AUDITING THEORY

Q.1) 
Which of the following best describes “high level of assurance”?

A It refers to the professional accountant having obtained evidence based on procedures agreed upon between the
. practitioner and the intended users to be satisfied that findings be reported to the intended users.
B It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be satisfied
. that the subject matter is plausible in the circumstances.
C It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter
. conforms in all material respects with identified suitable criteria.
D It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of any
. required modifications to be made in the financial statements in order for them to conform of prescribed criteria.
Q.2) 
Which statement is incorrect regarding an engagement to perform agreed-upon procedures?

A An auditor is engaged to carry out those procedures of an audit nature to which the auditor
. and the entity and any appropriate third parties have agreed and to report on factual findings.
B
The recipients of the report must form their own conclusions from the report by the auditor.
.
C
The report is restricted to those parties that have agreed to the procedures to be performed.
.
D
The report on factual findings is expressed in the form of negative assurance.
.
Q.3) Which of the following engagements provides third parties the highest level of assurance about the client’s financial
statements?
A
Audit
.
B
Review
.
C
Agreed-upon procedures
.
D
Compilation
.
Q.4) In which of the following situations can third parties assume responsibility of the auditor regarding association with financial
information?
A
When the auditor attaches a report to that information.
.
B
When the auditor consents to the use of the auditor's name in a professional connection.
.
C
Either a or b.
.
D
Neither a nor b.
.
Q.5) Which statement is incorrect regarding assurance engagement risk?
A Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter conforms in
. all material respects with suitable criteria.
B
All components of the engagement risk model will be significant for all assurance engagements.
.
C The extent to which the practitioner considers the relevant components of engagement risk will be affected by the
. engagement circumstances.
D Business risk is not part of engagement risk and does not affect the application of Philippine Standard on Assurance
. Engagements.
Q.6) A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material
misstatements in the financial statements taken as a whole.
A
Reasonable assurance
.
B Positive assurance
.
C
Moderate assurance
.
D. Negative assurance
Q.7) 
Which statement is incorrect regarding the external auditor’s consideration of the work of internal auditing?

A
The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures.
.
B The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and
. developing an effective audit approach.
During the course of planning the audit, the external auditor should perform a preliminary
C
assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the
.
financial statements in specific audit areas.
When the external auditor intends to use specific work of internal auditing, the external
D.
auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.
Q.8) 
The independent auditor lends credibility to client’s financial statements by

A
Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.
.
B
Testifying under oath about client’s financial statements.
.
C Stating in the auditor’s management letter that the examination was made in accordance with generally accepted auditing
. standards.
D
Attaching an auditor’s opinion to the client’s financial statements.
.
Q.9) 
Which of the following is responsible for the fairness of representations made in financial statements?

A
The independent auditor.
.
B
The internal auditor.
.
C
The client's management.
.
D
The audit committee.
.
Q.10) The exposure period allowed for each exposure draft of PSA to be considered by the organizations and persons to whom it is
sent for comment is generally
A
Four months
.
B
Three months
.
C
Two months
.
D
Six months
.
Q.11) 
Which statement is incorrect regarding the pronouncements of ASPC?

A
The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors.
.
B PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance
. in the form of explanatory and other material.
C
PSAs need only be applied to material matters.
.
D
The Interpretations have the same authority as the PAPSs.
.
Q.12) The following should be occupied only by a duly registered CPA, except
A Any position in any business or company in the private sector which requires supervising the recording of financial
. transactions.
B
Any position in any business or company in the private sector which requires preparation of financial statements.
.
C Any position in any business or company in the private sector which requires coordinating with the internal auditors for the
. audit of financial statements.
D
The position of the dean that supervises the BSA program of an educational institution.
.
Q.13) 
Which of the following is not represented in the Auditing and Assurance Standards Council?

A
Board of Accountancy
.
B
Bangko Sentral ng Pilipinas
.
C
Bureau of Internal Revenue
.
D. Securities and Exchange Commission
A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial statements
Q.14) 
through a review of the quality control measures instituted by an Individual CPA, Firm or Partnership of CPAs engaged in the
practice of public accountancy.
A
Peer review
.
B
Quality review
.
C
Analytical review
.
D. Administrative review
Q.15) 
Emong, CPA is applying for renewal of his professional license. He is exempted from the CPE requirements

A
If he is at least 65 years old.
.
B
If he is working abroad and he has been out of the country for at least two years immediately prior to the date of renewal.
.
C
Either a or b.
.
D
Under no circumstances.
.
Q.16) 
The following statements relate to RA 9298. Which statement is true?

A The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for
. negligence, incompetence, or any other just cause.
B
Insanity is not a ground for proceeding against a CPA.
.
C A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes
. decisions requiring professional accounting knowledge.
D After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose
. certificate of registration has been revoked.
Q.17) There is a need for assurance that all services obtained from a professional accountant are carried out to the highest
standards of performance. This statement relates to
A
Credibility
.
B. Professionalism
C
Quality of Services
.
D. Confidence
Q.18) Indicate the normal pattern of development for a professional accountant. I. A period of work experience. II. High standard of
general education. III. Specific education, training and examination in professionally relevant subjects
A
I, II, III
.
B
II, III, I
.
C
III, II, I
.
D. II, I, III
Q.19) A partner or employee of the firm serving as an officer or as a director on the board of an assurance client will most likely
create
A
Intimidation threat
.
B
Self-review threat
.
C
Advocacy threat
.
D
Familiarity threat
.
Q.20) 
Which of the following least likely create a self-review threat?

A. A former officer, director or employee of the assurance client serve as a member of the assurance team.
B A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the
. subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.
C
Assisting an audit client in matters such as preparing accounting records or financial statements.
.
D
A firm, or network firm, provides internal audit services to an audit client.
.
Q.21) This process may include, particularly in the case of large complex audits, requesting personnel not otherwise involved in the
audit to perform certain additional procedures.
A
Direction
.
B
Supervision
.
C
Review
.
D. All of these
Q.22) 
Which of the following is least likely a factor that affects the extent of quality control procedures?

A
The size of the firm.
.
B
The type of clients that the firm serves.
.
C
The number of practice offices.
.
D. The nature of the practice.
Q.23) Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in the audit of financial
statements?
A
The auditor is entitled to accept records and documents as genuine.
.
B
The auditor is may be held responsible for the prevention of fraud and error.
.
C
The auditor should consider the risk of material misstatements in the financial statements resulting from fraud or error.
.
D The risk of not detecting a material misstatement resulting from error is lower than the risk of not detecting a material
. misstatement resulting from fraud.
Q.24) 
Which statement is incorrect regarding “fraud risk factors”?

A Using the auditor’s knowledge of the business, the auditor may identify events or conditions that provide an opportunity, a
. motive or a means to commit fraud, or indicate that fraud may already have occurred.
B A missing document, an out of balance general ledger, or an analytical procedure that does not make sense may be the
. result of circumstances other than fraud.
C Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds have
. occurred.
D
The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or control risk.
.
Q.25) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation
and least likely to be detected by an auditor?
A
Understating the sales journal.
.
B
Overstating the accounts receivable control account.
.
C
Overstating the accounts receivable subsidiary ledger.
.
D
Understating the cash receipts journal.
.
Q.26) Example of the type of information that may come to the auditor's attention that may indicate that noncompliance with laws
or regulations has occurred most likely include
A
Payments for specified services or loans to consultants, related parties, employees or government employees.
.
B
Payments for goods or services made to the country from which the goods or services originated.
.
C
Purchasing at prices significantly above or below market price.
.
D Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its industry or
. to the services actually received.
Q.27) 
When the auditor knows that an illegal act has occurred, the auditor must

A
Issue an adverse opinion.
.
B
Withdraw from the engagement.
.
C
Report it to the proper government authorities.
.
D
Consider the effects on the financial statements, including the adequacy of disclosure.
.
Q.28) 
Which statement is correct regarding the auditor’s communications of audit matters with those charged with governance?

A
The auditor’s communications of matters include all audit matters of governance interest.
.
B
An audit of financial statements is designed to identify all matters that may be relevant to those charged with governance.
.
C
The auditor’s communications with those charged with governance may be made orally or in writing.
.
D. None of the above.
Q.29) 
It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before

A
The performance of substantive testing.
.
B
The commencement of the engagement.
.
C The completion of audit.
.
D
Before the issuance of audit report.
.
Q.30) When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on
the revised engagement (choose the incorrect one)
A
Should not contain a separate paragraph that refers to the original engagement.
.
B
Should not refer to any procedures that may have been performed in the original engagement.
.
C
Should qualify the opinion due to scope limitation.
.
D. Omits reference to the original engagement.
Q.31) 
A basic tool used by the auditor to control the audit work and review the progress of the audit.

A
Audit program
.
B
Progress flowchart
.
C
Engagement letter.
.
D
Time and Expense Summary
.
Q.32) 
Which of the following is not normally a planning procedure?

A Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical
. procedures.
B
Consider the risk of the existence of related-party transactions.
.
C
Consider the nature of the audit reports expected to be rendered.
.
D
Identify items likely to require adjustments.
.
Q.33) An 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 SEC.
.
C
At the client’s premises.
.
D
From the permanent file.
.
Q.34) 
The management’s assessment of the entity’s ability to continue as a going concern covers a period of:

A
Not longer than 12 months from balance date.
.
B
At least 12 months from the balance sheet date.
.
C
Not longer than 12 months from the date of audit report.
.
D
At least 12 months from the date of audit report.
.
Q.35) 
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

A
The results of the internal control questionnaire.
.
B
The contents of the management representation letter
.
C
The entity’s annualized interim financial statements.
.
D
The anticipated sample size of the planned substantive tests.
.
Q.36) 
How can the audit program best be described at the beginning of the audit process?

A
Tentative.
.
B
Comprehensive.
.
C
Conclusive.
.
D. Optional.
Q.37) 
Which of the following is appropriate about risk assessment?

A
Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of transactions
.
B
There is an inverse relationship between detection risk and the combined level of inherent and control risk.
.
C The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for substantive
. tests.
D
Audit risk may be more appropriately determined by assessing inherent and control risk separately.
.
Q.38) 
Which of the following most directly illustrates inherent risk?

A
Inadequate segregation of duties
.
B
Confirmation of receivables by an auditor fails to detect a material misstatement.
.
C
ABC Company, a client company, lacks sufficient working capital to continue operations.
.
D
A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.
.
Q.39) 
Which of the following is a valid statement about the assessment of control risk?

A
There is a positive relationship between detection risk and the combined level of inherent and control risk.
.
B The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing, and extent of
. substantive procedures required to eliminate audit risk.
C Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous assessment
. of control risk.
The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform
D
substantive tests on some assertions.The assessed level of inherent and control risks can be sufficiently low in order to
.
eliminate the auditor’s need to perform substantive tests on some assertions.
Q.40) 
The auditor should perform which of the following as risk assessment procedure?

A
Analytical procedures
.
B
Confirmation
.
C
Recalculation
.
D. Reperformance
Q.41) Which of the following is least likely a potential benefit of effectiveness and efficiency for an entity’s internal control that IT
 provides?
A. Enhance the timeliness, availability, and accuracy of information.
B
Enhance the ability to monitor the performance of the entity’s activities and its policies and procedures.
.
C
Eliminate the risk that controls will be circumvented.
.
D Consistently apply predefined business rules and perform complex calculations in processing large volumes of transactions
. or data.
Q.42) 
Control environment

A
Consists of the policies and procedures that help ensure that management directives are carried out.
.
B 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.
C Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions to
. address those risks, and the results thereof.
D Consists of the procedures and records established to initiate, record, process, and report entity transactions (as well as
. events and conditions) and to maintain accountability for the related assets, liabilities, and equity.
Q.43) 
Which of the following situations will normally result to increase in the extent of audit procedures?

A
Decrease in the risk of material misstatement.
.
B. Decrease in the degree of assurance the auditor plans to obtain.
C
Decrease in materiality level.
.
D. None of the above.
Q.44) The auditor should determine overall responses to address the risks of material misstatement at the financial statement level.
Such responses most likely include
A. Assigning less experienced staff.
B
Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.
.
C
Performing predictable further audit procedures.
.
D
Performing substantive procedures at an interim date instead of at period end.
.
Q.45) 
Which statement is incorrect regarding the nature, timing and extent of tests of controls?

A Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more
. assurance than those controls for which the audit evidence consists solely of inquiry and observation.
B If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the
. operating effectiveness of such controls at least once in every third audit.
C
The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years.
.
D The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of
. the auditor’s tests of controls.
Q.46) Which of the following statements is correct regarding the auditor’s primary objective in performing procedures to obtain an
understanding of the internal control structure?
A The primary objective is to provide the auditor with an evaluation of the consistency of application of management’s
. policies.
B
The primary objective is to provide the auditor with knowledge necessary for audit planning.
.
C
The primary objective is to provide the auditor with evidential matter to use in assessing inherent risk.
.
D. The primary objective is to provide the auditor with a basis for modifying tests of controls.
Q.47) 
Which of the following would most likely indicate internal control deficiency for the revenue cycle (including cash receipts)?
A
Credit is granted by a credit department.
.
B
Cash receipts received in the mail are received by a secretary with no recordkeeping responsibility.
.
C
Cash is deposited weekly.
.
D
Cash disbursements over P100,000 does not require two signatures on the check.
.
Q.48) 
The following statements relate directly to test of controls except

A
May involve comparisons of financial information with nonfinancial information.
.
B
Setting the planned assessed level of control risk at the maximum will eliminate these tests.
.
C
Often performed concurrently with obtaining an understanding of internal control.
.
D Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in updating accounts
. receivable balances.
Q.49) After obtaining an understanding of an entity’s internal controls, an auditor may assess control risk at the maximum for some
assertions because the auditor:
A
Believes internal control activities are unlikely to be effective.
.
B
Determines that internal control is not well-documented.
.
C
Performs tests of controls to restrict detection of risk to an acceptable level.
.
D
Identifies control activities that are likely to prevent material misstatements.
.
Q.50) The report of the service organization auditor on the suitability of design (Type A) will not ordinarily include an opinion by the
service organization auditor that:
A The description of the service organization's accounting and internal control systems, ordinarily prepared by the
. management of the service organization is accurate.
B
The systems' controls have been placed in operation.
.
C
The accounting and internal control systems are operating effectively based on the results from the tests of control.
.
D
The accounting and internal control systems are suitably designed to achieve their stated objectives.
.