MODULE 2

GENERALLY ACCEPTED AUDTING STANDARDS

1. As guidance for measuring the quality of the performance of an

auditor, the auditor should refer to

a. Statements of the Financial Accounting Standards Board.

b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing Standards.
d. Statements on Quality Control Standards.

2. Which of the following statements best describes the primary

purpose of Statements on Auditing Standards?

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 the
areas of inconsistency and divergence of auditor opinion
c. They are authoritative statements, enforced through the Code
of Professional Conduct, that are intended to limit the degree
of auditor judgment.
d. They are interpretations which are intended to clarify the
meaning of “generally accepted auditing standards”

3. Generally Accepted Auditing Standards (GAAS) and Philippine

Standards on Auditing (PSA) should be looked upon by
practitioners as

a. ideals to work towards, but which are not achievable.

b. maximum standards which denote excellent work.
c. minimum standards of performance which must be achieved
on each audit engagement.
d. benchmarks to be used on all audits, reviews, and
compilations.

4. An auditor needs not abide by a Philippines Standard on Auditing

if the auditor believes that

a. the amount is insignificant.

b. the requirement of the PSA is impractical to perform.
c. the requirement of the PSA is impossible to perform.
d. any of the above three is correct.

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5. Auditing standards are

a. Statutory in nature.
b. rules imposed by the Securities and Exchange Commission.
c. rules imposed by the PICPA
d. general guidelines to help auditors.

6. Which of the following best describes what is meant by generally

accepted auditing standards?

a. Pronouncements issued by the Auditing Standards and

Practices Council.
b. Procedures to be used to gather evidence to support financial
statements.
c. Rules acknowledged by the accounting profession because of
their universal compliance.
d. Measures of the quality of the auditor’s performance.

7. When GAAS do not provide "hard and fast rules," they provide
subjective guidance which allows auditors to:

a. Tailor their audit to procedures requested by management.

b. Only apply those standards that are important to the audit.
c. Accurately interpret the profession's Code of Professional
Conduct.
d. Use adequate professional judgment when applying the
standards.

8. Every independent audit engagement involves both auditing

standards and auditing procedures. The relationship between the
two may be illustrated by how they apply from engagement to
engagement. The best representation of this application is that,
from one audit engagement to the next,

a. Both auditing standards and auditing procedures are applied

uniformly.
b. Auditing standards are applied uniformly but auditing
procedures may vary.
c. Auditing standards may vary but auditing procedures are
applied uniformly.
d. Auditing standards are applied uniformly but auditing
procedures are optional.

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9. Generally accepted accounting principles (GAAP) are
distinguished from generally accepted auditing standards (GAAS)
in that:

a. GAAP are the principles for presentation of financial

statements and underlying transactions, while GAAS are the
standards that the auditors should follow when conducting
an audit.
b. GAAP are the principles auditors follow when conducting an
audit, while GAAS are the standards for presentation of
financial statements and underlying transactions.
c. GAAP are promulgated by the SEC, while GAAS are
promulgated by the ASC.
d. When GAAP are violated, sufficiently strong GAAS may make
up for most GAAP deficiencies.

10. The Philippine Standards on Auditing issued by the Auditing and

Assurance Standards Council (AASC)

a. are interpretations of generally accepted auditing standards

b. are the equivalent of laws for audit practitioners.
c. must be followed in all situations.
d. are optional guidelines which an auditor may choose to follow
or not follow when conducting an audit.

11. The standards which present guidance in the personal traits an

auditor must possess are known as:

a. general standards
b. standards of field work
c. standards of reporting
d. standards of operation

12. Which of the following best describes the character of the three
generally accepted auditing standards classified as general
standards?

a. criteria for competence, independence, and professional care

of individual
b. criteria for the content of the financial statements and related
footnote disclosures
c. criteria for the content of the auditor’s report

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 d. the requirements for planning and supervision

13. The general standards stress the importance of

a. the personal qualities which the auditor should have.

b. evidence accumulation.
c. communicating the auditor’s findings to the reader.
d. all of the above.

14. An auditor is most likely to refer to one or more of the three

general auditing standards in determining

a. the nature of a report qualification

b. the scope of auditing procedures
c. requirements for the consideration of internal control
d. whether the auditor should undertake an audit engagement

15. The first general standard of generally accepted auditing

standards states that

a. An independence in mental attitude is to be maintained.

b. Due professional care is to be exercised.
c. The audit is to be performed by a person or persons having
adequate technical training and proficiency as an auditor.
d. The work is to be adequately planned.

16. Which of the following is mandatory if the auditor is to comply

with the general standards of the generally accepted auditing
standards?

a. adequate technical training

b. use of analytical procedures
c. use of statistical sampling when feasible on an audit
engagement
d. confirmation of material accounts receivable balances

17. The first general standard requires that a person or persons have
adequate technical training and proficiency as an auditor. This
standard is met by

a. understanding business and finance

b. education and experience in auditing
c. continuing professional education

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 d. knowledge of Statements on Auditing Standards

18. Competence as a certified public accountant includes all of the

following except

a. Having the technical qualifications to perform an engagement.

b. Possessing the ability to supervise and evaluate the quality of
staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is
needed.

19. The general standards of GAAS require an auditor to:

a. maintain adequate technical training

b. express an opinion on the financial statements
c. supervise the engagement and the audit staff
d. gather proper audit evidence for the engagement

20. The first general standard requires that the audit of financial
statements be performed by a person or persons having adequate
technical training and

a. independence with respect to the financial statements and

supplementary disclosures.
b. exercising professional care as judged by peer reviewers
c. proficiency as an auditor which likely has been acquired from
previous experience
d. objectivity as an auditor, as verified by proper supervision.

21. In any case in which the incoming accountant is not qualified to

perform the work, a professional obligation exists to

a. acquire the requisite knowledge and skills.

b. suggest someone else who is qualified to perform the work.
c. decline the engagement
d. any of the above

22. Ultimately, the decision about whether or not an auditor is

independent must be made by the

a. auditor

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 b. audit committee
c. client
d. public

23. Which one of the following attributes is required of an auditor in

relation to audit clients?

a. Rationalization
b. Bias
c. Loyalty
d. Independence

24. To be independent, the auditor:

a. cannot place any reliance on the client's verbal and written

assertions.
b. is responsible only to third-party users of the financial
statements.
c. cannot perform any consulting services for an audit client.
d. must be impartial when dealing with the client.

25. What is the meaning of the generally accepted auditing standard

that requires that 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 interest in the
client’s business if it is not material

26. A CPA, while performing an audit, strives to achieve independence

in appearance in order to

a. Reduce risk and liability.

b. Comply with the generally accepted standards of field work.
c. Become independent in fact.
d. Maintain public confidence in the profession.

27. Which of the following best describes why publicly-traded

corporations follow the practice of having the outside auditor

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 appointed by the board of directors or elected by the
stockholders?

a. To comply with the regulations of the Financial Accounting

Standards Board.
b. To emphasize auditor independence from the management of
the corporation.
c. To encourage a policy of rotation of the independent auditor.
d. To provide the corporate owners with an opportunity to voice
their opinion concerning the quality of the auditing firm
selected by the directors.

28. Practitioner’s independence:

a. minimizes risk.
b. helps achieve public confidence
c. defends against liability
d. achieves compliance with the standards of fieldwork.

29. The auditor’s responsibility for illegal acts is:

a. Greater than for errors or fraud.

b. Less than it is for errors or fraud.
c. Restricted to information that comes to his attention.
d. The same as it is for errors or fraud.

30. An audit committee must be comprised of outside directors.

Which of the following is considered an outside director?

a. A member of company management.

b. A retired executive from another company.
c. The company’s independent auditor.
d. A consultant to the company.

31. If the client refuses to accept an audit report that is qualified due
to the known existence of an illegal act, the auditor should:

a. Issue an adverse opinion if management agrees to fully

disclose the matter.
b. Withdraw from the engagement and indicate the reasons to
the audit committee in writing.

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 c. Withdraw from the engagement and indicate the reasons to
the Securities and Exchange Commission or other regulatory
body in writing.
d. Issue an unqualified opinion if management agrees to fully
disclose the matter.

32. Reasonable assurance means:

a. Gathering of all available corroborating evidence for the

auditor to conclude that there are no material misstatements
in the financial statements, taken as a whole.
b. Gathering of the audit evidence necessary for the auditor to
conclude that the financial statements, taken as a whole, are
free from any misstatements.
c. Gathering of the audit evidence necessary for the auditor to
conclude that the financial statements are free of material
unintentional misstatements.
d. Gathering of the audit evidence necessary for the auditor to
conclude that there are no material misstatements in the
financial statements, taken as a whole.

33. Which of the following is not a general auditing standard?

a. Examination is to be performed by a person having adequate

technical training and proficiency.
b. The work is to be adequately planned.
c. Auditor is to maintain independence of mental attitude.
d. Auditor is to exercise due professional care in performance of
examination.

34. The exercise of due professional care requires that an auditor

a. uses error-free judgment.

b. considers internal control, including tests of controls.
c. be responsible for fulfilling his or her duties diligently and
carefully.
d. examines all corroborating evidence available.

35. 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?

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 a. Observance of the standards of field work and reporting.
b. Critical review of the audit work performed at every level of
supervision.
c. Degree of skill commonly possessed by others in the
profession.
d. Responsibility for losses because of errors of judgment.

36. The standard of due audit care requires the auditor to

a. Apply judgment in a conscientious manner, carefully weighing

the relevant factors before reaching a decision.
b. Ensure that the financial statements are free from error.
c. Make perfect judgment decisions in all cases.
d. Possess skills clearly above the average for the profession.

37. Required auditor communication to the Audit Committee

concerning illegal acts detected includes:

a. All material items.

b. All that are not adequately addressed by management.
c. Only those that constitute management fraud.
d. Any of such acts.

38. Due professional care requires

a. an auditor to exercise reasonable prudence in his work.

b. the examination of all corroborating evidence available.
c. the exercise of error-free judgment.
d. a consideration of internal control structure that includes
tests of controls.

39. Which of the following mostly describes the function of AASC

(ASPC)?

a. To promulgate auditing standards, practices and procedures

that shall be generally accepted by the accounting profession
in the Philippines.
b. To monitor full compliance by auditors to PSAs.
c. To assist the Board of Accountancy in conducting
administrative proceedings on erring CPAs in audit practice.

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 d. To undertake continuing research on both auditing and
financial accounting in order to make them responsive to the
needs of the public.

40. The exercise of due professional care requires that an auditor

a. Examine all available corroborating evidence.

b. Critically review the judgment exercised at every level of
supervision.
c. Reduce control risk below the maximum.
d. Attain the proper balance of professional experience and
formal education.

41. Which of the following best describes the reference to the

expression “taken as a whole” in the fourth generally accepted
auditing standard of reporting?

a. It applies only to a complete set of financial statements.

b. It applies equally to each item in each financial statement.
c. It applies equally to each material item in each financial
statement.
d. It applies equally to a complete set of financial statements and
to each individual financial statement.

42. The Philippine Standards on Auditing issued by ASPC

a. Apply to independent examination of financial statements of

any entity when such an examination is conducted for the
purpose of expressing an opinion.
b. Must not apply to other related activities of auditors.
c. Need to be applied on all audit related.
d. Require that in no circumstances would an auditor may judge
it necessary to depart from a PSA, even though such a
departure may result to more effective achievement of the
objective of an audit.

43. Which of the following is not one of the three generally accepted
auditing standards for fieldwork?

a. Adequate planning and supervision.

b. The need to express an opinion.

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 c. Sufficient competent evidence.
d. Understanding of the entity, including its internal control.

44. Which one of the following is a general standard?

a. Proper planning and supervision.

b. Due professional care.
c. Study the internal control structure
d. Gather sufficient competent evidence.

45. The third general standard states that due care is to be exercised
in the performance of the examination. This standard should be
interpreted to mean that a CPA who undertakes an engagement
assumes a duty to perform

a. with reasonable diligence and without fault or error.

b. as a professional who will assume responsibility for losses
consequent upon his error of judgment.
c. to the satisfaction of the client and third parties who may rely
upon it.
d. as a professional possessing the degree of skill commonly
possessed by other in the field.

46. The exercise of due professional care requires that an auditor

a. use error-free judgment.

b. consider internal control, including tests of controls.
c. critically review the work done at every level of supervision.
d. examine all corroborating evidence available.

47. 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?

a. Observance of the standards of fieldwork and reporting.

b. Critical review of the audit work performed at every level of
supervision.
c. Degree of skill commonly possessed others in the profession.
d. Responsibility for losses because of errors of judgment.

48. The third general standard states that due care is to exercised in
the performance of an audit. This standard is generally
interpreted to require

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 a. objective review of the adequacy of the technical training and
proficiency of firm personnel.
b. critical review of work done at every level of supervision.
c. thorough review of the existing internal control structure.
d. periodic review of a CPA firm’s quality control procedures.

49. A CPA who has been retained by a client that operates in an

industry totally new to him

a. May not accept such an engagement.

b. May accept the engagement only if the accounting firm
specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable level of
understanding of the transactions and accounting practices
unique to commercial banking.
d. May accept the engagement because training as a CPA
transcends unique industry characteristics.

50. The generally accepted standards of field work relate to

a. the competence, independence, and professional care of

persons performing the audit
b. criteria for the content of the auditor’s report on financial
statements
c. audit planning and evidence gathering
d. the need to maintain independence in mental attitude

51. Which of the following is correct concerning the concept of

materiality?

a. materiality is determined by reference to PICPA guidelines

b. materiality depends only on the peso amounts involved
c. materiality depends on the nature of an item rather than on
the peso amount
d. materiality is a matter of professional judgment

52. Which of the following is a field work auditing standard?

a. Independence in mental attitude.

b. Gathering of sufficient corroborative evidence.
c. Due professional care.

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 d. Adequate technical training and proficiency.

53. 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

a. early appointment of the auditor is advantageous both to the

auditor and to the client
b. acceptance of an audit engagement after the close of the
client’s fiscal year is generally not permissible
c. appointment of the auditor subsequent to the physical count
of inventories requires a disclaimer of opinion
d. performance of substantial parts of the engagement is
necessary at interim dates

54. 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.

55. Which of the following underlies the application of generally

accepted auditing standards, particularly the standards of field
work and reporting?

a. elements of materiality and risk

b. element of corroborating evidence
c. element of internal control
d. element of reasonable assurance

56. Auditors focus on

a. areas where the risk of material errors and irregularities is

least.
b. areas where the risk of material errors and irregularities is
greatest.

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 c. all areas equally.
d. a random selection of all areas.

57. If the auditor is convinced that the client has an excellent internal
control structure, the amount of audit evidence to be gathered.

a. can be significantly less than where internal control is not

adequate.
b. will not be affected since the auditor must arrive at an
independently determined opinion.
c. must be increased to support the auditor’s belief.
d. is not determinable.

58. The validity of evidence depends ultimately on the:

a. attestation standards and GAAS.

b. availability of subordinate evidence
c. relevance of the evidence
d. practitioner’s professional judgment

59. The decision as to how much evidence to be accumulated for a

given set of circumstances.

a. is provided by following the generally accepted accounting

principles.
b. is one requiring professional judgment
c. is determined by statistical analysis
d. is provided in the Philippines Standards on Auditing.

60. Which of the following statements about the reliability of audit

evidence is incorrect?

a. Evidence obtained from outside the entity is more reliable

than evidence obtained from internal sources.
b. Evidence obtained directly by the auditor through observation
and inspection is more reliable than evidence obtained
indirectly.
c. Evidence is more reliable if it is obtained from a member of
the entity's board of directors than from a member of the
entity's accounting staff.
d. Effective internal control provides more reliable evidence than
ineffective internal control.

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61. In connection with the third generally accepted auditing standard
of field work, an auditor examines corroborating evidential matter
that includes all of the following except

a. client accounting manuals

b. vendor invoices
c. written client representations
d. minutes of board meetings

62. Which of the following is not one of the standards of fieldwork?

a. Proper planning and supervision.

b. Due professional care.
c. Sufficient competent evidence.
d. Sufficient understanding of internal controls.

63. The generally accepted standards of reporting encompass all of

the following except

a. consideration of an entity’s internal control structure

b. consistent application of accounting principles
c. informative disclosures
d. conformity of financial statements with GAAP

64. Which one of the following is a reporting standard requirement?

a. To supervise the work that is performed on an audit

b. To facilitate an understanding of internal control
c. To educate the client on matters of GAAP
d. To require the auditor to express an opinion

65. Which of the following is not one of the four generally accepted
auditing standards for reporting?

a. The report shall identify those circumstances in which such

principles have not been consistently observed in the current
period in relation to the preceding period.
b. Informative disclosures in the financial statements are to be
regarded as reasonably adequate unless otherwise stated in
the report.
c. The report shall either contain an expression of opinion
regarding the financial statements, taken as a whole, or an

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 assertion to the effect that an opinion cannot be expressed.
When an overall opinion cannot be expressed, the reasons
therefore should be stated. In all cases where an auditor's
name is associated with financial statements, the report
should contain a clear-cut indication of the character of the
auditor's work, if any, and the degree of responsibility the
auditor is taking.
d. The audit report should state whether the audit was
conducted in accordance with GAAS.

66. Which one of the following statements is incorrect?

a. The auditor’s report must state whether the financial

statements conform with the generally accepted accounting
principles.
b. The auditor’s report must state whether the applicable
generally accepted accounting principles were not 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 financial 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.

67. The fourth standard of reporting requires the auditor’s report to

contain either an expression of opinion regarding the financial
statements taken as a whole or an assertion to the effect that an
opinion cannot be expressed. The objective of the fourth standard
is to prevent

a. an auditor from expressing different opinion on each of the

basic financial statements.
b. restrictions on the scope of the examination, whether imposed
by the client or by the inability to obtain evidence
c. misinterpretation regarding the degree of responsibility the
auditor is assuming
d. an auditor from reporting on one basic financial statement
and not the others.

68. When the financial statements contain a material departure from

generally accepted accounting principles, the auditor should issue
either

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 a. an unqualified or qualified opinion
b. a qualified opinion or a disclaimer of opinion
c. a qualified opinion or adverse opinion
d. an adverse opinion or a disclaimer of opinion

69. An objective of the fourth generally accepted standard of

reporting, relating to the expression of an opinion, is to

a. prohibit the auditor from issuing a report that does not

include an opinion on the financial statements taken as a
whole
b. inform users that the financial statements and related notes
are the joint responsibility of the auditor and management
c. prevent users of financial statements from misinterpreting the
degree of responsibility assumed by the auditor
d. ensure adequate informative disclosure in the financial
statements

70. Under which of the following circumstances may a CPA agree with
a departure from an accounting principle promulgated by
Accounting Standards Council?

a. When the principle was one formulated by the Accounting

Principles Board inasmuch as the APB is no longer the body
so designated to issue accounting standards.
b. When the CPA can demonstrate that application of the
principle in question would make the financial statements
materially misleading.
c. When the disputed principle is contrary to industry practice.
d. When adoption of the principle would cause the financial
statements to be inconsistent with prior years.

71. The fourth generally accepted auditing standard of reporting

requires an auditor to render report whenever an auditor’s name
is associated with financial statements. The overall purpose of
the fourth standard of reporting is to require that reports

a. Assure that the auditor is independent with respect to the

financial statements audited.
b. State that the audit has been conducted in accordance with
generally accepted auditing standards.

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 c. Indicate the character of the engagement and the degree of
responsibility assumed by the auditor.
d. State whether the accounting principles used in preparing the
financial statements have been applied consistently in the
period audited.

72. A basic objective of a CPA firm is to provide services that conform

to professional standards. Reasonable assurance of achieving this
objective is provided through

a. system of peer review.

b. continuing professional education.
c. a system of quality control.
d. compliance with generally accepted reporting standards.

73. Which of the following is not an attestation standard?

a. The engagement shall be performed by a practitioner having
adequate knowledge in the subject matter of the assertion.
b. Sufficient evidence shall be obtained to provide a reasonable
basis for the conclusion that is expressed in the report.
c. The work shall be adequately planned, and assistants, if any,
shall be properly supervised.
d. The report shall state whether the financial statements are
presented in accordance with generally accepted accounting
principles.
.
74. Which of the following is not an attestation standard?
a. Sufficient evidence shall be obtained to provide a reasonable
basis for the conclusion that is expressed in the report.
b. The report shall identify the assertion being reported on and
state the character of the engagement.
c. The work shall be adequately planned and assistant, if any,
shall be properly supervised.
d. A sufficient understanding of internal control shall be
obtained to plan the engagement.
75. Which of the following is a conceptual difference between the
attestation standards and generally accepted auditing standards?
a. The attestation standards provide a framework for the attest
function beyond historical financial statements.

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 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.
76. Which of the following best describes the purpose of attestation
standards and GAAS?

a. measures of quality for attestation and audit engagements

b. methods to discharge professional responsibilities in
attestation and audit engagements.
c. rules that represent the public’s expectations on attestation
and audit engagements.
d. objectives used to select evidence for attestation and audit
engagement.

77. What is the focus of the standards of fieldwork for attestation and
audit engagement?

a. guidelines for training, proficiency and due care

b. guidelines for the content of the practitioner’s report
c. guidelines for planning and for gathering evidence
d. guidelines for maintaining an independence in mental attitude

78. 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

a. Generally accepted accounting principles.

b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

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

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

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80. The four major steps in conducting an audit are:
I. Testing internal controls
II. Audit report
III. Planning
IV. Testing transactions and balances

The proper sequence in applying the above steps is:

a. III, I, IV, II
b. III, IV, I, II
c. II, III, IV, I
d. I, IV, III, II

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