CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING
FIRST PREBOARD EXAMNATION

MULTIPLE CHOICE QUESTIONS

1. Nonassurance engagements include all of the following, except

A. agreed-upon procedures.
B. management consulting.
C. preparation of tax returns where no conclusion is expressed.
D. compliance audit.

2. The subject matter of an assurance engagement can take the following forms,
except A. historical or prospective financial statements.
B. performance of an entity that could indicate efficiency and effectiveness.
C. the entity’s internal control system.
D. evaluation of capital investment proposal.

3. The accounting firm should establish policies and procedures designed to promote an internal
culture based on the recognition that quality is essential in performing engagements. This
may be communicated through the following means except
A. training seminars.
B. formal and informal dialogue.
C. publication in PICPA newsletter.
D. mission statements.

4. Inherent limitations in an audit stem from the following factors except

A. most audit evidence is persuasive rather than conclusive.
B. use of testing.
C. accounting and internal control system limitation.
D. incompetence of an auditor.

5. Which of the following is not among the risk assessment procedures that the auditor should
perform in obtaining an understanding of the entity and its environment, including its internal
control?
A. Inquiries of management and others within the entity
B. Analytical procedures
C. Observation and inspection
D. Confirmation

6. Which of the following can an auditor observe as a general control procedure used by
companies?
A. Segregation of functional responsibilities.
B. Management philosophy and operating style.
C. Open lines of communication to the audit committee of the board of directors.
D. External influences such as bank examiner audits.

7. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
A. Selecting a sample of vendors’ invoices for comparison to receiving reports.
B. Coordinating the assistance of entity personnel in data preparation.
C. Discussing matters that may affect the audit with firm personnel responsible for non
audit services to the entity.
D. Reading the current year interim financial statements.

8. A financial statement audit client has an information processing system where all information
is transmitted, processed, and maintained electronically. Because the company has very little

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITING
 tangible data available, the auditor has decided that it will be impossible to do enough
substantive testing to reduce the risk of material misstatement to an acceptably low level.
What should the auditor do in that situation?
A. Express a qualified opinion or disclaim an opinion.
B. Withdraw from the engagement.
C. Perform additional tests of controls to reduce the risk of material misstatement. D.
Recommend that the client convert a portion of the information processing system to a
manual system so backup documentation can be made available to the auditor.

9. An auditor has identified the controller’s review of the bank reconciliation as a control to test.
In connection with this test, the auditor interviews the controller to understand the specific
data reviewed on the reconciliation. In addition, the auditor verifies that the bank
reconciliation is properly prepared by the accountant and reviewed by the controller as
evidenced by their respective sign-offs. Which of the following types of audit procedures do
these actions illustrate?
A. Observation and inspection of records.
B. Confirmation and reperformance.
C. Inquiry and inspection of records.
D. Analytical procedures and reperformance.

10. Before accepting an engagement to audit a new client, a CPA is required to

obtain A. an understanding of the prospective client’s industry and business.
B. the prospective client’s signature to the engagement letter.
C. a preliminary understanding of the prospective client’s control environment. D. the
prospective client’s consent to make inquiries of the predecessor auditor, if any.

11. Which of the following types of documentary evidence should the auditor consider to be the
most reliable?
A. A sales invoice issued by the client and supported by a delivery receipt from an outside
trucker.
B. A check, issued by the company and bearing the payee’s endorsement, that is included
with the bank statements mailed directly to the auditor.
C. A working paper prepared by the client’s controller and reviewed by the client’s
treasurer.
D. Confirmation of an account payable balance mailed by and returned directly to the
auditor.

12. Which of the following is a definition of control risk?

A. The risk that a material misstatement will not be prevented or detected on a timely
basis by the client’s internal controls.
B. The risk that the auditor will not detect a material misstatement.
C. The risk that the auditor’s assessment of internal controls will be at less than the
maximum level.
D. The susceptibility of material misstatement assuming there are no related internal
control policies or procedures.

13. The overall attitude and awareness of an entity’s board of directors concerning the
importance of internal control usually is reflected in its
A. computer-based controls.
B. system of segregation of duties.
C. control environment.
D. safeguards over access to assets.

14. Which of the following services provides the lowest level of assurance on a financial
statement? A. An audit
B. A review
C. Neither service provides assurance on financial statements
D. Each service provides the same level of assurance on financial statements

15. The most reliable type of audit evidence that an auditor can obtain is

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A. physical examination by the auditor.

B. calculations by the auditor from company records.
C. confirmations received directly from third parties.
D. external documents.

16. Significant unexpected fluctuations identified by analytical procedures will usually necessitate
a(n)
A. audit report modification.
B. understanding of the client’s internal control.
C. explanation in the representation letter.
D. auditor investigation.

17. Which of the following statements is correct regarding internal control? A. A well-designed
internal control environment ensures the achievement of an entity’s control objectives.
B. An inherent limitation to internal control is the fact that controls can be circumvented
by management override.
C. A well-designed and operated internal control environment should detect collusion
perpetrated by two people.
D. Internal control is a necessary business function and should be designed and operated
to detect all errors and fraud.

18. A procedure that involves tracing a transaction from its origination through the company’s
information systems until it is reflected in the company’s financial report is referred to as a(n)
A. analytical analysis.
B. substantive procedure.
C. test of a control.
D. walk-through.

19. During an audit engagement, pertinent data are compiled and included in the audit working
papers. The working papers primarily are considered to be
A. a client-owned record of conclusions reached by the auditors who performed the
engagement.
B. evidence supporting financial statements.
C. support for the auditor’s representations as to compliance with relevant PSAs.
D. a record to be used as a basis for the following year’s engagement.

20. An examination of part of an organization's procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?
A. Operational audit
B. Production audit
C. Compliance audit
D. Financial statement audit

21. When considering internal control, an auditor must be aware of the concept of reasonable
assurance which recognizes that the
A. employment of competent personnel provides assurance that management’s control
objectives will be achieved.
B. establishment and maintenance of internal control is an important responsibility of the
management and not of the auditor.
C. cost of internal control should not exceed the benefits expected to be derived
therefrom.
D. separation of incompatible functions is necessary to ascertain that the internal control
is effective.

22. When assessing internal auditors’ objectivity, an independent auditor should A. consider the
policies that prohibit the internal auditors from auditing areas where they were recently
assigned.
B. review the internal auditors’ reports to determine that their conclusions are consistent
with the work performed.

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C. verify that the internal auditors’ assessment of control risk is comparable to the
independent auditor’s assessment.
D. evaluate the quality of the internal auditors’ working paper documentation and their
recent audit recommendations.

23. Which of the following procedures would an auditor most likely perform to test controls
relating to management’s assertion about the completeness of cash receipts for cash sales at
a retail outlet?
A. Observe the consistency of the employees’ use of cash registers and tapes. B.
Inquire about employees’ access to recorded but undeposited cash. C. Trace deposits in
the cash receipts journal to the cash balance in the general ledger. D. Compare the
cash balance in the general ledger with the bank confirmation request.

24. When engaged to compile the financial statements of an entity, an accountant is required to
possess a level of knowledge of the entity’s accounting principles and practices. This
requirement most likely will include obtaining a general understanding of the A. internal
control awareness of the entity’s senior management.
B. risk factors relating to misstatements arising from illegal acts.
C. design of the entity’s internal controls implemented.
D. nature of the entity’s business transactions, the form of its accounting records and the
accounting basis on which the financial information is to be presented.

25. An auditor uses assessed control risk to

A. evaluate the effectiveness of the entity’s internal controls.
B. identify transactions and account balances where inherent risk is at the maximum. C.
indicate whether materiality thresholds for planning and evaluation purposes are
sufficiently high.
D. determine the acceptable level of detection risk for financial statement assertions.

26. Which of the following should an auditor do when control risk is assessed at the maximum
level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
C. Document the assessment.
D. Document the internal control system more extensively.

27. To provide assurance that each voucher is submitted and paid only once, an auditor most
likely would examine a sample of paid vouchers and determine whether each voucher is A.
supported by a vendor’s invoice.
B. stamped “paid” by the check signer.
C. prenumbered and accounted for.
D. approved for authorized purchases.

28. Which of the following procedures would a CPA ordinarily perform when reviewing the
financial statements of an entity in accordance with Philippine Standards on Review
Engagements (PSREs)?
A. Document whether control risk is assessed at or below the maximum level.
B. Obtain an understanding of the entity’s internal control components. C.
Compare the financial statements with budgets or forecasts.
D. Apply year-end cutoff tests for the sales and purchasing functions.

29. Which of the following statements about tests of controls is most accurate? A. Auditing
procedures cannot concurrently provide both evidence of the effectiveness of internal
control procedures and evidence required for substantive tests. B. Tests of controls
include observations of the proper segregation of duties that ordinarily may be limited to
the normal audit period.
C. Tests of controls should be based upon proper application of an appropriate statistical
sampling plan.
D. Tests of controls ordinarily should be performed as of the balance sheet date or during
the period subsequent to that date.
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30. The auditor looks for an indication on duplicate sales invoices to see if the invoices have been
verified. This is an example of
A. a test of details of balances.
B. a test of control.
C. a substantive test of transactions.
D. both a test of control and a substantive test of transactions.

31. Which of the following presumptions is correct about the reliability of audit evidence? A.
Information obtained indirectly from outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive. C.
Reliability of audit evidence refers to the amount of corroborative evidence obtained. D.
Effective internal control provides more assurance about the reliability of audit evidence.

32. In an assurance engagement, the responsible party and the intended

users A. should be from different entities.
B. should be from the same entity.
C. are both responsible for determining the nature, timing and extent of the procedures
to be performed.
D. may be from the same entity or different entities.

33. The sequence of steps in gathering evidence as the basis of the auditor’s opinion
is A. aubstantive tests, assessment of control risk, and tests of controls.
B. assessment of control risk, substantive tests, and tests of controls.
C. assessment of control risk, tests of controls, and substantive tests.
D. tests of controls, assessment of control risk, and substantive tests.

34. Which of the following controls may prevent the failure to bill customers for some shipments?
A. Each shipment should be supported by a prenumbered sales invoice that is accounted
for.
B. Each sales order should be approved by authorized personnel.
C. Sales journal entries should be reconciled to daily sales summaries.
D. Each sales invoice should be supported by a shipping document.

35. The purpose of an engagement letter is to

A. document the CPA firm’s responsibility to external users of the audited financial
statements.
B. document the terms of the engagement.
C. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
D. emphasize management’s responsibility for approving the audit program.
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