AUDITING THEORY

1. An exception in a test of control provides only an indication of the likelihood of monetary

misstatements in the financial statements because tests of controls do not reveal whether
monetary misstatements have actually occurred.

An exception in a substantive test of transactions provides an indication of the likelihood

of monetary misstatements in the financial statements because substantive tests of
transactions do reveal whether monetary misstatements have actually occurred.

A. True; False C. False; True

B. False; False D. True; True

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

3. Which one of the following is more difficult to evaluate objectively?

A. Presentation of financial statements in accordance with PFRS.
B. Compliance with government regulations.
C. Efficiency and effectiveness of operations.
D. All three of the above are equally difficult.

4. If the auditor believes that the financial statements are not fairly stated or is unable to
reach a conclusion because of insufficient evidence, the auditor
A. Should withdraw from the engagement.
B. Should request an increase in audit fees so that more resources can be used to
conduct the audit.
C. Has the responsibility of notifying financial statement users through the auditor’s
report.
D. Should notify regulators of the circumstances.

5. In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover the fraud is
A. Greater for management fraud because managers are inherently more deceptive than
employees.
B. Greater for management fraud because of management’s ability to override existing
internal controls.
C. Greater for employee fraud because of the higher crime rate among blue collar
workers.
D. Greater for employee fraud because of the larger number of employees in the
organization.
6. Which of the following statements best describes the auditor’s responsibility regarding the
detection of fraud?
A. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from non-performance of audit procedures specifically described in the
engagement letter.
B. The auditor is required to provide reasonable assurance that the financial statements
are free of both material errors and fraud.
C. The auditor may extend auditing procedures to actively search for evidence of fraud
where examination indicates that fraud may exist.
D. The auditor is responsible for the failure to detect fraud only when an unmodified
opinion is issued.

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 7. Which of the following statements is not correct?
A. It is possible to vary the sample size from one unit to 100% of the items in the
population.
B. The decision of how many items to test should not be influenced by the increase costs
of performing the additional tests.
C. The decision of how many items to test must be made by the auditor for each audit
procedure.
D. The sample size for any given procedure is likely to vary from audit to audit.

8. For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client.
B. An auditor’s opinion to be economically useful and profitable to the auditing firm needs
to be formed within a reasonable time and based on evidence obtained that assures
profits for the auditing firm.
C. Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.

9. Which of the following is not a correct use of the terminology in relation to audit
evidence?
A. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
B. Documentary evidence is more reliable when it is received by the auditor indirectly
rather than directly.
C. Documents that originate outside the company are considered more reliable than
those that originate within the client’s organization.
D. External evidence, such as communications form banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.

10. When 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. In addition, the goal of audit efficiency is to gather and evaluate the information
A. No matter the cost involved in obtaining such evidence.
B. Even if cost is irrelevant to the auditor, because they bill the client for costs incurred.
C. At the lowest possible total cost.
D. At the cost suggested in the engagement letter.

11. The auditor is concerned that a client is failing 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 the 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.

12. The purpose of an engagement letter is to

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

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13. 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. The predecessor auditor has poor relations with the successor auditor.
B. The client is dissatisfied with the predecessor’s work.
C. There are actual or potential legal problems between the client and the predecessor.
D. The predecessor believes that the client lacks integrity.

14. The audit team gathers information about a new client’s business and industry in order to
obtain
A. An understanding of the client’s internal control system for financial reporting.
B. An understanding of how economic events and transactions have an effect on the
company’s financial statements.
C. Information about engagement risk.
D. Information regarding whether the company is engaging in financial statement fraud.

15. During audit planning, the auditor uses analytical procedures primarily to
A. Identify weaknesses in internal control.
B. Determine if the company’s financial statements appear reasonable and are free of
material misstatement.
C. Determine the correspondence of the company’s financial statements to the valuation
and accuracy audit objectives.
D. Understand the client’s business and industry and to indicate possible misstatements.

16. When performing planning analytical procedures for a client, the auditor detected that the
gross profit percentage had declined by 50% from the previous year to the year currently
under audit. The auditor should
A. Investigate the possibility the client may have made an error in their cost of goods
sold computation.
B. Assist management in developing greater cost efficiencies in their product line.
C. Prepare a going concern opinion for the client.
D. Advise the client to have extensive disclosure to alleviate investor concerns.

17. The auditor’s primary purpose in auditing the client’s system of internal control over
financial reporting is
A. To prevent fraudulent financial statements from being issued to the public.
B. To evaluate the effectiveness of the company’s internal controls over all relevant
assertions in the financial statements.
C. To report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D. To efficiently conduct the audit of financial statements.

18. Which of the following factors may increase risks to an organization?

A B C D
 Geographic dispersion of company operations Yes No Yes No
 Presence of new information technologies Yes No No Yes

19. Which of the following best describes the purpose of control activities?
A. The actions, policies and procedures that reflect the overall attitude management.
B. The identification and analysis of risks relevant to the preparation of financial
statements.
C. The policies and procedures that help ensure that necessary actions are taken to
address risks to the achievement of the entity’s objectives.
D. Activities that deal with ongoing assessment of the quality of internal control by
management.

20. A company is concerned with the theft of cash after the sale has been recorded. One way
in which fraudsters conceal the theft is by a process called “lapping.” Which of the
following best describes lapping?
A. Reduce the customer’s account by recording a sales return.
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 B. Write off the customer’s account.
C. Reduce the customer’s account by recording a sales allowance.
D. Apply the payment from another customer to the customer’s account.

21. An important characteristic of IT is uniformity of processing. Therefore, a risk exists that

A. Auditors will not be able to access data quickly.
B. Auditors will not be able to determine if data is processed consistently.
C. Erroneous processing can result in the accumulation of a great number of
misstatements in a short period of time.
D. All of the above.

22. Which of the following statements is not true?

A. Analytical procedures emphasize the overall reasonableness of transactions and
balances.
B. Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical procedures.
C. Substantive tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
D. Tests of details of balances emphasize the ending balances in the general ledger.

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

24. In many audits of sales transactions, substantive tests of transactions can be reduced in
determining the completeness objective because
A. Understatements of assets and income are a greater concern than overstatements.
B. Overstatements of assets and income are a greater concern than understatements.
C. It doesn’t matter if income is understated because the savings on income tax offsets
the reduced revenue and net income is correct.
D. The unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of
the two financial statements will not be misleading.

25. To determine if a sample is truly representative of the population, an auditor would be

required to
A. Conduct multiple samples of the same population.
B. Never use sampling because of the expense involved.
C. Audit the entire population.
D. Use systematic sample selection.

26. The most important test of details of balances to determine the existence of recorded
accounts receivable is
A. Tracing details of sales invoices to shipping documents.
B. Tracing the credits in accounts receivable to bank deposits.
C. Tracing sales returns entries to credit memos issued and receiving room reports.
D. The confirmation of customers’ balances.

27. It is common to use a combination of positive and negative confirmations by sending the
latter to accounts with large balances and the former to those with small balances.

When sending confirmations during most audits of accounts receivable, the emphasis is
often on confirming larger and older balances.

A. True; True C. True; False

B. False; False D. False; True

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28. Which of the following is the most effective control procedure to detect vouchers that
were prepared for the payment of goods that were not received?
A. Count goods upon receipt in storeroom.
B. Match purchase order, receiving report, and vendor’s invoice for each voucher in
accounts payable department.
C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.

29. Internal controls that are likely to prevent the client from including as a business expense
those transactions that primarily benefit management or other employees rather than the
entity being audited satisfy the control objective that
A. Acquisitions are correctly valued.
B. Existing acquisitions are recorded.
C. Acquisitions are correctly classified.
D. Recorded acquisitions are for goods or services received.

30. A CPA learns that his client has paid a vendor twice for the same shipment, once based
upon the original invoice and once based upon the monthly statement. A control
procedure that should have prevented this duplicate payment is
A. Attachment of the receiving report to the disbursement report.
B. Prenumbering of disbursement vouchers.
C. Use of a limit or reasonableness test.
D. Prenumbering of receiving reports.

31. If the client fails to record disposals of property, plant, and equipment, both the original
cost of the asset account and the net book value will be incorrect. What will the effect be
of this misstatement on the original cost and the book value?
A. Both will be overstated indefinitely.
B. The original cost will overstated indefinitely, and the net book value will be overstated
until the asset is fully depreciated.
C. The original cost will be overstated indefinitely, and the net book value will be
understated indefinitely.
D. The original cost will be overstated indefinitely, and the net book value will be
understated until the asset is fully depreciated.

32. The nature, extent, and timing of substantive tests of payroll transactions vary depending,
in part, on assessed control risk.

“Physical control over assets” is not a type of control that is applicable to the payroll cycle.
A. True; False C. True; True
B. False; True D. False; False

33. Which of the following controls would be appropriate regarding the release of materials
from a stockroom?
A. Production employees request materials be delivered to their work areas as they need
them.
B. Stockroom employees deliver materials to work areas throughout the day to maintain
acceptable levels of safety stock—no written records are maintained.
C. Production employees submit approved requisition forms to the stockroom for
materials needed.
D. Production employees in need of materials should personally pick up needed materials
from the stockroom.

34. If the auditor concludes that physical controls over inventory are so inadequate that the
inventory will be difficult to count, the auditor should ordinarily
A. Withdraw from the engagement.
B. Issue a qualified audit report.
C. Conduct expanded observation tests of physical inventory.
D. Hire an expert to assist the auditor.

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35. You are gathering evidence for the audit objective that existing inventory items are
included in the inventory listing schedule. The audit procedure that would provide you
with the best evidence to confirm this objective is
A. Trace from inventory tags to the inventory listing schedule and make sure the
inventory tag is included.
B. Trace the inventory totals to the general ledger.
C. Perform tests of lower-cost-or-net realizable value.
D. Account for unused tags shown in the auditor’s documentation to make sure no tags
have been added.

36. Which of the following is not an objective of the auditor’s examination of notes payable?
A. To determine whether internal controls are adequate.
B. To determine whether client’s financing arrangements are effective and efficient.
C. To determine whether transactions regarding the principal and interest of notes are
properly authorized.
D. To determine whether the liability for notes and related interest expense and accrued
liabilities are properly stated.

37. Which of the following errors would be least likely to be discovered during the tests of the
bank reconciliation?
A. Payment was made to an employee for more hours than he worked.
B. Cash received by the client subsequent to the balance sheet date was recorded as
cash receipts in the current year.
C. Payments on notes payable debited directly to the bank balance by the bank were not
entered in the client’s records.
D. Deposits were recorded in the cash receipts records near the end of the year,
deposited in the bank, and were included in the bank reconciliation as a deposit in
transit.

38. A major consideration in the audit of the general cash balance is the possibility of fraud.
The auditor must extend his or her procedures in the audit year-end cash to determine
the possibility of a material fraud when there are
A. Large cash balances at the end of the year.
B. Large cash receipts and disbursements during the year.
C. No imprest accounts used for payroll.
D. Inadequate internal controls.

39. Refusal by a client to prepare and sign the representation letter would require the auditor
to issue a
A. Qualified opinion or a disclaimer.
B. Adverse opinion or a disclaimer.
C. Qualified or an adverse opinion.
D. Unmodified opinion with an emphasis of matter paragraph.

40. Assurance provided by a review is substantially less than an audit. Which of the following
statements is true regarding these services?
A. A review requires more substantive evidence than an audit.
B. An audit requires less evidence related to internal control than a review.
C. A review requires less evidence than an audit.
D. None of the above statements is true.

41. Which of the following groups could not be involved in an operational audit?
A. CPA firms.
B. Government auditors.
C. Internal auditors.
D. None is correct; that is, all of the above could be involved.

42. Which of the following conditions most likely would pose the greatest risk in accepting a
new audit engagement?
A. Staff will need to be rescheduled to cover this new client.
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 B. There will be a client-imposed scope limitation.
C. The firm will have to hire an expert in one audit area.
D. The client’s financial reporting system has been in place for 10 years.

43. Audit plans should be designed so that

A. Most of the required procedures can be performed as interim work.
B. Inherent risk is assessed at a sufficiently low level.
C. The auditor can make constructive suggestions to management.
D. The audit evidence gathered supports the auditor’s conclusions.

44. When expressing an unmodified opinion, the auditor who evaluates the audit findings
should be satisfied that the
A. Amount of known misstatement is documented in the management representation
letter.
B. Estimate of the total likely misstatement is less than a material amount.
C. Amount of known misstatement is acknowledged and recorded by the client.
D. Estimate of the total likely misstatement includes the adjusting entries already
recorded by the client.

45. In assessing the objectivity of internal auditors, an independent auditor should

A. Evaluate the quality control program in effect for the internal auditors.
B. Examine documentary evidence of the work performed by the internal auditors.
C. Test a sample of the transactions and balances that the internal auditors examined.
D. Determine the organizational level to which the internal auditors report.

46. Reyes Merchandising Co. maintains a staff of three full-time internal auditors. If the work
of the internal auditors is relevant to the audit, it is efficient to consider how that work
may affect the audit, and the internal auditors are found to be competent and objective,
the independent auditor most likely will
A. Nevertheless need to make direct tests of assertions about material financial
statement amounts for which the risk of material misstatement is high.
B. Decrease the extent of the tests of controls needed to restrict detection risk to the
acceptable level.
C. Increase the extent of the procedures needed to reduce control risk to an acceptable
level.
D. Not evaluate and test the work performed by the internal auditors.

47. The auditor’s evaluation of the reasonableness of accounting estimates

A. Should be in the context of individual transactions.
B. Considers that management bases its judgment on both subjective and objective
factors.
C. Will be unfavourable if the estimates in the financial statements are based on
assumptions about future events and transactions.
D. Should be based on an attitude of conservatism.

48. A client who recently installed a new accounts payable system assigned employees a user
identification code (UIC) and a separate password. Each UIC is a person’s name, and the
individual’s password is the same as the UIC. Users are not required to change their
passwords at initial log-in nor do passwords ever expire. Which of the following
statements does not reflect a limitation of the client’s computer-access control?
A. Employees can easily guess fellow employees’ passwords.
B. Employees are not required to change passwords.
C. Employees can circumvent procedures to separate duties.
D. Employees are not required to take regular vacations.

49. A CPA is gaining an understanding of the internal controls for a client that sells garden
products using an Internet site. Which of the following is not likely to be found on the
client’s organizational chart?
A. The sales order department.
B. The shipping department.
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 C. The warehouse.
D. Computer processing.

50. Which of the following describes a weakness in accounts payable procedures?

A. The accounts payable clerk files invoices and supporting documentation after
payment.
B. The accounts payable clerk manually verifies arithmetic on the vendor invoice.
C. The accounts payable system compares the receiving report to the vendor invoice.
D. The accounts payable manager issues purchase orders.

51. The auditor should perform tests of controls when

A. Substantive procedures alone do not provide sufficient appropriate audit evidence at
the relevant assertion level.
B. Tests of details and substantive analytical procedures provide sufficient appropriate
audit evidence to support the assertion being evaluated.
C. The auditor is not able to obtain an understanding of internal controls.
D. The owner-manager performs virtually all the functions of internal control.

52. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year end if
A. Positive confirmations sent o debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a larger
balance than the amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller
balance than the amount being confirmed.

53. Which of the following procedures would best detect a liability omission by management?
A. Inquiry of senior support staff and recently departed employees.
B. Review and check mathematical accuracy of financial statements.
C. Review articles of incorporation and corporate bylaws.
D. Review purchase contracts and other legal documents.

54. The risk of material misstatement refers to

A. Control risk and acceptable audit risk.
B. Inherent risk.
C. The combination of inherent risk and control risk.
D. Inherent risk and audit risk.

55. In a financial statement audit, inherent risk is evaluated to help an auditor assess which of
the following?
A. The internal audit department’s objectivity in reporting a material misstatement of a
financial statement assertion it detects to the audit committee.
B. The risk the internal control system will not detect a material misstatement of a
financial statement assertion.
C. The risk that the audit procedures implemented will not detect a material
misstatement of a financial statement assertion.
D. The susceptibility of a financial statement assertion to a material misstatement
assuming there are no related controls.

56. Auditors begin their assessments of inherent risk during audit planning. Which of the
following would not help in assessing inherent risk during the planning phase?
A. Obtaining client’s agreement on the engagement letter.
B. Obtaining knowledge about the client’s business and industry.
C. Touring the client’s plant and offices.
D. Identifying related parties.

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57. As the acceptable audit risk is decreased, the likely cost of conducting an audit increases.

Acceptable audit risk is a measure of the auditor’s willingness to accept that the financial
statements do not contain material misstatements after the audit is completed and a
qualified audit report has been issued.

A. True; True C. False; False

B. True; False D. False; True

58. Related party transactions may be indicated when another company

A. Subsidizes certain operating expenses of the company.
B. Purchases its securities at their fair value.
C. Loans to company at market rates.
D. Has had a distributor relationship with the company for 10 years.

59. 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 basis.

60. If the auditor were responsible for making certain that all of management’s assertions in
the financial statements were absolutely correct
A. Bankruptcies could no longer occur.
B. Bankruptcies would be reduced to a very small number.
C. Audits would be much easier to complete.
D. Audits would not be economically practical.

61. Which of the following statements is true?

A. Auditors have generally found that the most effective and efficient way to conduct an
audit is to obtain some assurance for each class of transaction and for the ending
balance of the related account.
B. Management’s assertion follow and are closely related to the audit objectives.
C. The auditor’s primary responsibility is to find and disclose fraudulent management
assertions.
D. Assertions about presentation and disclosure deal with whether the accounts have
been included in the financial statements at appropriate amounts.

62. Which of the following statements about the existence and completeness assertions is not
true?
A. The existence and completeness assertions emphasize different audit concerns.
B. Existence deals with overstatements and completeness deals with understatements.
C. Existence deals with understatements and completeness deals with overstatements.
D. The completeness assertion deals with unrecorded transactions.

63. In testing for cutoff, the objective is to determine

A. Whether all of the current period’s transactions are recorded.
B. Whether transactions are recorded in the correct accounting period.
C. The proper cutoff between capitalizing and expensing expenditures.
D. The proper cutoff between disclosing items in notes to the financial statements or in
account balances.

64. Determine which of the following is most correct regarding the reliability of audit
evidence?
A. Information that is indirectly obtained from external sources is the most reliable audit
evidence.
B. Reliability of audit evidence is dependent upon the evidence being convincing.
C. Reliability of evidence refers to the amount of evidence obtained.
D. An effective internal control system provides more reliable audit evidence.

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65. When the auditor develops supporting evidence for amounts posted to account balances
with documentary evidence, that process is called
A. Inquiry.
B. Confirmation.
C. Vouching.
D. Physical examination.

66. Narratives, flowcharts, and internal control questionnaires are three common methods of
A. Documenting the auditor’s understanding of internal controls.
B. Designing the audit manual and procedures.
C. Documenting the auditor’s understanding of a client’s organizational structure.
D. Testing the internal controls.

67. Who is most likely to perpetrate fraudulent financial reporting?

A. Members of the board of directors.
B. Production employees.
C. Management of the company.
D. The internal auditors.

68. Which of the following is not a factor that relates to opportunities to misappropriate
assets?
A. Inadequate internal controls over assets.
B. Presence of large amounts of cash on hand.
C. Inappropriate segregation of duties or independent checks on performance.
D. Adverse relationships between management and employees.

69. A control that relates to all parts of the IT system is called a/an
A. General control.
B. Systems control.
C. Universal control.
D. Applications control.

70. The auditor would design which of the following audit tests to detect possible monetary
errors in the financial statements?
A. Control tests.
B. Analytical procedures.
C. Risk assessment procedures.
D. Tests of operating effectiveness of controls over revenue and cash.

71. If inherent risk is increased to medium from low, tests of details of balances can be
reduced.

The extent of tests of details of balances cannot be reduced when transaction-related

audit objectives have been satisfied by tests of controls or substantive tests of
transactions.

A. True; False C. True; True

B. False; True D. False; False

72. A document that details what the auditor will do to gather sufficient, appropriate evidence
is the
A. Audit strategy.
B. Audit program.
C. Audit procedure.
D. Audit risk model.

73. Analytical procedures must be performed in

A. The planning and test of control stages.
B. Conjunction with tests of transactions and tests of details of balances.
C. The planning and completion stages.
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 D. The planning, test of control, and completion stages.

74. An auditor noted that the accounts receivable department is separate from other
accounting activities. Credit is approved by a separate credit department. Control
accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged
monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or
sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda
are prenumbered and must correlate with receiving reports. Which of the following areas
could be viewed as an internal control weakness of the above organization?
A. Write-offs of delinquent accounts.
B. Credit approvals.
C. Monthly aging of receivables.
D. Handling of credit memos.

75. A purchasing agent places an order for inventory whenever a requisition is received from
the warehouse. The warehouse clerk issues requisitions based on periodic physical counts
because no perpetual records are maintained. Numerous duplicate orders have been
placed for goods previously ordered but not received. To prevent this excess ordering,
the firm should
A. Keep an adequate record of open purchase orders and review it before ordering.
B. Count goods in the warehouse less often.
C. Use prenumbered purchase orders.
D. Not use purchase requisitions.

76. 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 cannot infer that all nonrespondents have verified their account
information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.

77. The refusal of a client’s lawyer to provide a representation on the legality of a particular
act committed by the client is ordinarily
A. Sufficient reason to issue a “subject to” opinion.
B. Considered to be a scope limitation.
C. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
D. Proper grounds to withdraw from the engagement.

78. Which of the following steps should an auditor perform first to determine the existence of
related parties?
A. Examine invoices, contracts, and purchase orders.
B. Request a list of related parties from management.
C. Review the company’s business structure.
D. Review proxy and other materials filed with the SEC.

79. In planning the audit engagement, the auditor should consider each of the following
except
A. The auditor’s independence.
B. Risks of material misstatement due to fraud.
C. Anticipated levels of audit risk and materiality.
D. The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.

80. After obtaining a sufficient understanding of the entity, its environment, and internal
control in an audit of the financial statements, the auditor assesses
A. The need to apply auditing standards.
B. Detection risk to determine the acceptable level of inherent risk.
C. Detection risk and inherent risk to determine the acceptable level of control risk.
D. Control risk and inherent risk to determine the acceptable level of detection risk.
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81. Using your knowledge of the relationships among acceptable audit risk, inherent risk,
control risk, planned detection risk, tolerable misstatement, and planned evidence,
determine the effect on planned evidence (increase or decrease) of changing each of the
following factors, while the other factors remain unchanged.

A B C D
1. An increase in acceptable audit risk. Increase Decrease Increase Decrease
2. An increase in inherent risk. Decrease Decrease Increase Increase
3. A decrease in control risk. Increase Increase Decrease Decrease
4. An increase in planned detection risk. Increase Decrease Increase Decrease
5. An increase in tolerable misstatement Increase Increase Decrease Decrease

82. Which of the following factors is generally not considered in determining the sample size
for a test of controls?
A. Expected population deviation rate.
B. Risk of assessing control risk too low.
C. Tolerable deviation rate.
D. Risk of incorrect acceptance.

83. When the audited financial statements of the prior year are presented together with those
of the current year, the continuing auditor’s report should cover
A. Only the current year, but the prior year’s report should be referred to.
B. Only the current year, but the prior year’s report should be presented.
C. Only the current year.
D. Both years.

84. In properly designed internal control, the same employee should not be permitted to
A. Sign checks and cancel supporting documents.
B. Receive merchandise and prepare a receiving report.
C. Prepare disbursement vouchers and sign checks.
D. Initiate a request to order merchandise and approve merchandise received.

85. Prior to or in conjunction with obtaining information to identify risks of fraud, which of the
following is required?
A. Professional skepticism concerning indirect effect illegal acts.
B. Indirect verification of significant financial statement assertions.
C. A discussion with the client’s legal counsel as to contingent liabilities likely to affect the
financial statements.
D. A brainstorming session among team members about where financial statements may
be susceptible to fraud.

86. During an engagement to review the financial statements of an entity, a practitioner

becomes aware that several leases that should be capitalized are not capitalized. The
practitioner considers these leases to be material to the financial statements. The
practitioner decides to modify the standard review report because management will not
capitalize the leases. Under these circumstances, the practitioner should
A. State in his report that nothing has come to his attention that would cause him to
believe that the financial statements are not presented fairly, in all material respects,
in accordance with PFRS.
B. Express no assurance of any kind on the entity’s financial statements.
C. Emphasize that the financial statements are for limited use only.
D. Disclose the departure from PFRS in a separate paragraph of the practitioner’s report.

87. A CPA started to audit the financial statements of an entity. After completing certain audit
procedures, the client requested the CPA to change the engagement to a review because
of a scope limitation. The CPA concludes that there is reasonable justification for the
change. Under these circumstances, the CPA’s review report should include a
A. Statement that a review is substantially less in scope than an audit.
B. Reference to the scope limitation that caused the changed engagement.

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 C. Description of the auditing procedures that were completed before the engagement
was changed.
D. Reference to the CPA’s justification for agreeing to change the engagement.

88. Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An assessment of fraud risk factors likely to cause material misstatements.
B. An understanding of the prospective client’s industry and business.
C. The prospective client’s signature to a written engagement letter.
D. The prospective client’s consent to make inquiries of the predecessor, if any.

89. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Determine whether inventory ordered before the year-end was included in the physical
count.
B. Inquire about payroll checks that were recorded before year-end but cashed after
year-end.
C. Investigate changes in share capital recorded after year-end.
D. Review tax returns prepared by management after year-end.

90. A CPA audits the financial statements of a client that is not a public interest entity. The
CPA has also been asked to perform bookkeeping functions for the client. Under the Code
of Ethics for CPAs in the Philippines, which of the following activities would impair the
CPA’s independence with respect to the client?
A. The CPA records transactions in accordance with classifications determined by
management.
B. The CPA prepares financial statements from a trial balance provided by management.
C. The CPA posts adjusting journal entries prepared by management to the trial balance.
D. The CPA authorizes client transactions and reports them to management.

91. Which of the following statements would not normally be included in a representation
letter for a review of interim financial information?
A. To the best of our knowledge and belief, no events have occurred subsequent to the
balance sheet and through the date of this letter that would require adjustment to or
disclosure in the interim financial information.
B. We acknowledge our responsibility for the design and implementation of programs and
controls to prevent and detect fraud.
C. We understand that a review consists principally of performing analytical procedures
and making inquiries about the interim financial information.
D. We have made available to you all financial records and data.

92. As a condition of obtaining a loan from Metro Manila Bank, Maasim Corp. is required to
submit an audited statement of financial position but not the related statements of
income, changes in equity, or cash flows. Maasim would like to engage a CPA to audit
only its statement of financial position. Under these circumstances, the CPA
A. May not audit only Maasim’s statement of financial position if the amount of the loan is
material to the financial statements taken as a whole.
B. May not audit only Maasim’s statement of financial position if Maasim is not a listed
entity.
C. May audit only Maasim’s statement of financial position if the CPA disclaims an opinion
on the other financial statements.
D. May audit only Maasim’s statement of financial position if access to the information
underlying the basic financial statements is not limited.

93. An auditor believes there is substantial doubt about an entity’s ability to continue as a
going concern for a reasonable period of time. In evaluating the entity’s plans for dealing
with the adverse effects of future conditions and events, the auditor most likely would
consider, as a mitigating factor, the entity’s plans to
A. Purchase production facilities that are currently being leased from a third party.
B. Postpone expenditures to upgrade its information technology system.
C. Pay cash dividends that are in arrears to the preference shareholders.
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 D. Increase the useful lives of property, plant, and equipment for depreciation purposes.

94. An accountant has been engaged to compile pro forma financial information. During the
accountant’s acceptance procedures, it is discovered that the accountant is not
independent with respect to the company. What action should the accountant take with
regard to compilation?
A. The accountant should discuss the lack of independence with legal counsel to
determine whether it is appropriate to accept the engagement.
B. The accountant should disclose the lack of independence in the accountant’s
compilation report.
C. The accountant should withdraw from the engagement.
D. The accountant should compile the pro forma information but should not provide a
compilation report.

95. In a practitioner’s review of interim financial information, the practitioner typically

performs each of the following, except
A. Reading the minutes of the meetings of shareholders, those charged with governance,
and other appropriate committees to identify matters that may affect the interim
financial information.
B. Obtaining corroborating external evidence.
C. Inquiring of members of management responsible for financial and accounting
matters.
D. Applying financial ratios to the interim financial information.

96. Which of the following is an example of a safeguard implemented by the client that might
mitigate a threat to independence?
A. Required continuing education for assurance engagement team members.
B. Required second partner review of an assurance engagement.
C. Management selection of the CPA firm.
D. An effective corporate governance structure.

97. 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.
D. Year-end adjusting journal entries.

98. Which of the following procedures most likely would provide an auditor with evidence
about whether an entity’s internal control activities are suitably designed to prevent or
detect material misstatements?
A. Reperforming the activities for a sample of transactions.
B. Performing analytical procedures using data aggregated at a high level.
C. Vouching a sample of transactions directly related to the activities.
D. Observing the entity’s personnel applying the activities.

99. Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and operating effectively. This assurance is
most likely obtained in part by
A. Preparing flowcharts.
B. Performing substantive tests.
C. Analyzing tests of trends and ratios.
D. Inspection of documents.

100. The work of internal auditors may affect the independent auditor’s
I. Procedures performed in obtaining an understanding of internal control.
II. Procedures performed in assessing the risk of material misstatement.
III. Substantive procedures performed in gathering direct evidence.
A. I and II only.

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 B. I and III only.
C. II and III only.
D. I, II, and III.

101. Landing, CPA, is auditing the financial statements of Hilarion Company. Hilarion uses the
IT Service Center, Inc. to process its payroll transactions. IT’s financial statements are
audited by Copeng, CPA, who recently issued a report on IT’s internal control. Landing is
considering Copeng’s report on IT’s internal control in assessing control risk on the
Hilarion engagement. What is Landing’s responsibility concerning making reference to
Copeng as a basis, in part, for Landing’s own opinion?
A. Landing may refer to Copeng only if Landing is satisfied as to Copeng’s professional
reputation and independence.
B. Landing may refer to Copeng only if Landing relies on Copeng’s report in restricting
the extent of substantive tests.
C. Landing may refer to Copeng only if Landing’s report indicates the division of
responsibility.
D. Landing may not refer to Copeng under the circumstances above.

102. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally

would be concerned about assumptions that are
A. Susceptible to bias.
B. Consistent with prior periods.
C. Insensitive to variations.
D. Similar to industry guidelines.

103. To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. The availability of minutes of shareholders’ and directors’ meetings.
B. Losses from purchase commitments at prices in excess of market value.
C. The disclosure of compensating balance arrangements involving related parties.
D. Reductions of obsolete inventory to net realizable value.

104. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is
to provide the auditor with
A. The probable outcome of asserted claims and pending or threatened litigation.
B. Corroboration of the information furnished by management about litigation, claims,
and assessments.
C. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
D. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.

105. Which of the following is least likely to be an approach followed when auditing the fair
values of assets and liabilities?
A. Review and test management’s process of valuation.
B. Confirm valuations with audit committee members.
C. Independently develop an estimate of the value of the account.
D. Review subsequent events relating to the account.

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

A. Ascertaining the rights and obligations of the related parties.
B. Confirming the existence of the related parties.
C. Verifying the valuation of the related-party transactions.
D. Evaluating the disclosure of the related-party transactions.

107. Which of the following most likely would be detected by an auditor’s review of a client’s
sales cutoff?
A. Shipments lacking sales invoices and shipping documents.
B. Excessive write-offs of accounts receivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.
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108. The predecessor auditor, who is satisfied after properly communicating with the successor
auditor, has reissued a report because the audit client desires comparative financial
statements. The predecessor auditor’s report should make
A. Reference to the report of the successor auditor only in the introductory paragraph.
B. Reference to the work of the successor auditor in the management’s responsibility and
opinion paragraphs.
C. Reference to both the work and the report of the successor auditor only in the opinion
paragraph.
D. No reference to the report or the work of the successor auditor.

109. Which of the following inquiry or analytical procedures ordinarily is performed in an

engagement to review an entity’s financial statements?
A. Analytical procedures designed to test the accounting records by obtaining
corroborating audit evidence.
B. Inquiries concerning the entity’s procedures for recording and summarizing
transactions.
C. Analytical procedures designed to test management’s assertions regarding continued
existence.
D. Inquiries of the entity’s attorney concerning contingent liabilities.

110. Financial statements of an entity that have been reviewed by a practitioner should be
accompanied by a report stating that
A. The financial statements are the responsibility of the company's management.
B. The scope of the inquiry and analytical procedures performed by the practitioner has
not been restricted.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.

111. Which of the following fundamental ethical principles prohibits association of professional
accountants with reports, returns, communications or other information that is believed to
contain a materially false or misleading statement?
A. Integrity
B. Objectivity
C. Professional competence and due care
D. Confidentiality

112. Safeguards created by the profession, legislation or regulation include the following,
except
A. Continuing professional development requirements.
B. Professional standards.
C. Firm-wide and engagement specific safeguards.
D. Educational, training and experience requirements for entry into the profession.

113. All registered CPAs shall obtain and use a seal which shall be circular in form with a
smaller circle within. Which of the following is correct?
A. Engraved in the lower portion of the space between the circles is the CPA’s name.
B. Engraved in the middle of the smaller circle are the letters “CPA”.
C. Engraved in the middle of the smaller circle are the CPA’s name and registration
number.
D. Engraved in the middle of the smaller circle is the CPA’s name.

114. Inherent risk is __________ related to detection risk and __________ related to the
amount of audit evidence.
A. Directly, inversely.
B. Directly, directly.
C. Inversely, inversely.
D. Inversely, directly.
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115. The purpose of the requirement in having communication between the predecessor and
successor auditors is to
A. Allow the predecessor auditor to disclose information which would otherwise be
confidential.
B. Help the successor auditor to evaluate whether to accept the engagement.
C. Help the client by facilitating the change of auditors.
D. Ensure the predecessor collects all unpaid fees prior to a change in auditor.

116. Which of the following best expresses the requirement to establish with the client an
understanding of the responsibilities the auditor and company is taking for the audit
engagement?
A. Management asserts there are no material misstatements in the financials.
B. Auditors assert that the primary audit goal is audit efficiency.
C. Auditors assert that their primary responsibility is to plan and perform the audit in
order to provide reasonable assurance as to the detection of material misstatement
due to error or fraud.
D. Management’s assertion that they will provide the auditor with a risk assessment as to
material misstatements due to errors or fraud in the company’s financial statements.

117. When may the auditor refer to an auditor’s expert in the audit report?
A B C D
I. Only if the expert’s report results in a modification of
the audit opinion. Yes No Yes No
II. Only if the expert assisted in the audit of an account
material to the financial statements. Yes No No Yes

118. Which is usually recorded in the engagement letter?

A B C D
I. List of audit procedures to be used in inventory
observation. Yes No Yes No
II. The auditor’s assessment of audit risk. Yes No No Yes

119. Which one of the following is not an inherent risk factor in the financial statements?
A. The company made three acquisitions during the year in different lines of business.
B. The company’s industry is experiencing downward pricing pressure for its goods and
services.
C. The company’s inventory, because of multiple locations, is difficult to count.
D. The company has hired three different chief accounting officers for the year.

120. An adverse opinion is issued when the auditor believes

A. Some parts of the financial statements are materially misstated or misleading.
B. The financial statements would be found to be materially misstated if an investigation
were performed.
C. The auditor is not independent.
D. The overall financial statements are so materially misstated that they do not present
fairly the financial position or results of operations and cash flows in accordance with
the applicable financial reporting framework.

121. Subsequent to the close of SS Co. fiscal year ending October 31, 2013, a major debtor has
declared bankruptcy due to a series of events. The receivable is significantly material in
relation to the financial statements, and recovery is doubtful. The debtor had confirmed
the full amount due to SS at the balance sheet date. Because the account was confirmed
at the balance sheet date, SS refuses to disclose any information in relation to this
subsequent event. The CPA believes that all other accounts were stated fairly at the
balance sheet date. Accordingly, what type of opinion should be expressed?
A. Unmodified with an emphasis of matter paragraph.
B. Qualified due to a PFRS departure.
C. Qualified due to a scope limitation.
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 D. Disclaimer of opinion because of scope restriction.
122. According to the Code of Ethics, which of the following is true with respect to records in a
CPA’s possession?
A. Extensive analyses of inventory prepared by the client at the auditor’s request are
working papers that belong to the auditor and need not be furnished to the client
upon request.
B. The auditor who returns client records must comply with any subsequent requests to
again provide such information.
C. A corporation’s consolidating worksheets of their multinational conglomerate belong to
the auditor and need not be furnished to the client upon request.
D. An auditor may retain client records if fees due with respect to a completed
engagement have not been paid.

123. The auditor has considerable responsibility for notifying users as to whether or not the
statements are properly stated. This imposes upon the auditor a duty to
A. Provide reasonable assurance that material misstatements will be detected.
B. Be a guarantor of the fairness in the statements.
C. Be equally responsible with management for the preparation of the financial
statements.
D. Be an insurer of the fairness in the statements.

124. When comparing the auditor’s responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility
A. More on discovering errors than employee fraud.
B. More on discovering employee fraud than errors.
C. Equally on discovering either one.
D. On the senior auditor for detecting errors and on the manager for detecting employee
fraud.

125. The most important general ledger account included in and affecting several cycles is the
A. Cash account.
B. Inventory account.
C. Income tax expense and liability accounts.
D. Retained earnings account.

126. Which of the following is not a category of assertions that management makes about the
accounting information in the financial statements?
A. Assertions about classes of transactions for the period under audit.
B. Assertions about account balances at period end.
C. Assertions about the quality of source documents used to prepare the financial
statements.
D. Assertions about presentation and disclosure.

127. The auditor is determining that the recorded sales are for the amount of goods shipped
and are correctly billed and recorded. She is gathering evidence about which transaction
related audit objective?
A. Existence.
B. Completeness.
C. Accuracy.
D. Cut-off.

128. Which of the following is the most objective type of evidence?

A. A letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits.
B. The physical count of securities and cash.
C. Inquiries of the credit manager about the collectibility of noncurrent accounts
receivable.
D. Observation of cobwebs on some inventory bins.

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129. The primary purpose of performing analytical procedures in the planning phase of an audit
is to
A. Help the auditor obtain an understanding of the client’s industry and business.
B. Assess the going concern assumption.
C. Indicate possible misstatements.
D. Reduce detailed tests.

130. In performing your audit for a privately-held firm, your inquiries have yielded that one of
the company’s owner’s primary motivations is to pay the least amount of income tax that
is possible. Based on this observation, which audit objective for ending inventory would
the auditor be most concerned about ascertaining?
A. Completeness.
B. Accuracy.
C. Rights and obligations.
D. Existence.

131. Which of the following statements is not correct?

A. Analytical procedures are used to isolate accounts or transactions that should be
investigated more extensively.
B. For certain immaterial accounts, analytical procedures may be the only evidence
needed.
C. In some instances, other types of evidence may be reduced when analytical
procedures indicate that an account balance appears reasonable.
D. Analytical procedures use supporting documentation to determine which account
balances need additional detailed procedures.

132. What client information is needed by auditors in creating lead schedules?

A. Interim statements prepared by the client for the company’s 3 rd quarter financial
results.
B. General ledger information, including unadjusted ending balances and beginning
balances for accounts.
C. A schedule of adjusting entries made by the client for all balance sheet accounts.
D. Detailed transaction information that may explain the changes in balance sheet
accounts for the current year under audit.

133. A company frequently sells products at a price below inventory cost. Essential controls in
the risk assessment process would include
A. Adequate controls that address the risk of overstating inventory.
B. Adequate controls that address the risk of not including a purchased item in inventory.
C. Adequate controls that address the risk of understatement of inventory.
D. Adequate controls that address the risk of overstatement of cost of goods sold.

134. Internal controls can never be regarded as completely effective. Even if company
personnel could design an ideal system, its effectiveness depends on the
A. Adequacy of the computer system.
B. Proper implementation by management.
C. Ability of the internal audit staff to maintain it.
D. Competency and dependability of the people using it.

135. Of the following statements about internal controls, which one is least likely to be correct?
A. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost-benefit relationship, a client may apply controls on a test basis.
D. Control procedures reasonably ensure that collusion among employees cannot occur.

136. Which of the following is a factor that relates to incentives to misappropriate assets?
A. Significant accounting estimates involving subjective judgments.
B. Significant personal financial obligations.
C. Management’s practice of making overly aggressive forecasts.
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 D. High turnover of accounting, internal audit, and technology staff.

137. Auditors need to exhibit professional skepticism when auditing a client. This auditing
standard is best expressed by which of the following?
A. The auditor neither assumes dishonesty or honesty of management.
B. The auditor assumes dishonesty of management.
C. The auditor assumes honesty of management.
D. The auditor assumes management lacks integrity.

138. IT has several significant effects on an organization. Which of the following would not be
important from an auditing perspective?
A. Organizational changes.
B. The visibility of information.
C. The potential for misstatement.
D. None of the above; i.e., they are all important.

139. Which of the following statements related to application controls is correct?

A. Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B. Application controls relate to various aspects of the IT function including physical
security and the processing of transactions in various cycles.
C. Application controls relate to all aspects of the IT function.
D. Application controls relate to the processing of individual transactions.

140. Auditors should evaluate which of the following before evaluating application controls
because of the potential for pervasive effects?
A. Input controls.
B. Control environment.
C. Processing controls.
D. General controls.

141. The audit approach in which the auditor runs his or her own program on a controlled basis
to verify the client’s data recorded in a machine language is
A. The test data approach.
B. Called auditing around the computer.
C. The generalized audit software approach.
D. The microcomputer-aided auditing approach.

142. Collectively, procedures performed to obtain an understanding of the entity and its
environment, including internal controls, represent the auditor’s
A. Audit strategy.
B. Tests of controls.
C. Risk assessment procedures.
D. Tests of transactions.

143. If no material differences are found using analytical procedures and the auditor concludes
that misstatements are not likely to have occurred
A. Other substantive tests may be reduced.
B. It will be necessary to increase the tests of balances.
C. It will not be necessary to perform tests of balances.
D. It will be necessary to increase the tests of transactions.

144. Which of the following is not a valid basis for omitting an audit test in forming an opinion
on the client’s financial statements?
A. The difficulty and expense involved in testing a particular item.
B. The relative risk involved.
C. The degree of reliance on the relevant internal controls.
D. The relationship between the cost of obtaining evidence and its usefulness.

145. Which of the following audit tests would be regarded as a test of controls?
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 A. Comparison of the inventory pricing to vendors’ invoices.
B. Tests of the signatures on canceled checks to board of directors’ authorizations.
C. Tests of the additions to property, plant, and equipment by physical inspections.
D. Review of the specific items making up the balance in a given general ledger account.

146. A major purpose of the auditor’s report on financial statements is to

A. Assure investors of the complete accuracy of the financial statements.
B. Clarify for the public the nature of the auditor’s responsibility and performance.
C. Deter creditors from extending loans in high-risk situations.
D. Describe the specific auditing procedures undertaken to gather evidence for the
opinion.

147. As a result of sampling procedures applied as tests of controls, an auditor incorrectly

assesses control risk too low. The most likely explanation for this situation is that
A. The deviation rates of both the auditor’s sample and the population exceed the
tolerable rate.
B. The deviation rates of both the auditor’s sample and the population are less than the
tolerable rate.
C. The deviation rate in the auditor’s sample is less than the tolerable rate, but the
deviation rate in the population exceeds the tolerable rate.
D. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

148. When an audit is made in accordance with auditing standards, the auditor should always
A. Document the understanding of the client’s internal control but not the bases for the
conclusions about the assessed levels of control risk for financial statement assertions.
B. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
C. Obtain certain written representations from management.
D. Observe the taking of physical inventory on the balance sheet date.

149. Ads Co.’s directors voted immediately after year-end to double the advertising budget for
the coming year and authorized a change in advertising agencies. What is the effect of
this event on the year-end statements?
A. Disclosure by means of supplemental, pro forma financial data.
B. Adjustment of the financial statements.
C. Disclosure in a note to the financial statements.
D. No financial statement disclosure necessary.

150. Some subsequent events provide evidence of conditions not in existence at the balance
sheet date. Some of these events are of such a nature that disclosure is required to keep
the financial statements from being misleading. Adequate disclosure of these events may
include
A. Adjustment of the financial statements.
B. Pro forma financial statement presentation.
C. Notes to the auditor’s report.
D. Restatement of prior-period financial statements.

151. If the auditee has a material amount of treasury shares on hand at year end, the auditor
should
A. Count the certificates at the same time other securities are counted.
B. Count the certificates only if the company had treasury share transactions during the
year.
C. Not count the certificates if treasury shares are shown as deduction from equity.
D. Count the certificates only if the company classifies treasury shares with other assets.

152. A company makes a practice of investing excess short-term cash in trading securities that
are traded regularly on the Philippine Stock Exchange. A reliable test of the valuation of
these securities is
A. Consideration of current market quotations.
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 B. Confirmation of securities held by the broker.
C. Recalculation of investment value using a valuation model.
D. Calculation of premium or discount amortization.

153. During the preliminary survey phase of an audit of the organization’s production cycle,
management stated that the sale of scrap was well controlled. Evidence to verify that
assertion can best be gained by
A. Comparing current revenue from scrap sales with that of prior periods.
B. Interviewing persons responsible for collecting and storing the scrap.
C. Comparing the quantities of scrap expected from the production process with the
quantities sold.
D. Comparing the results of a physical inventory of scrap on hand with perpetual
inventory records.

154. For the week before Moron Company’s physical count, all receiving reports include a
notation that they have been prepared prior to the count. For the week after the physical
count, all receiving reports indicate that they have been prepared after the count. The
receiving department continues to receive goods after the cutoff time while the physical
count is in process. To determine the accuracy of the cutoff, the auditor should
A. Trace a sample of receiving reports issued after the last receiving report to the
physical items to see that they have been included in the physical count.
B. Trace a sample of receiving reports issued before the last receiving report to the
physical items to see that they have not been included in the physical count.
C. Observe that the receiving clerk is stamping the receiving reports properly.
D. List the number of the last receiving report for items included in the physical count.

155. Which of the following tests of details most likely would help an auditor determine
whether accounts payable have been misstated?
A. Examining reported purchase returns that appear too low.
B. Examining vendor statements for amounts not reported as purchases.
C. Searching for customer-returned goods that were not reported as returns.
D. Reviewing bank transfers recorded as cash received from customers.

156. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general
ledger control account as of October 31. By this procedure, the auditor is most likely to
learn of which of the following?
A. An October invoice was improperly computed.
B. An October check from a customer was posted in error to the account of another
customer with a similar name.
C. An opening balance in a subsidiary ledger account was improperly carried forward
from the previous accounting period.
D. An account balance is past due and should be written off.

157. Which of the following is the greatest drawback of using subsequent collections evidenced
only by a deposit slip as an alternative procedure when responses to positive accounts
receivable confirmations are not received?
A. Checking of subsequent collections can never be used as an alternative auditing
procedure.
B. By examining a deposit slip only, the auditor does not know whether the payment is
for the receivable at the balance sheet date or a subsequent transaction.
C. A deposit slip is not received directly by the auditor.
D. A customer may not have made a payment on a timely basis.

158. If the objective of an auditor’s test of details is to detect a possible understatement of

sales, the auditor most likely would trace transactions from the
A. Sales invoices to the shipping documents.
B. Cash receipts journal to the sales journal.
C. Shipping documents to the sales invoices.
D. Sales journal to the cash receipts journal.

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159. The primary difference between an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement addresses the verification of
A. Transactions.
B. Authorizations.
C. Costs.
D. Cutoffs.

160. A secondary result of the auditor’s understanding of internal control in an audit of an

entity’s financial statements is that the understanding may
A. Provide a basis for designing the nature, timing, and extent of further audit
procedures.
B. Assure that management’s procedures to detect all fraud are properly functioning.
C. Bring to the auditor’s attention possible control deficiencies.
D. Develop evidence to support the assessed risk of material misstatement.

161. Which of the following matters is an auditor required to communicate to those charged
with governance?
A. The basis for assessing the risk of material misstatement below the maximum.
B. The process used by management in formulating sensitive accounting estimates.
C. The auditor’s preliminary judgments about materiality levels.
D. The justification for performing substantive procedures at interim dates.

162. Which of the following procedures is most likely to prevent the improper disposition of
equipment?
A. A separation of duties between those authorized to dispose of equipment and those
authorized to approve removal work orders.
B. The use of serial numbers to identify equipment that could be sold.
C. Periodic comparison of removal work orders with authorizing documentation.
D. A periodic analysis of the scrap sales and the repairs and maintenance accounts.

163. Which of the following computerized control procedures is most effective in ensuring that
data uploaded from personal computers to a mainframe are complete and that no
additional data are added?
A. Self-checking digits to ensure that only authorized part numbers are added to the
database.
B. Batch control totals, including control totals and hash totals.
C. Passwords that effectively limit access to only those authorized to upload the data to
the mainframe computer.
D. Field-level edit controls that test each field for alphanumerical integrity.

164. Master files maintained as part of the processing of purchase transactions are
A. Accounts payable, bill of materials, finished goods inventory, and open purchase
orders.
B. Accounts payable, open purchase orders, raw materials inventory, and work-in-process
inventory.
C. Accounts payable, bill of materials, and open purchase orders.
D. Accounts payable, open purchase orders, and raw materials inventory.

165. Which of the following should not be the responsibility of a database administrator?
A. Design the content and organization of the database.
B. Develop applications to access the database.
C. Protect the database and its software.
D. Monitor and improve the efficiency of the database.

166. The most likely reason an audit cannot reasonably be expected to bring all violations of
laws and regulations by the client to the auditor’s attention is that
A. Violations of laws and regulations are perpetrated by management override of the
information and communication component of internal control.
B. Violations of laws and regulations by clients often relate to operating aspects rather
than accounting aspects.
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 C. The information and communication component of the client’s internal control
procedures may be so effective that the auditor performs only minimal substantive
testing.
D. Violations of laws and regulations may be perpetrated by the only person in the
client’s organization with access to both assets and the accounting records.

167. Which of the following computer hardware devices allows for an immediate update of
merchandise inventory in a retail environment?
A. Inventory control terminal.
B. CD-RW.
C. Video display terminal.
D. Point-of-sale terminal.

168. Computer manufacturers install software programs permanently inside the computer as
part of its main memory to provide protection from erasure or loss if electrical power is
interrupted. This concept is known as
A. File integrity.
B. Software control.
C. Firmware.
D. Random access memory (RAM).

169. The relationship between online, real-time database systems and batch processing
systems is that a firm
A. Will have only one processing mode because a single computer cannot do both.
B. Will not use batch processing if it has a large computer.
C. May use both processing modes concurrently.
D. Will always prefer an online, real-time processing system because batch processing is
slow.

170. The accountant’s knowledge of the accounting principles and practices of the client’s
industry should enable him/her to compile appropriate financial statements. Also, the
accountant should understand the nature of the entity’s business, its accounting records,
the qualifications of its personnel, the accounting basis of the financial statements, and
their content. To acquire such knowledge, the accountant does not normally
A. Consult Audit and Accounting Guides.
B. Read industry publications and consult textbooks and periodicals.
C. Obtain an understanding of internal control and assess control risk.
D. Make inquiries of the entity’s personnel.

171. During the course of an audit of the financial statements of Lason Corporation, Smokey,
CPA, discovered that the company vice-president had misrepresented one the company’s
products before the Bureau of Food and Drugs (BFAD) by falsifying test results.
Unasserted claims, material in amount, loom in the near future. Management refuses to
permit the inclusion of a liability for such claims even though it is probable that they will
be asserted and the amount of loss can be reasonably estimated. Smokey should issue a
report with a/an
A. Basis for modification paragraph and either an adverse opinion or a qualified opinion.
B. Qualified opinion and a basis for qualified opinion paragraph but should not consider
expressing an adverse opinion.
C. Qualified opinion and no basis for qualified opinion paragraph.
D. Unmodified opinion and an emphasis of matter paragraph.

172. The date of the audit report is important because

A. The auditor cannot date the report earlier than the date on which sufficient
appropriate evidence to support the opinion has been obtained.
B. The auditor bills time to the client up to and including the audit report date, and the
statement to the client should reflect this date.
C. PSAs require all audits to be performed on a timely basis.
D. It should coincide with the date of the financial statements.

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173. Notes to financial statements may be used to
A. Describe the nature and type of auditing procedures applied to the financial
statements.
B. Make an unsubstantiated claim that related party transactions were consummated on
terms equivalent to those that prevail in arm’s-length transactions.
C. Correct an improper financial statement presentation.
D. Indicate bases for valuing assets.

174. Which of the following statements is true concerning statistical sampling in tests of
controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific controls at a given rate ordinarily result in misstatements at a
lower rate.
C. The relationship between the expected population deviation rate and the sample size
is inverse.
D. In determining the tolerable rate, an auditor considers detection risk and the sample
size.

175. As lower acceptable levels of both audit risk and materiality are established, the auditor
should plan more work on individual accounts to
A. Find smaller misstatements.
B. Find larger misstatements.
C. Increase the tolerable misstatement in the accounts.
D. Decrease the risk of assessing control risk too low.

176. In establishing the existence and ownership of an investment held by a corporation in the
form of publicly traded stock, an auditor should inspect the securities or
A. Obtain written representations from management confirming that the securities are
properly classified as trading securities.
B. Inspect the audited financial statements of the investee company.
C. Confirm the number of shares owned that are held by an independent custodian.
D. Determine that the investment is carried at fair value.

177. An auditor is concerned about the possibility of fraud if

A. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are
deposited in the bank daily.
B. The monthly bank statement reconciliation is performed by the same employee who
maintains the perpetual inventory records.
C. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are
maintained by the same person.
D. One person, acting alone, has sole access to the petty cash fund (except for a
provision for occasional surprise counts by a supervisor or auditor).

178. Which of the following best describes a CPA’s engagement to report on an entity’s internal
control over financial reporting?
A. An assurance engagement that results in issuance of a report relating to the
effectiveness of internal control.
B. An audit of the financial statements that results in communicating significant
deficiencies in internal control.
C. A prospective engagement to project, for a period of time not to exceed one year, and
a report on the expected benefits of the entity’s internal control.
D. A consulting engagement to provide constructive advice to the entity on its internal
control.

179. In the accounting system of Apog Company, the quantities counted by the receiving
department and entered at a terminal are transmitted to the computer, which immediately
transmits the amounts back to the terminal for display on the terminal screen. This
display enables the operator to
A. Establish the validity of the account number.
B. Verify that the amount was entered accurately.
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 C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.

180. Disclosure in financial statements of a reporting entity that has participated in related-
party transactions that are material, individually or in the aggregate, should include all of
the following except
A. The nature of the relationship.
B. A description of the transactions for the period reported upon including amounts, if
any, and such other information necessary to an understanding of the effects on the
financial statements.
C. A statement that the transactions would have taken place regardless of whether the
parties were related.
D. The peso volume of the transactions amounts due from or to related parties and, if
not otherwise apparent, the terms and manner of settlement.

Items 181-184 are based on the following information:

Auditors perform audit procedures to obtain audit evidence that will allow them to draw
reasonable conclusions as to whether the client’s financial statements are prepared and
presented in conformity with Philippine Financial Reporting Standards. Match each audit
procedure with its type.

Type of Audit Procedure

A. Analytical review procedures

B. Tests of controls
C. Risk assessment procedures (other than analytical procedures)
D. Tests of details of account balances, transactions, or disclosures

181. Prepare a flowchart of internal control over purchases. (C)

182. Calculate the ratio of bad debt expense to credit sales. (A)

183. Determine whether disbursements are properly approved. (B)

184. Confirm accounts receivable. (D)

Items 185-188 are based on the following information:

You are a senior auditor with JST and Co. CPAs. Tanya, a new hire, has come to you with
questions concerning “assertions” and “audit procedures.” Match each assertion with the
statement that most closely approximates its meaning.

Statement
A. There is such an asset.
B. The company legally owns the assets.
C. All assets have been recorded.
D. Assets are recorded at proper amounts.

185. Completeness (C)

186. Existence and occurrence (A)

187. Rights and obligations (B)

188. Valuation (D)

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 Items 189-190 are based on the following information:

The following statements relate to the confirmation process when applied to accounts
receivable.

1. The confirmation requests should be mailed to respondents by the auditor. (C)

2. A combination of positive and negative request forms must be used if receivables are
significant. (I)

3. Second requests are ordinarily sent for positive form confirmation requests when the
first request is not returned. (C)

4. Confirmations address existence more than they address completeness. (C)

5. Auditors may ignore individually immaterial accounts when confirming accounts

receivable. (I)

6. The best way to evaluate the results of the confirmation process is to total the
misstatements identified and to compare that total to the account’s tolerable error
amounts. (I)

189. Which of the above statements are correct?

A. 1, 3, and 4 C. 2, 3, and 6
B. 1, 2, and 5 D. 3, 4, and 5

190. Which of the above statements are incorrect?

A. 3, 4, and 6 C. 2, 5, and 6
B. 1, 4, and 5 D. 1, 2, and 6

191. Which of the following activities is an analytical procedure an auditor would perform in the
final overall review stage of an audit to ensure that the financial statements are free from
material misstatement?
A. Reading the minutes of the board of directors’ meetings for the year under audit.
B. Obtaining a letter concerning potential liabilities from the client’s attorney.
C. Comparing the current year’s financial statements with those of the prior year.
D. Ensuring that a representation letter signed by management is in the file.

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

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

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

194. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit
team members should discuss the potential for material misstatement due to fraud. Which
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 of the following best characterizes the mindset that the audit team should maintain during
this discussion?
A. Presumptive C. Criticizing
B. Judgmental D. Questioning

195. Which of the following statements is correct regarding internal control?

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

196. When assessing internal auditors’ objectivity, an independent auditor should

A. Consider the policies that prohibit the internal auditors from auditing areas where they
were recently assigned.
B. Review the internal auditors’ reports to determine that their conclusions are consistent
with the work performed.
C. Verify that the internal auditors’ assessment of control risk is comparable to the
independent auditor’s assessment.
D. Evaluate the quality of the internal auditors’ working paper documentation and their
recent audit recommendations.

197. A portion of a client’s inventory is in public warehouses. Evidence of the existence of this
merchandise can most efficiently be acquired through which of the following methods?
A. Observation C. Calculation
B. Confirmation D. Inspection

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

199. The company being audited has an internal auditor that is both competent and objective.
The independent auditor wants to assign tasks for the internal auditor to perform. Under
these circumstances, the independent auditor may
A. Allow the internal auditor to perform tests of internal controls.
B. Allow the internal auditor to audit a major subsidiary of the company.
C. Not assign any task to the internal auditor because of the internal auditor’s lack of
independence.
D. Allow the internal auditor to perform analytical procedures, but not be involved with
any test of details.

200. Which of the following is least likely to be a test of a control?

A. Inquiries of appropriate personnel.
B. Inspection of management’s engagement letter.
C. Observation of the application of a policy.
D. Reperformance of the application of a policy.

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