COMPREHENSIVE REVIEWER

AUDITING THEORY

1. In determining the primary responsibility of the external auditor for an audit of a

company‟s financial statements, the auditor owes primary allegiance to:
A. the management of the audit client because the auditor is hired and paid by
management.
B. the audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company.
C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it determines auditing
standards and auditor‟s responsibility.

2. Which of the following would not represent one of the primary problems that would lead the
users to demand for independent audits of a company‟s financial statements?
A. Management bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
D. The remoteness of the user from the organization and thus the inability of the user to
directly obtain financial information from the company.
3. 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.
4. 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.
5. 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.
C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.
6. 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.
7. Financial statements audits:
A. reduce the cost of capital
B. report on compliance with laws and regulations
C. assess management„s efficiency
D. overlook information risk

8. 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
9. The risk associated with a company's survival and profitability is referred to as:
A. Business Risk
B. Information Risk
C. Detection Risk
D. Control Risk
10. An engagement in which a CPA firm arranges for a critical review of its practices by another
CPA firm is referred to as a(n):
A. Peer Review Engagement
B. Quality Control Engagement
C. Quality Assurance Engagement
D. Attestation Engagement
11. Attestation risk is limited to a low level in which of the following engagement(s)?
A. Both examinations and reviews
B. Examinations, but not reviews
C. Reviews, but not examinations
D. Neither examinations nor reviews
12. .An operational audit differs in many ways from an audit of financial statements. Which of
the following is the best example of one of these differences?
A. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement
B. The boundaries of an operational audit are often drawn from an organization chart and
are not limited to a single accounting period
C. Operational audits do not ordinarily result in the preparation of a report
D. The operational audit deals with pre-tax income
13. 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

14. 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.
15. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm
B. The senior assigned to the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement

16. 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
17. The auditor of financial statements must make very difficult interpretations regarding
authoritative literature. Additionally, the auditor must
A. proceed beyond PFRS to assess how the economic activity is portrayed in the financial
statements.
B. force management to make certain decisions regarding their financial statements.
C. disregard independence in order to find the underlying truth of the evidence.
D. establish new criteria by which financial statements may be compared.
18. Which one of the following is not a part of the attest process?
A. gathering evidence about assertions
B. proving the accuracy of the books and records
C. evaluating evidence against objective criteria
D. communicating the conclusions reached
19. Which one of the following is not a reason why the users of financial statements desire for an
independent assessment of the financial statement presentation?
A. complexity of transactions affecting the financial statements
B. lack of criteria on which to base information
C. remoteness of the user from the organization
D. all of them are potential reasons
20. Independent professional services that are provided on financial or other information that
improve the quality of decision making are known as
A. internal auditing.
B. financial auditing.
C. assurance services.
D. attestation services.
21. An audit which determines whether organizational policies are being followed and whether
external mandates are being met is known as
A. a financial audit.
B. a compliance audit.
C. an operational audit.
D. none of the above
22. May a CPA hire for the CPA‟s public accounting firm a non-CPA systems analyst who
specializes in developing computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist‟s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate the
specialist‟s end product.
C. No, because non-CPA professionals are not permitted to be associated with CPA firms
in public practice.
D. No, because developing computer systems is not recognized as a service performed by
public accountants.

23. Which of the following services may a CPA perform in carrying out a consulting service
for a client?

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
24. Which of the following describes how the objective of a review of financial statements
differs from the objective of a compilation engagement?
A. The primary objective of a review engagement is to test the completeness of the
financial statements prepared, but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide positive assurance that the
financial statements are fairly presented, but a compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance, but a compilation
expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive assurance that the
financial statements are fairly presented, but a compilation provides limited assurance.

25. Which of the following factors most likely would cause a CPA to decline a new audit
engagement?
A. The CPA does not understand the entity's operations and industry.
B. Management acknowledges that the entity has had recurring operating losses.
C. The CPA is unable to review the predecessor auditor's working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
26. When a firm or a member of the assurance team holds a direct financial interest or a material
indirect financial interest in the assurance client as a trustee, a self-interest threat may be
created by the possible influence of the trust over the assurance client. Accordingly, such an
interest cannot be held when:
A. The member of the assurance team, an immediate family member of the member of
the assurance team, and the firm are beneficiaries of the trust.
B. The interest held by the trust in the assurance client is not material to the trust.
C. The trust is not able to exercise significant influence over the assurance client.
D. The member of the assurance team or the firm does not have significant influence over
any investment decision involving a financial interest in the assurance client.

27. An inadvertent violation of the Independence rules as it relates to a financial interest in an

assurance client would not impair the independence of the firm, the network firm or a
member of the assurance team when:
A. The firm, and the network firm, has established policies and procedures that require all
professionals to report promptly to the firm any breaches resulting from the purchase,
inheritance or other acquisition of a financial interest in the assurance client.
B. The firm, and the network firm, promptly notifies the professional that the financial
interest should be disposed of.
C. The disposal occurs at the earliest practical date after identification of the issue, or the
professional is removed from the assurance team.
D. All of the given choices.

28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client
of the firm, the appropriate safeguard against the self-interest threat created would be:
A. Dispose the entire financial interest.
 B. Dispose of a sufficient amount of the financial interest so that the remaining interest is
no longer material.
C. Any of the two is appropriate.
D. None of the two is appropriate.

29. If a firm, or a network firm, has a material financial interest in an entity that has a
controlling interest in a financial statement audit client, the self interest threat created is so
significant. The audit firm can only perform the engagement if it:
I. Dispose of the entire financial interest.
II. Dispose of a sufficient amount of the financial interest so that the remaining
interest is no longer significant.
A. Either I or II
B. Neither I nor II
C. I only
D. II only

30. Which of the following safeguards is inappropriate if a firm has a material financial interest
in an entity that has a controlling interest in a financial statement audit client?
A. Discuss the presence of self-interest threat with the client‟s board of directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the financial interest in
total.

31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a
financial statement audit client. If the self-interest threat that is created by the financial
interest is significant, the firm that intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no longer material.
B. Discuss the matter with the audit committee of the financial statement audit client.
C. Refer the audit of the stockholders‟ equity of the financial statement audit
client to other CPA.
D. Either dispose of the financial interest in total or a sufficient amount so that the
remaining amount is no longer material.

32. The following loans and guarantees would not create a threat to independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures,
terms and requirements and the loan is immaterial to both the firm and the assurance
client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
C. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
D. If the firm, or a member of the assurance team, makes a loan to an assurance client that
is not a bank or similar institution, or guarantees such an assurance client's borrowing.

33. Examples of close business relationships that may create self-interest and intimidation
threat least likely include:
A. Having a material financial interest in a joint venture with the assurance client or a
controlling owner, director, officer or other individual who performs senior managerial
functions for that client.
 B. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
C. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client‟s products or services, or the assurance client acts
as the distributor or marketer of the products or services of the firm.
D. The purchase of goods and services from an assurance client by the firm (or from an
audit client by a network firm) or a member of the assurance team, provided the
transaction is in the normal course of business and on an arm‟s length basis.

34. When a firm or a member of the assurance team and the audit client or one of its officers
hold interest in a closely-held entity, a threat to independence is not created, except:
A. The relationship is clearly insignificant to the firm or a member of the assurance team
and the audit client.
B. The relationship is other than insignificant which is acceptable for indirect financial
interest.
C. The interest held is immaterial to the investor or group of investors.
D. The interest does not give the investor, or group of investors, the ability to control the
closely-held entity.

35. When an immediate family member of a member of the assurance team is a director or an
officer of the assurance client in a position to exert direct and significant influence over the
subject matter information of the engagement, the threat to independence can only be
reduced to an acceptable level, aside from withdrawing from the engagement, by:
A. Removing the individual from the assurance team.
B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family member of the
professional to go on forced vacation leave.

36. Which of the following relationships is most likely to impair a CPA‟s independence with
respect to a particular audit client on which the CPA works as a member of the engagement
team?
A. A close relative has a material investment in that client of which the CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA is not aware.
C. The CPA‟s father is the president of the audit client.
D. The CPA‟s spouse participates in a savings plan sponsored by the client.

37. An inadvertent violation of the rules on family and personal relationships would not impair
the independence of a firm or a member of the assurance team when:
A. The firm has established policies and procedures that require all professionals to report
promptly to the firm any breaches resulting from changes in the employment status of
their immediate or close family members or other personal relationships that create
threats to independence.
B. Either the responsibilities of the assurance team are re-structured so that the
professional does not deal with matters that are within the responsibility of the person
with whom he or she is related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.
38. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats
created is least likely affected by
A. The position the individual has taken at the assurance client.
B. The amount of any involvement the individual will have with the assurance team.
C. The length of time that the individual was a member of the assurance team or firm.
D. The former position of the individual within the assurance team or firm.

39. Using the same senior personnel on an assurance engagement over a long period of time
may create a familiarity threat. The significance of the threat will least likely depend upon
A. The length of time that the individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.

40. A small CPA firm provides audit services to a large local company. Almost 80 percent of
the CPA firm‟s revenues come from this client. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative assurance
care in the audit.
D. The auditor should provide an “emphasis of a matter paragraph‟ to his audit
report adequately disclosing this information and then it may issue an unqualified
opinion.

41. A professional accountant has been the partner-in-charge of a particular audit client for the
past eight years. This situation could result to the following threat to professional
independence:
A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity

42. Which statement is incorrect regarding long association of senior personnel with audit
clients that are listed entities?
A. Using the same lead engagement partner on an audit over a prolonged period may
create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined period, normally no
more than six years.
C. A partner rotating after a pre-defined period should not participate in the audit until a
further period of time, normally two years, has elapsed.
D. When audit client becomes a listed entity the length of time the lead engagement
partner has served the audit client in that capacity should be considered in determining
when the partner should be rotated.

43. The professional accountant who has been the lead engagement partner for an audit
engagement for a prolonged period of time may continue to serve as the lead engagement
partner before rotating off the engagement for how many years after the audit client
becomes a listed entity?
A. One year
B. Three years
C. Two years
D. Four years
44. While the lead engagement partner should be rotated after such a pre-defined period, some
degree of flexibility over timing of rotation may be necessary in certain circumstances.
Examples of such circumstances include:
A. Situations when the lead engagement partner‟s continuity is especially important to
the audit client, for example, when there will be major changes to the audit
client‟s structure that would otherwise coincide with the rotation of the lead
engagement partner.
B. Situations when, due to the size of the firm, rotation is not possible or does not
constitute an appropriate safeguard.
C. Both choices are correct.
D. Both choices are incorrect.

45. A CPA can continue to be an engagement partner on the audit of financial statements of
listed entities over a prolonged period of engagement. In order to avoid a creation of
familiarity threat, subject to transitional provisions, how many years are prescribed by the
as maximum for the CPA to continue serving as engagement partner for a listed entity?
A. Five years
B. Three years
C. Seven years
D. Ten years

46. An engagement partner who is rotated in the audit of financial statements of listed entity
can only participate in the audit engagement for the same client after a period of:
A. Twelve months
B. Two years
C. Three years
D. Five years

47. The following activities would generally create self-interest or self-review threats that are
so significant and that only avoidance of the activity or refusal to perform the assurance
engagement would reduce the threats to an acceptable level, except
A. Authorizing, executing or consummating a transaction, or otherwise exercising
authority on behalf of the assurance client, or having the authority to do so.
B. Determining which recommendation of the firm should be implemented.
C. Reporting, in a management role, to those charged with governance.
D. Providing technical assistance and advice on accounting principles for audit clients.

48. Which of the following may not create a self-review threat?

A. Supervising assurance client employees in the performance of their normal recurring
duties.
B. Preparing source documents in electronic or other form evidencing a business
transaction.
C. Prolonged period of assignment as member of engagement team in one particular audit
engagement.
D. Performing corporate financial services for the audit client.

49. If firm, or network firm, personnel providing such assistance make management decisions,
the self-review threat created could not be reduced to an acceptable level by any
safeguards. Examples of such managerial decisions include the following, except
A. Determining or changing journal entries, or the classifications for accounts or
transactions or other accounting records without obtaining the approval of the audit
clients
B. Authorizing or approving transactions.
 C. Preparing source documents or originating data (including decisions on evaluation
assumptions), or making changes to such documents or data.
D. Assisting an audit client in resolving account reconciliation problems.

50. The following services are considered to be a normal part of the audit process and do not,
under circumstances, threaten independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in the preparation of consolidated financial statements.
C. Drafting disclosure items.
D. Having custody of an assurance client‟s assets.

51. Which of the following will an auditor least likely discuss with the former auditors of a
potential client prior to acceptance of an audit engagement?
A. Integrity of the management
B. Fees charged for the services
C. Disagreements between the predecessor auditor and the management regarding
accounting principles
D. Reasons for changing audit firms

52. What is the most likely course of action to be taken by an auditor in assessing management
integrity?
A. Tour the plant
B. Review the minutes of the board of directors
C. Research the background and histories of officers
D. Review the bank reconciliation statements

53. An engagement letter should be written before the start of an audit because
A. it may limit the auditor‟s legal liability by specifying the auditor‟s responsibilities.
B. it specifies the client‟s responsibility for preparing schedules and making the
records available to the auditor.
C. it specifies the basis for billing the audit for the upcoming year.
D. All of the choices given are correct

54. When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether:
A. the predecessor's work should be utilized.
B. the company follows the policy of rotating its auditors.
C. in the predecessor's opinion, internal control of the company is satisfactory.
D. the engagement should be accepted.

55. A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of noncompliance to laws is usually set forth in a(an)
A. client representation letter.
B. letter of audit inquiry.
C. management letter.
D. engagement letter.
56. Prior to acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should
A. contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstances leading to the termination of the engagement with
an understanding that all information disclosed will be kept confidential.
B. accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination of
the engagement.
C. not communicate with the predecessor auditor because this would in effect be asking
the auditor to violate the confidential relationship between an auditor and the client.
D. advise the client of the intention to contact the predecessor auditor and request a
permission for the contact.

57. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessor‟s

A. opinion of any subsequent events occurring since the predecessor‟s audit report
was issued.
B. understanding as to the reasons for the change of auditors.
C. awareness of the consistency in the application of PFRS between periods.
D. evaluation of all matters of continuing accounting significance.

58. A successor auditor would most likely make specific inquiries of the predecessor auditor
regarding
A. specialized accounting principles being used by the client‟s industry.
B. the competency of the client‟s internal audit staff.
C. the uncertainty inherent in applying sampling procedures.
D. disagreements with management as to auditing procedures.

59. Which of the following statements concerning materiality thresholds is incorrect?

A. Aggregate materiality thresholds are a function of the auditor's preliminary judgment
concerning audit risk.
B. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
C. The smallest aggregate level of errors or fraud that could be considered material to any
of the financial statements is referred to as a "materiality threshold."
D. Materiality thresholds may change between the planning and review stages of the
audit. These changes may be due to quantitative and/or qualitative factors.

60. Which of the following concepts about materiality is incorrect?

A. Materiality is directly related to the acceptable level of detection risk.
B. Materiality does not apply if internal control is highly effective.
C. Materiality is a matter of professional audit judgment.
D. Materiality is more closely related to fieldwork and reporting standards than to general
standards.
61. Which of the following would not be a source of information about the risk of a potential
new audit client?
A. The predecessor auditor
B. Management
C. The internet
D. The new auditor‟s permanent file

62. In comparing management fraud with employee fraud, the auditor‟s risk of failing
to discover the fraud is greater for:
A. employee fraud because of the larger number of employees in the organization.
B. employee fraud because of the higher crime rate among blue collar workers.
C. management fraud because of management‟s ability to override existing
internal controls.
D. management fraud because managers are inherently smarter than employees.

63. Management‟s integrity affects all of the following risks except:

A. enterprise risk
B. financial reporting risk
C. engagement risk
D. all of the above risks are affected

64. The auditor is most likely to presume that a high risk of irregularities exists if
A. the client is a multinational company that does business in numerous foreign countries.
B. the client does business with several related parties.
C. inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
D. inadequate employee training results in lengthy EDP exception reports each month.

65. Which of the following audit risk components may be assessed in non-quantitative terms?
Inherent Risk Control Risk Detection Risk
A. Yes Yes No
B. Yes No Yes
C. No Yes Yes
D. Yes Yes Yes
66. Which of the following combinations of engagement risk, audit risk, and materiality would
lead the auditor to most audit work?
Engagement Risk Audit Risk Materiality
A. Low High High
B. Moderate Low Low
C. Low Moderate Low
D. High High High

67. Which of the following conditions justifies an auditor‟s decision of raising the
materiality level?
A. Internal control over revenue and receipts cycle is excellent.
 B. Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.

68. Which of the following does an auditor least likely perform in assessing audit risk?
A. Gather audit evidence in support of recorded transactions.
B. Obtain an understanding of the client's system of internal control.
C. Understand the economic substance of significant transactions completed by the client.
D. Understand the entity and the industry in which it operates.

69. Which type of risk does the management of a company have the most control over in the
short term?
A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk

70. In which of the following order would the auditors perform the following steps?
A. Determine audit risk; assess control risk; determine detection risk; set materiality.
B. Set materiality; determine audit risk; assess control risk; determine detection risk.
C. Set materiality; assess control risk; determine detection risk; determine audit risk.
D. Determine audit risk; set materiality; assess control risk; determine detection risk.

71. If the results of the auditor's tests of controls induce the auditor to change the assessed
level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain
constant, what is the effect on the acceptable level of detection risk?
A. A change in detection risk cannot be calculated because audit risk and inherent risk
values are not given.
B. Detection risk would increase from 0.3 to 0.6.
C. Detection risk would decrease from 0.4 to 0.2.
D. Detection risk would not change since audit risk and inherent risk do not change.

72. Which of the following may cause the management to intentionally understate profits?
A. Management wants to create "cookie jar" reserves for a rainy day.
B. The company is under scrutiny by tax authorities.
C. The company is suffering a large loss and wants to take a "big bath."
D. All of the given choices

73. Which of the following is true?

A. Auditors are responsible for detecting all fraudulent financial reporting.
B. Auditors must specifically consider fraud risk from overstating liabilities.
C. Auditors must specifically consider fraud risk from management override of controls.
D. All of them are true
74. Why should the auditor plan more work on individual accounts as lower acceptable levels
of both audit risk and materiality are established?
A. To find smaller errors
B. To find larger errors
C. To increase the tolerable error in the accounts
D. To decrease the risk of overreliance

75. With respect to errors and fraud, the auditor should plan to
A. search for errors or fraud that would have a material effect on the financial statements.
B. discover errors or fraud that would have a material effect on the financial statements.
C. search for errors that would have a material effect and for fraud that would have either
material or immaterial effects on the financial statements.
D. search for fraud that would have a material effect and for errors that would have either
material or immaterial effects on the financial statements.

76. The auditor‟s responsibility for identifying "direct-effect" non-compliance to laws

and regulations differs from their responsibility for detecting
A. errors.
B. indirect-effect non-compliance to laws and regulations.
C. fraud.
D. management fraud.

77. The element of the audit planning process most likely to be agreed upon with the client
before the implementation of the audit strategy is the determination of the
A. timing of inventory observation procedures to be performed.
B. evidence to be gathered to provide a sufficient basis for the auditor's opinion.
C. procedures to be undertaken to discover litigation, claims, and assessments.
D. pending legal matters to be included in the inquiry of the client's attorney.

78. Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to various accounts?
A. Attribute sampling
B. Materiality
C. The reliability of information
D. Management fraud

79. With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
A. An engagement proposed after the fiscal year ends should not be accepted.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of the specific audit procedures that
will be performed.
D. It is an acceptable practice to carry out substantial parts of the examination at interim
dates.

80. Which of the following is not a consideration in the development of audit programs?
 A. Internal control over the recording of plant asset additions and repairs and maintenance
expenditures is found to be weak.
B. The client constructed a major addition to its central manufacturing facility during the
year under audit.
C. The client is a private university located in Southern Philippines.
D. The members of the board of directors are elected by the stockholders during the
annual meeting.

81. An audit program provides a proof that

A. sufficient competent evidential matter is obtained.
B. the work is adequately planned.
C. there is compliance with generally accepted standards of reporting.
D. there is a proper study and evaluation of internal control.

82. The principal reason for developing a written audit program is to help assure that the
A. audit work is properly supervised.
B. audit work is properly planned and documented.
C. audit report contains only significant findings.
D. work of different auditors is properly coordinated.

83. One of the primary uses of an audit program is to

A. serve as a tool for planning, directing, and controlling the audit work.
B. document an auditor's understanding of the internal control.
C. provide for a standardized approach to the audit engagement.
D. delineate the audit risk accepted by the auditor .
84. Which of the following questions would an auditor most likely include in an internal control
questionnaire for notes payable?
A. Are assets that collateralize notes payable critically needed for the entity‟s
continued existence?
B. Are two or more authorized signatures required on checks that repay notes payable?
C. Are the proceeds from notes payable used for the purchase of noncurrent assets?
D. Are direct borrowings on notes payable authorized by the board of directors?

85. In an auditor‟s consideration of internal control, the completion of a questionnaire is

most closely associated with which of the following?
A. Separation of duties
B. Flowchart accuracy
C. Understanding the system
D. Tests of controls

86. During the review of the client‟s system of internal control, the auditor observes the
client employees as they apply the operating controls in order to
A. prepare a flowchart.
B. update information contained in the organization and procedure manuals.
C. corroborate the information obtained during the initial review of the system.
D. determine the extent of compliance with quality control standards.
87. An auditor‟s flowchart of a client‟s internal controls is a diagram depicting the auditor‟s
A. understanding of the internal controls.
B. program for tests of controls.
C. documentation of consideration of internal controls.
D. understanding of the types of irregularities that are probable.

88. Which of the following statements regarding the auditor‟s documentation of the
client‟s internal control structure is correct?
A. Documentation must include flow charts.
B. Documentation must include procedural write-ups.
C. No documentation is necessary although it is desirable.
D. No one particular form of documentation is necessary, and the extent of documentation
may vary.

89. Which of the following is the auditor‟s purpose of further testing the internal
control procedures?
A. Provide a basis for reducing the assessed level of control risk.
B. Reduce the risk that error or fraud that has not been prevented or detected by the
internal control system is not detected by the independent audit.
C. Provide assurance that transactions are executed in accordance with management's
authorization and access to assets is limited by a segregation of functions.
D. Provide assurance that transactions are recorded as necessary to permit the preparation
of the financial statements in conformity with PFRS.

90. Tests of controls are concerned primarily with each of the following questions except:
A. How were the controls applied?
B. Why were the controls applied?
C. Were the necessary controls consistently performed?
D. By whom were the controls applied?

91. The objective of tests of details of transactions that are being performed as tests of controls
procedures is to
A. monitor the design and use of entity documents such as pre-numbered shipping form.
B. determine whether controls have been placed in operation.
C. detect material misstatements in the account balances in the financial statements.
D. evaluate whether controls operate effectively.

92. Which of the following is ordinarily considered a test of internal control procedures?
A. Send confirmation letters to banks.
B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliation of bank accounts as of the balance sheet date.
93. Auditors can use several types of audit procedures to test controls. Which of the following
type of audit procedures is least likely to be used during tests of controls?
A. Physical examination of assets
 B. Inquiries of client personnel
C. Examination of documents, records, and reports
D. Observation of control-related activities.

94. The objective of dual-purpose tests is to:

A. Evaluate whether internal controls are operating effectively.
B. Detect material misstatements in the financial statements.
C. Identify unusual trends or patterns in comparative financial statements.
D. Test internal controls as well as transactions and balances using the same test
procedures.

95. Which of the following types of evidence will be gathered in order to test internal controls?
A. Confirmations of accounts receivable with customers.
B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.

96. Tests of controls least likely include:

A. Inquiries of appropriate client vendors.
B. Reperformance of a control.
C. Observation of the application of an accounting procedure.
D. Inspection of documents.

97. A procedure that would most likely be used by an auditor in performing tests of control
regarding segregation of functions on which no audit trail is available:
A. inspection.
B. observation.
C. reprocessing.
D. reconciliation.
98. The primary purpose of performing further control tests is to provide
A. a basis for reducing the assessed level of control risk below the maximum level.
B. a basis for understanding the flow of transactions through the accounting system.
C. assurance that transactions are properly recorded.
D. all accounting control procedures leave visible evidence.

99. Which of the following procedures most likely would be included as part of an auditor's
tests of control procedures?
A. Inspection
B. Reconciliation
C. Confirmation
D. Analytical procedures

100. Which of the following audit tests would be a test of controls?

A. Tests of the specific items making up the balance in a financial statement account.
B. Comparing inventory prices to vendors‟ invoices.
C. Tracing signatures on canceled checks to board of directors‟ authorizations.
 D. Tests of the additions to property, plant, and equipment by physical inspections.

101. For a particular assertion, control risk is the risk that

A. controls will not detect a material misstatement that occurs.
B. audit procedures will fail to detect a weak control system.
C. the prescribed control procedures will not be applied uniformly.
D. a material misstatement will occur in the accounting process.

102. Which of the following is an incorrect statement?

A. An example of a completeness assertion would be that notes payable in the balance
sheet includes all such obligations of the entity.
B. An example of an occurrence assertion would be that sales in the income statement
represent exchanges of goods or services that actually take place.
C. An example of a rights/obligations assertion would be that amounts capitalized for
leases in the balance sheet represent the cost of the entity‟s rights to leased property.
D. An example of a valuation/allocation assertion would be that property, plant, and
equipment are recorded at market value.

103. A distinction must be made between general audit objectives and specific audit objectives
for each account balance. Which of the following is an incorrect statement?
A. The general audit objectives are applicable to every account balance on the
financial statements.
B. The specific audit objectives are applicable to every account balance on the financial
statements.
C. The general audit objectives are tailored to the engagement.
D. The specific audit objectives are tailored to the engagement.

104. Which of the following “general transaction-related audit objectives” is not part of the
valuation or allocation assertion?
A. Completeness
B. Accuracy
C. Classification
D. Timing

105. Only three of the following management assertions are associated with transaction-related
audit objectives. Which one of the following is not?
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure

106. Which of the following statements is incorrectly stated?

A. Balance-related audit objectives are applied to account balance.
B. Transaction-related audit objectives are applied to classes of transactions.
C. Balance-related audit objectives are applied to the ending balance in balance sheet
accounts.
 D. Balance-related audit objectives are applied to both beginning and ending balances in
the balance sheet accounts.

107. The detail tie-in objective is not concerned that the details in the account balance
A. agree with related subsidiary ledger accounts.
B. are properly disclosed, in accordance with PFRS.
C. foot to the total in the account balance.
D. agree with the total in the general ledger.

108. The disclosure objective is concerned that

A. the account balance is properly presented in the financial statements.
B. disclosure requirements are properly presented in the financial statements and in the
footnotes.
C. both responses are correct.
D. both responses are incorrect.

109. If a long-term note receivable is included in the account receivable listing, there is a
violation of the
A. existence objective.
B. completeness objective.
C. classification objective.
D. timing objective.

110. After the general objectives are understood, specific objectives for each account balance on
the financial statements can be developed. Which of the following statements is true?
A. There should be at least one specific objective for each relevant general objective.
B. There will be only one specific objective for each relevant general objective.
C. There will be many specific objectives developed for each relevant general objective.
D. There must be one specific objective for each general objective.

111. Which of the following is not a proper matching of auditor‟s objective with
management‟s assertion?
A. Validity matches with existence or occurrence
B. Completeness matches with completeness
C. Ownership matches with rights and obligations
D. Classification matches with presentation/disclosure

112. An audit process is a well-defined methodology for organizing an audit to ensure that
A. the evidence gathered is both sufficient and competent.
B. all appropriate audit objectives are specified.
C. all appropriate audit objectives are met.
D. All of the responses are correct

113. Which of the following is correct?

A. The evidence that the auditor accumulates remains the same from audit to audit, but the
general objectives vary, depending on the circumstances.
 B. The general audit objectives remain the same from audit to audit, but the evidence
varies, depending on the circumstances.
C. The circumstances may vary from audit to audit, but the evidence accumulated remains
the same.
D. The general audit objectives may vary from audit to audit, but the circumstances
remain the same.

114. Auditing standards require the auditor to accumulate sufficient competent evidence to
support the opinion issued. Because of the nature of audit evidence, it is
A. unlikely that the auditor will be completely convinced that the opinion is correct.
B. likely that the auditor will be completely convinced that the opinion is correct.
C. unlikely that the auditor will arrive at a conclusion.
D. likely that the auditor would change his/her mind about the opinion if he/she takes the
time to gather additional evidence.

115. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
A. The audit program
B. The auditor's judgment
C. Philippine Standards on Auditing
D. The auditor's working papers

116. In the final analysis, the amount and kinds of evidential matter that are required to support
the auditor‟s opinion should be determined by
A. the audit committee.
B. auditor‟s judgment.
C. professional standards.
D. standards of auditing.

117. To adequately plan the extent of the audit evidence to gather, the generally accepted
auditing standards require the auditor to gain an understanding of
A. the internal control structure.
B. client‟s organization charts.
C. client‟s procedural manuals.
D. All of these

118. When unable to obtain sufficient competent evidential matter to determine whether certain
client management‟s acts are non-compliance to laws and regulations, the auditor
would most likely issue
A. an unqualified opinion with a separate explanatory paragraph.
B. either a qualified opinion or an adverse opinion.
C. either a disclaimer of opinion or a qualified opinion.
D. either an adverse opinion or a disclaimer of opinion.

119. An audit evidence is generally considered relevant when it is

A. derived through valid statistical sampling.
 B. objective and unbiased.
C. factual, adequate, and convincing.
D. consistent with the audit objectives.

120. Two overriding considerations that affect an auditor‟s judgment in accumulating

evidence are:

1. Sufficient competent evidence must be accumulated to meet the

auditor‟s professional responsibility.
2. Cost of accumulating evidence should be minimized.

In evaluating these conditions,

A. the first is more important than the second.
B. the second is more important than the first.
C. they are equally important.
D. it is impossible to prioritize one.

121. Most of the independent auditor's work in formulating an opinion on the financial
statements consists of
A. studying and evaluating internal control.
B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorded accountability with assets.

122. There are four subcategories of decisions that the auditors must make in accumulating audit
evidence. Which of the following is not one of those subcategories?
A. Audit procedures to be used
B. Reasons for deciding not to test controls
C. Sample size
D. Timing of the audit procedures

123. Evidential matter supporting the financial statements consists of the underlying accounting
data and all corroborating information available to the auditor. Which of the following is an
example of corroborating information?
A. Minutes of meetings of the board of directors
B. General and subsidiary ledgers
C. Accounting manuals
D. Worksheets supporting cost allocations

124. Which of the following is not one of the major phases in anaudit process?
A. Plan and design an audit approach
B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made in the financial statements
D. Complete the audit and issue the report

125. Evidential matter is generally considered sufficient when

 A. it is competent.
B. there is enough of it to afford a reasonable basis for an opinion on the financial
statements.
C. it has the qualities of being relevant, objective, and free from known bias.
D. it has been obtained through random selection.

126. In making decisions about evidence for a given audit, the auditor‟s goal is to
obtain a sufficient amount of timely, reliable evidence that is relevant to the information
being verified, and to do so
A. no matter what the cost involved in obtaining such evidence.
B. only if the cost is reasonable.
C. at the lowest possible total cost.
D. at any cost because the costs are billed to the client.

127. Which of the following is not a distinguishing feature of risk-based auditing?

A. Identifying areas posing the highest risk of financial statement errors
B. Analysis of internal control
C. Collecting and evaluating evidence
D. Concentrating audit resources in those areas presenting the highest risk of financial
statement errors

128. The competence of evidence available to an auditor is least likely affected by

A. the relevance of such evidence to the financial statement assertion being investigated.
B. the relationship of the source of such an evidence to the entity being audited.
C. the timeliness of the audit evidence obtained.
D. the sampling method employed by the auditor to obtain a number of samples as
evidence.

129. Which of the following procedures would provide the auditor the most reliable audit
evidence?
A. Inquiries of the client‟s internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department.
C. Analytical procedures performed by the auditor on the entity‟s trial balance.
D. Inspection of bank statements obtained directly from the client‟s financial institution.

130. The most reliable forms of documentary evidence are those documents that are
A. prenumbered.
B. easily duplicated.
C. internally generated.
D. authorized by a responsible official.

131. You have been assigned to audit the maintenance department of an organization. Which of
the following is likely to produce the least reliable audit evidence?
A. Notes on discussions with mechanics in the maintenance operation.
 B. A schedule comparing actual maintenance expenses with budgeted expenses and those
of the prior period and disclosing important differences.
C. A narrative covering review of user reports on maintenance service.
D. An analysis of changes in certain maintenance department ratios.

132. Before applying substantive tests to the details of asset accounts at an interim date, an
auditor should assess
A. control risk at below the maximum level.
B. inherent risk at the maximum level.
C. the difficulty in controlling the incremental audit risk.
D. materiality for the accounts tested as insignificant.
133. Before applying principal substantive tests to the details of accounts at an interim date, an
auditor should
A. assess control risk as below the maximum for the assertions embodied in the accounts
selected for interim testing.
B. determine that the accounts selected for interim testing are not material to the financial
statements taken as a whole.
C. consider whether the amounts of the year-end balances selected for interim testing are
reasonably predictable.
D. obtain written representations from management that all financial records and related
data will be made available.

134. If an auditor conducts an audit of financial statements in accordance with generally

accepted auditing standards, which of the following will the auditor most likely detect?
A. Misposting of recorded transactions
B. Forgery
C. Unrecorded transactions
D. Collusive fraud

135. Which of the following best explains the difference between audit objectives and audit
procedures?
A. Audit procedures establish broad general goals; audit objectives specify the detailed
work to be performed.
B. Audit objectives are tailor-made for each assignment; audit procedures are generic in
application.
C. Audit objectives define specific desired accomplishments; audit procedures provide the
means of achieving audit objectives.
D. Audit procedures and audit objectives are essentially the same.

136. In gathering audit evidence in the performance of substantive tests, the auditor
A. should use the test month approach.
B. relies on persuasive rather than convincing evidence in the majority of cases.
C. would consider the client‟s documentary evidence more competent than
evidence gathered from observation and physical inspection.
D. would express an adverse opinion if he has substantial doubt as to any significant
assertion.
137. The auditor will not ordinarily initiate discussion with the audit committee concerning the
A. extent to which the work of internal auditors will affect the scope of the examination.
B. extent to which a change in the company‟s organization will influence the scope of
the examination.
C. details of potential problems that the auditor believes might cause a qualified opinion.
D. details of the procedures that the auditor intends to apply.

138. The objective of dual-purpose tests is to

A. evaluate whether internal controls are operating effectively.
B. detect material misstatements in the financial statements.
C. identify unusual trends or patterns in comparative financial statements.
D. test internal controls as well as transactions and balances using the same test
procedures.

139. To test for unsupported entries in the ledger, the direction of audit testing should be from
the
A. ledger entries.
B. journal entries.
C. externally generated documents.
D. original source documents.

140. The least costly form of testing is usually

A. tests of controls.
B. tests of details of balances.
C. tests of details of transactions.
D. analytical procedures.

141. Tracing from source documents to journals most directly addresses which financial
statement assertion?
A. Valuation
B. Completeness
C. Existence
D. Rights

142. An auditor is examining the detailed debit and credit entries in an account. The auditor is
most likely performing
A. analytical procedures.
B. tests of details of balances.
C. tests of details of transactions.
D. tests of controls.

143. Choices about audit evidence are influenced by all of the following except:
A. The auditor‟s understanding of the business and industry
B. Assessment of inherent and control risk
 C. Comparisons of the auditor‟s expectation of the financial statements with the
client‟s books and records
D. Decisions about immaterial risk factors

144. The auditor is performing substantive tests several months before the end of the year. This
most likely means that
A. inherent risk is set at moderate to high.
B. detection risk is set at moderate to high.
C. control risk is set at maximum.
D. detection risk is set at low to very low.

145. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. supporting evidence to the accounting records.

146. WB Industries has significant information that is transmitted, processed, maintained, and
accessed electronically. The auditor has concluded that it is not possible to reduce
detection risk to an acceptable level by performing only substantive tests for a number of
financial statement assertions. The auditor‟s alternative strategy is to
A. increase the acceptable audit risk.
B. focus audit tests on other assertions for which substantive tests prove to be effective.
C. require management to change its information system to provide appropriate evidence.
D. perform tests of controls to gather evidential matter to be used as basis of assessing
control risk related to those assertions.

147. The decision on the part of the auditor to perform substantive tests during the interim
period will be based upon
A. audit risk control and cost effectiveness.
B. the approach followed in the past.
C. the auditor‟s time convenience.
D. the cooperation extended by the client staff.

148. Choose the best illustration of objective audit evidence from the following:
A. The paid invoice file containing invoices matched with receiving reports and purchase
orders.
B. Management's assertion that payment procedure requires matching of invoice with
receiving report and purchase order.
C. Clerical staff assurances that management policy regarding payment of invoices--
matching of invoice with receiving report and purchase order--is always followed.
D. The treasurer's statement of not remembering any exceptions in which an invoice was
submitted for payment that is not accompanied by a covering receiving report and
purchase order.

149. Which of the following audit procedures best supports the valuation objective?
 A. Performing a lower of cost or market test of the client's inventories
B. Reviewing a contingent liability disclosure for proper wording
C. Searching for unrecorded liabilities
D. Observing the client's year-end physical inventory taking

150. Which of the following is not an appropriate auditing procedure supporting the fairness of
financial-statement presentation?
A. Inspecting plant asset additions for existence
B. Recalculating accrued interest on notes payable
C. Examining invoices in support of legal fees recorded during the fiscal year
D. Reviewing the client's production quality control program

151. Audit procedures are normally performed

A. early in the accounting period being examined.
B. throughout the accounting period being examined, but with emphasis on the
transactions near the end.
C. within one to three months after the close of the accounting period.
D. During all three of the above periods

152. The auditor would unlikely perform early substantive testing of account balances when:
A. A number of significant deviations from control policies and procedures were detected
during tests of controls.
B. Due to economic factors, the fourth quarter activity this year is expected to be
somewhat sluggish.
C. The client uses a natural business year.
D. The taking of the client‟s inventory is performed at an early date.

153. As the acceptable level of detection risk decreases, an auditor may change the
A. timing of substantive tests by performing them at an interim date rather than at year-
end.
B. nature of substantive tests from a less effective to a more effective procedure.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. assessed level of inherent risk to a higher amount.

154. The auditor is concerned that a client usually fails to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to
A. select a sample of duplicate sales invoices and trace each to related shipping
documents.
B. trace a sample of shipping documents to related duplicate sales invoices.
C. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
D. compare the total of the Schedule of Accounts Receivable with the balance of the
Accounts Receivable account in the general ledger.

155. The extent of testing normally applies

A. exclusively to the number of items to be tested.
B. to both the number of items tested and the number of tests performed.
 C. exclusively to the number of substantive tests performed.
D. to both the nature of items tested and the number of tests performed.

156. Which of the following, when performed by the auditor, is not a test of mechanical
accuracy?
A. Extending sales invoices
B. Adding journals and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio

157. In the examination of the financial statements of Delta Company, the auditor determines
that in performing a test of internal control effectiveness, the rate of error in the sample does
not support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditor's notion of effectiveness. This
situation illustrates the risk of
A. underassessment of control risk.
B. overassessment of control risk.
C. incorrect rejection.
D. incorrect acceptance.

158. Several risks are inherent in the evaluation of audit evidence which has been obtained
through the use of statistical sampling. Which of the following risks is an example of the risk
of underassessment of control risk?
A. Failure to properly define the population to be sampled.
B. Failure to draw a random sample from the population.
C. Failure to accept the statistical hypothesis that internal control is unreliable when, in
fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not materially misstated
when the true book value is not materially misstated.

159. As a result of tests of controls, an auditor underassessed control risk and decreased
substantive testing. This underassessment occurred because the true occurrence rate in the
population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.

160. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a peso value?
A. Numerical sampling.
B. Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.

161. Which of the following statements is an advantage of classical variables sampling?

 A. If no errors are expected, classical variables sampling will result in a smaller sample
size than probability-proportional-to-size sampling.
B. A classical variables sampling plan can begin before the completed population is
available.
C. Classical variables sampling may result in a smaller sample size than probability-
proportional-to-size sampling if there are many differences between recorded and
audited amounts.
D. Classical variables sampling does not require recorded values for individual sampling
units.

162. What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the confidence level at which a decision will be reached from the results of
the sample selected.
B. To determine the occurrence rate for a given characteristic in the population being
studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.

163. An auditor is applying PPS sampling. In determining the sample size, which of the
following is not necessary?
A. a reliability factor for overstatement errors
B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error

164. In a variable sampling plan, an auditor must generally consider each of the following
except
A. variation within the population.
B. acceptable risk of incorrect acceptance.
C. tolerable error.
D. Population.

165. When sampling methods are used in a substantive test, all of the following factors must
be considered in determining an optimum sample size, except the
A. variation in the population.
B. risk levels that the auditor is willing to accept.
C. deviation occurrence rate that the auditor expects to exist in the sample.
D. tolerable misstatement.
166. PPS sampling is most appropriate when the auditor
A. anticipates understatement errors.
B. anticipates overstatement errors.
C. expects no errors.
D. has assessed control risk at the maximum.

167. The mean-per-unit estimation method calculates the estimated total audited value of a
population of accounts receivable as:
 A. A summation of the total individual accounts values in the population.
B. The sample mean audited value multiplied by the number of items in the population.
C. The estimated total audited value of the population multiplied by the number of items
in the sample.
D. The summation of the sample multiplied by the number of discrete samples in the
population.

168. What is the best description of "tolerable misstatement" for mean-per-unit estimation?
A. The maximum misstatement that may exist without causing an account to be materially
misstated.
B. The "bounds" around the sample mean that we would expect the value to fall within to
be correct.
C. The "projected" misstatement in the population based upon the sample chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which the book value
may exceed that sample mean without being materially misstated.

169. When are the ratio estimation and difference estimation techniques most likely to be
preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all provide similar
results.
B. When differences between book and audited values are infrequent.
C. When differences between book and audited values are frequent.
D. When differences between book and projected misstatement is estimated to be small.

170. What is one of the main advantages of the probability-proportional-to-size sampling

technique over the classical variables approach?
A. It provides a more accurate estimation of the sample mean.
B. It provides a wider range for acceptance so that less substantive testing needs to be
done.
C. It provides a smaller range for acceptance so that more errors are discovered.
D. It often requires a smaller sample size to be selected.

171. Probability-proportional-to-size sampling will result in what type of sample items being
selected?
A. Highly representative of the population because it is wholly randomized.
B. A higher proportion of small value items then large value items because of the
sampling interval used.
C. A higher proportion of large value items than small value items because of the
sampling interval used.
D. A biased sample means that may not be representative of the population.

172. While performing a substantive test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
A. alpha risk.
B. assessing control risk too low.
 C. beta risk.
D. assessing control risk too high.

173. The risk of incorrect acceptance relates to the:

A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Preliminary estimate of materiality.
D. Allowable risk of tolerable error.

174. Sample results support the conclusion that a recorded account balance is materially
misstated but, unknown to the auditor, the account is not misstated, suggesting the risk of
A. incorrect rejection.
B. assessing control risk too high.
C. incorrect acceptance.
D. assessing control risk too low.

175. Which of the following business functions is associated with the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.

176. Which of the following is not a common activity in the revenue/receipt cycle?
A. Order entry
B. Receiving
C. Inventory control
D. cash collection

177. The cash account is involved in which cycle?

A. Revenue and collection.
B. Acquisition and expenditure.
C. Production and conversion.
D. All of the given choices.

178. Which of the following is an appropriate audit procedure to test cancelled checks for
authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who are authorized by
the board.
C. Examine a representative sample of signed checks and trace their signatures to the
specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.

179. Which of the following is not likely a source of information about the accounting system in
the revenue area?
A. Direct inquiry of customers.
 B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.

180. Which of the following gives an indication of a potential fraudulent activity?

A. Numerous credit memoranda have been issued to the company's biggest customer.
B. Internal auditor cannot locate several credit memoranda to support reductions of
customers' balances.
C. The year-end bank reconciliation has no outstanding checks or deposits older than 15
days.
D. No one was absent the day the auditors handed out the paychecks.

181. Which of the following control procedures could prevent or detect errors or frauds arising
from shipments made to unauthorized parties?
A. Document policies and procedures for scheduling the shipments of goods.
B. Establish procedures for reviewing and approving the prices and sales terms before
sale.
C. Prenumber the bills of lading and assure that the related billings are made on a
periodic basis.
D. Prepare and periodically update the lists of authorized customers.

182. Which of the following control procedures would most likely assure that access to
shipping, billing, inventory control, and accounting records is restricted to personnel
authorized by management?
A. Segregate the responsibilities for authorization, execution, and recording, and
prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and require a daily
reconciliation of cash receipts records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and supporting
documentation.
D. Periodically substantiate and evaluate the recorded account balances.

183. An entity has implemented a control procedure which requires that authorized personnel
reconcile the total of individual customer accounts receivable with control totals. This
control relates to which of the following control objectives?
A. Sales, cash receipts, and related transactions should be recorded at the correct
amounts, in the proper period, and should be properly classified.
B. Recorded accounts receivable balances should reflect underlying transactions and
events.
C. Billings, collections, and related adjustments transactions should be posted accurately
to individual customer accounts.
D. Access to cash and cash-related records should be restricted to personnel authorized
by management.

184. Which of the following internal control procedures most likely would deter lapping of
collections from customers?
 A. Independent internal verification of dates of entry in the cash receipts journal with
dates of daily cash summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor who is
independent of credit approval.
C. Segregation of duties between receiving cash and posting collections to the accounts
receivable ledger.
D. Supervisor‟s comparison of the daily cash summary with the sum of the cash
receipts journal entries.

185. What sequence of steps does an auditor undertake when identifying control procedures that
are potentially reliable in assessing control risk below the maximum?
A. Consider the errors or frauds that might occur, determine control procedures, identify
control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or frauds
that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur, determine
control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or frauds
that might occur, and identify control objectives.

186. Assuming cash receipts from credit sales have been misappropriated, which of the
following is likely to conceal the misappropriation and unlikely to be detected?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.

187. Which of the following is most likely to provide management with incentives to overstate
earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.

188. Under which of the following circumstances does management have some discretion in
timing the recognition of revenue?
A. The timing of revenue is not reasonably determinable and the earnings process is not
complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm‟s length.

189. After preparing a flowchart of internal control for sales and cash receipts transactions and
evaluating the design of the system, the auditor would perform tests of controls on all
control procedures
A. That are documented in the flowchart.
 B. that are considered to be deficiencies that might allow errors to enter the accounting
system.
C. that are considered to be strengths that the auditor plans to rely on in assessing control
risk.
D. that would help in preventing irregularities.

190. Which of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.

191. Which of the following is not a universal rule for achieving control over cash?
A. Separate the cash-handling and record-keeping functions.
B. Decentralize the receiving of cash as much as possible.
C. Deposit each day‟s cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle cash.

192. On conducting an audit in which point in an ordinary sales transaction of a wholesaling

business is a lack of specific authorization of least concern to the auditor?
A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.

193. An auditor who examines check disbursements discovers a missing check number. Upon
inquiry to the person responsible for disbursements and reconciliation of the cash account,
he is told that the check number is missing because the check was voided. What is the
auditor's next step?
A. Prepare a bank transfer schedule to identify the check.
B. Examine the bank confirmation to determine whether the check cleared.
C. Since the person responsible for disbursements also reconciles the account, no
additional procedures are necessary.
D. Examine the voided checks file to determine whether the check is in the file.

194. Of the following, which procedure or document is most effective for detecting kiting?
A. A bank cut-off statement.
B. A bank statement.
C. A bank kiting statement.
D. Confirmation of bank balance.
195. Which of the following is confirmed on the standard form used for cash balances at
financial institution?
A. Factored accounts receivable.
B. Loss contingencies.
C. Loans payable.
 D. Safe deposit boxes controlled by the entity.

196. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
A. theft.
B. irregular endorsement.
C. substitution.
D. deposits in transit.

197. Which of the following is not a primary objective of the auditor in the tests of accounts
receivable?
A. Determining the approximate realizable value.
B. Determining the adequacy of internal control.
C. Establishing the validity of the receivables.
D. Determining the approximate time of collectibility of the receivables.

198. The negative form of accounts receivable confirmation request is particularly useful except
when
A. control procedures surrounding accounts receivable are considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large.

199. A sales cutoff test complements tests of

A. sales returns.
B. Cash
C. accounts receivable
D. sales allowances

200. Most part of the audit of sales and collection cycle

A. cannot be performed until the audit of cash is completed.
B. can be performed independently of the audit of other cycles.
C. must be performed simultaneously with the audit of the purchases and disbursements
cycle.
D. must be performed first so that the audit of the other cycles can rely on the data.

201. The audit objective: “The accounts receivable balance represents gross claims on
customers and agrees with the sum of the accounts receivable subsidiary ledger” is derived
from the assertion of
A. presentation and disclosure.
B. completeness.
C. valuation or allocation.
D. existence.

202. A shipping document used in vouching will primarily meet the:

 A. completeness assertion.
B. valuation or allocation assertion.
C. rights and obligations assertion.
D. occurrence assertion.

203. A shipping document used in tracing will primarily meet the:

A. completeness assertion.
B. valuation or allocation assertion.
C. rights and obligations assertion.
D. occurrence assertion.

204. An auditor is examining accounts receivable. Which one is the most competent type of
evidence in this situation?
A. Interviewing the personnel who records accounts receivable.
B. Verifying that postings to the receivable account from journals have been made.
C. Receipt by the auditor of a positive confirmation.
D. No response received for a request for a negative confirmation.

205. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
A. a majority of recipients usually lack the willingness to respond objectively.
B. some recipients may report incorrect balances that require extensive follow-up.
C. the auditor can not infer that all nonrespondents have verified their account
information.
D. negative confirmations do not produce evidential matter that is statistically
quantifiable.

206. Although most substantive testing is performed during the final audit, some substantive
tests may be done during the interim period. Which of the following statements
concerning the timing of substantive tests is true?
A. When internal control is weak, extensive substantive testing should be performed
during the interim audit.
B. Substantive testing should be performed during the interim audit only under
conditions of excellent internal control.
C. As a general rule, the auditor performs substantive tests of balances as of the balance
sheet date and tests of transactions during the interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts receivable as of a point
in time at least one month prior to the client's fiscal year-end.

207. Before applying principal substantive tests to the details of asset and liability accounts at
an interim date, the auditor should
A. assess the difficulty in controlling incremental audit risk.
B. investigate significant fluctuations that have occurred in the asset and liability
accounts since the previous balance sheet date.
C. select only those accounts which can effectively be sampled during year-end audit
work.
 D. consider the control tests that must be applied at balance sheet date to extend the audit
conclusions reached at the interim date.

208. Confirming accounts receivable is required whenever:

A. they are material and it is practicable and reasonable to do so.
B. they are material in amount.
C. it is practicable to do so.
D. it is reasonable to do so.

209. In the processing of accounts receivable confirmations, the auditor would not normally be
expected to:
A. reconcile the information to the corresponding customer‟s account.
B. personally deposit the requests in the mail.
C. include his own return address envelope.
D. personally prepare the confirmation letter.

210. The auditor should ordinarily mail confirmation requests to all banks with which the client
has conducted any business during the year, regardless of the year-end balance, since
A. the confirmation form also seeks information about indebtedness to the bank.
B. this procedure will detect kiting activities which would otherwise not be detected.
C. the mailing of confirmation forms to all the client‟s depository banks is required
by Philippine standards on auditing.
D. this procedure relieves the auditor of any responsibility with respect to non-detection
of forged checks.

211. An analysis of the aged accounts receivables is most directly related to which substantive
test objective?
A. Existence and occurrence.
B. Presentation and disclosure.
C. Rights and obligations.
D. Valuation.

212. The tests of balances to evaluate the adequacy of the allowance for uncollectible accounts
do not involve which of the following?
A. Considering the evidence concerning the collectibility of past due amounts.
B. Testing the aging of the amounts shown in the aging categories on the aged trial
balance.
C. Considering the evidence concerning the collectibility of current amounts.
D. Assessing the reasonableness of the percentages used to compute the allowance
component required for each aging category and the adequacy of the overall
allowance.
213. When scheduling audit work, the auditors are most likely to confirm accounts receivable
balances at an interim date if:
A. negative confirmations are being used.
B. internal control is weak.
C. internal control is strong.
 D. there is a simultaneous examination of cash and accounts payable.

214. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients actually receive them.
C. The recipients are likely to feel that in reality the confirmation is a subtle request for
payment.
D. The inference drawn from receiving no reply may not be correct.

215. Which of the following procedures least likely helps the auditors to assess the adequacy of
management's accounting estimate of the allowance for doubtful accounts?
A. Investigate confirmation exceptions for any indication of amounts in dispute.
B. Review the accounts which have been written off as uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful accounts.

216. Which of the following is a proper alternative audit procedure for no responses to positive
accounts receivable confirmation requests?
A. Examination of subsequent cash receipts in payment of the receivable.
B. Mailing of negative confirmation requests to nonrespondents.
C. Expansion of the sample by the number of nonrespondents.
D. Reduction of accounts receivable by the amount of the no responses.

217. Which of the following might be detected by an auditor's review of the client's sales cut-
off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year end accounts receivable.
D. Inflated sales for the year.

218. During the process of confirming receivables as of December 31, 2009, a positive
confirmation was returned indicating that the "balance owed as of December 31 was paid
by a customer on January 9, 2010." The auditor would most likely
A. determine whether there were any changes in the account between January 1 and
January 9, 2010.
B. determine whether a customary trade discount was taken by the customer.
C. reconfirm the zero balance as of January 10, 2010.
D. verify that the amount was received.

219. Which of the following analytical audit findings would most likely indicate a possible
problem?
A. A material decrease in the receivables turnover.
B. A material increase in inventory turnover.
C. A material decrease in days' sales outstanding.
D. A material increase in the acid test ratio.
220. When the objective of the auditor is to evaluate the appropriateness of adjustments to sales,
the best available evidence would normally be
A. oral evidence obtained by discussing adjustment-related procedures with controller
personnel.
B. analytical evidence obtained by comparing sales adjustments to gross sales for a
period of time.
C. physical evidence obtained by inspection of goods returned for credit.
D. documentary evidence obtained by inspecting documents supporting entries to
adjustment accounts.

221. Two types of accounts receivable confirmation requests are used in practice - positive and
negative. Negative confirmations may be used
A. when internal control over sales and accounts receivable is weak.
B. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a large number of small
balances are involved.
C. only when internal control over sales and accounts receivable is strong.
D. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a small number of large
balances are involved.

222. An auditor has found many new assets on the plant floor, which coincides with an increase
in the equipment subsidiary ledger. However, the auditor has noticed that lease payments
are being made to an equipment leasing company. The auditor should primarily be
concerned with which financial statement assertion?
A. Rights and obligations.
B. Relevance.
C. Clerical accuracy.
D. Completeness.

223. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. purchase requisitions.
b. receiving reports.
c. purchase orders.
d. vendor payments.

224. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff
test to obtain evidence that
a. all goods purchased before year end are received before the physical inventory count.
b. no goods held on consignment for customers are included in the inventory balance.
c. no goods observed during the physical count are pledged or sold.
d. all goods owned at year end are included in the inventory balance.
225. A client's physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the result of the failure to record:
A. sales.
B. sales discounts.
C. purchases.
D. purchase returns.

226. Which of the following audit procedures is not appropriate for addressing the assertion of
valuation?
A. verifying accounts payable trial balance
B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures.

227. When there are few property and equipment transactions during the year, the continuing
auditor usually makes a
a. complete review of the related internal controls and assesses control risk relative to
them.
b. complete review of the related internal controls and performs analytical review tests to
verify current year additions to property and equipment.
c. preliminary review of the related internal controls and performs a thorough
examination of the balances at the beginning of the year.
d. preliminary review of the related internal controls and performs extensive tests of
current year property and equipment transactions.

228. In analyzing the plant assets account, why is the examination of repairs and maintenance
records important?
A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.

229. In examining the miscellaneous revenue account, an auditor discovers income from plant
assets. What should be a primary audit concern?
A. That such assets have been removed from the ledger of property owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell them.
D. That such assets have been replaced by comparable equipment.

230. Which of the following statements is not correct concerning intangible assets?
A. Auditors review the reasonableness of the client's amortization program.
B. A lack of physical substance.
C. Valuation is a primary audit concern.
D. Proper presentation as current assets.
231. When performing an audit of the property, plant, and equipment accounts, an auditor
should expect which of the following to be most likely to indicate a departure from
generally accepted accounting principles?
A. A gain was recognized when a new asset was acquired at a price lower than its listed
retail price.
B. Interest has been capitalized for self-constructed equipment.
C. Assets have been acquired from affiliated corporations with the related transactions
recorded and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.

232. The auditors are least likely to learn of retirements of equipment through which of the
following?
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

233. A weakness in internal accounting control over the recording of retirements of equipment
may cause the auditor to
a. inspect certain items of equipment in the plant and trace those items to the accounting
records.
b. review the subsidiary ledger to ascertain whether depreciation was taken on each item
of equipment during the year.
c. trace additions to the "other assets" account to search for equipment that is still on hand
but no longer being used.
d. select certain items of equipment from the accounting records and locate them in the
plant.

234. When auditing inventories of raw materials, purchased parts, and/or merchandise
inventory, the auditor's most effective means for evaluating the valuation assertion is to
a. examine recent invoices from vendors, along with freight bills and compare with
client's unit costs, as adjusted for freight and discount.
b. compare purchases with prior year and with industry averages and account for
significant fluctuations.
c. trace quantities from tags or count sheets to final inventory listings.
d. scan inventory listings for large extended amounts, and trace related quantities to
auditor's copy of the inventory tag or listing.

235. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.
236. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
a. Repairs and maintenance expense.
b. Depreciation expense.
c. Gain on disposal of equipment.
d. Accounts payable.

237. The most significant audit step in substantiating additions to the office furniture account
balance is
a. examination of vendors' invoices and receiving reports for current year's acquisitions.
b. review of transactions near the balance sheet date for proper period cutoff.
c. calculation of ratio of depreciation expense to gross office equipment cost.
d. comparison to prior year's acquisitions.

238. Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year end if internal controls are adequate and
a. computerized records of perpetual inventory are maintained.
b. inventory is slow moving.
c. CBIS error reports are generated for missing pre-numbered inventory tickets.
d. obsolete inventory items are segregated and excluded.

239. Which of the following matters do auditors need not communicate to the audit committee
of a public company?
A. All critical accounting policies
B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted differences
D. Management letter comments

240. Analytical procedures are required to be performed during the:

A. planning and substantive test stages.
B. substantive test and overall review stages.
C. planning and overall review stages.
D. planning stage only.

241. Which of the following factors would least influence an auditor‟s consideration of
the reliability of data for purposes of analytical procedures?
A. Whether the data are processed in a computer system or in a manual accounting system
B. Whether sources within the entity are independent of those who are responsible for the
amount being audited
C. Whether the data are subjected to audit testing in the current or prior year
D. Whether the data are obtained from independent sources outside the entity or from
sources within the entity

242. Analytical procedures are

A. substantive tests designed to evaluate a system of internal control.
 B. tests of control procedures designed to evaluate the validity of management's
representation letter.
C. substantive tests designed to evaluate the reasonableness of financial information.
D. tests of control procedures designed to detect errors in reported financial information.

243. The auditor notices significant fluctuations in key elements of the company's financial
statements. If management is unable to provide an acceptable explanation, the auditor
should
A. consider the matter as a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting management fraud.
D. withdraw from the engagement.

244. Who is responsible for establishing the process and controls for preparing accounting
estimates?
E. The independent auditor
F. The internal auditor
G. The management
H. The controller

245. The auditor should adopt one or a combination of the following approaches in the audit of
an accounting estimate:

I. Review and test the process used by management to develop the estimate.
II. Use an independent estimate for comparison with what the management prepares.
III. Review subsequent events which confirm the estimate made.

I. Any of them
J. None of them
K. Either I or II
L. I only

246. Which of the following is not one of the primary approaches that the auditors may use
when evaluating the reasonableness of accounting estimates?
A. Review and test management's process of developing estimates.
B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be compared to management's
estimate.
D. Review subsequent events or transactions that have bearing on the estimate.

247. The auditor should normally concentrate on the key factors and assumptions used by
management including all of the following except those that are
M. insignificant to the accounting estimates.
N. sensitive to variations.
O. deviations from historical patterns.
P. susceptible to misstatements and biases.
248. In evaluating the assumptions on which the estimate is based, the auditor would need to
pay particular attention to assumptions which are
Q. reasonable in light of actual results in prior periods.
R. consistent with those used for other accounting estimates.
S. consistent with management‟s plans which appear appropriate.
T. subjective or susceptible to material misstatement.

249. Subsequent events refer to

A. only significant events that occur between the balance sheet date and the date of the
auditor‟s report which have been discovered by the auditor during the same period.
B. only significant events that occur between the balance sheet date and the date of the
auditor‟s report irrespective of the date they have been discovered by the auditor.
C. only significant events that occur between the balance sheet date and the date the
audited financial statements have been released to the client, irrespective of the date of
their discovery by the auditor.
D. all significant events that occur after balance sheet date.

250. Which of the following is not correct concerning a type I and a type II subsequent event?
A. A type I may require adjustment to financial statements while a type II would not.
B. Both a type I and a type II subsequent event may require note disclosure.
C. A type I is an event that occurred prior to year end, but was discovered after, while a
type II is one that arises subsequent to year end.
D. A type II event may require adjustment to the financial statements and a type I may
require note disclosure.

251. Which of the following statements that relates to subsequent events is inappropriately
described?
A. The auditor is expected to conduct a continuing review of all matters to which
previously applied procedures have provided satisfactory conclusions.
B. The auditor should consider the effect of subsequent events on the financial statements
and on the auditor‟s report.
C. The procedures to identify events that may require adjustment of, or disclosure in, the
financial statements would be performed as near as practicable to the date of the
auditor‟s report.
D. The procedures that are designed to obtain sufficiently appropriate audit evidence that
all events up to the date of the audit report that may require adjustment of, or disclosure
in, the financial statements are in addition to routine procedures which may be applied
to specific transactions.

252. The auditor's formal review of subsequent events normally should be extended through the
date of the
U. auditor's report.
V. next formal interim financial statements.
W. delivery of the audit report to the client.
X. mailing of the financial statements to the stockholders.
253. Which of the following appropriately describes the auditor‟s procedures with
respect to subsequent events?
A. The procedures to identity events that may require adjustments of, or disclosure in, the
financial statements would be performed as early as practicable.
B. Those routine procedures that are applied to specific transactions occurring after the
period ends are designed to obtain sufficient appropriate audit evidence that all events
up to the date of the audit report have been identified.
C. When a component is audited by another CPA, the auditor would consider the other
auditor‟s procedures regarding events after period end and the need to inform the
other auditor of the planned date of the audit report.
D. The auditor is responsible to inquire regarding the financial statements after the date of
the auditor‟s report.

254. Which of the following is least likely a procedure that would be performed by the auditor
near the auditor‟s report date?
A. Reading the minutes of the meetings of shareholders, the board of directors and audit
executive committees held throughout the audit year.
B. Reading the entity‟s latest available interim financial statements.
C. Inquiring of the client‟s legal counsel concerning litigations and claims.
D. Reviewing the procedures that management has established to ensure that subsequent
events are identified.

255. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after year-end.
B. Comparing the financial statements being reported on with those of the prior period.
C. Investigating personnel changes in the accounting department occurring after year-end.
D. Inquiring as to whether any unusual adjustments were made after year-end.

256. Which of the following should the auditor do the least when, after the financial statements
have been issued, the auditor becomes aware of a fact that existed at the date of the
auditor‟s report?
A. Consider whether the financial statements need revisions.
B. Discuss the matter with the management.
C. Take the action appropriate in the circumstance.
D. Inform those users who are currently relying on the financial statements about the fact
that has been discovered.

257. If subsequent to the issuance of the audited financial statements, the auditor becomes
aware of material misstatements in the financial statements that exist prior to the date of
the audit report, the auditor should
Y. notify the parties who are currently relying on the financial statements.
Z. discuss the matter with the management, and should take the action appropriate in the
circumstances.
 AA. document such information in the audit plan for succeeding audit.
BB. submit a revised copies of the financial statements and audit report to the
stockholders.

258. If, after the audited financial statements have been issued, the auditor becomes aware that
some information included in the statements is materially misleading, he or she has
CC. no obligation to disclose it, assuming he or she acted in good faith and without
negligence in arriving at the audit opinion.
DD. an obligation to inform the board of directors of the misleading
statements. EE.an obligation to inform all users who are relying on the financial
statements.
FF. an obligation to make certain that users who are relying on the financial statements are
informed.

259. When a new audit report is issued on financial statements because of subsequent discovery
of material misstatements on previously issued financial statements, the audit report should
include
A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the financial statements that
more extensively discusses the reason for the revision of the previously issued financial
statements.

260. When a fact, that existed before the date of the report is discovered and the management
revises the previously issued audited financial statements, the following are appropriate
except the:
A. new auditor‟s report should include an emphasis of a matter paragraph that refers to
a note to the financial statements that discusses the reason for the revision of the
financial statements and to the earlier report issued by the auditor.
B. new auditor‟s report should contain the original date.
C. performance of the procedures that are designed to obtain sufficient evidence as to
subsequent events would ordinarily be extended to the date the revised financial
statements are approved by the entity‟s management.
D. auditor is permitted to restrict the audit procedures regarding the financial statements to
the effects of the subsequent event that necessitated the revision.

261. The management should assess those events that may cast significant doubt about the
entity‟s ability to continue as a going concern for at least
A. two years from the balance sheet date.
B. two years from the date of the audit report.
C. one year from the balance sheet date.
D. one year from the date of the audit report.

262. Which of the following is incorrect about the management‟s responsibility to make
an assessment of an entity‟s ability to continue as a going concern?
 A. In assessing whether the going concern assumption is appropriate, the management
takes into account all the available information for the foreseeable future, which should
be at least twelve months from the balance sheet date.
B. Though there is a history of profitable operations and a ready access to financial
resources, management must make its assessment with detailed analysis.
C. Management‟s assessment of the going concern assumption involves making
a judgment, at a particular point of time, about the future outcomes of events or
conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to continue as a going-
concern entity.

263. Which of the following least likely indicate a potential going-concern problem of an
entity?
A. Historical negative operating cash flows
B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity
264. Which of the following is correct about the auditor‟s responsibility with respect to
the entity‟s ability to continue as a going concern?
A. The auditor is responsible to make an assessment of the entity‟s ability to continue as
a going concern.
B. The auditor‟s responsibility is to consider the appropriateness of the management‟s
use of the going concern assumption in the preparation of the financial statements.
C. The auditor can predict future events or conditions that may cause an entity to
discontinue as a going concern.
D. The auditor may allow the management to make an assessment of its ability to continue
as a going concern if the management is believed to be objective in doing such an
assessment.

265. In evaluating the management‟s assessment of the entity‟s ability to continue as a

going concern, he should consider the following, except:
A. the independence of the management.
B. the process that the management has followed to make its assessment.
C. the assumptions on which the assessment is based and management‟s plan for
future action.
D. whether the assessment has taken into account all relevant information of which the
auditor is aware of as a result of the audit procedures.

266. Which of the following is an appropriate procedure to test for an indication of events or
conditions that cast significant doubt on the entity‟s ability to continue as a going
concern beyond the period assessed by management?
A. Inspection
B. Inquiry
C. Observing
D. Analysis
267. When events or conditions have been identified to cast significant doubt on the
entity‟s ability to continue as a going concern, the auditor should
A. consider reassessing control risk at the maximum.
B. consider the issuance of disclaimer of opinion due to scope limitation.
C. review management plans for future actions based on its going-concern assessments.
D. report the matter to the board of directors and stockholders.

268. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate that there could be substantial doubt about an
entity‟s ability to continue as a going concern?
A. Review compliance with the terms of debt agreements
B. Confirm accounts receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balances

269. The auditor relies on the client representation letter to:

A. confirm written representations given to the auditor.
B. document the continuing materiality of client representations.
C. guarantee the absence of management fraud.
D. reduce the possibility of misunderstanding concerning management‟s representations.

270. The auditors are required to obtain a letter of representation from their clients. Which of
the following statements regarding the letter of representation is correct?
GG. A letter of representation should impress upon management its responsibility for
the assertions in the financial statements.
HH. A letter of representation should be signed by a company‟s financial officials
and attorneys.
II. A letter of representation documents the responses from the management to inquiries
about various aspects of the audit.
JJ. A letter of representation is a written statement from a non-independent party and as
such should not be regarded as a valid evidence.

271. A purpose of a management representation letter is to reduce

A. audit risk to an aggregate level of misstatement that could be considered material.
B. an auditor‟s responsibility to detect material misstatements only to the extent that
the letter is relied on.
C. the possibility of a misunderstanding concerning management‟s responsibility for
the financial statements.
D. the scope of an auditor‟s procedures concerning related party transactions
and subsequent events.

272. Which of the following statements is true with respect to management representations?
A. Management representations are dated as of the balance sheet date.
B. Management representations may serve as a substitute for various types of substantive
procedures.
 C. Management representations are signed by the auditor and delivered to the client's
officers.
D. Management representations are used to corroborate information obtained during the
audit.

273. When considering the use of management‟s written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations
A. complement, but do not replace, substantive tests designed to support the assertion.
B. constitute sufficient evidence to support the assertion when considered in combination
with a sufficiently low assessed level of control risk.
C. are not part of the evidence considered to support the assertion.
D. replace a low assessed level of control risk as evidence to support the assertion.

274. The auditor should obtain evidence that the management acknowledges its responsibility
for the fair presentation of the financial statements in accordance with PFRS, and has
approved the financial statements. The auditor can obtain evidence of management's
acknowledgment of such responsibility and approval

I. From relevant minutes of meetings of the board of directors or similar body.

II. By obtaining a written representation from the management.
III. By obtaining a signed copy of the financial statements.

KK. Any of the given procedures

LL.Either I or II
MM. I only
NN. None of the procedures given

275. A management representation letter would ordinarily be dated as of the

A. date the report is delivered to the entity audited.
B. date the financial statements were approved by the client management.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney of record.

276. A written representation from a client‟s management that, among other

matters, acknowledges its responsibility for the fair presentation of the financial
statements, should normally be signed by the
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chair of the board of directors.
C. chair of the audit committee of the board of directors.
D. chief executive officer, the chair of the board of directors, and the client‟s lawyer.

277. If the management refuses to furnish certain written representations that the auditor
believes are essential, which of the following is appropriate?
A. The auditor can rely on oral evidence relating to the matter as a basis for an
unqualified opinion.
 B. The client‟s refusal does not constitute a scope limitation that may lead to
a modification of the opinion.
C. The client‟s refusal may have an effect on the auditor‟s ability to rely on
other representations of the management.
D. The auditor should express an adverse opinion because of management‟s refusal.

278. For which of the following matters should an auditor obtain written management
representations?
A. Management‟s cost-benefit justifications for not correcting internal control
weaknesses.
B. Management‟s knowledge of future plans that may affect the price of the
entity‟s stock.
C. Management‟s compliance with contractual agreements that may affect the
financial statements.
D. Management‟s acknowledgment of its responsibility for employee‟s violations
of laws.

279. A written management representation letter is most likely to be an auditor‟s best source
of corroborative information of a client‟s intention to
A. terminate an employee pension plan.
B. make a public offering of its common stock.
C. settle an outstanding lawsuit for an amount less than the accrued loss contingency.
D. discontinue a line of business.

280. Which of the following matters would an auditor most likely include in a management
representation letter?
A. Communications with the audit committee concerning weaknesses in the internal
control structure.
B. The completeness and availability of minutes of stockholders‟ and directors‟ meetings.
C. Plans to acquire or merge with other entities in the subsequent year.
D. Management‟s acknowledgment of its responsibility for the detection of
employee fraud.

281. How are other reporting responsibilities addressed within the auditor‟s report?
a. They should be addressed in a separate section that follows the opinion paragraph.
b. They should be addressed within the introductory paragraph.
c. They should be addressed within the scope paragraph.
d. They should be addressed within the scope paragraph and separately described in a
separate paragraph.

282. Which of the following is incorrect regarding the auditor‟s signature?

A. The auditor‟s signature is either in the name of the audit firm, the personal name of
the auditor, or both, as appropriate.
B. The auditor‟s signature is either in the name of the audit firm or the personal name
of the auditor, but not both.
 C. In addition to the auditor‟s signature, the auditor may be required to declare
the auditor‟s professional accountancy designation.
D. The auditor‟s report filed with the Securities and Exchange Commission (SEC) must
be manually signed.

283. Which of the following information is(are) required when an auditor‟s report is issued
on financial statements to be filed with the Securities and Exchange Commission?

1. Audit report is manually signed.

2. Certifying partner to sign his name.
3. Partner‟s Tax Identification Number.
4. PRC registration number
5. Accreditation with SEC

A. 1, 2, 3, 4, 5
B. 2, 4, 5
C. 1, 3, 4, 5
D. 2, 3, 4, 5

284. An audit report should be dated as of the

A. date the stockholders approve the audited financial statements.
B. date of management approving the audited financial statements.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney.

285. Why is the date of the auditor‟s report important?

a. To have a basis of determining the audit fees to be paid to the auditor.
b. The date of the auditor‟s report informs the readers that the auditor has considered
the effect of events and transactions of which the auditor became aware and that
occurred up to that date.
c. To emphasize completeness assertion.
d. To inform the users of the financial statements that the auditor complied with the
applicable Philippine Standards on Auditing.

286. How is the auditor‟s report on the financial statements that require final approval
by stockholders before such financial statements are issued publicly dated?
A. The auditor‟s report should be dated coinciding the date of approval of the
financial statements by the stockholders.
B. The auditor‟s report should be dated after the approval of the financial statements
by the stockholders.
C. The date of the auditor‟s report coincides the date of approval of the
financial statements by the board of directors.
D. The audit report should be dual dated, the first date coinciding the approval by the
board of directors and the second date to coincide with the approval by the
stockholders.
287. The auditor‟s address is indicated in the auditor‟s report by:
A. naming the location in the country where the auditor practices his profession.
B. including the complete mailing address of the auditor.
C. identifying the country from where the auditor had secured his professional license.
D. the auditor‟s address is omitted in the report.

288. Which of the following is ordinarily true of a modification of the audit report by adding an
emphasis of matter paragraph?
A. The modification by adding an emphasis of matter paragraph is an “except for”
qualification of opinion.
B. The emphasis of matter paragraph is a “subject to” qualification of opinion.
C. The emphasis of matter paragraph would ordinarily refer to the fact that the
auditor‟s opinion is not qualified.
D. The emphasis of matter paragraph is presented before the opinion paragraph.

289. When additional language is added to the auditor's report without modifying the opinion,
the additional language should be included in:
A. the introductory paragraph.
B. the scope paragraph.
C. the opinion paragraph.
D. one or more additional paragraphs that follow the opinion paragraph.

290. Which of the following statements is not true?

A. A one-paragraph report is generally used when the auditor is not independent.
B. A modification of the audit report that involves modified wordings may contain an
unqualified opinion.
C. An addition of another paragraph to an otherwise standard audit report always requires
a modification of an unqualified opinion.
D. An unqualified opinion may be issued though the audit report requires an additional
explanatory paragraph.

291. An auditor includes a separate paragraph in an otherwise unmodified report to emphasize

that the entity being reported on had significant transactions with related parties. The inclusion
of this separate paragraph
A. is considered an “except for” qualification of the opinion.
B. violates generally accepted auditing standards if this information is already disclosed in
the footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase “with the
foregoing explanation.”
D. is appropriate and would not negate the unqualified opinion.

292. An auditor concludes that there is substantial doubt about an entity‟s ability to
continue as a going concern for a reasonable period of time. If the entity‟s disclosures
concerning this matter are adequate, the audit report should include a(an)
Adverse opinion “Except for” qualified opinion
A. Yes Yes
 B. No No
C. No Yes
D. Yes No

293. Under certain circumstances, the CPA may wish to emphasize specific matters regarding
the financial statements even though he or she intends to express an unqualified opinion.
Normally, such an explanatory information should be included in
A. the introductory paragraph.
B. a separate paragraph following the opinion paragraph in the report.
C. the opinion paragraph.
D. A separate paragraph preceding the opinion paragraph.

294. Salmon Company‟s financial statements adequately disclose uncertainties that

concern future events, the outcome of which cannot reasonably be estimated. The
auditor‟s report should include a(an)
A. unqualified opinion
B. “except for” qualified opinion
C. “subject to” qualified opinion
D. adverse opinion

295. The paragraphs of the report which is modified for uncertainties are the same as the
standard unqualified report. The explanatory paragraph as a form of the modification to
describe the uncertainty is added as the
A. first paragraph
B. last paragraph
C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last

296. An explanatory paragraph following an opinion paragraph that describes an uncertainty is

as follows:

As discussed in Note X to the financial statements, the company is a defendant in a

lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon
adjudication has been made in the accompanying financial statements.

What type of opinion should the auditor express in this circumstance?

A. Unqualified
B. Disclaimer
C. Qualified
D. adverse

297. The audit report issued by Lozano and Co., CPAs, included the following paragraph that
followed the opinion paragraph:
 Without qualifying our opinion we draw attention to Note 11 to the financial statements.
The Company is the defendant in a lawsuit alleging infringement of certain patent rights
...

This paragraph is considered:

A. an inappropriate reporting practice
B. an additional information to be a part of the notes to financial statements.
C. an emphasis of matter regarding uncertainty which is considered an acceptable
reporting practice
D. inappropriate because it contradicts the unqualified opinion issued by the auditor

298. In extreme cases such as situations involving multiple uncertainties that are significant to
the financial statements, the auditor
A. may consider to express a disclaimer of opinion
B. may qualify his opinion instead of issuing an unqualified opinion with emphasis
of matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a “subject to” opinion because the situations related to uncertainties

299. A client company has issues that cause substantial doubt regarding the entity's ability to
continue as a going concern. If this is the only major audit issue, which type of opinion will
the auditor usually refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion

300. Which of the following situations, the effect of which is significant, least likely require a
decision of whether to issue a qualified or adverse opinion?
A. Any disagreement with entity management regarding the acceptability of the
accounting policies selected by the management.
B. Limitation on the scope of the auditor‟s work.
C. Inadequate disclosures of financial information.
D. Unjustified changes in accounting policies.

301. The auditor may continue to express unqualified opinion though there are modifications
made in the audit report. Which of the following situations, would the auditor likely modify
his opinion?
A. The existence of multiple uncertainties that are adequately described in the notes to
financial statements.
B. The prior year‟s financial statements were audited by other CPAs.
C. An important subsidiary whose financial statements were included in the consolidated
financial statements were audited by other CPAs.
D. A substantial doubt about the client‟s ability to continue as a going concern
that is adequately disclosed in the financial statements.
302. In which of the following situations would qualified opinion be inappropriate?
A. Financial statements are materially misstated.
B. A doubt that is more than substantial about the ability of the company to continue as a
going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.

303. Which of the following is not a reason to issue a modified audit report with opinion other
than unqualified opinion?
A. The scope of the auditor‟s work is restricted by the client.
B. The amount of inventories at cost as presented in the balance sheet significantly
exceeded their market values.
C. Certain significant matter is omitted from either the financial statements or notes to
financial statements.
D. An adequately disclosed significant uncertainty, the resolution of which is dependent
upon future events and which may affect the financial statements.

304. Which of the following situations may likely require a modified audit report with modified
wordings or an emphasis of matter paragraph?
A. A significant uncertainty, not adequately disclosed in the financial statements.
B. An audit of inventory is restricted by the client. The auditor was satisfied about the
balance of the inventory by doing alternative audit procedures.
C. A change in the application of generally accepted accounting principle that is justified.
D. A less than substantial doubt regarding the ability of the entity to continue as a going
concern.

305. Which of the following circumstances may not result to a disclaimer of opinion?
A. A significant scope limitation in auditing the existence of inventories. The inventory
amount comprises 75 percent of the total assets of the client.
B. The auditor believes that there are multiple uncertainties that are significant to the
financial statements.
C. The accounts receivable of the client comprises 80 percent of the total assets. The
auditor was instructed by the client not to confirm account balances. The auditor,
however, was satisfied by the results of alternative audit procedures.
D. The auditor‟s wife owns very a few number of common shares of the client.

306. An auditor may express a qualified opinion because of

Departure from Lack of Scope

PFRS Consistency Limitation
A. YES YES YES
B. NO YES NO
C. YES NO NO
D. NO YES YES

307. Whenever an auditor issues a qualified report, he or she

 A. must use the term “subject to” in the opinion paragraph.
B. may use either the terms “subject to” or “ except for” in the opinion paragraph,
depending on the nature of the qualification.
C. must use the term “except for” in the opinion paragraph.
D. must not use the terms “subject to” or “except for” in the opinion paragraph.

308. An explanatory paragraph may be added to the audit report while at the same time issuing
an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of the auditor.
B. there is an immaterial departure from GAAP to ensure fair presentation with the
agreement of the auditor.
C. the audit opinion is partly based on the work of another auditor.
D. the audit work has been significantly limited by management.

309. Under which of the following sets of circumstances might an auditor disclaim an opinion?
A. The financial statements contain a departure from PFRS, the effect of which is
material.
B. The principal auditor decides to make reference to the report of another auditor who
audited a subsidiary.
C. There has been a material change between periods in the method of the application of
accounting principles.
D. There were significant limitations on the scope of the audit.

310. If an auditor is engaged to audit a client‟s financial statements after the annual
physical inventory count was made and the accounting records are not sufficiently reliable
to enable the auditor to become satisfied as to the year-end inventory balances, the opinion
to be expressed is
A. either an “except for” qualified opinion or an adverse opinion.
B. either a disclaimer or opinion or an “except for” qualified opinion.
C. either an adverse opinion or disclaimer of opinion.
D. an unqualified opinion.

Reviewer for Auditing Theory

1. Which of the following eliminates voluminous details from the auditor's working trial balance by
classifying and summarizing similar or related items?
a. Account analyses.
b. Lead schedules.
c. Control accounts.
d. Supporting schedules.

2. 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 relate 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.

3. Early appointment of the independent auditor will enable

a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

4. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper
planning as intended by the first standard of fieldwork would occur when the auditor
a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative accounts receivable confirmations instead of positive confirmations because the
latter require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to make
extensive test counts.

5. A CPA is conducting the first examination of a non-public company's financial statements. The
CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the
predecessor's working papers. This procedure is
a. acceptable if the client and the predecessor auditor agree to it.
b. acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work.
c. required if the CPA is to render an unqualified opinion.
d. unacceptable because the CPA should bring an independent viewpoint to a new engagement.

6. Before applying principal substantive tests to the details of asset and liability accounts at an interim
date, the auditor should
a. assess the difficulty in controlling incremental audit risk.
b. investigate significant fluctuations that have occurred in the asset and liability accounts since
the previous balance-sheet date.
c. select only those accounts which can effectively be sampled during year-end audit work.
d. consider the tests of controls that must be applied at the balance-sheet date to extend the audit
conclusions reached at the interim date.

7. Which of the following is not one of the three main reasons why the auditor should properly plan
engagements?
a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient competent evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.
8. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a
new client?
a. Client's standing in the business community.
b. Client's financial stability.
c. Client's relation with its previous CPA firm.
d. Client's probability of achieving an unqualified opinion.

9. The working papers are

a. the property of client.
b. property of the auditor although prepared by client.
c. the primary means of documenting that an adequate audit was conducted in accordance with
GAAS.
d. used primarily as a basis for the partners to review and reward the work of the managers,
seniors, and staff.

10. Audit programs are modified to suit the circumstances on particular engagements. A complete audit
program for an engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting control.
c. after reviewing the client's accounting records and procedures.
d. when the audit engagement letter is prepared
11. Which of the following would ordinarily not be found in the permanent file?
a. The history of the company.
b. The name of the predecessor auditor.
c. A record of the most important accounting policies.
d. A list of the major lines of business.

12. Transactions with related parties are important to the auditors because they will be disclosed in the
financial statements if material. Generally accepted accounting principles would not require disclosure of
a. the nature of the related-party relationship.
b. a description of transactions, including dollar amounts.
c. the amounts due from and to related parties.
d. Loans to officers during the year which had been repaid before the balance sheet date.

13. Audit programs generally include procedures to test actual transactions and resulting balances.
These procedures are primarily designed to
a. gather corroborative evidence.
b. test the adequacy of internal control.
c. detect irregularities that result in misstated financial statements.
d. obtain information of informative disclosures.

14. Which of the following items would not normally be included, in whole or in part, in the auditor's
permanent file on a client?
a. The articles of incorporation and bylaws.
b. Analyses of accounts such as long-term debt and stockholders' equity.
c. Organization charts and internal control questionnaires.
d. The audit program.

15. When a company changes auditors, SAS No. 7 requires communication between the predecessor
and successor auditors. The burden of initiating the communication rests with the
a. predecessor.
b. client.
c. successor.
d. SEC.
16. A measure of how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued is the
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

17. A measure of the auditor's assessment of the likelihood that there are material misstatements in an
account before considering the effectiveness of the client's internal control is
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

18. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

19. The largest portion of the auditor's working papers is the

a. lead schedules.
b. adjusting and reclassification entries.
c. supporting schedules.
d. working trial balance.

20. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of bond and note indentures.

21. Which of the following would not be classified as a related-party transaction?

a. An advance of one week's salary to an employee.
b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner or client.
d. Exchanges of equipment between two companies owned by the same person.

22. Which of the following would not be found in the corporate charter?
a. The kinds and amount of capital stock authorized.
b. The date of incorporation.
c. The types of business activity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stockholders.

23. During the course of an audit engagement an auditor prepares and accumulates audit working
papers. The primary purpose of the audit working papers is to
a. aid the auditor in adequately planning the work.
b. provide a point of reference for future audit engagements.
c. support the underlying concepts included in the preparation of the basic financial statements.
d. support the auditor's opinion.

24. Ordinarily, the working papers can be provided to someone else only with the express permission of
the client. This is the case even if
a. the papers are subpoenaed by a court.
b. the papers are used as a part of an AICPA quality review program.
c. the papers are requested as evidence in an AICPA Trial Board hearing.
 d. the papers are transferred as a result of a CPA selling his/her practice to another CPA firm.

25. The purpose of an engagement letter is to

a. reduce the CPA firm's responsibility to external users of the audited financial statements.
b. reduce the terms of the engagement to writing in order to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. satisfy the Statute of Frauds which requires that contracts for professional services must be in
writing to be enforceable.

26. The auditor is likely to accumulate more evidence when the audit is for a company
a. whose stock is publicly held.
b. which has extensive indebtedness.
c. which is to be sold in the near future.
d. All three of the above.

27. Which of the following is not an inherent risk that is common to all clients in certain industries?
a. Potential inventory obsolescence in the fashion clothes industry.
b. Reserve for loss in the casualty insurance industry.
c. Accounts receivable collection in the consumer loan industry.
d. Brand loyalty in the cosmetics industry.

28. One means of informing the client that the auditor is not responsible for the discovery of all acts of
fraud is the
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.

29. Which of the following is the most likely first step an auditor would perform at the beginning of an
initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor's report.
b. Study and evaluate the system of internal administrative control.
c. Tour the client's facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

30. The permanent section of the auditor's working papers generally should include
a. time and expense reports.
b. a copy of the engagement letter.
c. a copy of key customer confirmations.
d. names and addresses of all audit staff personnel on the engagement.

31. Which of the following would you expect to find in a corporation's bylaws?
a. The kinds and amounts of capital stock authorized.
b. The date of incorporation.
c. The rules and procedures adopted by the stockholders of the corporation.
d. The types of business activities that the corporation is authorized to conduct.

32. Which of the following would not usually be included in the minutes of the board of directors
and/or stockholders?
a. The duties and powers of the corporate officers.
b. Declaration of dividends.
c. Authorization of long-term loans.
d. Authorization of individuals to sign checks.
33. The purpose of the requirement in SAS No. 7 of having communication between the predecessor
and successor auditor is
a. to allow predecessor to disclose information which would otherwise be confidential.
b. to help the successor auditor to evaluate whether to accept the engagement.
c. to help the client by facilitating the change of auditors.
d. to ensure that information which is provided to the SEC on Form 8-K will be accurate.

34. An auditor should examine minutes of the board of directors' meetings

a. through the date of the financial statements.
b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test (sample) basis.

35. An extensive understanding of the client's business and industry and knowledge about the
company's operations are essential for doing an adequate audit. For a new client, most of this information is
obtained
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the client's premises.

36. Most auditors assess inherent risk as high for related parties and related-party transactions because
a. of the accounting disclosure requirement.
b. of the lack of independence between the parties.
c. both a and b.
d. it is required by generally accepted accounting principles.

37. Which of the following would not fit the description of a related-party transaction?
a. An unusually large sale of merchandise to the company's best and largest customer.
b. Sales of merchandise between a parent company and its subsidiary.
c. Exchanges of equipment between two companies owned by the same person.
d. Loans to corporate officers at market rates of interest with a regular repayment schedule.

38. One of the first things that the auditor will do after accepting a new client is
a. communicate with the client's predecessor auditor.
b. contact the client's attorney to discover legal obligations.
c. study the client's internal controls.
d. tour the client's facilities.

39. The first standard of field work recognizes that early appointment of the independent auditor has
many advantages to the auditor and the client. Which of the following advantages is least likely to occur as a
result of early appointment of the auditor?
a. The auditor will be able to plan the audit work so that it may be done expeditiously.
b. The auditor will be able to complete the audit work in less time.
c. The auditor will be able to better plan for the observation of the physical inventories.
d. The auditor will be able to perform the examination more efficiently and will be finished at an
early date after the year-end.

40. The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided when
a. predecessor auditor has poor relations with successor auditor.
b. client is dissatisfied with predecessor's work.
c. there are legal problems between client and predecessor.
d. predecessor believes that client lacks integrity.
41. Permanent files contain all the data
a. about the most recent audits.
b. about the current audit and financial statements.
c. of a historical or continuing nature about the client.
d. of a historical or continuing nature pertinent to the current audit.

42. With respect to records in a CPA's possession, rules of conduct provide that
a. copies of client records incorporated into audit working papers must be returned to the client
upon request.
b. worksheets in lieu of a general ledger belong to the auditor and need not be furnished to the
client upon request.
c. an extensive analysis of inventory prepared by the client at the auditor's request belongs to the
auditor and needs not be furnished to the client upon request.
d. the auditor who returns copies of client records must return the original records upon request.

43. An example of a reclassification entry would be an entry

a. to reduce inventory when client failed to write down its obsolete raw materials.
b. to change material credit balances in accounts receivable accounts to accounts payable
accounts.
c. to increase the allowance for doubtful accounts when it was discovered that a customer had
filed for bankruptcy protection under Chapter 11.
d. to increase the federal income tax liability account when it was discovered that client would be
in a higher tax bracket than originally estimated.

44. The engagement letter

a. affects the CPA firm's responsibility to external users of audited financial statements.
b. can be used to alter the auditor's responsibilities under generally accepted auditing standards.
c. can affect legal responsibilities to the client.
d. is useful only if it is an audit engagement, but has no effect for review or compilation services.

45. 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 to the auditor and 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 examination is necessary at interim dates.

46. The least effective method of identifying related parties would be

a. an inquiry of management.
b. a review of SEC filings.
c. a review of the purchases and sales journals for the period under audit.
d. an examination of stockholders' listings to identify principal stockholders.

47. Which of the following is not a document or record that should be examined early in the
engagement?
a. Management letter.
b. Corporate charter and bylaws.
c. Contracts.
d. Minutes of board of directors' and stockholders' meetings.

48. Which of the following is not a potential effect of an auditor's decision that a lower acceptable audit
risk is appropriate?
a. More evidence is required.
 b. Less evidence is required.
c. Special care is required in assigning experienced staff.
d. Review of the working papers by personnel who were not assigned to the engagement.

49. The official record of the meetings of the board of directors and stockholders is contained in the
corporate
a. bylaws.
b. charter.
c. minutes.
d. license.

50. Which of the following is a basic tool used by the auditor to control the audit work and review the
audit progress?
a. Audit program.
b. Engagement letter.
c. Time and expense summary.
d. Progress flowchart.

51. Companies filing with the SEC are required by FASB 14 to

a. prepare financial statements for each different segment of the business.
b. disclose segment information for different lines of business in the financial statements.
c. disclose if there are segments of the business, but they are not required to disclose the
percentage of revenue generated by each segment.
d. disclose segment information on the 10-K filed with the SEC, but it is not required on the
financial statements which are published in the annual report.

52. Reclassification entries are recorded in the

a. sales journal.
b. cash receipts journal.
c. general journal.
d. financial statements but not in the general ledger.

53. An auditor searching for related party transactions should obtain an understanding of each
subsidiary's relationship to the total entity because
a. the business structure may be deliberately designed to obscure related-party transactions.
b. this may reveal whether particular transactions would have taken place if the parties had not
been related.
c. intercompany transactions may have been consummated on terms equivalent to arm's-length
transactions.
d. this may permit the audit of intercompany account balances to be performed as of concurrent
dates.

54. Since SAS No. 21 requires audit testing of segment information if client has different lines of
business, it is important for the auditor to
a. visit all the different business locations before the audit is completed.
b. identify the segments early.
c. develop an audit program for each line of business.
d. have an office in each city where a business segment is located.

55. After preliminary audit arrangements have been made, an engagement confirmation letter should be
sent to the client. The letter usually would not include
a. a reference to the auditor's responsibility for the detection of errors or irregularities.
b. an estimation of the time to be spent on the audit work by audit staff and management.
c. a statement that management advisory services would be made available upon request.
d. a statement that a management letter will be issued outlining comments and suggestions as to
any procedures requiring the client's attention.
56. Which of the following would not be included in the auditor's working papers?
a. The accounting manual.
b. The results of the preceding year's audit.
c. Descriptive information about the internal control structure.
d. A time budget for the various audit areas.

57. It is easier and more common to implement increased evidence accumulation for inherent risk than
for acceptable audit risk because
a. inherent risk can usually be isolated to one or two accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be accumulated.

1 - 10. b, b, d, a, a, a, a, d, c, b
11 - 20. b, d, a, d, c, b, d, b, c, c
21 - 30. a, d, d, d, b, d, d, a, c, b
31 - 40. c, a, b, b, d, c, a, d, b, c
41 - 50. d, c, b, c, a, c, a, b, c, a
51 - 57. b, d, b, b, c, a, a

Auditing, Attestation, and Assurance

1. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
b. Training required to perform the service.
c. Scope of services.
d. CPA’s approach to the service.

ANSWER: C

2. 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 are fairly stated.
d. Assure the consistent application of correct accounting procedures.

ANSWER: C

3. Internal auditing often extends beyond examinations leading to the expression of an opinion on the
fairness of financial presentation and includes audits of efficiency, effectiveness, and
a. Internal control.
b. Evaluation.
c. Accuracy.
d. Compliance.

ANSWER: D

4. Which of the following best describes the operational audit?

a. It requires the constant review by internal auditors of the administrative controls as they relate to
operations of the company.
b. It concentrates on implementing financial and accounting control in a newly organized
company.
c. It attempts and is designed to verify 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.

ANSWER: D

5. 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.

ANSWER: A

6. Which of the following is not considered an assertion as formulated by the Auditing Standards Board?
a. Valuation or allocation.
b. Mathematical accuracy.
c. Rights and obligations.
d. Presentation and disclosure.

ANSWER: B

7. Which of the following is not a distinguishing feature of

risk-based auditing?
a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

ANSWER: C

8. To maximize independence, the director of internal auditing should report to the

a. Audit committee.
b. Controller.
c. Chief financial officer.
d. Director of information systems.

ANSWER: A

9. 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.

ANSWER: C
10. The best description of the scope of internal auditing is that it encompasses
a. Primarily operational auditing.
b. Both financial and operational auditing.
c. Primarily the safeguarding of assets and verifying the existence of such assets.
d. Primarily financial auditing.

ANSWER: B
11. 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.

ANSWER: D

12. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the
a. Scope paragraph of the auditor’s report.
b. Opinion paragraph of the auditor’s report.
c. Management letter.
d. Engagement letter.

ANSWER: D

13. The four major steps in conducting an audit are:

a. Testing internal controls
b. Audit report
c. Planning
d. Testing transactions and balances

The proper sequence in applying the above steps is:

a. cadb
b. cdab
c. bcda
d. adcb

ANSWER: A

13. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

ANSWER: A

15. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.

ANSWER: C

16. Which of the following statements is not a distinction between independent auditing and internal
auditing?
a. Independent auditors represent third party user external to the auditee entity, whereas internal auditors
report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing.
ANSWER: B
17. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve
misunderstandings between CPA and client regarding the precise nature of the work to be performed and the
type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in the audit process.
d. The engagement letter should be signed by both the client and the CPA and should be used only for
independent audits.

ANSWER: B

18. In assessing audit risk, the CPA needs to do all of the following except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the client.
d. Understand the entity and the industry in which it operates.

ANSWER: A

19. Which of the following tasks should be performed prior to the final audit?
a. Determining the fairness of property, plant, and equipment.
b. Confirming accounts receivable.
c. Testing internal control.
d. Collecting and evaluating evidence supporting the fairness of inventory values.

ANSWER: C
1. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new
client?
A. The client’s probability of achieving an unqualified opinion.
B. The client’s financial ability.
C. The client’s relations with its previous CPA firm.
D The client’s standing in the business community.
.
2. After accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:
A. The predecessor’s evaluation of matters of continuing accounting significance.
B. Disagreements which the predecessor had with the client concerning auditing procedures and
accounting principles.
C. The client’s ability to pay the fee for this engagement.
D The predecessor’s assessments of inherent risk and judgments about materiality.
.
3. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in a(n):
A Client’s representation letter C. Audit engagement letter.
.
B Independent auditor’s report D. Management letter
.
4. Which of the following is not a valid reason why an auditor sends to his client an engagement letter?
A. Avoid misunderstanding with respect to the engagement
B. Confirms the auditor’s appointment
C. Discloses the objective and scope of the audit
D Assures CPA’s compliance to PSAs
.
5. The secondary purpose of the engagement letter is to:
A. Remind management that the primary responsibility for the financial statements rests with
management.
B. Satisfy the requirements of the CPA’s liability insurance policy.
C. Provide a written record of the agreement with the client as to the services to be provided.
D Provide a starting point for the auditor’s preparation of the preliminary audit program.
.
6. S1 The engagement letter will include identification of significant dates throughout the engagement.
S2 The engagement letter will inform the client about the audit procedures to be performed.
A. True, true B. False, false C. True, false D. False, true

7. Which of the following procedures is performed primarily during audit planning?

A. Risk assessment procedures
B. Tests of controls
C. Substantive tests
D. All of the above are performed primarily during audit planning

8. Which of the following is not a risk assessment procedure?

A. Inquiries of management and others within the entity
B. Analytical procedures
C. External confirmation with customers
D. Observation and inspection

9. S1 Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
S2 An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the financial statements.
A. True, true B. False, false C. True, false D. False, true
10. S1 Analytical procedures are required to be used in planning a financial statement audit.
S2 Analytical procedures are required to be used all throughout the audit.
A. True, true B. False, false C. True, false D. False, true

11. S1 In a financial statement audit, audit risk represents the probability that internal controls fail and the
failure is not detected by the auditor’s procedures.
S2 Audit risk may be eliminated by 100% testing of the items in the population.
A. True, true B. False, false C. True, false D. False, true

12. In a financial statement audit, detection risk represents:

A. The susceptibility of an account balance to error that could be material.
B. The risk that error could occur and not be prevented or detected by the internal control structure
of the client.
C. The risk that the auditor fails to modify materially misstated financial statements.
D. The risk that error could occur and not be detected by the auditor’s procedures.
13. The following statements describe components of internal control. Which one describes risk assessment
process?
A. This includes the governance and management functions and the attitudes, awareness, and
actions of those charged with governance and management concerning the entity’s internal
control and its importance in the entity.
B. The process for identifying business risks relevant to financial reporting objectives and
deciding about actions to address those risks, and the results thereof.
C. The classes of transactions in the entity’s operations that are significant to the financial
statements.
D. The policies and procedures that help ensure that management directives are carried out.
14. S1 The auditor assesses detection risk because it affects the level of control risk that the auditor may
accept.
S2 The auditor assesses control risk because it affects the level of detection risk that the auditor may
accept.
A. True, true B. False, false C. True, false D. False, true

15. Which of the following would not be a method used to conduct tests of controls?
A Inquiry and observation. C. Reperformance.
.
B Inspection. D. Analytical procedures
.

16. As the auditor plans to rely more on the client’s internal control structure,
A Substantive tests should increase. C. Substantive tests should decrease.
.
B Tests of controls should increase. D. Tests of controls should decrease.
.
17. S1 Audit evidence comprises all the information available to the auditor during an audit engagement.
S2 Accounting records, on their own, constitute sufficient appropriate evidential matter.
A. True, true B. False, false C. True, false D. False, true

18. Which of the following is an example of the auditor’s direct knowledge?

I. Inspection
II. Observation
III. Computation
A. I only B. I and III C. II and III D. I, II and III

19. S1 An auditor should recognize that the application of auditing procedures may produce evidential
matter indicating the possibility of errors and irregularities and therefore should not depend on
internal accounting control features that are designed to prevent or detect errors or irregularities.
S2 Inquiries of the client’s internal audit staff, held in private, constitute one of the most reliable
sources of evidence in testing the rights and obligations assertion related to land and buildings.
A. True, true B. False, false C. True, false D. False, true

20. Which of the following is an example of fraud?

A. Client personnel make mistakes in gathering or processing accounting data from which
financial statements are prepared.
B. Client personnel alter accounting records from which financial statements are prepared.
C. Client personnel overlook or misinterpret facts, causing accounting estimates to be incorrect.
D. Client personnel make mistakes in the application of accounting principles.

21. Which of the following situations are applicable to fraud as well as error?
A. Mistakes in gathering or processing accounting data
B. Suppression of the recording of accounting transactions
C. Misinterpretation of facts, causing the classification of leases to be incorrect
D. Misapplication of accounting policies
22. Which of the following best describes a portion of the auditor’s responsibility regarding illegal acts by
clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect that illegal acts have been performed, they should conduct a legal audit
of the company
D. The auditor’s responsibility for the detection of all illegal acts is the same as their responsibility
regarding material errors and irregularities.
23. Which of the following is not generally included in the working papers file?
A. Documentation of the auditor’s understanding of the accounting and internal control systems.
B. Copy of the internal auditor’s audit program.
C. Analyses of significant ratios and trends.
D. An indication as to who performed the audit procedures and when they were performed.

24. The standard (unmodified) audit report includes the following:

I. Emphasis of a matter paragraph
II. Unqualified opinion
A. I only B. II only C. I and II D. Neither I nor II

25. When restrictions that materially limit the scope of the audit are imposed by the client, the auditor
generally should issue which of the following opinions?
A “Except for” C. Unqualified
.
B Adverse D. Disclaimer
.

26. An audit report should be dated no earlier than:

A. Date the report is delivered to the entity audited.
B. Date the auditee has obtained sufficient, appropriate audit evidence.
C. Date of the completion of the audit.
D. Date a letter of audit inquiry is received from the entity’s attorney of record.

27. Which of the following statements indicates an adverse opinion?

A. “The financial statements do not present fairly in all material respects the financial position,
results of operations, and cash flows in conformity with GAAP.”
B. “The auditor does not express an opinion on the financial statements.”
C. “The financial statements present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with GAAP.”
D “Except for the effects of a matter, the financial statements present fairly in all material respects
. the financial position, results of operations, and cash flows in conformity with GAAP.”

28. In which of the following paragraphs can you find the phrase “Philippine Financial Reporting Standards”?
I. Opening paragraph
II. Management responsibility paragraph
III. Auditor’s responsibility paragraph
IV. Opinion paragraph
A. I only B. II and III C. II and IV D. II, III and IV

29. This means the application of audit procedures to less than 100% of items within an account balance or
class of transactions, where all sampling units have a chance of being selected for testing.
A Audit sampling C. Haphazard testing
.
B Selecting specific items D. Statistical sampling
.
30. A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a
 A Random sample. C. Judgment sample.
.
B Statistical sample. D. Representative sample.
.

31. S1 The documentary evidence which physically represents the sampling units in a given population, is
known as sampling form.
S2 Error that arises from an isolated event that has not recurred other than on specifically identifiable
occasions and is therefore not representative of errors in the population is known as projected error.
A. True, true B. False, false C. True, false D. False, true

32. S1 An advantage of statistical sampling over non-statistical sampling methods in tests of controls is
that the statistical sampling methods provide an objective basis for qualitatively evaluating
sampling risk.
S2 Statistical sampling methods do not allow the auditor to eliminate the need to use judgment in
determining the appropriate sample size.
A. True, true B. False, false C. True, false D. False, true

33. One of the causes of sampling error is

A. The use of inappropriate or ineffective audit procedures.
B. Fatigue and lack of attention to detail
C. Failure to draw a representative sample.
D The use of attributes sampling instead of variables sampling.
.

34. Which of the following comments best illustrates the concept of non-sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor uses attributes sampling instead of variables sampling.
D The documents related to the chosen sample may not be available for inspection.
.
35. At times a sample may indicate that the auditor’s assessed level of control risk for a given control is
reasonable when, in fact, the true compliance rate does not justify the “less than high” level. This
situation illustrates the risk of
A Assessing control risk too low. C. Incorrect rejection.
.
B Assessing control risk too high. D. Incorrect acceptance.
.

36. The consequence of assessing control risk too high relates to the
a Efficiency of the audit. c. Preliminary estimates of materiality
. levels.
b Effectiveness of the audit. d. Allowable risk of tolerable error.
.

37. The likelihood of assessing control risk too low is the risk that the sample selected to test controls:
A. Does not support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure justifies such an assessment.
B. Contains misstatements that could be material to the financial statements when aggregated
with misstatements in other account balances or transactions classes.
C. Contains proportionately fewer deviations from prescribed internal control structure policies
or procedures than exist in the balance or class as a whole.
D. Supports the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure does not justify such an assessment.
38. While performing a substantive test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not
materially misstated. This situation illustrates the risk of
A Incorrect rejection. C. Assessing control risk too low.
.
B Incorrect acceptance. D. Assessing control risk too high.
.

39. A sampling method that is useful when testing controls is:

A Non-statistical sampling. C. Discovery sampling.
.
B Attribute estimation sampling. D. Stratified random sampling.
.

40. If the auditor is concerned that a population may contain exceptions, the determination of a sample size
sufficient to include at least one such exception is a characteristic
A Random sampling C. PPS Sampling
.
B Discovery sampling D. Variable sampling
.

41. S1 Statistical sampling may be applied to test controls when a client’s control procedures leave an audit
trail as evidence of compliance.
S2 For purposes of audit sampling in tests of controls, errors refer to misstatements.
A. True, true B. False, false C. True, false D. False, true

42. A decrease in the expected population deviation rate will cause the sample size to:
A Increase C. Remain unchanged
.
B Decrease D. Cannot be determined.
.
43. This is the deviation rate that an auditor will permit in the population and would still be willing to
reduce the assessed level of control risk:
A Population deviation rate. C. Sample deviation rate.
.
B Tolerable misstatement. D. Tolerable deviation rate.
.

44. Which of the following sampling methods is used to estimate a numerical measurement of a population,
such as a peso value?
A Attribute sampling. C. Variables sampling.
.
B Stop-or-go sampling. D. Random-number sampling.
.

45. When selecting samples, a decrease in the tolerable misstatement will cause the sample size to:
A Increase C. Remain unchanged
.
B Decrease D. Cannot be determined.
.

46. This is the misstatement that the auditor finds in the sample, adjusted to estimate the misstatement in the
population.
A Tolerable misstatement. C. Projected misstatement.
.
B Sample misstatement. D. Anticipated misstatement.
.
47. When performing a test of a control with respect to control over cash receipts, an auditor may use a
systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of
this type of sampling is that the items in the population
A. Must be systematically replaced in the population after sampling.
B. May systematically occur more than once in the sample.
C. Must be recorded in a systematic pattern before the sample can be drawn.
D May occur in a systematic pattern, thus destroying the sample randomness.
.

48. S1 A method of sampling in which all items in the population are divided into two or more sub-
population is known as systematic sampling.
S2 One of the disadvantages of haphazard sampling is the risk of conscious bias in the selection of
samples.
A. True, true B. False, false C. True, false D. False, true

49. According to PSA 560, “subsequent events” refer to:

A. Events occurring between the period end and the date of the auditor’s report
B. Facts discovered after the date of the auditor’s report.
C. Events occurring between the week immediately before the end of the period and the date of the
auditor’s report.
D. Events occurring between the period end and the date of the auditor’s report and facts
discovered after the date of the auditor’s report.

50. Which of the following procedures should an auditor most likely perform regarding subsequent events?
A. Comparing the financial statements being reported on with those of the prior period.
B. Investigating changes in accounting department personnel occurring after the date of the
financial statements.
C. Confirming a sample of material accounts receivable established after the date of the financial
statements.
D Inquiring as to whether any unusual adjustments were made after the date of the financial
. statements

51. After the date of the audit report but before the financial statements are issued, the auditor becomes
aware of a material subsequent event which requires adjustment in the financial statements. If
management does not amend the financial statements, the audit opinion to be issued would be:
A Unqualified opinion with explanation C. Adverse opinion
.
B Qualified opinion or adverse opinion D. Qualified opinion
.

52. When obtaining evidence regarding litigation against a client, the CPA would be least interested in
determining:
A. The period in which the underlying causes of litigation occurred.
B. An estimate of when the matter will be resolved.
C. An estimate of the potential loss.
D The probability of an unfavorable outcome.
.

53. The secondary source of information to be reported about litigation, claims, and assessments is the
A Client’s lawyer C. Client’s management
.
B Court records D. Independent auditor
.

54. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims
and assessments most likely would cause the auditor to request clarification?
 A. “I believe that the company will be able to defend this action successfully.”
B. “The possible liability to the company is nominal in amount.”
C. “This case against the company is without merit!”
D “The action can be settled for less than the damages claimed.”
.

55. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments,
the auditor should:
A. Honor the confidentiality of the client-lawyer relationship.
B. Seek to obtain the corroborating information from management.
C. Consider the refusal to be tantamount to a scope limitation.
D Disclose this fact in the notes to the financial statements.
.

56. Audit inquiries with the client’s legal counsel should cover cases up to:
A The balance sheet date C. The date when the letter was written
.
B The date of the audit report D. Cannot be determined
.

57. The primary objective of analytical procedures used in the final review of an audit is to
A. Obtain evidence from details tested to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in determining the reasonableness of the financial statements.
D Satisfy doubts when questions arise about a client’s ability to continue in existence.
.

58. The responsibility for the identification and disclosure of related parties and related party transactions
rests with the:
A External auditor. C. Internal audit department head
.
B Entity management D. Controller
.
59. Which of the following events most likely indicates the existence of related parties?
A. Discussing terms of merger with a company that is a major competitor.
B. Making a loan with scheduled terms for repayment
C. Borrowing a large sum of money at a very low interest rate.
D Selling real estate at a price that differs significantly from its carrying value.
.

60. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s
relationship to the total entity because:
A. This may permit the audit of intercompany account balances to be performed as of concurrent
dates.
B. The business structure may be deliberately designed to obscure related party transactions.
C. This may reveal whether particular transactions would have taken place if the parties had not
been related.
D Intercompany transactions may have been consummated on terms equivalent to arms’ length
. transactions.

61. When auditing related-party transactions, an auditor places primary emphasis on

A. Eliminating the effects of related party transactions.
B. Substance over form of the transactions, and disclosure of the related-party transactions.
C. Testing the existence of the related parties.
D. Determining the accuracy and classification of the related-party transactions.
62. The responsibility to evaluate the cliednt’s assessment of an entity’s ability to continue as a going
concern rests with:
A The auditor C. The BOA
.
B The entity’s management D. The financial statement users
.

63. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are positive.
B. Share dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D Interest payable in arrears for several months.
.

64. Travis, CPA, believes there is substantial doubt about the ability of Alice Co. to continue as a going
concern for a reasonable period of time. In evaluating Alice Co.’s plans for dealing with the adverse
effects of future conditions and events, Travis most likely would consider, as a mitigating factor, Alice
Co.’s plans to:
A. Postpone or cancel research and development projects related to future products
B. Accumulate treasury stock at prices favorable to Alice Co.’s historic price range
C. Purchase equipment and production facilities currently being leased
D Negotiate increases in required dividends being paid on preference shares
.

65. The auditor should obtain evidence of management’s acknowledgment of responsibility for
I. The fair presentation of the financial statements in accordance with PSAs
II. Approval of the financial statements
A. I only B. II only C. Both I and II D. Neither I nor II

66. Which of the following documentation is required for an audit in accordance with Philippine Standards
on Auditing (PSAs)?
A An internal control C. A client engagement
. questionnaire. letter.
B A planning D. A management
. memorandum or representation letter.
checklist.
67. S1 Management representation letters are substitutes for substantive test procedures.
S2 All members of the client’s management are to sign the management representation letter.
A. True, true B. False, false C. True, false D. False, true

68. Written client representation letters are normally signed by the:

A. president and the chairperson of the board.
B. treasurer and the internal auditor.
C. chief executive officer and the chief financial officer.
D corporate counsel and the audit committee chairperson.
.

69. Management representation letters should be dated as of the date of the:

A Statement of financial position. C. Completion of the audit
.
B Latest interim financial statements. D. Latest related party transaction.
.
70. Management’s refusal to furnish a written representation letter on a matter, which the auditor considers
essential, may lead the auditor to choose between the issuance of:
A Unqualified or qualified opinion C. Adverse opinion or disclaimer of
. opinion
B Qualified opinion or Adverse opinion D. Qualified opinion or disclaimer of
. opinion

71. Which of the following statements is incorrect?

a. PSA 100 states that when an expert is used in the collection and evaluation of evidence, the
practitioner and the expert should on a combined basis, possess sufficient knowledge of the
subject matter and have adequate proficiency in the subject matter for the practitioner to
determine that sufficient, appropriate evidence has been obtained. (x)
b. Compilation engagements ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that
information.
c. According to PSA 200, Objective and General Principles Governing an Audit of Financial
Statements, the professional responsibilities of an auditor include independence, integrity,
objectivity, confidentiality, professional behavior, technical standards, and professional
competence and due care.
d. PSA 210, Terms of Audit Engagements, applies to audits, reviews, and other related
services.

72. Assurance services are independent professional services that

a. Include a written communication that expresses a conclusions
b. Improve the quality of information, or its context for decision makers. (x)
c. Include audit services, attest services, and consulting services.
d. Involve the examination of the credibility of a written assertion that is the responsibility of
another party.

73. Which of the following services would be most likely to be structured as an attest engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data-base system for the revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements of
specified laws. (x)
d. The compilation of client’s forecast information.

74. Which of the following statements is incorrect?

a. Attendance consists of being present during all or part of a process being performed by
others.
b. Audit evidence will comprise source documents and accounting records underlying
financial statements and corroborating information from other sources.
c. The characteristics for determining whether criteria are suitable are relevance, reliability,
neutrality and consistency. (x)
d. Governance describes the role of persons entrusted with the supervision, control and
direction of an entity.

75. The Constitution of the Philippines requires this Office to “keep the general accounts of the
Government and for such period as may be provided by law, preserve the vouchers pertaining
thereto”
a. National Accounting Office
b. Ministry of Finance
c. Auditing units to each bureau or office.
d. Commission on Audit. (x)
76. Which of the following is not required by PSA 200, which states that professional competence and
due care is one of the ethical responsibilities of an auditor in an audit engagement?
a. observance of the relevant Philippine Standards on Auditing
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 (x)

77. The term testing alludes to the concept of

a. A guarantee
b. A certificate
c. Accuracy
d. Sampling (x)

78. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected
for all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
d. Professional skepticism. (x)

79. Philippine Standards on Auditing (PSAs)

a. must be followed on every audit, but the auditor may choose an alternative course of action
if it is justifiable (x)
b. must be followed only on those audits which must be submitted to the SEC
c. are ideal standards that are rarely, if ever, attained
d. must be followed by CPAs who are members of the PICPA, but they are optional for CPAs
who are not members of the PICPA

80. All of the following organizations are represented in both the Financial Reporting Standards
Council (FRSC) and the Auditing and Assurance Standards Council (AASC), except:
a. Professional Regulatory Board of Accountancy
b. Bangko Sentral ng Pilipinas
c. Bureau of Internal Revenue (x)
d. Commission on Audit

81. PSAs include standards on reporting. Which of the following is not one of the focus of PSA 700,
the Auditor’s Report on Financial Statements?
a. adequacy of informative disclosures
b. circumstances when GAAP are not consistently followed
c. whether statements were prepared in accordance with GAAP
d. sufficient appropriate evidence is to be obtained to support the audit conclusions (x)

82. Because external auditors are paid fees by their clients, external auditors
a. are absolutely independent and may conduct audits
b. may be sufficiently independent to conduct audits (x)
c. are never considered to be independent
d. must receive approval of the SEC before conducting audits

83. Which of the following situations best illustrates the application of professional skepticism?
a. G, CPA, is engaged in discussions with J, the client’s controller. G obtains several oral
representations from J, which the former readily accepts without further work or support
from other audit procedures.
b. G, CPA has decided to continue with the audit of FLS Company. Throughout the course of
the audit, G does not believe any of the representations made by J, controller.
 c. G, CPA, is discussing several audit issues with J, a member of top management.
Throughout the meeting with J, G neither assumes that J is dishonest, nor assumes
unquestioned honesty in J’s oral representations. (x)
d. G, CPA is engaged in discussions with J, the client’s controller, regarding several audit
issues. Throughout the meeting with J, J neither assumes that G is dishonest, nor assumes
unquestioned honesty in G’s oral representations.

84. Objectivity refers to a practitioner’s ability:

a. To remain impartial. (x)
b. To identify assertions that are appropriate.
c. To be unyielding in all disputes.
d. To choose independently between accounting principles and auditing standards.
85. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of prospective client’s industry and business.
b. The prospective client’s signature to the engagement letter.
c. A preliminary understanding of the prospective client’s control environment.
d. The prospective client’s consent to make inquiries of the predecessor auditor, if any. (x)

86. In financial statement audit, audit risk represents the probability that
a. internal control fails and the failure is not detected by the auditor’s procedures
b. the auditor unknowingly fails to modify an opinion on materiality misstated financial
statements (x)
c. inherent and control risk cause errors that could be material to the financial statements
d. the auditor is not retained to conduct financial statement audit in the succeeding year

87. If the auditor concludes that there is reasonable justification to change the engagement and if the
audit work performed complies with the PSAs applicable to the changed engagement, the report
issued would be that appropriate for:
a. The original engagement, without reference to the original engagement.
b. The revised terms of engagement, without reference to the original engagement. (x)
c. The revised terms of engagement, with reference to the original engagement.
d. The original engagement, with reference to the revised engagement.

88. Which of the following services provides the highest level of assurance to third parties about a
company’s financial statements?
a. Audit (x)
b. Review
c. Compilation
d. Write-up work

89. When CPA firms do an audit of historical financial statements, part of the audit usually consists of
identifying operational problems and making recommendations they may benefit the audit client.
The recommendations can be made orally but they are typically made by use of a
a. Letter of representation
b. Engagement letter.
c. Management letter. (x)
d. Client letter.

90. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presences often have been observed in circumstances where frauds have
occurred. (x)
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified during an audit.

91. The most difficult type of misstatement to detect is fraud based on

a. The over-recording of transactions.
b. The non-recording of transactions. (x)
c. Recorded transactions in subsidiaries.
d. Related party receivables.

92. Which of the following conditions identified during fieldwork of an audit is most likely to affect the
auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end.
b. Computer generated documents.
c. Missing documents. (x)
d. Year-end adjusting journal entries.
93. Which of the following most accurately summarizes what is meant by the term “material
misstatement?”
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material fraud.
c. Material error, material fraud, and certain illegal acts. (x)
d. Material error and material illegal acts.

94. Which of the following is most likely to be a response to the auditor’s assessment that the risk of
material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory of certain locations on an unannounced basis. (x)
b. Perform analytical procedures rather than taking test counts.
c. Request that the inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different dates so as to
allow the same auditor to be present at every count.

95. Which of the following is not a component of audit planning?

a. Observing the client’s annual physical inventory-taking and making test counts of selected items.
(x)
b. Making arrangements with the client concerning the timing of audit fieldwork and use of
the client’s staff in completing certain phases of the examination.
c. Obtaining an understanding of the entity and its environment, including its internal control.
d. Developing audit programs.

96. In planning an examination, the auditor would consider all of the following matters, except
a. Anticipated reliance on internal controls
b. Preliminary judgment about materiality levels for audit purposes
c. Financial statements items likely to require adjustment
d. The kind of audit opinion likely to be given (x)

97. In developing the overall audit plan for a new client, a factor not to be considered is
a. The terms of the engagement and any statutory responsibilities
b. The client’s business, including the structure of the organization and accounting system
used
c. The amount of estimated audit fee (x)
d. The audit risks and procedures to be performed to achieve audit objectives

98. A CPA may reduce audit work on a first time audit by reviewing the working papers of the
predecessor auditor. The predecessor should permit the successor to review working papers relating
to matters of continuing significance, such as those that relate to
a. Extent of reliance on the work of specialists
b. Fee arrangements and summaries of payments
c. Analysis of contingencies (x)
d. Staff hours required to complete the engagement

99. Following PSAs, which of the following is not one of the assertions made in financial statements by
management concerning each major account and class of transactions?
a. Relevance. (x)
b. Existence.
c. Valuation.
d. Presentation and disclosure.

100. Assertions are representations of management that are embodied in financial statement
components. They can be either explicit or implicit. Which of these assertions is not about
valuation or allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net realizable value.
 c. Notes payable in the balance sheet include all such obligations of the entity. (x)
d. Property cost is systematically allocated to appropriate accounting period.

101. Which statement is correct?

a. A review involves the application of audit skills and techniques and the gathering of
evidence. (x)
b. A review comprises inquiry, confirmation, and analytical procedures which are designed to
review the reliability of an assertion that is the responsibility of one party for use by another
party.
c. In a compilation engagement, the accountant is engaged to use auditing expertise as
opposed to accounting expertise.
d. Since no assurance is expressed in a compilation engagement, users of compiled
information derive no benefit, even when the service has been performed with due
professional skill and care.
102. Adequate planning helps ensure that appropriate attention is devoted:
a b(x) c d

To important areas of the audit Yes Yes Yes Yes

So that potential problems are
promptly identified Yes Yes No No
So that the work is completed
expeditiously No Yes No Yes

103. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
a. Reviewing investment transactions of the audit period to determine whether related parties
were created.
b. Performing analytical procedures to identify areas that may represent specific risks. (x)
c. Reading the minutes of stockholder and director meeting to discover whether any unusual
transactions have occurred.
d. Obtaining a written representation letter from the client to emphasize management’s
responsibilities.

104. A preliminary or entrance conference with the auditee is a useful step in avoiding
misunderstandings. Which of the following items is usually not covered in a preliminary
conference?
a. Special problems known to be relevant to the audit.
b. Extent to which the independent auditor will need assistance and cooperation from the
organization’s personnel.
c. Condition of accounting records and other data sources which may affect the cope of the
audit and difficulty of completion.
d. Audit program to be followed. (x)

105. Audit programs generally include procedures necessary to test actual transactions and
resulting balances. These procedures are primarily designed to
a. Detect irregularities that result in misstated financial statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence (x)
d. Obtain information for informative disclosures.

106. A procedure designed to test for peso errors or irregularities directly affecting the
correctness of financial statement balances is a
a. Substantive test. (x)
b. Compliance test.
c. Test of controls.
d. Definition of peso-unit sampling.
107. The following statements relate to the scope of practice of accountancy. Which one is
correct?
a. Practice in Education/Academe shall constitute in a person in an educational institution
which involve teaching of accounting, auditing, management advisory services, accounting
aspects of finance, business law, taxation, and other technically-related subjects. (x)
b. Members of the Integrated Bar of the Philippines are the only ones allowed to teach
business law and taxation.
c. In connection with the practice of accountancy in commerce and industry, any position in
any business or company in the private sector which requires supervising the recording of
financial transactions, preparation of financial statements, coordinating with the external
auditors for the audit of such financial statements and other related functions shall be
occupied only by a duly registered CPA, provided that such business or company must have
authorized capital of at least Five Million Pesos (5,000,000.00) and/or annual revenue of at
least Ten Million Pesos (10,000,000.00).
d. Practice in government shall constitute in a person who holds, or is appointed to, a position
in an accounting professional group in government or in a government-owned and/or
controlled corporation, excluding those performing proprietary functions, where decision-
making requires knowledge in the science of accounting.
108. The following, except one, are the duties normally performed by the engagement partner:
a. To manage the firm.
b. To establish contact with clients.
c. To discuss with the client problems that may arise during the audit. (x)
d. To decide on questions of policy.

109. Which of the following is not a power of the Professional Regulatory Board of
Accountancy?
a. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of
RA9298
b. To hold exclusive power to administer oaths in connection with the administration of RA9298
(x)
c. To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the
accountancy profession
d. To monitor the conditions affecting the practice of accountancy and adopt such measures,
including promulgation of accounting and auditing standards, rules and regulations and best
practices, as may be deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.

110. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. Financial pressures affecting employees. (x)
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.

111. Which of the following is the best criterion for evaluating a staff auditor’s work
performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of objectives set forth in the audit. (x)

112. International Standards on Auditing (ISAs) on which the PSAs are based are generally
applicable to the public sector, including government business enterprises. However, the
applicability of the equivalent PSAs on Philippine public sector entities has not been addressed by
the Auditing Standards and Practices Council (Note: The ASPC has been replaced by the Auditing
and Assurance Standards Council). It is the understanding of the ASPC that this matter will be
addressed by:
a. The Association of CPAs in Public Practice itself in due course.
b. The Commission on Audit itself in due course. (x)
c. The Professional Regulation Commission of the Philippines itself in due course.
d. The Professional Regulatory Board of Accountancy itself in due course.

113. Materiality should be considered by the auditor when:

a. Determining the nature, timing and extent of audit procedures and evaluating the effect of
misstatements. (x)
b. Evaluating the effect of misstatements.
c. Determining the nature, timing and extent of audit procedures.
d. Evaluating the effect of misstatements but not when determining the nature, timing and
extent of audit procedures.

114. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine Institute
of CPAs.
 b. Materiality depends only on the peso amount of an item relative to other fees in the
financial statements.
c. Materiality depends on the nature of an item rather than the peso amount.
d. Materiality is a matter of professional judgment. (x)

115. Pirma and Lang, CPAs, is doing the 2006 audit of SAN MIGUEL BEEF. The partner
assigned to the engagement, Mr. Pirma, works at the Manila office of the firm. Which of the
following audit firm personnel should obtain a sufficient understanding of San Miguel Beef and its
environment, including its internal control?
a. Assistants assigned to the Manila Office of Pirma and Lang, CPAs.
b. The whole team assigned to the San Miguel Beef audit engagement. (x)
c. All firm professionals, regardless of their involvement in the engagement.
d. Only Mr. Pirma, since is he is the one to sign the audit report for San Miguel Beef’s 2006
financial statements.

116. The following statements relate to Councils mentioned in the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004. Which of these statements is incorrect?
a. The Chairpersons of the FRSC and the AASC shall both be appointed by the Professional
Regulation Commission.
b. Any member of any existing accounting and auditing standard-setting council shall not be
disqualified from being appointed to the FRSC and the AASC as the case may be for the
terms provided herein.
c. The Education Technical Council was created to assist the Professional Regulation
Commission in carrying out its powers and functions and to further assist in the attainment
of the objective of continuously upgrading the accountancy education in the Philippines. (x)
d. The PRC CPE Council shall be composed of a chairperson and two (2) members.

117. Auditing standards require the auditor to obtain an understanding of the client’s internal
controls
a. for every audit (x)
b. for first-time audits
c. sufficient to find any frauds which may exist
d. whenever it would be appropriate

118. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities, information and communication
systems, and monitoring. (x)
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy and organizational structure.

119. An auditor should obtain sufficient knowledge of an entity’s information system relevant to
financial reporting to understand the
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates (x)
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud

120. Internal control cannot be designed to provide reasonable assurance regarding the
achievement of objectives concerning
a. Reliability of financial reporting
b. Elimination of all fraud (x)
c. Compliance with applicable laws and regulations
d. Effectiveness and efficiency of operations
121. The following statements relate to reinstatement, reissuance and replacement of revoked or
lost certificates. Which one of these statement(s) is(are) correct?
(1) The Board may, after the expiration of two (2) years from the date of revocation of a
certificate of registration and upon application and for reasons deemed proper and
sufficient, reinstate the validity of a revoked certificate of registration and in so doing,
may, in its discretion, exempt the applicant from taking another examination.
(2) A new certificate of registration to replace lost, destroyed, or mutilated certificate/license
may be issued, subject to the rules promulgated by the Board and the Commission, upon
payment of the required fees.
(3) The Board shall issue a resolution, subject to the approval of the Commission in granting a
petition for reinstatement to the practice of accountancy.

a. (1) and (2)

b. (1) and (3)
c. (2) and (3)
d. (1), (2), and (3) (x)

122. Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered indicators of
possible fraud?
 a. Managers regularly assuming subordinates’ duties.
b. Managers dealing in matters outside their profit center’s scope.
c. Managers not complying with corporate directives and procedures.
d. Managers subject to formal performance reviews on a regular basis. (x)

123. Which of the following statements is incorrect?

a. Internal auditing relates to audit which serves the needs of management.
b. Government auditing often extends beyond examinations leading to the expression of
opinion on the fairness of financial presentation and includes audits of efficiency,
effectiveness and compliance.
c. A compliance audit is designed to evaluate the efficiency and effectiveness of an
organization or some part thereof. (x)
d. CPA firms, internal auditors and governmental auditors can perform operational audits.

124. A comprehensive and constructive examination of the organizational structure of a

company, institution, or branch of government or any component thereof, its plans and objectives,
its means of operation and its use of human and physical facilities to reveal defects or irregularities
and to indicate possible improvements is called
a. Financial audit
b. Management audit (x)
c. Government audit
d. Internal audit

125. In an audit situation, communication between the successor and predecessor auditors should
be
a. Documented in an engagement letter.
b. Acknowledged in a representation letter.
c. Initiated by the successor auditor. (x)
d. Written and included in the audit report.

126. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor.
b. Successor auditor. (x)
c. Principal auditor.
d. Interim auditor.

127. JM, CPA, requested permission to communicate with the predecessor auditors of a
prospective client. The prospective client’s refusal to permit this will bear directly on JM’s
decision concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting principles between years.
c. Apparent scope limitation.
d. Integrity of management. (x)

128. The auditors will not ordinarily initiate discussion with the audit committee concerning the
a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company’s organization will influence the scope of the
examination.
c. Details of potential problems which the auditors believe might cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply. (x)

129. The policy on delegation states that there is to be sufficient direction, supervision and
review of work at all levels to provide reasonable assurance that the work performed meets
appropriate standards of quality. These procedures include the following, except:
a. Provide for the approval of the scheduling and staffing of the audit by the auditor. (x)
b. Provide procedures for planning audits.
 c. Provide procedures for maintaining the firm’s standards of quality for the work performed.
d. Provide on-the-job training during the performance of audits.

130. According to the IRR, how many representatives of the Quality Review Committee will
come from the accredited national professional organization of CPAs?
a. Five members (x)
b. Four members
 c. Six members
d. Seven members

131. Which of the following statements is incorrect?

a. Per PSA 220, the auditor means the person with the final responsibility for the audit.
b. The auditor should implement those quality control procedures which are, in the context of
the policies and procedures of the firm, appropriate for the individual audit.
c. The work performed by each assistant needs to be reviewed by personnel of at least equal
competence.
d. The procedures on skills and competence include those for hiring, for professional
responsibilities and for advancement. (x)

132. The following fraud risk factors relate to industry conditions, except:
a. New accounting, statutory or regulatory requirements that could impair the financial
stability or profitability of the entity.
b. A high degree of competition or market saturation, accompanied by declining margins.
c. Unusually rapid growth or profitability, especially compared with that of other companies
in the same industry. (x)
d. A declining industry with increasing business failures and significant declines in customer
demand.

133. If there is a risk of material misstatement resulting from fraud that may involve or result in
improper revenue recognition, which of the following is the most appropriate course of action for
the auditor to take?
a. Review the entity’s inventory records to help identify locations, areas or items for specific
attention during or after the physical inventory count.
b. Confirm with customers certain relevant contract terms and the absence of side agreements.
(x)
c. Perform tests of non-standard journal entries affecting long-term liabilities to confirm that
they are adequately supported and reflect the underlying events and transactions.
d. Request the assistance of an expert, taking care to ensure that the expert’s assumptions,
methods or findings have also been reviewed by the auditor.

134. When evaluating the possible effect of noncompliance on the financial statements, the
auditor considers the following, except:
a. The potential financial consequences, such as fines, penalties, damages, threat of
expropriation of assets, enforced discontinuation of operations, and litigation.
b. Whether the auditor should be held responsible for preventing such non-compliance. (x)
c. Whether the potential financial consequences require disclosure.
d. Whether the potential financial consequences are so serious as to call into question the fair
presentation given by the financial statements.

135. According to the Implementing Rules and Regulations, which portion of RA9298 embodies
the legislative intent in enacting the Philippine Accountancy Act of 2004?
a. Short title.
b. Objectives.
c. Declaration of policy (x)
d. Scope of practice.

136. Practice of public accountancy shall constitute in a person, be it his/her individual capacity,
or as a partner or as a staff member in an accounting or auditing firm, holding out himself or herself
as one skilled in the knowledge, science and practice of accounting, and as a qualified person to
render professional services as a CPA, or offering or rendering, or both, to more than one client on
a fee basis or otherwise, services such as the following, except:
a. The audit or verification of financial transactions and accounting records.
 b. The preparation, signing or certification for clients of reports of audit, balance sheet, and
other financial, accounting and related schedules, exhibits, statements or reports which are
to be used by stockholders or for publication or for credit purposes, or to be filed with a
court or government agency, or to be used for any other purpose.
c. The design, installation, review, and revision of accounting systems and controls.
d. When he/she represents clients before government agencies on tax and other matters outside
the province of accounting. (x)

137. The following statements pertain to the rules and regulations on the accreditation of
individual CPAs, firms and partnerships of CPAs engaged in the public practice of accountancy.
Which one is correct?
a. Within sixty days from the effective date of the revised rules and regulations, individual
CPAs, firms, and partnerships of CPAs who/which are not yet registered shall register with
the Board and the Commission in the manner provided for in the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004.
b. The registration shall be valid for a period of two years.
c. Renewal of registration shall be made every three years on or before November 30 on the
year of expiry upon compliance with the requirements set forth in the Implementing Rules
and Regulations.
d. The registration of applicants approved during any month of the year shall expire on the
third year following its approval. (x)

138. Individual CPAs, firms, and partnerships of CPAs organized after the effective date of the
revised rules and regulations set forth in Annex A of the IRR shall register with the board and the
commission and:
a. Shall not commence the practice of public accountancy until a valid Certificate of
Registration has been issued. (x)
b. Shall not commence the practice of public accountancy until a valid Certificate of
Commissioning has been issued.
c. Subject to favorable recommendation of the Board, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid
for two years.
d. Subject to favorable recommendation of the Commission, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid
for three years.

139. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective
manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit report, in order to reduce audit risk to an acceptably low level. (x)
c. Planning involves the engagement partner and other key members of the engagement team
to benefit from their experience and insight and to enhance the effectiveness and efficiency
of the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the engagement.

140. In performing MAS engagement, CPAs should not take any positions that might
a. Constitute advice and assistance.
b. Provide technical assistance in implementation.
c. Result in new organizational structure.
d. Impair their objectivity. (x)

141. The overall attitude and awareness of an entity’s board of directors concerning the
importance of the internal control structure usually is reflected in its
 a. computer-based controls
b. system of segregation of duties
c. control environment (x)
d. safeguards over access to assets

142. Which of the following statements is incorrect?

a. Competence as a CPA includes having the required technical qualifications to perform an
audit engagement.
b. Generally accepted auditing standards are best described as the conventions, rules and
procedures that are necessary to define the accepted accounting practices at a particular
time. (x)
c. Generally, evidential matter is considered sufficient when there is enough of it to afford a
reasonable basis for an opinion.
d. An annual report is a document, which an entity ordinarily issues on an annual basis, which
includes its financial statements together with the audit report thereon.

143. The following statements relate to the Philippine Institute of Certified Public Accountants
(PICPA). Which one is incorrect?
a. A director can only represent a sector in a region if he/she has been a member in good
standing in such sector in the region for at least two years at the time of his/her nomination.
b. There shall only be fourteen national directors, unless there is a valid reason to have
additional representation. (x)
c. The national directors shall be apportioned according to sectors in the four geographic
sectors based on the ratio of latest available number of members in good standing from
those areas.
d. It shall have a full-time career Executive Director who shall implement the policies
promulgated by the PICPA Board of Directors and shall have direct supervision over the
PICPA Secretariat.

144. Which of the following cases illustrate a violation of the provisions of RA9298
and its IRR regarding the rule on temporary and special permits?
a. F, foreign CPA, is internationally recognized as one of the foremost experts in computerized
fraud audits. In the judgment of the Board of Accountancy, obtaining the services of F is
essential for the advancement of accountancy in the Philippines. F is granted a
temporary/special permit to provide training to Filipino auditors regarding the finer points of
his specialization, and his permit is restricted to this particular engagement.
b. L, foreign CPA, is called for a specific purpose which, in the judgment of the Board of
Accountancy, is essential for the development of the country. L is granted a temporary/
special permit to practice for the particular work that he is being engaged. There is no
Filipino CPA qualified for such specific purpose.
c. C, foreign CPA, is called for consultation, which, in the judgment of the Board of
Accountancy, is essential for the development of the country. C is granted a temporary/
special permit to practice for the particular consultation that she is being engaged. There is
no Filipino CPA qualified for such consultation.
d. S, foreign CPA, is engaged as professor in special international accounting modules which
are essential to accountancy education in the Philippines. She was given a
temporary/special permit which restricts her practice to teaching and performing
compilation work for local enterprises. (x)

145. The following except one, are examples of the type of information that may come to the
auditor’s attention that may indicate that noncompliance with laws or regulations has occurred:
a. Investigation by government departments or payment of fines or penalties.
b. Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
c. Purchasing at prices approximating market price. (x)
d. Existence of an accounting system which fails, whether by design or by accident, to provide
an adequate audit trail or sufficient evidence.
146. Eugene, CPA is planning the audit of Ghostfighter Corporation’s 2006 financial statements.
In documenting the terms of engagement, which of the following statements is most likely to appear
in Eugene’s engagement letter?
a. “Fees for our services are based on our regular per diem rates, plus travel and other out-of
pocket expenses and a certain percentage of the tax savings as a result of audit adjustments
to net income.”
b. “Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatements may remain undiscovered.” (x)
c. “During the course of our audit, we may observe opportunities for economy in, or improved
controls over your operations.”
d. “In addition to our report on the financial statements, we expect to provide you with a
separate letter concerning any material weaknesses in accounting and internal control
systems which did not come to our notice.”

147. The following statements pertain to audit planning and materiality. Which one is
incorrect?
a. The extent of planning will vary according to the size of the entity, the auditor’s experience
with the entity and knowledge of the business, and the complexity of the audit engagement.
b. Materiality provides a threshold or cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be useful.
 c. Materiality is most useful in assessing the scope of an auditor’s program relating to various
amounts.
d. An overall audit program is first prepared, followed by the development of the overall audit
plan and the establishment of an overall audit strategy. (x)

148. The auditor’s duty of confidentiality would ordinarily preclude the reporting of fraud or
error to a third party. However, in certain circumstances, the duty of confidentiality is justifiably
overridden by the following, except:
a. Law.
b. Statute.
c. Courts of law.
d. Pressure from a competitor of the audit client. (x)

149. Which of the following statements is correct?

a. A profession is distinguished by certain characteristics, one of which is the collection of
fees for services rendered and the fee is based on written agreements with the client.
b. Retainer fee basis is the method of billing clients whereby the billing is done on the basis of
actual time spent by the staff multiplied by the hourly rates agreed upon.
c. The sole proprietorship, corporate, and partnership forms of business organization are the
only allowable legal forms of public accounting practice in the Philippines.
d. The Securities and Exchange Commission shall not register any corporation organized for
the practice of public accountancy. (x)

150. The audit procedures deemed necessary in the circumstances to achieve the objective of the
audit refer to:
a. Audit program
b. Audit objective
c. Substantive procedures
d. Scope of an audit (x)