PSA 501 – Audit Evidence – Additional Considerations on Specific Items a. The balance sheet date.

1. When inventory is material to the financial statements, the auditor should obtain sufficient b. Seven working days after the request is received by the lawyer.
appropriate audit evidence regarding its existence and condition by attendance at physical c. The date of the audit inquiry itself.
inventory counting unless impracticable. Where attendance is impracticable, due to factors such d. The expected date of the completion of audit field work.
as the nature and location of the inventory, the auditor should 8. The refusal of a client’s lawyer to provide a representation on the legality of a particular act
a. Take or observe some physical counts on an alternative date and, when necessary, perform committed by the client is ordinarily
tests of intervening transactions. a. Sufficient reason to issue a “subject to” opinion.
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of b. Considered to be a scope limitation.
existence and condition to conclude that the auditor need not make reference to a scope c. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
limitation. confidentiality.
c. Issue qualified or disclaimer of opinion. d. Proper grounds to withdraw from the management.
d. Issue qualified or adverse opinion. 9. Which statement is incorrect regarding valuation and disclosure of long-term investments?
2. When litigation or claims have been identified or when the auditor believes they may exist, the a. When long-term investments are material to the financial statements, the auditor should obtain
auditor should sufficient appropriate audit evidence regarding their valuation and disclosure.
a. Seek direct communication with the entity’s lawyers. b. Audit procedures regarding long-term investments ordinarily include considering evidence as
b. Disclose the litigation and claims in the auditor’s report. to whether the entity has the ability to continue to hold the investments on a long term basis.
c. Issue unqualified opinion with explanatory paragraph. c. If market quotations exceed the carrying amounts, the auditor would consider whether a write-
d. Issue qualified or adverse opinion. down is required.
3. The auditor should carry out procedures in order to become aware of any litigation and claims d. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor
involving the entity which may have a material effect on the financial statements. Such would consider whether appropriate adjustments and/or disclosures have been made.
procedures least likely include 10. Which statement is incorrect regarding segment information?
a. Making appropriate inquiries of management including obtaining representations. a. Segment information is information in the financial statements regarding distinguishable
b. Reviewing board minutes and correspondence with the entity’s lawyers. components or industry and geographical aspects of an entity.
c. Examining interest expense accounts. b. When segment information is material to the financial statements, the auditor should obtain
d. Using any information obtained regarding the entity’s business including information obtained sufficient appropriate audit evidence regarding its disclosure in accordance with generally
from discussions with any in-house legal department. accepted accounting principles in the Philippines.
4. The primary source of information to be reported about litigation, claims, and assessments is the c. The auditor considers segment information in relation to the financial statements taken as a
a. Client’s lawyer c. Client’s management whole, and is ordinarily required to apply auditing procedures that would be necessary to
b. Court records d. Independent auditor express an opinion on the segment information standing alone.
5. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to d. Audit procedures regarding segment information ordinarily consist of analytical procedures
provide the auditor with and other audit tests appropriate in the circumstances.
a. The probable outcome of asserted claims and pending or threatened litigation. PSA 505 – External Confirmations
b. Corroboration of the information furnished by management about litigation, claims, and 11. Which statement is incorrect regarding external confirmation?
assessments. a. External confirmation is the process of obtaining and evaluating audit evidence through a
c. The attorneys’ opinions of the client’s historical experiences in recent similar litigation. direct communication from a third party in response to a request for information about a
d. A description and evaluation of litigation, claims, and assessments that existed at the balance particular item affecting assertions made by management in the financial statements.
sheet date. b. External confirmation of an account receivable provides strong evidence regarding the
6. Which of the following statements concerning litigation, claims, and assessments, which were valuation of the account as at a certain date.
extracted from a letter from a client’s lawyer, is most likely to cause the auditor to request c. The auditor should tailor external confirmation requests to the specific audit objective.
clarification? d. The auditor may use positive or negative external confirmation requests or a combination of
a. “I believe that the possible liability to the company is nominal in amount.” both.
b. “I believe that the action can be settled for less than the damages claimed.” 12. Negative confirmation requests is unlikely to be used to reduce audit risk to an acceptable level
c. “I believe that the plaintiff’s case against the company is without merit.” when:
d. “I believe that the company will be able to defend this action successfully.” a. The assessed level of inherent and control risk is low.
7. The appropriate date for the client to specify as the effective date in the audit inquiry to a lawyer is b. A large number of small balances is involved.
 c. A substantial number of errors is expected. a. Unqualified opinion with explanatory paragraph. c. Qualified or disclaimer of opinion.
d. The auditor has no reason to believe that respondents will disregard these requests. b. Qualified or adverse opinion. d. Adverse or disclaimer of opinion.
13. An auditor should perform alternative procedures to substantiate the existence of accounts 20. If the current period's accounting policies have not been consistently applied in relation to opening
receivable when balances and if the change has not been properly accounted for and adequately disclosed, the
a. No reply to a positive confirmation request is received. auditor should express a
b. No reply to a negative confirmation request is received. a. Unqualified opinion with explanatory paragraph. c. Qualified or disclaimer of opinion.
c. Collectability of the receivables is in doubt. b. Qualified or adverse opinion. d. Adverse or disclaimer of opinion.
d. Pledging of the receivables is probable. PSA 520 – Analytical Procedures
PSA 510 – Initial Engagements – Opening Balances 21. It means the analysis of significant ratios and trends including the resulting investigation of
14. For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that: fluctuations and relationships that are inconsistent with other relevant information or which deviate
a. The opening balances do not contain misstatements that materially affect the current period's from predicted amounts.
financial statements. a. Analytical proceduresc. Tests of controls
b. The prior period's closing balances have been correctly brought forward to the current period b. Substantive proceduresd. Audit sampling
or, when appropriate, have been restated. 22. Analytical procedures are used for the following purposes, except:
c. Appropriate accounting policies are consistently applied or changes in accounting policies a. To assist the auditor in planning the nature, timing and extent of other audit procedures.
have been properly accounted for and adequately disclosed. b. As a test performed to obtain audit evidence about the suitability of design and effective
d. All of the above. operation of the accounting and internal control systems.
15. Opening balances means those account balances which exist at the beginning of the period. c. As substantive procedures when their use can be more effective or efficient than tests of
These are based upon the closing balances of the prior period and reflect the effects of: details in reducing detection risk for specific financial statement assertions.
I. Current transactions (e.g. stock dividends) that will be given retroactive effect recognition. d. As an overall review of the financial statements in the final review stage of the audit.
II. Transactions of prior periods. 23. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit.
III. Accounting policies applied in the prior period. Information to develop this estimate can be obtained from all of the following, except
a. All of these c. I only a. Comparison of financial data with data for comparable prior periods, anticipated results (e.g.,
b. I and II only d. II and III only budgets and forecasts), and similar data for the industry in which the entity operates.
16. Which of the following is least considered in determining the sufficiency and appropriateness of b. Study of the relationships of elements of financial data that would be expected to conform to a
the audit evidence that the auditor will obtain regarding opening balances? predictable pattern based upon the entity’s experience.
a. The length of years in operations of the entity. c. Study of the relationships of financial data with relevant nonfinancial data.
b. The materiality of the opening balances relative to the current period’s financial statements. d. Tracing transactions through the system to determine whether procedures are being applied
c. The accounting policies adopted by the entity. as prescribed.
d. The risk of misstatements of accounts. 24. Analytical procedures used as a substantive procedure focus on
17. Which of the following accounts is more difficult for the auditor to be satisfied as to the balance at a. Understanding the business and in identifying areas of potential risk.
the beginning of the period? b. Detecting material misstatements in the financial statements.
a. Accounts receivable c. Inventory c. Obtaining audit evidence about the suitability of design and effective operation of the
b. Accounts payable d. Accrued interest payable accounting and internal control systems
18. If, after performing necessary audit procedures, the auditor is unable to obtain sufficient d. Whether the financial statements as a whole are consistent with the auditor’s knowledge of the
appropriate audit evidence concerning opening balances, the auditor's report should include: business.
I. A qualified opinion 25. Which of the following statements concerning analytical procedures is true?
II. A disclaimer of opinion a. Analytical procedures may be omitted entirely for some financial statement audits.
III. An opinion which is qualified or disclaimed regarding the results of operations and cash flows b. Analytical procedures used in planning the audit should not use nonfinancial information.
and unqualified regarding financial position c. Analytical procedures usually are effective and efficient for tests of controls.
a. Any of the abovec. Either I or II d. Analytical procedures alone may provide the appropriate level of assurance for some
b. None of the aboved. I only assertions.
19. If the opening balances contain misstatements which could materially affect the current period's 26. The application of analytical procedures is based on the expectation that relationships among data
financial statements and the effect of the misstatement is not properly accounted for and exist and continue in the absence of known conditions to the contrary. Which of the following items
adequately disclosed, the auditor should express a tend to be the most predictable for purposes of analytical procedures applied as substantive tests?
 a. Relationships involving balance sheet accounts. evidence obtained during the course of the audit.
b. Transactions subject to management discretion. d. Consideration of the need to apply other audit procedures.
c. Relationships involving income statement accounts. PSA 540 – Audit of Accounting Estimates
d. Data subject to audit testing in the prior year. 34. It means an approximation of the amount of an item in the absence of a precise means of
27. Analytical procedures performed in the overall review stage of an audit suggest that several measurement
accounts have unexpected relationships. The results of these procedures most likely indicate that a. Accounting estimate c. Accounting error
a. Irregularities exist among the relevant account balances. b. Accounting policy d. Accounting change
b. Internal control activities are not operating effectively. 35. The auditor should adopt one or a combination of the following approaches in the audit of an
c. Additional tests of details are required. accounting estimate:
d. The communication with the audit committee should be revised. I. Review and test the process used by management to develop the estimate.
28. As a result of analytical procedures, the independent auditor determines that the gross profit II. Use an independent estimate for comparison with that prepared by management.
percentage has declined from 30% in the preceding year to 20% in the current year. The auditor III. Review subsequent events which confirm the estimate made.
should a. Any of the above c. Either I or II
a. Document management’s intentions with respect to plans for reversing this trend. b. None of the above d. I only
b. Evaluate management’s performance in causing this decline. 36. In evaluating the assumptions on which the estimate is based, the auditor would need to pay
c. Require footnote disclosure. particular attention to assumptions which are
d. Consider the possibility of a misstatement in the financial statements. a. Reasonable in light of actual results in prior periods.
29. An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests b. Consistent with those used for other accounting estimates.
of transactions and account balances usually is determined by the c. Consistent with management’s plans which appear appropriate.
a. Availability of data aggregated at a high level. d. Subjective or susceptible to material misstatement.
b. Relative effectiveness and efficiency of the tests. PSA 545 – Auditing Fair Value Measurements and Disclosures
c. Timing of tests performed after the balance sheet data. 37. Which statement is incorrect regarding auditing fair value measurements and disclosures?
d. Auditor’s familiarity with industry trends. a. The auditor should obtain sufficient appropriate audit evidence that fair value measurements
30. An auditor’s preliminary analysis of accounts receivable turnover revealed the following rates; and disclosures are in accordance with GAAP in the Philippines.
2005 2004 2003 b. Many measurements based on estimates, including fair value measurements, are inherently
4.3 6.2 7.3 imprecise.
Which of the following is the most likely cause of the decrease in accounts receivable turnover? c. The auditor's consideration of such assumptions is based on information available to the
a. Increase in the cash discount offered c. Shortening of due date terms auditor at the time of the audit.
b. Liberalization of credit policy d. Increased cash sales d. The auditor is responsible for predicting future conditions, transactions or events which, had
31. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained they been known at the time of the audit, may have had a significant effect on management's
decrease in the ratio of gross profit to sales suggests which of the following possibilities? actions or management's assumptions underlying the fair value measurements and
a. Unrecorded purchases disclosures.
b. Unrecorded sales 38. Which statement is incorrect regarding fair value measurements?
c. Merchandise purchases being charged to selling and general expense a. Underlying the concept of fair value measurements is a presumption that the entity is a going
d. Fictitious sales concern.
32. Analytical procedures used in the overall review stage of an audit generally include b. Fair value is normally the amount that an entity would receive or pay in a forced transaction,
a. Considering unusual or unexpected account balances that were not previously identified. involuntary liquidation, or distress sale.
b. Performing tests of transactions to corroborate management’s financial statement assertions. c. The measurement of fair value may be relatively simple for assets that are bought and sold in
c. Gathering evidence concerning account balances that have not changed from the prior year. active and open markets.
d. Retesting controls that appeared to be ineffective during the assessment of control risk. d. The estimation of fair value may be achieved through the use of a valuation model or through
33. The investigation of unusual fluctuations and relationships ordinarily begins with the assistance of an expert, such as an independent appraiser.
a. Identification significant fluctuations or relationships that are inconsistent with other relevant 39. The degree to which a fair value measurement is susceptible to misstatement is a(an)
information or that deviate from predicted amounts. a. Audit risk b. Inherent risk c. Control risk d. Detection risk
b. Inquiries of management. 40. Regarding fair value measurements and disclosures, the auditor is not required to
c. Comparing management's responses with the auditor's knowledge of the business and other a. Obtain evidence about management's intent to carry out specific courses of action, and
 consider its ability to do so, where relevant to the fair value measurements and disclosures charge.
under GAAP in the Philippines. PSA 620 – Using the Work of an Expert
b. Evaluate whether the entity's method for its fair value measurements is applied consistently. 47. Which statement is incorrect regarding the auditor’s use of the work of an expert?
c. Use the work of an expert. a. When using the work performed by an expert, the auditor should obtain sufficient appropriate
d. Test the entity's fair value measurements and disclosures. audit evidence that such work is adequate for the purposes of the audit.
41. Which of the following is ordinarily the best evidence of fair value? b. “Expert” means a person or firm possessing special skill, knowledge and experience in a
a. Published price quotations in an active market. particular field other than accounting and auditing.
b. Discounted cash flow analysis. c. The auditor's education and experience enable the auditor to be knowledgeable about
c. Comparative transaction model. business matters in general, but the auditor is not expected to have the expertise of a person
d. None of the above. trained for or qualified to engage in the practice of another profession or occupation.
42. When testing the entity's fair value measurements and disclosures, the auditor evaluates whether: d. When the auditor uses the work of an expert employed by the auditor, that work is used in the
a. The assumptions used by management are reasonable. employee's capacity as an assistant on the audit.
b. The fair value measurement was determined using an appropriate model, if applicable. 48. An expert may be:
c. Management used relevant information that was reasonably available at the time. A B C D
d. All of the above. Engaged by the entity Yes Yes Yes Yes
PSA 550 – Related Parties Engaged by the auditor No No No Yes
43. Which statement is incorrect regarding the auditor's responsibilities and audit procedures Employed by the entity Yes Yes No Yes
regarding related parties and transactions with such parties? Employed by the auditor No No Yes Yes
a. The auditor should perform audit procedures designed to obtain sufficient appropriate audit 49. Which of the following least likely requires the services of an expert?
evidence regarding the identification and disclosure by management of related parties and the a. Valuations of certain types of assets like land and buildings.
effect of related party transactions that are material to the financial statements. b. Legal opinions concerning interpretations of engagements, statutes and regulations.
b. An audit cannot be expected to detect all related party transactions. c. Determination of amounts using specialized techniques.
c. The auditor is responsible for the identification and disclosure of related parties and d. Application of accounting methods in computing inventory balances.
transactions with such parties. 50. When the auditor has to determine the need to use the work of an expert, he would least likely
d. The auditor needs to have a level of knowledge of the entity's business and industry that will consider:
enable identification of the events, transactions and practices that may have a material effect a. The cost of using the services of an expert.
on the financial statements. b. The quantity and quality of other audit evidence available.
44. When auditing related-party transactions, an auditor places primary emphasis on c. The materiality of the financial statement item being considered.
a. Confirming the existence of the related parties. d. The risk of misstatement based on the nature and complexity of the matter being considered.
b. Verifying the valuation of the related-party transactions. 51. Which of the following statements concerning the auditor’s use of the work of a specialist is true?
c. Evaluating the disclosure of the related-party transactions. a. If the auditor believes that the determinations made by the specialist are unreasonable, only a
d. Ascertaining the rights and obligations of the related parties. qualified opinion may be expressed.
45. After determining that a related-party transaction has, in fact, occurred, and auditor should b. If the specialist is related to the client, the auditor is still permitted to use the specialist’s
a. Add a separate paragraph to the auditor’s standard report to explain the transaction. findings as corroborative evidence.
b. Perform analytical procedures to verify whether similar transactions occurred, but were not c. The specialist may not be related to the client.
recorded. d. The specialist is identified in the auditor’s report when the auditor expresses an unqualified
c. Obtain an understanding of the business purpose of the transaction. opinion.
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length 52. In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s
transaction. report. This is an appropriate reporting practice if the
46. Which of the following least likely indicates the existence of previously unidentified related parties? a. Auditor is not familiar with the professional certification, personal reputation, or particular
a. Transactions which have abnormal terms of trade., such as unusual prices, interest rates, competence of the specialist.
guarantees, and repayment terms. b. Auditor, as a result of the specialist’s findings, adds an explanatory paragraph emphasizing a
b. Transactions which lack an apparent logical business reason for their occurrence. matter regarding the financial statements.
c. Transactions in which substance does not differ from form. c. Specialist is aware that his/her work will be used to evaluate the assertions in the financial
d. Unrecorded transactions such as the receipt or provision of management services at no statements.
 d. Auditor, as a result of the specialist’s findings, decides to indicate a division of responsibility III. By obtaining a signed copy of the financial statements.
with the specialist. a. Any of the above b. Either I or II c. I only d. None of the above
PSA 560 – Subsequent Events 58. A purpose of a management representation letter is to reduce
53. Which of the following statements best expresses the auditor’s responsibility with respect to a. Audit risk to an aggregate level of misstatement that could be considered material.
events occurring in the subsequent events period? b. An auditor’s responsibility to detect material misstatements only to the extent that the letter is
a. The auditor has no responsibility for events occurring in the subsequent period unless these relied on.
events affect transactions recorded on or before the balance sheet date. c. The possibility of a misunderstanding concerning management’s responsibility for the financial
b. The auditor’s responsibility is to determine that transactions recorded on or before the balance statements.
sheet date actually occurred. d. The scope of an auditor’s procedures concerning related party transactions and subsequent
c. The auditor is fully responsible for events occurring in the subsequent period and should events.
extend all detailed procedures through the last day of field work. 59. When an audit is made in accordance with Philippine Standards on Auditing, the auditor should
d. The auditor is responsible for determining that a proper cutoff has been made and for always
performing a general review of events occurring in the subsequent period. a. Document the understanding of the client’s internal control and the basis for all conclusions
54. Which of the following procedures should an auditor ordinarily perform regarding subsequent about the assessed level of control risk for financial statement assertions.
events? b. Employ analytical procedures as substantive tests to obtain evidence about specific assertions
a. Compare the latest available interim financial statements with the financial statements being related to account balances.
audited. c. Obtain appropriate representations from management.
b. Send second requests to the client’s customer who failed to respond to initial accounts d. Observe the taking of physical inventory on the balance sheet date.
receivable confirmation requests. 60. For which of the following matters should an auditor obtain written management representations?
c. Communicate material weaknesses in the internal control to the client’s audit committee. a. Management’s cost-benefit justifications for not correcting internal control weaknesses.
d. Review the cutoff bank statements for several months after the year-end. b. Management’s knowledge of future plans that may affect the price of the entity’s stock.
55. Which of the following is least likely a procedure that would be performed by the auditor near the c. Management’s compliance with contractual agreements that may affect the financial
auditor’s report date? statements.
a. Reading the minutes of the meetings of shareholders, the board of directors and audit d. Management’s acknowledgment of its responsibility for employee’s violations of laws.
executive committees held throughout the audit year. 61. When considering the use of management’s written representations as audit evidence about the
b. Reading the entity’s latest available interim financial statements. completeness assertion, an auditor should understand that such representations
c. Inquiring of the client’s legal counsel concerning litigations and claims. a. Complement, but do not replace, substantive tests designed to support the assertion.
d. Reviewing the procedures that management has established to ensure that subsequent b. Constitute sufficient evidence to support the assertion when considered in combination with a
events are identified. sufficiently low assessed level of control risk.
56. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other c. Are not part of the evidence considered to support the assertion.
procedures concerning audited financial statements, unless d. Replace a low assessed level of control risk as evidence to support the assertion.
a. Information, which existed at the report date and may affect the report, comes to the auditor’s 62. A written representation from a client’s management that, among other matters, acknowledges
attention. responsibility for the fair presentation of financial statements, should normally be signed by the
b. The control environment changes after issuance of the report. a. Chief executive officer and the chief financial officer.
c. Information about an event that occurred after the end of field work comes to the auditor’s b. Chief financial officer and the chair of the board of directors.
attention. c. Chair of the audit committee of the board of directors.
d. Final determinations or resolutions are made of contingencies that had been disclosed in the d. Chief executive officer, the chair of the board of directors, and the client’s lawyer.
financial statements. 63. If management refuses to furnish certain written representations that the auditor believes are
PSA 580 – Management Representations essential, which of the following is appropriate?
57. The auditor should obtain evidence that management acknowledges its responsibility for the fair a. The auditor can rely on oral evidence relating to the matter as a basis for an unqualified
presentation of the financial statements in accordance with GAAP in the Philippines, and has opinion.
approved the financial statements.The auditor can obtain evidence of management's b. The client’s refusal does not constitute a scope limitation that may lead to a modification of the
acknowledgment of such responsibility and approval opinion.
I. From relevant minutes of meetings of the board of directors or similar body. c. The client’s refusal may have an effect on the auditor’s ability to rely on other representations
II. By obtaining a written representation from management. of management.
 d. The auditor should express an adverse opinion because of management’s refusal. 70. Which statement is incorrect regarding small entities?
64. A management representation letter would ordinarily be dated as of the a. Small business entities ordinarily have few owners; often there is a single proprietor.
a. Date the report is delivered to the entity audited. b. Record keeping may be unsophisticated or poor, which results in a greater risk that the
b. Date the financial statements were approved by the client management. financial statements may be inaccurate or incomplete.
c. Balance sheet date of the latest period reported on. c. Size and economic considerations in small entities mean that internal controls are often
d. Date a letter of audit inquiry is received from the entity’s attorney of record. neither necessary nor desirable.
PAPS 1000 – Inter-Bank Confirmation Procedures d. In many small entities, accounting populations are often small and easily analyzed.
65. The purpose of this Statement is to provide assistance on inter-bank confirmation procedures to 71. Which of the following quality control policies and procedures may not be relevant sole
the external independent auditor, to bank management, such as internal auditors, and to BSP practitioners with no assistants auditing small entities?
examiners. a. Consultationc. Assignment
a. PAPS 1000 b. PAPS 1004 c. PAPS 1005 d. PAPS 1006 b. Monitoringd. Professional requirements
66. Which statement is incorrect regarding inter-bank confirmations? 72. Which statement is correct regarding the application of PSAs to audit of small entities?
a. The requirement for bank confirmation arises from the need of the bank's management and its a. The auditor’s in-depth understanding of the entity and its business may eliminate the need for
auditors to confirm the financial and business relationships. the auditor to maintain adequate working papers.
b. While inter-bank relationships are similar in nature to those between the bank and a non-bank b. The auditor would not ordinarily accept an audit engagement in which the terms of the
customer, there may be special significance in some inter-bank relationships. engagement are such that the auditor believes that the need to express a disclaimer of opinion
c. The auditor should decide from which bank or banks to request confirmation, have regard to exists.
such matters as size of balances, volume of activity, degree of reliance on internal controls, c. The requirements of PSA 220 relating to quality control on individual audits are not relevant to
and materiality within the context of the financial statements. audit of small entities.
d. It is usual practice to request a response only if the information submitted is incorrect or d. All small entities are to be regarded by the auditor as necessarily involving a higher risk of
incomplete. fraud or error than larger entities.
67. Encumbrance is 73. In the audit of small entities, there are particular problems in obtaining audit evidence to support
a. A security given by a borrower to a lender as a pledge for repayment of a loan, rarely given in what assertion?
the case of inter-bank business. a. Existenceb. Completenessc. Valuationd. Rights
b. A potential liability, which only crystallize upon the fulfillment of or the failure to fulfill certain 74. Which of the following services is prohibited to be rendered to an audit client?
conditions. a. Bookkeeping services.
c. A claim or lien, such as a mortgage upon real property, which diminishes the owner's equity in b. Advising on the selection and application of accounting policies.
the property. c. Assisting with the preparation of financial statements.
d. The right of a bank, normally evidenced in writing, to take possession of any account balances d. All of the above.
that a guarantor or debtor may have with it to cover the obligations to the bank of the PAPS 1000ph – Audit Evidence-Practical Problems in Audit of Financial Statements
guarantor, debtor or third party. 75. PAPS 1000ph focuses on
PAPS 1005 – The Special Consideration In An Audit of Small Entities a. The scope limitations due to the inability of the client to prepare schedules, reports or
68. A small entity is any entity in which the following can be found, except computations or the failure to reconcile differences in audit due to the poor condition of the
a. There is concentration of ownership and management in a small number of individuals (often a accounting records.
single individual). b. Instances when the documents or information exist but are not made available to the auditor.
b. Numerous sources of income. c. Instances when the scope limitation is imposed by the client or by circumstances.
c. Unsophisticated record-keeping. d. Instances when a particular audit procedure is beyond the area of expertise of the auditor.
d. Limited internal controls together with the potential for management override of controls. 76. The additional audit procedures to be performed by the auditor when the client fails to prepare
69. Which of the following factors are considered in determining the applicability of PSAs in an audit of certain audit requirements may be determined based on the:
financial statements? I. Materiality and the importance of the account(s) affected.
A B C D II. Quality of the audit evidence obtained thus far, whether it is an initial audit or a recurring audit.
Yes Yes Yes No • Size of the entity III. Feasibility and timeliness of coming up with a solution for the problem.
Yes No Yes No • Legal form of the entity IV. Agreed-upon reporting requirements.
Yes Yes No No • Ownership or management structure of the entity a. I, II, III and IV b. I, II and III c. I and II d. I and IV
Yes Yes No No • Nature of the entity’s activities 77. When management fails to prepare schedules or reports for an item that is material to the financial
statements needed by the auditor in his audit despite an earlier agreed-upon timetable, the auditor
should not:
a. Evaluate the reasons why management is unable to prepare his audit requirements.
b. Discuss with management his position concerning the preparation of the audit requirements as
early as the planning stage and not when the audit is almost completed.
c. Agree on a revised timetable within which the requirements are to be prepared by the
management and, where management is still unable to prepare the schedules/reports, decide
on the most appropriate course of action under the circumstances.
d. Prepare his own audit requirements if doing so would compromise his independence since he
might end up auditing his own work.
78. Which of the following is incorrect regarding audit procedures to be performed by the auditor when
the client fails to prepare certain audit requirements?
a. The auditor has the responsibility to ensure that management addresses the reasons that
prevent management from preparing the auditor’s requirements.
b. When the inadequacy in recordkeeping or accounting records of the client that gives rise to its
inability to provide the information being required by the auditor is not corrected or addressed
within a reasonable period of time of, say, one year, this could indicate the existence of
situations or weaknesses in the system that require the auditor to exercise professional
skepticism.
c. It is sufficient for client to merely prepare a schedule or analysis required by the auditor.
d. Limiting the discussion of problems or issued encountered during the audit to middle
management without involving the people who make decisions is self-defeating and not
advisable, regardless of circumstances.