscal year ends should not accepted.
b. An inventory count must be observed at the balance sheet date
c. The client's audit committee should not be told of the specific audit
procedures that will be performed.
d. It is an acceptable practice to-carry out substantial parts of the examination at
interim dates
a. Internal control over the recording of plant asset additions and repairs and
maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility
during the year under audit.
c. The client is a private university located in Southern Philippines.
d. The members of the board of directors are elected by the stockholders during
the annual meeting.
62. The principal reason for developing a written audit program is to assure that the
a. Serve as a tool for planning, directing, and controlling the audit work.
b. Document an auditors understanding of the internal control
c. Provide for a standardized approach to the audit engagement
d. Delineate the audit risk accepted by the auditor.
65. In deciding whether to use the work of internal auditors, external auditors must
evaluate the internal auditors‘
a. Objectivity and competence.
b. Independence and professionalism.
c. education and certification
d. age and gender
67. For which of the following judgments may on independent auditor share
responsibility with an entity's internal auditor who is assessed to be both
competent and objective?
68. After studying and evaluating a client's existing internal control, an auditor has
concluded that the policies and procedures are well designed and functioning as
intended. Under these circumstances, the auditor would most likely
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect
errors and fraud.
c. Setacceptable detection, risk at a higher level than would be set under
conditions of weak internal control.
d. set acceptable detection risk at a lower level than would be set under
conditions of weak internal control.
70. Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should not be accepted?
72. Which of the following statements is accurate about "fraud risk factors"
considered when conducting an audit?
73. Which of .the following is not an example of a likely adjustment in the auditor‘s
overall audit approach when significant risk is found to exist?
74. Which of the following conditions identified during the audit increases the risk of
employee fraud?
75. Which of the following is not ordinarily considered a factor indicative of increased
financial reporting risk when an auditor is considering a client‘s risk assessment
policies?
MODULE 6
PSA-BASED QUESTIONS
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. Expressions of an opinion.
a. Prevent irregularities
b. Provide reasonable assurance that the company's objective be achieved
c. Catch all errors that may occur in the company
d. Aid in the effective auditing of the company
a. Control risk
b. Control activities
c. The information System
d. The control environment
10. Which of the following best describes the interrelated components of internal
control?
12. The auditor‘s review of the client's internal control is documented in order to
substantiate
13. An auditor would most likely .be concerned with internal control policies and
procedures that provide reasonable assurance about:
a. The efficiency of management's decision-making process
b. Appropriate prices thatthe entity should charge for its products.
c. Methods of assigning production tasks to employees
d. The entity's ability to process and summarize financial data.
14. When considering the effectiveness of internal control, the auditor should
recognize that inherent limitations do exist. Which following is an example of
inherent limitations in a client‘s internal control?
16. Which of the following is an inherent limitation of any client‘s internal control?
a. The benefits expected to be derived from effective internal control should not
exceed the costs of such control.
b. The competence and integrity of client personnel provide an environment
conducive to control and provide assurance that effective control will be
achieved.
c. The procedures that are designed to assure the execution and recording of
transactions in accordance with proper authorizations are effective against
frauds perpetrated by management
d. The procedures whose effectiveness depends on segregation of duties can
be circumvented by collusion.
a. The president and chief executive officer, with the assistance of the corporate
controller, inflated earnings by recording fictitious sales at year-end.
b. A newly-installed electronic data processing system failed to provide for a
comparison of sales order amount with prior customer balance and credit
limit. This resulted in numerous sales to customers who had already
exceeded their credit limits.
c. Numerous recording errors occurred because persons analyzing and
recording transactions did not have the necessary accounting background.
d. A computer programmer and a computer operator conspired to divert funds
from the company to an account controlled by dishonest employees.
18. Corporate directors, management, external auditors, and internal auditors all play
important roles in creating a proper control environment. Top management is
primarily responsible for
19. The primary responsibility for establishing and maintaining internal controls rests
with the
a. internal auditors
b. management
c. Securities and Exchange Commission
d. External auditors.
21. Internal control is a function of management, and effective control is based upon
the concept of charge and discharge of responsibility and duty. Which of the
following is an important feature of effective internal control?
a. Control activities
b. Management philosophy and operating style
c. Assessing activity level risks
23. Which of the following is not a major emphasis in the design of effective internal
accounting control?
24. A proper understanding of the client's internal control is an integral part of the
audit planning process. The results of the understanding
27. The purpose of tests of controls is to provide reasonable assurance that the
a. Operating effectively
b. Placed in operation (implemented)
c. Properly accumulated into balance sheet totals
d. Properly documented by the client
29. After documenting internal control in an audit engagement, the auditor may
perform tests on
30. Which of the following audit techniques would most likely provide an auditor with
the most assurance about the effectiveness of the operation of an internal control
procedure?
31. After the study and evaluation of a client's internal control policies and
procedures has been completed, an auditor might decide to
34. The auditor is studying internal control policies and procedures within the sales,
shipping, and billing subset of the revenue cycle. Which of the following
conditions suggests a need for additional testing of controls?
a. Make inquiries
b. Make observations
c. Inspect documents and records
d. Design substantive tests
37. To obtain evidence about control risk, an auditor ordinarily selects tests from a
variety of techniques, including
a. Analysis
b. Confirmation
c. Reperformance
d. Comparison
39. Management's attitude toward aggressive financial reporting and its emphasis on
meeting projected profit goals most likely would significantly influence an entity's
control environment when
QUIZZERS
a. The audit committee consists of the president, two vice-dents, and the
corporate controller.
b. The company does not have a centralized human resource function
c. The company has an effective internal audit staffs that monitors controls on a
continuous basis.
d. The company routinely transacts business with related parties.
a. The internal auditors report to the audit committee of the board of directors
b. The controller reports to the vice president of production.
c. The payroll accounting department reports to the chief accountant
d. The cashier reports to the treasurer
9. Internal control can only provide reasonable and not an absolute e of achieving
entity's control objectives. One of the factors limiting the likelihood of achieving
those objectives is that
11. External factors can either strengthen or weaken an entity's internal control.
Which of the following conditions supports strong internal control?
13. For good internal control, which of the following functions should not be the
responsibility of the treasurer's department?
a. Data processing.
b. Handling of cash
c. Custody of securities.
d. Establishing credit policies.
a. an auditor during the normal study and evaluation of the system of internal
control
b. a controller when reconciling accounts in the general ledger
c. Employees in the normal course of performing their assigned functions.
d. The chief financial officer when reviewing interim financial statements.
15. In general, material irregularities perpetrated by which of the following are most
difficult to detect?
a. Internal auditor
b. Computer operator
c. Cashier
d. Controller
16. Controls that enhance the reliability of the financial statements may be classified
as prevention controls and detection controls. Which the following is primarily a
detection control?
18. Which of the following factors are included in an entity's control environment?
19. Emir is responsible for the custody of finished goods in the warehouse. If his
company wishes to maintain strong internal control, which of the following
responsibilities are incompatible with his primary job?
a. Control environment
b. Risk assessment
c. Control activities
d. Monitoring
21. Infernal control procedures are not designed to provide reasonable assurance
that
23. Which of the following statements best describes a weakness often associated
with computers?
24. The financial statements are not likely to correctly reflect Philippine Financial
Reporting Standards if
25. The basic concept of internal control which recognizes that the cost of internal
control should not exceed the benefits expected to be derived is known as:
a. Management by exception
b. Management responsibility
c. Limited assurance
d. Reasonable assurance
26. Internal control should provide reasonable (but not necessarily absolute)
assurance which means that:
27. When considering internal control, an auditor must be aware of the concept of
reasonable assurance which recognizes that
29. Adequate separation of duties. within an EDP department would ensure that
30. Which of the following duties would indicate a weakness in the internal control
system?
31. Control risk is a measure of the auditor's expectation that the internal control
structure
32. Of the following statements about an internal control system, which one is not
valid?
a. No one person should be responsible for the custodial responsibility and the
recording responsibility for an asset.
b. Transactions must be properly authorized before such transactions are
processed.
c. Because of thecost benefit relationship, a client may apply control procedures
on a test basis.
d. Control procedures reasonably ensure that collusion among employees
cannot occur.
33. An entity should consider the cost of a control in relation to the risk. Which of the
following controls best reflects this philosophy for a large peso investment in
heavy machine tools?
.
UNDERSTANDING AND DOCUMENTATION OF INTERNAL CONTROL
a. tests of transactions.
b. analytical tests.
c. tests of controls.
d. a walk-through.
36. The actual operation of an internal control system may be most objectively
evaluated by
I. Classes of transactions
II. Account balances
a. I only.
b. II only.
c. both I and II, because they are equally weighted.
d. both I and II, because they vary from client to client
38. The three key concepts that underlie the study of an internal control structure and
the assessment of control risk would not include a criterion that
39. Even with the most effectively designed internal control structure, the auditor
must obtain audit evidence, beyond testing the controls, for every
41. A consideration of internal control made during an audit is usually not sufficient to
express an opinion on an entity's controls because
42. An auditor's report on internal control of a publicly held company would ordinarily
be of least use to
a. shareholders.
b. directors.
c. officers.
d. regulatory agencies.
43. The accountant's report that expresses an opinion on an entity's internal controls
should state that the
44. 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
45. The accountant's report that expresses an opinion on an entity's internal controls
would not include a
48. The sequence of steps in gathering evidence as the basis of the auditor‘s opinion
is:
50. Which of the following is the logical order of performing the following auditing
procedures?
a. ABC
b. ACB
c. BAC
d. BCA
52. Which of the following statements with respect to the independent auditor‘s
evaluation of internal control is correct?
c. The auditor generally should not evaluate the overall effectiveness of internal
control, but should separately evaluate each of the transaction cycles.
d. The auditor should evaluate all internal control weaknesses before
determining the, control procedures that should prevent or detect errors or
irregularities.
53. The auditor concludes that a public company has significant deficiencies in its
internal controls over financial reporting. Which of the following is not a proper
response to this finding?
55. Which of the following statements concerning the independent auditor's required
communication of material weaknesses in internal control is correct?
56. After obtaining a sufficient understanding of internal control, the auditor assesses
57. The ultimate purpose of assessing control risk is to contribute to the auditor‘s
evaluation of the risk that
58. It is important for the auditor to consider the competence of the audit employees
because their competence bears directly and importantly upon the
59. in gaining an understanding of internal control the auditor may trace several
transactions through the control process, including how the interface with any
service organizations whose services are part of the information system. The
primary purpose of this task is to
62. Which of the following tasks should be performed prior to the final audit?
What should be the logicalorder in which these four steps are performed?
a. III, IV, I, II
b. III, I, II, IV
c. II, III, I, IV
d. II, I, III, IV
65. The auditor‘s study and evaluation of internal control may be done for all but
which of the following reasons?
a. To provide a basis for offering the client, other value-added services designed
to increase efficient and effective operations.
b. To determine the nature, timing, and extent of other audit tests.
c. To establish a basis for reliance on internal controls.
d. To provide training and development for staff accountants.
66. Regardless of the assessed level of control risk, an auditor would perform some
67. A procedure that involves tracing a transaction from its origination through the
company's information systems is referred to as a (n):
a. Inquiry/analysis approach.
b. Re-analysis approach.
c. Remediation
d. Walkthrough
68. Auditors frequently use flowcharts in connection with which of the following?
a. Ease of preparation
b. Comprehensive coverage of controls.
c. Simplicity.
d. Ease in following information flow.
a. Narratives
b. Flowcharts
c. Internal control questionnaires
d. Each of the three documentation techniques is appropriate to do
74. An auditor is least likely to test for on internal control that provides for
75. An internal control questionnaire (ICQ) contains the following question: ―Does a
single individual receive and list cash receipts and perform posting tosales and
general ledgers?" What action should an auditor take if the accounting manager
responds "yes to the question?
77. Which method provides the auditor with the best visual grasp of a system and a
means for analyzing complex operations?
a. A flowcharting approach
b. A questionnaire approach.
c. A matrix approach
d. A detailed narrative approach.
80. The auditors‘understanding of their clients‘ internal control provides a basis for:
81. With respect to the client's system of internal control, the auditor is concerned
that the existing policies, and procedures provide reasonable assurance that
82. Which of the following best describes the primary reason why an auditor uses
flowcharts during on audit engagement?
83. Regardless of whether the auditor decides to test or not the controls for operating
effectiveness, he/she must fully document his or her understanding of the internal
control policies and procedures obtained through whatever means. Which of the
following does not describe on appropriate means for documenting his/her
understanding of the control system?
84. Which of the following questions would an auditor most likely include in an
internal control questionnaire for notes payable?
a. Are assets that collateralize notes payable critically needed for the entity‘s
continuedexistence? B
b. Are two or more authorized signatures required on checks that repay notes
payable?.
c. Are the proceeds from notes payable used for the purchase of noncurrent
assets?
d. Are direct borrowings on notes payable authorized by the board of directors?
a. Separation of duties
b. Flowchart accuracy
c. Understanding the system
d. Tests of controls
86. During the review of the client's system of internal control, the auditor observes
theclient employees as they apply the operating controls in order to
a. prepare flowchart.
b. update information contained in the organization and procedure manuals
c. corroborate the information obtained during the initial review of the system.
d. determine the extent of compliance with quality control standards.
88. Which of the following statements regarding the auditor's documentation of the
client‘s internal control structure is correct?
TESTS OF CONTROLS
89. Which of the following the auditor's purpose of further testing the control
procedures?
90. Tests of controls are concerned primarily with each of the following questions
except:
91. The objective of tests of details of transactions that are being performed as tests
of controls procedures is to
93. Auditors can use several types of audit procedures to test controls. Which of the
following type of audit procedures is least likely to be used during tests of
controls?
95. Which of the following types of evidence will be gathered in order to test internal
controls?
97. A procedure that would most likely be used by on auditor in performing tests of
control regarding segregation of functions on which no audit trail is available:
a. inspection.
b. Observation
c. Reprocessing
d. Reconciliation
a. A basis for the assessed level of control risk below the maximum level
b. a basis for understanding the flow of transactions through the accounting
system.
c. assurance that transactions are properly recorded.
d. all accounting control procedures leave visible evidence.
99. Which of the following procedures most likely would be included as part of an
auditor's tests of control procedures?
a. Inspection
b. Reconciliation
c. Confirmation
d. Analytical procedures
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 maximum
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
maximum.
102. In considering the evidence needed to assess control risk during the period from
interim to year-end, all of the following should be considered except the:
104. The auditor is examining copies of sales invoices only for the initials of the
person responsible for checking the extensions. This is an example of
a. test of controls.
b. dual purposetest.
c. substantive test.
d. test of balances
105. Which of the following statements about tests of controls is not valid?
a. The auditor mayperform inquiry and observation and gathering audit evidence
about the operating effectiveness of the control
b. Ordinarily, making inquiries provides more reliable audit evidence than doing
observation when testing segregation of functional responsibilities
c. Audit evidence obtained by doing observation pertains only to the point in
time at which the procedure was applied.
d. Observation of who applies a control procedure is useful as a test of control
procedures when evaluating control effectiveness of both cornpuferized and
manual system
a. The assessed level of inherent and control risk can be sufficiently low, thus
resulting to eliminating the need for substantive tests.
b. Audit risk may be more effectively determined by assessing inherent and
control risk separately.
c. There is an inverse relationship between detection risk and the combined
level of inherent and control risk
d. Detection risk is eliminated if an auditor were to examine 100 percent of the
account balance or class of transactions.
a. Efficiency
b. efficiency and effectiveness.
c. effectiveness.
d. cost benefit ratio.
109. Which of the following is a step in an auditor's decision to assess control risk at
below the maximum?
111. After obtaining an understanding of internal control and assessing control risk,
an auditor decides not perform additional tests of controls. The auditor most likely
concludes that the
IR CR AR
a. 20% 40% 10%
b. 20% 60% 5%
c. 10% 70% 4.5%
d. 30% 40% 5.5%
113. In studying internal control and assessing control risk, the auditor applies the
following steps:
a. CDEAB
b. CBAED
c. EACBD
d. AECBD
114. After obtaining an understanding of the client's internal control, the auditor
should consider whether
115. An independent auditor has concluded that the client's records, procedures and
representations can be relied upon based on tests made during the year when
internal control was found to be effective. The aucitor should test the records,
procedures, and representations again at year-end if:
a. Inquiries and observations lead the auditor to believe that conditions have
changed significantly
b. Comparisons of year-end balances with like balances at prior dates revealed
significant fluctuations.
c. Unusual transactions occurred subsequent to the completion at the interim
audit work
d. Client records are in a condition that facilitates effective and efficient testing.
117. In the assessment of control risk, the auditor is basically concerned that the
client‘s internal control provides reasonable assurance that
118. Which of the following is one of the most fundamental and effective controls?
119. Which circumstance would be consistent with both the planned assessed level
and the assessed level of controlrisk being low?
120. The results of the considerations of internal control least likely affect the
auditor‘s decisions pertaining to:
121. A material weakness in the design and the operation of controls that had been
discovered in an audit of internal controls results in:
a. A management letter
b. An unfavorable opinion
c. Firing of the auditors
d. Adjusting audit journal entries
a. Material weakness.
b. Reportable condition.
c. Significant deficiency
d. Strong control deficiency.
124. Which of the following terms includes the concept that least likely to have a
likelihood of occurrence?
125. When performing an audit of internal control for a public company, the auditors
will consider which of the following types of controls?
a. Preventive–Yes: Detective—Yes
b. Preventive–Yes: Detective—No
c. Preventive--No; Detective—Yes
d. Preventive--No; Detective—No
126. Which of the following is not a strong indicator of the existence of a material
weakness in internal control?
127. A control that reduces the risk that on existing or potential control weakness will
result in a failure to meet a control objective is referred to as a:
a. Compensating control.
b. Conditional control.
c. Non-routine control.
d. Walkthrough control.
a. The auditor usually gathers all or most of the evidence with substantive tests.
b. Usually little or no reliance is placed on controls.
c. The assessment of control risk is usually at or near maximum level.
d. Extensive tests of controls are performed.
129. Which Of the following is not a characteristic of the lower control risk approach?
130. If the auditor uses the primarily substantive approach instead of the lower
control risk approach
132. An auditor may decide to assess control risk at the maximum level for certain
assertions because he believes
133. The assessment of control risk can be made at any of the following times
except:
134. Which of the following statements is true? If control risk is assessed of the
maximum, the
136. After considering a client's internal control, the auditor has concluded that the
system is well designed and is functioning as anticipated. Under these
circumstances, the auditor would most likely
138. As a result of tests of controls, an auditor assessed control risk too low d
decreased substantive testing. This assessment occurred because the true
deviation rate in the population was
a. Less than the risk of assessing control risk too low, based on the auditor's
sample.
b. Less than the deviation rate in the auditor's sample.
c. More than the risk of assessing control risk too low, based on the auditor's
sample.
d. More than the deviation rate in the' auditor's sample.
139. 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:
140. Once an understanding of the internal control structure that is sufficient for
audit planning is obtained, then the auditor must first assess
Module 7
Computerized Environment
3. Which of the following most likely represents a disadvantage for an entity that
maintains computer data files rather than manual files?
4. Which of the following statements best describes a weakness often associated with
computers?
A. Since orders and billing transactions are done over the computer, source
documents cannot be obtained/
B. Auditors often need to plan ahead to capture information about selected
transactions over the EDI.
C. There is no audit trail in an EDI systems, so controls are typically assessed as
weak.
D. Since all transactions occur over the computer, reliability is high and little
substantive testing is needed.
6. Since the computer can do many jobs simultaneously, segregation is not as defined
as it is in a manual system. How can a computer system be modified to compensate
for the lack of segregation of duties?
A. The computer system should be under the direction of the internal audit
department.
B. The computer system should be accessible to various competent parties so
they can check on each other‘s work.
C. Strong controls should be built into both the computer software and hardware
to limit access and manipulation.
D. Many companies run complete parallel manual and automated accounting
systems for a cross check on input and output.
9. Matthews Corp. has changed from a system of recording time worked on time cards
to a computerized payroll system in which employees record time in and out with
magnetic cards. The IT system automatically updates all payroll records for the time
worked. Because of this change,
10. The increased presence of the microcomputer in the workplace has resulted in an
increasing number of persons having access to the computer. A control that is often
used to prevent unauthorized access to sensitive programs is:
11. Checklists, systems development methodology, and staff hiring are examples of
what type of controls?
A. Detective
B. Preventive
C. Subjective
D. Corrective
A. Providing for the separation of duties between keypunching and error listing
operations.
B. Attaching plastic file protection rings to reels of magnetic tape before new
data can be entered on the file.
C. Making a validity check of an identification number before a user can have
access to the computer files.
D. Preparing batch totals to provide assurance that file updates are made for the
entire input.
13. One of the features that distinguishes computer processing from manual processing
is
14. What type of computer-based system is characterized by data that are assembled
from more than one location and records that are updated immediately?
A. Microcomputer system
B. Minicomputer system
C. Batch processing system
D. Online real-time system
15. For the accounting system of Acme Company, the amounts of cash disbursements
entered into on CBIS terminal are transmitted to the computer that immediately
transmits the amounts back to the terminal for display on the terminal screen. This
display enables the operator to
16. The technique that lends an effective control for protecting confidential information
from unauthorized access by transforming programs and information into an
unintelligible form:
A. Defragmentation.
B. Cryptography.
C. Trojan horse.
D. Recycle.
17. Which of the following is not a major reason why an accounting audit trail should be
maintained for a computer system?
A. Query answering
B. Deterrent to fraud
C. Monitoring purposes
D. Analytical review
21. For good internal control over computer program changes, a policy should be
established requiring that
A. The programmer designing the change adequately test the revised program.
B. All program changes be supervised by the CBIS control group.
C. Superseded portions of programs be deleted from the program run manual to
avoid confusion.
D. All proposed changes should be approved in writing by a responsible
individual.
C. The control group is solely responsible for the distribution of all computer
output.
D. Computer programmers write and debug programs which perform routines
designed by the systems analyst.
23. What is the computer process called when data processing is performed
concurrently with a particular activity and the results are available as soon enough to
influence the particular course of action being taken or the decision being made?
A. Batch processing
B. Real time processing
C. Integrated data processing
D. Random access processing
24. Online real-time systems and electronic data interchange systems have the
advantages of providing more timely information and reducing the quantity of
documents associated with less automated systems. The advantages, however,
may create some problems for the auditor. Which of the following characteristics of
these systems does not create an audit problem?
25. To ensure that goods received are the same as those shown on the purchase
invoice, a computerized system should:
26. Errors in data processed in a batch computer system may not be detected
immediately because
A. Transaction trails in a batch system are available only for a limited period of
time.
B. There are delays in processing transactions in a batch system.
A. Operating system
B. Utility programs
C. Data base management system
D. Language program
28. A compiler is
30. Computer systems are becoming more vulnerable to unauthorized access because
34. Which of the following may not be a purpose of using computer-audit software?
A. Add transactions or balances in the data files for comparison with control
account balance.
B. Select accounts or transactions for detailed testing.
C. To evaluate the collectability of accounts receivable.
D. To examine data bases for unusual items.
35. While systems analysis focuses on information needs and objectives, system design
concentrates on
A. Writing programs
B. Providing for controls
C. Testing completed modules
D. What to do and how to do it
36. All activities related to a particular application in a manual system are recorded in a
journal. The name of the corresponding item in a computerized system is a
A. Master file.
B. Transaction file.
C. Year-to-date file.
D. Current balance file.
38. Specialized programs that are made available to users of computer systems to
perform routing and repetitive functions are referred to as
A. Operating system.
B. Utility programs.
C. Database management system.
D. Language program.
41. A system with several computers that are connected for communication can also
process its own data, is known as
43. The most critical aspect regarding separation of duties within the information
systems is between
44. Which of the following most likely represents a significant deficiency in the internal
control structure?
45. Which of the following activities would most likely be performed in the EDP
department?
46. An arrangement where two or more personal computers are linked together through
the use of special software and communication lines.
D. Internet.
47. Which of the following controls most likely would assure that an entity can
reconstruct its financial records?
A. Hardware controls are built into the computer by the computer manufacturer.
B. Backup diskettes or tapes of files are stored away from originals.
C. Personnel who are independent of data input and output operations.
D. System flowcharts provide accurate description of input and output
operations.
48. Mill Co. uses a batch processing method to its sales transactions. Data on Mill‘s
sales transactions tape are electronically checks in preparing its invoice, sales
journals, and updated customer account balance. One of the direct outputs of the
creation of the tape most likely would be a
50. A computer system that enables users to access data and programs directly
through workstations.
51. Which of the following client electronic data processing (EDP) systems generally
can be audited without examining or directly testing the EDP computer programs of
the systems?
52. Computer systems are typically supported by a variety of utility software packages
that are important to an auditor because they
53. To obtain evidence that online access controls are properly functioning an auditor
most likely would
A. Create checkpoints of periodic intervals after live data processing to test for
unauthorized use of the system.
B. Examine the transaction log to discover whether any transactions were lost or
entered twice due to a system malfunction
C. Enter invalid identification numbers or passwords to ascertain whether the
system rejects them.
D. Vouch a random sample of processed transactions to assure proper
authorization.
54. Whether or not a real time program contains adequate controls is most effectively
determined by the use of
A. Audit software
B. A tracing routine
C. An integrated test facility
D. A traditional test deck
A. Interpreter
B. Verifier
C. Compiler
D. Converter
60. The computer process whereby data processing is performed concurrently with a
particular activity and the results are available soon enough to influence the course
of action being taken or the decision being made is called:
61. A type of computer system whereby individual transactions are entered on line and
are added to a transaction file that contains other transactions entered during the
period. Later, this transaction file, on a periodic basis, updates the master file.
62. When a database administrator‘s position exists within an organization, the auditor
must be aware of the:
63. Which of the following functions would have the least effect on an audit if they are
not properly segregated?
64. Which of the following is the least significant characteristic of an on-line computer
system?
65. When software or files can be accessed from on-line servers, users should be
required to enter a(n)
A. Parity check.
B. Self-diagnosis test.
C. Personal identification code.
D. Echo check.
66. Controls which are designed to assure that the information processed by the
computer is valid, complete, and accurate are called
A. Input controls.
B. Output controls.
C. Processing controls.
D. General controls.
68. Which of the following is mostly a potential threat to an on-line computer system?
A. A user may have the potential ability to make unauthorized changes to the
data and program.
B. Validation checks of data entered is usually ignored.
C. Most of transactions may be omitted because of the absence of adequate
audit trail.
D. Most of documents that will be processed may lack proper authorization.
70. Which of the following represent examples of general, application and user control
activities, respectively, in the computer environment?
71. Which of the following is not a type of general information technology controls?
A. Processing controls.
B. Systems development.
C. Physical and on-line security
D. Segregation of IT duties
72. Suppose that the computer operators are also programmers and have access to
computer programs and data files, in which of the following general controls will the
auditor most likely conclude to have a weakness?
A. Processing controls.
B. Back-up and contingency planning
C. Systems development
D. Segregation of computer professionals‘ duties
73. The possibility of losing a large amount of information stored in computer files most
likely would be reduced by the use of
A. Back-up files.
B. Check digits.
C. Completeness tests.
D. Conversion verification.
A. Organizations charts
B. System flowcharts
C. Hash total
D. Control over program changes
75. Which of the following control policies would potentially prevent the programmer to
make unauthorized changes to programs?
C. A thorough checking and testing of the application program before they are
finally installed.
D. A strict implementation of a policy that prevents the programmer to have
access to program used in the computer operations
76. Totals of amounts in the computer-record data fields which are not usually added
for other purposes but are used only for data processing control purposes are called
A. A record totals.
B. Hash totals.
C. Processing data totals.
D. Field totals.
77. A hash total of employee numbers is part of the input to a payroll master file update
program. The program compares the hash total to the total computed for
transactions applied to the master file. The purpose of this procedure is to:
78. An accounts payable program posted a payable to a vendor that is not included in
the on-line vendor master file. A control which would prevent this error is a
A. Validity check
B. Range check
C. Reasonableness test
D. Parity check
79. In a computerized sales processing system, which of the following controls is most
effective in preventing sales invoice pricing errors?
A. Sales invoices are reviewed by the product managers before being mailed to
customers.
B. Current sales prices are stored in the computer, and, as stock numbers are
entered from sales orders, the computer automatically prices the orders.
C. Sales prices, as well as product numbers, are entered as sales orders are
entered at remote terminal locations.
D. Sales prices are reviewed and updated on a quarterly basis.
80. A computer report which is designed to create an audit trail for each on-line
transaction.
A. Transaction file
B. Master file
C. Transaction edit report
D. Transaction log
81. If a control total were to be computed on each of the following data items, which
would best be identified as a hash total for a payroll computerized application?
A. Net pay
B. Department numbers
C. Hours worked
D. Total debits and total credits
82. A control to verify whether the peso amounts for all debits and credits for incoming
transactions are posted to a receivables master file is the:
83. Which of the following would not be an appropriate procedure for testing the general
control activities of an information system?
84. While entering data into the cash receipts transaction file, an employee transposed
two numbers in a customer code. Which of the following controls could prevent input
of this type of error?
A. Sequence check
B. Record check
C. Self-checking digit
D. Field-size check
A. An input control
B. An output control
C. A processing control
D. A file management control
A. Check digits
B. Control totals
C. Validity tests
D. Process tracing data
87. If an auditor is using test data in a client‘s computer system to test the integrity of the
systems output, which of the following types of controls is the auditor testing?
A. General controls
B. User controls
C. Quantitative test controls
D. Application controls
88. Which of the following controls would be most efficient in reducing common data
input errors?
A. Keystroke verification
B. A set of well-designed edit checks
C. Balancing and reconciliation
D. Batch totals
90. Which of the following is an incorrect statement regarding testing strategies related
to auditing through the computer?
A. The test data approach involves processing the client‘s data on a test basis to
determine the integrity of the system
B. The test data approach involves processing the auditor‘s test data on the
client‘s computer system to determine whether computer-performed controls
are working properly
C. Test data should include all relevant data conditions that the auditor is
interested in testing
D. When the auditor uses the embedded audit module approach, an audit
module is inserted in the client‘s system to capture transactions with certain
characteristics
91. An internal auditor noted the following points when conducting a preliminary survey
in connection with the audit of an EDP department. Which of the following would be
considered a safeguard in the control system on which the auditor might rely?
92. The employees in a manufacturing are made many errors as they wrote their clock
numbers on time sheets and cost distribution forms. An effective control technique
would have been the use of
A. Batch totals.
B. Turn around documents.
C. Hash totals.
D. Record counts.
93. An on-line access control that checks whether the user‘s code number is authorized
to initiate a specific type of transaction of inquiry us referred to as
A. Password
B. Computability test
C. Limit check
D. Reasonableness test
A. Compatibility test
B. Self-checking digit
C. Hash total
D. Sequence check
95. When erroneous data are detected by computer program controls, such data may
be excluded from processing and printed on an error report. The error report should
most probably be reviewed and followed up by the
A. IT control group
B. Supervisor of computer operations
C. System analyst
D. Computer programmer
A. Reports can be developed that summarize the errors by type, cause and
person responsible.
B. Less manual work is required to determine how to correct errors.
C. Better editing techniques will result.
D. The audit trail is maintained.
98. In order to control purchasing and accounts payable, an information system must
include
100.Payroll systems should have elaborate controls to prevent, detect, and correct
errors and authorized tampering. The best set of controls for a payroll system
includes
A. Batch and hash totals, record counts of each run, proper separation of duties,
special control over unclaimed checks, and backup copies of activities and
master files.
B. Passwords and user codes, batch totals, employee supervision and record
count for each run.
C. Sign tests, limit tests, passwords and user codes on-line edit check, and
payments by check.
D. Batch totals, record counts, user codes, proper separation of duties, and on-
line edit checks.
A. Batch total
B. Hash total
C. Record count
D. Subsequent check
A. Batch total
B. Sequence check
C. Compatibility test
D. Completeness test
105.Which one of the following input validation routines is not likely to be appropriate in
a real time operation?
A. Field check
B. Sequence check
C. Redundant data check
D. Reasonableness check
A. Yes Yes
B. No No
C. No Yes
D. Yes No
A. Data conversion
B. Surveillance of CRT messages
C. Systems development
D. Minor maintenance according to a schedule
108.When EDP programs or files can be accessed from terminals, users should be
required to enter a(n)
A. Parity check
B. Personal identification code
C. Self-diagnostic test
D. Echo check
109.An auditor would most likely be concerned with which of the following controls in a
distributed data processing system?
A. Hardware controls
B. Systems documentation controls
C. Access controls
D. Disaster recovery controls
A. General standards
B. Standards of fieldwork
C. Reporting standards
D. All of these are equally affected.
111.A control feature in an electronic data processing system requires the central
processing unit (CPU) to send signals to the printer to activate the print mechanism
for each character. The print mechanism, just prior to printing, sends signal back to
the CPU verifying that the proper print position has been activated. This type of
hardware control is referred to as
A. Echo check
B. Validity control
C. Signal control
D. Check digit control
113.A customer erroneously ordered item No. 86321 rather than item No. 83621. When
this order is processed, the vendor‘s EDP department would identify the error with
what type of control?
A. Key verifying
B. Self-checking digit
C. Batch total item inspection
D. Item inspection
114.In an automated payroll system, all employees in the finishing department were
paid at the rate of P75 per hour when the authorized rate was P70 per hour. Which
of the following controls would have been most effective in preventing such an error?
116.After preliminary phase of the review of a client‘s EDP controls, an auditor may
decide not to perform tests of controls (compliance tests) related to the control
procedures within the EDP portion of the client‘s internal control structure. Which of
the following would not be a valid reason for choosing to omit such tests?
117.To obtain evident that user identification and password control procedures are
functioning as designed, an auditor would most likely
118.A well prepared flowchart should make it easier for the auditor to
119.Testing controls without the use of the computer is possible when the:
120.Which of the following audit techniques most likely would provide an auditor with
the most assurance about the effectiveness of the operation of an internal control
procedure?
A. Desk checking
B. Use of test data
C. Completing outstanding jobs
D. Parallel simulation
122.Which of the following is least likely a risk characteristic associated with CIS
environment?
A. The test data approach involves processing the client‘s data on a test basis to
determine the integrity of the system
B. The test data approach involves processing the auditor‘s test data on the
client‘s computer system to determine whether computer performed controls
are working properly
C. Test data should include all relevant data conditions that the auditor is
interested in testing
D. When the auditor uses the embedded audit module approach, an audit
module is inserted in the client‘s system to capture transactions with certain
characteristics
124.Which of the following is not one of the auditor‘s major concerns when he has to
make a documentation of the internal control in a computerized environment?
125.An auditor is preparing test data for use in the audit of a computer-based accounts
receivable application. Which of the following items would be appropriate to include
as an item in the test data?
126.If an auditor is using test data in a client‘s computer system to test the integrity of
the systems output, which of the following types of controls is the auditor testing?
A. General controls
B. User controls
C. Quantitative test controls
D. Applications controls
A. Test data
B. Tagging and lagging
C. Integrated test facility
D. Program analysis
A. General computer controls but does not test application computer controls
B. Application computer controls but does not test general computer controls
C. Neither general nor application computer controls
D. Both general and application computer controls
131.In auditing through a computer, the test data method is used by auditors to test the
132.An integrated test facility (ITF) would be appropriate when the auditor needs to
135.When testing a computerized accounting system, which of the following is not true
of the test data approach?
A. The test data need consist pf only those valid and invalid conditions in which
the auditor is interested
B. Only one transaction of each type need be tested
C. Test data are processed by the client‘s computer programs under the
auditor‘s control
D. The test data must consist of all possible valid and invalid conditions
A. The auditor traces adding machine tapes of sales order batch totals to a
computer printout of the sales journal
B. The auditor develops a set of hypothetical sales transactions and, using the
client‘s computer program, enters the transactions into the system and
observes the processing flow
C. The auditor enters hypothetical transactions into the client‘s processing
system during client processing of live data
D. The auditor observes client personnel as they process the biweekly payroll.
The auditor is primarily concerned with the computer rejection of data that
fails to meet reasonableness limits
137.Auditing by testing the input and output of a computer-based system instead of the
computer program itself will
A. Not detect program errors which do not show up in the output sampled
B. Detect all program errors regardless of the nature of the output
C. Provide the auditor with confidence in the results of the auditing procedures
D. Not provide the auditor with confidence in the results of the auditing
procedures
138.Which of the following is an acknowledged risk of using test data when auditing
computerized records?
A. The test data may not include all possible types of transactions
B. The computer may not process a simulated transaction in the same way it
would an identical actual transaction
C. The method cannot be used with simulated master records
D. Test data may be useful in verifying the correctness of account balances, but
not in determining the presence of processing controls
139.An auditor used test data to verify the existence of controls in a certain computer
program. Even though the program performed will on the test, the auditor may still
have a concern that
A. The program tested is the same one used in the regular production runs
B. Generalized audit software may have been a better tool to use
C. Data entry procedures may change and render the test useless.
D. No documentation exists for the program
140.An auditor most likely would introduce test data into a computerized payroll system
to test internal controls related to the
A. Test date must consist of all possible valid and invalid conditions
B. The program tested is different from the program used throughout the year by
the client
C. Several transactions of each type must be tested
D. Test data are process by the client‘s computer programs under the auditor‘s
control
142.Which of the following is not among the errors that an auditor might include in the
test data when auditing a client‘s EDP system?
143.An auditor who is testing EDP controls in a payroll system would most likely use
test data that contain conditions such as
A. Parallel simulation
B. Integrated testing facility approach
C. Test data approach
D. Exception report tests
146.Test data, integrated test data and parallel simulation each require an auditor to
prepare data and computer programs. CPA‘s who lack either the technical expertise
or time to prepare programs should request from the manufacturers or EDP
consultants for
A. Printed on a report
B. Compared with actual results manually
C. Compared with actual results using comparison program
149.In auditing through the computer, actual client data is used with:
150.Assume that an auditor estimated that 10,000 checks were issued during the
accounting period. If an application control that performs a limit check for each check
request is to be subjected to the auditor‘s test-data approach, the sample should
include
Module 8
A. Silent on the matter because it is an internal matter for the auditing firm.
B. Expanded to document that the assistant auditor is completely disassociated
from responsibility for the auditor‘s opinion.
C. Expanded to document the additional work required because all
disagreements of this type will require further substantive testing.
D. Expanded to document the assistant auditor‘s position and the manner in
which the difference of opinion was resolved
9. Working papers that record the procedures used by the auditor to gather evidence
should be
A. Considered the primary support for the financial statements being audited.
B. Viewed as the connecting link between the books of accounts and the
financial statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the particular audit engagement is terminated.
10. Which of the following factors will least affect the auditor‘s judgement as to the
quantity, type, and content of the working papers desirable for a particular
engagement?
11. During the audit engagement, data are compiled and included in the audit working
papers. The working papers are
12. Which of the following is not a factor affecting the independent auditor‘s judgement
about the quantity, type, and content of audit working papers?
A. The need for supervision and review of the work performed by assistants.
B. The nature and condition of the client‘s records and internal controls.
C. The expertise of the client personnel and their participation in preparing the
schedules.
13. Which of the following factors most likely affects the auditor‘s judgment about the
quantity, type and content of the working papers?
14. Audit working papers are used to record the results of the auditor‘s evidence
gathering procedures. When preparing working papers, the auditors should
remember that working papers should be
A. Kept on the client‘s premises so that the client can have access to them for
reference purposes.
B. The primary support for the financial statements being examined,
C. Considered as part of the client‘s accounting records that are retained by the
auditor.
D. Designed to meet the circumstances and the auditor‘s needs on each
engagement.
15. Audit working papers are indexed by means of reference numbers. The primary
purpose of indexing is to
16. The principal purpose for cross-indexing the audit working papers is to
17. Documentation may not be deleted form the working papers after the
A. Sufficient
B. Reliable
C. Relevant
D. Unbiased
20. Which of the following is not one of the determinants of the persuasiveness of
evidence?
A. Competence
B. Physical examination
C. Relevance
D. Sufficiency
21. In determining the sufficiency of evidential matter, which of the following would not
normally be a factor?
A. Cost/benefit considerations
B. The sampling technique used
C. Audit risk
D. Materiality of the account
22. Which of the following statements is not true regarding the competence of audit
evidence?
25. Which of the following factors is most important in determining the competence of
audit evidence?
27. Which of the following is not one of the characteristics of competent evidence?
28. Which of the following presumptions does not relate to the competence of audit
evidence?
A. The more effective the internal control is, the more assurance it provides
about the accounting data and financial statements
B. An auditor‘s opinion, to be economically useful, is formed within a reasonable
time and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more
reliable than evidence secured solely within the entity.
D. The independent auditor‘s direct personal knowledge, obtained through
observation and inspection, is more persuasive than information obtained
indirectly.
29. Which of the following statement relating to the competence of evidential matter is
always true?
30. Although the validity of evidential matter is dependent on the circumstances under
which it is obtained, there are three general presumptions that have some
usefulness. The situations given below indicate the relative reliability that a CPA has
placed on two types of evidence obtained in different situations. Which of these is an
exception to one of the general presumptions?
A. The CPA places more reliance on the balance in the scrap sales account at
Plant A, where the CPA has made limited tests of transactions because of
effective controls, than at Plant B where the CPA has made extensive tests of
transactions because of ineffective controls.
B. The CPA places more reliance on the CPAs computation of interest payable
on outstanding bonds than on the amount confirmed by the trustee.
C. The CPA places more reliance on the report of an expert on an inventory of
precious gems than on the CPAs physical observation of the gems.
D. The CPA places more reliance on a schedule of insurance coverage obtained
from the company‘s insurance agent than on one prepared by the internal
audit staff.
31. Which of the following would not be a factor in determining the competence of
evidential matter?
A. There are many ways ab auditor can accumulate evidence to meet the overall
audit objectives.
B. Sufficient competent evidence must be accumulated to meet the auditor‘s
professional responsibility.
C. The cost of accumulating the evidence should be minimized.
D. Gathering evidence and minimizing costs are equally important.
33. Each of the following might, by itself, form a valid basis for an auditor of deciding to
omit a test except for the:
34. The following statements were made in a discussion of audit evidence by two
independent auditors. Which of these statements is not valid?
A. ―I am seldom convinced beyond all doubt about all aspects of the financial
statements being audited.‖
B. ―I would not undertake that procedure because at best the results would only
be persuasive and I‘m looking for convincing evidence.‖
C. ―I evaluate the degree of risk involved in deciding the kind of evidence I will
gather.‖
D. ―I evaluate the usefulness of the evidence I can obtain against the cost to
obtain it.‖
35. Management assertions that are embodied in the financial statements are
37. As used in auditing, which of the following statements best describes ―assertions‖?
A. Assertions are the representations of managements as to the reliability of the
information system.
B. Assertions are the auditor‘s findings to be communicated in his audit report.
C. Assertions are the representations of managements as to the fairness of
presentation of the financial statements.
D. Assertions are found only in the notes to the financial statements.
39. The audit objective ―that all transactions and accounts that should be presented in
the financial statements are included‖ is related to which assertion?
A. Occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure
40. The audit objective ―that all footnotes have been included in the financial statements‖
is related most closely to which assertion?
A. Existence or occurrence
B. Rights and obligations
C. Completeness
D. Presentation and disclosure
41. Which of the following is a management assertion that relates to the valuation or
allocation of fixed assets?
42. Which of the following statements about the existence and completeness objectives
is incorrect?
A. The existence and completeness objectives emphasize opposite audit
concerns
B. Existence deals with overstatements and completeness deals with
understatements.
C. Existence deals with understatements and completeness deals with
overstatements.
D. The completeness objective deals with unrecorded transactions.
43. If reported sales for 2009 erroneously included sales that occurred in 2010, the
assertion violated on the 2009 statements would be
A. Occurrence
B. Completeness
C. Presentation and disclosure
D. Rights and obligation
47. Which of the following best describes the primary purpose of audit procedures?
A. To detect errors or irregularities
B. To comply with financial reporting standards
C. To gather corroborative evidence
D. To verify the accuracy of account balances
48. Physical examination of assets is not sufficient form of evidence when the auditor
wants to determine the
A. Existence of the asset
B. Quantity and description of the asset
C. Condition or quality of the asset
D. Ownership of the asset
50. Which of the following statements is not true? ―The evidence gathering technique of
observation
A. Is useful in most parts of the audit.‖
B. Is rarely sufficient by itself.‖
C. Is limited to what the auditor sees.‖
D. Requires the gathering of corroborative evidence.‖
52. A CPA, who is performing an independent audit, would most likely use recalculation
as a substantive test for which of the following expense-related accounts?
A. Purchases of supplies
B. Interest expense
C. Advertising expense
D. Repairs and maintenance expense
54. External auditors often confirm assertions contained in the organization‘s financial
statements and accounting records with third parties. Which of the following best
explains why confirmation produces an evidence of high quality?
A. Written assertions from knowledgeable third parties provide sufficient
evidence to achieve most audit objectives.
B. Confirmation by knowledgeable third parties is usually the most relevant
evidence available.
C. Confirmation by knowledgeable third parties is usually the least costly
evidence to obtain.
D. Confirmation by knowledgeable third parties is highly competent because of
its independent source.
55. When comparing the reliability of external versus internal documents, the external
documents are generally considered
A. More reliable
B. Less reliable
C. Equally reliable
D. Unreliable
57. Analytical procedures are so important that they are required during
A. Planning and completion phases
B. Planning and testing phases
C. Testing and completion phases
D. Planning, testing, and completion phases
QUIZZERS
DOCUMENTATION
1. In determining the quantity and quality of evidence to gather, the auditor will be
satisfied when the evidence is
A. Irrefutable.
B. Highly persuasive.
C. Conclusive.
D. Completely convincing.
2. The current file of the auditor‘s working papers generally should include
3. It refers to the detailed instructions for the collection of a particular type of audit
evidence that is to be obtained at some time during the audit
A. Sampling plan.
B. Audit procedure
C. Audit program
D. Audit plan
4. The auditor‘s working papers will least likely include documentation showing how the
5. Although the quantity and content of audit working papers vary with each particular
engagement, an auditor‘s permanent files most likely include
6. The audit working paper that reflects the major components of an amount reported
in the financial statements is the
7. An auditor ordinarily uses a working trial balance resembling the financial statements
without footnotes, but containing columns for
A. Point out to the responsible client officials the errors made by various
company personnel
B. Summarize the adjustments that must be made before the company can
prepare and submit its income tax returns
C. Identify the potential effects on the financial statement of errors or disputed
items that were considered immaterial when discovered.
D. Summarize the errors made by the company so that corrections can be made
after the audited financial statements are released.
10. Using personal computers in auditing may affect the methods used to review the
work of staff assistants because
11. In an internal audit, the audit supervisor determines that the working papers are
complete
A. When satisfied that the audit objectives have been met and the working
papers support the conclusions
B. When working papers refer to the steps outlined in the audit program
C. Only after the auditor who prepared the working papers has signed and dated
them
D. When proper cross-references to other working papers are noted.
12. Standardized working papers are often used, chiefly because they allow working
papers to be prepared more
A. Efficiently
B. Comprehensively
C. Neatly
D. Accurately
13. After the fieldwork audit procedures are completed, a partner of the CPA firm who
has not been involved in the audit performs a second or wrap-up working paper
review. This second review usually focuses on
15. ―The detailed description of the results of the various evidence decisions for a
specific audit‖ is called an
A. Audit procedure.
B. Audit plan
C. Audit program
D. Audit guide
16. In using the work of a specialist, an understanding should exist among the auditor,
the client, and the specialist as to the nature of the work to be performed by the
specialist. Preferably, the understanding should be documented and would include
all of the following except
17. Which of the following is an invalid description of why working papers are
developed?
18. During the working paper review, an audit supervisor finds that the auditor‘s reported
findings are not adequately cross-referenced to the supporting documentation. The
supervisor will most likely instruct the auditor to
A. Prepare a working paper to indicate that the full scope of the audit was
carried out
B. Familiarize himself with the sequence of working papers so that he will be
able to answer questions about the conclusions stated in the report
C. Eliminate any cross-references to other working papers since the system is
unclear
D. Provide a working paper indexing system that shows the relationship between
findings, conclusions, and the related facts.
21. Which of the following is a basic tool used by the auditor to control the audit work
and review the progress of the audit?
22. Which of the following working papers would one normally expect to find in the
permanent file?
23. The permanent file section of the working papers that is kept for each audit client
most likely contains
A. Review notes pertaining to questions and comments regarding the audit work
performed
B. A schedule of time spent on the engagement by each individual auditor
C. Correspondence with the client‘s legal counsel concerning pending litigation
D. Narrative descriptions of the client‘s internal control policies and procedures
24. Which of the following statements is correct with respect to ownership of audit
documentation?
27. Which of the following assertions is least likely to be tested exclusively at an interim
date?
28. Assuming a low assessed level of control risk, which of the following audit
procedures is least likely to be performed?
A. Reading the minutes of the directors‘ meetings held during the audit year
B. Confirming accounts payable balances
C. Obtaining a management representation letter
D. Testing of control procedures on purchasing function
30. Which of the following is not one of the broad categories of assertions?
31. Determining whether amounts are in conformity with GAAP addresses the proper
measurement of assets, liabilities, revenues, and expenses which includes all of the
following except:
34. A distinction must be made between general audit objectives and specific audit
objectives for each account balance. Which of the following is an incorrect
statement?
A. The general audit objectives are applicable to every account balance on the
financial statements
B. The specific audit objectives are applicable to every account balance on the
financial statements
C. The general audit objectives are tailored to the engagement
D. The specific audit objectives are tailored to the engagement
35. Which of the following ―general transaction-related audit objectives‖ is not part of the
valuation or allocation assertion?
A. Completeness
B. Accuracy
C. Classification
D. Timing
36. Only three of the following management assertions are associated with transaction-
related audit objectives. Which one of the following is not?
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure
37. Which of the following statements is incorrectly stated?
38. The detail tie-in objective is not concerned that the details in the account balance
40. If a long-term note receivable is included in the account receivable listing, there is a
violation of the
A. Existence objective
B. Completeness objective
C. Classification objective
D. Timing objective
41. After the general objectives are understood, specific objectives for each account
balance on the financial statements can be developed. Which of the following
statements is true?
A. There should be at least one specific objective for each relevant general
objective
B. There will be only one specific objective for each relevant general objective
C. There will be many specific objectives developed for each relevant objective
D. There must be one specific objective for each general objective
42. Which of the following is not a proper matching of auditor‘s objective with
management‘s assertion?
43. An audit process is a well-defined methodology for organizing an audit to ensure that
AUDIT EVIDENCE
A. The evidence that the auditor accumulates remains the same from audit to
audit, but the general objectives vary, depending on the circumstances
B. The general audit objectives remain the same from audit to audit, but the
evidence varies, depending on the circumstances
C. The circumstances may vary from audit to audit, but the evidence
accumulated remains the same
D. The general audit objectives may vary from audit to audit, but the
circumstances remain the same
45. Auditing standards require the auditor to accumulate sufficient competent evidence
to support the opinion issued. Because of the nature of audit evidence, it is
A. Unlikely that the auditor will be completely convinced that the opinion is
correct
B. Likely that the auditor will be completely convinced that the opinion is correct
C. Unlikely that the auditor will arrive at a conclusion
D. Likely that the auditor would change his/her mind about the opinion if he/she
takes the time to gather additional evidence
46. Which of the following ultimately determines the specific audit procedures necessary
to provide an independent auditor with a reasonable basis for the expression of an
opinioin?
47. In the final analysis, the amount and kinds of evidential matter that are required to
support the auditor‘s opinion should be determined by
48. To adequately plan the extent of the audit evidence to gather, the generally
accepted auditing standards require the auditor to gain an understanding of
49. When unable to obtain sufficient competent evidential matter to determine whether
certain client management‘s acts are non-compliance to laws and regulations, the
auditor would most likely issue
52. Most of the independent auditor‘s work in formulating an opinion on the financial
statements consists of
53. There are four subcategories of decisions that the auditors must make in
accumulating audit evidence. Which of the following is not one of those
subcategories?
54. Evidential matter supporting the financial statements consists of the underlying
accounting data and all corroborating information available to the auditor. Which of
the following is an example of corroborating information?
55. Which of the following is not one of the major phases in an audit process?
A. It is competent
B. There is enough of it to afford a reasonable basis for an opinion on the
financial statements
C. It has the qualities of being relevant, objective, and free from known bias
D. It has been obtained through random selection
57. In making decisions about evidence for a given audit, the auditor‘s goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being
verified, and to do so
60. Which of the following procedures would provide the auditor the most reliable audit
evidence?
61. The most reliable forms of documentary evidence are those documents that are
A. Prenumbered
B. Easily documented
C. Internally generated
D. Authorized by a responsible official
62. You have been assigned to audit the maintenance department of an organization.
Which of the following is likely to produce the least reliable audit evidence?
63. Before applying substantive tests to the details of asset accounts at an interim date,
an auditor should assess
64. Before applying principal substantive tests to the details of accounts at an interim
date, an auditor should
A. Assess control risk as below the maximum for the assertions embodied in the
accounts selected for interim testing
B. Determine that the accounts selected for interim testing are not material to the
financial statements taken as a whole
C. Consider whether the amounts of the year-end balances selected for interim
testing are reasonably predictable
D. Obtain written representations from management that all financial records and
related data will be made available
66. Which of the following best explains the difference between audit objectives and
audit procedures?
A. Audit procedures establish broad general goals; audit objectives specify the
detailed work to be performed
B. Audit objectives are tailor-made for each assignment; audit procedures are
generic in application
C. Audit objectives define specific desired accomplishments; audit procedures
provide the means of achieving audit objectives
D. Audit procedures and audit objectives are essentially the same
67. In gathering audit evidence in the performance of substantive tests, the auditor
68. The auditor will not ordinarily initiate discussion with the audit committee concerning
the
A. Extent to which the work of internal auditors will affect the scope of the
examination
B. Extent to which a change in the company‘s organization will influence the
scope of the examination
C. Details of potential problems that the auditor believes might cause a qualified
opinion
D. Details of the procedures that the auditor intends to apply
69. With respect to the auditor‘s planning of a year-end examination, which of the
following statements is always true?
70. An auditor test counts a batch of inventory. This is an example of what kind of
evidence?
A. Analytical
B. Documentary
C. Physical
D. Testimony
72. Each audit program should have a column for all of the following except:
74. Accounting for the numeric sequence in the issuance of the sales invoices meets
primarily the
A. Completeness assertion
B. Valuation or allocation assertion
C. Occurrence
D. Presentation or disclosure assertion
75. Which of the following factors affects the competence of evidence obtained by an
auditor?
76. Which one of the following is the least persuasive type of audit evidence?
77. Audit evidence takes different forms and varies in persuasiveness. Which of the
following is the least persuasive type of evidence?
A. Vendor‘s invoice
B. Computations made by the auditor
C. Bank statement obtained from the client
D. Canceled checks
A. Evidence must pertain to the objective that the auditor is testing before it can
be persuasive
B. Relevance can be considered only in terms of specific audit objectives
C. Evidence may be relevant to one objective but not to other objective
D. All the responses are true
A. Relevance
B. Reliability of evidence
C. Sufficient
D. Any of the given choices
80. Which of the following statements about the competence of evidence is not correct?
81. Which one of the following forms of evidence would be least reliable?
83. Evidence obtained directly by the auditor is more competent than information
obtained indirectly. Which of the following is not an example of the auditor‘s direct
knowledge about an evidence?
A. Physical examination
B. Observation
C. Computation
D. Inquiry
84. When the auditor is gathering evidence, he will conclude that if the source of
information is independent, the evidence will
A. Reliable
B. Not be reliable
C. Be reliable if the provider has no reason to be biased
D. Not be reliable unless the provider is qualified to do so
86. Evidence is usually more persuasive for balance sheet accounts when it is obtained
87. For income statement accounts, evidence is more persuasive if there is a sample
from
89. Generally, what source of evidence would most persuasively support audit
comclusions?
A. External
B. Inquiry
C. Oral
D. Informal
90. Observation, though considered a reliable audit procedure, has limited usefulness.
However, it is used in a number of different audit situations. Which of the following
statements is true regarding observation as an audit technique
A. It is the most effective audit methodology to use in filling out internal control
questionnaires
B. It is the most persuasive technique to learn how transactions are really
processed during the period under audit
C. It is rarely sufficient to satisfy any audit assertion other than existence
D. It is the most persuasive audit technique for determining if fraud has really
occurred
91. Which of the following would be the most relevant form of evidence to evaluate the
reasonableness of account balances?
A. Analytical
B. Documentary
C. Physical
D. Representation
92. When an auditor calculates the gross margin as a percent of sales and compares it
with previous periods, this type of evidence is called
A. Physical examination
B. Computation
C. Observation
D. Inquiry
93. Objective evidence is more reliable than evidence that requires considerable
judgment to determine whether it is correct. Which of the following is not an example
of an objective evidence?
95. Physical examination refers to the inspection or count by the auditor of assets such
as
A. Cash or inventory only
B. Cash, inventory, canceled checks, and sales documents
C. Cash, inventory, securities, notes receivable, and tangible fixed assets
D. Cash, inventory, canceled checks, and tangible fixed assets
A. Physical examination
B. Documentation
C. Confirmation
D. Garbage
97. Confirmations are a highly regarded and often used type of evidence because they
A. Are inexpensive
B. Cause no inconvenience for auditor or third party
C. Come from independent sources
D. All of the given choices
1. Negative confirmations
2. Positive confirmations with a request for information
If they were placed in the order of their reliability, from highest to lowest, the
sequence would be
A. 1, 2, 3
B. 3, 2, 1
C. 2, 3, 1
D. 3, 1, 2
99. Whenever practicable and reasonable, the CPA must confirm a sample of
A. Accounts receivable
B. Accounts payable
C. Both accounts receivable and accounts payable
D. Client‘s bank accounts
101.When the auditor examines the client‘s documents and records to substantiate the
information on the financial statements, it is commonly referred to as
A. Inquiry
B. Confirmation
C. Vouching
D. Physical examination
103.A document which the auditor receives from the client, but which is prepared by
someone outside the client‘s organization, is a(n)
A. Confirmation
B. Internal document
C. External document
D. Inquiry
105.Which of the following statements is not true? ―The evidence gathering technique of
inquiry
106.An auditor would be least likely to use confirmations in connection with the
examination of
A. Inventories
B. Long-term debt
C. Property, plant, and equipment
D. Stockholders‘ equity
107.Which of the following is an example of internal evidence that the auditor would
obtain in an audit of accounts receivable?
A. External
B. Inquiry of management
C. Auditor-prepared analysis
D. Inquiry of company legal counsel
AUDIT PROCEDURES
109.A list of audit procedures that the auditors need to perform to produce evidence is
called an
A. Audit plan
B. Audit program
C. Audit standard
D. Audit budget
111.In the context of an audit of financial statement, substantive tests are audit
procedures that
112.When evaluating the planned level of substantive tests for each significant
assertion, the auditor will consider the evidence obtained from all of the following
except:
113.A revision of the planned level of detection risk will be necessary whenever
116.To test for unsupported entries in the ledger, the direction of audit testing should be
from he
A. Ledger entries
B. Journal entries
C. Externally generated documents
D. Original source documents
A. Test of controls
B. Tests of details of balances
C. Tests of details of transactions
D. Analytical procedures
118.Tracing from source documents to journals most directly addresses which financial
statement assertion?
A. Valuation
B. Completeness
C. Existence
D. Rights
119.An auditor is examining the detailed debut and credit entries in an account. The
auditor is most likely performing
A. Analytical procedures
B. Test of details of balances
C. Test of details of transactions
D. Test of controls
120.Choices about audit evidence are influenced by all of the following except:
121.The auditor is performing substantive tests several months before the end of the
year. This most likely means that
122.In testing the existence assertion for an asset, an auditor ordinarily works from the
124.The decision on the part of the auditor to perform substantive tests during the
interim period will be based upon
125.Choose the best illustration of objective audit evidence from the following:
A. The paid invoice file containing invoices matched with the receiving reports
and purchase orders
B. Management‘s assertion that payment procedure requires matching of invoice
with receiving report and purchase order
126.Which of the following audit procedures best supports the valuation objective?
129.The auditor would unlikely perform early substantive testing of account balances
when:
130.As the acceptable level of detection risk decreases, an auditor may change the
131.The auditor is concerned that a client usually fails to bill customers for shipments.
An audit procedure that would gather relevant evidence would be
A. Select a sample of duplicate sales invoices and trace each to related shipping
documents
B. Trace a sample of shipping documents to related duplicate sales invoices
C. Trace a sample of Sales Journal entries to Accounts Receivable subsidiary
ledger
D. Compare the total of the Schedule of Accounts Receivable with the balance
of the Accounts Receivable account in the general ledger
133.Which of the following, when performed by the auditor, is not a test of mechanical
accuracy?
134.Which of the following audit procedures would provide the least reliable evidence
about legal title to inventories?
136.Which of the following types of audit tests are not used to satisfy planned detection
risk?
A. Analytical procedures
B. Tests of controls
C. Substantive tests of transactions
D. Tests of details of balances
137.Substantive tests aid the auditor in all, but which of the following ways?
138.Auditors usually try to plan the audit to minimize the use of tests of details of
balances because
139.The independent auditor selects several transactions in each functional are and
traces them through the entire accounting system, paying special attention to
evidence about whether or not the control features are in operation. This audit
procedure is an example of a
A. Sequence test
B. Test of controls
C. Substantive test
D. Functional test
140.Ending account balances may be audited through the use of which of the following
types of audit procedures?
141.Which of the following represents an incorrect pairing of a type of audit test and
evidence?
143.Where the auditor has assessed control risk of a particular area at a reduced level,
he will then
144.Many tests of controls involve inspecting documents. These tests are commonly
referred to as
A. Tests of transactions
B. Tests of documentations
C. Tests of balances
D. Tests of analytical procedures
145.Upon completion of all the necessary audit procedures, the auditor should combine
the information obtained to reach an overall conclusion as to whether the financial
statements are fairly presented. This is a highly subjective process that relies heavily
on
D. Comparison of current year financial data with projections for next year‘s
financial results
A. Test of controls
B. Computer controls
C. Analytical procedures
D. Post audit working paper review
A. The definition of analytical tests places the emphasis on whether the client‘s
recorded date comply with PFRS
B. Analytical procedures are required on all audits
C. Analytical procedures are required on all review service engagements
D. For small accounts with small balances, analytical procedures alone may be
sufficient evidence
A. Errors
B. Irregularities
C. Areas of improvements
D. Areas that need more detailed procedures
155.Which of the following is not one of the major types of analytical procedure?
157.Most auditors prefer to replace test of details with analytical procedures whenever
possible because
159.A schedule set up to combine similar general ledger accounts, the total of which
appears on the working trial balance as a single amount referred to as a:
A. Supporting schedule
B. Lead schedule
C. Audit note
D. Reconciling schedule
160.The auditors use analytical procedures during the course of an audit. The most
important phase of performing these procedures is the:
MODULE 9
SAMPLING
PSA-BASED QUESTIONS
A. Applying audit procedures which are inappropriate for the audit objectives.
B. Failing to recognize errors or deviations in the documents examined.
C. Arriving at incorrect statistical conclusions due to computational errors.
D. Choosing a sample which has proportionately more errors than the
population.
A. The auditor may use a less than optimal statistical method for the
circumstances, e.g. difference estimation instead of ratio estimation.
B. The auditor may fail to recognize an error that exists in the sample.
C. Even though a sample is properly chosen, it may not be representative of the
population.
D. The confidence level and/or precision established by the auditor are not
appropriate.
5. Statistical sampling:
A. Measures quantitatively the risk from testing only a part of the audit
population.
B. Allows the same degree of confidence as nonstatistical sampling but with
substantially less work.
C. Allows the auditor to replace some judgments with quantitative measures.
D. Measures the reliability of misstatements.
10. When the auditor goes through a population and selects items for the sample
without regard to their size, source, or other distinguishing characteristics, it is
called
A. block selection
B. haphazard selection
C. systematic selection
D. statistical selection
11. The tolerable deviation rate has a significant effect on sample size. The
relationship of tolerable deviation rate to the sample size is
A. parallel
B. inverse
C. direct
D. variable
12. The acceptable risk of assessing control risk too low in relation to the sample size
is
A. direct
B. inverse
C. parallel
D. not defined
13. The deviation rate that the auditor will permit in the population and still be willing
to reduce the assessed level of control risk is:
A. The expected population rate has little or no effect on the sample size.
B. As the population size doubles, the sample size should also double.
C. For a given tolerable rate, a larger sample size should be selected as the
expected population deviation rate decreases
D. The population size has little or no effect on sample size except for very small
populations.
15. Which of the following factors is generally not considered in determining the
sample size for a test of controls?
A. Population size
B. Risk of assessing control risk too low
C. Tolerable rate
D. Expected population deviation rate
16. When an auditor does a sampling for attributes, which of the following would
decrease sample size?
17. If all other factors that are specified in a sampling plan remain constant, changing
the expected population deviation rate from 1 percent to 2 percent would cause
the required sample size to
A. increase
B. decrease
C. remain the same
D. become indeterminate
18. Which of the following statements concerning the sample size is true?
A. Population size
B. Reliability
C. Precision interval
D. Standard deviation
QUIZZERS
CONCEPTS
2. A sample in which the characteristics of the sample are the same as those of the
population is a (an)
A. random sample
B. variable sample
C. acceptance sample
D. representative sample
A. attribute sampling
B. discovery sampling
C. acceptance sampling
D. variables sampling
4. Nonsampling errors occur when audit tests do not uncover existing exceptions in
the
A. population
B. sample
C. planning stage
D. financial statements
B. An auditor may select audit procedures that are not appropriate to achieve
the specific objective.
C. An auditor may fail to recognize errors in the documents examined for the
chosen sample.
D. The documents related to the chosen sample may not be available for
inspection.
6. The auditors who prefer statistical to non-statistical sampling believe that the
principal advantage of statistical sampling flows from its unique ability to
9. Detection risk may be subdivided into the risk that analytical procedures and other
substantive procedures will fail to detect a material misstatement and the
allowable:
12. Which of the following statements is a valid criticism against the use of
nonstatistical sampling methods?
13. Which of the following statements is not correct regarding probabilistic and
nonprobabilistic sample selection?
14. Which one is not a sample selection method commonly associated with
nonstatistical audit sampling?
15. Which one is not a sample selection method commonly associated with statistical
audit sampling?
21. In which of the following cases would the auditor be most likely
23. In order to quantify the risk that the sample evidence leads to erroneous
conclusions about the sampled population
A. Each item in the sampled population must have an equal chance of being
selected.
B. Each item in the sampled population must have a chance of being selected
proportional to its book value.
C. Each item in the sampled population must have an equal or known probability
of being selected.
D. The precise number of items in the population must be known.
A. which include errors will not be overlooked when the auditor exercises
compatible reciprocal options.
B. may occur in a systematic pattern, thus making the sample more
representative.
C. may occur more than once in a sample.
D. do not have to be prenumbered in order for the auditor to use the technique.
26. If all other factors in a sampling, plan are held constant, changing the measure of
tolerable error to a smaller value would cause the sample size to be:
A. Smaller.
B. Larger.
C. Unchanged.
D. Indeterminate.
28. Other factors- remaining constant, the audit risk is increased by an increase in:
A. Materiality.
B. The effectiveness of analytical procedures.
C. The risk of incorrect rejection.
D. Detection risk.
29. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing
control risk too high relate to the
30. Which type of sampling plan is most frequently used in testing control activities?
A. Attributes sampling.
B. Discovery sampling.
C. Probability-proportional-to-size sampling.
D. Classical variables sampling.
31. Tests of controls provide reasonable assurance that controls are applied as
prescribed. A sampling method that is useful when testing controls is:
A. Nonstatistical sampling
B. Discovery sampling
C. Attribute estimation sampling
D. Stratified random sampling
32. Attributes sampling would be an appropriate method to use on which one of the
following procedures in an audit program?
33. Which of the following is a valid statement about the assessment of control risk?
A. There is a positive relationship between detection risk and the combined level
of inherent and control risk.
B. Misstatements discovered by conducting substantive procedures may cause
the auditor to modify the previous assessment of control risk.
C. The auditor should consider the assessed levels of inherent and control risks
in determining the nature, timing, and extent of substantive procedures required to
eliminate audit risk.
D. The assessed level of inherent and control risks can be sufficiently low in
order to eliminate the auditor's need to perform substantive tests on some
assertions.
36. Acceptable risk of assessing control risk too low or too high is directly related to
A. nonsampling risk
B. sampling risk
C. inherent risk
D. control risk
37. Which of the following statements is true about nonstatistical sampling, in tests of
controls?
38. The risk which the auditor is willing to take of accepting a control as being
effective when, in fact, it is not is the
39. If the auditor is concerned that a population may contain exceptions, the
determination of a sample size sufficient to include at least one such exception is
a characteristic of
A. Discovery sampling
B. Variables sampling
C. Random sampling
D. Monetary-unit sampling
40. Statistical sampling may be applied to test controls when a client's control
procedures:
42. If the size of the sample to be used in a particular test of attributes has not been
determined by utilizing statistical concepts but the sample has been chosen in
accordance with random selection procedures,
43. Which of the following factors does an auditor generally need to consider in
planning a particular audit sample for a control test?
45. The tolerable rate of deviation for tests of controls necessary to justify a control
risk assessment depends primarily on which of the following?
46. An auditor who is examining inventory may appropriately apply sampling for
attributes in order to estimate the
A. lower than the expected rate of errors in the related accounting population
B. higher than the expected rate of errors in the related accounting records
C. identical to the expected rate of errors in the related accounting records
D. unrelated to the expected rate of errors in the related accounting records
49. The precision limit for control testing necessary to justify lowering the assessed
control risk level depends primarily on which of the following?
50. An auditor performs a test to determine whether all merchandise for which the
client was billed was received. The population for this test consists of all
A. Merchandise received.
B. Vendors' invoices.
C. Canceled checks.
D. Receiving reports.
51. Although mathematically based, statistical sampling does not replace audit
judgment. In utilizing statistical sampling techniques, the auditor must apply
judgment in all but which of the following tasks?
52. If an auditor, in planning to use statistical sampling, is concerned with the number
of a client's sales invoices that contain mathematical errors, he would most likely
utilize
53. An auditor wishes to determine if the error rate on travel reimbursement claims is
within the five-percent tolerance level set by management. What sampling plan
should the auditor use?
A. Variables sampling.
B. Attribute sampling.
C. Judgment sampling.
D. PPS sampling.
54. An auditor samples cash disbursement records for significant errors of P5, 000 or
more. Upon finding 'one such error, these records are scheduled for a complete
review. This conclusion is most likely based on a
A. Cluster sample.
B. Discovery sample.
C. Systematic sample.
D. Stratified sample.
55. In attribute estimation, which of the following must be known in order to appraise
the results of the auditor's sample?
56. Given random sampling, the same sample size, and the same tolerable error for
the testing of two unequal populations, the risk of assessing control risk too low on
the smaller population is
A. the same as the risk of assessing control risk too low on the larger population
B. higher than the risk of assessing control risk too low on the larger population
C. lower than the risk of assessing control- risk too low on the larger population
D. not determinable relative to the risk of assessing control risk too low on the
larger population
57. When using statistical sampling for tests of controls, an auditor's evaluation would
include a statistical conclusion about whether:
A. The auditor finds five deviations and concludes that procedures work
inadequately. The actual population deviation rate is 2%.
B. The auditor finds no deviations and concludes that, procedures work
adequately. The true population deviation rate is 5%.
C. The auditor finds no deviations and concludes that the procedures work
adequately. The true population deviation rate is 2%.
D. The auditor finds five deviations and concludes that procedures work
inadequately. The true population deviation rate is 6%.
59. An auditor who uses statistical sampling for attributes in testing internal controls
should increase the assessed level of control risk when the
A. Sample occurrence rate is less than the expected occurrence rate used in
planning the sample.
B. Tolerable rate less the allowance for sampling risk exceeds the sample
occurrence rate.
C. Sample occurrence rate plus the allowance for sampling risk exceeds the
tolerable rate.
D. Sample occurrence rate plus the allowance for sampling risk equals the
tolerable rate.
60. If a selected random number matches the number, of a voided voucher, the
voucher ordinarily should be replaced by another one if it
A. constitutes a deviation
B. cannot be located
C. has been properly voided
61. Assuming the tolerable deviation rate is 5 percent; the expected population rate is
3 percent, and the allowance for sampling risk is 2 percent, what should an
auditor conclude if the test of 100 randomly selected documents reveals 4
deviations?
A. accept the sample results as a support for assessing control risk below the
maximum because the tolerable rate less the allowance, for sampling risk equals
the expected population deviation rate
B. assess control risk at the maximum because the sample deviation rate plus
the allowance for sampling risk exceeds the tolerable rate
C. assess control risk at the maximum because the tolerable rate plus the
allowance for sampling risk exceeds the expected population deviation rate
D. accept the sample results as support for assessing control risk below the
maximum because the sample deviation rate plus the allowance for sampling risk
exceeds the tolerable rate
62. What is ordinarily the preferable course of action when an auditor finds a higher
than expected deviation rate when he is sampling controls?
63. Which one is most likely to have more serious consequences, assessing control
risk as too high or too low, and why?
A. Too high, because too much reliance will be put on weak controls, increasing
overall audit risk.
B. Too high, because of audit inefficiency and consequently audit reliability will
be inhibited.
C. Too low, because too much reliance will be put on weak controls, increasing
overall audit risk.
D. Too low, because audit efficiency and consequently audit reliability will be
inhibited.
64. Assessing control risk too high is the risk that the sample result
A. Does not support tolerable error for some or all of management's assertions.
B. Contains proportionately more deviations from prescribed control procedures
than what actually exist in the population as a whole.
66. At times a sample may indicate that the auditor's assessed level of control risk for
a given control is reasonable when, in fact, the true compliance rate does not
justify the assessed level. This situation illustrates the risk of
67. In the examination of the financial statements of Delta Company, the auditor
determines that in performing a test of internal control effectiveness, the rate of
error in the sample does not support the auditors preconceived notion of a
tolerable occurrence rate when, in fact, the actual error rate in the population does
meet the auditors notion of effectiveness. This situation illustrates the risk of
68. Several risks are inherent in the 'evaluation of audit evidence which has been
obtained through the use of statistical sampling. Which of the following risks is an
example of the risk of underassessment of control risk?
70. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a peso value?
A. Numerical sampling.
B: Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.
A. To increase the confidence level at which a decision will be reached from the
results of the sample selected.
B. To determine the occurrence rate for a given characteristic in the .population
being studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.
73. An auditor is applying PPS sampling. In determining the sample size, which of the
following is not necessary?
74. In a variable sampling plan, an auditor must generally consider each of the
following except
75. When sampling methods are used in a substantive test, all of the following factors
must be considered in determining an optimum sample size, except the
76. Which of the following factors would influence the sample size for a substantive
test of details for a specific account?
77. An auditor initially planned to use unrestricted random sampling with replacement
when testing accounts receivable. Later, the auditor decided to use unrestricted
random sampling without replacement. As a result only of this decision, the
sample size should
A. increase
B. remain the same
C. decrease
D. be recalculated using a binomial distribution
78. The relationship between the sampling risk of incorrect acceptance and the
sample size of substantive tests is
A. inverse
B. indeterminate
C. positive
D. linear
79. The use of the difference estimation sampling technique to estimate peso
amounts is inappropriate when
A. The total book value is known and corresponds to the sum of all the individual
book values.
B. A book value for each sample item is unknown.
C. There are some observed differences between audited values and book
values.
D. The audited values are nearly proportional to the book value.
80. Which of the following situations would increase the sample size? A decrease in:
81. A number of factors influence the sample size for a substantive test of details of
an account balance. All other factors being equal, which of the following would
lead to a larger sample size?
82. For variables sampling purposes, changes in certain parameters affect sample
size positively while changes in others have a negative effect. In this regard,
which of the following statements is true?
A. ratio, estimation
B. probability proportional to size sampling
C. discovery sampling
A. The total population book value is known and corresponds to the sum of all
population items.
B. There are some observed differences between audited end recorded book
values
C. Differences between recorded and audited values are nearly proportional to
the recorded values.
D. There are no recorded values for some items in the population.
85. A population that is physically separated into two or more groups based on
sample variation being less than that for the entire population is called a
A. systematic sample
B. judgment sample
C. simple random sample
D. stratified sample
D. PPS sampling is less likely to overstate the allowance for sampling risk when
errors are found in the sample
90. Which of the following courses of action would an auditor most likely follow in
planning a sample of cash disbursements if the auditor is aware of several
unusually large cash disbursements?
A. Increase the sample size to reduce the effect of the unusually large
disbursements.
B. Continue to draw new samples until all the unusually large disbursements
appear in the sample.
C. Set the tolerable rate of deviation at a lower level than originally planned.
D. Stratify the cash disbursements population so that .the unusually large
disbursements are selected.
92. The mean-per-unit estimation method calculates the estimated total audited value
of a population of accounts receivable as:
B. The "bounds" around the sample mean that we would expect the value to fall
within to be correct.
C. The "projected" misstatement in the population based upon the sample
chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which the book
value may exceed that sample mean without being materially misstated.
94. When are the ratio estimation and difference estimation techniques most likely to
be preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all provide
similar results.
B. When differences between book and audited values are infrequent.
C. When differences between book and. audited values are frequent.
D. When differences between book and projected misstatement is estimated to
be small.
97. While performing a substantive test of details during an audit, the auditor
determined that the sample results supported the conclusion that the recorded
account balance was materially misstated. It was, in fact, not materially misstated.
This situation illustrates the risk of
A. alpha risk
B. assessing control risk too low
C. beta risk
D. assessing control risk too high
99. Sample results support the conclusion that a recorded account balance is
materially misstated but, unknown to the auditor, the account is not misstated,
suggesting the risk of
A. incorrect rejection
B. assessing control risk too high
C. incorrect acceptance
D. assessing control risk too low
A. Incorrect rejection
B. Alpha error
C. Incorrect acceptance
D. Type I error
MODULE 10
Tests of Controls
A. Order entry
B, Receiving
C. Inventory control
D. Cash collection
5. Which of the following is not likely a source of information about the accounting
system in the revenue area?
7. Which of the following control procedures could prevent or detect errors or frauds
arising from shipments made to unauthorized parties?
8. Which of the following control procedures would most likely assure that access to
shipping, billing, inventory control, and accounting records is restricted to
personnel authorized by management?
10. Which of the following internal control_ procedures most likely would deter lapping
of collections from customers?
11. What sequence of steps does an auditor undertake when identifying control
procedures that are potentially reliable in assessing control risk below the
maximum?
A. Consider the errors or frauds that might occur, determine control procedures,
identify control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or
frauds that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur,
determine control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or
frauds that might occur, and identify control objectives.
12. Assuming cash receipts from credit sales have been misappropriated, which of
the following is likely to conceal the misappropriation and unlikely to be detected?
13. Which of the following is most likely to provide management with incentives to
overstate earnings?
14. Under which of the following circumstances does management have some
discretion in timing the recognition of revenue?
15. After preparing a flowchart of internal control for sales and cash receipts
transactions and evaluating the design of the system, the auditor would perform
tests of controls on all control procedures
16. Which of the following would the auditor consider to be an incompatible operation
if the cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.
17. Which of the following is not a universal rule for achieving control over cash?
A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.
19. A company has computerized sales and cash receipts journals. The computer
programs for these journals have been properly debugged. The auditor
discovered that the total of the accounts receivable subsidiary accounts differs
materially from the accounts receivable control account. This discrepancy could
indicate
A. Lapping of receivables.
B. Credit memoranda being improperly recorded.
C. Receivables not being properly aged.
D. Statements being intercepted prior to mailing.
20. To achieve control when there is no billing department, the billing function should
be performed by the
A. accounting department
B. sales department
C. shipping department
D. credit and collection department
21. The person who opens the mail commonly prepares a remittance advice when a
customer fails to return one with the payment. Consequently, mail should be
opened by the
A. credit manager
B. receptionist
C. sales manager
D. accounts receivable clerk
22. Which of the following control procedures will likely prevent the concealment of a
cash shortage that was, perpetrated by improperly writing off a trade account
receivable?
A. Write off must be approved by a responsible officer after reviewing the credit
department's recommendations and supporting evidence.
B. Write Off must' be supported by an aging schedule showing that only
receivables that are several months overdue have been written off.
C. Write off must be approved by the cashier.
D. Write off must be authorized by field sales representatives.
23. Which of the following would unlikely improve control over an entity's cash?
24. Which of the following would best protect a company that wishes to prevent
lapping?
25. Which of the following is the greatest drawback of using subsequent collections
that are evidenced only by a deposit slip as an alternative procedure when
responses to positive accounts receivable confirmations are not received?
26. In considering internal control within the revenue/receipt cycle, what is the
purpose of a transaction walk through?
27. Which of these assignments of duties would least likely lead to an embezzlement
or theft?
28. Standard control procedures over customer remittances received through the mail
include the policy that requires the mailroom personnel to
29. After making the deposit, the daily cash summaries and the validated deposit slips
should be forwarded by the cashier directly to the:
A. Treasurer.
B. Accounts receivable clerk.
C. General accounting.
D. Internal auditor.
30. The accounting and the cash receipts functions should be handled by which
department(s)?
31. When auditing cash, the auditor should mostly be concerned with:
A. Detective risk.
B. Inherent risk.
C. Adjunct risk.
D. Nonsampling risk.
33. Jolas embezzled P50,000 from the company's account in Bank A. At year-end he
concealed the shortage by drawing a check in Buy and deposited it in Bank A. He
has not recorded the transaction the books. This is an example of:
A. Lapping.
B. Kiting.
C. An effective cash management.
D. Related-party transactions.
34. A client maintains two bank accounts. One of the accounts, Bank A, has an
overdraft of P10, 000. The other account, Bank B, has a positive balance of P5,
000. To conceal the overdraft from the auditor, the client may decide to
A. Draw a check for at least P 10,000 on Bank A for deposit in Bank B. Record
the receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
B. Draw a check for P 10,000 on Bank B for deposit in Bank A. Record the
disbursement but not the receipt. List the disbursement as an outstanding check,
but do not list the receipt as a deposit in transit. Record the receipt at the
beginning of the following period.
C. Draw a check for at least P10, 000 on Bank B for deposit in Bank A. Record
the receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
D. Draw a check for at least P10, 000 on Bank A for deposit in Bank B. Record
the disbursement but not the receipt and list the disbursement as an outstanding
check. Record the receipt at the beginning of the following year.
35. A company has a policy of rotating employees' assigned duties. This policy is
most important for employees who:
36. Alpha Company uses its sales invoices for posting to perpetual inventory records.
Inadequate internal control procedures over the invoicing function allow goods to
be shipped that are not yet invoiced. The inadequate controls could cause an
37. Which of the following control procedures may prevent the failure to bill customers
for some shipments?
38. The most effective control for ensuring that customers are billed only for goods
shipped is to
39. A company policy should clearly indicate that defective merchandise returned by
customers is to be delivered to the
A. Sales clerk.
B. Receiving clerk.
C. Inventory control clerk.
D. Accounts receivable clerk.
40. During the review of a small business client's internal control system, the auditor
discovered that the accounts receivable clerk approves credit memos and has
access to cash. Which of the following controls would be most effective in
offsetting this weakness?
41. The most effective control to prevent unbilled and unrecorded shipments of
finished goods is to
A. completeness assertion
B. rights and obligation
C. valuation or allocation
D. occurrence
44. To verify that all sales transactions' have been recorded, a test of transactions
should be completed on a representative sample drawn from
45. To gather audit evidence about the .proper credit approval of sales, auditor would
select sample of documents from the population represented by the
48. An effective procedure to test for unbilled shipments is to trace from the
49. To determine whether refunds granted to customers were properly approved, the
auditor should trace accounts receivable entries to:
A. Sales invoices.
B. Remittance advices.
C. Shipping documents.
D. Credit memos.
50. The following are four steps that an auditor undertakes in assessing control risk:
A. DBAC
B. BCDA
C. BDAC
D. DCAB
51. In order for the auditors to be able to recognize potential fraud, they must be
aware of the basic characteristics of fraud. Which of the following is a
characteristic of fraud?
A. Unintentional deception.
B. Taking unfair or dishonest advantage of uninformed individuals.
C. Lack of training.
D. Negligence on the part of executive management.
SUBSTANTIVE TESTS
53. As one of the year-end audit procedures, the auditor instructed the client's
personnel to prepare a standard bank confirmation request for a bank account
that had been closed during the year. After the client's treasurer had signed the
request, it was mailed by the assistant treasurer. What is the major flaw in this
audit procedure?
55. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor would examine all of the following except:
A. bank confirmation
B. cutoff bank statement
C. year-end bank statement
D. bank reconciliation
58. Which of the following audit procedures is most likely to detect a cash balance
that is restricted as to withdrawal?
59. An auditor should trace bank transfers for the last part of the audit period and the
first part of the subsequent period to detect whether
A. the cash receipts journal was held open for a few' days after the year-end
B. cash balances were overstated because of kiting
C. the last checks recorded before the year-end were actually mailed by the
year-end
D. any unusual payments to or receipts from related parties occurred.
60. An unrecorded check issued during the last week of the year would Most likely be
discovered by the auditor when the
A. Initials of the in-charge auditor indicating a review of the staff assistants' work.
B. Cut-off bank statements received directly from the banks.
63. Which of the following auditing procedures would: the auditor not apply to a cutoff
bank statement?
A. Trace year-end outstanding checks and deposits in transit to the cutoff bank
statement.
B. Compare dates, payees and endorsements on returned checks with the cash
disbursements record.
C. Determine that the year-end deposit in transit was credited by the bank on the
first working day of the following accounting period.
D. Reconcile the bank account as of the end of the cutoff period.
64. Which of the following would be the most appropriate audit procedure to test the
processing of interbank transfers?
65. While performing an audit of cash, an auditor begins to suspect kiting. Which of
the following is the best evidence that the auditor could obtain concerning whether
kiting is taking place?
68. Of the following, which procedure or document is most effective for defecting
kiting?
69. Which of the following is confirmed on the standard form used for cash balances
at financial institution?
70. When counting cash on hand, the auditor must exercise control over all cash and
other negotiable assets to prevent
A. theft
B. irregular endorsement
C. substitution
D. deposits in transit
71. Which of the following is not a primary objective of the auditor in the tests of
accounts receivable?
A. sales returns
B. cash
C. accounts receivable
D. sales allowances
75. The audit objective: "The accounts receivable balance represents gross claims on
customers and agrees with the sum of the accounts receivable subsidiary ledger"
is derived from the assertion of
A. completeness assertion
B. valuation or allocation assertion
C. rights and obligations assertion
D. occurrence assertion
A. completeness assertion
78. An auditor is examining accounts receivable. Which one is the most competent
type of evidence in this situation?
80. Although most substantive testing is performed during the final audit, M IMO
substantive tests may be done during the interim period. Which of the following
statements concerning the timing of substantive tests is true?
81. Before applying principal substantive tests to the details of asset and liability
accounts at an interim date, the auditor should
D. consider the control tests that must be applied at balance sheet date to
extend the audit conclusions reached at the interim date
83. In the processing of accounts receivable confirmations, the auditor would not
normally be expected to:
84. The auditor should ordinarily mail confirmation requests to all banks with which •
the client has conducted any business during the year, regardless of the year-end
balance, since
A. the confirmation form, also seeks information about indebtedness to the bank
B. this procedure will detect kiting activities which would otherwise not be
detected
C. the mailing of confirmation, forms to all the client's depository banks is
required by Philippine standards on auditing
D. this procedure relieves the auditor of any responsibility with respect to non-
detection of forged checks.
85. An analysis of the aged accounts receivables is most directly related in which
substantive test objective?
86. The tests of balances to evaluate the adequacy of the allowance for uncollectible
accounts do not involve which of the following?
87. When scheduling audit work, the auditors are most likely to confirm accounts
receivable balances at an interim date if:
88. Which of the following is the best argument against the use of negative accounts
receivable confirmations?
89. Which of the following procedures least likely helps the auditors to assess the
adequacy of management's accounting estimate of the allowance for doubtful
accounts?
90. Which of the following is a proper alternative audit procedure for no responses to
positive accounts receivable confirmation requests?
91. Which of the following might be detected by an auditor's review of the client's
sales cut-off?
92. During the process of confirming receivables as of December 31, 2009, a positive
confirmation was returned indicating that the "balance owed as of December 31
was paid by a customer on January 9, 2010." The auditor would most likely
A. determine whether there were any changes in- the account between January
1 and January 9, 2010
B. determine whether a customary trade discount was taken by the customer
C. reconfirm the zero balance as of January 10, 2010
D. verify that the amount was received
93. Which of the following analytical audit findings would most likely indicate a
possible problem?
94. When the objective of the auditor is to evaluate the appropriateness adjustments
to sales, the best available evidence would normally be
96. In which type of evidential matter would an auditor primarily rely upon when
evaluating the collectability of accounts receivable?
A. Positive confirmation.
B. Negative confirmation.
C. Aged accounts receivable listing.
D. Management's representations.
97. A client who wishes to inflate earnings decides to hold the sales record open
beyond year-end and record 2011 sales in 2010. Although the invoices are dated
as of year-end, the shipments were made in the following period. Moreover, the
goods were included in the ending inventory of the period under audit. Which of
the following auditing procedures would not assist in detecting this form of
fraudulent financial reporting?
98. Which of the following substantive field work procedures provides the best
evidence about the completeness of recorded revenues?
99. Which source document should an auditor use to verify the correct sales date for
an item sold FOB shipping point?
100. Which of the following procedures would an auditor most likely rely on to verify
management's assertion of completeness?
A. Sales revenue.
B. Sales returns and allowances.
C. Accounts receivable.
D. Allowance for bad debts.
A. valuation
B. classification
C. existence
D. completeness
104. Which of the following audit objectives is not served by confirming customers'
accounts receivable?
105. For customers who are not responding to a first request for positive confirmation
requests, the auditor should next
A. contact the customer by telephone and attempt to confirm the balance orally
B. analyze subsequent remittances from the customer to see if the year-end
balance has been paid
C. send a second request for confirmation
D. examine underlying documentation supporting the, year-end balance
106. An aged trial balance of accounts receivable is usually used by the auditor to
107. An auditor reconciles the total of the accounts receivable subsidiary ledgers to the
general ledger control account balance, as of December 31, 2008. Which of the
following would the auditor most likely learn?
Which of the following is the most likely cause of the decrease in accounts
receivable turnover?
110. When there are a large number of relatively small account balances, negative
confirmation of accounts receivable is acceptable if internal control is
A. strong and the individuals receiving the confirmation requests are unlikely to
give them adequate consideration
B. weak and the individuals receiving the confirmation requests are likely to give
them adequate consideration
C. weak and the individuals receiving the confirmation requests are Unlikely to
give them adequate consideration
D. strong and the individuals receiving the confirmation requests are likely to
give them adequate consideration
111. In the confirmation of accounts receivable, the auditor would most likely
113. The auditors may use positive' and/or negative forms of confirmation requests for
accounts receivable. An auditor most likely will use
114. Which of the following statements is correct concerning the use of negative
confirmation requests?
A. Understated receivables
B. Overstated sales
C. Kiting
D. Misappropriated inventory
A. valuation or allocation
B. presentation and disclosure
C. existence or occurrence
D. rights and obligations
117. In auditing accounts receivable, which of the following questions would add value
to an audit?
118. Which is the most persuasive evidence to support accounts receivable (not
including the allowance for doubtful accounts)?
119. Which of the following procedures could reveal unrecorded sales as of balance
sheet date?
120. Once an auditor has determined that accounts receivable have increased due to
slow collections in a "tight money" environment, the auditor would likely
A. propose an increase in the balance in the allowance for bad debts account
121. Customers with substantial due balances have failed to reply after a second
requests had been mailed to them directly. Which of the following audit
procedures is most appropriate?
122. An auditor's primary concern when performing tests of controls over purchasing is
to determine whether:
123. A client erroneously recorded a large purchase twice. Which of the following
control procedures would most likely detect this error in a timely and efficient
manner?
124. The accounts payable department receives a purchase order form to accomplish
all of the following except
125. For effective internal control purposes, which of the following individuals should be
responsible for mailing signed checks?
A. Receptionist
B. Accounts payable clerk
C. Treasurer
D. Payroll clerk
127. How con an auditor determine whether the Receiving Department procedures are
applied properly?
128. Whit of the following control procedures could prevent or detect payment for
goods that have not been received?
A. receiving reports, to determine that the related canceled checks are dated no
earlier than the receiving reports
B. receiving reports, to determine that the related canceled checks are dated no
later than the receiving reports
C. canceled checks, to determine that the related receiving reports are dated no
earlier than the checks
D. canceled checks, to determine that the related receiving reports are dated no
later than the checks
130. Omitting quantities from copies of purchase orders sent to the receiving
department is a control procedure intended mainly to
131. Which of the following is not an appropriate activity for the treasurer's department?
A. Prepares checks.
B. Cancels vouchers.
C. Forwards checks to vendors.
D. Prepares vouchers.
132. As a senior auditor, you are reviewing a write-up of internal control in cash
receipts and disbursement procedures. Which of the following deficiencies alone
should cause you the least concern?
133. Matching the suppliers' invoice, the purchase order, and the receiving report
normally should be the responsibility of the
A. receiving department
B. accounts payable department
C. purchasing department
D. treasury function
134. To avoid potential errors and irregularities, well-designed controls in the accounts
payable area should include a separation of which of the following functions?
135. Which of the following is a necessary control procedure for cash disbursements?
A. Checks should be signed by the controller and at least one other employee of
the company.
B. Checks should be sequentially numbered, and the numerical sequence
should be accounted for by the person preparing the bank reconciliation.
C. Checks and supporting documents should be marked "paid" immediately after
the check is returned with the bank statement.
D. Checks should be sent directly to the payee by the employee who prepares
documents that authorizes check preparation.
136. Which of the following functions is not appropriate for the accounts payable
department?
138. When goods are received, the receiving clerk should match the goods with the
140. To assure that disbursements are neither improper nor inaccurate, an entity
should require that all checks be
141. The mailing of disbursement checks and remittance advices should be controlled
by the employee who
143. Which of the following control questions relates to the existence and Occurrence
objective in purchasing and accounts payable?
A. Are the purchase order forms prenumbered and the numerical sequence
checked for missing documents?
B. Does the accounting department check invoices for mathematical accuracy?
C. Does the chart of accounts and accounting manual give instructions for
classifying debit entries?
D. Are receiving reports prepared for each item received?
145. To adequately provide for the segregation of duties, the purchase requisitions for
regular inventory stock should be initiated by which of the following departments?
A. Purchasing department.
B. Sales department.
C. Warehouse.
D. Shipping.
146. In a properly designed accounts payable system, a voucher is prepared after the
invoice, purchase order, requisition, and receiving report are verified. The next
step in the system is to
147. Which of the following is an internal control procedure that would prevent a paid
disbursement voucher from being presented for payment a second time?
148. Which of the following may be considered an appropriate means for further testing
controls over vendor payments?
149. Which of the following would be the best procedure to determine whether
purchases were properly authorized?
A. Completeness.
B. Presentation.
C. Rights.
D. Valuation.
152. When the auditors discover an overstatement of accounts payable, they would
most likely expect to find an overstatement of:
A. accrued liabilities
B. inventory
C. retained earnings
D. revenues
153. An auditor usually examines receiving reports that support entries in the:
154. Which of the following transactions would an auditor most likely repose an
adjustment to the financial statements?
A. Inventory is included on the balance sheet at year-end, but the check for
payment has not been paid until January 12.
B. An order for office supplies that has not been recorded because the goods
have neither been received nor paid for by year-end.
C. Purchase of P5,000 of office furniture that was ordered on December 22 with
a P1,000 deposit being made with an entry debiting "deposit on furniture" for
P1,000 and a credit to cash for P1,000. The office furniture was received on
January 5.
D. Shop supplies are included on the balance sheet at year-end, but the payable
and subsequent cash disbursements are not recorded until after year-end.
155. Only one of the following four statements which compare confirmation of accounts
payable with suppliers and confirmation of accounts receivable with customers is
true. The true statement is that
157. Which of the following is true about the audit procedure of confirming accounts
payable?
158. Which of the following best explains why accounts payable confirmation
procedures are not always used?
159. Which of the following audit procedures is not designed primarily to test for the
correctness of purchases and sales cutoff?
160. Which of the following procedures relating to the audit of accounts payable could
the auditor delegate entirely to the client's employees?
162. Which of the following procedures would help an auditor test for overstatements of
accounts payable at the balance sheet date?
163. In testing cutoff for purchases and payables at December 31, an auditor is
confronted with the following four scenarios. Which of the four most likely
represents a cutoff error, requiring that the auditor propose an adjusting journal
entry?
A. Shipping terms are FOB shipping point. Goods were shipped on December
31. The purchase was recorded on December 31.
B. Shipping terms are FOB destination. Goods were shipped on December 31.
The purchase was recorded on December 31.
C. Shipping terms are FOB shipping point. Goods were shipped on January 2.
The purchase was recorded on January 4.
D. Shipping terms are FOB destination. Goods were shipped on December 31.
The purchase was recorded on January 2.
164. When an auditor selects a sample of items from the vouchers payable register for
the last month of the period being audited and traces the items to underlying
documents, the auditor, is gathering evidence primarily in support of the assertion
that
165. Which of the following audit procedures is the most efficient for defecting
unrecorded liabilities at the balance sheet date?
166. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?
A. Unpaid bills
B. Bills of lading
C. Shipping records
D. Unmatched sales invoices
167. Which of the following is not a step in the search for unrecorded liabilities?
168. To determine whether accounts payable are complete, an auditor performs a test
to verify that all merchandise received is recorded. The population of documents
for this test consists of all:
A. Vendors' invoices
B. Receiving reports
C. Purchase orders
D. Canceled checks
169. Which of the following audit procedures is best for identifying unrecorded trade
accounts payable?
170. Which of the following procedures is least likely to alert the auditors to unrecorded
accounts payable?
172. The audit procedures applied to accrued liabilities differ from those applied to
accounts payable because
A. accrued liability balances are less material than accounts payable balances.
B. evidence supporting accrued liabilities is nonexistent, whereas evidence
supporting accounts payable is readily available.
C. accrued liabilities usually pertain to services of a continuing nature, whereas
accounts payable are the result of completed transactions.
D. accrued liabilities at year-end will become accounts payable during the
following year.
173. Accrued liabilities generally differ from accounts payable in that occurred
liabilities:
174. Which of the following best describes the auditors' approach to the audit of
accrued liabilities?
A. Confirmation.
B. Observation.
C. Plan a low assessed level of control risk.
D. Test computations.
A. Purchase order.
B. Production plan.
C. Sales forecast.
D. Bill of materials.
A. Bill of materials.
B. Purchase order.
C. Production plan.
D. Sales forecast.
178. Comparing material usage reports to raw material stores issue slips is a control to
help insure which assertion?
179. Client's inventory instructions should include all the following except
180. Tracing a test count to the inventory compilations provides evidence for which
assertion?
181. Which of the following least likely serves as a substitute for performing other audit
procedures?
182. Which of the following is an internal control weakness for a company whose
inventory of supplies consists of .a large number of individual items?
183. An auditor would most efficiently test for the misclassification of capital
acquisitions as expenses by
185. In conjunction with the observation of a client's physical inventory, the auditors
should:
A. plan the physical inventory
B. segregate damaged and obsolete goods
C. supervise the client's personnel
D. evaluate the adequacy of the client's counting procedures
186. An auditor has accounted for a sequence of inventory tags and is now tracing
information on a representative number of tags to the inventory summary sheets.
Which assertion does this procedure relate in most directly?
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
187. An inventory turnover analysis most likely helps the auditors to detect:
188. During an audit of a non-public entity, which of the following is primarily an overall
audit approach to audit plant assets and equipment by a continuing auditor?
189. Which of the following is the legitimate reason why a responsible party would
have difficulty estimating environmental cleanup costs?
190. Which of the following statements concerning plant assets is not correct?
191. An auditor has found many new assets on the plant floor, which coincides with an
increase in the equipment subsidiary ledger. However, the auditor has noticed
that lease payments are being made to an equipment leasing company. The
auditor should primarily be concerned with which financial statement assertion?
A. purchase requisitions
B. receiving reports
C. purchase orders
D. vendor payments
193. When auditing merchandise inventory at year end, the auditor performs a
purchase cutoff test to obtain evidence that
A. goods purchased before year end are received- before the physical inventory
count
B. no goods held on consignment for customers are included in the inventory
balance
C. no goods observed during the physical count are pledged or sold
D. all goods owned at year end are included in the inventory balance
194. A client's physical count of inventories was higher than the inventory quantities
per the perpetual records. This situation could be the result of the failure to
record:
A. sales
B. sales discounts
C. purchases
D. purchase returns
195. Which of the following audit procedures is not appropriate for addressing the
assertion of valuation?
196. When there are few property and, equipment transactions during the year, the
continuing auditor usually makes a
A. complete review of the related internal controls and assesses control risk
relative to them
B. complete review of the related internal controls and performs analytical review
tests to verify current year additions to property and equipment
C. preliminary review of the related internal controls and performs a thorough
examination of the balances at the beginning of the year
D. preliminary review of the related internal controls and performs extensive
tests of current year property and equipment transactions
197. In analyzing the plant assets account, why is the examination of repairs and
maintenance records important?
A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.
A. That such assets have been removed from the ledger of property owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell them.
D. That such assets have been replaced by comparable equipment.
199. Which of the following statements is not correct concerning intangible assets?
200. When performing an, audit of the property, plant, and equipment accounts, an
auditor should expect which of the following to be most likely to indicate a
departure from generally accepted accounting principles?
A. A gain was recognized when .a new asset was acquired at a price lower than
its listed retail price.
201. The auditors are least likely to learn of retirements of equipment through which of
the following?
A. inspect certain items of equipment in the plant and trace those Items to the
accounting records
B. review the subsidiary ledger to ascertain whether depreciation was taken on
each item of equipment during the year
C. trace additions to the "other assets" account to 'search for equipment that is
still on hand but no longer being used.
D. select certain items of equipment from the accounting records and locate
them in the plant
203. When auditing inventories of raw materials, purchased parts, and/or Merchandise
inventory, the auditor's most effective means for evaluating the valuation assertion
is to
A. examine recent invoices from vendors, along with freight bills and compare
with client's unit costs, as adjusted for freight and discount.
B. compare purchases with prior year and with industry averages and account
for significant fluctuations.
C. trace quantifies from tags or count sheets to final inventory listings.
D. scan inventory listings for large extended amounts, and trace related
quantities to auditor's copy of the inventory tag or listing.
204. The auditor tests the quantity of materials charged to work in process by tracing
these quantities to
A. cost ledgers.
B. perpetual inventory records
C. receiving reports
D. material requisitions
205. Which of the following accounts would most likely be reviewed by the auditor to
gain reasonable' assurance that additions to the equipment account are not
understated?
206. The most significant audit step in substantiating additions to the office furniture
account balance is
207. Instead of taking a physical inventory count on the balance sheet date, the client
may take physical counts prior to the year-end if internal controls are adequate
and
208. Which of the following is not one of the independent auditor's 'objectives regarding
the audit of inventories?
209. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve
this objective?
210. Which of the following procedures is most relevant to testing the completeness
assertion for prepaid insurance?
211. In a manufacturing company, which of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
212. When perpetual inventory records are maintained in quantities and in pesos, and
internal accounting control over inventory is weak, the auditor would probably
A. want the client to schedule the physical inventory count at the end of the year
B. insist that the client perform physical counts of inventory items several times
during the year
C. increase the extent of tests for unrecorded liabilities at the end of the year
D. have to disclaim an opinion on the income statement for that year
213. In auditing plant assets and accumulated depreciation for proper valuation, the
auditor should do all of the f0llowing, except:
214. To verify the proper value of costs charged to real property records for
improvements to the property, the best source of evidence would be:
215. An auditor has accounted for a sequence of inventory tags and is now going to
trace information on a representative number of tags to the physical inventory
sheets. The purpose of this procedure is to obtain assurance that
217. The auditor may conclude that depreciation charges are insufficient by noting
218. To test the accuracy of the current year's depreciation charges, an auditor should
rely most heavily on
220. Which of the following audit procedures would provide the least reliable evidence
that the client has legal title to inventories?
221. An auditor wants to develop an audit test to evaluate the reasonableness of the
quantity of scrap material resulting from a certain production process compared to
industry standards. Which would be the most competent type of evidence
available to satisfy this objective?
A. Documentary.
B. Indirect testimony.
C. Physical.
D. Analytical.
222. Which of the following controls would be the most appropriate means to ensure
that terminated employees had been removed from the payroll?
223. Which of the following departments should have the responsibility for authorizing
payroll rate changes?
A. Human Resources.
B. Payroll.
C. Treasurer.
D. Timekeeping.
224. Effective internal control over the payroll function should include which of the
following?
A. Total time recorded on time clock cards should be reconciled to job reports by
employees responsible for those specific jobs.
B. Payroll department employees should be supervised by the management of
the human resources department.
C. Payroll department employees should be responsible in maintaining the
personnel records.
D. Total time spent on jobs should be compared to the total number of hours
indicated on time clock cards.
225. The purpose of segregating the duties, of hiring personnel and distributing payroll
checks is to separate the
226. An auditor would consider internal control procedures relating to a client‘s payroll
procedures to be ineffective if the payroll department supervisor is responsible for
227. The human resources department receives an edit listing of payroll changes
processed at every payroll cycle. If they do not verify the tinges processed, this
could result in:
229. Inspecting marketable securities provides primary evidence about the assertion of
A. existence
B. rights and obligations
C. valuation
D. all of the above
230. If market prices are not readily available for fair value measurements,
management should use
232. Controls over making estimates include all of the following except
233. Which of the following is least likely to be included in the audit program for
debenture bonds?
234. An auditor has calculated the interest paid on a company's recorded bonds and
found the interest paid was 10%; in examining the bonds he notes that they are
8% bonds sold without a premium or a discount. Which of the following is most
likely?
235. An audit found that P10, 000,000 of long term debt on the financial statements will
become due in 6 months. The financial statement assertion that must be
addressed in determining that the proper amount of debt is included as current is:
A. existence
B. completeness
C. rights
D. presentation
236. Sole of capital stock and large debt financing transactions are usually authorized
by
237. For a large publicly traded client the auditors' examination of capital stock account
will not ordinarily include:
238. An audit program for the examination of the retained earnings count should
include a step that requires the verification of the:
239. When verifying dividend amounts paid, an auditor will typically do all except which
of the following?
240. When a corporation has convertible debentures or stock options, which of the
following procedures should the auditor perform?
MODULE 11
PSA-BASED QUESTIONS
1. Which of the following matters do auditors need not communicate to the audit
committee of a public company?
6. Who is responsible for establishing the process and controls for preparing
accounting estimates?
I. Review and test the process used by management to develop the estimate.
II. Use an independent estimate for comparison with what the management
prepares.
Ill. Review subsequent events which confirm the estimate made.
A. Any of them
B. None of them
C. Either I or II
D. I only
8. Which of the following is not one of the primary approaches that the auditors may
use when evaluating the reasonableness of accounting estimates?
9. The auditor should normally concentrate on the key factors and assumptions
used by management including all of the following except that those that are
10. In evaluating the assumptions on which the estimate is based, the auditor would
need to pay particular attention to assumptions which are
A. only significant events that occur between the balance sheet date and the
date of the auditor‘s report which have been discovered by the auditor during
the same period
B. only significant events that occur between the balance sheet date and the
date of the auditor‘s report irrespective of the date they have been
discovered by the auditor
C. only significant events that occur between the balance sheet date and the
date the audited financial statements have been released to the client,
irrespective of the date of their discovery by the auditor.
D. all significant events that occur after the balance sheet date.
12. Which of the following is not correct concerning a type I and a type II subsequent
event?
14. The auditor‘s formal review of subsequent events normally should be extended
through the date of the
A. auditors report.
B. next formal interim financial statements.
C. delivery of the audit report to the client.
D. mailing of the financial statements to the stockholders.
15. Which of the following appropriately describes the auditor‘s procedures with
respect to subsequent events?
16. Which of the following is least likely a procedure that would be performed by the
auditor near the auditor's report date?
17. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
18. Which of the following should the auditor do the least when, after the financial
statement have been issued, the auditor becomes aware of a fact that existed at
the date of the auditor‘s report?
19. If subsequent to the issuance of the audited financial statements, the auditor
becomes aware of material misstatements in the financial statements that exist
prior to the date of the audit report, the auditor should
A. notify the parties who are currently relying on the financial statements.
B. discuss the matter with the management, and should take the action
appropriate in the circumstances.
C. document such information in the audit plan for succeeding audit.
D. submit a revised copies of the financial statements and audit report to the
stockholders.
20. If, after the audited financial statements have been issued, the auditor becomes
aware that some information included in the statements is materially misleading,
he or she has
A. no obligation to disclose it, assuming he or she acted in good faith and without
negligence in arriving at the audit opinion.
B. an obligation to inform the board of directors of the misleading statements.
C. an obligation to inform all users who are relying on the financial statements.
D. an obligation to make certain that users who are relying on the financial
statements are informed.
A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the financial
statements that more extensively discusses the reason for the revision of the
previously issued financial statements.
22. When a fact, that existed before the date of the report is discovered and the
management revises the previously issued audited financial statements, the
following are appropriate except the:
revision of the financial statements and to the earlier report issued by the auditor.
B. new auditor‘s report should contain the original date.
C. performance of the procedures that are designed to obtain sufficient evidence
as to subsequent events would ordinarily be extended to the date the revised
financial statements are approved by the entity's management.
D. auditor is permitted to restrict the audit procedures regarding the financial
statements to the effects of the subsequent event that necessitated the revision.
23. The management should assess those events that may cast significant doubt
about the entity's ability to continue as a going concern for at least
24. Which of the following is incorrect about the management's responsibility to make
an assessment of an entity's ability to continue as a going concern?
25. Which of the following least likely indicate a potential going-concern problem of
on the entity?
26. Which of the following is correct about the auditor's responsibility with respect to
the entity's ability to continue as a going concern?
A. Inspection
B. Inquiry
C. Observing
D. Analysis
29. When events or conditions have been identified to cast significant doubt on the
entity's ability to continue as a going concern, the auditor should
30. Which of the following audit procedures would most likely assist an auditor in
identifying conditions and events that may indicate that there could be substantial
doubt about an entity's ability to continue as a going concern?
32. The auditors are required to obtain a letter of representation from their clients.
Which of the following statements regarding the letter of representation is
correct?
36. The auditor should obtain evidence that the management acknowledges its
responsibility for the fair presentation of the financial statements in accordance
with PERS, and has approved the financial statements.
The auditor can obtain evidence of management's acknowledgment of such
responsibility approval
38. A written representation from a client's management that, among other matters.
acknowledges its responsibility for the fair presentation of the financial
statements, should normally be signed by the
39. If the management refuses to furnish certain written representations that the
auditor believes are essential, which of the following is appropriate?
A. The auditor can rely an oral evidence relating to the matter as a basis for an
unqualified opinion.
B. The client's refusal does not constitute a scope limitation that may lead to a
modification of the opinion.
C. The client's refusal may have an effect on the auditor's ability to rely on other
representations of the management.
D. The auditor should express an adverse opinion because of management‘s
refusal.
40. For which of the following matters should on auditor obtain written management
representations?
42. Which of the following matters would an auditor most likely include in a
management representation letter?
QUIZZERS
1. Which of the following is not among the characteristics of the procedures being
performed in completing the audit?
A. They are optional since they have only an indirect impact on the opinion to be
expressed.
B. They involve a lot of subjective judgment by the auditor.
C. They do not pertain to specific transaction cycles or accounts.
D. They are usually performed by the audit managers or other senior rnembers of
the audit team who have extensive audit experience with the client.
A B C D
Perform additional procedures YES NO NO YES
Request management to adjust
financial statements for identified YES YES NO YES
misstatements
Request management to adjust
financial misstatements for YES NO YES NO
projected misstatements
A. Attorney's letter
B. Management representation letter
C. Internal control deficiency letter
D. All of these are signed by the auditor
9. They involve analysis of significant ratios and trends including the resultant
investigation of fluctuations and relationships that are inconsistent with other
relevant information or expectation:
A. inquiry
B. analytical procedures.
C. account analysis.
D. inspection.
10. Analytical procedures performed in the overall review stage of on audit suggest
that several accounts have unexpected relationships. The results of these
procedures most likely indicate that
13. An auditor suspects that fictitious sales may have been recorded during the year.
Which of the following analytical review results would most likely indicate that
fictitious sales were recorded?
15.Of the following procedures, which one does not produce analytical evidence?
A. Compare revenue, cost of sales, and gross profit with the prior year and
investigate significant variations.
B. Examine monthly performance reports and investigate significant revenue and
expense variances.
16. The extent to which analytical procedures provide useful substantive evidence
depends on
19. A benefit obtained from comparing client's data with industry average is that it
provides
20. When the current year's unaudited trial balance is compared to the prior year's
audited trial balance.
21. When a higher than normal ratio of long-term debt to net worth is coupled with a
lower than average ratio of profits to total assets, the company
A. is highly successful.
22. Which of the following discoveries through the use of analytical procedures would
indicate a relatively high risk of financial failure?
24. Which method of analytical procedure is most useful because many expenses,
such as cost of goods sold, might be expected to bear a predictable relationship
to net sales?
A. Horizontal analysis
B. Trend analysis
C. Vertical analysis
D. Reasonable analysis
25. One type of analytical procedure is trend analysis. Which of the following is the
best example of trend analysis?
27. Analytical procedures enable the auditor to predict the balance or quantity of an
item under audit. Information to develop this estimate can be obtained from all of
the following except
29. Which of the following items tend to be the most predictable for purposes of
analytical procedures applied as substantive tests?
34. In evaluating the effectiveness of a company‘s credit and collection policies, the
ratio most likely to be used by an auditor is
A. quick ratio.
B. accounts receivable turnover.
C. working capital turnover.
D. return on sales.
35. During an audit of the accounts receivable function, you found that the accounts
receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What
is the most likely cause of the decrease in the turnover rate?
A. consistency qualification.
B. review of internal control.
C. explanation in the representation letter.
D. auditor investigation.
37. An auditor compares 2010 revenues and expenses with those of the prior year
and investigates all changes exceeding 10%. By this procedure the auditor would
be most likely to learn that
A. an increase in property tax rates has not been recognized in the client's
accrual.
B. the 2010 provision for uncollectible accounts is inadequate, because of
worsening economic conditions.
C. fourth quarter payroll taxes were not paid.
D. the client changed its capitalization policy for small tools in 2010.
38. Of the following procedures, which is the most important that on auditor should
use when performing an analytical review of the income statement?
A. Select sales and expense items and trace their amounts to related supporting
documents.
B. Compare actual revenues and expenses with the corresponding figures of the
previous year and investigate significant differences.
C. Obtain from the proper client representatives, inventory certificates for the
beginning and ending inventory amounts that were used to determine cost of
sales.
D. Ascertain that the net income amount in the statement of changes in financial
position (statement of cash flows) agrees with the net income amount in the
income statement.
40. Which of the following is not a purpose served by the application of analytical
procedures?
41. Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of
the following possibilities?
A. Unrecorded purchases
B. Unrecorded sales
C. Merchandise purchases being charged to selling and general expense
D. Fictitious sales
42. In applying analytical procedures, the auditor discovered that gross profit as a
percent of sales declined sharply during the current year. A possible cause might
be
A. the client has significant amounts of obsolete inventory carried at full cost.
B. a significant quantity of finished goods located in a distant warehouse was
inadvertently omitted from the ending inventory.
C. recorded sales included goods that were shipped the following year.
D. depreciation of office equipment was overstated.
43. An abnormal fluctuation in gross profit that might suggest the need for extended
audit procedures for sales and inventories would most likely be identified in the
planning phase of the audit by the use of
44. What form of analytical review might uncover the existence of obsolete
merchandise?
45. What is ordinarily the primary concern when auditing the income
statement?
46. Compared to balance sheet accounts, the audit of income statement accounts
generally relies more heavily on:
47. What audit procedure is not ordinarily used to examine selling, general and
administrative expenses?
A. .Analytical procedures
B. Use of budgets to identify unexpected differences
C. Confirmations of amounts paid with advertising agencies
D. Detailed tests of balances
48. Which of the following income statement accounts is least likely to be subject to
extensive detailed tests of balances?
49. Which of the following procedures is normally not considered in the auditor's
substantive procedures for revenue and expense accounts?
50. The auditors' best course of action with respect to "Other financial information"
included in a client prepared annual report containing the auditor‘s report is to:
51. Which of the following events in the subsequent period is on example of a Type
2 subsequent event?
52. Which of the following statements best expresses the auditor's responsibility with
respect to events occurring in the subsequent period?
A. The auditor has no responsibility for events occurring in the subsequent period
unless these events affect transactions recorded on or before the balance sheet
date.
B. The auditor's responsibility is to determine that transactions recorded on or
before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period
and should extend all detailed procedures through the last day of the field work.
D. The auditor is responsible for determining that a proper cutoff has been made
and for performing a general review of events occurring in the subsequent
period.
54. Which of the following procedures can be performed only in the subsequent
period?
55. A major customer of an audit client suffers a fire just prior to completion of year-
end fieldwork. The audit client believes that this event could have a significant
direct effect on the financial statements. The auditor should:
56. An auditor is concerned with completing various phases of the audit after the
balance sheet date. This subsequent period extends to the date of the
A. auditor's report.
B. final review of the audit working papers.
C. public issuance of the financial statements.
D. delivery of the auditor‘s report to the client.
57. Which of the following procedures should an auditor ordinarily perform regarding
subsequent events?
A. Compare the latest available interim financial statements with the financial
statements being audited.
B. Send second requests to client's customers who failed to respond to the first
accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the client's audit
committee.
D. Review the cutoff bank statements for several months after the year-end.
58. Which of the following events occurring after the issuance of an auditor‘s report
most likely would cause the auditor to make further inquiries about the previously
issued financial statements?
59. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. an information, which existed at the report dote that affects the report comes
to the auditor's attention.
B. the control environment changes after the issuance of the report.
C. an information about on event that occurred after the end of field work comes
to the auditor's attention.
D. the final determinations or resolutions are made of contingencies that had
been disclosed in the financial statements.
60. Subsequent to the issuance of the auditor's report, the auditor become aware of
facts existing at the report date that would have affected the report had the
auditor then been aware of such facts. After determining that the information is
reliable, the auditor should next
A. notify the board of directors that the auditor‘s report must no longer be
associated with the financial statements.
B. determine whether there are persons relying or likely to rely on the financial
statements who would attach importance to the information.
C. request the management to disclose the effects of the newly discovered
information by adding a footnote to subsequently issued financial statements.
D. issue a revised set of pro-forma financial statements that consider the newly
discovered information.
61. On March 15, 2010, Kiel, CPA, expressed an unqualified opinion on a client's
audited financial statements for the year ended December 31, 2009. On May 4,
2010, Kiel's internal inspection program disclosed that engagement personnel
failed to observe the client's physical inventory. Omission of this procedure
impairs Kiel's current ability to support the unqualified opinion. If the shareholders
are currently relying on the opinion, Kiel should first
62. Six months after issuing an unqualified opinion on audited financial statements,
an auditor discovered that the engagement personnel failed to confirm several of
the client's material accounts receivable balances. The auditor should first:
A B C D
Procedures to obtain evidence with
respect to subsequent events are YES YES NO NO
extended.
An emphasis of a matter is required. YES NO NO YES
66. Which of the following statements concerning litigation, claims and assessments
which were extracted from a letter from a client's lawyer is most likely to cause
the auditor to request clarification?
A. "I believe that the possible liability to the company is nominal in amount."
B. "I believe that the action can be settled for less than the damages claimed."
C. ―I believe that the plaintiff's case against the company is without merit."
D. "I believe that the company will be able to defend this action successfully."
68. Which of the following is typically the auditor‘s initial procedure to be performed
to identify litigation, claims, and assessments?
69. The auditors should request that on audit client sends a letter of inquiry to those
attorneys who have been consulted concerning litigation, claims, or
assessments. The primary reason for this request is to provide:
A. items which have high probability of being resolved to the client‘s detriment.
B. asserted claims and pending or threatened litigation.
C. legal matters subject to unsettled points of law, uncorroborated information or
other complex judgments.
D. matters to which the attorney has given substantial attention in the form of
legal consultation or representation.
72. The primary reason why an auditor requests that letters of inquiry be sent to the
client's legal counsel is to provide the auditor with
73. An auditor should obtain evidential matter relevant to each of the following actors
concerning third-party litigation against a client except the
74. The primary source of information about litigation, claims, and assessments is the:
A. board of directors.
B. client's attorneys.
C. management.
D. reply through direct confirmation with the other party involved.
75. The letter of audit inquiry to the client's lawyer(s) is the auditor's primary means
of obtaining:
76. A lawyer's refusal to respond to a letter of audit inquiry normally requires the
auditor to issue a(n):
78. When litigation or claims have been identified or when the auditor believes they
may exist, the auditor should
79. When an audit is made in accordance with the Philippine Standards on Auditing,
the auditor should always
A. document the understanding of the client's internal control and the basis for all
conclusions about the assessed level of control risk to financial statement
assertions.
B. employ analytical procedures as substantive tests to obtain evidence about
specific assertions related to account balances.
C. obtain appropriate representations from the management.
D. observe the taking of physical inventory on the balance sheet date.
82. Which of the following is least likely an action that may mitigate an entity's
difficulty to continue as a going concern?
83. Road, CPA, believes there is "substantial doubt about the ability of Kennon
Company to continue as a going concern for a reasonable period of time. In
evaluating Kennon's plan for dealing with the adverse effects of future conditions
and events, Rood most likely would consider, as a mitigating factor, Kennon's
plans to:
84. The auditor is most likely to discover omitted audit procedures during:
MODULE 12
INTERNAL AUDITING
A. the treasurer.
B. the company‘s president.
C. a retired executive from another company.
D. a consultant to the company.
2. The primary difference between operational auditing and financial auditing is that
In operational auditing
A. the auditor is not concerned with whether the audited activity is generating
Information in compliance with financial accounting standards
B. The operational auditor is seeking to help management use resources in the
most effective manner possible.
C. the auditor starts with the financial statements of an activity being audited and
works backward to the basic processes involved on producing them.
D. the auditor can use analytical skills and tools that are not necessary in
financial auditing.
A. internal control
B. evaluation
C. accuracy
D. compliance
I. Operating responsibility
II. Organizational status
III. Objectivity
IV. Authority over operations
A. I and II
B. II and III
C. Ill and IV
D. I and IV
5. Internal auditors are most likely to issue a report on which of the following?
6. The internal audit staff has been asked to conduct an audit of the purchasing
department. Top management feels that there have been some production
bottlenecks recently because of out-of-stock situations. What is the primary
objective of the auditors in this assignment?
8. The role of the internal auditor with respect to a purchasing deportment audit is to
9. Which of the following statements regarding assurance services is/are true with
respect to internal auditors?
III. Assurance services can be provided bray in the areas of controls and financial
reporting.
A. I and II
B. II only
C. I. II, and III
D. None of the above
11. The primary audience for the written report issued by the internal auditor at the
completion of an audit should be
A. the external auditors when they intend to rely on the internal auditor's work.
B. managers outside the area of audit so as to inform them of what is going on in
other areas of the organization.
C. the audit committee who needs to be kept informed on the risks to which the
organization is exposed.
D. the management inside or outside the audited area who can take corrective
action.
12. Which of the following statements is/are true regarding independence and
objectivity as applied to internal auditing?
A. I and ll
B. I and III
C. I, II. and III
D. Ill only
13. An internal auditor determines that the actual procedures differ from prescribed
control procedures. The auditor should
A. I and 3
B. 2 and 3
C. I and 4
D. 2 and 4
15. Follow-up activities by the internal auditor may be terminated, even though
corrective action has not been taken, when the
16. Which of the following would not be an audit activity that contributes to improved
corporate governance?
17. An internal auditor is preparing a final audit report to management. There is,
however, disagreement between the auditor .and the auditee on one finding
which details the auditee‘s violation of corporate purchasing policy. The auditee
believes the purchasing policy is open to interpretation and that there was no
violation. The auditor believes that the policy is clearly stated and that the
auditee's actions were a violation. In this circumstance, the auditor should
18. Which of the following statements is not correct regarding the internal and
external audit profession?
A. External auditors cannot perform internal audit work for their public company
financial statement audit clients.
B. Internal audit work is broader in scope.
C All auditors performing internal audits must be Certified Internal Auditors.
D. The audit committee is an important client.
19. According to the Standards, the internal audit director should ensure follow-up of
prior audit findings and recommendations:
A. analyze operational areas for control deficiencies, especially those that would
allow a fraud to go undetected.
B. perform trend analysis to identify high risk areas that merit management
attention.
C. analyze operations to identify potential deficiencies as a basis for improving
operational performance.
D. determine mismanagement or ineffective management by department or
divisional managers.
21. Internal auditing has been a dynamic profession. Which of the following best
describes the scope of internal auditing as it has developed to date?
A. Internal auditing involves appraising the economy and efficiency with which
resources are employed.
22. You have been selected to develop an internal auditing department for your
company. Your approach would most likely be to hire:
A. internal auditors each of whom possesses all the skills required to handle all
audit assignments.
B. inexperienced personnel and train them the way the company wants them
trained.
C. degreed accountants since most audit work is accounting related.
D. internal auditors who collectively have the knowledge and skills needed to
complete all internal audit assignments.
24. Which of the following is the most appropriate method of reporting disagreement
between the auditor and the auditee concerning audit findings and
recommendations?
A. State the auditor's position because the report is designed to provide the
auditor's independent view.
B. State the auditee's position because management is ultimately responsible for
the activities reported.
C. State both positions and identify the reasons for the disagreement.
D. State neither position. If the disagreement is ultimately resolved, there will be
no reason to report the previous disagreement. If the disagreement is never
resolved, the disagreement should not be reported, because there is no
mechanism to resolve it.
25. Workpapers document the work done by the internal auditor. The internal auditor
should
C. prepare the workpapers but review them with the auditee to be sure that the
evidence is appropriately compiled.
D. defer preparation of workpapers for a business segment until the audit work
on that phase is completed.
26. Which of the following could be an organization factor that might adversely affect
the ethical behavior of the director of internal auditing?
28. The president wants to know whether the purchasing function is properly meeting
its charge to ―purchase the right material at the right time in the right quantities."
Which of the following types of audits addresses the president's request?
29. Prior to commencing an operational audit, the auditee management requests that
the auditor include certain tests in the audit program. The auditor should
30. A company's new president meets the director of internal audit for the first time,
and asks the director to briefly describe his department's overall responsibility.
The director should state that the internal audit's overall responsibility is to:
31. Which of the following shortcomings that was uncovered during a review of
recent audit should cause the greatest concern to the supervisor of internal
auditing?
36. A major part of an operational audit involves appraising the efficiency and
effectiveness of the activity or unit being audited. Efficiency and effectiveness
appraisal include all but the following steps:
37. The operational auditor should evaluate the organization's overall planning
process to determine whether.
A. all plans, policies, and procedures are compatible with the organization's
objectives.
B. expected benefits do not exceed the cost of drawing them up.
C. each plan is developed or approved by senior management.
D. the premises for plans are based on historical data.
Economy &
Program Results Compliance Efficiency
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D. Yes No Yes
40. The major objective of the internal auditor‘s review of computer program testing
procedures in system development is to determine
41. Which one of the following is not reason to conduct an operational audit?
A. Efficiency
B. Economy
C. Correctness of accounting procedures
D. Effectiveness
43. To maximize independence, the director of internal auditing should report to the
A. audit committee
B. controller
C. chief financial officer
D. director of information systems.
44. Independence of the internal auditors would be least likely achieved if internal
auditors report to the?
A. President
B. Controller
C. Audit Committee
D. The Board of Directors
45. Lydia previously worked in accounts payable before transferring to internal audit.
She has been assigned to do some testing in the accounts payable because of
familiarity with that department. Which of the following is the best response to
this situation?
46. In performing an operational audit, internal auditors are most likely to focus upon
which of the following attributes?
47. The primary difference between on operational audit and a compliance audit is
which of the following?
48. What is the final step that should be undertaken in an operational audit?
49. Operational audit generally have been performed by internal auditors but may be
performed by independent accountants. A primary purpose of an operational
audit is to provide:
50. Which of the following is generally considered one of the main ieasons why
internal auditors evaluate the effectiveness of their company's internal control
structure?
A. To determine whether all risks and exposures of the company have been
either reduced or eliminated.
B. To determine whether the established internal controls are functioning as
intended by management.
C. To determine the extent of reliance the internal auditors can place on the
controls in the process of evaluating the financial statements.
D. To reduce the amount of detailed testing for their external auditors.
51. Which of the following is not one of the three phases in an operational audit?
A. Planning
B. Review of the internal control structure
C. Evidence accumulation and evaluation
D. Reporting and follow-up
52. There are several sources that the operational auditor can utilize in developing
specific evaluation criteria. An area that is not considered a source is
A. necessary.
B. reasonable.
C. properly approved.
D. properly supported with documentation.
54. When planning an operational audit, the auditor should consider the risk of
55. When performing an operational audit, the auditor would normally be concerned
with all of the following except
56. The benefits of an operational audit generally include all of following except
A. increased revenue.
B. increased reliability of the financial statements.
C. increases productivity.
D. decreased costs.
A. department supervisors.
B. audit committee.
C. stockholders.
D. top management.
A. management objectives.
B. board of director directives.
C. laws and regulations.
D. accepted business practices.
61. When an independent auditor decides that the work performed by internal
auditors may have a bearing on the nature, timing, and extent of planned audit
procedures, the independent auditor should evaluate the objectivity of the
internal auditors. Relative to objectivity, the independent auditor should
MODULE 13
1. The primary standards for assurance engagement other than audits or reviews of
historical financial statements are the:
3. Performing inquiry and analytical procedures that provide the accountant with a
reasonable basis for expressing limited assurance that there are no material
modifications that should be made to the financial statements in order for them to
be in conformity with PFRS or with other comprehensive basis of accounting is
the definition of
A. compilation
B. audit
C. review
D. agreed-upon procedure
C. a statement that an audit is not being performed and that an audit opinion will
not be expressed
D. the fact that because of the test nature and other inherent limitations of an
audit, together with the inherent limitations of any accounting and internal control
system, there is an unavoidable risk that even same material misstatements may
remain undiscovered
A. Entity's organization
B. Nature of entity's assets, liabilities, revenues and expenses
C. Accounting system
D. Internal control
7. Which of the following is not used as a basis by the auditor in determining the
specific nature, timing and extent of review procedures?
A. The auditor should apply his judgment in determining the specific nature,
timing and extent of review procedures.
B. The auditor should apply the same materiality considerations as would have
been applied had an audit opinion on the financial statements been expressed.
C. There is a greater risk that misstatements will not be detected in an audit than
in a review.
9. Which of the following is least likely done by the auditor in conducting a review of
financial statements?
A. Inquiries of management
B. Inquiries regarding events subsequent to the balance sheet date
C. Any procedures designed to identify relationships among data that appear to
be unusual
D. Communicating any material weaknesses discovered during the study and
evaluation of internal accounting control
14. Which of the following should the auditor perform in a review engagement?
16. When performing a review of the financial statements of a non public entity the
CPA should:
17. Which of the following is a major difference between a review and an audit of the
financial statements?
18. Which of the following is not included in the scope, paragraph of a review report?
… Nothing has come to our attention that causes us to believe that the
accompanying financial statements are not presented fairly, in all material
respects in accordance with generally accepted accounting principles in the
Philippines.
20. In a review engagement, if there has been a material scope limitation, the auditor
should describe the limitation in the review report and either
A. does not express an opinion or any form of limited assurance on the financial
statements
B. is not aware of any material modifications that should be made to the financial
statements for them to conform with PFRS
C. obtained reasonable assurance about whether the financial statements are
free of material misstatement
D. examined evidence, on a test basis, supporting the amounts and disclosures
in the financial statements
23. The statement that the reviewer "is not aware of any material modification that
should be made to the financial statements in order for them to be in conformity
with PERS" is known as:
A. reasonable assurance
B. negligent performance
C. negative assurance
D. necessary ignorance
24. The professional accountants issued the following statement in their report: ...,
nothing came to our attention that caused us to believe that the accompanying
financial statements are not presented fairly,…
25. The objective of an agreed upon-procedures engagement is for the auditor to:
A. carry out procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings
B. carry out procedures of a review nature to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual findings
C. carry out procedures of a review nature and to express limited assurance
based on those agreed procedures
D. carry out procedures of an audit nature and to express limited assurance
27. Rivera, CPA, has significant indirect financial interest on Mother Corporation.
Mother Corporation engaged Rivera to apply agreed upon procedures on
accounts .receivable and thereafter submits a Report of Factual Findings to
Discount Finance. According to Philippine Standards on Auditing that applies to
this engagement, Rivera:
28. Which of the following ethical principles governing the auditor's professional
responsibilities for agreed-upon procedures engagement is not required of
auditors?
A. Technical standards
B. Confidentiality
C. Integrity
D. Independence
A. Users of the report assess for themselves the procedures and findings
reported by the auditor and draw their own- conclusions from the auditor's work.
B. The report is restricted to those parties that have agreed to the procedures to
be performed since others, unaware of the reasons for the procedures, may
misinterpret the results.
C. The auditor should conduct an agreed-upon procedures engagement in
accordance with PSA and the terms of the engagement.
D. Where the auditor is not independent, a statement to that effect need not be
made in the report of factual findings.
A. addressee (ordinarily the client who engaged the auditor to perform the
agreed-upon procedures)
B. identification of the purpose for which the agreed-upon procedures were
performed
C. a description of the auditor's .factual findings including sufficient details of
errors and exceptions found
D. a statement that the procedures performed constitute an audit and, as such,
an opinion is expressed
A. Review Report
B. Compilation Report
C. Report of Factual Findings
D. Audit Report
39. Which of the following is not appropriate for the accountant's report on the results
of applying agreed-upon procedures to prospective financial statements?
A. Auditing
B. Review
C. Consulting
D. Accounting
42. A CPA has been, engaged to compile financial statements for a nonpublic client.
Which the following statements best describes this engagement?
A. The CPA must perform the basic accepted auditing procedures necessary to
determine that the statements are in conformity with PFRS
B. The CPA is performing an accounting services rather than an examination of
financial statements
C. The financial statements are representation of both management and the
CPA.
D. The CPA may prepare the statements from the books but may not assist in
adjusting and closing the books
A. compilation report
B. compilation report and review report
C. comfort letter
D. report of any type
46. Indicate whether the following procedures performed in an audit engagement are
also required when performing related services.
A B C D
• Agreeing on the terms of
engagement Yes Yes Yes No
• Engagement planning Yes Yes Yes No
• Documentation Yes Yes No No
• Issuance of report Yes No No No
A. do nothing
B. withdraw from the engagement
C. issue a qualified or adverse opinion
D. issue a negative assurance
A. a statement that the compilation has been performed in accordance with the
Philippine Standards on Related Services applicable to compilation
B. a statement that the financial statements are the representation of the
management
C. a statement that adequate disclosure has been made concerning accounting
policy and practice
D. a statement that the financial statement have not been audited or reviewed
53. The level of assurance that is provided by the CPA on a compilation report is
A. low
B. high
C. moderate
D. none
56. On each page of the financial information or on the front of the complete set of
financial statements, the financial information compiled by the accountant should
contain a reference such as
A. "Unaudited"
B. "Compiled without Audit or Review"
C. "Refer to Compilation Report"
D. Any of the given choices
57. Each page of the financial statements compiled by an accountant should include a
reference such as
62. Given one of more hypothetical assumptions, a responsible party may prepare, to
the best of its knowledge and belief, an entity's expected financial position, results
of operations, and changes in financial position. Such prospective financial
statements are most commonly known as
63. Prospective financial information can include financial statements or one or more
elements of financial statements and may be prepared for distribution to third
parties in
64. When prospective financial statements are prepared, the "responsible party" is
usually the
A. management
B. CPA who examines them
C. government entity that requires them
D. audit committee
A. The auditor should not accept or should withdraw from an engagement when
the assumptions are clearly unrealistic or when the auditor believes that the
prospective financial information will be inappropriate for its intended use.
B. The auditor and the client should agree on the terms of the engagement.
C. The auditor should obtain a sufficient level of knowledge of the business to be
able to evaluate whether all significant assumptions required for the preparation of
the prospective financial information have been identified.
D. The auditors need not obtain written representations from the management
regarding the intended use of the prospective financial information, the
completeness of significant management assumptions and the management's
acceptance of its responsibility for the prospective financial information.
A. general use
B. limited use only
C. either general or limited use
A. state that the forecast is presented in conformity with the generally accepted
accounting principles in the Philippines
B. provide an explanation of the differences between an examination and an
audit
C. state that the accountant is responsible for events and circumstances not to
exceed one year after the report's date
D. disclaim an opinion on whether the assumptions provide a reasonable basis
for the projection
69. When the auditor believes that, the presentation and disclosure of the prospective
financial information is not adequate, the auditor should
70. When an accountant examines financial forecast that fails to disclose several
significant assumptions used to prepare the forecast, the accountant should
describe the assumptions in the accountant's report and issue a (n)
71. Assurance services are independent professional services that improve the
quality of information or its
A. context
B. profitability
C. reliability
D. sufficiency
72. When an accountant performs more than one level of service, generally should
issue a report that is appropriate for:
QUIZZERS
2. The degree of certainty that the practitioner has attained and wishes to convey is
a (n)
A. assertion
B. conveyance
C. assurance
D. declaration
A. Assessment
B. Detailed review
C. Evaluation
D. Examination
A. Limited
B. Neutral
C. None
D. Positive
8. The objective of a review of interim financial information is to provide the CPA with
a basis for
11. Which of the following procedures is not normally performed by the accountant in
a review engagement of a non-public entity?
12. Performing inquiry and analytical review procedures is the primary basis for an
accountant to issue
A. compilation reports
B. management advisory services report
C. review report
D. audit report
14. Claire, CPA, was engaged to review the financial statements of Emir Company, a
nonpublic entity. Evidence came to Claire's attention that indicated a substantial
doubt as to Emir's ability to continue as a going concern. The principal conditions
and events that caused the substantial doubt have been fully disclosed in the
notes to Emir's financial statements. Which of the following statements best
describes Claire's reporting responsibility concerning this matter?
15. The objective of a review of the interim financial information: of a public company
is to
C. provide the accountant with a basis for reporting to the board of directors or
shareholders
D. obtain corroborating evidence through inspection, observation, and
confirmation.
16. If requested to perform a review engagement for a non-public entity for which the
accountant has immaterial direct financial interest, the accountant is:
A. not independent and, therefore, may issue a review report but not an auditor's
opinion
B. not independent and, therefore, may not issue a review report
C. not independent and, therefore, may not be associated with the financial
statements
D. independent because the financial interest is immaterial
18. When providing a limited assurance that the financial statements of a non-public
entity requires no material modifications in order to present them in accordance
with PFRS, the accountant should
19. The statement that "nothing came to our attention which would indicate that these
statements are not fairly presented" expresses which of the following?
A. Disclaimer of opinion
B. Negative assurance
C. Negative confirmation
D. Piecemeal opinion
20. Which of the following would not be included in a CPA's report based upon a
review of the financial statements?
21. In a review service where the client failed to follow PFRS, the accountant is
A. not required to determine the effect of a departure if the management has not
done so, but that fact must be disclosed in the report
B. required to determine the effect of a departure if the management has not
done so and that fact must be disclosed in the report
C. not required to determine the effect of a departure if management has not
done so and that fact need not be disclosed in the report
D. required to determine the effect of a departure if management has not done
so but, that fact heed not be disclosed in the report
23. An accountant who reviews the financial statements should issue a report stating
that a review
24. In a review engagement, if the CPA believes that the financial statements lack a
material disclosure that the management refuses to Include, the CPA should
25. Which of the following procedures would normally be included in the review
engagements?
A. Yes, Yes
B. Yes, No
C. No; Yes
D. No, No
28. If the CPA is not familiar with the specialized industry accounting principles but
plans to obtain certain level of knowledge, which of the following engagements
may be accepted?
I. Compilation
II. Review
III. Audit
A. I only
B. I and II only
C. All of the them
D. None of them
I. Audit
II. Review
III. Compilation
A. The auditor is not required to comply with the "Code of Professional Ethics for
Certified Public Accountants" promulgated by the Board of Accountancy.
B. The auditor should conduct a review in accordance with PSRE 2400.
C. The auditor should plan and perform the review with an attitude of
professional skepticism, recognizing that circumstances may exist cause the
financial statements to be materially misstated.
D. For the purpose of expressing a negative assurance in the review report, the
auditor should obtain sufficient appropriate evidence primarily through inquiry and
analytical procedures to be able to draw conclusions.
32. Which of the following is required to be performed in an audit but not in a review
engagement?
D. Financial statements that are unaudited and are prepared from a client's
accounting records
A. disclaimer of opinion
B. adverse opinion
C. restrictions on its distribution
D. unqualified opinion
36. A CPA is not required to comply with the "Code of Professional Ethics for Certified
Public Accountants" when performing a(n):
A. review
B. agreed-upon procedures
C. compilation
D. None of the choices given
A. completion of fieldwork
B. completion of the engagement
C. transmittal of the compilation report
D. the latest subsequent event referred to in the notes to the financial
statements.
39. An accountant has been asked to compile the financial statements of a nonpublic
company that omit substantially all the disclosures required by generally accepted
accounting principles. The accountant may issue a compilation report if
40. You own Garter, Inc., which manufactures wooden tables. You need to hire some
accountants to prepare your monthly financial statements. The preparation of your
financial statements is referred to as a(n):
A. audit
B. compilation
C. review
D. special report
41. A compilation report is not required when compiled financial statements are
expected to be used by:
A. management only
B. management and third parties
C. third parties only
D. a compilation report is required whenever financial statements are compiled.
A. Compliance
B. Compilation
C. Examination
D. Review
A. compilation report
B. review report
C. comfort letter
D. qualified opinion
45. When a CPA compiles a non-public entity's financial statements that omit
substantially all disclosures required by PFRS; the CPA should indicate in the
compilation report that the financial statements are
A. states that the financial statements are not intended to be in conformity with
generally accepted accounting principles
B. states that the financial statements are not examined in accordance with
generally accepted auditing standards
C. refers to the authoritative pronouncements that explain, the, comprehensive
basis of accounting being used
D. justifies the comprehensive basis of accounting being used.
49. A comfort letter is typically sent to whom and for what reason?
A. Unless the auditor has expressed an audit opinion on the financial statements
from which the summarized financial statements were derived, the auditor should
not report on summarized financial statements.
B. Summarized financial statements are presented in considerably less detail
than annual audited financial statements.
C. Summarized financial statements need to be appropriately titled in order to
identify the audited financial statements from which they have been derived.
D. Summarized financial statements contain all the information required by the
financial reporting framework used for the annual audited financial statements.
53. The auditor's report on summarized financial statements least likely include
54. Which of the following best describes the auditor's responsibility for "other
information" that, is included in the annual report to stockholders which contains
financial statements and the auditor's report?
A. independent auditor
B. client
C. client's lawyer
D. internal auditor
56. An auditor has been engaged to audit a set of financial statements that were
prepared on a cash basis. The auditor
A. must ascertain that there is a proper disclosure of the fact that the cash basis
of accounting has been used, the general nature of material items omitted, and
the net effect of the omissions
B. may not be associated with statements that are not in accordance with PFRS
C. must render a qualified report explaining the departure from PFRS in the
opinion paragraph
D. must restate the financial statements on an accrual basis and then issue the
standard report.
59. Which of the following services is not normally performed in connection with
prospective financial statements?
A. Examination
B. Review
C. Agreed-upon procedures
D. Compilation
60. If a CPA has both compiled and reviewed the financial statements of a nonpublic
entity the CPA should issue:
61. Which of the following represents the highest to lowest level of auditors in the
assurance or even no assurance provided by auditors in the performance of the
engagement?
64. The CPA is asked to audit financial statements prepared on a modified cash
basis. This is acceptable provided the CPA
SIMULATED EXAMINATION I
A. Assertions.
B. Established criteria.
C. Evidence.
D. Written reports.
A. determine whether the financial statements fairly present the entity's operations.
B. evaluate the feasibility of attaining the entity's operational objectives.
C. make recommendations for improving performance.
D. report on the entity's relative success in attaining its profit maximization.
5. Public accountants are not prohibited from providing which of the following services
for public audit clients
A. audits of the effectiveness of internal controls
B. the function of the internal auditors
C. selection and implementation of an accounting information system
D. quarterly financial statement bookkeeping
A. the auditor should evaluate the conclusions drawn from the audit evidence obtained
during the course of the audit
B. the auditor evaluates whether there is a reasonable assurance about whether the
financial statements are free from any misstatements
C. the auditor evaluates whether sufficiently appropriate audit evidence has been
obtained to eliminate the risk of material misstatements
D. the auditor verifies that all errors that misstate the financial statements have been
corrected by the client
8. If the auditor encounters circumstances that lead him to conclude that compliance
with a specific requirement results to financial statements that are misleading the
auditor:
A. considers the need to appropriately modify the auditor's report
B. does not need to modify the report.
C. needs to issue qualified opinion
D. needs to disclaim his opinion
9. An expectation of the public is that the auditor will recognize that the primary users of
audit services are:
A. the employees
B. the Securities and Exchange Commission
C. the investors and creditors
D. the board of directors
A. The auditor is paid by the client organization rather than the users of the financial
statements.
B. The auditor takes a personal loan from the president of the company.
C. The auditor's dependent son holds 25 shares of the client's common stock.
D. The auditor has not received payment for the previous audit services.
11. A CPA firm is considered independent when it performs which of the following
services for a publicly traded audit client?
12. The following are factors that a professional accountant should use the basis of his
acceptance of an assurance engagement, except:
A. The auditor believes that a conclusion based on suitable criteria can be expressed.
B. The subject matter is identifiable.
C. The conclusion can be meaningful to the intended user of the report of the
practitioner.
D. The likelihood that the conclusion to be expressed always support', the assertion of
the responsible party.
13. Which of the following represents a procedure the auditor may use because
plausible relationships .among financial" statement balances ore expected to exist?
A. Attributes testing
B. Enterprise risk assessment
C. Inherent tests of control
D. Analytical review
A. ratio analysis
B. trend analysis
C. internal control analysis
D. vertical analysis
17. Which of the following is not a major emphasis in the design a effective internal
control?
18. Which one of the following is the most relevant factor in assessing the control risk of
a computerized environment?
19. What is the overriding objective of the international Auditing Standards that are
issued by the International Auditing Practice Committee of the International Federation
of Accountants?
A. To improve the uniformity of auditing practices and related services throughout the
world.
B. To override a country's regulations governing the audit of financial statements.
C. To replace the generally accepted auditing standards.
D. To provide a uniform application of specific audit procedures that are acceptable
worldwide.
20. Individual CPAs, Firms or Partnerships of CPAs, including partners mid staff
members thereof shall register with the BOA and the PRC. IIII application for
registration of Ocampo and Co., CPAs was approved on July 31, 2006, the registrant
should apply for the renewal on or before:
21. Management's assertions in the financial statements are of relevant to the audit
process because:
A. they embody the procedures that will be performed by the audit team
B. they include representations of financial statement in accordance with the applicable
reporting criteria
C. they provide evidence that -auditors have prepared financial statements in
accordance with GAAP
D. they relate to regulator's expectations about audit results
22. To establish the validity of account balances and transactions relating to recorded
amounts, auditors may resort to:
A. vouching
B. tracing
C. representing
D. footing
23. The assertion of existence can be audited directionally by considering balances and
transactions from:
25. Which of the following best represents an auditor's responsibility for fraud?
A. Auditors are only required to find securities fraud
B. Auditors defer to management to discover the extent of fraud
C. Auditors are required to discover misstatements resulting from material fraud D.
Auditors are required to seek out and find all fraud, regardless of its magnitude
26. An auditor will most likely estimate the tolerable failure rate in order to:
27. How many CPE credit units must be accumulated by a registered accounting
professional within the three-year period coinciding the renewal of a CPA's registration?
A. 90 credit units
B. 60 credit units
C. 40 credit units
D. 20 credit units
28. For a company with strong internal control over receivables, the distinguishing
feature of the audit use of positive confirmations in contrast to negative confirmations is:
30. The auditor may determine that fixed assets that should have been capitalized as
assets have been recognized as expenses during the period under audit by testing:
31. The product of inherent risk and control risk is assessed as low. How would an
auditor with this assessment most likely test depreciation expense?
32. Misstatements that are found during an audit and aggregated at the conclusion of
the audit for further consideration by the auditor for their impact on the financial
statements typically include:
A. those material items that have been proposed by the auditor for adjustment and
accepted by the client
B. those of an immaterial magnitude that have been passed by the auditor until the
completion of the audit
C. Those of a material nature that have been ignored by the auditor due to the risk of
sampling error
D. those of immaterial amounts that were not documented by the auditor because they
ore of an inconsequential matter to the audit
33. The application of due professional care means that the auditor work conforms with
all of the following except:
C. The work that would have been performed by a reasonable person who was not
necessarily trained in auditing.
D. The work is at least equal to that which had been performed on the audit
engagement during the preceding year.
34. The second standard of fieldwork requires the auditor to do all of the following
except
36. Balboa, a senior auditor, is the - team leader of the audit team assigned in the audit
of HCB Company. His first assignment as audit assistant was the audit of inventory of
NCB Company. Since then, he has been a member, and far the last 5 years, the in-
charge of the team for the audit of HCB. What kind of threat to independence, if any,
has been created by the foregoing fact?
A. Advocacy threat.
B. Self-interest threat.
C. Self-review threat.
D. Familiarity threat.
37. What kind of threat to independence most likely occurs when any product or
judgment of a previous assurance engagement or non assurance. engagement needs
to be re-evaluated in reaching conclusions on the assurance engagement or when a
member of that, assurance team was previously a director or officer of the assurance
client, or was an employee in a position to exert direct and significant influence over the
subject matter of the assurance engagement?
A. Self-interest threat
B. Advocacy threat
C. Self-review threat
D. Familiarity threat.
38. Which of the following is prohibited by the Code of Professional Ethic for CPAs?
39. The example(s) of circumstances that may create self-interest threat include
40. Jennifer Gomez, CPA, forgot to test a client's assessment of goodwill impairment
during an audit. Such an act is probably an example of:
A. ordinary negligence
B. due diligence
C. reckless professional behavior
D. fraud
41. Similar to auditors in the CPA realm, internal auditors also strive to possess:
A. independence
B. Objectivity.
C. Competence.
D. All of these choices.
42 In the auditor's responsibility paragraph of the audit report, the use of the term
"misstatements" conveys that the auditors are responsible to each for
A. minor misstatements.
B. significant Misstatements.
C. fraudulent misstatements.
D. all misstatements.
43. The appropriate date for the audit report is one on which the
44. A responsibility of the auditor and opinion qualification can be issued only when the
auditor
A. is not independent.
B. is not able to accumulate all the evidence required by generally accepted auditing
standards.
C. has accumulated all the evidence required by generally accepted auditing standards.
D. has been restricted by the client from gathering inc needed information and the
possible effect of such a limitation requires a disclaimer of opinion .
45. A qualified opinion is appropriate when the auditor is satisfied that the overall
financial statements are
A. fairly stated
B. materially misstated
C. misleading
D. fairly stated, even though there is an immaterial exception
47. The risk that material misstatements have occurred in transactions entering the
accounting system is
A. audit risk.
B. inherent risk.
C. control risk.
D. detection risk.
48. In the audit risk model, if an auditor wanted to keep audit risk at a low level, but
there was a great inherent risk of material Misstatement and the internal control was
ineffective, then procedures would need to be designed so that
A. detection risk was at a low level.
B. detection risk was at a high level.
C. control risk was at a low level.
D. inherent risk was at a high level.
50. When qualified or adverse opinion is issued, the qualifying paragraph is inserted
51. If the auditor believes there is minimal likelihood that the resolution of an uncertainty
will have a material effect on the financial statements. the auditor would issue a(n)
A. qualified opinion
B. unqualified opinion
C. adverse opinion
D disclaimer of opinion
A. The practitioner should always refer to the work of the expert in his report.
B. The practitioner should divide the responsibility between him and the expert.
C. The auditor should have an understanding of the aspects of the subject matter for
which the expert has used, sufficient to enable the practitioner to accept responsibility
for the conclusion on subject matter being expressed.
D. The practitioner should first obtain a level at knowledge of the business, sufficient to
at least equal the expertise of the expert, so that he can review the results of the work at
the expert.
A. client's business.
B. substantive procedures.
C. major types of transactions.
D. effectiveness of the client's accountants.
55. Which of the following risks is entirely a quality criterion based on professional
judgment?
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk
A. net income.
B. total assets.
C. working capital.
D. all of the given choices.
57. The only unqualified reports which use modified wordings are those involving
A. occurrence.
B. presentation and discios6re.
C. consistency and comparability.
D. completeness.
59. Which of the following types of evidence will be gathered in order to test internal
controls?
60. If, when performing analytical procedures, an, auditor observes that operating
income has declined significantly between the preceding year and the current year, the
auditor should next:
62. Which of the following is not a change that affects consistency and -therefore does
not require an explanatory paragraph?
63. When there is a subsequent discovery of omitted procedures, although the financial
statements are fairly presented, the auditor may not have met due diligence
requirements. The auditor:
64. A statement in a report such as "Nothing came to our attention that is would lead us
to question the fairness of the presentations" is referred to as a(n):
A. unqualified opinion.
B. disclaimer of opinion.
C. negative assurance.
D. positive assurance.
65. In a financial statement audit, management is responsible for the following except:
67. Adequate planning and design of an audit is necessary for an audit to restrict which
type of component of audit risk?
A. Control risk.
B. Detection risk.
C. Sufficiency risk.
D. Inherent risk.
68. Prior to beginning the field work on a new audit engagement in which a CPA does
not possess expertise in the industry in which the client operates, the CPA should
70. Engagement risk is, influenced by the risks associated with the following, except:
A. The sufficiency and appropriateness of the evidence likely to be available.
B. The nature and extent of the process used to collect and evaluate evidence. C. The
identified user of the assurance engagement report.
D. The nature and form of the subject matter.
71. Discussions with the owner-manager of an audit client reveal to the auditor that the
company is more concerned with minimizing their income tax payments than
maximizing income. Based on this information, which management assertion will the
auditor be concerned about verifying with regard to sales revenue?
72. Which of the following primary assertions is satisfied when an au observes the
client's physical count of inventory
A. Valuation
B. Completeness
C. Existence
D. Rights and obligations
A.III only
B. I and Ill only
C. I, Ill, and IV only
D. All the given acts are fraudulent
74. Which of the following statements best represents the reason auditors prepare
engagement letters to be signed by their clients?
75. Which of the following series of steps represent the correct sequence of evidence as
represented in the audit testing hierarchy?
76. Professional skepticism dictates that when management makes a statement to the
auditors, the auditors should
77. Philippine Standards on Auditing require the auditors to assess the risk of material
misstatements due to fraud
79. An auditor obtains knowledge about a prospective client's business and industry to:
81. The auditor has assessed the level of control risk (together with the assessed level
of inherent risk) to determine the acceptable level of detection risk for financial
statement assertions for receivable account balances. As the acceptable, level of
detection risk decreases, which of the following adjustments to the accounts receivable
audit program would the audit team normally make?
A. Change the, nature of substantive tests to less efficient procedures, such as using
negative rather than positive confirmations.
B. Change the timing of the confirmation process to an interim date.
C. Increase the sample size of the accounts for confirmations.
D. Change the sampling method from random to convenience sampling.
82. An auditor determines that the management integrity is high, the risk of account
misstatements is low, and the client's information system is fellable. Which of the
following conclusions can be reached regarding the need to perform direct tests of
account balances?
A. Direct tests should be limited to material account balances, and the extent of testing
should be sufficient to corroborate the auditor's assessment of low risk.
B. Direct tests of account balances are not needed..
C. Direct tests of account balances are necessary if audit risk was set at a low level, but
are not necessary if audit risk was set at a high level.
D. Direct tests should be performed on all account balances to independently verify the
correctness of the financial statements.
84. Which of the following best describes the auditor's responsibility' for, detecting
financial reporting fraud versus detecting a defalcation?
A. There is more responsibility for detecting financial reporting fraud because audits are
designed to look for financial misstatements.
B. The auditor is responsible for detecting financial reporting fraud only if it is material
but he is responsible for detecting all defalcations caused by a known deficiency in the
client's internal control.
C. The auditor is responsible for detecting material misstatements to the financial
statements; thus there is no difference in the responsibility of detecting financial
reporting fraud or - a defalcation as long as they are material.
D. The auditor is responsible for detecting financial reporting fraud of any amount if
collusion and red flags are present.
85. Fraudulent companies will prepare financial statements that materially misleading by
doing all of the following except
86. A program for understanding the client's inherent risk and contra would not include
the procedure to:
A. It clearly documents the audit procedures that were performed by the auditors.
B. It further acknowledges that management is responsible for fraud Contained in the
financial statements.
C. It provides the auditor with comfort that the client has integrity and is not misleading
the engagement team.
D. It clarifies certain matters included in the letter and documents them for the auditor
as further evidence from the client.
88. A company issues preferred stock. Which of the following will the auditor evaluate
for disclosure purposes in the financial statements relating to the outstanding shares of
preferred stock?
A. Liquidation preference
B. Fair market value
C. Number of shareholders of record
D. Dividends per share ratio
89. Which of' the following statements is (are) correct regarding the auditor's use of
materiality as if applies to a financial statement audit?
A. The auditor is required to report all incidences of material fraud to the audit
committee.
B. There is no difference between the peso amount of planning materiality when
searching for a defalcation versus .searching for financial reporting fraud.
C. The auditor must consider qualitative factors such as whether senior management is
involved in determining the materiality of fraud.
D. All of the statements are correct.
90. Which of the following would not be considered a motivation to commit fraud?
91. The likelihood of assessing control risk too high is the risk that sample selected to
test controls
A. does not support the auditor's planned assessed level of control risk when the true
operating effectiveness of the control justifies such an assessment.
B. contains misstatements that could be material to the financial statements when
aggregated with misstatements in other account balances or transaction classes.
C. contains proportionately fewer deviations from prescribed controls than what exist in
the balance or class or a whole.
D. does not support the tolerable misstatement for some or all of management's
assertions.
92. When an incoming auditor becomes aware of certain material misstatement in the
prior period's comparative financial statements on which the predecessor auditor
previously issued unmodified report, the incoming auditor should
A. Modify the opening paragraph by referring to the predecessor auditor, the type of
opinion issued and the date of the report
B. Restate the financial statements of the prior period
C. Discuss the matter with the management and, after having obtained management's
authorization, contact the Predecessor auditor and propose that the prior period financial
statements be restated.
D. Obtain management's authorization for the revision of the prior year's financial
statements and include an emphasis of matter paragraph to describe si tch o revision
mode
93. What is the reason for ensuring that every copy of a vendor's invoice has a receiving
report?
A. To ascertain that merchandise billed by the vendor Was received by the company.
B. To ascertain that the merchandise received by the company was billed by the
vendor.
C. To ascertain that the invoice was correctly prepared:
D. To ascertain that a check was prepared for every invoice.
94 Which of the following is not done -by an auditor when obtaining an understanding of
an entity's internal control?
95. The auditor attempts to determine the operation of the accounting system by tracing
one or few transactions through the accounting system. This procedure is referred to as
A. tracing.
B. tests of controls.
C. vouching.
D. a walk-through.
97. When providing consulting services, the CPA acts primarily as a(n):
A. independent accountant.
B. expert on compliance with industry standards.
C. technology specialist
D. objective advisor on the use of information.
A. An opinion paragraph.
B. Issues and findings.
C. A commitment to implement solutions.
D. All of these choices.
SIMULATED EXAMINATION 2
1. Which of the following best describes the reason why on independent auditor reports
on financial statements?
2. Operational auditing refers to the study of business operations for the purpose of
making recommendations for which of the following?
3. The accuracy of information that is included in the footnotes that accompany the
audited financial statements of a company whose shares are traded on a stock
exchange is the primary responsibility of the:
A. Positive
B. High
C. Moderate
D. Absolute
6. The existence of audit risk is recognized by the statement in the scope paragraph
auditor‘s responsibility of the auditor's standard report that the
7. Which of the following is, explicitly cited in the Revised Accountancy Law IRA 9298)?
A. The Professional Regulation Commission has the authority to replace any member of
the Board of Accountancy for negligence, incompetence, or any other just cause
B. Insolvency is a ground for proceedings against a CPA
C. A person shall be considered to be in the professional practice of accounting if, as an
officer in a private enterprise, he makes decisions requiring professional accounting
knowledge
D. After .three years, subject to certain conditions, the Board of Accountancy may order
the reinstatement of a CPA whose certificate of registration has been revoked
8. Which of the following is not a requisite in applying for the CPA licensure
examinations?
10. Which of the following was a modification made to the iFAC Code to consider
Philippine regulatory requirements and circumstances?
A. The period for rotation of the lead engagement partner was changed front seven to
five years
"The intended user needs to have confidence that the profession accountant hat no.
interest that creates an unacceptable risk of bias with respect to the subject matter‖
A. Confidentiality.
B. Integrity
C. Professional competence and due care
D. Objectivity
12. Which of the following is most likely a violation of the Code of Ethics?
A. The professional accountant in public practice bills a client a fee, lower than what
previously has been charged for similar services
B. The professional accountant makes a representation that specific professional
services in the current or future periods will be performed for a stated fee if it is likely at
the time of representation that such fee will be substantially increased
C. The professional accountant in public practice is the one who determines the
appropriate billing rates of each professional staff engaged in performing services
D. The professional accountant agrees to the client's proposal for a professional fee
that is dependent to the number of service hours rendered
13. Which of the following acts may potential create a self-review threat?
14. Which of the following types of loan granted to a member of the assurance Team by
an assurance client that is a -bank is mostly a potential threat to independence?
A: Car loan
B. Credit card balance
C. Clean loan
D. Home-mortgage loan
15. The criteria are the standards or benchmarks used to evaluate the subject matter of
an assurance engagement. Among the following criteria, which one is the least
objective?
16. How is the auditor's report on the financial statements that require final approval by
stockholders before 'such financial statements are issued publicly dated?
A. The auditor's report should be dated coinciding the date of approval of the financial
statements by the stockholders
B. The auditor's report should be dated after the approval of the financial statements by
the stockholders
C. The date of the auditor's report coincides the date of approval of the financial
statements by the board of directors
D. The audit report should be dual dated, the first date coinciding the approval by the
board of directors and the second date to coincide with the approval by The
stockholders
17. In pursuing its quality control objectives with respect to independence, a CPA -firm
may use policies and procedures such as
18. Which of the following is an element of a CPA firm's quality control system that
should be considered in establishing its qualify control policies and procedures?
19. Before the practitioners rely on the work of the expert, he should obtain sufficient
appropriate evidence that the work of the expert is adequate by considering the
following, except:
20. Which of the following is an invalid reason why an auditor cannot issue an absolute
assurance?
21. The audit procedures deemed necessary in the circumstances to achieve the
objective of the audit refer to:
A. audit program
B. audit objective
C. substantive procedures
D. scope of an audit
22. In which of the following would the judgment of the auditor be most critical?
23. Which of the following does not require the auditor to send a new engagement
letter?
A. An indication that the client misunderstands the objective and scope of the audit
B. A change of engagement from higher to lower level of assurance
C. A recent change in the engagement
D. Legal requirements and other government agencies‘ pronouncements
24. An auditor who agreed for a change in the type of engagement from higher to lower
level of assurance, should issue the report based on the revised engagement
A. but should discuss in a separate paragraph the reason for the change
B. and should always refer to any procedures that should have been performed in the
original engagement
25. Which of the following is an appropriate reason why the auditor considers the
professional competence of assistants whom the work will be delegated?
I. Integrity of management.
II. Possible effect on other aspects of the audit.
III. Legal determination of the act of non-compliance.
A. A, B, C
B. A, B
C. A, C
D. C
27. The auditor should perform the following risk assessment procedures to obtain an
understanding of the entity and its environment, including its internal control, except:
A. inquiries of management and others within the entity
B. inquiries of the entity‘s external legal counsel or of valuation experts that the entity
has used
C. analytical procedures
D. observation arid inspection
28. Which the following distinctions between general audit objectives and specific audit
objectives for each account balance is correct?
A. The general audit objectives are applicable to every account balance on the financial
statements
B. The specific audit objectives are applicable to every account balance on the financial
statements
C. The general audit objectives are stated in terms tailored to the engagement
D. The specific audit objectives are stated in. terms tailored to the engagement
29. The risk that the audit will fail to uncover a material misstatement is eliminated
D. under no circumstances
30. What is the relationship between materiality and the level of control risk?
A. Direct
B. Parallel
C. Inverse
D. Positive
A. Internal control system refers to all the Policies and procedures adopted by, the
management of an entity to assist in eliminating material errors but not fraud
B. A strong environment, by itself, ensures the effectiveness of the internal control
system
C. The internal control system is confined to those matters which relate directly to the
functions of the accounting system
D. In the audit of financial statements, the auditor is only concerned with those policies
and procedures within the accounting and internal control system that are relevant to
the financial statements
32. 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:
33. Which of the following least likely affects the nature, timing, and extent of the
procedures performed by the auditor to obtain an understanding of the accounting and
internal control system of an audit client
A. Materiality considerations
B. The expected level of detection risk
C. The auditor‘s assessment of inherent risk
D. The complexity of the accounting process
D. Management should not consider the costs of the accounting and internal control
systems because such a consideration makes the system ineffective.
A. As the planned level of assurance increases, the auditor seeks more reliable audit
evidence
B. Those controls subject to testing by performing Inquiry combined with inspection or
re-performance ordinarily provide more assurance than those controls for which the
audit evidence consists solely of inquiry and observation
C. The absence of misstatements detected by a substantive procedure provides audit
evidence that controls related to the assertion being tested are effective
D. A material misstatement detected by the auditor's procedures that was not identified
by the entity ordinarily is indicative of the existence of a material weakness in internal
control.
A. The auditor designs tests of controls to obtain sufficient appropriate audit evidence
that the controls operated effectively throughout the period of reliance
B. The more the auditor relies on the operating effectiveness of controls in the
assessment of risk, the lesser is the extent of the auditor's tests of controls
C. If the rate of expected deviation is too high, the auditor may determine that tests of
controls for a particular assertion may not be effective
D. Because of the inherent consistency of IT processing, the auditor may not need to
increase the extent of testing, of an automated control
37. When would an auditor typically not perform additional tests of a computer systems
controls?
38. The evaluation of deviations that were observed upon completing the tests of
controls:
A. May require the need for doing more extensive understanding of control.
B. may require more extensive tests of controls.
C. may not require modification of the nature, timing, and extent of the planned
substantive procedures.
D. requires a documentation of the basis of assessment of control risk if the assessed
level of control risk is assessed at the maximum.
A. If the auditor assesses the level of control risk at the maximum, no documentation of
the reason is necessary
B. If the auditor assesses the level control risk at less than maximum, no documentation
of the reason is necessary
C. If the auditor assesses the level of control risk at the maximum, documentation of the
reason is necessary
D. All of the given choices
A. The assessed level of inherent and control risk can be sufficiently low, thus resulting
to eliminating the need for substantive tests
B. There is an inverse relationship between detection risk and the combined level of
inherent and control risks
C. Audit risk may be more appropriately determined by assessing inherent and control
risk 'separately
D. Detection risk is eliminated if an auditor were to examine 100 percent of the account
balance or class of transactions
A. Highest
B. Lower
C. Medium
D. Higher
42. Which of the following should the auditor not consider of having specialized CIS
skills in an audit?
A. The auditor needs to obtain a sufficient understanding of the accounting and internal
control system affected by the OS environment
B. The auditor needs to determine the effect of the CIS environment on the assessment
of overall risk and of risk at the account balance and class of transactions level
C. The need of the auditor to make analytical procedures during the completion stage of
the audit
D. Design and perform appropriate tests of controls and substantive procedures
43. Which of the following characteristics of CIS environment should the auditors be
least concerned?
44. Which of the following is least likely a risk characteristic associated with CIS
environment?
45. Which of the following is not one of the auditor's motor concerns when he has to
make a documentation of the internal control in a computerized environment?
48. Which of the following should the auditor least consider in determining the
significance of service organization activities to the client and its relevance to the audit?
A. The control policies and procedures of the client in requiring that all payments for
goods and services be supported by receiving reports
B. The client's internal controls that are applied to the transactions processed by the
service organization
C. The material financial statement assertions that are affected by the use of the service
organization
D. Terms of contract and relationship between the client and the service organization
49. When the auditor considers that the service organization activities are significantly
relevant to the audit and he concludes that it would be efficient to obtain evidence from
tests of controls, such evidence may be obtained by, except:
50. Which of the following statements about the existence and completeness objectives
are not true?
52. The determination of the appropriate sample size based on t tolerable deviation rate
in a test of control procedure relates to
A. sufficiency.
B. relevance.
C. validity.
D. appropriateness.
53. Which of the following least likely affect the sufficiency of the appropriate audit
evidence?
54. Which of the following statements that relate to the persuasiveness of audit
evidence is invalid?
A. The audit evidence obtained directly by the auditor is more reliable than that one
provided by the client management
B. The oral representation by the dent management is invalid evidence
C. The effectiveness of accounting and internal control adds to the reliability of internal
audit evidence
D. While internal audit evidence is considered to be acceptable, the auditor usually
prefers audit evidence from external sources
55. The following statements are discussions about financial' assertions and audit
evidence. Which of them is (are) correct?
A. II,III, IV
B. I, III
C. II, IV
D. I, III, IV
1. Documentary audit evidence created by third-parties and held by the client entity.
2. Documentary audit evidence created and held by third parties.
3. Documentary audit evidence created and held by the client entity.
A. 1, 3, 2
B. 3, 1, 2
C. 2, 1, 3
D. 2, 3, 1
57. The inspection of property and equipment primarily relates to which financial
assertion?
A. ownership
B. Valuation
C. Completeness
D. existence
58. If the reported sales for 2007 erroneously include sales that occurred in 2008, the
assertion that caused misstatements on the 2007 financial statements would be:
A. occurrence
B. Valuation or allocation
C. completeness
D. presentation and disclosure
60. According to Philippine Standards on Auditing, the auditor's responsibility for failure
to detect fraud arises
A. when such failure clearly results from failure to comply with generally accepted
auditing standards.
B. whenever the amounts involved are material.
C. only when the examination was specifically designed to detect fraud.
D. only when such failure clearly results-from negligence so gross as to sustain an
inference of fraud on the part of the auditor.
61. If an auditor believes a client may have committed illegal acts, which of the following
actions should the auditor take?
A. Consult with that the client's counsel and the auditor's counsel to determine how the
suspected illegal acts will be communicated to the stockholders
B. Extend auditing procedures to determine whether the suspected illegal acts have a
material effect on the financial statements
C. Make inquiries of the clients management and obtain an understanding of the
circumstances underlying the acts and of other evidence to 'determine the effects of
such acts on the financial statements
D. Notify each member of the audit committee of the board at directors about the nature
of the acts and request that they advise an approach to be taken by the auditor
62. An audit program should be sufficiently detailed to provide all of the following
except:
67. The test of details of balances, when .applied by the auditor to examine rent and
lease expense for- capitalized leases, would satisfy the audit objective of
A. Existence
B. detail tie-in
C. presentation and disclosure
D. classification
69. Which of the following circumstances would most likely cause an auditor to suspect
that material fraud exists in a client's financial statements?
A. Property and equipment items are usually sold at a loss before being fully
depreciated.
B. Significantly fewer responses to a positive confirmation requests are received than
what is expected.
C. Monthly bank reconciliations usually include several in-transit items.
D. Clerical errors are listed on an CBIS-generated exception report.
70. Auditor's examine invoices for accounts such as repairs and maintenance primarily
to determine whether
A. expenditures for fixed assets have been 'recorded in the proper period
B. expenditures have been improperly authorized
C. noncapitalized expenditures have been properly expensed
D. expenditures that were expensed should have been capitalized
72. When obtaining an evidence regarding litigation against a client, the CPA would be
least interested in determining
73. Banaue Company is an affiliate of the audit client and is audited by another firm of
auditors. Which of the following is roost likely to be used by the auditor to obtain
assurance that all guarantees of the affiliate's indebtedness have been detected?
A. Send the standard bank confirmation request to all the client's lender banks. B.
Review client minutes and obtain representation letter.
C. Examine supporting documents for all entries in intercompany accounts.
D. Obtain written confirmation of indebtedness from the auditor of the affiliate.
74. Which of the following subsequent events will be least likely to result an adjustment
to the financial statements?
75. An auditor is concerned with completing various phases of the examination after the
balance sheet date. This "subsequent period" extends to the date of the:
A. auditor's report.
B. final review of the audit working papers.
C. issuance of the financial statements to the users.
D. delivery of the auditor's report to the client.
76. Which of the following material events occurring subsequent to balance sheet date
would require an adjustment to the financial statements?
77. Selena, CPA, is preparing an audit program for the purpose of ascertaining the
occurrence of subsequent events that may require adjustment or disclosure essential to
a fair presentation of the financial statements in conformity with the Philippine financial
reporting standards. Which one of the following procedures would be least appropriate
for this purpose?
A. Confirm, as of the completion of the fieldwork, those accounts receivable that have
increased significantly from the year-end date.
B. Read the minutes of the board of directors' meetings.
C. Inquire of management concerning events which may have occurred.
D. Obtain a lawyer's letter as of the completion of fieldwork.
78. An auditor's decision concerning whether or not to "dual date" the audit report is
based upon the auditor's willingness to
79. As part of an audit, a CPA often requests a representation letter tram the client.
Which one of the following is not a valid purpose of such a letter?
80. The risk that the auditor gives an unqualified audit opinion when the financial
statements are materially misstated refers to
A. Audit risk
B. Inherent risk
C. Detection risk
D. Control risk
81. Which of the following disagreements with the management may potentially cause
the auditor to disclaim his opinion?
83. Which of the following is not explicitly included in the paragraph of the auditor's
report?
85. When the auditor concludes that the financial statements are presented fairly in
material respects, in accordance with the identified financial reporting framework, he
should issue:
86. In which of the following situations does an auditor need to issue an unqualified
opinion?
A. A significant doubt about the ability of the company to continue as a going concern;
such concern is adequately disclosed by the entity in the notes to financial statements.
B. A limitation of the scope of the audit the possible effect of which is material to the
financial statements.
C. The auditor has disagreement .with, management regarding the acceptability of the
accounting policies, the effect of which is material.
D. The omission of significant information in the financial statement.
87. Which of the following disagreements with the management may potentially cause
the auditor to disclaim his opinion?
88. When the client does not disclose restrictions of future cash dividends and the CPA
discloses the omitted information in the separate paragraph of the audit report, the
opinion should be:
89. When the financial -statements of the prior period were audited by another CPA, the
incoming auditor's report indicates:
A B C D
1. The dates and periods covered by prior years' financial YES YES NO NO
statements
2. That the financial statements of the prior period* were YES YES YES NO
audited by another CPA
3. The type of opinion issued by another CPA and if YES NO YES YES
modified, the reason thereof
90. When the auditor's report on the prior period, as previously issued, included a
modified opinion, the auditor's report should refer to the corresponding figures:
A. though the matter which gave rise to the modification of the audit report had been
subsequently resolved
B. if the matter that gave rise to the modification of the previous auditor's report is
unresolved and results in a modification of the auditor's report regarding the current
figures.
C. only when the matter that gave rise to the modification is unresolved and results to a
modification of the auditor's report regarding the current figures.
D. in all cases where the matter which gave rise to the modification of the previous
audit report was satisfactorily resolved and properly dealt with in the financial
statements, the current report would not refer to the previous modification.
91. In which of the following circumstances would a modification of the tor's report on
the current period not necessary?
A. If the prior period financial statements had been revised and reissued with a new
auditor's report.
B. If the prior period financial statements had not been revised and reissued but the
matter that gave rise to the modification, though material to the current period is
resolved.
C. If the matter that gave rise to the modification of the previous audit report was related
to an unresolved beginning balance of property accounts.
D. The report of the prior period issued by a continuing auditor.
92. They are not presented as complete financial statements capable of landing alone,
but are an integral part of the current period.
A. general use
B. limited use only
C. either general or limited use
D. use by internal management only
95. Given one of more hypothetical assumptions, a responsible party may prepare, to
the best of its knowledge and belief, an entity's expected financial position, results of
operations, and changes in financial position. Such prospective financial statements are
most commonly known as
A. states that the financial statements are not intended to be in conformity with
Philippine financial reporting standards.
B. states that the financial statements were not examined in accordance with generally
accepted auditing standards.
C. refers to the authoritative pronouncements that explain the comprehensive basis of
accounting being used.
D. justifies the comprehensive basis of accounting being used.
97. The objective of a review of interim financial information is to provide the CPA with a
basis for
A. expressing a limited opinion that the financial information presented in conformity
with Philippine financial reporting standards
B. expressing compilation opinion on the financial statements.
98. Audit reports issued in connection with which of the following are generally not
considered to be special reports or special purpose reports?
99. The party that is responsible for the assumptions identified in the preparation of
prospective financial statements is usually
100. In extreme cases such as situations involving multiple uncertainties that are
significant to the financial statements, the auditor
SIMULATED EXAMINATION 3
1. An audit that involves obtaining and evaluating evidence about the efficiency and
effectiveness of an entity's operating activities in relation to specified objectives is a(n)
A. external audit
B. Financial statement audit.
C. Operational audit.
D. Compliance audit.
4. The auditor's standard report states that the financial statements are presented tairly
5. Which of the following statements about the report that conveys a high level of
assurance on the subject matter is correct?
A. The practitioner's report should contain a subjective expression of his opinion about
a subject matter based on the identified suitable criteria on the evidence obtained.
B. The practitioner must not issue an oral conclusion about a subject matter based on
the identified suitable criteria and the evidence obtained.
C. The report can take various forms, such in writing, electronic form, oral or by
symbolic representation.
D. The report should be in a standard format for reporting on all assurance
engagement.
8. Which of the following statements about the failure of the auditor of detecting material
misstatements always true?
10. The Code of Professional Conduct would be violated if a member accepted a fee for
services and the fee was:
11. No person shall serve the Professional Regulatory Board at Accountancy for more
than
A. 3 years
B. 6 years
C. 9 years
D. 12 years
13. A partner of the firm who is serving as a company secretary for an audit client
creates which of the-following threats?
A. The auditor is paid by the client organization rather than the SEC.
B. The auditor takes a personal 'rim from the president of the company.
C. The auditor‘s dependent son holds 25 shores (one-half percent) of the client's
outstanding common stock.
D. The auditor has not received .payment for the previous audit services.
15. Which of the following represents a situation in which the auditors may disclose
client information to outside parties?
D. Explaining to the local television news station why the client is likely to miss payroll in
the 'forthcoming periods.
17. The rules on independence require that a member in public practice shall be
independent in the performance of professional services as required by the Code of
Professional Ethics. For which of the following services does the rule apply?
A. fact.
B. appearance.
C. conduct.
D. total.
19. A significant aspect of conducting an audit with due professional care is the auditor's
attitude of professional:
A. Pessimism
B. Skepticism
C. Optimism
D. Courtesy
20. Which one of the following is not considered a valid source information about the
client's processes?
A. confirmation of third-parties
B. review of the client's budget
C. a tour of the client's plant
D. management inquiry
21. The risk that financial statements are likely to be misstated materially without regard
to the effectiveness of internal control is which type of risk?
A. inherent risk
B. Audit risk
C. client risk
D. control risk
22. When must an auditor perform analytical review procedures in a financial statement
audit?
23. Which of the following would an auditor least likely discuss with the former auditors
of a potential client prior to acceptance?
A. Integrity of management
B. Fees charged for services
C. Predecessor's disagreements with management regarding the use of accounting
principles
D. Reasons for changing audit firms
24. Which of the following -represents a procedure that the auditor may use because
plausible relationships among financial statement balances are expected to exist?
A. Attributes testing
B. Review engagement
C. Inherent test of control
D. Analytical review
26. Which of the following is not a major emphasis in the effective internal control?
30. Which of the following is a valid statement about the assess control risk?
31. Which of the following statements about tests of controls is not valid?
A. The auditor may perform inquiry and observation and gathering audit evidence about
the operating effectiveness of the control.
B. Audit evidence obtained by doing observation pertains only to the point in time at
which the procedure was applied.
C. Ordinarily, making inquiries provides more reliable audit evidence than doing
observation when testing segregation of functional responsibilities.
D. Observation of who applies a control procedure is useful as a test of control
procedures when evaluating control effectiveness of both computerized and manual
system
32. The auditor should consider whether the assessment of control risk confirmed:
A. Upon completion of the understanding of infernal control.
B. Upon the conclusion of the audit, based on the results substantive procedures and
other audit evidence obtained.
C. Upon completion of tests of controls ft
D. Before the final audit program is completed.
A. inspect certain items of equipment in the plant and trace those items to- tile
accounting records
B. review the property master file to ascertain whether depreciation was taken on each
item of equipment during the year
C. trace additions to the "other assets" account to search for equipment that is still on
hand but no anger being used
D. select certain items of equipment fran the accounting records and locate them in the
plant
35. When the auditor performs tests of control regarding the policy counting materials
received from the supplies, the auditor most likely
36. Which of the following statements reflects on auditor's responsibility lot detecting
errors and fraud?
A. An-auditor is responsible for detecting employee errors and fraud, but not for
discovering fraud involving employee collusion it management override.
B. An auditor should plan the .audit to detect errors and fraud that are caused- by
departures from GAAP
C. An auditor is not responsible for detecting errors and fraud unless the application of
GAAS would result in such detection.
37. The audit risk is the, product of inherent, control and detection risks. Which of these
risks is the dependent variable?
A. Detection risk
B. Control risk
C. Inherent risk
D. All of these are dependent variables.
38. A type of fraud in which an employee takes assets from an organization for
personal gain:
A. Fraudulent financial reporting.
B. Defalcation.
C. Window dressing.
D. Inside trading.
40. In planning an audit engagement, which of the following best likely affects the
independent auditors judgment as to the quantity, type, and content of working papers?
A. The estimated occurrence rate of attributes.
B. The preliminary evaluations -based on substantive testing.
C. The content of the client's representation letter.
D. The anticipated nature of the auditor report.
41. Which statement is incorrect regarding the discussion among the engagement team
about the susceptibility of the entity's financial statements to material misstatements?
A. The members of the engagement team should discuss the susceptibility of the
entity's financial statements to material misstatements.
B. The objective of this discussion is for members of the engagement team to gain a
better understanding of the potential for material misstatements of the financial
statements resulting from fraud or error in the specific areas assigned to them, and to
understand how the results of the audit procedures that they perform may affect other
aspects of the audit.
C. The discussion provides an opportunity for more experienced engagement team
members, including the engagement partner, to shore their insights based on their
knowledge of the entity, and for the team members to exchange information about the
business risks.
D. All the team members should have a comprehensive knowledge of all aspects of the
audit.
42. In which of the following situations would materiality be least likely considered
critical?
A. A decision of whether the auditor has to obtain a representation letter from the
management.
B. In determining the nature, timing and extent of audit procedures.
C. A decision of whether to modify the audit opinion.
D. Evaluating the effect of misstatements.
44. They are EDP control procedures that provide reasonable assurance that all
transactions are authorized and recorded, and are processed completely, accurately
and on a timely basis.
A. General controls
B. Application controls
C. Hardware controls
D. Software controls
45. A collection of files that is shared and used by a number of different users:
A. Database
B. Flat file
C. Master file
D. Transaction file
46. The applications of auditing procedures using the computer as an audit tool refer to
47. It refers to an act of omission or commission by the audit client entity. either
intentional or unintentional, which are contrary to the prevailing laws or regulations
A. Fraud
B. Negligence
C. Noncompliance
D. Defalcation
48. Which of the following elements ultimately determines the specific auditing
procedures that are necessary in the circumstances to afford a reasonable basis for an
opinion?
A. auditor judgment
B. relative risk
C. materiality
D. reasonable assurance
50. Which of the following statements is generally correct about the competence of
evidential matter?
51. To adequately plan the appropriate audit evidence, generally accepted auditing—
standards require the auditor to gain an understanding of the internal control structure.
This understanding is obtained by:
B. Analytical procedures used in planning the audit should not use nonfinancial
information
C. Analytical procedures usually are effective and efficient for tests of controls
D. Analytical procedures alone may provide the appropriate level of assurance for some
assertions
53. Each of the following might, by itself, form a valid basis for an auditor to decide to
omit a test except for the
54. Another entity that executes or records transaction on behalf of a client is called:
55. Testing in the direction from the source documents to the general ledger involves
testing transactions or balances primarily for which type of error?
A. Overstatement
B. Understatement
C. Neither overstatement nor understatement
D. Either overstatement or understatement
56. Management's assertions in the financial statements 'are relevant to the audit
process because:
A. they embody the procedures that will be performed by the audit team
B. they include representations that the financial statements are in accordance with
GAAP
C. they provide evidence that auditors have prepared financial statements in
accordance with GAAP
D. they relate to regulators expectations about audit results
59. Which of the following audit tests is usually the most costly to perform?
A. Analytical procedures.
B. Tests of balances.
C. Tests of controls.
D. Substantive tests of transactions.
60. Auditors usually try to plan the audit to minimize the use of tests of
A. the other tests are more reliable.
B. the other tests are less costly.
C. the other tests require less experienced audit person
D. any of the choices is true.
62. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
A. Repairs and maintenance expense
B. Depreciation expense
C. Gain on disposal of equipment
D. Accounts payable
64. In relation to opening balances, which of the following may cause the auditor to
disclaim his opinion?
A. The opening balances contain misstatements that could materially affect the current
period‘s financial statements and such misstatements have not been corrected.
B. The current period's accounting policies have not been consistently applied in
relation to opening balances and the effect of such change is not properly accounted for
or disclosed.
C. The inability of the auditor to obtain sufficient appropriate audit evidence concerning
opening balances.
D. The assessed substantial doubt about the entity's ability to continue as a going
concern as-indicated by consistent negative cash flows.
65. Which of the following does not affect the sufficiency and appropriateness of the
audit evidence that the incoming auditor will need to obtain regarding opening
balances?
66. Which of the following is the least concern of the, client auditor in reviewing the
report of service organization auditor on the effectiveness of the internal control design
of the service organization?
67. Which of the following is least likely entitled to the report of the service organization
auditor on the suitability of internal control design and operating effectiveness of the
service organization?
68. Upon completion of the audit, the auditor needs to consider uncorrected
misstatements because:
69. What should a prudent auditor do when the aggregate of uncorrected misstatements
approaches the materiality level?
A B C D
Perform additional procedures YES NO NO YES
Request management to adjust financial YES YES NO YES
statements for identified misstatements
Request management to adjust financial YES YES YES NO
statements for projected misstatements.
70. They involve analysis of significant ratios and trends including the resultant
investigation of fluctuations and relationships that are inconsistent with other relevant
information or expectation:
A. Inquiry.
B. Analytical procedures.
C. Account analysis.
D. Inspection
71. Which of the following procedures may provide the auditor with information not
previously possessed by him?
A. Inspection.
B. Inquiry.
C. Analytical procedures.
D. Computation.
A. Inquiry.
B. Observation.
C. Tracing.
D. Inspection.
73. If the current period's accounting policies have not been consistently applied in
relation to opening balances and if the chance has not been property accounted for or
disclosed, the auditor should issue either a (an)
74. An audit of the General Lizard Company, a home appliance manufacturer company,
detects material misapplication of the measurement of the lower of cost or market
principle. General Lizard's executive and financial management will not change the
recorded amounts or disclosures to the auditor's satisfaction. Such a situation will most
likely result in which type of report?
A. Unqualified
B. Disclaimer
C. Qualified or adverse
D. Negative assurance
75. A client company has issues that cause substantial doubt regarding the entity's
ability to continue as a going concern. If this is the only major audit issue, which type of
opinion will the auditor usually refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion
76. The auditors of White Stained Sheets, Inc. are unable to obtain evidence regarding
accounts receivable which is a material balance. Instead, the auditors are able .to
satisfy themselves with other alternative procedures relating to the White Stained
Sheets audit. Which report will the auditors most likely issue in this situation?
A. Qualified
B. Unqualified
C. Adverse
D. Disclaimer
77. Ajax Wilson audits Doornail, Inc. without having independence. Such a situation
would lead to the issuance of a(n):
78. When management does not amend the financial statements in circumstances
where the auditor believes they need to be amended and the auditor's report has not
been released to the entity, the auditor should issue either a (n):
79. When financial statements are audited by an accounting firm, the partner-in-charge
of engagement ordinarily signs in the name of the firm because:
A. The auditor is unable to carry out an audit procedure believed to be desirable. B. The
timing of auditor's appointment is too late which results to inability of the auditor to
perform prescribed procedures.
C. The audit engagement requires a limited reporting objective.
D. The entity's accounting records are inadequate.
81. Which of the following documentation is required for an audit in accordance with
Philippine standards on auditing?
A. An internal control questionnaire.
B. A client engagement letter.
C. A planning memorandum or Checklist.
D. A client representation letter.
82. Which of the following scenarios regarding a lawsuit filed against a client by a third
party would qualify as a "contingent liability"?
83. Which of the following factors will least affect the independent auditor's judgment as
to the quantity, type, and content of the working papers desirable for a particular
engagement?
A. Nature of the auditor's report.
B. Nature of the financial statements schedules or other information upon which the
auditor is reporting.
C. Need for supervision and review.
D. Number of personnel assigned to the audit.
84. Before releasing the audit report, the auditor should perform which of the following?
A. Instruct the client to release the financial statements to the bank
B. Perform planning for the subsequent period audit
C. Review the financial statements analytically for any inconsistencies
D. Secure a deposit from the client to safeguard against lawsuits
85. What is the primary purpose of the auditors' request for an attorney's letter relating
to a client?
86. Which one of the following subsequent events will most likely result to an
adjustment to the financial statements?
A. Material change in the amount of settlement, of a lawsuit which had been estimated
at year end
B. Entry into a significant-new line of products and business
C. Proceeds received-from a 'related party note payable
D. Signing of a letter-of-intent by the' client to acquire 55% of another entity for stock
87. Which one of the following is a key condition indicating doubt regarding an entity's
ability to continue as a going-concern?
88. Misstatements that are found during-an audit and aggregated at the conclusion of
the audit for further consideration by the auditor for their impact on the financial
statements typically include:
A. those material items that have been proposed by the auditor for adjustment and
accepted by the client.
B. those of an immaterial magnitude that have been passed by the auditor until the
completion of the audit.
C. those of a material nature that have been ignored by the auditor due to the risk of
sampling error.
D. those of immaterial amounts that were not documented the auditor because they are
of an inconsequential matter to the audit.
89. If, after the audited financial statements have been issued, the auditor becomes
aware that some information included in the statements is materially misleading, he has
A. no obligation to disclose it, assuming he acted in good faith and without negligence
in arriving at the audit opinion.
B. an obligation to inform the board of directors of the misleading statements.
C. an obligation to inform all users who are relying on the financial statements.
D. an obligation to make certain that users who are relying on the financial statements
are informed.
91. Which of the following is an inappropriate specific procedure that the auditor may
perform in completing-a review engagement?
92. Which of the following is true of the report based on-an agreed-upon procedures
engagement?
A. The report is restricted to those parties who have agreed to those specific
procedures to be performed.
B. The CPA provides the recipients of the report a tinged assurance reasonableness of
the assertion(s) presented in the financial information.
C. The report states that the auditor has not recognized any basis that requires revision
of financial statements.
D. The report should state that the procedures performed are limited to analytical
procedures and inquiry.
94. Which one of the following the most relevant factor ki assessing the control risk of a
computerized environment?
95. Which application most effectively allows users to state data in on organized
manner and gather information in a usable format?
98. Which one of the following is often utilized to authenticable the user a computer
system?
A. Rewrite the coding used to generate programs to satisfy financial audit assertions
B.Perform analytical procedures associated with the information technology
environment
C. Determine which computer assisted audit techniques are used by the client
D. Understand the use of systems to determine the audit procedures to be performed
SIMULATED EXAMINATION 4
a. Authoritative
b. Alternative
c. Persuasive
d. Parallel
3. Which of the following statements best describes why the profession of CPAs
has deemed it essential to promulgate a code of ethics and to establish a
mechanism for enforcing observance of the code?
5. The CPA should not undertake an engagement if his fee is to be based upon
6. The objectives of the Philippine Accountancy Act of 2004 are the following,
except:
a. Absolute assurance.
b. High assurance
c. Negative assurance
d. Reasonable assurance.
8. Which of the following most completely describes how independence has been
defined by the CPA profession?
10. Which of the following best describes what is meant by the term generally
accepted auditing standards?
13. The Code of Professional Ethics states, in part, that a CPA should maintain
integrity and objectivity. Objectivity refers to the CPA's ability to
a. Determine accounting practices that were consistently applied.
14. Which of the following engagements allows the CPA practitioner charging
contingent fees?
15. Are the following CPAs required to comply with the Code Professional Conduct?
A BCD
CPAs in Commerce and-Industry. Yes Yes Yes Yes
CPAs in Public Accounting No Yes Yes No CPAs in Education/Acaderne Yes No
Yes No CPAs in Government Yes No Yes No
16. If the firm performs a simultaneous services of auditing the client' financial
statements and bookkeeping services, the CPA ma potentially face a
a. Self-interest threat
b. Intimidation threat
c. Self-review threat
d. Familiarity threat
17. Financial interest is either direct or indirect. Which one of the following relatives
of the auditor who holds financial interest is construed as direct financial interest
of the auditor?
a. Sibling
b. Parent
c. Spouse
d. Non-dependent child
19. Karen, CPA, has been retained to audit the financial statements of Redeemer
Company. Redeemer Company's predecessor auditor, Gino, CPA, who has been
notified by Redeemer that Gina's services have been terminated. Under these
circumstances, which party should initiate the communications between Karen
and Gino?
20. A successor auditor would most likely make specific inquiries of the predecessor
auditor regarding
21. Which of the following factorsmost likely would cause an auditor not to accept a
new audit engagement?
22. Which of the following is least likely included in an audit engagement letter?
23. Which of the following least likely influence the auditor's decision to send a
separate engagement letter to a component of parent entity client?
a. Legal requirements
b. Degree of ownership by parent
c. Reporting requirements of the component entity
d. Who appoints the auditor of the component
24. Which of the following is not an acceptable reason for a change of the
engagement from a higher to a lower level of assurance?
a. Cost considerations.
b. Restriction on the scope of the engagement.
c. Misunderstanding as to the nature of the engagement originally requested
d. Audited financial statements are no longer needed because the client was
able to obtain alternative financing.
25. The following are quality control procedures that are observed firm:
a. I
b. I, III
c. II, IV
d. I, II, III, IV
26. It involves informing assistants at their responsibilities and the objectives of the
procedures they have to perform:
a. Supervision
b. Delegation
c. Direction
d. Review
a. Materiality
b. Intent
c. Effect on financial statements
d. Frequency of occurrence
30. Which statement is incorrect regarding the auditor's consideration of laws and
regulations in an audit of financial statements?
a. When the auditor becomes aware of information concern possible instance of
noncompliance, the auditor should evaluate its possible effect on the financial
statements.
b. If the auditor concludes that the noncompliance act has a material effect on
the financial statements, and has not been properly reflected in the financial
statements, the auditor should express a qualified or an adverse opinion.
c. The auditor may withdraw from the engagement when the entity does not
take the remedial action that the auditor considers it necessary in the
circumstances, even when the noncompliance is not material to the financial
statements.
d. In order to plan the audit, the auditor should obtain a specific understanding
of the legal and regulatory framework applicable to the entity and the industry
and how the entity is complying with that framework.
34. Inquiries directed towards those charged with governance may most likely
35. Which statement is incorrect regarding significant risks that require special audit
consideration?
a. The auditor should determine which of the identified risks are in the auditor's
judgment, require special audit consideration
b. The auditor excludes the effect of identified controls relatedto the risk to
determine whether the nature of the risk, the likely magnitude of the potential
misstatement including the possibility that the risk may give rise to multiple
misstatements and the likelihood of the risk occurring are such that require
audit consideration.
c. Routine, non-complex transactions that are subject to systematic processing
are more likely to give rise to significant risks they have higher inherent risks
d. Significant risks are often derived from business risks that may result in a
material misstatement.
36. Some account balances, such as those for pensions or leases are the results of
complex calculations. The susceptibility to material misstatements in these types
of accounts is defined as
a. Audit risk
b. Sampling risk
c. Detection risk
d. Inherent risk
37. The risk that an auditor's procedures will lead to the conclusion that material
misstatement does not exist in an account balance when in fact, such
misstatement does exist is
a. Audit risk
b. Control risk
c. inherent risk
d. Detection risk
38. Audit risk consists of inherent risk, control risk; and detection risk. Which of the
following statements is true?
40. Which of the following audit risk components may be assessed in non-
quantitative terms?
A B C D
Individual account balances YES YES YES NO
Classes of transactions YES YES NO NO
Disclosures YES NO NO YES
42. The assessment of materiality level in relation to specific account balances and
classes of transactions will enable the auditor to
a. Omit certain necessary audit tests.
b. Assess whether the audit opinion will be modified.
c. Select audit procedures that are appropriate based on acceptable detection
risk
d. Primarily determine whether tests of controls would be performed.
43. The diagram below depicts the auditor's estimated maximum deviation rate
compared with the tolerable rate, and also depic7 the true population deviation
rate compared with the tolerable rate, and also depicts the true population
deviation rate compared with the tolerable rate.
As a result of tests of controls, the auditor assesses control risk lower than
necessary and thereby decreases substantive testing. This is illustrated by
situation.
a. I
b. III
c. II
d. IV
45. Which of the following is the best explanation of the difference, if any, between
audit objectives and audit procedures?
a. Audit procedures establish broad general goals, audit objectives specify the
detailed work to be performed
b. Audit objective are tailor-made for each assignment; audit procedures are
generic in application
c. Audit objectives decline specific desired accomplishments; audit procedures
provide the means of achieving audit
d. Audit procedures and audit objectives are essentially the same
46. In gathering audit evidence in the performance of substantive tests, the auditor
48. The assessment at the risks of material misstatement atthe financial statement
level is affected by the auditor‘s understanding of the control environment.
Weaknesses in the control environment ordinarily will lead the auditor to
a. Have more confidence in internal control and the reliability of audit evidence
generated internally within the entity.
b. Conduct some audit procedures at an interim date rather than at period end.
c. Modify the nature of audit procedures to obtain more persuasive audit
evidence.
d. Decrease the number of locations to be included in the audit scope
49. The most reliable forms of documentary evidence are those documents that are
a. Prenumbered
b. Easily duplicated
c. internally generated
d. Authorized by a responsible official
52. In the audit of which of the following general ledger accounts will tests of controls
be particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
53. The auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such responses least likely include
54. Which statement is incorrect regarding the nature of further audit procedures?
a. The nature of further audit procedures refers to their purpose and their type
b. Certain audit procedures may be more appropriate for some assertions than
others.
c. The higher the auditor's assessment of risk, the less reliable and relevant is
the audit evidence sought by the auditor from substantive procedures
d. The auditor is required to obtain audit evidence about the accuracy and
completeness of information produced by the entity's information system
when that information is used in performing audit procedures
55. Which statement is incorrect regarding the extent of further audit procedures?
56. Which of the following most would give the most assurance concerning the
valuation assertion of accounts receivable?
a. vouching the amounts in the subsidiary ledger to details on shipping
documents.
b. comparing the receivable turnover ratios with industry statistics for
reasonableness
c. inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
57. In auditing accounts payable, an auditor's procedures most likely will focus
primarily on management's assertion of
a. Existence or occurrence
b. Completeness
c. Presentation and disclosure
d. Valuation or allocation
58. Which of the following procedures is least likely to be performed before the
balance sheet date?
a. Observation of Inventory
b. Search for unrecorded liabilities
c. Testing internal control over cash
d. Confirmation of receivables
59. An auditor is most likely to inspect loan' agreements under which an entity's
inventories are pledged to support management‘s financial statement assertion
of
a. Existence or occurrence
b. Presentation and disclosure
c. Completeness
d. Valuation or allocation
60. The auditor should design and perform further audit procedures whose nature,
timing, and extent are responsive to the assessed risks of material misstatement
at the assertion level. Which of the following is the most important consideration
in responding to the assessed risks?
61. An auditor selected items for test counts while observing a client's physical
inventory. The auditor then traced the test counts to the client's inventory listing.
This procedure most likely obtained evidence concerning
a. Rights and obligations
b. Existence or occurrence
c. Completeness
d. Valuation
62. Which of the following would represent the most rational response by the auditor
to an assessment of higher than average risk of fraud in an upcoming audit
engagement?
64. Which statement is incorrect regarding the timing of further audit procedures?
a. Timing refers to when audit procedures are performed or the period or date to
which the audit evidence applies.
b. The auditor may perform tests of controls or substantive procedures at an
interim date or at period end.
c. If the auditor performs tests of controls or substantive procedure prior to
period end, the auditor considers the additional evidence required for the
remaining period.
d. All audit procedures can be performed prior to period end
a. Valuation
b. Classification
c. Existence
d. Completeness
67. The auditor most likely performs extensive tests for possible understatement of
a. Revenues
b. Assets.
c. Capital
d. Liabilities
68. The auditor generally makes a decision not to test the effectiveness of controls in
operation when
69. Which of the following is a. correct response of the auditor when he requires a
loweracceptable level of detections risk?
71. The risk of incorrect acceptance and the risk assessing control risk too low relate
to the
a. Sequential sampling
b. Variable estimation Sampling
c. Attribute estimation sampling
d. Discovery sampling
a. Incorrect rejection
b. Incorrect acceptance
c. Alpha error
d. Type 1 error
a. Variables
b. Stratified
c. Ratio
d. Attributes
76. When performing a financial statement audit, auditors are required to explicitly
assess the risk of material misstatement due to:
a. Errors
b. Fraud
c. Illegal acts
d. Business risk.
77. Generally, the auditor prefers external evidence to internal evidence. This is a
measure of
a. Relevance.
b. Appropriateness.
c. Analysis.
d. Evidence gathering.
78. "A transaction or event is recorded at the proper amount and revenue or
expense is allocated at the proper period" is a financial assertion of:
a. Occurrence
b. Completeness.
c. Valuation.
d. Measurement
a. Ordinarily, audit evidence regarding one assertion will compensate for failure
to obtain audit evidence regarding another assertion
b. Ordinarily, audit evidence is obtained regarding each financial assertion
c. The nature, timing and extent of substantive tests will vary depending on the
assertions
d. Audit tests can provide audit evidence about more than one assertion
80. With respect to audit objectives, the term validity relates to which of the following
assertions?
82. Which of the following would not be a factor in determining the competency of
evidential matter?
83. For the initial audit engagement, the auditor needs not obtain sufficient
appropriate audit evidence that:
84. The use of the phrase "present fairly, In all material respects" in the opinion
paragraph is most closely associated with which of the following concepts from
the scope - responsibility of the auditor paragraph?
a. significant estimates
b. substantial guarantee
c. positive conclusion
d. basis for an opinion
85. Identify the appropriate type of opinion to issue when the auditor believes that
there is a minimal loss resulting from the resolution of an uncertain
a. Unqualified opinion
b. Unqualified opinion with a separate explanatory paragraph.
c. Qualified opinion or disclaimer of opinion, depending on whether the
uncertainty is adequately disclosed
d. Qualified opinion or disclaimer of opinion, depending upon the materiality of
the loss
a. The auditor's report must state whether the financial statements conform with
the Philippine financial reporting standards.
b. The auditor's report must not state whether the applicable Philippine financial
reporting standards were consistently followed from the prior period to the
current period.
c. The auditor's report must state whether the client has provided adequate
disclosure on the finance statements and in the accompanying notes to
financial statements.
d. the auditor's report must express an opinion on the financial statements taken
as a whole, or explain why an opinion cannot be provided
a. The audit was planned and performed to obtain reasonable assurance about
whether the financial statements are free of material misstatements.
b. The audit was conducted in accordance with generally accepted auditing
standards.
c. The auditor makes the significant estimates in the preparation of the financial
statements.
d. A statement by the auditor that the audit provides a reasonable basis for the
opinion.
89. When there are extreme uncertainties that are significant to the financial
statements, the auditor may consider it appropriate to:
90. Which of the following may not potentially result to an issuance of either qualified
or disclaimer of opinion?
a. The timing of auditor's appointment is too late which results to inability of the
auditor‘s to perform prescribed procedures.
b. The entity's accounting records are inadequate.
c. The auditor is unable to carry out an audit procedure believed to be desirable.
d. The audit engagement requires an audit of balance sheet only
91. Where a limitation on the scope of the auditor's work requires modification of an
unqualified opinion, the auditor's report should describe the limitation and:
92. The audit report of the incoming auditor least likely include an indication
a. That the financial statements of the prior period were audited by another
CPA.
b. The type of report issued by the predecessor auditor
c. The division of responsibility between the successor and the predecessor
auditor.
d. The date of the predecessor auditor's report.
94. What are the concerns of an auditor when assessing whether comparative
financial statements meet the requirements of the relevant financial reporting
framework?
Concern 1. That prior period figures presented agree with the amounts and
other disclosures presented in the prior period or if necessary, appropriate
adjustments and/or disclosures have been made
Concern 2. That accounting policies of the prior period are consistent with
those of the current period.
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
a. The auditor should issue a report to which the comparatives are referred to
when the comparative's are materially misstated
b. The auditor is not required to identify the comparative in his report because
his opinion applies only to the current year's financial statements.
c. The auditor should issue a report in which the comparatives are specifically
identified because the auditor's opinion is expressed individually on the
financial statements of each period presented.
d. The auditor is only required to specifically identified the comparatives when
his opinion on the prior year's financial statements is other than unqualified.
96. Which of the following actions by an incoming auditor with respect to the financial
statements of prior year which were audited by another CPA is inappropriate?
a. The incoming auditor report only on the current period and the predecessor
auditor to reissue the audit report on the prior period.
b. The incoming auditor modifies the opening paragraph by stating that the prior
period's statements were audited by another auditor, the type of report and
the appropriate reasons for a modification if the report was modified and the
date of the report
c. The incoming auditor should assess whether the
comparativefinancialstatements meet the requirements of the relevant
financial accounting framework.
d. Review the working papers prepared by the predecessor auditor and
appropriately assess whether he can assume responsibility with respect to
the comparatives that are presented as comparative financial statements.
a. Parallel simulation.
b. Integrated testing facility approach.
c. Test data approach.
d. Exception report tests.
99. Output controls ensue that the results of computer processing are accurate,
complete, and properly distributed. Which of the following is not a typical output
control?
a. Reviewing the computer processing logs to determine that all of the correct
computer jobs executed properly
b. Periodically reconciling outputs reports to make sure that totals, formats, and
critical details ore correct and agree with input.
c. Maintaining formal procedures and documentation specifying authorized
recipients of output reports, checks, or other critical documents
d. Matching input data with information on master files and placing unmatched
items in a suspense file
100. Which of the following procedures would on auditor most likely perform in
planning a financial statement audit?
SIMULATED EXAMINATION 5
the auditor‘s attention that causes the auditor to believe that the financial
statements are not prepared in all material respect, in accordance with generally
accepted accounting principles in the Philippine (negative assurance)
11. Which of the following standards requires a critical review of the work done and the
judgment exercised by those assisting in an audit at every level of supervision?
a. proficiency
b. audit risk
c. inspection
d. Due care
12. In conducting a fraud investigation the auditor shoul first;
a. identify the perpetrators.
b. Obtain the facts
c. obtain confession
d Notify a law enforcement agency
13. Which of the following is an element of a CPA firm‘s quality control system that
should be considered in establishing its quality control policies and procedures?
a. complying with laws and regulations
b. using statistical sampling techniques
c. assigning personnel to engagements
d. considering audit risk and materiality
14. The nature and extent of CPA firm‘s quality control policies and procedures depend
on:
a. the CPA firms size=Yes; The Nature of the CPA firms practice=Yes; Cost-
benefit. Consideration=Yes
b the CPA firms size=Yes; The Nature of the CPA firms practice=Yes; Cost-
benefit. Consideration=No
c. the CPA firms size=Yes; The Nature of the CPA firms practice=No; Cost-
benefit Consideration=YES
d. the CPA firms size=No; The Nature of the CPA firms practice=Yes; Cost-
benefit. Consideration=Yes
15. The primary purpose of establishing quality control policies and procedures in
deciding whether to accept a new client is to
a. enable the CPA firm to attest to the reliability of the client
b. satisfy the CPA firms duty to the public
c. minimize the likelihood of association with clients whose management lacks
integrity
d. anticipate before performing any fieldwork whether an unqualified opinion can
be expressed
16. Which of the following will least create a threat to independence?
a. a member of the assurance team, partner or former partner of the firm has
joined the assurance client
b. deposit made by, or brokerage accounts of, a firm or a member of the
assurance team with an assurance client that is a bank broker or similar
institution, provided the deposit or account is held under normal commercial
terms
b. whether sources within the entity were independent of those who are
responsible for the amount being audited
c. whether the date were subjected to audit testing in the current or prior year
d. whether the date were obtained from independent sources outside the entity or
from sources within the entity
23. in evaluating the reasonable of an entity accounting estimate an auditors normally
would be concerned about assumptions that are;
a susceptible to bias
b Consistent with prior periods
c insensitive to variations
d similar ro industry guidelines
24. the primary objective of the procedures performed t obtain an understanding of
internal control is to provide an auditor with
a. knowledge necessary for audit planning
b evidential matter to use in assessing inherent risk
c.a basis for modifying test of controls
d. an evaluation of the consistency in the application of management‘s policies
25. Management philosophy and operating style most likely would have a significant
influence on an entity‘s control environment when:
a. the internal auditor reports directly to management
b. management is dominated by one individual
c. accurate management job descriptions delineate specific duties.
d. the audit committee actively oversees the financial reporting process
26 the control environment includes which of the following?
a. control activities
b. management philosophy and operating style
c. assessing activity level risks
d application level controls
27. Which of the following would an audit of a company‘s internal control include?
a. An engagement to perform internal audit procedures.
b. Implementation of key financial controls
c. concluding on the accuracy of the statements of cash flows
d. Testing of managements risk assessment procedures
28. which one of the following is considered an adequate document in an internal
control system?
a. the accounting clerk initials the banks reconciliation
b. the mailroom mails commissions checks
c. invoices are prepares without sequential numbering
d. fixed assets are assigned useful lives at random
29. A material weakness in the design of the operation of controls that is discovered in
an audit of internal controls results in;
a. not submitting a management letter
b. an unfavourable opinion
c. the firing of the auditors
d. adjusting audit journal entries
30.as the acceptable level of detection risk decreases, an auditor may:
33.in planning an audit, the auditors knowledge about the design of relevant internal
controls should be used to:
a. identify the types of potential misstatements that could occur
b. assess the operational efficiency of internal control
c. determine whether controls have been circumvented by collusion
d. document the assessed level of control risk
34. To determine whether the client‘s system of internal control is operating effectively
in minimizing an error of failure to invoice a shipment, the auditor would select of
transactions from the population represented by the
a. customer order file
b. bill of loading file
c. open invoice file
d. sales invoice file
35. Tracing copies of sales invoices to shipping document will provide evidence that all
a. Shipments to customer were recorded as receivables
b. billed sales were shipped
c. debits to subsidiary accounts receivable ledger are for sales shipped
d. shipments to customers were billed
36. Controls over approving credit relate to the:
a. completeness assertion
b. rights and obligations
c. valuation or allocation
d. occurrence
37. The following are the four steps that an auditor undertakes in assessing control risk
A. DBAC
B. BCDA
C. BDAC
D. DCAB
39. After assessing control risk at below the maximum level, an auditor desires to seek
a further reduction in the assessed level of control risk. At this time, the auditor would
consider whether:
a. it would be efficient to obtain an understanding of the entity's information
system relevant to financial reporting.
b. the entity's internal controls have been placed in operation.
c. the entity's internal controls pertain to any financial statement assertions.
d. additional evidential matter sufficient to support a further reduction is likely to
be available.
41. Which of the following controls most likely could prevent EDP personnel from
modifying programs to bypass programmed controls?
a. errors in some transactions may caused rejection of other transactions in the batch.
b. the identification of errors in input data typically is not part of the program.
c. there are time delays in processing transactions in a batch system.
d. the processing of transactions in a batch system is not uniform.
43. Which of the following input controls is a numeric Value computed to provide
assurance that the original value has not been altered in construction of transmission?
a. Hash total
b. Parity checks
c. Encryption
d. Check digit
44. Which of the following tasks could not be performed by generctli7ed auditsoftware?
a. Choosing a sample of accounts receivable for confirmation
b. Footing the bank reconciliation
c. Summarizing data
d. Reading the minutes of the board of directors' meeting
45. Which of the following tasks may be performed by generalized audit software?
a. Selection of a sample
b. Extraction of information
c. Obtaining file statistics
d. All of the given tasks may be performed
46. It involves the application of audit procedures to less than 100 percent of items
within an account balance or class of transactions.
a. Analytical procedures
b. Substantive testing
c. Audit sampling
d. Tests of controls
c. Control risk
d Detection risk
.49. Uncertainties that still exist even if the auditor examines 100 percent of an account
balance is •
a. Sampling risk
b. Nonsampling risk
c. Inherent risk
d. Control risk
50. As the expected population deviation rate increases (all other factors remaining the
same)
a. The sample size should increase.
b. The sample size should decrease.
c. The sample size should remain constant,
d. The change in the sample size cannot be determined.
51. The risk of incorrect acceptance and the likelihood of assessing control risk too low
relate to the:
52. The maximum misstatements that may exist in a population that an auditor is willing
to accept
A. Materiality level
B. Tolerable error
C. Tolerable deviations
D. Likely misstatements
54. While performing test of details during on audit, an auditor determined that the
sample results supported the conclusion that the recorded account balance was
materially misstated. It was, in fact, not materially misstated: This situation illustrates the
risk of:
55. Which of the following would most likely be an advantage in using classical
variables sampling rather than probability-proportional-to-size (PPS) sampling?
57. Which of the following is not an information source for developing analytical
procedures used in an audit?
A. Relationships among financial statement elements.
B. Relationships between financial and relevant nonfinancial data
C. Comparison of financial data with anticipated results (e.g., budgets and forecasts).
D. Comparison of current year financial data with projections for next year's financial
results.
58. If, when performing analytical procedures, an auditor observes that operating
income has declined significantly between the preceding year and, the current year, the
auditor should next:
59. Which of the following is an invalid statement about the relationship of accounting
arid internal control to the persuasiveness of audit evidence?
A. The effectiveness of the client's accounting and internal control has a significant
impact an. the competence of most types of evidence
B. Both physical examination and reperformance are likely to be highly reliable if the
accounting internal controls are effective.
C. The effectiveness of accounting and internal control system is inversely related to the
sufficiency of audit evidence required.
D. The effectiveness of accounting policies and procedures on revenue and cash
receipts significantly affects the extent of substantive procedures on cash
disbursements and expenditures.
60. It refers to the measure of the quantity of audit evidence considered necessary to
achieve the predetermined acceptable level of detection risk:
A. Relevance.
B. Validity.
C. Sufficiency.
D. Appropriateness.
61. The manner of obtaining audit evidence that consists of examining records,
documents or tangible assets:
A. Inspection.
B. inquiry
C. Analytical procedures.
D. Observation.
62. Which of the following least likely affect the persuasiveness of audit evidence that
the auditor obtains?
66. The decision as to how much evidence to be accumulated for a given set of
circumstances
67. Which of the "following is least considered in determining the sufficiency and
appropriateness of the audit evidence that the auditor will obtain regarding opening
balances?
A. The length of years in operations of the entity.
B. The materiality of the opening balances relative to the current period's financial
statements.
C. The accounting policies adopted by the entity.
D. The risk of misstatements of accounts.
68. In determining the sufficiency of evidential matter, which of the following would not
normally be a factor?
A. Cost/benefit considerations.
B. The sampling technique used.
C Materiality of the account balance.
D. Acceptable level of audit risk.
A. Specific misstatements during the current audit year identified by the auditor. B. Net
effect of uncorrected misstatements identified during the audit of previous year.
C. The auditors best estimate of other misstatements which cannot be specifically
identified.
D. The sum of the three misstatements given.
70. If based on the aggregate of uncorrected misstatements the auditor believes there
may be material misstatements, the auditor should perform additional procedures. If the
client refuses to adjust the financial statements and the auditor is able to conclude that
the aggregate of uncorrected misstatements is material, the auditor should:
71. When a client auditor uses a report of the auditor of a service organization, the client
auditor:
A. Should refer the matter in a separate emphasis of matter paragraph of his auditor's
report.
B. Should refer the matter by modifying the scope and opinion paragraphs of the
auditor's report.
C. Should attach the copy of the service organization auditor's report to his audit report.
D. Makes no reference in his auditor's report oh the service organization.
73. Opening balances are based upon the closing balances of the prior period and
reflect the effect of
I. Current transactions (e.g., stock dividends) that will be given retroactive effect
recognition.
II. Transactions of prior periods.
III. Accounting policies applied in the prior periods.
A. All of these
B. I only
C. I and II only
D. II and Ill only
A. many customers merely sign and return the confirmation without verifying their
details.
B. recipients usually respond only if they disagree with the information on the request
C. customers may not be inclined to report understatement errors in their accounts.
D. auditors typically select many accounts with low recorded balances to be confirmed
75. Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most rely or
yield the highest level of evidence?
A. Accounts receivable
B. Interest expense
C. Accounts payable.
D. Travel and entertainment expense
76. To test whether all sates transactions have been recorded, an auditor should test a
sample drawn from an entity's file of:
A. Receiving reports
B. Sales orders
C. Bills of lading
D. Sales invoices
77. An auditor ordinarily sends a standard confirmation request to all banks with which
the client has done business during the year under audit, regardless of the year-end
balance. A purpose of this procedure is to
78. The type of test used to check that customer sales are not entered tin some
unreasonable amount is known as a in):
79. The auditor notices significant fluctuations in key elements of flu company's financial
statements. it management is unable to provide an acceptable explanation, the auditor
should
80. The criteria against which the auditor measures the fairness of financial statement
presentation are known as:
A. generally accepted auditing standards.
B. Philippine financial reporting standards.
C. generally used accounting principles.
D. generally accepted governmental accounting principles.
81. A CPA, engaged to examine financial statements: observes that the accounting for
a certain material item is pot in conformity wit Philippine financial reporting standards,
and that ibis fact permanently disclosed in a footnote to the financial statements. The
CPA does not agree with this departure from PERS and should
A. Not allow the accounting treatment for this it-'n to affect the type of opinion because
the deviation from Philippine financial reporting standards was disclosed.
B. Express an unqualified opinion and add an explanatory paragraph emphasizing the
matter by reference to the footnote.
C. Qualify the opinion because of the deviation from Philippine financial reporting
standards.
D. Disclaim an opinion.
82. When the financial statements of the prior period were not audited the incoming
auditor should:
A. not allow the inclusion of the corresponding figures in the financial statements of the
current period.
B. obtain sufficient appropriate audit evidence that the corresponding figures meet the
requirements of the relevant financial reporting framework.'
C. Disclaim his opinion and treat the unaudited corresponding figures us 'oasis ul scope
limitation
D. Insist that an a prior year's financial statements most be made.
A. The auditor may express a qualified, adverse of disclaimer at opinion with respect to
one or more financial statements for one-or more periods, while issuing a different
report oh other financial statements.
B. When reporting on the prior period financial statements in connection with the current
year's audit, if the opinion on such prior period financial statements is different from the
opinion previously expressed, the auditor should disclose the substantive reasons for
the different opinion in the opening paragraph.
C. The auditor may consider expressing an opinion on prior period financial statement
which is different from the opinion that he had previously expressed on such financial
statements.
D. When the prior period financial statements are not audited, the incoming auditor
should carry on appropriate procedures of verifying the opening balances.
84. The following explanatory paragraph accompanies the auditor's report for financial
statements as of and for period ending December 31 2010:
"Because we were appointed auditors of the Company during 2009, we were not able to
observe the counting of the physical inventories at the beginning of 2009 or satisfy
ourselves concerning those inventory quantities by alternative procedures. Since -
opening inventories.... Our audit report on the financial statements for that, year ended
December 31, 2009 was modified accordingly."
The foregoing paragraph is included in connection with a report in which the auditor.
A. Expresses an unmodified opinion regarding the current financial statements but a
modified report regarding comparatives
B. Expresses unmodified opinion regarding the current period figure but a modified
report regarding the corresponding figures.
C. Expresses modified report on both the current financial statement and comparatives.
D. Expresses modified report regarding the current period arid corresponding figures.
85. For what purpose does the following explanatory paragraph in (in audit report that
accompanies the financial statements of Grey Company as of and for the year ended
December 31, 2008 serve?
"As discussed in Note Na. 9 to the financial statements no depreciation has been
provided in the financial statements which practice, in our opinion, is not in accordance
with the Philippine financial reporting standards in the Philippines. This is a result of a
decision taken by management at the start of 2007 and caused us to qualify our audit
opinion on the financial statements relating to the year. Based on the straight-line
depreciation the loss for the year should be increased by P1.2 Million in 2008 and
P800,000 in 20074...,"
A. An explanatory paragraph for a modification of the auditor's report regarding the
current period and the corresponding figures.
B. An explanatory paragraph for a modification of the corresponding figures but not for
modification of current period figures
C. An explanatory paragraph for a modification of the auditor's report regarding both the
current financial statements and prior year's financial statements.
D. An explanatory paragraph regarding a modification of the auditor's report regarding
prior year's financial statements only.
86. The following modification is made on the opening paragraph at the audit report that
accompanies the financial statements of the Gold, Inc.
We have audited the accompanying balance sheet as of December 31. 2008, and the
related ... for the year then ended. These financial statements ... "The financial
statements of the company as of and for the year ended December 31, 2007, were
audited by another auditor whose report dated April 5, 2008 expressed an unqualified
opinion on those statements."
The Modification is made in connection to:
A. Prior period financial statements were audited by other auditor and the incoming
auditor decided to share responsibilities whir
B. Prior period financial statements were audited by another auditor and such financial
statements of prior year are used as comparatives.
C. Reference to the predecessor auditor's report oh the corresponding figures in the
incoming auditor's report for the current period
D. A modified report regarding the current period figures but unmodified report
regarding the corresponding figures.
87. When the prior year's financial statements, which are used as comparatives, were
audited by other auditor, the incoming auditor should modify:
88. Which of the following is appropriate when material inconsistency exist in the other
information and the entity refuses to make the amendment?
89. They are not presented as complete financial statements capable of standing atone,
but are an integral part of the current period financial statements intended to be read
only in relationship to the current period figures.
A. Corresponding figures
B. Prior period figures
C. Comparative financial statements
D. Comparatives
90. When the auditor was unable to satisfy himself as to the appropriateness of the
unaudited opening balances for both, current and noncurrent assets, the auditor should
express a(n):
92. It exists when other information, not related to matters appearing in the audited
financial statements, is incorrectly stated or presented.
A. Material inconsistency
B. Material misstatement of fact
C. Material weaknesses
D. Misstatement
D. Less extensive than review procedures but mare extensive than agreed-upon
procedures.
95. What type of assurance would you expect to see for an audit on the fairness of
financial statements?
A. No assurance.
B. Limited assurance.
C. Negative assurance.
D. Positive assurance.
96. What type of assurance would you expect to see for a compilation of financial
statement information?
A. No assurance.
B. Limited assurance.
C. Negative assurance.
D. Positive assurance.
97. Which one of the following consists primarily of inquiries of on entity's management
and comparative analyses of financial information?
A. audit.
B: compilation.
C. agreed-upon procedures.
D. review.
100. In order for auditors to be able to recognize potential fraud, they must be aware of
the basic characteristics of fraud. Which of the following is a characteristic of fraud?
A. Unintentional deception.
B. Taking unfair or dishonest advantage of uninformed individuals.
C. Lack of training.
3. Suitable criteria are required for reasonably consistent evaluation or measurement of the
subject matter of an assurance engagement. Which of the following statements
concerning the characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.
9. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as
a result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather
than conclusive.
C. The practitioner may not have the required assurance knowledge and skills
to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming conclusions
based on that evidence.
11. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in
February 2008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than
the entity s auditor.
C. Reviews of historical financial or other information by a practitioner other than the
entitys auditor.
D. Reviews of historical financial or other information of an audit client.
13. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.
15. The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain professional
skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.
16. Which of the following best describes the reason why independent auditors report on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the
statements and the persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the result
of the independent auditors work.
D. Poorly designed internal control may be in existence.
17. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
19. Operational audits generally have been conducted by internal and COA auditors, but may
be performed by certified public accountants. A primary purpose of an operational audit is
to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a
companys top-level management.
C. Aid to the independent auditor, who is conducting the examination of the financial
statements.
D. A means of assurance that internal accounting controls are functioning as planned.
20. Which of the following terms best describes the audit of a taxpayer s return by a BIR
auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
22. Which of the following is the most appropriate action to be taken by a CPA who has been
asked to perform a consulting services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with
others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on
Auditing (PSAs).
25. Internal auditors review the adequacy of the company s internal control system primarily
to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit
objectives.
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B. Determine whether the internal control system provides reasonable
assurance that the companys objectives and goals are met efficiently and
economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements are
fairly presented.
26. The members of the Professional Regulatory Board of Accountancy shall be appointed by
the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP).
27. The following statements relate to the submission of nominations to the Board of
Accountancy. Which is correct?
A. The Accredited National Professional Organization of CPAs (APO) shall submit its
nominations to the president of the Philippines not later than sixty (60) days prior to
the expiry of the term of an incumbent chairman or member.
B. The APO shall submit its nominations to the PRC not later than thirty (30) days prior to
the expiry of the term of an incumbent chairman or member.
C. If the APO fails to submit its own nominee(s) to the PRC within the required period,
the PRC in consultation with the Board of Accountancy shall submit to the president of
the Philippines a list of five (5) nominees for each position.
D. There should be adequate documentation to show the qualifications and
primary field of professional activity of each nominee.
28. The following statements relate to the term of office of the chairman and members of the
Board of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of three (3) years.
B. Any vacancy occurring within the term of a member shall be filled up for the unexpired
portion of the term only.
C. No person who has served two successive complete terms as chairman or
member shall be eligible for reappointment until the lapse of two (2) years.
D. Appointment to fill up an unexpired term is not to be considered as a complete term.
29. The Board of Accountancy has the power to conduct an oversight into the quality of audits
of financial statements through a review of the quality control measures instituted by
auditors in order to ensure compliance with the accounting and auditing standards and
practices. This power of the BOA is called
A. Quality assurance review C. Appraisal
B. Peer review D. Quality control
30. Which of the following statements concerning the issuance of Certificates of Registration
and Professional Identification Cards to successful examinees is correct?
A. The Certificate of Registration issued to successful examinees is renewable every three
(3) years.
B. The Professional Identification Card issued to successful examinees shall remain in full
force and effect until withdrawn, suspended or revoked in accordance with RA 9298.
C. The BOA shall not register and issue a Certificate of Registration and
Professional Identification Card to any successful examinee of unsound
mind.
D. The BOA may, after the expiration of three (3) years from the date of revocation of a
Certificate of Registration, reinstate the validity of a revoked Certificate of Registration.
31. Which of the following statements concerning ownership of working papers is incorrect?
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A. All working papers made by a CPA and his/her staff in the course of an examination
remain the property of such CPA in the absence of a written agreement between the
CPA and the client to the contrary.
B. Working papers include schedules and memoranda prepared and submitted by the
client of the CPA.
C. Working papers include reports submitted by a CPA to his/her client.
D. Working papers shall be treated confidential and privileged unless such documents are
required to be produced through subpoena issued by any court, tribunal, or
government regulatory or administrative body.
32. Any person who shall violate any of the provisions of the Accountancy Act or any of its
implementing rules and regulations promulgated by the Board of Accountancy subject to
the approval of the PRC, shall, upon conviction, be punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not
exceeding two years or both.
D. Lethal injection.
33. A partner surviving the death or withdrawal of all the other partners in a partnership may
continue to practice under the partnership name for a period of not more than how many
years after becoming a sole proprietor?
A. 1 C. 3
B. 2 D. 4
34. The death or disability of an individual CPA and/or the dissolution and liquidation of a firm
or partnership of CPAs shall be reported to the BOA not later than how many days from
the date of such death, dissolution or liquidation.
A. 15 C. 60
B. 30 D. 90
35. Which of the following statements concerning a CPA s disclosure of confidential client
information is ordinarily correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect the CPA s
professional interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional duty to make the
disclosure.
D. Disclosure may be made to any government agency without subpoena.
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36. Which of the following statements best explains why the CPA profession has found it
essential to establish ethical standards and means for ensuring their observance?
A. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over material rewards
establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of responsibility to
the public.
D. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.
37. Which of the following will not create self-interest threat for a professional accountant in
public practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance client.
C. Undue dependence on total fees from a client.
D. Preparing the original data used to generate records that are the subject
matter of the assurance engagement.
38. Familiarity threat could be created under the following circumstances except
A. A professional accountant accepting gifts from a client whose value is
inconsequential or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to exert significant
influence over the subject matter of the engagement having recently served as the
engagement partner.
D. A member of the engagement team having a close or immediate family member who
is a director or officer of the client.
39. Which of the following circumstances may create advocacy threat for a professional
accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant client.
42. According to Section 240 of the Code of Ethics, fees charged for assurance engagements
should be a fair reflection of the value of the work involved. In determining professional
fees, the following should be taken into account, except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on the work.
43. Financial interests may be held through an intermediary (for example, a collective
investment vehicle, estate or trust). When control over the investment vehicle or the
ability to influence investment decisions exists, the code defines that financial interest to
be
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.
44. The concept of materiality is least important to an auditor when considering the
A. Effects of a direct financial interest in the client upon the auditor s
independence.
B. Decision whether to use positive or negative confirmations of accounts receivable.
C. Adequacy of disclosure of a clients illegal act.
D. Discovery of weaknesses in a clients internal control.
45. A direct financial interest or a material indirect financial interest in the audit client of a
member of the audit team or his immediate family member may create a significant self-
interest threat. Which of the following safeguards would be least likely considered to
eliminate the threat or reduce it to an acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a member of
the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it
so that the remaining interest is no longer material prior to the individual becoming a
member of the audit team.
D. Remove the member of the audit team from the audit engagement.
46. When an immediate family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in
such a position during the period covered by the engagement, the threats to
independence can only be reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member.
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B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit
committee.
47. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or
from a financial statement audit client by a network firm) or a member of
the assurance team provided that the transaction is in the normal course of
business and on an arm s length basis.
B. A partner or employee of the firm or a network firm serves as Company Secretary for
a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.
48. The following forms of assistance to a financial statement audit client do not generally
threaten the firms independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial statements.
49. The following statements relate to the provision of taxation, internal audit or IT Systems
services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or assets) for
an audit client for the purpose of preparing accounting entries that will be
subsequently audited by the firm creates a self-interest threat.
B. A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that involve the
design and implementation of financial information technology systems that are used
to generate information forming part of a client s financial statements may create a
self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management controls does not
create a threat to independence provided that firm or network firm personnel do not
perform management functions.
50. What threat to independence is created when the litigation support services provided to
an audit client include the estimation of the possible outcome and thereby affects the
amounts or disclosures to be reflected in the financial statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
51. What threat to independence may be created if fees due from an assurance client for
professional services remain unpaid for a long time, especially if a significant part is not
paid before the issue of the assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat
52. These are fees calculated on a predetermined basis relating to the outcome or result of a
transaction or the result of the work performed.
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A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.
53. As defined in the Code of Ethics, what is the communication to the public of information
as to the services or skills provided by professional accountants in public practice with a
view to procuring professional business?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
54. As defined in the Code of Ethics, what is the communication to the public of facts about a
professional accountant which are not designed for the deliberate promotion of that
professional accountant?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
57. After evaluating the significance of the threat created by an actual or threatened litigation,
the following safeguards should be applied to reduce the threat to an acceptable level,
except
A. Disclosing to the audit committee, or others charged with governance, the extent and
nature of the litigation.
B. If the litigation involves a member of the assurance team, removing that individual
from the assurance team.
C. Involving an additional professional accountant in the firm who was not a member of
the assurance team to review the work or otherwise advise as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.
58. The following statements relate to the provision of legal services to an audit client. Which
is incorrect?
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A. The provision of legal services to an audit client involving matters that
would not be expected to have a material effect on the financial statements
may create a self-review threat.
B. Legal services to support an audit client in the execution of a transaction (e.g.,
contract support) may create a self-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the financial
statements of the audit client would create advocacy and self-review threats so
significant no safeguards could reduce the threats to an acceptable level.
D. The appointment of a partner or an employee of the firm or network firm as General
Counsel for legal affairs to an audit client would create self-review and advocacy
threats that are so significant no safeguards could reduce the threats to an acceptable
level.
59. The following circumstances create advocacy threats for a professional accountant in
public practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit client in litigation or disputes with third
parties.
C. Acting as campaign manager for the president of a client who is running for a public
office.
D. A member of the assurance team having a significant close business
relationship with an assurance client.
60. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
A. Anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
B. Enable the CPA firm to attest to the reliability of the client.
C. Satisfy the CPA firms duty to the public concerning the acceptance of new clients.
D. Minimize the likelihood of association with clients whose management lacks
integrity.
62. Which element of a system of quality control is addressed by the establishment of policies
and procedures designed to provide the firm with reasonable assurance that it has
sufficient personnel with the competence, capabilities, and commitment to ethical
principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagement performance
63. For audits of financial statements of listed entities, the engagement partner should not
issue the auditors report until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
64. Who should take responsibility for the overall quality on each audit engagement?
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A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm
65. The engagement partner should take responsibility for the direction, supervision, and
performance of the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor s report that is issued to be
appropriate in the circumstances. Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement, considering their
significance, and modifying the planned approach appropriately.
C. Informing the members of the engagement team of their responsibilities.
D. Identifying matters for consultation or consideration by more experienced engagement
team members during the audit engagement.
66. 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.
70. Which of the following auditing procedures most likely would assist an auditor in
identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent
liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of
guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.
71. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.
72. If the results of the auditors experts work do not provide sufficient appropriate audit
evidence or are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
73. A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unmodified opinion has been
issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.
74. Which of the following is not one of the three primary objectives of effective internal
control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.
75. Which of the following statements concerning the relevance of various types of controls to
a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary importance, while
controls over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most
directly relevant to a financial statement audit, but other controls may also
be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit
approach is taken.
76. An auditor should consider two key issues when obtaining an understanding of a client s
internal controls. These issues are
A. The effectiveness and efficiency of the controls.
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B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.
77. Authorizations can be either general or specific. Which of the following is not an example
of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager s authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.
78. An auditor should obtain sufficient knowledge of an entity s information system, including
the related business processes relevant to financial reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.
79. Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis,
the accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account
balances.
80. Which of the following control activities in an entity s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable
ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable
control account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.
81. Which of the following controls is not usually performed in the accounts payable
department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendors invoice with the related purchase requisition, purchase order,
and receiving report.
82. After gaining an understanding of internal control and assessing the risks of material
misstatement, 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 is not possible or practicable to reduce the risks of material misstatement
at the assertion level to an acceptably low level with audit evidence
obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow misstatements to enter
the accounting system.
P a g e | 15
D. An increase in the assessed level of control risk is justified for certain financial
statement assertions.
83. An auditor may decide to assess control risk at the maximum level for certain assertions
because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entitys control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.
84. Which of the following statements is correct concerning an auditor s assessment of control
risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entitys internal control.
B. Evidence about the operation of controls in prior audits may not be considered during
the current years assessment of control risk.
C. The basis for an auditors conclusions about the assessed level of control risk need not
be documented unless control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must
provide that the controls are operating effectively.
86. Which of the following tests of controls most likely would help assure an auditor that
goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.
87. When there are numerous property and equipment transactions during the year, an
auditor who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of
the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
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89. Fraud involving one or more members of management or those charged with governance
is referred to as
A. Management fraud. C. Fraudulent financial reporting.
B. Employee fraud. D. Misappropriation of assets.
90. The auditor is concerned with fraud that causes a material misstatement in the financial
statements. There are two types of intentional misstatements that are relevant to the
auditor: misstatements resulting from fraudulent financial reporting and misstatements
resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
P a g e | 17
D. Collusion within the entity or with third parties.
92. The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting
earnings and earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other
assets susceptible to theft created by recent changes made to employee compensation
or benefit plans.
94. Which of the following conditions or events may create incentives/pressures to commit
fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet
financial targets established by those charged with governance, including
sales or profitability incentive goals.
D. Inadequate access controls over automated records.
95. When the auditor identifies a misstatement in the financial statements, the auditor should
consider whether such a misstatement may be indicative of fraud and if there is such an
indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of
the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.
AUDITING IN A CIS/IT ENVIRONMENT
96. The use of a computer changes the processing, storage, and communication of financial
information. A CIS environment may affect the following, except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditors design and performance of tests of control and substantive procedures
to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entity s accounting and internal
control systems.
99. The auditor shall consider the entitys CIS environment in designing audit procedures to
reduce risk to an acceptably low level. Which of the following statements is incorrect?
A. The auditors specific audit objectives do not change whether financial information is
processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not
influenced by the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted audit
techniques (CAATs), or a combination of both to obtain sufficient appropriate audit
evidence.
D. In some CIS environments, it may be difficult or impossible for the auditor to obtain
certain data for inspection, inquiry, or confirmation without the aid of a computer.
101. Which of the following statements most likely represents a disadvantage for an entity that
maintains data files on personal computers (PCs) rather than manually prepared files?
A. It is usually more difficult to compare recorded accountability with the physical count
of assets.
B. Random error associated with processing similar transactions in different ways is
usually greater.
C. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
D. It is usually easier for unauthorized persons to access and alter the files.
102. The internal controls over computer processing include both manual procedures and
procedures designed into computer programs (programmed control procedures). These
manual and programmed control procedures comprise the general CIS controls and CIS
application controls. The purpose of general CIS controls is to
A. Establish specific control procedures over the accounting applications in order to
provide reasonable assurance that all transactions are authorized and recorded and
are processed completely, accurately, and on a timely basis.
B. Establish a framework of overall controls over the CIS activities and to
provide a reasonable level of assurance that the overall objectives of
internal control are achieved.
C. Provide reasonable assurance that systems are developed and maintained in an
authorized and efficient manner.
D. Provide reasonable assurance that access to data and computer programs is restricted
to authorized personnel.
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103. An entity has recently converted its purchasing cycle from a manual process to an online
computer system. Which of the following is a probable result associated with conversion
to the new IT system?
A. Traditional duties are less separated.
B. Increased processing time.
C. Reduction in the entitys risk exposure.
D. Increased processing errors.
104. An entity should plan the physical location of its computer facility. Which of the following
is the primary consideration for selecting a computer site?
A. It should be in the basement or on the ground floor.
B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must travel to deliver data
and reports and be easily accessible by a majority of company personnel.
D. It should provide security.
105. An entity installed antivirus software on all its personal computers. The software was
designed to prevent initial infections, stop replication attempts, detect infections after
their occurrence, mark affected system components, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too complex.
106. Which of the following should be considered by the auditor in deciding which means (or
combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency.
A. I only C. Both I and II
B. II only D. Neither I nor II
107. The quantity of audit evidence needed is affected by the risk of misstatement and also by
the quality of such audit evidence.
The reliability of audit evidence is influenced by its source and by its nature and is
dependent on the individual circumstances under which it is obtained.
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A. Both statements are true. C. True; False.
B. Both statements are false. D. False; True.
110. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.
111. Which of the following generalizations does not relate to the appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation received from a third
party) is more reliable than that generated internally.
B. An auditors opinion, to be economically useful, is formed within reasonable time and
based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related accounting and
internal control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that obtained
from the entity.
112. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a
test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
113. In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
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114. Which of the following statements is correct concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
D. Negative confirmation requests are effective when understatements of account
balances are suspected.
115. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness.
116. Confirmation is the process of obtaining and evaluating a direct communication from a
third party in response to a request for information about a particular item affecting
financial statement assertions. Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness
117. To gain assurance that all inventory items in a client s inventory listing schedule are valid,
an auditor most likely would vouch
A. Inventory tags noted during the auditors observation to items listed in the inventory
listing schedule.
B. Inventory tags noted during the auditors observation to items listed in receiving
reports and vendors invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor s
recorded count sheets.
D. Items listed in receiving reports and vendors invoices to the inventory listing schedule.
118. Which of the following is not an audit procedure that the independent auditor would
perform with respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for
litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation, claims, and
assessments that existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted claims that the
lawyer has advised are probable of assertion and must be disclosed.
D. Confirm directly with the clients lawyer that all claims have been recorded in the
financial statements.
119. Audit documentation may be recorded on paper or on electronic or other media. The
following are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entitys accounting records
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120. The completion of the assembly of the final audit file after the date of the auditor s report
does not ordinarily involve
A. The performance of new audit procedures or the drawing of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly process.
AUDIT SAMPLING
122. Population, as defined in PSA 530, means the entire set of data from which a sample is
selected and about which the auditor wishes to draw conclusions. It is important for the
auditor to ensure that the population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II
B. II only D. Neither I nor II
123. An advantage of statistical over nonstatistical sampling methods in tests of controls is that
the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for substantive
testing.
D. Eliminate the need to use judgment in determining appropriate sample sizes.
124. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on
the characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific
objective.
C. An auditor may fail to recognize errors in the documents examined for the chosen
sample.
D. The documents related to the chosen sample may not be available for inspection.
125. Which of the following statistical selection techniques is least desirable for use by an
auditor?
A. Systematic selection C. Block selection
B. Stratified selection D. Sequential selection
126. Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control
risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from the prior
year.
D. Performing tests of transactions to corroborate management s financial statement
assertions.
127. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
128. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms for repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.
129. An auditor searching for related party transactions should obtain an understanding of each
subsidiarys relationship to the total entity because
A. This may permit the audit of intercompany account balances to be performed as of
concurrent dates.
B. This may reveal whether particular transactions would have taken place if the parties
had not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Intercompany transactions may have been consummated on terms equivalent to
arms-length transactions.
130. After determining that a related party transaction has, in fact, occurred, an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an arm s-
length transaction.
C. Add a separate paragraph to the auditors report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.
131. Which of the following statements best describes the date of the financial statements?
A. The date on which those with the recognized authority assert that they have prepared
the entitys complete set of financial statements, including the related notes, and that
they have taken responsibility for them.
B. The date that the auditors report and audited financial statements are made available
to third parties.
C. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject
to audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the opinion on the financial statements.
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132. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts receivable established after the date of the
financial statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personnel changes in the accounting department occurring after the date
of the financial statements.
133. Which of the following statements best expresses the auditor s responsibility with respect
to facts discovered after the date of the auditor s report but before the date the financial
statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the auditor
should issue a new report which contains either a qualified opinion or an adverse
opinion.
C. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in the
circumstances.
D. The auditor should withdraw from the engagement.
134. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed
in the financial statements.
B. Information about an event that occurred after the date of the auditor s report comes
to the auditors attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditors attention.
135. Which of the following events occurring after the issuance of an auditor s report most
likely would cause the auditor to make further inquiries about the previously issued
financial statements?
A. A technological development that could affect the entity s future ability to continue as
a going concern.
B. The entitys sale of a subsidiary that accounts for 30% of the entity s consolidated
sales.
C. The discovery of information regarding a contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.
136. Which of the following statements best describes the auditor s responsibility concerning
the appropriateness of the going concern assumption in the preparation of the financial
statements?
A. The auditors responsibility is to make a specific assessment of the entity s ability to
continue as a going concern.
B. The auditors responsibility is to predict future events or conditions that may cause the
entity to cease to continue as a going concern.
C. The auditors responsibility is to consider the appropriateness of management s use of
the going concern assumption and consider whether there are material uncertainties
about the entitys ability to continue as a going concern that need to be disclosed in
the financial statements.
D. The auditors responsibility is to give a guarantee in the audit report that the entity
has the ability to continue as a going concern.
137. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entitys ability to continue as a going concern?
A. Cash flows from operating activities are negative.
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B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.
138. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entitys ability to continue as a going concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
139. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity s
ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.
140. When an auditor concludes that there is substantial doubt about a continuing audit client s
ability to continue as a going concern for a reasonable period of time, the auditor s
responsibility is to
A. Consider the adequacy of disclosure about the client s possible inability to continue as
a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible
effects on the financial statements.
C. Report to the clients audit committee that management s accounting estimates may
need to be adjusted.
D. Reissue the prior years auditors report and add an emphasis of matter paragraph that
specifically refers to substantial doubt and going concern.
141. When an audit is made in accordance with generally accepted auditing standards, the
auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
D. Document the understanding of the clients internal control and the basis for all
conclusions about the assessed level of control risk for financial statement assertions.
142. When considering the use of managements written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.
143. A written representation from a client s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client s lawyer.
D. Chair of the audit committee of the board of directors.
144. The date of the management representation letter should coincide with the date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditors report
D. Latest interim financial information
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146. What type of opinion should be expressed if the client s management refuses to provide a
representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
147. The primary reason an auditor requests that letters of inquiry be sent to a client s
attorneys is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.
B. The attorneys opinions of the clients historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims,
and assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.
149. The refusal of a clients lawyer to provide a representation on the legality of a particular
act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditors report because of the lawyer s obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a subject to opinion.
150. Managements refusal to give the auditor permission to communicate with the entity s
legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.
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151. The following statements relate to the date of the auditor s report. Which is false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditors report should not be earlier than the date on which the
financial statements are signed or approved by management.
C. The date of the auditors report should not be later than the date on which the
financial statements are signed or approved by management.
D. The date of the auditors report should always be later than the date of the financial
statements (i.e., the balance sheet date).
152. In which of the following circumstances would an auditor most likely add an emphasis of
matter paragraph to the auditors report while expressing an unqualified opinion?
A. There is a substantial doubt about the entitys ability to continue as a going concern.
B. Managements estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management s records retention
policy.
153. A note to the financial statements of the Prudent Bank indicates that all of the records
relating to the banks business operations are stored on magnetic disks, and that no
emergency backup systems or duplicate disks are stored because the bank and its
auditors consider the occurrence of a catastrophe to be remote. Based upon this note,
the auditors report should express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A subject to opinion
154. When would the auditor refer to the work of an appraiser in the auditor s report?
A. An adverse opinion is expressed based on a difference of opinion between the client
and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the
auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the
appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to
disclose the use of the appraisers work.
155. When audited financial statements are presented in a document (e.g., annual report)
containing other information, the auditor
A. Should read the other information to consider whether it is inconsistent with the
audited financial statements.
B. Has no responsibility for the other information because it is not part of the basic
financial statements.
C. Has an obligation to perform auditing procedures to corroborate the other information.
D. Is required to express a qualified opinion if the other information has a material
misstatement of fact.
156. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. If the auditor
concludes that the financial statements do not require revision, but the client refuses to
revise or eliminate the material inconsistency, the auditor may
P a g e | 29
A. Disclaim an opinion on the financial statements after explaining the material
inconsistency in an emphasis of matter paragraph.
B. Revise the auditors report to include an other matter paragraph describing the
material inconsistency.
C. Express a qualified opinion after discussing the matter with the client s directors.
D. Consider the matter closed because the other information is not in the audited
statements.
157. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine
Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial
doubt about the entitys ability to continue as a going concern.
D. The auditor did not observe the entitys physical inventory and is unable to become
satisfied as to its balance by other auditing procedures.
158. An auditor should disclose the substantive reasons for expressing an adverse opinion in
the Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.
159. The predecessor auditor, who is satisfied after properly communicating with the incoming
auditor, has reissued his/her auditors report on prior year financial statements. The
predecessor auditors report should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion
paragraph.
D. Not refer to the report or the work of the incoming auditor.
160. The following statements relate to unaudited prior year financial statements that are
presented in comparative form with audited current year financial statements. Which is
incorrect?
A. The incoming auditor should state in the auditor s report that the comparative financial
statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances
of the current period.
C. Clear disclosure in the financial statements that the comparative financial statements
are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited
figures are materially misstated, the auditor should request management to revise the
prior years figures or if management refuses to do so, appropriately modify the
report.
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161. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of
management.
C. Consists principally of inquiries of company personnel and analytical procedures
applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain
other procedures ordinarily performed during an audit.
162. An accountants report on a review of the financial statements of an entity should state
that the accountant
A. Does not express an opinion or any form of limited assurance on the financial
statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of
material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the
financial statements.
163. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the accountant has
not been restricted.
B. The financial statements are the responsibility of the company s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.
165. When compiling an entitys financial statements, an accountant would be least likely to
A. Perform analytical procedures designed to identify relationships that appear to be
unusual.
B. Read the compiled financial statements and consider whether they appear to include
adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial
statements.
P a g e | 31
D. Plan the work so that an effective engagement will be performed.
166. Which of the following should not be included in an accountant s report based upon the
compilation of an entitys financial statements?
A. A statement that a compilation of the company s financial statements was made in
accordance with the Philippine Standard on Related Services applicable to compilation
engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only
negative assurance on the statements.
167. An accountant may accept an engagement to apply agreed-upon procedures that are not
sufficient to express an opinion on one or more specified accounts or items of a financial
statement provided that
A. The accountants report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles.
C. Distribution of the accountants report is restricted.
D. The accountant is also the entitys continuing auditor.
168. When an accountant examines prospective financial statements, the accountant s report
should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with
generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year
after the reports date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
prospective financial statements.
169. The following statements relate to the examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to whether the results shown in the
prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the
auditor should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine
prospective financial information when the assumptions are clearly unrealistic.
D. When in the auditors judgment an appropriate level of satisfaction has been obtained,
the auditor is not precluded from expressing positive assurance regarding the
assumptions.
170. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast
1. In determining the primary responsibility of the external auditor for an audit of a company‟s
financial statements, the auditor owes primary allegiance to:
A. the management of the audit client because the auditor is hired and paid by
management.
B. the audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company.
C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it determines auditing
standards and auditor‟s responsibility.
2. Which of the following would not represent one of the primary problems that would lead the
users to demand for independent audits of a company‟s financial statements?
A. Management bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
D. The remoteness of the user from the organization and thus the inability of the user to
directly obtain financial information from the company.
9. The risk associated with a company's survival and profitability is referred to as:
A. Business Risk
B. Information Risk
C. Detection Risk
D. Control Risk
10. An engagement in which a CPA firm arranges for a critical review of its practices by another
CPA firm is referred to as a(n):
A. Peer Review Engagement
B. Quality Control Engagement
C. Quality Assurance Engagement
D. Attestation Engagement
11. Attestation risk is limited to a low level in which of the following engagement(s)?
A. Both examinations and reviews
B. Examinations, but not reviews
C. Reviews, but not examinations
D. Neither examinations nor reviews
12. .An operational audit differs in many ways from an audit of financial statements. Which of
the following is the best example of one of these differences?
A. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement
B. The boundaries of an operational audit are often drawn from an organization chart and
are not limited to a single accounting period
C. Operational audits do not ordinarily result in the preparation of a report
D. The operational audit deals with pre-tax income
15. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm
B. The senior assigned to the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement
17. The auditor of financial statements must make very difficult interpretations regarding
authoritative literature. Additionally, the auditor must
A. proceed beyond PFRS to assess how the economic activity is portrayed in the financial
statements.
B. force management to make certain decisions regarding their financial statements.
C. disregard independence in order to find the underlying truth of the evidence.
D. establish new criteria by which financial statements may be compared.
18. Which one of the following is not a part of the attest process?
A. gathering evidence about assertions
B. proving the accuracy of the books and records
C. evaluating evidence against objective criteria
D. communicating the conclusions reached
19. Which one of the following is not a reason why the users of financial statements desire for an
independent assessment of the financial statement presentation?
A. complexity of transactions affecting the financial statements
B. lack of criteria on which to base information
C. remoteness of the user from the organization
D. all of them are potential reasons
20. Independent professional services that are provided on financial or other information that
improve the quality of decision making are known as
A. internal auditing.
B. financial auditing.
C. assurance services.
D. attestation services.
21. An audit which determines whether organizational policies are being followed and whether
external mandates are being met is known as
A. a financial audit.
B. a compliance audit.
C. an operational audit.
D. none of the above
22. May a CPA hire for the CPA‟s public accounting firm a non-CPA systems analyst who
specializes in developing computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist‟s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist‟s
end product.
C. No, because non-CPA professionals are not permitted to be associated with CPA firms
in public practice.
D. No, because developing computer systems is not recognized as a service performed by
public accountants.
23. Which of the following services may a CPA perform in carrying out a consulting service
for a client?
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
24. Which of the following describes how the objective of a review of financial statements
differs from the objective of a compilation engagement?
A. The primary objective of a review engagement is to test the completeness of the
financial statements prepared, but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide positive assurance that the
financial statements are fairly presented, but a compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance, but a compilation
expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive assurance that the
financial statements are fairly presented, but a compilation provides limited assurance.
25. Which of the following factors most likely would cause a CPA to decline a new audit
engagement?
A. The CPA does not understand the entity's operations and industry.
B. Management acknowledges that the entity has had recurring operating losses.
C. The CPA is unable to review the predecessor auditor's working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
26. When a firm or a member of the assurance team holds a direct financial interest or a material
indirect financial interest in the assurance client as a trustee, a self-interest threat may be
created by the possible influence of the trust over the assurance client. Accordingly, such an
interest cannot be held when:
A. The member of the assurance team, an immediate family member of the member of
the assurance team, and the firm are beneficiaries of the trust.
B. The interest held by the trust in the assurance client is not material to the trust.
C. The trust is not able to exercise significant influence over the assurance client.
D. The member of the assurance team or the firm does not have significant influence over
any investment decision involving a financial interest in the assurance client.
28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client
of the firm, the appropriate safeguard against the self-interest threat created would be:
A. Dispose the entire financial interest.
B. Dispose of a sufficient amount of the financial interest so that the remaining interest is
no longer material.
C. Any of the two is appropriate.
D. None of the two is appropriate.
29. If a firm, or a network firm, has a material financial interest in an entity that has a
controlling interest in a financial statement audit client, the self interest threat created is so
significant. The audit firm can only perform the engagement if it:
I. Dispose of the entire financial interest.
II. Dispose of a sufficient amount of the financial interest so that the remaining
interest is no longer significant.
A. Either I or II
B. Neither I nor II
C. I only
D. II only
30. Which of the following safeguards is inappropriate if a firm has a material financial interest
in an entity that has a controlling interest in a financial statement audit client?
A. Discuss the presence of self-interest threat with the client‟s board of directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the financial interest in
total.
31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a
financial statement audit client. If the self-interest threat that is created by the financial
interest is significant, the firm that intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no longer material.
B. Discuss the matter with the audit committee of the financial statement audit client.
C. Refer the audit of the stockholders‟ equity of the financial statement audit client to
other CPA.
D. Either dispose of the financial interest in total or a sufficient amount so that the
remaining amount is no longer material.
32. The following loans and guarantees would not create a threat to independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures,
terms and requirements and the loan is immaterial to both the firm and the assurance
client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
C. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
D. If the firm, or a member of the assurance team, makes a loan to an assurance client that
is not a bank or similar institution, or guarantees such an assurance client's borrowing.
33. Examples of close business relationships that may create self-interest and intimidation
threat least likely include:
A. Having a material financial interest in a joint venture with the assurance client or a
controlling owner, director, officer or other individual who performs senior managerial
functions for that client.
B. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
C. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client‟s products or services, or the assurance client acts as
the distributor or marketer of the products or services of the firm.
D. The purchase of goods and services from an assurance client by the firm (or from an
audit client by a network firm) or a member of the assurance team, provided the
transaction is in the normal course of business and on an arm‟s length basis.
34. When a firm or a member of the assurance team and the audit client or one of its officers
hold interest in a closely-held entity, a threat to independence is not created, except:
A. The relationship is clearly insignificant to the firm or a member of the assurance team
and the audit client.
B. The relationship is other than insignificant which is acceptable for indirect financial
interest.
C. The interest held is immaterial to the investor or group of investors.
D. The interest does not give the investor, or group of investors, the ability to control the
closely-held entity.
35. When an immediate family member of a member of the assurance team is a director or an
officer of the assurance client in a position to exert direct and significant influence over the
subject matter information of the engagement, the threat to independence can only be
reduced to an acceptable level, aside from withdrawing from the engagement, by:
A. Removing the individual from the assurance team.
B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family member of the
professional to go on forced vacation leave.
36. Which of the following relationships is most likely to impair a CPA‟s independence with
respect to a particular audit client on which the CPA works as a member of the engagement
team?
A. A close relative has a material investment in that client of which the CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA is not aware.
C. The CPA‟s father is the president of the audit client.
D. The CPA‟s spouse participates in a savings plan sponsored by the client.
37. An inadvertent violation of the rules on family and personal relationships would not impair
the independence of a firm or a member of the assurance team when:
A. The firm has established policies and procedures that require all professionals to report
promptly to the firm any breaches resulting from changes in the employment status of
their immediate or close family members or other personal relationships that create
threats to independence.
B. Either the responsibilities of the assurance team are re-structured so that the
professional does not deal with matters that are within the responsibility of the person
with whom he or she is related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.
38. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats
created is least likely affected by
A. The position the individual has taken at the assurance client.
B. The amount of any involvement the individual will have with the assurance team.
C. The length of time that the individual was a member of the assurance team or firm.
D. The former position of the individual within the assurance team or firm.
39. Using the same senior personnel on an assurance engagement over a long period of time
may create a familiarity threat. The significance of the threat will least likely depend upon
A. The length of time that the individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.
40. A small CPA firm provides audit services to a large local company. Almost 80 percent of
the CPA firm‟s revenues come from this client. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative assurance
care in the audit.
D. The auditor should provide an “emphasis of a matter paragraph‟ to his audit report
adequately disclosing this information and then it may issue an unqualified opinion.
41. A professional accountant has been the partner-in-charge of a particular audit client for the
past eight years. This situation could result to the following threat to professional
independence:
A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity
42. Which statement is incorrect regarding long association of senior personnel with audit
clients that are listed entities?
A. Using the same lead engagement partner on an audit over a prolonged period may
create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined period, normally no
more than six years.
C. A partner rotating after a pre-defined period should not participate in the audit until a
further period of time, normally two years, has elapsed.
D. When audit client becomes a listed entity the length of time the lead engagement
partner has served the audit client in that capacity should be considered in determining
when the partner should be rotated.
43. The professional accountant who has been the lead engagement partner for an audit
engagement for a prolonged period of time may continue to serve as the lead engagement
partner before rotating off the engagement for how many years after the audit client
becomes a listed entity?
A. One year
B. Three years
C. Two years
D. Four years
44. While the lead engagement partner should be rotated after such a pre-defined period, some
degree of flexibility over timing of rotation may be necessary in certain circumstances.
Examples of such circumstances include:
A. Situations when the lead engagement partner‟s continuity is especially important to the
audit client, for example, when there will be major changes to the audit client‟s
structure that would otherwise coincide with the rotation of the lead engagement
partner.
B. Situations when, due to the size of the firm, rotation is not possible or does not
constitute an appropriate safeguard.
C. Both choices are correct.
D. Both choices are incorrect.
45. A CPA can continue to be an engagement partner on the audit of financial statements of
listed entities over a prolonged period of engagement. In order to avoid a creation of
familiarity threat, subject to transitional provisions, how many years are prescribed by the
as maximum for the CPA to continue serving as engagement partner for a listed entity?
A. Five years
B. Three years
C. Seven years
D. Ten years
46. An engagement partner who is rotated in the audit of financial statements of listed entity
can only participate in the audit engagement for the same client after a period of:
A. Twelve months
B. Two years
C. Three years
D. Five years
47. The following activities would generally create self-interest or self-review threats that are
so significant and that only avoidance of the activity or refusal to perform the assurance
engagement would reduce the threats to an acceptable level, except
A. Authorizing, executing or consummating a transaction, or otherwise exercising
authority on behalf of the assurance client, or having the authority to do so.
B. Determining which recommendation of the firm should be implemented.
C. Reporting, in a management role, to those charged with governance.
D. Providing technical assistance and advice on accounting principles for audit clients.
49. If firm, or network firm, personnel providing such assistance make management decisions,
the self-review threat created could not be reduced to an acceptable level by any
safeguards. Examples of such managerial decisions include the following, except
A. Determining or changing journal entries, or the classifications for accounts or
transactions or other accounting records without obtaining the approval of the audit
clients
B. Authorizing or approving transactions.
C. Preparing source documents or originating data (including decisions on evaluation
assumptions), or making changes to such documents or data.
D. Assisting an audit client in resolving account reconciliation problems.
50. The following services are considered to be a normal part of the audit process and do not,
under circumstances, threaten independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in the preparation of consolidated financial statements.
C. Drafting disclosure items.
D. Having custody of an assurance client‟s assets.
51. Which of the following will an auditor least likely discuss with the former auditors of a
potential client prior to acceptance of an audit engagement?
A. Integrity of the management
B. Fees charged for the services
C. Disagreements between the predecessor auditor and the management regarding
accounting principles
D. Reasons for changing audit firms
52. What is the most likely course of action to be taken by an auditor in assessing management
integrity?
A. Tour the plant
B. Review the minutes of the board of directors
C. Research the background and histories of officers
D. Review the bank reconciliation statements
53. An engagement letter should be written before the start of an audit because
A. it may limit the auditor‟s legal liability by specifying the auditor‟s responsibilities.
B. it specifies the client‟s responsibility for preparing schedules and making the records
available to the auditor.
C. it specifies the basis for billing the audit for the upcoming year.
D. All of the choices given are correct
54. When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether:
A. the predecessor's work should be utilized.
B. the company follows the policy of rotating its auditors.
C. in the predecessor's opinion, internal control of the company is satisfactory.
D. the engagement should be accepted.
55. A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of noncompliance to laws is usually set forth in a(an)
A. client representation letter.
B. letter of audit inquiry.
C. management letter.
D. engagement letter.
56. Prior to acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should
A. contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstances leading to the termination of the engagement with
an understanding that all information disclosed will be kept confidential.
B. accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination of
the engagement.
C. not communicate with the predecessor auditor because this would in effect be asking
the auditor to violate the confidential relationship between an auditor and the client.
D. advise the client of the intention to contact the predecessor auditor and request a
permission for the contact.
57. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessor‟s
A. opinion of any subsequent events occurring since the predecessor‟s audit report was
issued.
B. understanding as to the reasons for the change of auditors.
C. awareness of the consistency in the application of PFRS between periods.
D. evaluation of all matters of continuing accounting significance.
58. A successor auditor would most likely make specific inquiries of the predecessor auditor
regarding
A. specialized accounting principles being used by the client‟s industry.
B. the competency of the client‟s internal audit staff.
C. the uncertainty inherent in applying sampling procedures.
D. disagreements with management as to auditing procedures.
62. In comparing management fraud with employee fraud, the auditor‟s risk of failing to
discover the fraud is greater for:
A. employee fraud because of the larger number of employees in the organization.
B. employee fraud because of the higher crime rate among blue collar workers.
C. management fraud because of management‟s ability to override existing internal
controls.
D. management fraud because managers are inherently smarter than employees.
64. The auditor is most likely to presume that a high risk of irregularities exists if
A. the client is a multinational company that does business in numerous foreign countries.
B. the client does business with several related parties.
C. inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
D. inadequate employee training results in lengthy EDP exception reports each month.
65. Which of the following audit risk components may be assessed in non-quantitative terms?
Inherent Risk Control Risk Detection Risk
A. Yes Yes No
B. Yes No Yes
C. No Yes Yes
D. Yes Yes Yes
66. Which of the following combinations of engagement risk, audit risk, and materiality would
lead the auditor to most audit work?
Engagement Risk Audit Risk Materiality
A. Low High High
B. Moderate Low Low
C. Low Moderate Low
D. High High High
67. Which of the following conditions justifies an auditor‟s decision of raising the materiality
level?
A. Internal control over revenue and receipts cycle is excellent.
B. Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.
68. Which of the following does an auditor least likely perform in assessing audit risk?
A. Gather audit evidence in support of recorded transactions.
B. Obtain an understanding of the client's system of internal control.
C. Understand the economic substance of significant transactions completed by the client.
D. Understand the entity and the industry in which it operates.
69. Which type of risk does the management of a company have the most control over in the
short term?
A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk
70. In which of the following order would the auditors perform the following steps?
A. Determine audit risk; assess control risk; determine detection risk; set materiality.
B. Set materiality; determine audit risk; assess control risk; determine detection risk.
C. Set materiality; assess control risk; determine detection risk; determine audit risk.
D. Determine audit risk; set materiality; assess control risk; determine detection risk.
71. If the results of the auditor's tests of controls induce the auditor to change the assessed
level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain
constant, what is the effect on the acceptable level of detection risk?
A. A change in detection risk cannot be calculated because audit risk and inherent risk
values are not given.
B. Detection risk would increase from 0.3 to 0.6.
C. Detection risk would decrease from 0.4 to 0.2.
D. Detection risk would not change since audit risk and inherent risk do not change.
72. Which of the following may cause the management to intentionally understate profits?
A. Management wants to create "cookie jar" reserves for a rainy day.
B. The company is under scrutiny by tax authorities.
C. The company is suffering a large loss and wants to take a "big bath."
D. All of the given choices
75. With respect to errors and fraud, the auditor should plan to
A. search for errors or fraud that would have a material effect on the financial statements.
B. discover errors or fraud that would have a material effect on the financial statements.
C. search for errors that would have a material effect and for fraud that would have either
material or immaterial effects on the financial statements.
D. search for fraud that would have a material effect and for errors that would have either
material or immaterial effects on the financial statements.
76. The auditor‟s responsibility for identifying "direct-effect" non-compliance to laws and
regulations differs from their responsibility for detecting
A. errors.
B. indirect-effect non-compliance to laws and regulations.
C. fraud.
D. management fraud.
77. The element of the audit planning process most likely to be agreed upon with the client
before the implementation of the audit strategy is the determination of the
A. timing of inventory observation procedures to be performed.
B. evidence to be gathered to provide a sufficient basis for the auditor's opinion.
C. procedures to be undertaken to discover litigation, claims, and assessments.
D. pending legal matters to be included in the inquiry of the client's attorney.
78. Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to various accounts?
A. Attribute sampling
B. Materiality
C. The reliability of information
D. Management fraud
79. With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
A. An engagement proposed after the fiscal year ends should not be accepted.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of the specific audit procedures that
will be performed.
D. It is an acceptable practice to carry out substantial parts of the examination at interim
dates.
80. Which of the following is not a consideration in the development of audit programs?
A. Internal control over the recording of plant asset additions and repairs and maintenance
expenditures is found to be weak.
B. The client constructed a major addition to its central manufacturing facility during the
year under audit.
C. The client is a private university located in Southern Philippines.
D. The members of the board of directors are elected by the stockholders during the
annual meeting.
82. The principal reason for developing a written audit program is to help assure that the
A. audit work is properly supervised.
B. audit work is properly planned and documented.
C. audit report contains only significant findings.
D. work of different auditors is properly coordinated.
86. During the review of the client‟s system of internal control, the auditor observes the client
employees as they apply the operating controls in order to
A. prepare a flowchart.
B. update information contained in the organization and procedure manuals.
C. corroborate the information obtained during the initial review of the system.
D. determine the extent of compliance with quality control standards.
87. An auditor‟s flowchart of a client‟s internal controls is a diagram depicting the auditor‟s
A. understanding of the internal controls.
B. program for tests of controls.
C. documentation of consideration of internal controls.
D. understanding of the types of irregularities that are probable.
88. Which of the following statements regarding the auditor‟s documentation of the client‟s
internal control structure is correct?
A. Documentation must include flow charts.
B. Documentation must include procedural write-ups.
C. No documentation is necessary although it is desirable.
D. No one particular form of documentation is necessary, and the extent of documentation
may vary.
89. Which of the following is the auditor‟s purpose of further testing the internal control
procedures?
A. Provide a basis for reducing the assessed level of control risk.
B. Reduce the risk that error or fraud that has not been prevented or detected by the
internal control system is not detected by the independent audit.
C. Provide assurance that transactions are executed in accordance with management's
authorization and access to assets is limited by a segregation of functions.
D. Provide assurance that transactions are recorded as necessary to permit the preparation
of the financial statements in conformity with PFRS.
90. Tests of controls are concerned primarily with each of the following questions except:
A. How were the controls applied?
B. Why were the controls applied?
C. Were the necessary controls consistently performed?
D. By whom were the controls applied?
91. The objective of tests of details of transactions that are being performed as tests of controls
procedures is to
A. monitor the design and use of entity documents such as pre-numbered shipping form.
B. determine whether controls have been placed in operation.
C. detect material misstatements in the account balances in the financial statements.
D. evaluate whether controls operate effectively.
92. Which of the following is ordinarily considered a test of internal control procedures?
A. Send confirmation letters to banks.
B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliation of bank accounts as of the balance sheet date.
93. Auditors can use several types of audit procedures to test controls. Which of the following
type of audit procedures is least likely to be used during tests of controls?
A. Physical examination of assets
B. Inquiries of client personnel
C. Examination of documents, records, and reports
D. Observation of control-related activities.
95. Which of the following types of evidence will be gathered in order to test internal controls?
A. Confirmations of accounts receivable with customers.
B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.
97. A procedure that would most likely be used by an auditor in performing tests of control
regarding segregation of functions on which no audit trail is available:
A. inspection.
B. observation.
C. reprocessing.
D. reconciliation.
98. The primary purpose of performing further control tests is to provide
A. a basis for reducing the assessed level of control risk below the maximum level.
B. a basis for understanding the flow of transactions through the accounting system.
C. assurance that transactions are properly recorded.
D. all accounting control procedures leave visible evidence.
99. Which of the following procedures most likely would be included as part of an auditor's
tests of control procedures?
A. Inspection
B. Reconciliation
C. Confirmation
D. Analytical procedures
103. A distinction must be made between general audit objectives and specific audit objectives
for each account balance. Which of the following is an incorrect statement?
A. The general audit objectives are applicable to every account balance on the
financial statements.
B. The specific audit objectives are applicable to every account balance on the financial
statements.
C. The general audit objectives are tailored to the engagement.
D. The specific audit objectives are tailored to the engagement.
104. Which of the following “general transaction-related audit objectives” is not part of the
valuation or allocation assertion?
A. Completeness
B. Accuracy
C. Classification
D. Timing
105. Only three of the following management assertions are associated with transaction-related
audit objectives. Which one of the following is not?
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure
107. The detail tie-in objective is not concerned that the details in the account balance
A. agree with related subsidiary ledger accounts.
B. are properly disclosed, in accordance with PFRS.
C. foot to the total in the account balance.
D. agree with the total in the general ledger.
109. If a long-term note receivable is included in the account receivable listing, there is a
violation of the
A. existence objective.
B. completeness objective.
C. classification objective.
D. timing objective.
110. After the general objectives are understood, specific objectives for each account balance on
the financial statements can be developed. Which of the following statements is true?
A. There should be at least one specific objective for each relevant general objective.
B. There will be only one specific objective for each relevant general objective.
C. There will be many specific objectives developed for each relevant general objective.
D. There must be one specific objective for each general objective.
111. Which of the following is not a proper matching of auditor‟s objective with management‟s
assertion?
A. Validity matches with existence or occurrence
B. Completeness matches with completeness
C. Ownership matches with rights and obligations
D. Classification matches with presentation/disclosure
112. An audit process is a well-defined methodology for organizing an audit to ensure that
A. the evidence gathered is both sufficient and competent.
B. all appropriate audit objectives are specified.
C. all appropriate audit objectives are met.
D. All of the responses are correct
114. Auditing standards require the auditor to accumulate sufficient competent evidence to
support the opinion issued. Because of the nature of audit evidence, it is
A. unlikely that the auditor will be completely convinced that the opinion is correct.
B. likely that the auditor will be completely convinced that the opinion is correct.
C. unlikely that the auditor will arrive at a conclusion.
D. likely that the auditor would change his/her mind about the opinion if he/she takes the
time to gather additional evidence.
115. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
A. The audit program
B. The auditor's judgment
C. Philippine Standards on Auditing
D. The auditor's working papers
116. In the final analysis, the amount and kinds of evidential matter that are required to support
the auditor‟s opinion should be determined by
A. the audit committee.
B. auditor‟s judgment.
C. professional standards.
D. standards of auditing.
117. To adequately plan the extent of the audit evidence to gather, the generally accepted
auditing standards require the auditor to gain an understanding of
A. the internal control structure.
B. client‟s organization charts.
C. client‟s procedural manuals.
D. All of these
118. When unable to obtain sufficient competent evidential matter to determine whether certain
client management‟s acts are non-compliance to laws and regulations, the auditor would
most likely issue
A. an unqualified opinion with a separate explanatory paragraph.
B. either a qualified opinion or an adverse opinion.
C. either a disclaimer of opinion or a qualified opinion.
D. either an adverse opinion or a disclaimer of opinion.
120. Two overriding considerations that affect an auditor‟s judgment in accumulating evidence
are:
121. Most of the independent auditor's work in formulating an opinion on the financial
statements consists of
A. studying and evaluating internal control.
B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorded accountability with assets.
122. There are four subcategories of decisions that the auditors must make in accumulating audit
evidence. Which of the following is not one of those subcategories?
A. Audit procedures to be used
B. Reasons for deciding not to test controls
C. Sample size
D. Timing of the audit procedures
123. Evidential matter supporting the financial statements consists of the underlying accounting
data and all corroborating information available to the auditor. Which of the following is an
example of corroborating information?
A. Minutes of meetings of the board of directors
B. General and subsidiary ledgers
C. Accounting manuals
D. Worksheets supporting cost allocations
124. Which of the following is not one of the major phases in anaudit process?
A. Plan and design an audit approach
B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made in the financial statements
D. Complete the audit and issue the report
126. In making decisions about evidence for a given audit, the auditor‟s goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being
verified, and to do so
A. no matter what the cost involved in obtaining such evidence.
B. only if the cost is reasonable.
C. at the lowest possible total cost.
D. at any cost because the costs are billed to the client.
129. Which of the following procedures would provide the auditor the most reliable audit
evidence?
A. Inquiries of the client‟s internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department.
C. Analytical procedures performed by the auditor on the entity‟s trial balance.
D. Inspection of bank statements obtained directly from the client‟s financial institution.
130. The most reliable forms of documentary evidence are those documents that are
A. prenumbered.
B. easily duplicated.
C. internally generated.
D. authorized by a responsible official.
131. You have been assigned to audit the maintenance department of an organization. Which of
the following is likely to produce the least reliable audit evidence?
A. Notes on discussions with mechanics in the maintenance operation.
B. A schedule comparing actual maintenance expenses with budgeted expenses and those
of the prior period and disclosing important differences.
C. A narrative covering review of user reports on maintenance service.
D. An analysis of changes in certain maintenance department ratios.
132. Before applying substantive tests to the details of asset accounts at an interim date, an
auditor should assess
A. control risk at below the maximum level.
B. inherent risk at the maximum level.
C. the difficulty in controlling the incremental audit risk.
D. materiality for the accounts tested as insignificant.
133. Before applying principal substantive tests to the details of accounts at an interim date, an
auditor should
A. assess control risk as below the maximum for the assertions embodied in the accounts
selected for interim testing.
B. determine that the accounts selected for interim testing are not material to the financial
statements taken as a whole.
C. consider whether the amounts of the year-end balances selected for interim testing are
reasonably predictable.
D. obtain written representations from management that all financial records and related
data will be made available.
135. Which of the following best explains the difference between audit objectives and audit
procedures?
A. Audit procedures establish broad general goals; audit objectives specify the detailed
work to be performed.
B. Audit objectives are tailor-made for each assignment; audit procedures are generic in
application.
C. Audit objectives define specific desired accomplishments; audit procedures provide the
means of achieving audit objectives.
D. Audit procedures and audit objectives are essentially the same.
136. In gathering audit evidence in the performance of substantive tests, the auditor
A. should use the test month approach.
B. relies on persuasive rather than convincing evidence in the majority of cases.
C. would consider the client‟s documentary evidence more competent than evidence
gathered from observation and physical inspection.
D. would express an adverse opinion if he has substantial doubt as to any significant
assertion.
137. The auditor will not ordinarily initiate discussion with the audit committee concerning the
A. extent to which the work of internal auditors will affect the scope of the examination.
B. extent to which a change in the company‟s organization will influence the scope of the
examination.
C. details of potential problems that the auditor believes might cause a qualified opinion.
D. details of the procedures that the auditor intends to apply.
139. To test for unsupported entries in the ledger, the direction of audit testing should be from
the
A. ledger entries.
B. journal entries.
C. externally generated documents.
D. original source documents.
141. Tracing from source documents to journals most directly addresses which financial
statement assertion?
A. Valuation
B. Completeness
C. Existence
D. Rights
142. An auditor is examining the detailed debit and credit entries in an account. The auditor is
most likely performing
A. analytical procedures.
B. tests of details of balances.
C. tests of details of transactions.
D. tests of controls.
143. Choices about audit evidence are influenced by all of the following except:
A. The auditor‟s understanding of the business and industry
B. Assessment of inherent and control risk
C. Comparisons of the auditor‟s expectation of the financial statements with the client‟s
books and records
D. Decisions about immaterial risk factors
144. The auditor is performing substantive tests several months before the end of the year. This
most likely means that
A. inherent risk is set at moderate to high.
B. detection risk is set at moderate to high.
C. control risk is set at maximum.
D. detection risk is set at low to very low.
145. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. supporting evidence to the accounting records.
146. WB Industries has significant information that is transmitted, processed, maintained, and
accessed electronically. The auditor has concluded that it is not possible to reduce
detection risk to an acceptable level by performing only substantive tests for a number of
financial statement assertions. The auditor‟s alternative strategy is to
A. increase the acceptable audit risk.
B. focus audit tests on other assertions for which substantive tests prove to be effective.
C. require management to change its information system to provide appropriate evidence.
D. perform tests of controls to gather evidential matter to be used as basis of assessing
control risk related to those assertions.
147. The decision on the part of the auditor to perform substantive tests during the interim
period will be based upon
A. audit risk control and cost effectiveness.
B. the approach followed in the past.
C. the auditor‟s time convenience.
D. the cooperation extended by the client staff.
148. Choose the best illustration of objective audit evidence from the following:
A. The paid invoice file containing invoices matched with receiving reports and purchase
orders.
B. Management's assertion that payment procedure requires matching of invoice with
receiving report and purchase order.
C. Clerical staff assurances that management policy regarding payment of invoices--
matching of invoice with receiving report and purchase order--is always followed.
D. The treasurer's statement of not remembering any exceptions in which an invoice was
submitted for payment that is not accompanied by a covering receiving report and
purchase order.
149. Which of the following audit procedures best supports the valuation objective?
A. Performing a lower of cost or market test of the client's inventories
B. Reviewing a contingent liability disclosure for proper wording
C. Searching for unrecorded liabilities
D. Observing the client's year-end physical inventory taking
150. Which of the following is not an appropriate auditing procedure supporting the fairness of
financial-statement presentation?
A. Inspecting plant asset additions for existence
B. Recalculating accrued interest on notes payable
C. Examining invoices in support of legal fees recorded during the fiscal year
D. Reviewing the client's production quality control program
152. The auditor would unlikely perform early substantive testing of account balances when:
A. A number of significant deviations from control policies and procedures were detected
during tests of controls.
B. Due to economic factors, the fourth quarter activity this year is expected to be
somewhat sluggish.
C. The client uses a natural business year.
D. The taking of the client‟s inventory is performed at an early date.
153. As the acceptable level of detection risk decreases, an auditor may change the
A. timing of substantive tests by performing them at an interim date rather than at year-
end.
B. nature of substantive tests from a less effective to a more effective procedure.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. assessed level of inherent risk to a higher amount.
154. The auditor is concerned that a client usually fails to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to
A. select a sample of duplicate sales invoices and trace each to related shipping
documents.
B. trace a sample of shipping documents to related duplicate sales invoices.
C. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
D. compare the total of the Schedule of Accounts Receivable with the balance of the
Accounts Receivable account in the general ledger.
156. Which of the following, when performed by the auditor, is not a test of mechanical
accuracy?
A. Extending sales invoices
B. Adding journals and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio
157. In the examination of the financial statements of Delta Company, the auditor determines
that in performing a test of internal control effectiveness, the rate of error in the sample does
not support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditor's notion of effectiveness. This
situation illustrates the risk of
A. underassessment of control risk.
B. overassessment of control risk.
C. incorrect rejection.
D. incorrect acceptance.
158. Several risks are inherent in the evaluation of audit evidence which has been obtained
through the use of statistical sampling. Which of the following risks is an example of the risk
of underassessment of control risk?
A. Failure to properly define the population to be sampled.
B. Failure to draw a random sample from the population.
C. Failure to accept the statistical hypothesis that internal control is unreliable when, in
fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not materially misstated
when the true book value is not materially misstated.
159. As a result of tests of controls, an auditor underassessed control risk and decreased
substantive testing. This underassessment occurred because the true occurrence rate in the
population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.
160. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a peso value?
A. Numerical sampling.
B. Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.
162. What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the confidence level at which a decision will be reached from the results of
the sample selected.
B. To determine the occurrence rate for a given characteristic in the population being
studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.
163. An auditor is applying PPS sampling. In determining the sample size, which of the
following is not necessary?
A. a reliability factor for overstatement errors
B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error
164. In a variable sampling plan, an auditor must generally consider each of the following
except
A. variation within the population.
B. acceptable risk of incorrect acceptance.
C. tolerable error.
D. Population.
165. When sampling methods are used in a substantive test, all of the following factors must
be considered in determining an optimum sample size, except the
A. variation in the population.
B. risk levels that the auditor is willing to accept.
C. deviation occurrence rate that the auditor expects to exist in the sample.
D. tolerable misstatement.
166. PPS sampling is most appropriate when the auditor
A. anticipates understatement errors.
B. anticipates overstatement errors.
C. expects no errors.
D. has assessed control risk at the maximum.
167. The mean-per-unit estimation method calculates the estimated total audited value of a
population of accounts receivable as:
A. A summation of the total individual accounts values in the population.
B. The sample mean audited value multiplied by the number of items in the population.
C. The estimated total audited value of the population multiplied by the number of items
in the sample.
D. The summation of the sample multiplied by the number of discrete samples in the
population.
168. What is the best description of "tolerable misstatement" for mean-per-unit estimation?
A. The maximum misstatement that may exist without causing an account to be materially
misstated.
B. The "bounds" around the sample mean that we would expect the value to fall within to
be correct.
C. The "projected" misstatement in the population based upon the sample chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which the book value
may exceed that sample mean without being materially misstated.
169. When are the ratio estimation and difference estimation techniques most likely to be
preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all provide similar
results.
B. When differences between book and audited values are infrequent.
C. When differences between book and audited values are frequent.
D. When differences between book and projected misstatement is estimated to be small.
171. Probability-proportional-to-size sampling will result in what type of sample items being
selected?
A. Highly representative of the population because it is wholly randomized.
B. A higher proportion of small value items then large value items because of the
sampling interval used.
C. A higher proportion of large value items than small value items because of the
sampling interval used.
D. A biased sample means that may not be representative of the population.
172. While performing a substantive test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
A. alpha risk.
B. assessing control risk too low.
C. beta risk.
D. assessing control risk too high.
174. Sample results support the conclusion that a recorded account balance is materially
misstated but, unknown to the auditor, the account is not misstated, suggesting the risk of
A. incorrect rejection.
B. assessing control risk too high.
C. incorrect acceptance.
D. assessing control risk too low.
175. Which of the following business functions is associated with the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.
176. Which of the following is not a common activity in the revenue/receipt cycle?
A. Order entry
B. Receiving
C. Inventory control
D. cash collection
178. Which of the following is an appropriate audit procedure to test cancelled checks for
authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who are authorized by
the board.
C. Examine a representative sample of signed checks and trace their signatures to the
specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.
179. Which of the following is not likely a source of information about the accounting system in
the revenue area?
A. Direct inquiry of customers.
B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.
181. Which of the following control procedures could prevent or detect errors or frauds arising
from shipments made to unauthorized parties?
A. Document policies and procedures for scheduling the shipments of goods.
B. Establish procedures for reviewing and approving the prices and sales terms before
sale.
C. Prenumber the bills of lading and assure that the related billings are made on a
periodic basis.
D. Prepare and periodically update the lists of authorized customers.
182. Which of the following control procedures would most likely assure that access to
shipping, billing, inventory control, and accounting records is restricted to personnel
authorized by management?
A. Segregate the responsibilities for authorization, execution, and recording, and
prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and require a daily
reconciliation of cash receipts records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and supporting
documentation.
D. Periodically substantiate and evaluate the recorded account balances.
183. An entity has implemented a control procedure which requires that authorized personnel
reconcile the total of individual customer accounts receivable with control totals. This
control relates to which of the following control objectives?
A. Sales, cash receipts, and related transactions should be recorded at the correct
amounts, in the proper period, and should be properly classified.
B. Recorded accounts receivable balances should reflect underlying transactions and
events.
C. Billings, collections, and related adjustments transactions should be posted accurately
to individual customer accounts.
D. Access to cash and cash-related records should be restricted to personnel authorized
by management.
184. Which of the following internal control procedures most likely would deter lapping of
collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with
dates of daily cash summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor who is
independent of credit approval.
C. Segregation of duties between receiving cash and posting collections to the accounts
receivable ledger.
D. Supervisor‟s comparison of the daily cash summary with the sum of the cash receipts
journal entries.
185. What sequence of steps does an auditor undertake when identifying control procedures that
are potentially reliable in assessing control risk below the maximum?
A. Consider the errors or frauds that might occur, determine control procedures, identify
control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or frauds
that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur, determine
control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or frauds
that might occur, and identify control objectives.
186. Assuming cash receipts from credit sales have been misappropriated, which of the
following is likely to conceal the misappropriation and unlikely to be detected?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.
187. Which of the following is most likely to provide management with incentives to overstate
earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.
188. Under which of the following circumstances does management have some discretion in
timing the recognition of revenue?
A. The timing of revenue is not reasonably determinable and the earnings process is not
complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm‟s length.
189. After preparing a flowchart of internal control for sales and cash receipts transactions and
evaluating the design of the system, the auditor would perform tests of controls on all
control procedures
A. That are documented in the flowchart.
B. that are considered to be deficiencies that might allow errors to enter the accounting
system.
C. that are considered to be strengths that the auditor plans to rely on in assessing control
risk.
D. that would help in preventing irregularities.
190. Which of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.
191. Which of the following is not a universal rule for achieving control over cash?
A. Separate the cash-handling and record-keeping functions.
B. Decentralize the receiving of cash as much as possible.
C. Deposit each day‟s cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle cash.
193. An auditor who examines check disbursements discovers a missing check number. Upon
inquiry to the person responsible for disbursements and reconciliation of the cash account,
he is told that the check number is missing because the check was voided. What is the
auditor's next step?
A. Prepare a bank transfer schedule to identify the check.
B. Examine the bank confirmation to determine whether the check cleared.
C. Since the person responsible for disbursements also reconciles the account, no
additional procedures are necessary.
D. Examine the voided checks file to determine whether the check is in the file.
194. Of the following, which procedure or document is most effective for detecting kiting?
A. A bank cut-off statement.
B. A bank statement.
C. A bank kiting statement.
D. Confirmation of bank balance.
195. Which of the following is confirmed on the standard form used for cash balances at
financial institution?
A. Factored accounts receivable.
B. Loss contingencies.
C. Loans payable.
D. Safe deposit boxes controlled by the entity.
196. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
A. theft.
B. irregular endorsement.
C. substitution.
D. deposits in transit.
197. Which of the following is not a primary objective of the auditor in the tests of accounts
receivable?
A. Determining the approximate realizable value.
B. Determining the adequacy of internal control.
C. Establishing the validity of the receivables.
D. Determining the approximate time of collectibility of the receivables.
198. The negative form of accounts receivable confirmation request is particularly useful except
when
A. control procedures surrounding accounts receivable are considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large.
201. The audit objective: “The accounts receivable balance represents gross claims on
customers and agrees with the sum of the accounts receivable subsidiary ledger” is derived
from the assertion of
A. presentation and disclosure.
B. completeness.
C. valuation or allocation.
D. existence.
204. An auditor is examining accounts receivable. Which one is the most competent type of
evidence in this situation?
A. Interviewing the personnel who records accounts receivable.
B. Verifying that postings to the receivable account from journals have been made.
C. Receipt by the auditor of a positive confirmation.
D. No response received for a request for a negative confirmation.
205. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
A. a majority of recipients usually lack the willingness to respond objectively.
B. some recipients may report incorrect balances that require extensive follow-up.
C. the auditor can not infer that all nonrespondents have verified their account
information.
D. negative confirmations do not produce evidential matter that is statistically
quantifiable.
206. Although most substantive testing is performed during the final audit, some substantive
tests may be done during the interim period. Which of the following statements
concerning the timing of substantive tests is true?
A. When internal control is weak, extensive substantive testing should be performed
during the interim audit.
B. Substantive testing should be performed during the interim audit only under conditions
of excellent internal control.
C. As a general rule, the auditor performs substantive tests of balances as of the balance
sheet date and tests of transactions during the interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts receivable as of a point
in time at least one month prior to the client's fiscal year-end.
207. Before applying principal substantive tests to the details of asset and liability accounts at
an interim date, the auditor should
A. assess the difficulty in controlling incremental audit risk.
B. investigate significant fluctuations that have occurred in the asset and liability
accounts since the previous balance sheet date.
C. select only those accounts which can effectively be sampled during year-end audit
work.
D. consider the control tests that must be applied at balance sheet date to extend the audit
conclusions reached at the interim date.
209. In the processing of accounts receivable confirmations, the auditor would not normally be
expected to:
A. reconcile the information to the corresponding customer‟s account.
B. personally deposit the requests in the mail.
C. include his own return address envelope.
D. personally prepare the confirmation letter.
210. The auditor should ordinarily mail confirmation requests to all banks with which the client
has conducted any business during the year, regardless of the year-end balance, since
A. the confirmation form also seeks information about indebtedness to the bank.
B. this procedure will detect kiting activities which would otherwise not be detected.
C. the mailing of confirmation forms to all the client‟s depository banks is required by
Philippine standards on auditing.
D. this procedure relieves the auditor of any responsibility with respect to non-detection
of forged checks.
211. An analysis of the aged accounts receivables is most directly related to which substantive
test objective?
A. Existence and occurrence.
B. Presentation and disclosure.
C. Rights and obligations.
D. Valuation.
212. The tests of balances to evaluate the adequacy of the allowance for uncollectible accounts
do not involve which of the following?
A. Considering the evidence concerning the collectibility of past due amounts.
B. Testing the aging of the amounts shown in the aging categories on the aged trial
balance.
C. Considering the evidence concerning the collectibility of current amounts.
D. Assessing the reasonableness of the percentages used to compute the allowance
component required for each aging category and the adequacy of the overall
allowance.
213. When scheduling audit work, the auditors are most likely to confirm accounts receivable
balances at an interim date if:
A. negative confirmations are being used.
B. internal control is weak.
C. internal control is strong.
D. there is a simultaneous examination of cash and accounts payable.
214. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients actually receive them.
C. The recipients are likely to feel that in reality the confirmation is a subtle request for
payment.
D. The inference drawn from receiving no reply may not be correct.
215. Which of the following procedures least likely helps the auditors to assess the adequacy of
management's accounting estimate of the allowance for doubtful accounts?
A. Investigate confirmation exceptions for any indication of amounts in dispute.
B. Review the accounts which have been written off as uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful accounts.
216. Which of the following is a proper alternative audit procedure for no responses to positive
accounts receivable confirmation requests?
A. Examination of subsequent cash receipts in payment of the receivable.
B. Mailing of negative confirmation requests to nonrespondents.
C. Expansion of the sample by the number of nonrespondents.
D. Reduction of accounts receivable by the amount of the no responses.
217. Which of the following might be detected by an auditor's review of the client's sales cut-
off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year end accounts receivable.
D. Inflated sales for the year.
218. During the process of confirming receivables as of December 31, 2009, a positive
confirmation was returned indicating that the "balance owed as of December 31 was paid
by a customer on January 9, 2010." The auditor would most likely
A. determine whether there were any changes in the account between January 1 and
January 9, 2010.
B. determine whether a customary trade discount was taken by the customer.
C. reconfirm the zero balance as of January 10, 2010.
D. verify that the amount was received.
219. Which of the following analytical audit findings would most likely indicate a possible
problem?
A. A material decrease in the receivables turnover.
B. A material increase in inventory turnover.
C. A material decrease in days' sales outstanding.
D. A material increase in the acid test ratio.
220. When the objective of the auditor is to evaluate the appropriateness of adjustments to sales,
the best available evidence would normally be
A. oral evidence obtained by discussing adjustment-related procedures with controller
personnel.
B. analytical evidence obtained by comparing sales adjustments to gross sales for a
period of time.
C. physical evidence obtained by inspection of goods returned for credit.
D. documentary evidence obtained by inspecting documents supporting entries to
adjustment accounts.
221. Two types of accounts receivable confirmation requests are used in practice - positive and
negative. Negative confirmations may be used
A. when internal control over sales and accounts receivable is weak.
B. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a large number of small
balances are involved.
C. only when internal control over sales and accounts receivable is strong.
D. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a small number of large
balances are involved.
222. An auditor has found many new assets on the plant floor, which coincides with an increase
in the equipment subsidiary ledger. However, the auditor has noticed that lease payments
are being made to an equipment leasing company. The auditor should primarily be
concerned with which financial statement assertion?
A. Rights and obligations.
B. Relevance.
C. Clerical accuracy.
D. Completeness.
223. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. purchase requisitions.
b. receiving reports.
c. purchase orders.
d. vendor payments.
224. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff
test to obtain evidence that
a. all goods purchased before year end are received before the physical inventory count.
b. no goods held on consignment for customers are included in the inventory balance.
c. no goods observed during the physical count are pledged or sold.
d. all goods owned at year end are included in the inventory balance.
225. A client's physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the result of the failure to record:
A. sales.
B. sales discounts.
C. purchases.
D. purchase returns.
226. Which of the following audit procedures is not appropriate for addressing the assertion of
valuation?
A. verifying accounts payable trial balance
B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures.
227. When there are few property and equipment transactions during the year, the continuing
auditor usually makes a
a. complete review of the related internal controls and assesses control risk relative to
them.
b. complete review of the related internal controls and performs analytical review tests to
verify current year additions to property and equipment.
c. preliminary review of the related internal controls and performs a thorough examination
of the balances at the beginning of the year.
d. preliminary review of the related internal controls and performs extensive tests of
current year property and equipment transactions.
228. In analyzing the plant assets account, why is the examination of repairs and maintenance
records important?
A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.
229. In examining the miscellaneous revenue account, an auditor discovers income from plant
assets. What should be a primary audit concern?
A. That such assets have been removed from the ledger of property owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell them.
D. That such assets have been replaced by comparable equipment.
230. Which of the following statements is not correct concerning intangible assets?
A. Auditors review the reasonableness of the client's amortization program.
B. A lack of physical substance.
C. Valuation is a primary audit concern.
D. Proper presentation as current assets.
231. When performing an audit of the property, plant, and equipment accounts, an auditor
should expect which of the following to be most likely to indicate a departure from
generally accepted accounting principles?
A. A gain was recognized when a new asset was acquired at a price lower than its listed
retail price.
B. Interest has been capitalized for self-constructed equipment.
C. Assets have been acquired from affiliated corporations with the related transactions
recorded and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.
232. The auditors are least likely to learn of retirements of equipment through which of the
following?
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.
233. A weakness in internal accounting control over the recording of retirements of equipment
may cause the auditor to
a. inspect certain items of equipment in the plant and trace those items to the accounting
records.
b. review the subsidiary ledger to ascertain whether depreciation was taken on each item
of equipment during the year.
c. trace additions to the "other assets" account to search for equipment that is still on hand
but no longer being used.
d. select certain items of equipment from the accounting records and locate them in the
plant.
234. When auditing inventories of raw materials, purchased parts, and/or merchandise
inventory, the auditor's most effective means for evaluating the valuation assertion is to
a. examine recent invoices from vendors, along with freight bills and compare with
client's unit costs, as adjusted for freight and discount.
b. compare purchases with prior year and with industry averages and account for
significant fluctuations.
c. trace quantities from tags or count sheets to final inventory listings.
d. scan inventory listings for large extended amounts, and trace related quantities to
auditor's copy of the inventory tag or listing.
235. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.
236. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
a. Repairs and maintenance expense.
b. Depreciation expense.
c. Gain on disposal of equipment.
d. Accounts payable.
237. The most significant audit step in substantiating additions to the office furniture account
balance is
a. examination of vendors' invoices and receiving reports for current year's acquisitions.
b. review of transactions near the balance sheet date for proper period cutoff.
c. calculation of ratio of depreciation expense to gross office equipment cost.
d. comparison to prior year's acquisitions.
238. Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year end if internal controls are adequate and
a. computerized records of perpetual inventory are maintained.
b. inventory is slow moving.
c. CBIS error reports are generated for missing pre-numbered inventory tickets.
d. obsolete inventory items are segregated and excluded.
239. Which of the following matters do auditors need not communicate to the audit committee
of a public company?
A. All critical accounting policies
B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted differences
D. Management letter comments
241. Which of the following factors would least influence an auditor‟s consideration of the
reliability of data for purposes of analytical procedures?
A. Whether the data are processed in a computer system or in a manual accounting system
B. Whether sources within the entity are independent of those who are responsible for the
amount being audited
C. Whether the data are subjected to audit testing in the current or prior year
D. Whether the data are obtained from independent sources outside the entity or from
sources within the entity
243. The auditor notices significant fluctuations in key elements of the company's financial
statements. If management is unable to provide an acceptable explanation, the auditor
should
A. consider the matter as a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting management fraud.
D. withdraw from the engagement.
244. Who is responsible for establishing the process and controls for preparing accounting
estimates?
E. The independent auditor
F. The internal auditor
G. The management
H. The controller
245. The auditor should adopt one or a combination of the following approaches in the audit of
an accounting estimate:
I. Review and test the process used by management to develop the estimate.
II. Use an independent estimate for comparison with what the management prepares.
III. Review subsequent events which confirm the estimate made.
I. Any of them
J. None of them
K. Either I or II
L. I only
246. Which of the following is not one of the primary approaches that the auditors may use
when evaluating the reasonableness of accounting estimates?
A. Review and test management's process of developing estimates.
B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be compared to management's
estimate.
D. Review subsequent events or transactions that have bearing on the estimate.
247. The auditor should normally concentrate on the key factors and assumptions used by
management including all of the following except those that are
M. insignificant to the accounting estimates.
N. sensitive to variations.
O. deviations from historical patterns.
P. susceptible to misstatements and biases.
248. In evaluating the assumptions on which the estimate is based, the auditor would need to
pay particular attention to assumptions which are
Q. reasonable in light of actual results in prior periods.
R. consistent with those used for other accounting estimates.
S. consistent with management‟s plans which appear appropriate.
T. subjective or susceptible to material misstatement.
250. Which of the following is not correct concerning a type I and a type II subsequent event?
A. A type I may require adjustment to financial statements while a type II would not.
B. Both a type I and a type II subsequent event may require note disclosure.
C. A type I is an event that occurred prior to year end, but was discovered after, while a
type II is one that arises subsequent to year end.
D. A type II event may require adjustment to the financial statements and a type I may
require note disclosure.
251. Which of the following statements that relates to subsequent events is inappropriately
described?
A. The auditor is expected to conduct a continuing review of all matters to which
previously applied procedures have provided satisfactory conclusions.
B. The auditor should consider the effect of subsequent events on the financial statements
and on the auditor‟s report.
C. The procedures to identify events that may require adjustment of, or disclosure in, the
financial statements would be performed as near as practicable to the date of the
auditor‟s report.
D. The procedures that are designed to obtain sufficiently appropriate audit evidence that
all events up to the date of the audit report that may require adjustment of, or disclosure
in, the financial statements are in addition to routine procedures which may be applied
to specific transactions.
252. The auditor's formal review of subsequent events normally should be extended through the
date of the
U. auditor's report.
V. next formal interim financial statements.
W. delivery of the audit report to the client.
X. mailing of the financial statements to the stockholders.
253. Which of the following appropriately describes the auditor‟s procedures with respect to
subsequent events?
A. The procedures to identity events that may require adjustments of, or disclosure in, the
financial statements would be performed as early as practicable.
B. Those routine procedures that are applied to specific transactions occurring after the
period ends are designed to obtain sufficient appropriate audit evidence that all events
up to the date of the audit report have been identified.
C. When a component is audited by another CPA, the auditor would consider the other
auditor‟s procedures regarding events after period end and the need to inform the other
auditor of the planned date of the audit report.
D. The auditor is responsible to inquire regarding the financial statements after the date of
the auditor‟s report.
254. Which of the following is least likely a procedure that would be performed by the auditor
near the auditor‟s report date?
A. Reading the minutes of the meetings of shareholders, the board of directors and audit
executive committees held throughout the audit year.
B. Reading the entity‟s latest available interim financial statements.
C. Inquiring of the client‟s legal counsel concerning litigations and claims.
D. Reviewing the procedures that management has established to ensure that subsequent
events are identified.
255. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after year-end.
B. Comparing the financial statements being reported on with those of the prior period.
C. Investigating personnel changes in the accounting department occurring after year-end.
D. Inquiring as to whether any unusual adjustments were made after year-end.
256. Which of the following should the auditor do the least when, after the financial statements
have been issued, the auditor becomes aware of a fact that existed at the date of the
auditor‟s report?
A. Consider whether the financial statements need revisions.
B. Discuss the matter with the management.
C. Take the action appropriate in the circumstance.
D. Inform those users who are currently relying on the financial statements about the fact
that has been discovered.
257. If subsequent to the issuance of the audited financial statements, the auditor becomes
aware of material misstatements in the financial statements that exist prior to the date of
the audit report, the auditor should
Y. notify the parties who are currently relying on the financial statements.
Z. discuss the matter with the management, and should take the action appropriate in the
circumstances.
AA. document such information in the audit plan for succeeding audit.
BB. submit a revised copies of the financial statements and audit report to the
stockholders.
258. If, after the audited financial statements have been issued, the auditor becomes aware that
some information included in the statements is materially misleading, he or she has
CC. no obligation to disclose it, assuming he or she acted in good faith and without
negligence in arriving at the audit opinion.
DD. an obligation to inform the board of directors of the misleading statements.
EE.an obligation to inform all users who are relying on the financial statements.
FF. an obligation to make certain that users who are relying on the financial statements are
informed.
259. When a new audit report is issued on financial statements because of subsequent discovery
of material misstatements on previously issued financial statements, the audit report should
include
A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the financial statements that
more extensively discusses the reason for the revision of the previously issued financial
statements.
260. When a fact, that existed before the date of the report is discovered and the management
revises the previously issued audited financial statements, the following are appropriate
except the:
A. new auditor‟s report should include an emphasis of a matter paragraph that refers to a
note to the financial statements that discusses the reason for the revision of the
financial statements and to the earlier report issued by the auditor.
B. new auditor‟s report should contain the original date.
C. performance of the procedures that are designed to obtain sufficient evidence as to
subsequent events would ordinarily be extended to the date the revised financial
statements are approved by the entity‟s management.
D. auditor is permitted to restrict the audit procedures regarding the financial statements to
the effects of the subsequent event that necessitated the revision.
261. The management should assess those events that may cast significant doubt about the
entity‟s ability to continue as a going concern for at least
A. two years from the balance sheet date.
B. two years from the date of the audit report.
C. one year from the balance sheet date.
D. one year from the date of the audit report.
262. Which of the following is incorrect about the management‟s responsibility to make an
assessment of an entity‟s ability to continue as a going concern?
A. In assessing whether the going concern assumption is appropriate, the management
takes into account all the available information for the foreseeable future, which should
be at least twelve months from the balance sheet date.
B. Though there is a history of profitable operations and a ready access to financial
resources, management must make its assessment with detailed analysis.
C. Management‟s assessment of the going concern assumption involves making a
judgment, at a particular point of time, about the future outcomes of events or
conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to continue as a going-
concern entity.
263. Which of the following least likely indicate a potential going-concern problem of an
entity?
A. Historical negative operating cash flows
B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity
264. Which of the following is correct about the auditor‟s responsibility with respect to the
entity‟s ability to continue as a going concern?
A. The auditor is responsible to make an assessment of the entity‟s ability to continue as a
going concern.
B. The auditor‟s responsibility is to consider the appropriateness of the management‟s use
of the going concern assumption in the preparation of the financial statements.
C. The auditor can predict future events or conditions that may cause an entity to
discontinue as a going concern.
D. The auditor may allow the management to make an assessment of its ability to continue
as a going concern if the management is believed to be objective in doing such an
assessment.
265. In evaluating the management‟s assessment of the entity‟s ability to continue as a going
concern, he should consider the following, except:
A. the independence of the management.
B. the process that the management has followed to make its assessment.
C. the assumptions on which the assessment is based and management‟s plan for future
action.
D. whether the assessment has taken into account all relevant information of which the
auditor is aware of as a result of the audit procedures.
266. Which of the following is an appropriate procedure to test for an indication of events or
conditions that cast significant doubt on the entity‟s ability to continue as a going concern
beyond the period assessed by management?
A. Inspection
B. Inquiry
C. Observing
D. Analysis
267. When events or conditions have been identified to cast significant doubt on the entity‟s
ability to continue as a going concern, the auditor should
A. consider reassessing control risk at the maximum.
B. consider the issuance of disclaimer of opinion due to scope limitation.
C. review management plans for future actions based on its going-concern assessments.
D. report the matter to the board of directors and stockholders.
268. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate that there could be substantial doubt about an
entity‟s ability to continue as a going concern?
A. Review compliance with the terms of debt agreements
B. Confirm accounts receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balances
270. The auditors are required to obtain a letter of representation from their clients. Which of
the following statements regarding the letter of representation is correct?
GG. A letter of representation should impress upon management its responsibility for
the assertions in the financial statements.
HH. A letter of representation should be signed by a company‟s financial officials and
attorneys.
II. A letter of representation documents the responses from the management to inquiries
about various aspects of the audit.
JJ. A letter of representation is a written statement from a non-independent party and as
such should not be regarded as a valid evidence.
272. Which of the following statements is true with respect to management representations?
A. Management representations are dated as of the balance sheet date.
B. Management representations may serve as a substitute for various types of substantive
procedures.
C. Management representations are signed by the auditor and delivered to the client's
officers.
D. Management representations are used to corroborate information obtained during the
audit.
273. When considering the use of management‟s written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations
A. complement, but do not replace, substantive tests designed to support the assertion.
B. constitute sufficient evidence to support the assertion when considered in combination
with a sufficiently low assessed level of control risk.
C. are not part of the evidence considered to support the assertion.
D. replace a low assessed level of control risk as evidence to support the assertion.
274. The auditor should obtain evidence that the management acknowledges its responsibility
for the fair presentation of the financial statements in accordance with PFRS, and has
approved the financial statements. The auditor can obtain evidence of management's
acknowledgment of such responsibility and approval
276. A written representation from a client‟s management that, among other matters,
acknowledges its responsibility for the fair presentation of the financial statements, should
normally be signed by the
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chair of the board of directors.
C. chair of the audit committee of the board of directors.
D. chief executive officer, the chair of the board of directors, and the client‟s lawyer.
277. If the management refuses to furnish certain written representations that the auditor
believes are essential, which of the following is appropriate?
A. The auditor can rely on oral evidence relating to the matter as a basis for an
unqualified opinion.
B. The client‟s refusal does not constitute a scope limitation that may lead to a
modification of the opinion.
C. The client‟s refusal may have an effect on the auditor‟s ability to rely on other
representations of the management.
D. The auditor should express an adverse opinion because of management‟s refusal.
278. For which of the following matters should an auditor obtain written management
representations?
A. Management‟s cost-benefit justifications for not correcting internal control
weaknesses.
B. Management‟s knowledge of future plans that may affect the price of the entity‟s
stock.
C. Management‟s compliance with contractual agreements that may affect the financial
statements.
D. Management‟s acknowledgment of its responsibility for employee‟s violations of
laws.
279. A written management representation letter is most likely to be an auditor‟s best source of
corroborative information of a client‟s intention to
A. terminate an employee pension plan.
B. make a public offering of its common stock.
C. settle an outstanding lawsuit for an amount less than the accrued loss contingency.
D. discontinue a line of business.
280. Which of the following matters would an auditor most likely include in a management
representation letter?
A. Communications with the audit committee concerning weaknesses in the internal
control structure.
B. The completeness and availability of minutes of stockholders‟ and directors‟ meetings.
C. Plans to acquire or merge with other entities in the subsequent year.
D. Management‟s acknowledgment of its responsibility for the detection of employee
fraud.
281. How are other reporting responsibilities addressed within the auditor‟s report?
a. They should be addressed in a separate section that follows the opinion paragraph.
b. They should be addressed within the introductory paragraph.
c. They should be addressed within the scope paragraph.
d. They should be addressed within the scope paragraph and separately described in a
separate paragraph.
283. Which of the following information is(are) required when an auditor‟s report is issued on
financial statements to be filed with the Securities and Exchange Commission?
A. 1, 2, 3, 4, 5
B. 2, 4, 5
C. 1, 3, 4, 5
D. 2, 3, 4, 5
286. How is the auditor‟s report on the financial statements that require final approval by
stockholders before such financial statements are issued publicly dated?
A. The auditor‟s report should be dated coinciding the date of approval of the financial
statements by the stockholders.
B. The auditor‟s report should be dated after the approval of the financial statements by
the stockholders.
C. The date of the auditor‟s report coincides the date of approval of the financial
statements by the board of directors.
D. The audit report should be dual dated, the first date coinciding the approval by the
board of directors and the second date to coincide with the approval by the
stockholders.
287. The auditor‟s address is indicated in the auditor‟s report by:
A. naming the location in the country where the auditor practices his profession.
B. including the complete mailing address of the auditor.
C. identifying the country from where the auditor had secured his professional license.
D. the auditor‟s address is omitted in the report.
288. Which of the following is ordinarily true of a modification of the audit report by adding an
emphasis of matter paragraph?
A. The modification by adding an emphasis of matter paragraph is an “except for”
qualification of opinion.
B. The emphasis of matter paragraph is a “subject to” qualification of opinion.
C. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor‟s
opinion is not qualified.
D. The emphasis of matter paragraph is presented before the opinion paragraph.
289. When additional language is added to the auditor's report without modifying the opinion,
the additional language should be included in:
A. the introductory paragraph.
B. the scope paragraph.
C. the opinion paragraph.
D. one or more additional paragraphs that follow the opinion paragraph.
292. An auditor concludes that there is substantial doubt about an entity‟s ability to continue
as a going concern for a reasonable period of time. If the entity‟s disclosures concerning this
matter are adequate, the audit report should include a(an)
293. Under certain circumstances, the CPA may wish to emphasize specific matters regarding
the financial statements even though he or she intends to express an unqualified opinion.
Normally, such an explanatory information should be included in
A. the introductory paragraph.
B. a separate paragraph following the opinion paragraph in the report.
C. the opinion paragraph.
D. A separate paragraph preceding the opinion paragraph.
294. Salmon Company‟s financial statements adequately disclose uncertainties that concern
future events, the outcome of which cannot reasonably be estimated. The auditor‟s report
should include a(an)
A. unqualified opinion
B. “except for” qualified opinion
C. “subject to” qualified opinion
D. adverse opinion
295. The paragraphs of the report which is modified for uncertainties are the same as the
standard unqualified report. The explanatory paragraph as a form of the modification to
describe the uncertainty is added as the
A. first paragraph
B. last paragraph
C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last
297. The audit report issued by Lozano and Co., CPAs, included the following paragraph that
followed the opinion paragraph:
Without qualifying our opinion we draw attention to Note 11 to the financial statements.
The Company is the defendant in a lawsuit alleging infringement of certain patent rights
...
298. In extreme cases such as situations involving multiple uncertainties that are significant to
the financial statements, the auditor
A. may consider to express a disclaimer of opinion
B. may qualify his opinion instead of issuing an unqualified opinion with emphasis of
matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a “subject to” opinion because the situations related to uncertainties
299. A client company has issues that cause substantial doubt regarding the entity's ability to
continue as a going concern. If this is the only major audit issue, which type of opinion will
the auditor usually refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion
300. Which of the following situations, the effect of which is significant, least likely require a
decision of whether to issue a qualified or adverse opinion?
A. Any disagreement with entity management regarding the acceptability of the
accounting policies selected by the management.
B. Limitation on the scope of the auditor‟s work.
C. Inadequate disclosures of financial information.
D. Unjustified changes in accounting policies.
301. The auditor may continue to express unqualified opinion though there are modifications
made in the audit report. Which of the following situations, would the auditor likely modify
his opinion?
A. The existence of multiple uncertainties that are adequately described in the notes to
financial statements.
B. The prior year‟s financial statements were audited by other CPAs.
C. An important subsidiary whose financial statements were included in the consolidated
financial statements were audited by other CPAs.
D. A substantial doubt about the client‟s ability to continue as a going concern that is
adequately disclosed in the financial statements.
302. In which of the following situations would qualified opinion be inappropriate?
A. Financial statements are materially misstated.
B. A doubt that is more than substantial about the ability of the company to continue as a
going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.
303. Which of the following is not a reason to issue a modified audit report with opinion other
than unqualified opinion?
A. The scope of the auditor‟s work is restricted by the client.
B. The amount of inventories at cost as presented in the balance sheet significantly
exceeded their market values.
C. Certain significant matter is omitted from either the financial statements or notes to
financial statements.
D. An adequately disclosed significant uncertainty, the resolution of which is dependent
upon future events and which may affect the financial statements.
304. Which of the following situations may likely require a modified audit report with modified
wordings or an emphasis of matter paragraph?
A. A significant uncertainty, not adequately disclosed in the financial statements.
B. An audit of inventory is restricted by the client. The auditor was satisfied about the
balance of the inventory by doing alternative audit procedures.
C. A change in the application of generally accepted accounting principle that is justified.
D. A less than substantial doubt regarding the ability of the entity to continue as a going
concern.
305. Which of the following circumstances may not result to a disclaimer of opinion?
A. A significant scope limitation in auditing the existence of inventories. The inventory
amount comprises 75 percent of the total assets of the client.
B. The auditor believes that there are multiple uncertainties that are significant to the
financial statements.
C. The accounts receivable of the client comprises 80 percent of the total assets. The
auditor was instructed by the client not to confirm account balances. The auditor,
however, was satisfied by the results of alternative audit procedures.
D. The auditor‟s wife owns very a few number of common shares of the client.
308. An explanatory paragraph may be added to the audit report while at the same time issuing
an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of the auditor.
B. there is an immaterial departure from GAAP to ensure fair presentation with the
agreement of the auditor.
C. the audit opinion is partly based on the work of another auditor.
D. the audit work has been significantly limited by management.
309. Under which of the following sets of circumstances might an auditor disclaim an opinion?
A. The financial statements contain a departure from PFRS, the effect of which is
material.
B. The principal auditor decides to make reference to the report of another auditor who
audited a subsidiary.
C. There has been a material change between periods in the method of the application of
accounting principles.
D. There were significant limitations on the scope of the audit.
310. If an auditor is engaged to audit a client‟s financial statements after the annual physical
inventory count was made and the accounting records are not sufficiently reliable to enable
the auditor to become satisfied as to the year-end inventory balances, the opinion to be
expressed is
A. either an “except for” qualified opinion or an adverse opinion.
B. either a disclaimer or opinion or an “except for” qualified opinion.
C. either an adverse opinion or disclaimer of opinion.
D. an unqualified opinion.
CPAR Reviewers
Auditing
Theory
1
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the
AASC’s engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
ASSURANCE ENGAGEMENTS
1. “Assurance engagement” means an agreement in which a particular expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against criteria.
2. “Subject matter information” refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject I performed by
the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
2
has performed the evaluation or measurement that is not available to the intended users in the
assurance report (direct reporting engagements)
3
ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS
1. The objective of a review of financial statements is to enable a practitioner to state whether, on
the basis of procedures which do not provide all the evidence that would be require in an audit,
anything has come to the practitioner’s attention that causes the practitioner to believe that the
financial statements are not prepared, in all material respects, in accordance with an identified
financial reporting framework (negative assurance)
2. A review comprises INQUIRY and ANALYTICAL PROCEDURES which are designed to review the
reliability of an assertion that is the responsibility of one party for use by another party.
3. A review does not ordinarily involve an assessment of accounting and internal control systems,
tests of records and of responses to inquiries by obtaining corroborating evidence through
inspection, observation, confirmation and computation, which are procedures ordinarily
performed during an audit.
4. The level of assurance provided in a review report is less that that given in an audit report.
SUMMARY
Nature of service Audit Review Agreed-upon Compilation
Procedures
Level of Assurance High, but not Moderate No assurance No assurance
Provided absolute assurance
assurance
Report provided Positive assurance Negative Factual findings of Identification of
on assertion(s) assurance on procedures information
(Audit Report) assertion(s) compiled
(Review Report) (Compilation
Report)
4
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance
that:
a. The firm and its personnel comply with professional standards and regulatory and
legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
It is in the interest of both client and auditor that the auditor sends an engagement
letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.
5
Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
The financial reporting framework adopted by management in
preparing the financial statements.
The scope of the audit, including reference to applicable
legislation, regulations or pronouncements of professional
bodies to which the auditor adheres.
The form of any reports or other communication of results of
the engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal controls system, there is an
unavoidable risk that even some material misstatement may
remain undiscovered.
Unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to change
the engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result
from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service originally
requested; or
c. A restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a
change in the engagement)
3. A change would not be considered reasonable if it appeared that the change relates
to information that is incorrect, incomplete or otherwise unsatisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor
would also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complies with the PSAs applicable to
the change engagement, the report issued would be that appropriate for the revised
terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original engagement,
except where the engagement is changed to undertake agreed-upon
procedures.
7. Where the terms of the engagement are changed, the auditor and the client should
agree in the new terms.
8. The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider
whether there is any obligation, contractual or otherwise, to report to other parties,
such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. The auditor should perform the following activities at the beginning of the current audit
engagement:
Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3. The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets
the scope, timing and direction of the audit, and guides the development of the more detailed
audit plan
5. The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
6. The audit plan is more detailed than the overall audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.
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Direction, Supervision and Review
1. The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work.
2. The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:
3. The auditor plans the nature, timing and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
1. The auditor may discuss elements of planning with those charged with governance and the entity’s
management.
2. Discussions with those charged with governance ordinarily include the overall audit strategy and
timing of the audit, including any limitations thereon, or any additional requirements.
3. When discussion of matters included in the overall audit strategy or audit plan occur, care is
required in order not to compromise the effectiveness of the audit.
The auditor should perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
2. Communicate with the previous auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1. The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risks of material misstatement of the financial
statements whether due to fraud or error, and sufficient to design and perform further audit
procedures.
2. The auditor should perform the following risk assessment procedures to obtain an understanding
of the entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b.) Nature of the entity, including the entity’s selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
d.) Measurement and review of the entity’s financial performance.
e.) Internal control.
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INTERNAL CONTROL
1. Internal control is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of the
entity’s objectives with regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
The control environment 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 in the entity.
The auditor should obtain an understanding of the entity’s risk assessment process, i.e., the entity’
process for identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks, and the results thereof.
The auditor should obtain an understanding of the information system, including the related
business processes, relevant to financial reporting, including the following areas:
The classes of transactions in the entity’s operations that is significant to the financial
statements.
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the financial statements.
The related accounting records, whether electronic or manual, supporting information, and
specific accounts in the financial statements, in respect of initiating, recording, processing
and reporting transactions.
How the information system captures events and conditions, other than classes of
transactions that are significant to the financial statements.
The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures.
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Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis
and taking the necessary corrective actions modified for changes in conditions.
1. The auditor should 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
disclosures.
2. The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material
misstatement of the financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the
financial statements.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 330
THE AUDITOR’S PROCEDURES IN REPONSE TO ASSESSED RISKS
Overall responses
1. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n
gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of further
audit procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
Timing refers to when audit procedures are performed or the period or date to which the audit
evidence applies.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditor’s risk assessment includes an expectation of the operating effectiveness
of controls; or
b. When the substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level
2. Tests of the operating effectiveness of controls are performed only on those controls that
the auditor has determined are suitably designed to prevent, or detect and correct, a
material misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
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2. The auditor’s substantive procedures should include the following audit procedures related to
the financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the
course of preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance with the applicable
financial reporting framework.
Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material misstatement at
the financial statement level and the nature, timing, and extent of the further
audit procedures;
The linkage of those procedures with the assessed risks at the assertion level;
and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained
in prior audits, the auditor should document the conclusions reached with regard to relying on
vcfsuch controls that were tested in a prior audit.
3. The auditor’s documentation should demonstrate that the financial statements agree or
reconcile with the underlying accounting records.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework, the auditor should assess whether
the aggregate of uncorrected misstatements that have been identified during the audit is
material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material, the
auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the
misstatements identified
5. If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to the
auditor’s report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. “Analytical procedures” means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entity’s financial
statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to a
predictable patter based on the entity’s experience, such as gross margin
percentages.
b. Between financial information and relevant no-financial information, such as payroll
costs to numbers and employees
4. The auditor should apply analytical procedures at the planning stage to assist in understanding
the business and in identifying areas of potential risk. Analytical procedures in planning the use
both financial and non-financial information.
5. The auditor should apply analytical procedures at or near the end of the audit when performing
an overall conclusion as to whether the financial statements as a whole are consistent with the
auditor’s knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. The presence of
these relationships provides audit evidence as to the completeness, accuracy and validity of the
data produced by the accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures depends on
the following factors:
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a. Materiality of the items involved
b. Other audit procedures directed toward the same audit objectives
c. Accuracy with which the expected results of analytical procedures can be predicted.
8. When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanations and appropriate corroborative
evidence.
9. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by:
a. Corroboration of management responses; and
b. Consideration of the need to apply other audit procedures based on the results of
such inquiries, if management is unable to provide an explanation or if the
explanation is not considered adequate.
PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and
transactions with such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements. However, an
audit cannot be expected to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entity’s internal control, the auditor should consider
the adequacy of control activities over the authorization and recording of related party
transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of related
parties; and
b. The adequacy of related party disclosures in the financial statements
7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties
and transactions with such parties or concludes that their disclosure in the financial statements
is not adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to
identify and assess the risks of material misstatement of the financial statements and to design
and perform further audit procedures.
2. The external auditor should perform an assessment of the internal audit function when internal
auditing is relevant to the external auditor’s risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
4. When planning to use the work of internal auditing, the external auditor will need to consider
internal auditing’s tentative plan for the period and discuss it as early a stage as possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and
extent of the external auditor’s procedures, it is desirable to agree in advance the timing of such
work, the extent of audit coverage, materiality levels and proposed methods of sample
selection, documentation of the work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate intervals
during the period.
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7. When the external auditor intends to use specific work of internal auditing, the external auditor
should evaluate and perform audit procedures on that work to confirm its adequacy for the
external auditor’s purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of
the scope of the work and related programs and whether the preliminary assessment of the
internal auditing remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of internal
auditing will depend on:
The external auditor’s judgment as to the risk of material misstatement of the
area concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work that
has been evaluated and the audit procedures performed on the internal auditor’s work.
PSA 620
USING THE WORK OF AN EXPERT
1. “Expert’ means a person or firm possessing special skill, knowledge and experience in a
particular filed other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter being
considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5. The risk that an expert’s objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the expert’s
work is adequate for the purposes of the audit. Audit evidence may be obtained through a
review of the terms of reference which are often set out in written instructions from the entity
to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the expert’s work
b. A general outline as to the specific matters the auditor expects the expert’s report
to cover
c. The intended use by the auditor of the expert’s work, including the possible
communication to third parties of the expert’s identity and extent f involvement
d. The extent of the expert’s access to appropriate records and files
e. Clarification of the expert’s relationship with the entity, if any.
f. Confidentiality of the entity’s information
g. Information regarding the assumptions and methods intended to be used by the
expert and their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the expert’s work as audit evidence
regarding the financial statement assertion being considered. This will involve assessment of
whether the substance of the expert’s findings is properly reflected in the financial statements
or supports the financial statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
c. Results of the expert’s work in the light of the auditor’s overall knowledge of the
business and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to establish
whether the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
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9. If the results of the expert’s work do not provide sufficient audit evidence or if the results are
not consistent with other audit evidence, the auditor should resolve the matter. This may
involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditor’s report
10. When issuing an unmodified auditor’s report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditor’s opinion
or a division of responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditor’s report, in
some circumstances it may be appropriate, in explaining the nature of the modification, to refer
to or describe the work o the expert (including the identity of the expert and the extent of the
expert’s involvement). In these circumstances, the auditor would obtain the permission of the
expert before making such a reference. If permission is refused and the auditor believes a
reference is necessary, the auditor may need to seek legal advice.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2. “Audit Evidence” is all the information used by the auditor in arriving at the conclusions on
which the opinion is based, and includes the information contained in the accounting records
underlying the financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and records
of electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts’ reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry,
observation, and inspection; and
Other information developed by, or available to, the auditor that permits the
auditor to reach conclusions through valid reasoning
17
5. When information produced by the entity is used by the auditor to perform audit procedures,
the auditor should obtain audit evidence about the accuracy and completeness of the
information
6. In forming an audit opinion, the auditor does not examine all the information available because
conclusions ordinarily can be reached by using sampling approaches and other means of
selecting items for testing.
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE - transactions and events that have been recorded have
occurred and pertain to the entity
2. COMPLETENESS - all transactions and events that should have been recorded
have been recorded.
3. ACCURACY - amounts and other data relating to recorded transactions and
events have been recorded appropriately
4. CUTOFF - transactions and events have been recorded in the correct
accounting period
5. CLASSIFICATION - transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE -assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS - the entity holds or controls the right to assets,
and liabilities are obligations of the entity
3. COMPLETENESS - all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. VALUATION AND ALLOCATION - assets, liabilities and equity interests are
included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded
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3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
PSA 501
AUDIT EVIDENCE – ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
2. If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date
and, when necessary, perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that the auditor need not make
reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the auditor
would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an expert’s assistance is needed.
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Accurate identification of the stage of completion of work in progress, of slow moving,
obsolete or damaged items and inventory by a third party, for example, on consignment.
Whether appropriate arrangements are made regarding the movement of inventory between
areas and the shipping and receipt of inventory before and after the cutoff date.
6. To obtain assurance that management’s procedures are adequately implemented the auditor
would observe employee’s procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of inventory
just prior to, during, and after the count so that the accounting for such movements can be
checked at a later date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.
9. When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct conformation from the third party as to the quantities and condition of inventory
held on behalf of the entity. Depending on the materiality of this inventory, the auditor would
consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditor’s report on the adequacy of third party’s accounting and internal
control systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts, or obtaining confirmation from other parties when such inventory has been pledged
as collateral.
1. The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.
2. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entity’s lawyers.
3. The letter, which should be prepared by management and sent by the auditor, should request the
lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer
will respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Management’s assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved.
A request that the lawyer confirms the reasonableness of management’s assessments and
provides the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entity’s lawyers,
this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of
opinion.
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Valuation and disclosure of long-term investments
1. When long-term investments are material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding their valuation and disclosure.
2. Audit procedures ordinarily include considering evidence as to whether the entity has the ability
to continue to hold the investments on a long-term basis and discussing with management
whether the entity will continue to hold the investments as long-term investments and obtaining
written representations to that effect.
3. Other procedures would ordinarily include considering related financial statements and other
information, such as market quotations, which provide an indication of value and comparing such
values to the carrying amount of the investments up to the date of the auditor’s report.
Segment information
1. When segment information is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable
financial reporting framework.
2. The auditor considers segment information in relation to the financial statements taken as a
whole, and is not ordinarily required to apply auditing procedures that would be necessary to
express an opinion on the segment information standing alone.
3. Audit procedures regarding segment information ordinarily consist of analytical procedures and
other audit test appropriate in the circumstances.
4. The auditor would discuss with management the methods used in determining segment
information, and consider whether such methods are likely to result in disclosure in accordance
with GAAP and test the application of such methods.
PSA 505
EXTERNAL CONFIRMATIONS
1. External confirmation is the process of obtaining and evaluating audit evidence through a direct
communication from a third party in response to a request for information about a particular item
affecting assertions made by management in the financial statements.
2. A positive external confirmation request asks the respondent to reply to the auditor in all cases
either by indicating the respondent’s agreement with the given information, or by asking the
respondent to fill in the information.
3. A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request.
4. Negative confirmation requests may be used to reduce the risk of material misstatement to an
acceptable level when:
The assessed risk of material misstatement is lower.
A large number of small balances are involved.
A substantial number of errors are not expected.
The auditor has no reason to believe that respondents will disregard these requests.
5. When performing confirmation procedures, the auditor should maintain control over the process
of selecting those to whom a request will be sent, the preparation and sending of confirmation
requests, and the responses to those requests.
6. The auditor should perform alternative procedures where no response is received to a positive
external confirmation request. The alternative audit procedures should be such as to provide the
evidence the evidence about the financial statement assertions that the confirmation request was
intended to provide.
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7. When the auditor forms a conclusion that the confirmation process and alternative procedures
have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should
undertake additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together
with the results from any other procedures performed, provide sufficient appropriate audit
evidence regarding the assertion being audited.
22
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FRAUD refers to an intentional act by one party or more individuals among management, those charged
with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal
advantage
Fraud involves:
Incentive or pressure to commit fraud
A perceived opportunity to act or to do so
Some rationalization of the act
Management fraud - fraud involving one or more members of management or those charged with
governance
Employee fraud - fraud involving only employees of the entity
(In either case, there may be collusion within the entity or with third parties outside of the entity)
2. MISAPPROPRIATION OF ASSETS
Involves the theft of an entity’s assets and is often perpetrated by employees in
relatively small and immaterial amounts
Can also involve management who are usually more able to disguise or conceal
misappropriations in ways that are difficult to detect
Often accompanied by false or misleading records or documents in order to conceal the
fact that the aspects are missing or have been pledged without proper authorization
Can be accompanied in a variety of ways including:
o Embezzling receipts
o Stealing physical assets or intellectual property
o Causing an entity to pay for the goods and services not received
o Using an entity’s assets for personal use
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Responsibilities of Those charged with Governance and of Management
1. The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and with management
2. It is important management, with the oversight of those charged with governance, place a
strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place,
and fraud deterrence, which could persuade in individuals not to commit fraud because of the
likelihood detection and punishment
3. It is the responsibility of those charged with governance of the entity to ensure , through
oversight of management, that the entity establishes and maintains internal control to provide
reasonable assurance with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable law and regulations
4. It is the responsibility of management, with oversight from those charged with governance, to
establish a control environment and maintain policies and procedures to assist in achieving the
objective ensuring, as far as possible, the orderly and efficient conduct of the entity’s business
3. The risk of the auditor not detecting a material misstatement resulting from management fraud
is greater than for employee fraud, because management is frequently in a position to directly
or indirectly manipulate accounting records and present fraudulent financial information
4. The subsequent discovery of a material misstatement of the financial statements resulting from
fraud does not, in and of itself, indicate a failure to comply with PSAs
24
Responses to the risks of material misstatement due to fraud
1. The auditor should determine overall responses to address he assessed risks of material
misstatement due to fraud at the financial statement level and should design and perform
further audit procedures whose nature, timing and extent are responsive to the assessed risks at
the assertion level
2. In determining overall responses to address the risks of material misstatement due to fraud at
the financial statement level the auditor should:
Consider the assignment and supervision of personnel
Consider the accounting policies used by the entity; and
Incorporate an element of unpredictability in the selection of the nature, timing
and extent of audit procedures
3. Audit procedures responsive to risks of material misstatement due to fraud at the assertion
level
The auditor’s responses may include changing the nature, timing, and extent of audit
procedures in the following ways:
a. The nature of audit procedures to be performed may need to be changed to obtain
audit evidence that is more reliable and relevant to obtain additional corroborative
information
b. The timing of substantive procedures may need to be modified. The auditor may
conclude that performing substantive testing at or near the period end better addresses
an assessed risk of material misstatement due to fraud
c. The extent of the procedures applied reflects the assessment of the risks of material
misstatement due to fraud. For example, increasing sample sizes or performing
analytical procedures at a more detailed level may be appropriate
4. To respond to the risk of management override of controls, the auditor should design and
perform audit procedures to:
a. Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements
b. Review accounting estimates for biases that could result to material misstatement due
to fraud
c. Obtain an understanding of the business rationale of significant transactions that the
auditor become aware of that are outside the normal course of the business for the
entity, or that otherwise appear to be unusual given the auditor’s understanding of the
entity and its environment
Management representations
The auditor should obtain written representations from management that:
a. It acknowledges its responsibility for the design and implementation of internal control to
prevent and detect fraud
b. It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
i. Management
ii. Employees who have significant roles in internal control
iii. Others where the fraud could have a material effect on the financial statements
and
d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected
fraud, affecting the entity’s financial statements communicated by the employees,
former employees, analysts, regulators or others
25
Communication with management and those charged with governance
1. If the auditor has identified a fraud or has obtained information that indicates that a fraud may
exist, the auditor should communicate these matters as soon as practicable to the appropriate
level of management
2. If the auditor has identified fraud involving management, employers who have significant roles
in internal control, or others where the fraud results in a material misstatement in the financial
statements, the auditor considers seeking legal advice to assist in the determination of the
appropriate course of action
3. If the integrity or honesty of management or those charged with governance is doubted, the
auditor considers seeking legal advice to assist in the determination of the appropriate course of
action
4. The auditor should make those charged with governance and management aware, as soon as
practicable, and at the appropriate level of responsibility, of material weaknesses in the design
or implementation of internal control to prevent and detect fraud which may have come to the
auditor’s attention
5. The auditor’s professional duty to maintain the confidentiality of client information may
preclude reporting fraud to a party outside the client the entity. However, the duty of
confidentiality may be overridden by regulatory requirements
Documentation
1. The documentation of the auditor’s understanding of the entity and its environment and the
auditor’s assessment of the risks of material misstatement should include:
a. The significant decisions reached during the discussion among the engagement
team regarding the susceptibility of the entity’s financial statements to material
misstatement due to fraud
b. The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level
2. The documentation of the auditor’s responses to the assessed risks of material misstatement
should include:
a. The overall responses to the assessed risks of material misstatement due to fraud at
the financial statement level and the nature, timing and extent of audit procedure,
and the linkage of those procedures with the assessed risks of material
misstatement due to fraud at the assertion level
b. The results of the audit procedures, including those designed to address the risk of
management override of controls
3. The auditor should document the communications about fraud made to management, those
charged with governance, regulators and others
4. When the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the circumstances
of the engagement, the auditor should document the reasons for that conclusion
26
PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
1. “Noncompliance” as used in PSA 250 refers to acts of omission or commission by he entity being
audited, either intentional and unintentional, which are contrary to the prevailing laws and
regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of
the entity) by the entity’s management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and regulation
may materially affect the financial statements
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDIT SAMPLING
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items with an
account balance or class of transactions
2. Sampling may be statistical or nonstatistical.
I. Statistical sampling means any approach t sampling that has the following
characteristics:
a. Random selection of a sample
b. Use of probability theory to evaluate sample results
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In
aids an auditor I forming conclusions about one r more characteristics or either a particular class of
transactions or a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entity’s rate of deviation (also called rate of occurrence) from a
prescribed control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
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SAMPLING RISK
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit
procedures
2. The confidence level (also called reliability level) is the mathematical complement of the
applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level
when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is lower
than it actually is
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher than
actually is
It affects audit efficiency as it would lead to additional work to establish
that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
The risk that the auditor would conclude that a material error exists
when in fact it does
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists
when in fact it does not
It affects audit effectiveness as it would lead to additional work to
establish that initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related
to the size of the sample. For example, most audit evidence is persuasive rather than conclusive, the
auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to
recognize an error.
29
The lower the rate of deviation that the auditor is willing to accept, the larger the
sample size needs to be
d. Haphazard selection
The auditor selects a sample without following a structured technique
It is not appropriate when using statistical sampling
e. Stratification
This involves subdividing the population into subpopulations or strata, i.e., a group of
sampling units which have similar characteristics (often monetary value)
The strata must be explicitly defined so that each sampling unit can belong to only one
stratum
This method enables the auditor to direct his efforts towards the items he considers
would potentially contain the greater monetary error
30
The maximum deviation rate is based on the sample size and the number of
deviations discovered. There are standard tables that yield maximum population
deviation rates at specified risks of assessing control risk too low
Allowance for sampling risk = Maximum Deviation Rate – Sample Deviation Rate
c. Considering qualitative information
The auditor considers each of the deviation’s nature, importance, and probable cause
d. Reaching an overall conclusion
In assessing control risk, the auditor considers all available quantitative and qualitative
information
B. Difference estimation
It is a classical variables sampling technique that uses the average difference between
audited amounts and individual recorded amounts to estimate the total audited amount of a
population and an allowance for sampling risk.
31
C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to
recorded amount in the sample to estimate the total amount of the population and an
allowance for sampling risk
Ratio estimation is more appropriate when he differences are nearly proportional to book
values.
Difference estimation is more appropriate when there is little or n relationship between the
absolute amounts of the differences and the book values.
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EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR TESTS OF CONTROL
(PSA 530, APPENDIX I)
33
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
1. A CIS environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether the computer is operated
by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the accounting
and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work
performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional
possessing such skills, who may be either on the auditor’s staff or an outside professionals
6. In planning the portions of the audit which may be affected by the client’s CIS environment, the
auditor should obtain an understanding of the significance and complexity of the CIS activities
and the availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS
environment and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce audit
risk to an acceptably low level. The auditor can use either manual audit procedures, computer-
assisted audit techniques, or a combination of both to obtain sufficient evidential matter
Organizational Structure
Characteristics of a CIS organizational structure includes:
a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual operations,
generally the number of persons involved in the processing of financial information is significantly
reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-readable
form, either in one computer installation located centrally or in a number of installations distributed
throughout the entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence than
those using manual procedures. In addition, these systems may be accessible by a larger number of
persons.
System characteristics that may result from the nature of CIS processing include:
a. Absence of input documents
Data may be entered directly into the computer system without supporting document
In some on-line transaction systems, written evidence of individual data entry
authorization (e.g., approval for order entry) may be replaced by other procedures, such
as authorization controls contained in computer programs (e.g., credit limit approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for a
limited period of time (e.g., audit logs may be set to overwrite themselves after a period of time or
when the allocated disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary data
may be printed
34
Data and computer programs may be assessed and altered at the computer or through
the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls,
there is an increased potential for unauthorized access to, and alteration of, data and programs by
persons inside or outside the entity
CIS APPLICATION CONTROLS – to establish specific control procedures over the application systems in
order to provide reasonable assurance that all transactions are authorized, recorded and are processed
completely, accurately and on a timely basis. CIS application controls include:
35
a. Controls over Input – designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the computer
Transactions are accurately converted into machine readable form and recorded in the
computer data files
Transactions are not lost, added, duplicated or improperly changed
Incorrect transactions are rejected, corrected and, if necessary, resubmitted on a timely
basis.
b. Controls over processing and computer data files – designed to provide reasonable assurance
that:
Transactions, including system generated transactions, re properly processed by the
computer
Transactions are not lost, added, duplicated or improperly changed
Processing errors (i.e., rejected data and incorrect transactions) are identified and
corrected on a timely basis
c. Controls over output – designed to provide reasonable assurance that:
Results of processing are accurate
Access to output is restricted to authorized personnel on a timely basis
Output is provided to appropriate authorized personnel on a timely basis
36
Individual transactions are entered at terminal devices, validated, and used to
update related computer files immediately.
b. On-line/batch processing
Individual transactions are entered at a terminal device, subjected to certain
validation checks, and added to a transaction file that contains other transactions entered during the
period. Later, during a subsequent processing cycle, the transaction file may be validated further and
then used to update relevant master file.
c. On-line/Memo update (and subsequent Processing)
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share
computer equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to
access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
37
c. Optical character recognition (OCR) – reads characters directly from documents
based on their shapes and positions on the source document
d. Cathode ray tube (CRT) – a typewriter-like device that decodes keystrokes into
electronic impulses
e. Key-to-tape and Key-to-disk – systems in which input data can be entered directly
onto magnetic tape, magnetic disk, or floppy disk through CRT
10. STORAGE DEVICES – devices which store data that can be subsequently used by the CPU
a. Random access – data can be accessed directly regardless of how it is physically
stored (e.g., magnetic disk)
b. Sequential access – data must be processed in the order in which it is physically
stored (e.g., magnetic tape)
11. OUTPUT DEVICES – produce readable data or machine-readable data when further processing is
required. Examples are CRT, printer, and CRT COM (Computer output to Micro film)
12. TERMINALS – CRT devices or microcomputers used for input/output (communication) with the
CPU
13. POINT-OF-SALE DEVICES – a terminal connected to a computer. It takes the place of a cash
register or similar devices which allows instant recording and is capable of keeping perpetual
inventory
14. MODEM – a device for interfacing communications equipment within communication networks
Software consists of computer programs which instruct the computer hardware to perform the desired
processing.
ELECTRONIC DATA INTERCHANGE (EDI) – the electronic exchange of transactions, from one entity’s
computer to another entity’s computer through an electronic communications network. In electronic
fund transfer (EFT) Systems, for example, electronic transactions replace checks as a mean of payment.
EDI controls include:
a. Authentication – controls must exist over the origin, proper submission, and proper delivery
of EDI communications to ensure that the EDI messages are accurately sent and received to
and from authorized customers and suppliers.
b. Encryption – involves conversion of plain text data to cipher text data to make EDI messages
unreadable to unauthorized persons
c. VAN controls – a value added network (VAN) is a computer service organization that
provides network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
38
1. Auditing around the computer – the auditor ignores or bypasses the computer processing
function of an entity’s EDP system
2. Auditing with the computer – the computer is used as an audit tool
3. Auditing through the computer – the auditor enters the client’s system and examines directly
the computer and its system and application software
39
d. Transaction tagging – a transaction record is tagged and then traced
through critical control points in the information system
e. Extended records – this technique attaches additional audit data which
would not otherwise be saved to regular historic records and thereby helps
to provide a more complete audit trail
III. Review of operating system and other system software
1. JOB ACCOUNTING DATA/ OPERATING SYSTEM LOGS – these logs that track
particular functions, include reports of the resources use by the computer system.
The auditor may be able to use them to review the work processed, to determined
whether unauthorized applications were processed and to determine that
authorized applications were processed properly
2. LIBRARY MANAGEMENT SOFTWARE – this logs changes in programs, program
modules, job control language, and other processing activities
3. ACCESS CONTROL AND SECURITY SOFTWARE – this restricts access to computers to
authorized personnel through techniques such as only allowing certain users with
“read-only” access or through use of an encryption
COMPUTERIZED AUDIT TOOLS
1. AUDIT SOFTWARE – computer programs used to process data of audit significance from the
client’s accounting system
a. Package programs (generalized audit software)
1. Reading computer files
2. Selecting samples
3. Performing calculations
4. Creating data files
5. Printing reports in an auditor-specified format
b. Purpose written programs (special purpose or custom designed programs)
c. Utility programs – they are generally not designed for audit purposes
2. Electronic spreadsheets – contain a variety of predefined mathematical operations and
functions that can be applied to data entered into the cells of a spreadsheet
3. Automated work paper software – designed to generate a trial balance, lead schedules, and
other reports useful for the audit. The schedules and reports can be created once the auditor
has either manually entered or electronically imported through using the client’s account
balance information into the system
4. Text retrieval software – allow user to view any text that ia available in an electronic format. The
software program allows the user to browse through text files much as a user would browse
through books.
5. Database management systems
6. Public databases
7. Word processing software
Factors to consider in using CAAT
1. Degree of technical competence in CIS
2. Availability of CAAT and appropriate computer facilities
3. Impracticability of manual tests
4. Effectiveness and efficiency
5. Timing of tests
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
41
3. When the auditor becomes aware of events which materially affect the financial statements, the
auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements
The representation letter is provided in connection with your audit of the financial statements of ABC Company for
the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial
statements present fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1
and of the results of its operations and its cash flows for the year time ended in accordance with (indicate relevant
financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role in
the accounting and internal control systems or that could have a material effect on the financial
statements
We have made available to you all the books of account and supporting documentation and all minutes
of meetings and shareholders and BOD (namely those held on (dates) respectively)
42
We confirm the completeness of the information provided regarding the identification of related
parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material effect
on the financial statements in the event of noncompliance. There has been no noncompliance with
requirements of regulatory authorities that could have a material effect on the financial statements in
the event of noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset and
liabilities reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in excess of
net realizable value)
Indicate that there are no events subsequent to period which require adjustments in the statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected to
be received
Indicate that there are no formal or informal compensating balance arrangements with any of the cash,
except those that are disclosed
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
[Appropriate addressee]
We have audited the accompanying financial statements of ABC Company which comprise a balance
sheet as at date December 31, 20X1, and the income statement, statement of changes in equity and
cash flow statement for the year ended, and a summary of significant accounting policies and other
explanatory notes.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement. An audit involves performing
procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend upon the auditor’s judgment, including the assessment of the risks of
material misstatements on the financial statements whether due to fraud or error. In making those risk
assessments; the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal
control of the entity. An audit also includes evaluating the appropriateness of the accounting policies
used and the reasonableness of accounting estimates made by the management, as well as evaluating
the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements fairly, in all material respects, the financial position of ABC
Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then
ended in accordance with the Philippine Financial Reporting Standards.
[Auditor’s signature]
[Date of Auditor’s report]
[Auditor’s address]
44
MODIFICATIONS TO THE INDEPENDENT AUDITOR’S REPORT (BASED ON PSA 701)
Matters that do not affect the auditor’s opinion
You may add an emphasis of matter paragraph to the report to highlight a matter
affecting the financial statements which is included in the note of the financial
statements that more extensively discuss the matter
The paragraph would preferably be included after the opinion paragraph but before the
section on any other reporting responsibilities, if any.
Emphasis of matter paragraph is used to highlight the existence of:
Material uncertainty relating to the event or condition that may cast significant
doubt on the entity’s ability to continue as a going concern; or
Significant uncertainty (other than a going concern problem), the resolution of
which is dependent upon future events and which may affect the financial
statements
Emphasis of matter paragraph to report on matters other than those affecting the
financial statements. For example, if an amendment to other information in a document
containing audited financial statements is necessary and the entity refuses to make an
amendment
Without qualifying our opinion, we draw attention to Note X in the financial statements which
indicates that the Company incurred a net loss of P_____ during the year ended December 31,20X1 and,
as of date, the company’s current liabilities exceeded its total assets by P_____. These conditions, along
with other matters, as set forth in Note X, indicate the existence of a material uncertainty which may
cast significant doubt about the Company’s ability to continue as a going concern.
Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on
scope is not so material and pervasive as to require an adverse opinion or a disclaimer
of opinion.
A qualified opinion should be expressed as being “except for” the effects of the matter
to which the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and pervasive
to the financial statements that the auditor concludes that a qualification of the report
is not adequate to disclose the misleading or incomplete nature of the financial
statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so material
and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the financial statements.
45
REPORT MODIFICATIONS
Limitation on scope
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since that
date was prior to the time we were initially engaged as auditors for the company. Owing to the
nature of the company’s records, we were unable to satisfy ourselves as to inventory quantities
by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects … (opinion paragraph)
(The paragraph discussing the scope of the audit would either be omitted or amended according
to the circumstances)
We were not able to observe all physical inventories and confirm accounts receivables due to
limitations placed on the scope of our work by the company)
Because of the significance of the matters discussed in the preceding paragraph, we do not
express an opinion on the financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
As discussed in the Note X to the financial statements, no depreciation has been provided in the
financial statements which practice, in our opinion, is not in accordance in PFRS. The provision
for the year ended December 31, 20X1, should be xxx based on the straight-line method of
depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly,
the fixed assets should be reducedby accumulated depreciation of xxx and the loss for the year
and accumulated deficit should be increased by xxx and xxx, respectively.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects … (opinion paragraph)
46
4. DISAGREEMENT ON ACCOUNTING POLICIES – INADEQUATE DISCLOSURES
QUALIFIED OPINION
We have audited … (remaining words are the same as in the introductory page)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
On January 31,20X2, the Company issued debentures in the amount of… for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash
dividends to earnings after December 31,19X1, which restrictions was not disclosed in the
company’s financial statements. Disclosure of this is required by the PAS 1, Presentation of
financial statements.
In our opinion, except for the omission of the information included in the preceding paragraph,
the financial statements present fairly, in all material respects… (opinion paragraph)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with …
(auditor’s responsibility paragraph)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the
financial statements do not present fairly, in all material respects, the financial position of ABC
Company as of December 31,19X1, and of its financial performance and its cash flows for the
year then ended in accordance with PFRS… (Opinion paragraph)
Facts discovered after the date of the auditor’s report but before the financial statements are
issued
4. During the period from the date of the auditor’s report to the date the financial
statements are issued:
o The responsibility to inform the auditor of facts which may affect the financial
statements rests with management
o When the auditor becomes aware of the facts that will materially affect the
financial statements, the auditor should:
Consider whether the financial statements needed amendment
Discuss the matter with the management
Take the action appropriate in the circumstances
47
5. When the management amends the financial statements, the auditor would carry out
the procedures necessary in the circumstances and would provide management with a
new report on the amended financial statements
6. The new auditor’s report would be dated not earlier than the date the amended
financial statements are signed or approved and, accordingly, the procedures to identify
subsequent events would be extended to the date of the new auditor’s report
7. When management does not amend the financial statements but the auditor believes
they need to be amended and the auditor’s report has not been released to the entity,
the auditor should express a qualified opinion or an adverse opinion.
48
o When the principal auditor concludes that the work of the other cannot be used
and the principal auditor has not been able to perform sufficient additional
procedures regarding financial information of the component audited by the
other auditor, the principal auditor should express a qualified or a disclaimer of
opinion because of a scope of limitation.
o If the auditor issues or intend to issue, a modified auditor’s report, the principal
auditor would consider whether the subject of modification is of such a nature
and significance, in relation to the financial statements of the entity on which the
principal auditor is reporting that a modification on the principal auditor’s report
is required.
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial statements
taken as a whole solely upon the report of another auditor regarding the audit of
one or more components, the principal auditor’s report should state this fact
clearly and should indicate the magnitude of the portion of the financial
statements audited by the other auditor.
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other
disclosures relating to the current period.
o These are not presented as complete financial statements capable of standing
alone
o The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made
Corresponding figures agree with the amounts and other disclosures
presented in prior period or whether appropriate adjustments and/or
disclosures have been made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered separate
financial statements.
These are presented for comparison with the financial statements of the current period,
but do not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative financial
statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current
period or whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and disclosures
have been made
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a. Unresolved, and results in modification of the auditor’s report regarding the
current figures period, the auditor’s report should also be modified regarding the
corresponding figures
b. Unresolved, but does not result in a modification of the auditor’s report
regarding the current period figures, the auditor’s report should also be modified
regarding the corresponding figures
c. Resolved, and properly dealt with in the financial statements, the current period
report does not ordinarily refer to the previous modification. However, if the
matter is material to the current period, the auditor may include an emphasis of
the matter paragraph dealing with the situation
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the
incoming auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another
auditor
b. Type of report issued by the predecessor auditor and, if the report was modified,
the reasons therefore;
c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor
should state that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially
misstated, the auditor should request management to revise the corresponding figures
or if management refuses to do so, appropriately modify the report
INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
The predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
The incoming auditor’s report should state that the prior period was audited by another
auditor and the incoming auditor’s report should indicate:
o That the financial statements of the prior period was audited by another auditor
o The type of report issued by the predecessor auditor, and if the report was
modified, the reasons; therefore
o Date of the report
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1. An entity ordinarily issues on an annual basis a document which includes its audited
financial statements together with the auditor’s report thereon, also called “annual
report”.
Material inconsistencies
2. This exists when the other information contradicts information contained in the audited
financial statements
3. If, on reading the other information, the auditor identifies material inconsistency, the
auditor should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should express a qualified or adverse opinion
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should consider including in the auditor auditor’s
report an emphasis of matter paragraph.
51
Reports on an “other comprehensive basis of accounting” financial statements
1. The report should include a statement that indicates the basis of accounting used or
should refer to the note to the financial statements giving that information
2. The opinion should state whether the financial statements are prepared, in all material
aspects, in accordance with the identified basis of accounting
3. If the financial statements are not suitably titled or the basis of accounting is not
adequately disclosed, the auditor should issue an appropriately modified report
52
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.
3. A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.
4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.
53
6. If the auditor has reason to believe that the information subject to review may be
materially misstated, the auditor should carry out additional or more extensive procedures
as are necessary to be able to express negative assurance or to confirm that a modified
report is required.
We have reviewed the accompanying balance sheet of AAA Company at December 31, 19XX, and the related
statements of income, changes in equity and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements
based on our review.
We conducted our review in accordance with the Philippines Standards on Review Engagements 2400. This
Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial
statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and
analytical procedures applied to financial data and thus provide less assurance than an audit. We have not performed
an audit an accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements are not presented fairly, in all material respects in accordance with Philippine Financial Reporting
Standards.
3. As the auditor simply provides a report of the factual findings of agreed-upon procedures,
no assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditor’s work.
4. The report is restricted to those parties that have agreed to procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
REPORTING
6. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.
54
A description of the auditor’s factual findings including sufficient details of errors and exceptions found;
A statement that the procedures performed does not constitute either an audit or a review and, as such,
no assurance is expressed;
A statement that had the auditor performed additional procedures, an audit or a review, other matters
might have come to light that would have been reported;
A statement that the report is restricted to those parties that have agreed to the procedures to be
performed;
A statement (when applicable) that report relates only to the elements, accounts, items, or financial and
non-financial information specified and that it does not extend to the entity’s financial statements taken
as a whole;
Date of the report;
Auditor’s address; and
Auditor’s signature.
3. The procedures employed are not designed and do not enable the accountant to express
any assurance on the financial information.
5. The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that
is appropriate in the circumstances.
7. The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements.
9. The financial information compiled by the accountant should contain a reference such as
“Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation report’ on
55
each page of the financial information or on the front of the complete set of financial
statements.
On the basis of information provided by the management we have compiled, in accordance with the Philippine
Standard on Related Services applicable to compilation engagements, the balance sheet of XXX Company as of
December 31, 19XX and statements of income, changes in equity and cash flows for the year then ended.
Management is responsible for these financial statements. We have not audited or reviewed these financial
statements and accordingly express no assurance thereon.
4. Prospective financial information can include financial statement or one or more elements
of financial statements and may be prepared:
As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
For distribution to third parties.
7. The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.
56
9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and management’s acceptance of its responsibility for the
prospective financial information.
We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected
and the variation may be material.
We have learned the projection (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the projection including the assumptions set out in Note X on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and management’s
actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not
be appropriate for purposes other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which
causes us t believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state
or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of
the assumptions and is presented in accordance with Philippine Financial Reporting Standards.
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still
likely to be different from the projection since other anticipated events frequently do not occur as expected and the
variation may be material.
When the auditor believes that the presentation and disclosure of the prospective information is
not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.
When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information, the auditor should either express an adverse
opinion or withdraw from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
is based on the International Code of Ethics for professional accountants developed by the
International Federation of Accountants.
Is mandatory for all CPAs and is applicable to professional services performed in the
Philippines on or after January 1, 2004.
Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
Part C - applies to employed professional accountants, and may also apply, in
appropriate circumstances, to accountants employed in public practice
3. CONFIDENTIALITY
a. Professional accountants have an obligation to respect the confidentiality of information
about a client’s or employer’s affairs acquired in the course of professional services.
b. The duty of confidentiality continues even after the end of the relationship between the
professional accountant and the client or employer.
4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware of
the limitations attaching to tax advice and services so that they do not misinterpret an
expression of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or communication
in which there is reason to believe that it:
1. Contains a false or misleading statement;
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2. Contains statements or information furnished recklessly or without any real
knowledge of whether they are true or false; or
3. Omits or obscure information required to be submitted and such omission or
obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return of
a prior year, or the failure to file a required tax return, he/she has a responsibility to:
1. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in
connection with that return or other related information submitted to the
authorities; and
b. Should consider whether continued association with the client or employer in
any capacity is consistent with professional responsibilities.
When a professional accountant performs services in a country other than the home
country and differences on specific matters exist between ethical requirements of the two
countries, the following provisions should be applied:
1. When the ethical requirements of the country in which the services are being
performed are LESS STRICT than the Philippine Code of Ethics, then our code should be
applied.
2. When the ethical requirements of the country in which the services are being
performed are STRICTER than our code, then the ethical requirements in the country
where services are being performed should be applied.
3. When the ethical requirements of the Philippines are mandatory for services performed
outside the Philippines and are stricter than that set out in (1) and (2) above, then the
ethical requirements of the Philippines should be applied.
6. PUBLICITY
In the marketing and promotion of themselves and their work, professional accountants
should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the qualifications
they possess, or experience they have gained; and
c. Not denigrate the work of other accountants.
INDEPENDENCE
a. Independence requires:
1. Independence of mind – The state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism.
2. Independence in appearance – The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all
relevant information, including safeguards applied, would reasonably conclude a
firms, or a member of the assurance team’s integrity, objectivity or professional
skepticism had been compromised.
b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are other
than clearly insignificant, identify and apply SAFEGUARDS to eliminate the threats or
reduce them to acceptable level, such that independence of mind and independence in
59
appearance are not compromised. In situations when no safeguards are available to
reduce the threat to an acceptable level. The only possible actions are to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.
Network firm – an entity under common control, ownership or management with the firm or any entity
that a reasonable and informed third party having knowledge of all relevant information would
reasonably conclude as being part of the firm nationally or internationally
Financial interest – an interest in equity or other security, debenture, loan or other debt instrument of
an entity including rights and obligations to acquire such an interest and derivatives directly related to
such interest
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest
in, or other self-interest conflict with, an assurance client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements
2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance
engagement needs to be reevaluated in reaching conclusions on the assurance engagement
or;
b. When a member of the assurance team was previously a director or officer of the assurance
client, or was an employee in a position to exert direct and significant influence over the
subject matter of the assurance engagement
3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance client’s position or opinion to the point that objectivity may, or may be
perceived to be compromised
4. FAMILIARITY THREAT
Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s
interests.
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5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or
employees of an assurance client
SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate
safeguards should be identified and applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or
interest creating the threat, the only course of action available will be the refusal to perform, or
withdrawal from, the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures
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Safeguards within the firm’s own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone
with the firm or network firm who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services
provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to
enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance client
during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and
ends when the assurance report is issued, except when the assurance engagements is of a
recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement ends
with the notification by either party that the professional relationship has terminated or the
issuance of the final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by the
financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any thretas to
independence may be created by:
a. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
b. Previous services provided to the audit client
Similarly, in the case of an assurance engagement that is not an audit engagement, the firm
should consider whether any financial or business relationships or previous services may create
threats to independence.
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AUDITING THEORY MCQ BY SALOSAGCOL
CHAPTER 1
1. Broadly defined, the subject matter of any audit consist of
a. Financial statements
b. Economic data
c. Assertions
d. Operating data
6. The auditor communicates the results of his or her work through the medium if
the
a. Engagement letter
b. Audit report
c. Management letter
d. Financial statement
10.Which of the following has the primary responsibility for the fairness of the
representations made in the financial statements?
a. Client’s management
b. Audit Committee
c. Independent auditor
d. Board of Accountancy
14.An attitude that includes a questioning mind and critical assessment of audit
evidence is referred to as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision
15.Jack has been retained as auditor of EVC Company. The function of Jack’s opinion
on financial statements of EVC Company is to
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation
c. Detect fraud and abuse in management operations
d. Serve requirements of BIR, SEC, or Central Bank
18.Which of the following is not one of the general principles governing the audit of
financial statements?
a. The auditor should plan and perform the audit with an attitude of
professional skepticism.
b. The auditor should obtain sufficient appropriate evidence primarily
through inquiry and analytical procedure to be able to draw reasonable
conclusions.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.
AUDITING THEORY MCQ BY SALOSAGCOL
19.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 consequence for a decision-
maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
CHAPTER 2
AUDITING THEORY MCQ BY SALOSAGCOL
2. The responsibility for the detection and prevention of errors, fraud and
noncompliance with laws and regulations rests with
a. Auditor
b. Client’s legal counsel
c. Fraud
d. Illegal acts
4. The following statements relate to the auditor’s responsibility for the detection of
errors and fraud. Identify the correct statements.
I. Due to the inherent limitation of the audit, there is a possibility
that material misstatements in the financial statements may
not be detected.
II. The subsequent discovery of material misstatement of the
financial information resulting from fraud or error does not, in
itself, indicate that the auditor failed to follow the basic
principles and essential procedures of an audit.
a. I only
b. Both Statements are true
c. II only
d. Both statements are false
CHAPTER 3:
3. Which of the following is not one of the three primary objectives of effective
internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
4. Which of the following internal control objectives would be most relevant to the
audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
5. An act of two or more employee to steal assets and cover their theft by
misstating the accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency
8. In evaluating the design of the entity’s internal control environment, the auditor
considers the certain subcomponents of control environment and how they have
been incorporated into the entity’s processes. Subcomponents of control
environment would include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems
13.The policies and procedures that help ensure that management directives are
carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems
14.Which of the following is not one of the specific control activities that are
relevant to financial statement audit?
a. Performance reviews
b. Physical controls
AUDITING THEORY MCQ BY SALOSAGCOL
c. Segregation of duties
d. Monitoring
16.Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of
the management
b. The identification and analysis of risks and relevant to the preparation of
the financial statements
c. The policies and procedures that help ensure that necessary actions are
taken in order to achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal
control by management
18.Which of the following is not a medium that can normally be used by an auditor
to record information concerning a client’s internal control policies and
procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
19.An auditor uses the knowledge provided by the understanding of internal control
and the final assessed level of control risk primarily to determine the nature,
timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
20.Based on the requirement of PSA 3330, how frequently must an auditor test
operating effectiveness of controls that appear to functions as they have in past
years and on which the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
AUDITING THEORY MCQ BY SALOSAGCOL
CHAPTER 4:
1. These are acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws and
regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
AUDITING THEORY MCQ BY SALOSAGCOL
5. The essence of the due care principle is that the auditor should not be guilty of:
a. Bias
b. Errors in judgement
c. Fraud
d. Negligence
10.In which of the following circumstances would a CPA be bound by the ethics to
refrain from disclosing any confidential information obtained during course of a
professional engagement?
a. The CPA is issued summon enforceable by the court order which orders
the CPA to present confidential information
b. A major stockholder of a client company seeks accounting information
from CPA after the management declined to disclose the requested
information
c. Confidential client information is made available with the client’s
permission
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself
12.Which of the following most accurately states how objectivity has been defined
by the Code of Ethics?
a. Being honest and straight forward in all professional and business
relationships.
b. A state of mind that permits the provision of an opinion without being
affected by influences that compromise professional judgement
c. A combination of impartiality, intellectual honesty and a freedom from
conflict of interest
d. Avoiding facts and circumstances that could reduce the public confidence
in the professional accountant’s report
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional behaviour
15.It refers to the avoidance of facts and circumstances that are so significant that
a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firm’s or
a member of the assurance team’s integrity, objectivity or professional
scepticism had been compromised.
a. Independence in fact
b. Independence in appearance
c. Independence in mind
d. Inherent independence
17.Acting for an audit client in the resolution of a dispute or litigation would most
likely create
a. Self-interest threat
b. Intimidation threat
c. Advocacy threat
d. Familiarity threat
19.Accepting gift or undue hospitality from an assurance client would create most
likely create
a. Familiarity threat
b. Self-review threat
c. Advocacy threat
d. Intimidation threat
AUDITING THEORY MCQ BY SALOSAGCOL
CHAPTER 5
1. This consists of checking the mathematical accuracy of documents of records.
a. Reperformance
b. Confirmation
c. Recalculation
d. Inspection
2. Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d. Rights and obligations
3. Which of the following assertions does not relate to classes of transactions and
events for the period?
a. Completeness
b. Valuation
c. Cut-off
d. Accuracy
4. An assertion that transactions are recorded in the proper accounting period is:
a. Classification
b. Occurrence
c. Accuracy
d. Cut-off
7. Preliminary knowledge about the client’s business and industry must be obtained
prior to the acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the
engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
AUDITING THEORY MCQ BY SALOSAGCOL
10.An incoming auditor should request the new client to authorize the predecessor
auditor to allow a review of the predecessor’s
Engagement letter Working Paper
a. Yes Yes
b. Yes No
c. No Yes
d. No No
11.Engagement letter that documents and confirms the auditor’s acceptance of the
engagement would normally be sent to the client
a. Before the audit report is issued
b. After the audit report is issued
c. At the end of fieldwork
d. Before the commencement of the engagement
14.The audit engagement letter should generally include a reference to each of the
following except
a. The expectation of receiving a written management representation letter
AUDITING THEORY MCQ BY SALOSAGCOL
16.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. Memorandum to be placed in the permanent section of the auditing
working papers
b. Engagement letter
c. Client representation letter
d. Comfort letter
18.Which of the following factors most likely would cause an auditor not to accept a
new audit engagement?
a. An inadequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing
control risk
19.Which of the following should an auditor obtain from the predecessor auditor
prior to accepting an audit engagement
a. Analysis of balance short accounts
b. Analysis of income statements accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
20.An incoming auditor most likely would make specific inquiries of the predecessor
auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
AUDITING THEORY MCQ BY SALOSAGCOL
CHAPTER 6:
1. Which of the following statements is most correct regarding the primary purpose
of audit procedures?
a. To detect all errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions
regarding the client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order
to adjust the accounts to actual
AUDITING THEORY MCQ BY SALOSAGCOL
3. You are auditing the company’s purchasing process for goods and services. You
are primarily concerned with the company not recording all purchase
transactions. Which audit procedure below would be the most effective audit
procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts payable
account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the accounts
payable account.
12.An example of an external document that provides reliable information for the
auditor is:
a. employees time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.
13.An example of a document that the auditor receives from the client, but which
was prepared by someone outside the client’s organization, is a:
a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
14.To be considered reliable evidence, confirmations must be controlled by:
a. a client employee responsible for accounts receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.
15.Given the economic and time constraints in which auditors can collect evidence
about management assertions about the financial statements, the auditor
normally gathers evidence that is:
AUDITING THEORY MCQ BY SALOSAGCOL
a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.
16.It refers to the material (working papers) prepared by and for, or obtained and
retained by the auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence
17.Which of the following best describes one of the primary objectives of audit
documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income taxation return.
c. Provide documentation that the audit was conducted in accordance with
auditing standards.
d. Provide additional support or recorded amounts to the client.
18.Which of the following is not an expert upon whose work an auditor may relay?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer
19.An expert whose expertise is used by the entity in preparing financial statements
is called a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist
CHAPTER 7
1. This involves developing an overall strategy for the expected conduct and scope
of the examination; the nature, extent, and timing of which vary with the size
and complexity, and experience with and knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers
2. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
AUDITING THEORY MCQ BY SALOSAGCOL
4. The preliminary judgment about materiality and the amount of audit evidence
accumulated are related.
a. directly
b. indirectly
c. not
d. inversely
8. When comparing level of materiality used for planning purposes and the level of
materiality used for evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on total
assets while the level of materiality for evaluating purposes to be
based on net income.
10. Auditors frequently refer to the terms audit assurance, overall assurance, ad
level of assurance to refer to .
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
11.The risk that financial statements are likely to be misstated materially without
regard to the effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
12.When planning a financial statement audit, the auditor should assess inherent
risk at the
Financial statement level Account balance or transaction class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES
c. The greater the inherent and control risk the auditor believes exist, the
less detection risk that can be accepted.
d. The auditor might make separate or combines assessments of inherent
risk and control risk.
15.Which of the following is not correct regarding an auditor’s decision that a lower
acceptable audit risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not assigned
to the engagement
16.These consist of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationship that are inconsistent with
other relevant information or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis
18. In developing the overall audit plan and audit program, the auditor should
assess inherent risk at the:
Audit plan Audit program
a. Financial statement level Accounting balance level
b. Account balance level Financial statement level
c. Account balance level Account balance level
d. Financial statement level Financial statement level
20. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems being
reviewed.
CHAPTER 8
1. This involves the application of the procedures to less than 100% of the items
within an account balance or class of transactions. This enables the auditor to
obtain and evaluate audit evidence about some characteristics of the selected
items in order to form an opinion about the characteristics of all items
supporting an account balance or transaction class.
a. Audit techniques
b. Selective testing
c. Audit sampling
d. Specific identification
4. In a sampling application, the group of items about which the auditor wants to
estimate some characteristic is called the
a. Population c. Attribute of interest
b. Sample d. Sampling unit
5. Non-sampling error occur when the audit tests do not uncover existing
exceptions in the
a. Population
b. Planning stage
c. Sample
d. Financial statement
6. PSA 530 identifies two general approaches to audit sampling. They are
a. Random & nonrandom
b. Statistical & nonstatistical
c. Precision & reliability
d. Risk and nonrisk
7. The relationship between sample size and the allowable sampling risks is
a. Direct
b. Inverse
c. Sample deviation rate
d. Expected deviation rate
10.The process which requires the calculation of an interval and them selects the
items based on the size of the interval is
a. Statistical sampling
b. Systematic selection
c. Random selection
d. Computerized selection
11.A method of sampling in which all the items in the population are divided into
two or more sub-population is
a. Variable sampling
b. Stratified sampling
c. Attribute sampling
AUDITING THEORY MCQ BY SALOSAGCOL
d. Divisible sampling
12.If the auditor is concerned that a population may contain exceptions, the
determination of a sample size sufficient to include at least one such exception is
a characteristic of
a. Discovery sampling
b. Random sampling
c. Variables sampling
d. Peso-unit sampling
13.Which of the following statistical sampling plans does not use a fixed sample size
for tests of controls?
a. PPS sampling
b. Value-weighted sampling
c. Sequential sampling
d. Variables sampling
16.The deviation rate the auditor expects to find in the population, before testing
begins, is called the
a. Tolerable deviation rate
b. Computer upper deviation rate
c. Sample deviation rate
d. Expected deviation rate