Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDITING CONCEPTS

PSA BASED QUESTIONS

1. The primary purpose of an independent audit of financial statements is to
A. Provide a basis for assessing management’s performance.
B. Comply with laws and regulations.
C. Assure management that the financial statements are unbiased and free from
material misstatements.
D. Provide users with an unbiased opinion about the fairness of information
presented in the financial statements.

2. Which of the following statements best describes a review service?

A. A review engagement focuses on providing assurance on the assertions
contained in the financial statements of a public company.
B. A review engagement focuses on providing assurance on the internal controls
of a public company.
C. A review engagement focuses on providing limited assurance on financial
statement of a private company.
D. A review engagement focuses on providing advice in a three-party contract.

3. Professional skepticism dictates that when management makes a statement to

the auditors, the auditors should
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.

4. In performing a financial statement audit, which of the following would an auditor

least likely consider?
A. Internal control.
B. Compliance with GAAP.
C. Quality of managements’ business decisions.
D. Fairness of the financial statement amounts.

5. The level of assurance provided by an audit of detecting a material

misstatement is referred to as:
A. Absolute assurance.
B. High assurance.
C. Negative assurance.
D. Reasonable assurance.

6. An audit involves ascertaining the degree of correspondence between assertions and

established criteria. In the case of financial statement audit, which of the following is
not a valid criterion?
A. Accounting standards generally accepted in the Philippines.
B. International Accounting Standards.
C. Authoritative financial reporting framework.
D. Philippine Standards on Auditing.

7. Which of the following statements is (are) true regarding the provision of

assurance services?
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.

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8. Which of the following is least likely an objective of an assurance
engagement?
A. The engagement is intended to prevent the issuance of materially
misleading information
B. The engagement is intended to enhance the credibility of information about a
subject matter.
C. An assurance engagement is intended for a professional accountant to
express a conclusion that provides the intended users with a level of
assurance about the subject matter.
D. The engagement is intended to provide a level of assurance to be issued by a
professional accountant about the information of being in conformity, in all
material respects, with suitable criteria.

9. The broad range of assurance engagements includes all, but which of the
following?
1.) Engagements intended to provide high or moderate levels of assurance.
2.) Preparation of tax returns, though no conclusion is expressed.
3.) Attest and direct reporting engagements.
4.) Engagement to report externally, but not internally.
5.) Engagements in the private and public sector.
6.) Agreed-upon procedure engagement.
A. 2, 4, 5
B. 2, 4, 6
C. 2, 5, 6
D. 4, 6

10. Which statement does not accurately describe an assurance engagement?

A. The objective of an assurance engagement is for a professional accountant to
evaluate or measure a subject matter that is the responsibility of another
party against identified suitable criteria, and to express a conclusion that
provides the intended user with a level of assurance about that subject
matter.
B. Not all engagements performed by professional accountants are assurance
engagements.
C. A particular engagement, to be an assurance engagement, depends upon
whether it exhibits all the following elements: a two-party relationship, a
subject matter, suitable criteria, and a conclusion.
D. An engagement in form of agreed-upon procedures result in the expression of
factual findings.

11. Which of the following is not an element of an assurance engagement?

A. A subject matter.
B. Suitable criteria.
C. A conclusion.
D. A two-party relationship.

12. A draft of statement, studies or standards, should be discussed by the Council en

banc. How many members of AASC are required to approve the draft for exposure?
A. Majority
B. Ten
C. Eight
D. Twelve

13. Theoretically, it is possible to provide an infinite range of assurance form a very

low level of assurance to an absolute level of assurance. In practice, the
professional accountants cannot provide absolute assurance because of the
following, except:
A. The professional accountants employ testing process.
B. The internal control has its inherent limitations.
C. The use of judgment in gathering evidence and drawing conclusions based on
that evidence.
D. The lack of expertise of the professional accountants in doing a systematic
engagement process.

14. Which is not true of the intended user?

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.

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 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 one of the intended users.
D. The intended user(s) may not be the addressee of the professional
accountant’s report.

15. Which of the following is least likely a subject matter of an assurance engagement?
A. Data.
B. Systems and processes.
C. Compliance with 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:
A. A description of the engagement and identification of the subject matter.
B. Identification of the standards under which the engagement was conducted.
C. Reference to the work of an expert.
D. Identification of the criteria.

17. Some or all of the following are planning considerations:

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.

Which of the foregoing are matters that need to be considered in planning an

assurance engagement?
A. All of them.
B. I, II, III, V.
C. II, III, IV, VI.
D. I, III, V, VI.

18.How many members of AASC are needed to approve the exposed draft as
Philippine Standards on Auditing?
A. Majority of the regular members.
B. At least eight.
C. At least ten.
D. At least twelve.

19.Which of the following is required if the professional accountant uses experts

who are not professional accountants?
A. The ultimate responsibility for the professional service is assumed by the
expert who is not a professional accountant.
B. The professional accountant is discouraged to engage the services of experts
who are not a professional accountant.
C. The professional accountant must take steps to see that such experts
are aware of the ethical requirements of the profession.
D. Experts who are not professional accountants need not be informed of the
ethical requirements because they are not members of the Accountancy
profession.

20. Which of the following is expected of AASC to do?

A. AASC should normally expose a proposed interpretation of statements.
B. AASC should normally expose its opinion on specific queries form a practicing
CPA.
C. When it is deemed necessary to expose a statement for a comment on
proposed interpretations of statements, the exposure period is
understandably shorter than those of the regular drafts of standards.
D. To make the statements of Philippine Standards on Auditing operative, the
final statement shall be submitted to the Board of Accountancy for
approval.

21. Which one of the following is not a key attribute that is essential to perform an
assurance service?
A. Subject matter knowledge
B. Independence

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 C. Established criteria or standards
D. Accounting skills

22. As it relate to an audit, materiality is

A. Not taken into consideration.
B. Related only to the sufficiency of procedures performed.
C. Based upon audit fees.
D. Determined based upon the importance to a user of the financial
statements.

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 an

assurance?
A. It refers to the auditor’s satisfaction as to the reliability of an assertion being
made by one party for use by another party.
B. The level of assurance that may be provided is determined by the reporting
objective.
C. An assurance is expressed positively in the report.
D. Because of the inherent limitation in an audit, the assurance is of limited one.

25. It provides a threshold or cutoff point rather that 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?
A. The data to be audited can be verified.
B. Short-term conflicts may exist between the managers who prepare the data
and the auditors who examine them.
C. Auditors act on behalf of management.
D. An audit benefits the public.

3. An audit of financial statements is conducted in order to determine if the

A. Organization is operating efficiently and effectively.
B. Auditee is following specific procedures or rules set down by some higher
authority.
C. Overall financial statements are stated in accordance with specified criteria.
D. Client entity prescribes a good internal control system.

4. Which of the following statements does not describe a condition that creates a
demand for auditing?
A. Conflict between an information provider and a user can result in biased
information.
B. Information can have substantial economic consequences for a decision
maker.
C. Expertise is often required for information preparation and verification.
D. Users can directly assess the quality of information.

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5. Why does a company choose to have an independent auditor report on its financial
statements?
A. Independent auditors will always detect management fraud.
B. The company’s management preparing the statements may have a vested
interest in reporting certain results.
C. Independent auditors guarantee the accuracy of the financial statements.
D. And independent audit is designed to search for deficiencies in the company’s
internal controls.

6. Which of the following criteria is unique to the independent auditor’s attest function?
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 auditors
report on an entity’s financial statements?
A. A management fraud may exist, and it is likely to be detected by independent
auditors.
B. The management that prepares the statements and the persons who use the
statements may have conflicting interests.
C. Misstated account balances may be corrected as a result of an independent
audit work.
D. The management that prepares the statements may have overlooked a poorly
designed system of internal control.

8. Information risk refers to the risk that

A. The client’s financial statements may be materially false and misleading.
B. The auditor may express an unqualified opinion on financial statements that
are materially misstated.
C. The client entity may not be able to remain in business.
D. Errors and frauds would not be detected by the auditor’s procedures.

9. Which of the following is responsible for an entity’s financial statements?

A. The entity’s management.
B. The entity’s audit committee.
C. The entity’s internal auditors.
D. The entity’s board of directors.

10. A typical objective of an operational audit is for the auditor to

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

12. An independent audit is important to the readers of financial statements because it

A. Provides a measure of management’s stewardship function.
B. Measures and communicates the financial data included in the financial
statements.
C. Objectively examines and reports on management’s financial statements.
D. Reports on the accuracy of information in the financial statements.

13. Which of the following types of audit uses laws and regulations as its criteria?
A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Financial audit

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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 so 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 aids in the communication of economic date because

the audit
A. Confirms the accuracy of management’s financial representation.
B. Lends credibility to the financial statements.
C. Guarantees that financial data are fairly presented.
D. Assures the readers of financial statements that any fraudulent activity has
been detected and its effect has been corrected.

17. Which of the following best describes the attest process?

A. Proving the accuracy of the books and records.
B. Gathering sufficient evidence about specific and known assertions.
C. Assisting management in the successful operations of the company.
D. Assembling and filing tax returns and related supplemental information.

18. The assumption underlying an audit of financial statements is that they will be
used by
A. The regulatory agencies to verify information that is relevant to their
supervisory functions.
B. The board of directors as basis of declaring cash dividends.
C. The general public in making investment decisions.
D. Different groups for different purposes.

19. Which of the following is an example of an assertion made by the management

in an entity’s financial statements?
A. The financial statements are prepared in an unbiased manner.
B. The reported inventory balances reflect all related transactions for the
period.
C. The reported accounts receivable do not include any uncollectible accounts.
D. The scope of the auditor’s investigation is not limited in any way by
management.

20. A CPA certificate is an evidence of

A. Recognition of independence.
B. Basic competence at the time the certificate granted.
C. Culmination of the education process.
D. Membership in the PICPA.

21. An audit can have a significant effect on

A. Information risk.
B. Business risk.
C. The risk-free interest rate.
D. All of these.

22. Which of the following is cause of information risk?

A. Voluminous data.
B. Biases and motives of the provider of information.
C. Remoteness of the provider of the information.
D. Each of these is a cause of information risk.

23. The main way(s) to reduce information risk is to have

A. The user verify the information.
B. The user share the information risk with management.
C. Audited financial statements provided.

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 D. All of these.

24. The predominant type of attestation service performed by CPAs is

A. Audit.
B. Review.
C. Compilation.
D. Management consulting.

25. Upon completion of a typical audit, the auditor has

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
A. Type of service being rendered.
B. Training required to perform the service.
C. Scope of services.
D. CPA’s approach to the service.

27. Which of the following attributes is more closely associated with assurance
services performed by a CPA firms than with other lines of professional work?
A. Integrity
B. Competence
C. Independence
D. Keeping informed on current professional developments

28. An investor, while reading the financial statements of Silver Corporation, learned that
the statements are accompanied by an unqualified auditor’s report. From this the
investor may conclude that:
A. Any disputed over significant accounting issued have been settled to the
auditor’s satisfaction.
B. The auditor is satisfied that Silver is 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 objectivity and be free of conflicts of interest when
performing:
A. Audits, but not any other professional services
B. All attestation services, but not other professional services
C. All attestation and tax services, but not other professional services
D. All professional services

30. A summary of findings rather than assurance is most likely to be issued on which
engagement?
A. Agreed-upon procedures
B. Compilation
C. Examination
D. Review

31.Which of the following professional 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

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.

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33. The most common type of audit report contains a(n):
A. Adverse opinion.
B. Disclaimer of opinion.
C. Qualified opinion.
D. Unqualified opinion.

34. The auditor’s judgment concerning the overall fairness of presentation of

financial position, results of operation, and changes in cash flow is applied
within the framework of
A. Quality control
B. Generally accepted auditing standards which include the concept of
materiality
C. The auditor’s evaluation of the audited company’s internal control
D. Philippine Financial Reporting Standard

35. In “auditing” accounting data, the auditor is concerned with

A. Determining whether recorded information properly reflects the economic
events that occurred during the accounting period.
B. Determining if fraud has occurred.
C. Determining if taxable income has been calculated correctly.
D. Analyzing the financial information to be sure that it complied with
government requirement.

36. In all cases, audit reports must

A. Be signed by the individual who performed the audit procedures.
B. Certify the accuracy of the quantitative information which was audited.
C. Inform reader of the degree of correspondence between the quantifiable
information and the established criteria.
D. Communicate the auditor’s findings to the general public.

37. Which one of the following is an example of management expectations from the
independent auditors?
A. An expert providing a written communication as the product of the
engagement.
B. Individuals who perform day-to-day accounting functions on behalf of the
company.
C. An active participant in management decision-making.
D. An internal source of expertise on financial and other matters.

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.

39. In performing attestation services, a CPA will normally:

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 analyses and cost estimates.
D. States a conclusion about a written assertion.

40. Which of the following best describes an operational audit?

A. It requires a constant review of the administrative controls by internal
auditors as they relate to operations of the company.
B. It concentrates an implementing financial and accounting control in a newly
organized company.
C. It attempts on verifying the fair presentation of a company’s results of
operations.
D. It concentrates on seeking out aspects of operations in which waste would be
reduced by the introduction of controls.

41. Evidence is defined as any information used by the auditor to determine whether the
quantifiable information being audited is stated in accordance with the established
criteria. Evidence takes many different forms, including
A. Oral representation (testimony) from the client management.
B. Written communication (confirmation) with outsiders.

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 C. Observations made by the auditor.
D. All of these.

42. Because the client company pays the external auditor a professional fee, he
A. Is absolutely independent and may conduct an audit.
B. May be sufficiently independent to conduct and audit.
C. Is never considered to be independent.
D. Must receive approval of the Securities and Exchange Commission before
conducting an audit.

43. A typical objective of an operational audit is to determine whether an entity’s

A. Financial statements fairly present financial position and cash flows.
B. Financial statements present fairly the results of operations.
C. Financial statements fairly present financial position, results of operations,
and cash flows.
D. Specific operating units are functioning efficiently and effectively.

44. Which of the following is more difficult to evaluate objectivity?

A. Efficiency and effectiveness of operations.
B. Compliance with applicable government regulations.
C. Presentation of financial statements is accordance with the applicable
financial reporting criteria.
D. All the given criteria are equally difficult to evaluate objectively.

45. An audit which is undertaken in order to determine whether the auditee is following
specific procedures or rules laid down by some higher authority is classified as a(n)
A. Audit of financial statements.
B. Compliance audit.
C. Operational audit.
D. Production audit.

46. Assurance services involve which of the following?

A. Relevance as well as reliability.
B. Non-financial information as well as traditional financial statements.
C. Electronic databases as well as printed reports.
D. All of these.

47. Which of the following is a difference between attestation and auditing standards?
A. Attestation standards cover attest engagements other than those involving
GAAP financial statements.
B. Attestation standards do not require independence in metal attitude.
C. Auditing standards apply only to CPAs while attestation standards apply to all
accountants.
D. Attestation standards do not include standards of reporting.

48. Which of the following pertains to the reliability of audit evidence?

A. The independence of the source of evidence.
B. The expertise level of the auditor who obtains the evidence.
C. Whether the audit client uses a manual or computerized accounting system.
D. The quantity of the evidence obtained.

49. The audit committee of the board of directors of accompany is responsible for
A. Hiring the auditor.
B. Preparing the financial statements.
C. The audit work papers.
D. Independence and obtaining evidence.

50. Which of the following statements is true concerning a compliance audit?

A. Compliance audits are only performed by government auditors.
B. Risks such as inherent risk, control risk, and detection risk are not appropriate
in the planning and performance of a compliance audit.
C. Materiality is difficult to measure in compliance audit.
D. A report on compliance can only include negative assurance.

51. Audits of financial statements include an expression of a conclusion about which of

the following financial statement characteristics?
A. Governance.
B. Reliability.

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 C. Relevance.
D. Timeliness.

52. A review of a company’s financial statements by a CPA firm:

A. Is significantly less in scope than an audit and results in a report which
provides positive assurance, although not absolute assurance.
B. Is similar in scope to an audit and adds similar credibility to the statements.
C. Concludes with the issuance of a report expressing the CPA’s opinion as to the
fairness of the statements.
D. Is designed to provide only limited or moderate assurance.

53. The attest function:

A. Is an essential part of every engagement performed by a CPA.
B. Requires a complete review of all transactions during the period under
examination.
C. Requires a review of a sample of transactions during the period under
examination.
D. Includes the preparation of a written report about the CPA’s conclusion.

54. Broadly defined, the subject matter of any audit consists of

A. Assertions.
B. Operating data.
C. Financial statements.
D. Economic data.

55. The expertise that distinguishes auditors from accountants is in terms of the
A. Ability to interpret generally accepted accounting principles.
B. Requirement to possess education beyond the Bachelor’s degree.
C. Accumulation and interpretation of evidence.
D. Ability to interpret accounting standards.

56. Most of the independent auditors work in formulating an opinion on 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 physical existence of property.

57. Attestation risk is limited to a low level in which of the following engagement(s)?
A. Both examination and review
B. Examination but not review
C. Review but not examination
D. Neither examination nor review

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):
A. Peer review engagement
B. Quality control management
C. Quality assurance engagement
D. Attestation engagement

59. The review of a company’s financial statements by a CPA firm

A. Is substantially less in scope of procedures than an audit
B. Requires detailed analysis of the major accounts
C. Has similar cope as an audit and adds similar credibility to the statements
D. Culminates in issuance of a report expressing the CPA’s opinion as to the
fairness of the statements

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?

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 A. The usual audit of 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 the preparation of a report.
D. The operational audit deals with operating profit while financial audit
considers both the operating and net profits.

62. The audit of historical financial statements should be conducted by the CPA
professionals in accordance with
A. Philippine Financial Reporting Standards.
B. Philippine Standards on Auditing.
C. The auditor’s judgment.
D. The audit program.

63. Whenever a CPA professional is engaged to perform an audit of financial statement

according to Philippine Standards on Auditing, he required to comply with those
standards in order to
A. Eliminate audit risk.
B. Eliminate the professional judgment in resolving audit issues.
C. Have a measure of the quality of audit performance.
D. To reduce the audit program to be prepared by the auditor.

64. What is the overall objective of internal auditing?

A. To attest to the efficiency with which resources are used.
B. Ascertain that the cost of internal control is justified.
C. To ascertain that financial statements present accurately the financial
position, operating results, and changes in cash and stockholders’ equity.
D. To help other members of the organization of effectively discharging their
responsibilities.

65. 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.

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?
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.

67. Assurance services involve all the following except:

A. Improving the quality of information for decision purposes.
B. Improving the quality of the decision model used.
C. Improving the relevance of information.
D. Implementing a system that improves the processing of information.

68. Which of the following is the broadest and most inclusive concept?
A. Audits of financial statements.
B. Internal control audit.
C. Assurance services.
D. Compilation services.

69. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of the client’s
assertions.
B. A review provides positive assurance by attesting the reliability of the client’s
assertions.

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 C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.

70. Unlike consulting services, assurance services:

A. Make recommendation to management
B. Report on how to use information
C. Report on the quality of information
D. Are two-party contracts.

71. Financial statement audits:

A. Reduce the cost of capital
B. Report on compliance with laws and regulations
C. Assess management’s efficiency
D. Overlook information risk

72. A summary of findings rather than assurance is most likely to be included in a(n):
A. Agreed-upon procedures report
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):
A. Peer Review Engagement
B. Quality Control Engagement
C. Quality Assurance Engagement
D. Attestation Engagement

75. 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

76. An operational audit differs in many ways from an audit of financial statements.
Which of the following is the best example of one 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 auditors do not ordinarily result in the preparation of a report
D. The operational audit deals with pre-tax income

77. The review of a company’s financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit
B. Requires detailed analysis of the major accounts
C. Is of similar scope as an audit and adds similar credibility to the statements
D. Culminates in issuance of a report expressing the CPA’s opinion as to the
fairness of the statements

78. When performing an engagement to review a nonpublic entity’s financial statements,

an accountant most likely would:
A. Obtain an understanding of the entity’s internal control.
B. Limit the distribution of the accountant’s report.
C. Confirm a sample of significant accounts receivable balances.
D. Ask about actions taken at board of directors’ meetings.

79. 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

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 C. The manager assigned to the engagement
D. The partner in charge of the engagement

80. Assurance services may include which of the following?

A. Attesting to financial statements
B. Examination of the economy and efficiency of governmental operations
C. Evaluation of a division’s performance for management
D. All of the given choices

81. 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.

82. 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

83. Which one of the following in 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

84. 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 auditing.
D. Attestation auditing.

85. 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.

86. Which of the following statements is correct regarding a review engagement of a

nonpublic entity?
A. An accountant must establish an understanding with the client in an
engagement letter.
B. An accountant must obtain an understanding of the client’s internal control
when performing a review.
C. A review provides an accountant with a basis for expressing limited assurance
on the financial statements.
D. A review report contains an accountant’s opinion that the financial
statements, taken as a whole, present fairly the assertions issued by the
management.

87. 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.

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88. Which of the following services may a CPA perform in carrying out a consulting
service for a client?
I. Analysis of the client’s accounting system
II. Review of the client’s proposed business plan
III. Preparation of information for obtaining financing

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?
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.

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 the predecessor auditor’s working papers.
D. Management is unwilling to permit inquiry of its legal counsel.

-end-

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