Auditing Reviewer

Compiled Reviewer in Auditing Theory
Contents
Introduction to Assurance Principles.................................................... 1
Introduction to Audit................................................................... 3
Systems of Quality Management........................................................... 7
The Philippine Accountancy Act of 2004 and Other Laws................................... 9
The Code of Ethics for Professional Accountants........................................ 12
Pre-engagement......................................................................... 13
Audit Planning......................................................................... 18
Fraud, Error and Non-compliance........................................................ 26
Internal Control....................................................................... 28
Audit Evidence and Substantive Testing................................................. 37
Auditing Transaction Cycles............................................................ 45
Audit Sampling......................................................................... 45
Completing the Audit................................................................... 46
Audit Report........................................................................... 48
Other Reporting Responsibilities....................................................... 51
Auditing in IT Environment............................................................. 52
Introduction to Assurance Principles
1. The Philippine Framework for Assurance Engagements identifies two types of assurance
engagements a practitioner is permitted to perform: a reasonable assurance engagement and
a limited assurance engagement. Which of the following is the objective of a limited assurance
engagement?
a. A reduction in assurance engagement risk to a very low level in the circumstances of the
engagement as a basis for a disclaimer of the practitioner’s conclusion.
b. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the
engagement as a basis for a positive form of expression of the practitioner’s conclusion.
c. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of
the engagement as a basis for a negative form of expression of the practitioner’s conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of
the engagement as a basis for a modified form of expression of the practitioner’s conclusion.
2. In an assurance engagement, the person or persons, either as individuals or representatives of an

entity, responsible for the subject matter is the
a. Intended user
b. Responsible party
c. Professional accountant
d. Client
3. Which of the following best describes the objective of an assurance engagement?

a. Improve the company’s outcomes.
b. Compare the company’s information and policies with those of other entities.
c. Enhance the credibility of information in order to improve the likelihood that the information will
meet the needs of an intended user.
d. Assist in preparing the company’s financial statements.
4. A practitioner is engaged to provide assistance on the compilation of documents necessary for the
client to be accredited by the Department of Environment and Natural Resources. The practitioner
should refer to which of the following sources for professional guidance?
I. PSAs III. PSRS
II. PSAEs IV. PSQM
a. I and II only c. II and IV only
b. III and IV only d. II and III only
5. The Securities Exchange Commission restrict accredited auditors from providing many non-audit
services to their audit clients. Which of the following is true for SEC accredited auditors?
I. They are restricted from providing internal audit outsourcing services to audit clients.
II. There is no restriction on providing non-audit services to audit clients.
a. I only c. Both I and II
b. II only d. Neither I nor II
6. A practitioner's report on agreed-upon procedures should contain which of the following

statements?
a. The procedures performed were those agreed to by the specified parties identified in the report.
b. Sufficiency of procedures is the responsibility of the practitioner.
c. All classification codes appeared to comply with such performance documents.
d. Nothing came to my attention as a result of applying the procedures.
7. The following, except one, is always present in assurance engagements. Select the exception:
a. The issuance of a written report.
b. The consideration of internal control.
c. The presence of written assertions which is the responsibility of another party.
d. Independence of mind and in appearance on part of the auditor.
8. Which of the following statements correctly defines the term reasonable assurance?
a. A substantial level of assurance to allow an auditor to detect a material misstatement.
b. A significant level of assurance to allow an auditor to detect a material misstatement.
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c. An absolute level of assurance to allow an auditor to detect a material misstatement.
d. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.
9. The single feature that most clearly distinguishes auditing, attestation, and assurance is:
a. type of service.
b. training required to perform the service.
c. scope of services.
d. CPA’s approach to the service.
10. One of the elements of an assurance engagement is suitable criteria. As per PFAE, which of the
following least likely describes it?
a. Neutral and comprehensive c. Understandable and reliable
b. Complete and relevant d. Neutral and reliable
11. A practitioner is engaged to compile the financial statements of XYZ Corporation. The practitioner
should refer to which of the following sources for professional guidance?
I. PSAs III. PSRSs
II. PSAEs IV. ISQM 1
a. I and II only c. II and IV only
b. II and III only d. III and IV only
12. In performing an attestation engagement, a CPA typically:

a. supplies litigation support services.
b. assesses control risk at a low level.
c. expresses a conclusion on an assertion about some type of subject matter.
d. provides management consulting advice.
13. Which one of the following best describes the assurance process?
a. Proving the accuracy of the books and records
b. Gathering evidence about specific and known assertions
c. Assisting management in the successful operations of the company
d. Assembling and filing tax returns and related supplemental information
14. Which is not true of the intended user?

a. The intended user is the person or class of persons for whom the professional accountant
prepares the report for a specific use or purpose.
b. The intended user(s) is (are) always limited to the addressee of the professional accountant’s
report.
c. The responsible party may also be one of the intended users.
d. The intended user(s) may not be the addressee of the professional accountant’s report.
15. Which of the following 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
16. Non-assurance engagements include all of the following, except

a. agreed-upon procedures.
b. management consulting.
c. preparation of tax returns where no conclusion is expressed.
d. compliance audit.
17. A practitioner's report on agreed-upon procedures that is in the form of procedures and
findings should contain
a. negative assurance that the procedures did not necessarily disclose all reportable conditions.
b. an acknowledgment of the practitioner's responsibility for the sufficiency of the procedures.
c. a statement of restrictions on the use of the report.
d. a disclaimer of opinion on the entity's financial statements.
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18. Which of the following statements correctly defines the term reasonable assurance?
a. A substantial level of assurance to allow an auditor to detect a material misstatement.
b. A significant level of assurance to allow an auditor to detect a material misstatement.
c. An absolute level of assurance to allow an auditor to detect a material misstatement.
d. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.
19. Which of the following services, if any, may a practitioner who is not independent provide?
a. Reviews but not compilations.
b. Compilations but not reviews.
c. Both compilations and reviews.
d. No services.
20. The objective of assurance services is to

a. Improve the firm’s outcomes.
b. Compare internal information and policies to those of other firms.
c. Enhance decision making.
d. Provide more timely information.
21. In an assurance engagement, the responsible party and the intended users
a. Should be from different entities.
b. May be from the same entity or different entities.
c. Should be from the same entity.
d. Are both responsible for determining the nature, timing and extent of the procedure to be
performed.
22. In an assurance engagement, the outcome of the evaluation or measurement of a subject

matter against criteria is called
a. Subject matter information
b. Subject matter
c. Assurance
d. Conclusion
23. 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.
24. The following, except one, is always present in assurance engagements. Select the exception.
a. The issuance of a written report.
b. The consideration of internal control.
c. The presence of written assertions which is the responsibility of another party.
d. Independence of mind and in appearance on part of the auditor.
25. Which of the following is not an assurance service?

a. Examination of company’s report on its greenhouse gas emissions
b. Audit of historical financial statements
c. Review of interim financial statements
d. Preparation of tax returns in relation to accounting aspect
26. Non-assurance engagements include all of the following, except

a. agreed-upon procedures.
b. management consulting.
c. preparation of tax returns where no conclusion is expressed.
d. compliance audit.
Introduction to Audit
27. One objective of an operational audit is to:
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a. determine whether the financial statements fairly present the entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit maximization.
28. RR, CPA was engaged to provide limited assurance that the financial statements require no material
modifications to be made in accordance with Philippine Financial Reporting Standards. About this,
RR, CPA should
a. Understand the system of internal accounting control that the entity uses.
b. Test the accounting records that identify inconsistencies with the prior year's financial
statements.
c. Understand the accounting principles of the industry in which the entity operates.
d. Develop audit programs to determine whether the entity's financial statements are fairly
presented.
29. An auditor's report would be designated as a special report when it is issued in connection with
a. Financial statements for an interim period which are subjected to limited review.
b. Financial statements that purport to be in accordance with generally accepted accounting
principles but do not include a presentation of the statement of cash flows.
c. Financial statements that are prepared in accordance with a comprehensive basis of accounting
other than generally accepted accounting principles.
d. Financial statements that are unaudited and are prepared from a client's accounting records
30. Inherent limitations in an audit stem from the following factors, except __________
a. most audit evidence is persuasive rather than conclusive.
b. use of testing.
c. accounting and internal control system limitation.
d. incompetence of an auditor.
31. To obtain reasonable assurance about whether the financial statement as a whole is free from
material misstatement, the auditor must fulfill several performance responsibilities, including:
a. verifying that all audit work is performed by a CPA with a minimum of three years of
experience.
b. exercising professional judgment.
c. providing an opinion on the financial statements.
d. obtaining sufficient, appropriate audit evidence.
32. While this type of engagement involves the application of audit skills and techniques and the
gathering of evidence, it does not ordinarily involve an assessment of accounting and internal
control systems, tests of records, and of responses to inquiries by obtaining corroborating evidence
through inspection,
observation, confirmation, and computation.
a. Compilation
b. Review
c. Agreed-upon procedures
d. Consultancy
33. The words that best describes the relationship which should exist between the external auditor and
the management of the client company are:
a. mutual trust and respect.
b. advocacy of management’s position.
c. skeptical vigilance.
d. adversarial relationship.
34. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected
for all of the following except
a. Employee collusion
b. Falsified documentation
c. Need to apply professional judgment in evaluating fraud risk factors
d. Professional skepticism
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35. Which of the following is not a benefit arising from having the financial reports audited?
a. Auditors suggest how controls can be improved.
b. Auditors suggest how greater operating efficiencies may be achieved.
c. Audits have a favourable effect on employee efficiency and honesty.
d. Audits provide access to less favourable borrowing terms.
36. Which of the following groups is considered a subgroup ordinarily charged with assisting the board
of directors in fulfilling its oversight responsibilities?
a. Audit committee.
b. Secured creditors.
c. Internal auditors.
d. Senior management.
37. Governmental auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and
also
a. Accuracy
b. Compliance
c. Evaluation
d. Internal control.
38. An auditor may achieve audit objectives related to particular assertions by

a. Performing analytical procedures.
b. Adhering to a system of quality control.
c. Preparing auditor working papers.
d. Increasing the level of detection risk.
39. Place these phases of an audit in chronological order:

A. Assess the risk of material misstatement
B. Respond to assessed risks
C. Perform risk assessment procedures
D. Evaluate audit evidence
a. A, B, C, D.
b. C, A, B, D.
c. A, C, D, B.
d. D, C, B, A.
40. To maximize independence, the director of internal auditing should report to the:
a. audit committee. c. chief financial officer.
b. controller. d. external auditor.
41. Which of the following is not a recommendation usually made following the completion of an
operational audit?
a. Economic and efficient use of resources
b. Effective achievement of business objectives
c. Attesting to the fairness of the financial statements
d. Compliance with company policies
42. Inherent limitations in an audit stem from the following factors except:
a. most audit evidence is persuasive rather than conclusive.
b. use of testing.
c. accounting and internal control system limitation.
d. incompetence of an auditor.
43. AMOR, CPA, is performing a compilation service for Clean and Green Corporation. In the
course of performing compilation procedures, AMOR became aware that some of the
information provided by Clean and Green’s management are incomplete. Client management
refuses to comply with AMOR’s requests for additional information. In this case, AMOR should:
a. Issue a qualified opinion on the financial statements compiled.
b. Issue an adverse opinion on the financial statements compiled.
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c. Issue a disclaimer of opinion on the financial statements complied.
d. Withdraw from the engagement.
44. 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. Operational audit
b. Production audit
c. Compliance audit
d. Financial statement audit
45. If a CPA is considered not independent from his/her client, he may only issue a
a. review report.
b. compilation report.
c. comfort letter.
d. qualified opinion.
46. Which of the following procedures is not included in a review engagement?

a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. Tests of internal control.
47. When engaged to compile the financial statements of an entity, an accountant is required to
possess a level of knowledge of the entity’s accounting principles and practices. This requirement
most likely will include obtaining a general understanding of the
a. internal control awareness of the entity’s senior management.
b. risk factors relating to misstatements arising from illegal acts.
c. design of the entity’s internal controls implemented.
d. nature of the entity’s business transactions, the form of its accounting records and the
accounting basis on which the financial information is to be presented.
48. Which of the following procedures regarding notes payable would an accountant most likely
perform during a review engagement?
a. Confirming the year-end outstanding note payable balance with the lender.
b. Examining records indicating proper authorization of the notes payable.
c. Making inquiries of management regarding maturities, interest rate, and collateral.
d. Documenting control procedures for payment calculations of the notes’ principal and interest.
49. The primary reasons for the existence of Auditing Standards is:
a. they provide assurance of the minimum standards that should have been employed by the
auditor in arriving at the opinion.
b. they are necessary to maintain a cost-effective service.
c. they will safeguard the auditor when they are sued.
d. all of the above.
50. Audit committees are perceived to strengthen the independence of auditors. Which of the following
is normally an objective of an audit committee?
a. Ensuring that the entity operates in the best interests of the shareholders.
b. Assisting the board of directors to discharge its responsibility to exercise due care, diligence and
skill.
c. Giving advice on the selection of the board of directors.
d. All are objectives of an audit committee.
51. The group which has the legal responsibility for removal of the auditor is:
a. management.
b. the shareholders.
c. the audit committee.
d. the board of directors.
52. Which of the following procedures is not included in a review engagement?

a. Inquiries of management.
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b. Inquiries regarding events after the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. A study and evaluation of internal control.
53. 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.
54. 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.
55. A CPA has been engaged to perform review services for a client. Identify which of the following is a
correct statement.
a. The CPA must perform the basic audit procedures necessary to determine that the statements
are in conformity with the applicable financial reporting framework.
b. The financial statements are primarily representations of the CPA.
c. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books.
d. The CPA is performing an assurance engagement other than an audit of the financial
statements.
Systems of Quality Management

56. Which of the following is an element of the CPA’s quality management system that should be
considered in establishing its quality management policies and procedures?
a. Considering audit risk and materiality
b. Using statistical sampling techniques
c. Assigning personnel to engagements
d. Complying with laws and regulations
57. If differences of opinion arise between the engagement partner and the engagement quality control
reviewer, then the engagement partner should:
a. follow the firm's policies and procedures for resolving differences of opinion.
b. issue a disclaimer of opinion and report the issue to the entity's audit committee.
c. discuss the differences of opinion with the entity's management and issue a modified auditor's
report.
d. withdraw from the engagement when permissible under law or regulation.
58. Which of the following correctly identifies the deadline for the completion of audit documentation?
a. Within 45 days after the last day of fieldwork.
b. Within 90 days after the last day of fieldwork.
c. Within 60 days after the report release date.
d. Within 45 days after the report release date.
59. The auditor with final responsibility for an engagement and one of the assistants have a difference
of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be
disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to
a. Refer the disagreement to the IAASB's Quality Review Committee.
b. Document the details of the disagreement with the conclusion reached.
c. Discuss the disagreement with the entity's management or its audit committee.
d. Report the disagreement to an impartial peer review monitoring team.
60. Which of the following activities would be most helpful to a CPA in deciding whether to accept a
new audit client?
a. Reviewing industry benchmarking data.
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b. Considering the client's compensation methods.
c. Evaluating the CPA's ability to properly service the client.
d. Evaluating the most recent peer review of the client's previous auditor.
61. One purpose of establishing quality control policies and procedures for acceptance and continuance
of client relationships and specific engagements is to
a. Undertake engagements only that the accounting firm is competent to perform.
b. Monitor significant deficiencies in the design and operation of the client’s internal control.
c. Identify noncompliance with aspects of contractual agreements that affect the financial
statements.
d. Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned
responsibilities.
62. Within the context of quality control, a primary purpose of the engagement performance element is
to help ensure that
a. CPA firm personnel have adequate technical training.
b. Engagements are adequately supervised.
c. The CPA firm undertakes only those engagements it is competent to perform.
d. CPA firm personnel comply with relevant ethical requirements.
63. Evaluate the following statements:

Statement 1: An engagement quality review is an objective evaluation of the significant judgments
made by the engagement team and the conclusions reached thereon, performed by the
engagement quality reviewer and completed on or after the date of the engagement report.
Statement 2: The engagement quality reviewer may be a member of the engagement team.
a. Only statement 1 is correct. c. Only statement 2 is correct.
b. Both statements are correct. d. Both statements are incorrect.
64. Statement I: An engagement quality review is an objective evaluation of the significant judgments
made by the engagement team, and the conclusions reached thereon, performed by the
engagement quality reviewer and completed on or after the date of the engagement report.
Statement II: The engagement quality reviewer may be an employee of the firm.
a. Only statement I is true. c. Both statements are true.
b. Only statement II is true. d. Both statements are false.
65. Statement I: It may be appropriate for the engagement team, in the context of the firm’s policies
or procedures, to consult outside the firm where the firm lacks appropriate internal resources.
Statement II: The engagement team are not allowed to seek for advisory services provided by
firms, professional and regulatory bodies or commercial organizations that provide relevant quality
control services.
66. Where internal technical and training resources are unavailable, the firm
a. Violates a basic tenet of quality control regarding capabilities and competence
b. Cannot adequately provide for the professional development needs of its members.
c. Must obtain, within two years, the necessary internal technical and training resources
d. May use a suitably qualified external person for the purpose.
67. Quality management policies and procedures should be relevant, adequate, effective, and complied
with. This statement is most closely associated with the quality management element of
_______________.
a. Review
b. Supervision
c. Monitoring and remediation.
d. Relevant ethical requirements.
68. One purpose of establishing quality control policies and procedures for acceptance and continuance
of client relationships and specific engagements is to
a. Undertake engagements only that the accounting firm is competent to perform.
b. Monitor significant deficiencies in the design and operation of the client’s internal control.
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c. Identify noncompliance with aspects of contractual agreements that affect the financial
statements.
d. Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned
responsibilities.
69. The auditor with final responsibility for an engagement and one of the assistants have a difference
of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be
disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to
a. Refer the disagreement to the IAASB's Quality Review Committee.
b. Document the details of the disagreement with the conclusion reached.
c. Discuss the disagreement with the entity's management or its audit committee.
d. Report the disagreement to an impartial peer review monitoring team.
70. A requirement that working papers be reviewed by the supervisor, and any deficiencies
be discussed with the preparer is an example of a quality management procedure in the
area of
a. acceptance and continuance of client relationships and specific engagements.
b. engagement performance.
c. human resources.
d. relevant ethical requirements.
71. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. Auditor's system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor's report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency as
auditors.
72. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. Auditor's system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor's report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency as
auditors.
73. Which of the following professionals has primary responsibility for the performance of an
audit?
a. The managing partner of the firm.
b. The senior assigned to the engagement.
c. The manager assigned to the engagement.
d. The partner in charge of the engagement.
The Philippine Accountancy Act of 2004 and Other Laws

74. Which of the following is not represented in both AASC and FRSC?
a. SEC c. PRBO
b. BSP d. BIR
75. As per PRBOA Resolution No. 45 Series of 2020 on refresher course, the certificate of completion as
evidenced by TOR issued by qualified schools shall be valid for _____ years from the date of
completion.
a. Two (2) c. One (1)
b. Three (3) d. Five (5)
76. The following statements relate to the Board of Accountancy. Which statement is incorrect?
a. The Board consists of a Chairman and six members.
b. The Chairman and members are appointed by the President of the Philippines upon
recommendation of PRC.
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c. No person shall be appointed a member of the Board unless he is natural-born citizen of the
Philippines, a duly registered CPA and has been in the practice of accountancy for at least ten
years.
d. The Professional Regulation Commission may remove from the Board any member whose
certificate to practice has been removed or suspended.
77. In accordance with PRC Resolution No. 254 Series of 2017, an individual born on March 2, 1996 has
applied for accreditation with the BOA to practice public accounting was approved on April 30,
2019. The registration shall expire on
a. September 30, 2022
b. March 2, 2022
c. December 31, 2022
d. April 30, 2022
78. The following were the ratings of examinees who took Licensure Examination for CPAs (LECPA) in
October 2022.
S1 S2 S3 S4 S5 S6
Examinee 1 95 95 95 95 95 95
Examinee 2 75 75 75 75 75 75
Examinee 3 82 73 74 74 74 74
Examinee 4 64 74 85 85 85 85
Examinee 5 75 75 75 74 74 74
Examinee 6 74 74 74 74 74 74
Examinee 7 100 100 100 64 74 74
Examinee 8 64 95 86 74 75 77
Examinee 9 100 100 100 31 32 75
Examinee 10 100 74 74 74 74 74
Of the ratings presented above, how many examinees obtained a conditional status in the Board
Exam?
a. 4
b. 2
c. 3
d. 5
79. Under the current PRC regulations, what is the minimum number of CPD credit units that a
registered professional accountant in commerce and industry should accumulate for accreditation
within the three-year period?
a. 120 credit units c. 15 credit units
b. 0 credit units d. 60 credit units

Statement 1: The public practice of accountancy is confined to sole proprietorship and partnership
only.
Statement 2: From among PRBOA members, the Chairman of the PRBOA is tasked to appoint a
vice-chairman for a term of three (3) years.

Statement 1: As per PRBOA Resolution No. 45 Series of 2020 on refresher course, the certificate of
completion as evidenced by TOR issued by qualified schools shall be valid for four (4) complete
CPALE from the date of completion.
Statement 2: The BIR is represented in both AASC and FRSC.

Statement 1: Similar to PRBOA Chairman, the Chairman of COA is not allowed to be re-appointed.
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Statement 2: The mission of COA is to ensure accountability for public resources, promote
transparency, and help improve government operations, in partnership with stakeholders, for the
benefit of the Filipino people.
83. Which of the following statements is correct?

a. RA 9298 provides for and governs the supervision, control, and regulation of the practice of
Filipino professional accountants in the Philippines and abroad.
b. RA 9298 is aligned with the policy of the State to recognize accountants in revenue generation
and development.
c. A CPA, though not a lawyer, can teach law subjects in the BSA program.
d. A person is deemed to be in public practice when he/she is involved in decision-making
requiring professional knowledge in the science of accounting and the accounting aspects of
finance and taxation or is employed in a position requiring a CPA.
84. The following first-time candidates had these CPALE ratings:

Examinees CPALE Ratings
Subj. 1 Subj. 2 Subj. 3 Subj. 4 Subj. 5 Subj. 6
Bang 91 87 94 73 74 64
Beng 80 68 67 74 80 75
Bing 77 79 64 74 76 80
Bong 77 76 65 75 76 77
Bung 88 89 65 65 65 78
Of the following statements, how many is/are correct?

1. Bang and Beng failed.
2. Bong earned conditional units.
3. Bang and Bung passed.
4. Bing had to retake two subjects.
a. One statement only c. Three statements only
b. Two statements only d. All statements are correct
85. The following statements relates to the Board of Accountancy. Which statement is incorrect?
a. The Board consists of a Chairman and six members.
b. The Chairman and members are appointed by the President of the Philippines upon
recommendation of the PRC.
c. No person shall be appointed a member of the Board unless he is natural-born citizen of the
Philippines, a duly registered CPA and has been in the practice of Accountancy for at least ten
years.
d. The Professional Regulation Commission may remove from the Board any member whose
certificate to practice has been removed or suspended.
86. In accordance with PRBOA’s Resolution no. 22 Series of 2020, which of the following government
agencies was added to the list of the members of the Auditing and Assurance Standards Council
(AASC)?
a. Insurance Commission c. FINEX
b. Commission on Audit d. BIR
87. Barbie Oppenheimer recently took the licensure examination for Certified Public Accountants and
obtained the following rating:
Management Services 75%

Auditing 82%
Taxation 89%
Regulatory Framework for Business Transactions 77%
Barbie, who was pregnant during the licensure examination, gave birth on the final day of the
board examination, resulting in her absence for the last two (2) subjects, for which she received a
zero rating. Which of the following statements is correct?
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a. Barbie is considered as having passed the examination for humanitarian reasons.
b. Barbie has failed the licensure examination for not completing it.
c. Barbie will be considered no-show and she will have to apply and take the entire subjects of the
board examination again.
d. Barbie will receive conditional credits for the four subjects she had taken and will have to retake
the last two subjects within two years from the previous exam.
88. Which of the following statements about RA 9298 or the Philippine Accountancy Act of 2004 and its
implementing rules and regulations is incorrect?
a. Any role in a private sector business or company meeting the threshold criteria that requires
supervision over financial transactions, preparation of financial statements, and coordination
with external auditors, can only be filled by a registered CPA.
b. One of the qualifications of the members of the Professional Regulatory Board of Accountancy
includes being of good moral character and must not have been convicted of crimes involving
moral turpitude.
c. The Certificate of Registration issued to examinees who pass the licensure examination is valid
until revoked, while the Professional Identification Card is subject to renewal every three years.
d. In all cases, a person who is not a citizen of the Philippines shall not be allowed to practice
accountancy in the Philippines.
The Code of Ethics for Professional Accountants

89. According to the Code of Ethics, applying the conceptual framework requires exercising professional
judgment, remaining alert for new information and to changes in facts and circumstances, and
using the:
a. diligence of a good father of a family test.
b. reasonable and informed third party test.
c. independence test.
d. professional skepticism test.
90. When accountants are not independent, which of the following reports can nevertheless be issued?
a. Compilation report.
b. Standard unmodified audit report.
c. Examination report on a forecast.
d. Examination of internal control over financial reporting.
91. According to the IFAC Code of Ethics for Professional Accountants, audit teams are required to be
independent of the audit client during the engagement period and during which other period?
a. The fiscal year following the period covered by the financial statements.
b. The period covered by the financial statements.
c. The calendar years that include any part of the period covered by the financial statements.
d. The two years prior to the period covered by the financial statements.
92. When exercising professional judgment, this refers to the tendency of the CPA to use an initial
piece of information as an anchor against which subsequent information is inadequately assessed.
a. Availability bias c. Confirmation bias
b. Anchoring bias d. Selective perception
93. Bert, a CPA, is approached by Wally, a client. Wally requests that Bert return the records provided
to Bert by Wally during an audit. Wally still owes Bert the fees associated with the audit. According
to the Code of Ethics, what should Bert do?
a. Bert should return the records to Wally only after the fee has been paid.
b. Bert should not return the records to Wally without a court order.
c. Bert should not return the records to Wally because the records now belong to Bert.
d. Bert should return the records to Wally.
94. Which of the following statements is true with respect to the concept of independence when an
auditor prepares and audits those financial statements for a client?
a. The auditor is not independent.
b. The auditor is independent if he or she can maintain professional detachment.
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c. The auditor can audit the financial statements only if the audit process does not culminate in
expressing an opinion on the financial statements.
d. The auditor cannot audit the financial statements since a lack of integrity exists.
95. S1: A self-interest or intimidation threat to compliance with the principles of integrity and
professional behavior is created when a professional accountant becomes aware of non-compliance
or suspected noncompliance with laws and regulations.
S2: When encountering such non-compliance or suspected non-compliance, the accountant shall
obtain an understanding of those legal or regulatory provisions and comply with them, including
any requirement to report the matter to an appropriate authority and any prohibition on alerting
the client.
a. True, True
b. False, true
c. True, false
d. False, false
96. Independence is linked to the principles of

a. Objectivity
b. Objectivity and integrity
c. Integrity and due care
d. Objectivity, integrity and confidentiality
97. Which of the following threats is most likely created when an individual is involved in an audit
engagement over a long period of time?
a. Familiarity threat.
b. Familiarity and self-interest threats.
c. Self-interest threat.
d. Advocacy and familiar threats.
98. CPAs in public practice who perform assurance engagements are governed by the following, except
a. Philippine Framework for Assurance Engagements
b. Code of Ethics for Professional Accountants in the Philippines
c. Philippine Standards on Related Services
d. Philippine Standards on Quality Management
99. The underlying reason for a code of professional conduct for any profession is
a. The need for public confidence in the quality of service of the profession.
b. That it provides a safeguard to keep unscrupulous people out.
c. That it is required by legislation.
d. That it allows licensing agencies to have a yardstick to measure deficient performance.
100. Independence is required for which of the following types of services?

a. Audits.
b. Tax work.
c. Consulting.
d. Always required of the CPA.
101. Independence is not required for which of the following types of services?
a. Audits.
b. Reviews.
c. Consulting.
d. Attestation.
102. The difference between what the public expects to get from the audited financial statements and
what the public is actually getting is known as:
a. Credibility gap c. Expectation gap
b. Audit gap d. Assurance gap
Pre-engagement
103. Before accepting an engagement to audit a new client, an auditor is required to
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a. Obtain a copy of the client’s financial statements.
b. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
c. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
d. Discuss the management representation letter with the client’s audit committee.
104. The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. The agreed terms shall be recorded in a/an
a. Engagement letter
b. Letter of audit inquiry
c. Management representation letter
d. Confirmation letter
105. A CPA firm should decline an offer to perform consulting services engagement if:
a. the proposed engagement is not accounting-related.
b. recommendations made by the CPA firm are to be subject to review by the client.
c. acceptance would require the CPA firm to make management decisions for an audit client.
d. the proposed engagement is tax related.
106. An entity requests that a CPA change an audit engagement to a review engagement. If the
accountant agrees to the change, how, if at all, should the accountant’s review report be modified?
a. The accountant should issue the review report without mentioning the change in engagement.
b. The accountant should include in the review report a disclaimer of an audit opinion.
c. The accountant should include in the review report the circumstances that resulted in the
change in engagement.
d. The accountant should include in the review report a reference to the original engagement but
not the reason for the change.
107. Which of the following activities would be most helpful to a CPA in deciding whether to accept a
new audit client?
a. Reviewing industry benchmarking data.
b. Considering the client's compensation methods.
c. Evaluating the CPA's ability to properly service the client.
d. Evaluating the most recent peer review of the client's previous auditor.
108. Which of the following factors most likely would influence an auditor's determination of the
auditability of an entity's financial statements?
a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control procedures.
109. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should not be accepted?
a. There are significant related-party transactions that management claims occurred in the
ordinary course of business.
b. Internal control activities requiring the segregation of duties are subject to management
override.
c. Management continues to employ an inefficient system of information technology to record
financial transactions.
d. It is unlikely that sufficient appropriate evidence is available to support an opinion on the
financial statements.
110. If the auditor is unable to agree to a change of the engagement and is not permitted to continue
the original engagement, the auditor should
a. Insist on continuing the original engagement.
b. Express a qualified opinion.
c. Express an adverse opinion.
d. Withdraw from the engagement.
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override.
112. The primary objective of an auditor when considering the acceptance of an initial audit engagement
of a non-issuer is to
a. Establish whether the preconditions for an audit are present.
b. Agree with management on the timing of tests at interim and year end.
c. Limit the auditor's responsibility if management fails to provide written representations.
d. Specify the degree to which management intends to rely on the auditor's testing of internal
controls.
113. When an auditor of a parent is also the auditor of a component, then each of the following factors
would ordinarily influence the decision to obtain a separate engagement letter from the component,
except:
a. The legal requirements regarding the appointment of the auditor.
b. Whether a separate audit report is to be issued on the component.
c. Whether there has been any turnover of the component's board members.
d. The degree of independence of the component management from the parent entity.
override.
115. Which of the following activities by small business clients best demonstrates management integrity
in the absence of a written code of conduct?
a. Emphasizing ethical behavior through oral communication and management example.
b. Developing and maintaining formal descriptions of accounting procedures.
c. Documenting internal control procedures using flowcharts rather than narratives.
d. Reporting regularly to the board of directors about operations and finances.
116. Which of the following statements most likely would be included in an engagement letter from an
auditor to a client?
a. The CPA firm will provide assurance about whether the financial statements are free of all
misstatements.
b. The CPA firm will involve information technology specialists in the performance of the audit.
c. The CPA firm is responsible for prevention of frauds that may affect the financial statements.
d. The CPA firm will issue an unqualified opinion on the client’s financial statements
117. Prior to commencing field work, an auditor usually discusses the general audit strategy with the
client's management. Which of the following details do management and the auditor usually agree
upon at this time?
a. The specific matters to be included in the communication with the audit committee.
b. The minimum amount of misstatements that may be considered to be significant deficiencies.
c. The schedules and analyses that the client's staff should prepare.
d. The effects that inadequate controls may have over the safeguarding of assets.
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118. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the
reasons for this is that:
a. new auditors are usually assigned to an initial audit.
b. predecessor auditors need to be consulted.
c. the client's business, industry, and internal controls are unfamiliar to the auditor and need to be
carefully studied.
d. a larger proportion of customer accounts receivable need to be confirmed on an initial audit.
119. In connection with an audit of financial statements, the auditor would ordinarily use an
engagement letter to:
a. mutually agree upon contingent fees between the company and the auditor.
b. assert that a properly planned audit will detect and identify all material misstatements.
c. specify any arrangements concerning the involvement of the company's internal auditors on the
audit.
d. determine which of the company's financial statement notes will be compiled by the auditor
during the audit.
120. Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. an understanding of the prospective client's industry and business.
b. the prospective client's signature to a written engagement letter.
c. the prospective client's consent to make inquiries of the predecessor auditor, if any.
d. an assessment of fraud risk factors likely to cause material misstatements.
121. Which of the following best describes the purpose of the engagement letter?
a. by clearly defining the nature of the engagement, the engagement letter helps to avoid and
resolve misunderstandings between CPA and client regarding the precise nature of the work to
be performed and the type of report to be issued.
b. the engagement letter relieves the auditor of some responsibility for the exercise of due care.
c. the engagement letter should be signed by both the client and the CPA and should be used only
for independent audits.
d. the engagement letter conveys to management the detailed steps to be applied in the audit
process.
122. In order to establish whether the preconditions for an audit are present, the auditor shall determine
whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable. The auditor should also obtain management’s agreement that it
acknowledges and understands its responsibility (choose the exception).
a. For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation.
b. For such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
c. To provide the auditor with access to all information of which management is aware that is
relevant to the preparation of the financial statements such as records, documentation and
other matters.
d. To provide the auditor with unrestricted access to persons within and outside the entity from
whom the auditor determines it necessary to obtain audit evidence.
123. The pre-engagement activities of an audit engagement for a public accounting firm do not include:
a. evaluating the public accounting firm's independence with regard to the audit engagement.
b. obtaining predecessor auditor’s audit documentation.
c. obtaining an engagement letter.
d. ensuring that there are sufficient firm resources to complete the engagement on a timely basis.
124. This year, Bethel Enterprises engaged a new auditor who must
a. attempt to communicate with the predecessor auditor before accepting the engagement.
b. review the predecessor auditor's audit documentation if the audit is to be in accordance with
GAAS.
c. seek the SEC's permission to accept the engagement if Bethel is publicly owned.
d. reject the engagement if the change in auditors resulted from a dispute with the predecessor.
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125. Prior to beginning the fieldwork on a new audit engagement in which the audit team does not
possess expertise in the industry in which the client operates, the audit team should
a. reduce audit risk by lowering the preliminary levels of materiality.
b. design special substantive tests to compensate for the lack of industry expertise
c. engage financial experts familiar with the nature of the industry.
d. obtain knowledge of matters that relate to the nature of the entity's business.
a. There are significant related party transactions that management claims occurred in the
override.
d. It is unlikely that sufficient evidence is available to support an opinion on the financial
statements.
127. When a company has changed auditors:

a. The successor auditor has the responsibility to initiate contact with the predecessor auditor to
ask about the client before the engagement is accepted; the predecessor has no responsibility
to initiate this contact, even when aware of matters bearing on the integrity of management.
b. The predecessor must respond fully to all inquiries made by the successor auditor.
c. The successor must discuss with the predecessor auditor matters bearing on the engagement
before accepting the engagement.
d. The successor may choose not to attempt any communication with the predecessor auditor.
128. Which of the following matters does an auditor usually include in the engagement letter?
a. Arrangements regarding fees and billing.
b. Analytical procedures that the auditor plans to perform.
c. Indications of negative cash flows from operating activities.
d. Identification of working capital deficiencies.
129. Which of the following is incorrect regarding an auditor’s understanding with a potential client prior
to beginning an audit?
a. The understanding should list the audit fees and frequency of billing.
b. The understanding should be in the form of an engagement letter in order to be in conformity
with PSAs.
c. The understanding should cover the limitations of the engagement.
d. The understanding should cover the responsibilities of the independent auditor.
130. An accountant agrees to the client's request to change an engagement from a review to a
compilation of financial statements. The compilation report should include:
a. No reference to the original engagement.
b. Reference to a departure from PSAs.
c. Scope limitations that may have resulted in the change of engagement.
d. Information about review procedures already performed.
131. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements most likely would withdraw from the engagement if
a. The illegal act is a violation of generally accepted accounting principles.
b. The client does not take the remedial action that the auditor considers necessary.
c. The illegal act was committed during a prior year that was not audited.
d. The auditor has already assessed control risk at the maximum level.
132. Ronaldo, CPA was engaged to perform an audit of financial statements of Beerca Corp. for the year
ended December 31, 2022. After Ronaldo, CPA had commenced the audit procedures, Beerca Corp.
requested to change the service to a review engagement. The change was due to a
misunderstanding as to the nature of audit procedures. In this scenario, Ronaldo, CPA’s review
report should include a reference to the
I. Reason for the change
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II. Original audit engagement
a. Yes, No
b. No, Yes
c. Yes, Yes
d. No, No
Audit Planning
133. The auditor’s risk assessment procedures should always include the following, except
a. Inquiries of management and of others within the entity.
b. Analytical procedures.
c. Observation and inspection.
d. Substantive test procedures and tests of controls.
134. Professional skepticism requires that an auditor assume that management is

a. Honest, in the absence of fraud risk factors.
b. Dishonest until completion of audit tests.
c. Neither honest nor dishonest.
d. Offering reasonable assurance of honesty.
135. The risk that the auditor may give an inappropriate opinion when the financial statements are
materially misstated is called
a. Detection risk
b. Business risk
c. Audit risk
d. Inherent risk
136. When assessing the risk of material misstatements in the financial statements:
a. the auditor must have an understanding of the client’s business and industry.
b. inadequate internal control procedures will mitigate client business risk.
c. GAAS specifies in detail how much and what type of evidence the auditor needs to obtain.
d. company management is responsible for determining materiality levels.
137. With respect to the auditor’s planning of a year-end examination, which of the following statements
is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the statement of financial position date.
c. The client’s audit committee should not be told of the specific audit procedures that will be
performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
138. Which of the following persons is not a specialist upon whose work an auditor may rely?
a. Actuary c. Internal auditor
b. Appraiser d. Engineer
139. This inherent risk factor arises when the required information cannot be prepared based only on
sufficiently precise and comprehensive data that is verifiable through direct observation.
a. Change c. Subjectivity
b. Uncertainty d. Complexity
140. Which of the following is most likely to require special planning considerations related to asset
valuation?
a. Inventory is comprised of oil and mineral deposits.
b. The client has recently purchased an expensive Apple computer.
c. Assets costing less than P5,000 are expensed immediately even when the expected life exceeds
one year.
d. Accelerated depreciation methods are used for amortizing the costs of factory equipment.
141. Which of the following is correct concerning performance materiality on an audit?

a. It will ordinarily be less than financial statement materiality.
b. It should be established at beginning of an audit and not be revised thereafter.
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c. It should be established at separate amounts for the various financial statements.
d. It need not be documented in the working papers.
142. Which of the following types of risks most likely would increase if accounts receivable are confirmed
3 months before year end?
a. Inherent.
b. Control.
c. Detection.
d. Business
143. Which of the following audit procedures consists of looking at a process or procedure being
performed by others?
a. Observation
b. Inspection of records and documents
c. Inspection of tangible assets
d. Inquiry
144. In the planning stage of an audit engagement, the auditor is required to perform audit procedures
to obtain an understanding of the entity and its environment, including its internal control. These
procedures are called
a. Risk assessment procedures
b. Substantive tests
c. Tests of controls
d. Dual-purpose tests
145. According to generally accepted auditing standards, which element is mandatory to document in an
audit?
a. A flowchart or detailed description of the accounting system illustrating the recording and
classification processes for financial transactions.
b. The overall audit strategy and audit plan.
c. All significant stakeholder groups.
d. A questionnaire about internal control that identifies controls ensuring specific goals are met.
146. 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.
147. 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.
148. 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.
149. While assessing the risk of material misstatement, auditors identify risk, relate risk to what could go
wrong, consider the magnitude of risk and
a. Assess the risk of misstatements due to illegal acts.
b. Consider the complexity of the transactions involved.
c. Consider the likelihood that the risk could result in material misstatements.
d. Determine materiality levels
150. PSA 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement, requires the
auditor to perform risk assessment procedures at
a. The overall financial statement level only.
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b. The assertion level only.
c. The overall financial statement level and the assertion level for classes of transactions, account
balances and disclosures.
d. Either the overall financial statement or assertion level.
151. Which of the following comparisons would be most useful to an auditor in evaluating the results of
an entity's operations?
a. Prior-year accounts payable to current-year accounts payable
b. Prior-year payroll expense to budgeted current year payroll expense
c. Current-year revenue to budgeted current-year revenue
d. Current-year warranty expense to current-year contingent liabilities
152. An auditor who performed analytical procedures that compared current-year financial information
to the comparable prior period noted a significant increase in net income. Given this result, which
of the following expectations of recorded amounts would be unreasonable?
a. A decrease in costs of goods sold as a percentage of sales.
b. A decrease in accounts payable.
c. A decrease in retained earnings.
d. A decrease in notes payable.
153. On the basis of audit evidence related to internal control, an auditor decides to increase the
assessed level of the risk of material misstatement from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the auditor
would
a. Increase the inherent risk.
b. Increase materiality levels.
c. Decrease substantive testing.
d. Decrease detection risk.
154. On the basis of audit evidence related to internal control, an auditor decides to increase the
assessed level of the risk of material misstatement from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the auditor
would
a. Increase the inherent risk.
b. Increase materiality levels.
d. Decrease detection risk
155. . __________ is an individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the auditor to assist the auditor
in obtaining sufficient appropriate audit evidence.
a. Auditor’s expert
b. Management’s expert
c. Expert
d. Specialist
156. The risk that the auditor may give an inappropriate opinion when the financial statements are
materially misstated is called
a. Detection risk c. Audit risk
b. Business risk d. Reputational risk
157. Audit risk has three components: inherent risk, control risk, and detection risk. Which is correct?
a. Detection risk is a function of the efficiency of an auditing procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent
risk.
c. The risk that material misstatements will not be prevented or detected on a timely basis by
internal control can be reduced to zero by effective controls.
d. The existing levels of inherent risk, control risk, and detection risk can be changed at the
discretion of the auditor.
158. There is an inverse relationship that exists between the acceptable level of detection risk and the
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a. Risk of failing to discover material misstatements.
b. Assurance provided by substantive tests.
c. Preliminary judgments about materiality levels.
d. Risk of misapplying audit procedures.
159. Which of the following is least likely to be considered when assessing inherent risk?
a. Nonroutine transactions.
b. Estimation transactions.
c. Susceptibility to theft.
d. Expected effectiveness of controls.
160. Which of the following results of analytical procedures would most likely indicate possible
unrecorded liabilities?
a. Current ratio of 2:1 as compared to 5:1 for the prior period.
b. Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.
c. Accounts payable turnover of 5, compared to 10 for the prior period.
d. Accounts payable balance increase greater than 10 percent over the prior period.
161. Under which of the following circumstances would an auditor be considered to be using the work of
a specialist?
a. The auditor engages a lawyer to interpret the provisions of a complex contract.
b. The auditor makes inquiries of the client's lawyer regarding pending litigation.
c. A tax expert employed by the auditor's CPA firm reviews the client's tax accruals.
d. The client engages an outside computer service organization to prepare its payroll.
162. Which of the following conditions would an auditor most likely assess a high level of risk of material
misstatement?
a. All material acquisitions of PPE are required to be approved by the board of directors.
b. Most additions are self-constructed by the entity.
c. Recently acquired loans include covenants that preclude plant acquisitions for years.
d. Gross PPE increased 30% during the current period.
163. Which of the following is least likely part of an auditor’s risk assessment procedures?
a. Inquiries with production personnel regarding costs added during production.
b. Inspection of industry publications and trade journals.
c. Observation of petty cash disbursement procedures.
d. Analytical procedures on depreciation and amortization charges.
164. Based on new information gained during an audit of an entity, an auditor determines that it is
necessary to modify materiality for the financial statements as a whole. In this circumstance, which
of the following statements is accurate?
a. The auditor is required to reperform audit procedures already completed on the audit using the
revised materiality.
b. The auditor should consider disclaiming an opinion due to a scope limitation.
c. The revision of materiality at the financial statement levels will not affect the planned nature
and timing of audit procedures, only the extent of those procedures.
d. Materiality levels for particular classes of transactions, account balances, or disclosures might
also need to be revised.
165. Which of the following statements is correct regarding the predictability of analytical procedures in
a financial statement audit?
a. Relationships involving only balance sheet accounts tend to be more predictable than
relationships involving income statement accounts.
b. Relationships involving income statement accounts tend to be more predictable than
relationships involving only balance sheet accounts.
c. Relationships involving transactions subject to management discretion tend to be more
predictable than automated transactions.
d. Relationships in a dynamic environment tend to be more predictable than relationships in a
stable environment.
166. Management's responses to inquiries can be corroborated by each of the following, except:
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a. Visits to the entity's premises and plant facilities.
b. Inspection of documents and internal control manuals.
c. Preparation of the summary of unadjusted differences.
d. Observation of entity activities and operations.
167. In performing interviews and examining documents related to preliminary work in a financial
statement audit of an entity, an auditor identifies a business risk associated with plans for a new
product line. What should the auditor do as a result?
a. Modify the scope of the engagement to include an analysis of the budget for the new product
line and consider the new risk in conjunction with other risks after the budget items have been
analyzed.
b. Analyze the newly identified risk in conjunction with economic circumstances related exclusively
to the new product line and consider whether there is an immediate consequence for the risk of
material misstatement for affected classes of transactions.
c. Modify the financial statement disclosures to include the newly identified risk if it is likely that
the new product line will have an adverse effect on the company’s profitability.
d. Analyze the newly identified risk in conjunction with other known business risks and consider
whether there is an immediate consequence for the risk of material misstatement at various
levels of the audit.
168. Which of the following most accurately describes the process of a walkthrough?
a. Testing and documenting the results of tests of selected controls.
b. Inspection of selected documents, records, and internal control documentation.
c. Observation of an entity's activities and operations.
d. Following a transaction from its origination until it is reflected in the financial statements.
169. When planning an engagement to examine the effectiveness of the entity’s internal control, a
practitioner would be least likely to consider which of the following factors?
a. Preliminary judgments about the effectiveness of internal control.
b. The extent of recent changes in the entity and its operations.
c. The type of available evidential matter pertaining to the effectiveness of the entity’s internal
control.
d. The evaluation of the operating effectiveness of the controls.
170. How would an auditor most appropriately respond to a heightened assessed risk of material
misstatement?
a. By obtaining a management representation
b. By performing analytical procedures, but not substantive procedures, at period end.
c. By assigning more experienced staff or those with specialized skills to high-risk areas.
d. By performing tests of controls at interim-and period-end dates.
171. All else being equal, as the level of materiality decreases, the amount of evidence required will:
a. Remain the same
b. Increase
c. Decrease
d. Change in an unpredictable fashion
172. Of the following procedures, which is not considered part of “obtaining an understanding of the
client’s environment?”
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and disbursements.
173. Which of the following is not a way in which auditors use the concept of overall materiality?
a. As a guide to planning the audit
b. As a guide to the evaluation of evidence
c. As a guide for making decisions about the audit report
d. As a guide for assessing control risk
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174. This term refers to inherent risk factor which arises from inherent limitations in the ability to
prepare required information in an objective manner, due to limitations in the availability of
knowledge or information.
a. Change c. Subjectivity
b. Bias d. Constraint
175. Which of the following statements is most correct concerning audit risk?
a. Audit risk can be eliminated by having the correct audit procedures.
b. Audit risk cannot be quantified with certainty.
c. Audit risk is the same for all audit client in the same industry.
d. Audit risk can be quantified with a reasonable degree of certainty.
176. Which of the following is most likely to be used as a materiality benchmark for a hedge fund
company?
a. Total revenues
b. Total assets under management
c. Earnings before income taxes
d. Total equity
177. The amount or amounts set by the auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole.
a. Performance materiality
b. Tolerable misstatement
c. Tolerable deviation
d. Particular FS items materiality
178. Which of the following aspects of audit risk is controllable to some extent by the auditor?
a. Inherent Risk
b. Control Risk
c. Risk of Material Misstatements
d. Detection Risk
179. When is the use of analytical procedures required in an audit?

I. In the planning phase
II. In the evidence-gathering phase
III. In the concluding phase
a. I only
b. I and II only
c. I and III only
d. I, II, and III
180. In response to an increased level of assessed risk of material misstatement, an auditor would
generally:
a. not make changes to the nature, timing, or extent of further audit procedures.
b. increase the emphasis on professional skepticism when gathering and evaluating audit evidence
with the audit team.
c. perform more substantive audit procedures at an interim date instead of at period end.
d. perform additional tests of controls at an interim date to eliminate the need for substantive
tests at period end.
181. Analytical procedures are required at the planning stage of all audits and as:
a. Tests of control
b. Substantive procedures
c. A part of the final overall review
d. Computer generated procedures
182. Which of the following best describes why auditors are concerned with detecting related party
transactions?
a. The financial statements must often be adjusted for the effects of material related party
transactions.
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b. Material related party transactions must be disclosed in the notes to the financial statements.
c. The substance of related party transactions will differ from their form.
d. In a related party transaction, one party can exercise significant influence over the other party.
183. Which of the following is not among the risk assessment procedures that the auditor should
perform in obtaining an understanding of the entity and its environment, including its internal
control?
a. Inquiries of management and others within the entity
b. Analytical procedures
c. Observation and inspection
d. Confirmation
184. The audit procedure that may be helpful in identifying the existence of unusual transactions
or events, and amounts, ratios and trends that may indicate matters that have financial
statement and audit implications is
a. inquiries of management.
b. observation and inspection.
c. confirmation.
d. analytical procedures.
185. What is the primary means of dealing with risk in planning decisions related to audit evidence?
a. Selection of more effective tests of details of balances.
b. Application of the audit risk model.
c. Establishing a lower preliminary judgment about materiality.
d. Allocating materiality judgment to segments.
186. 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
187. Which of the following is an example of the concept of inherent risk?

a. Humans make more errors than computers; therefore, a manual accounting system is riskier
than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so the risk that there will
be errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible than those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller sample sizes.
188. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at yearend
b. Nature of substantive tests from a less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one time
d. Assessed level of inherent risk to a higher amount
189. An attitude that includes a questioning mind and a critical assessment of audit evidence
is referred to as
a. due professional care.
b. reasonable assurance.
c. professional skepticism.
d. supervision.
190. An auditor who uses the work of an expert may refer to the expert in the auditor's report
if the
a. auditor believes that the expert's findings are reasonable in the circumstances.
b. expert's findings support the related assertions in the financial statements.
c. auditor modifies the report because of the difference between the client's and the expert's
valuations of an asset.
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d. expert's findings provide the auditor with greater assurance of reliability about management's
representations.
191. Analytical procedures performed as ______________ may identify aspects of the entity of which
the auditor was unaware and may assist in assessing the risks of material misstatement to provide
a basis for designing and implementing responses to the assessed risks.
b. Substantive procedures
c. Concluding procedures
d. All of the above are correct.
192. Statement I: The overall audit strategy sets the scope, timing and direction of the audit,
and guides the development of the more detailed audit plan.
Statement II: One of the contents of the overall audit strategy is the nature, timing, and extent of
risk assessment procedures that the auditor intends to perform to obtain understanding of the
entity.
a. True, True
b. True, False
c. False, True
d. False, False
193. Which of the following is least likely a consideration in establishing the overall audit strategy for an
initial audit?
a. Industry–specific reporting requirements such as reports mandated by industry regulators.
b. The need for a statutory audit of standalone financial statements in addition to an audit for
consolidation purposes.
c. Overall materiality established by the predecessor auditor in prior year’s audit.
d. Whether the entity has an internal audit function and, if so, whether, in which areas and to
what extent, the work of the function can be used, or internal auditors can be used to provide
direct assistance, for purposes of the audit.
194. A financial statement audit client has an information processing system where all information is
transmitted, processed, and maintained electronically. Because the company has very little tangible
data available, the auditor has decided that it will be impossible to do enough substantive testing to
reduce the risk of material misstatement to an acceptably low level. What should the auditor do in
that situation?
a. Express a qualified opinion or disclaim an opinion.
b. Withdraw from the engagement.
c. Perform additional tests of controls to reduce the risk of material misstatement.
d. Recommend that the client convert a portion of the information processing system to a manual
system so backup documentation can be made available to the auditor.
195. 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.
196. Holding other planning considerations equal, a decrease in the amount of misstatement in a class
of transactions that an auditor could tolerate most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
d. Decrease the extent of auditing procedures to be applied to the class of transactions.
197. Which of the following most likely would cause an auditor to consider whether a client's financial
statements contain material misstatements?
a. Management did not disclose to the auditor that it consulted with other accountants about
significant accounting matters.
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b. The chief financial officer will not sign the management representation letter until the last day
of the auditor's field work.
c. Audit trails of computer-generated transactions exist only for a short time.
d. The results of an analytical procedure disclose unexpected differences
Fraud, Error and Non-compliance

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

Statement 1: The objective of the auditor is to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels thereby
providing a basis for designing and implementing responses to the assessed risks of material
misstatement.
Statement 2: When the auditor intends to use information obtained from the auditor’s previous
experience with the entity and from audit procedures performed in previous audits, the auditor
shall evaluate whether such information remains relevant and reliable as audit evidence for the
current audit.
200. Statement I: If the auditor concludes that the identified or suspected non-compliance has a
material effect on the financial statements and has not been adequately reflected in the financial
statements, the auditor shall express a qualified opinion or disclaim an opinion on the financial
statements.
Statement II: If the auditor is precluded by management or those charged with governance from
obtaining sufficient appropriate audit evidence to evaluate whether non-compliance that may be
material to the financial statements has, or is likely to have, occurred, the auditor shall express a
qualified opinion or adverse opinion on the financial statements based on a limitation on the scope
of the audit.
201. During the course of audit engagement, the CPA needed additional studies and consultation with
experts. This additional study and consultation is deemed to be
a. An unusual practice which should have voided the audit engagement
b. Lack of competence on the part of the CPA
c. An appropriate part of the professional conduct of the audit engagement
d. Undertaken as a responsibility of management
202. If an auditor establishes a relatively high level for materiality, then the auditor will:
a. accumulate more evidence than if a lower level had been set.
b. accumulate less evidence than if a lower level had been set.
c. accumulate approximately the same evidence as would be the case were materiality lower.
d. accumulate an undetermined amount of evidence.
203. An auditor may achieve audit objectives related to particular assertions by

a. performing analytical procedures.
b. adhering to a system of quality control.
c. preparing auditor working papers.
d. increasing the level of detection risk.
204. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements most likely would withdraw from the engagement if
a. The illegal act is a violation of generally accepted accounting principles.
b. The client does not take the remedial action that the auditor considers necessary.
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c. The illegal act was committed during a prior year that was not audited.
d. The auditor has already assessed control risk at the maximum level.
205. Which of the following statements best describes the auditor’s responsibility regarding the detection
of material errors and fraud?
a. The auditor is responsible for the failure to detect material errors and fraud only when such
failure results from the nonapplication of generally accepted accounting principles.
b. Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the
existence of fraud risk factors.
c. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transactions even if there is no
evidence that material errors and fraud may exist.
206. While performing their audit, the audit team uncovers fraud that is likely to have an immaterial
effect on the financial statements taken as whole. In this case the auditors should
a. Plan on additional audit procedures to determine the exact amount of the fraud.
b. Communicate with legal authorities as to the identity of the fraudsters.
c. Disclose the fraud to the appropriate level of management or to the audit committee.
d. Call the whistleblower hotline and name the suspected individuals.
207. Auditors may identify conditions during fieldwork that change or support a judgment about the
initial assessment of fraud risks. Which of the following is not a condition which should alert an
auditor that the initial assessment should be changed?
a. Preliminary assessment of control risk has been modified
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and management
d. Missing or conflicting evidence
208. While performing their audit, the audit team uncovers fraud that is likely to have an immaterial
effect on the financial statements taken as whole. In this case the auditors should
a. Plan on additional audit procedures to determine the exact amount of the fraud.
b. Communicate with legal authorities as to the identity of the fraudsters.
c. Disclose the fraud to the appropriate level of management or to the audit committee.
d. Call the whistleblower hotline and name the suspected individuals.
209. Auditors may identify conditions during fieldwork that change or support a judgment about the
initial assessment of fraud risks. Which of the following is not a condition which should alert an
auditor that the initial assessment should be changed?
a. Preliminary assessment of control risk has been modified
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and management
d. Missing or conflicting evidence
210. While testing a sample of an audit client's bank reconciliations during the year under audit, an
auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner.
The auditor suspects there may be fraud. Which of the following audit responses is most
appropriate in this situation?
a. Because the findings are not material, the auditor should project the errors to the population
and consider the materiality of the projected misstatement in the auditor's concluding
procedures.
b. The auditor should consider the implications for the integrity of management or employees and
the possible effect on other aspects of the audit.
c. The auditor should focus on material misstatements and not consider these immaterial findings
or potential errors further.
d. The auditor should report the finding to the appropriate level of management immediately.
211. Which of the following statements best describes the auditor’s responsibility regarding the detection
of material errors and fraud?
a. The auditor is responsible for the failure to detect material errors and fraud only when such
failure results from the nonapplication of generally accepted accounting principles.
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b. Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the
existence of fraud risk factors.
c. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transactions even if there is no
evidence that material errors and fraud may exist.
Internal Control
212. A primary objective of procedures performed to obtain an understanding of internal control is to
provide an auditor with
a. Knowledge necessary to assess the risks of material misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of management’s policies.
213. 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.
214. In an audit of financial statements in accordance with generally accepted auditing standards, an
auditor is required to
a. Document the auditor’s understanding of the entity’s internal control.
b. Search for significant deficiencies in the operation of internal control.
c. Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
d. Determine whether controls are suitably designed to prevent or detect material misstatements.
215. A primary objective of procedures performed to obtain an understanding of internal control is to

provide an auditor with
a. Knowledge necessary to assess the risks of material misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of management’s policies.
216. After assessing control risk, an auditor desires to seek a further reduction in the assessed level of
control risk. At this time, the auditor would consider whether
a. It would be efficient to obtain an understanding of the entity’s information system.
b. The entity’s controls have been implemented.
c. The entity’s controls pertain to any financial statement assertions.
d. Additional audit evidence sufficient to support a further reduction is likely to be available.
217. Assessing control risk at a low level most likely would involve
a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances.
c. Changing the timing of substantive tests by omitting interim-date testing and performing the
tests at year-end.
d. Identifying specific controls relevant to specific assertions.
218. The objective of the test of the operating effectiveness of controls is to determine if
a. Controls are functioning as designed.
b. Necessary controls are absent.
c. Incompatible functions exist.
d. Material dollar errors exist.
219. In a properly functioning control environment, which of the following should not be the
responsibility of the treasurer.
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a. Handling of cash.
b. Data processing.
c. Custody of securities.
d. Establishing credit policies.
220. After obtaining an understanding of internal control and assessing the risk of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that
a. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.
b. Additional evidence to support a further reduction in the risk of material misstatement is not
available.
c. An increase in the assessed level of risk of material misstatement is justified for certain financial
statement assertions.
d. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
221. The objective of tests of details of transactions performed as tests of controls is to

a. Monitor the design and use of entity documents such as prenumbered shipping forms.
b. Determine whether controls have been implemented.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether controls operated effectively.
222. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs
223. Which of the following statements concerning internal control is incorrect?

a. Internal control is affected by people.
b. Internal control is expected to provide absolute assurance.
c. Internal control is a process.
d. Internal control is geared to achieving objectives in the overlapping categories of financial
reporting, compliance and operations.
224. This internal control component is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees.
a. Control activities
b. Monitoring of controls
c. Control environment
d. The entity’s risk assessment process
225. In an audit of financial statements in accordance with generally accepted auditing standards, an
auditor is required to
a. Document the auditor’s understanding of the entity’s internal control.
b. Search for significant deficiencies in the operation of internal control.
c. Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
d. Determine whether controls are suitably designed to prevent or detect material misstatements.
226. Within the context of quality control, a primary purpose of the engagement performance element is
to help ensure that
a. CPA firm personnel have adequate technical training.
b. Engagements are adequately supervised.
c. The CPA firm undertakes only those engagements it is competent to perform.
d. CPA firm personnel comply with relevant ethical requirements.
227. An independent CPA performing an external audit may decide, based on professional judgment, to
use the direct assistance of internal auditors in
I. Obtaining an understanding of the entity, including internal control
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II. Performing test of the operating effectiveness of controls
III. Performing substantive tests
a. I only
b. I and II only
c. I and III only
d. I, II, and III
228. Which is correct?

a. The auditor’s understanding of internal control must be documented through process
flowcharts.
b. The auditor’s understanding of internal control must be documented through a narrative of the
activities in the business processes.
c. The auditor’s understanding of internal control may or may not be documented based on
professional judgment.
d. The auditor’s understanding of internal control may be documented in different forms and its
extent may vary across audits.
229. 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.
230. To determine whether internal control effectively minimized errors of failure to bill a customer for a
shipment, the auditor would select a sample of transactions from the population represented by the
a. Customer order file
b. Shipping records file
c. Subsidiary customer accounts ledger
d. Sales invoice
231. Which of the following statements concerning the relevance of various types of controls to a
financial statement audit is correct?
a. All controls are ordinarily relevant to a financial statement audit.
b. Controls over safeguarding of assets are of primary importance, while controls over the
reliability of financial reporting may also be relevant.
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a
financial statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach
is taken.
232. Before applying substantive procedures to the details of asset accounts at an interim date, an
auditor should assess
a. Control risk at below the maximum level.
b. Inherent risk at the maximum level.
c. The difficulty in controlling the incremental audit risk.
d. Materiality for the accounts tested as insignificant.
233. Which of the following is not an advantage of an IT system used as part of the entity's internal
control system?
a. A reduced amount of information is required to be reviewed manually.
b. Detection of potential problems only if the computer is programmed to do so.
c. The delivery, timeliness and accuracy of information are maintained as the volume of
transactions increases.
d. Potentially fewer errors as individual calculation discrepancies are reduced.
234. The mailing of disbursement checks and remittance advice should be controlled by the employee
who
a. Signed the checks last.
b. Approved the vouchers for payment.
c. Matched the receiving reports, purchase orders, and vendors' invoices.
d. Verified the mathematical accuracy of the vouchers and remittance advice.
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235. Which of the following statements about auditor documentation of the client’s internal controls is
correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. Documentation is desirable but not necessary.
d. No one particular form of documentation is necessary.
236. The following are components of internal control, except

a. Control activities
b. The entity’s risk assessment process
c. Control environment
d. Business risk
237. An auditor’s flowchart of an entity’s information system is a diagrammatic representation that

depicts the auditor’s
a. Documentation of the study and evaluation of the internal control system.
b. Understanding of the system.
c. Understanding of the types of fraud that are probable, given the present system.
d. A program for tests of controls.
238. An audit client failed to maintain copies of its procedures manuals and organizational flowcharts.
What should the auditor do in an audit of financial statements?
a. Issue a qualified opinion on the basis of a scope limitation.
b. Document the auditor’s understanding of internal control.
c. Assess control risk at the maximum level.
d. Restrict the auditor’s responsibility to assess the effectiveness of controls in the audit
engagement letter.
239. When an auditor discovered that certain control activities were ineffective, the auditor
a. Level of detection risk.
b. Extent of tests of details.
c. Level of inherent risk.
d. Extent of tests of controls.
240. An audit client failed to maintain copies of its procedures manuals and organizational flowcharts.
What should the auditor do in an audit of financial statements?
a. Issue a qualified opinion on the basis of a scope limitation.
b. Document the auditor’s understanding of internal control.
c. Assess control risk at the maximum level.
d. Restrict the auditor’s responsibility to assess the effectiveness of controls in the audit
engagement letter.
241. A client erroneously recorded a large purchase twice. Which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling vendor’s monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.
242. A walkthrough test involves tracing a few transactions through the financial reporting system. This
procedure may serve as a ________.
a. Risk assessment procedure
b. Test of control
c. Both A and B
d. Neither A nor B
243. After obtaining an understanding of internal control and assessing the risk of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that
a. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.
P a g e | 31
b. Additional evidence to support a further reduction in the risk of material misstatement is not
available.
c. An increase in the assessed level of risk of material misstatement is justified for certain financial
statement assertions.
d. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
244. The objective of tests of details of transactions performed as tests of controls is to

a. Monitor the design and use of entity documents such as prenumbered shipping forms.
b. Determine whether controls have been implemented.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether controls operated effectively.
245. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.
246. Statement I: An entity’s risk assessment process includes how management identifies business risks
relevant to the preparation of financial statements in accordance with the entity’s applicable
financial reporting framework, estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to respond to and manage them and the results thereof.
Statement II: Management’s ability to make appropriate decisions in managing and controlling the
entity’s activities and to prepare reliable financial reports affects the quality of system–generated
information.
Statement III: Separate evaluations of internal controls are usually performed by internal auditors.
a. All statements are true.
b. Two of the statements are true.
c. Only one statement is true.
d. All of the statements are false.
247. Statement I: The entity’s risk assessment process is an iterative process for identifying and
analyzing risks to achieving the entity’s objectives and forms the basis for how management or
those charged with governance determine the risks to be managed.
Statement II: Adhering to segregation of duties principle, salespersons should not have the ability
to modify product prices files or commission rates.
248. 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.
249. Significant deficiencies need to be communicated to the company’s audit committee because:
a. they represent material weaknesses that allow fraud to be perpetrated.
b. they represent significant design flaws in internal controls.
c. they represent falsification of accounting records.
d. they represent disclosure of information related to issuance of a “going concern” opinion.
250. Which of the following questions is most likely to be included by an auditor on an internal control
questionnaire?
a. Are direct borrowings on notes payable authorized by the board of directors?
b. Are assets that collateralize notes payable critically needed for the entity’s continued existence?
c. Are two or more authorized signatures required on checks that repay notes payable?
d. Are the proceeds from notes payable used for the purchase of noncurrent assets?
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251. Two months before the year end, the bookkeeper erroneously recorded the receipt of a long-term
bank loan by a debit to cash and a credit to sales. Which of the following is the most effective
procedure for detecting this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare a year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.
252. During its fiscal year, a company issued, at a discount, a substantial amount of first mortgage
bonds. When performing audit work, the independent auditor
a. Confirms the existence of the bondholders.
b. Reviews the minutes for authorization.
c. Traces the net cash received from the issuance to the bonds payable account.
d. Inspects the records maintained by the bond trustee.
253. Which of the following control activities most likely would justify a reduced level of control risk
concerning property, plant and equipment acquisitions?
a. Periodic physical inspection of PPE by the internal audit staff.
b. Approval of periodic depreciation entries by a supervisor independent of the accounting
department.
c. The review of prenumbered purchase orders to detect unrecorded trade-ins.
d. Comparison of current year PPE account balances with prior-year figures.
254. Which of the following statements correctly describes the "top-down approach" used during an
audit of internal control over financial reporting?
a. Begin reviewing balance sheet accounts and then review income statement accounts.
b. Begin reviewing income statement accounts and then review balance sheet accounts.
c. Begin by understanding the overall risks to internal control over financial reporting at the
financial statement level.
d. Begin by understanding the overall risks to internal control over financial reporting at the
general ledger level.
255. If an auditor is obtaining an understanding of an entity’s information and communication

component of internal control, which of the following factors should the auditor assess?
a. The integrity and ethical values of top management.
b. The philosophy and operating style of management to promote effective internal control over
financial reporting.
c. The classes of transactions in the issuer’s operations that are significant to the issuer’s financial
statements.
d. The oversight responsibility over financial reporting and internal control by the board or audit
committee.
256. Which of the following situations represents a limitation, rather than a failure, of internal control?
a. A jewelry store employee steals a small necklace from a display cabinet.
b. A bank teller embezzles several hundred dollars from the cash drawer.
c. A purchasing employee and an outside vendor participate in a kickback scheme.
d. A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the
difference.
257. In obtaining an understanding of an audit client’s internal controls, which of the following is not
among the procedures performed by an auditor?
a. Inquiries
b. Observation
c. Analytical Procedures
d. Walkthrough
258. Which of the following types of audit procedures according to purpose is not always required to be
performed by an auditor?
b. Test of controls
c. Substantive procedures
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d. All of the above are required procedures.
259. An auditor with the CPA firm of Winston and Churchill is working to understand a client’s inventory
procurement system. In hopes of assessing the control risk present in this system, the auditor is
reviewing a flowchart created by company employees. One symbol has a diamond shape. What
does that symbol represent?
a. A document within the system
b. A decision made within the system
c. A process carried out within the system
d. The input of information within the system
260. When considering internal control, an auditor should be aware of the concept of reasonable
assurance, which recognizes that
a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.
b. Adequate safeguards over access to assets and records should permit an entity to maintain
proper accountability.
c. Establishing and maintaining internal control is an important responsibility of management.
d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.
261. Which of the following observations, made during the preliminary survey of a local department
store's disbursement cycle, reflects a control strength?
a. Individual department managers use pre-numbered forms to order merchandise from vendors.
b. The receiving department is given a copy of the purchase order complete with a description of
goods, quantity ordered, and extended price for all merchandise ordered.
c. The treasurer's office prepares checks for suppliers based on vouchers prepared by the
accounts payable department.
d. Individual department managers are responsible for the movement of merchandise from the
receiving dock to storage or sales areas as appropriate.
262. The auditor is studying internal control policies and procedures within the sales, shipping, and
billing subset of the revenue cycle. Which of the following conditions suggests a need for additional
testing of controls?
a. Internal control is found to be weak with regard to shipping and billing.
b. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is
attributable to three major customers.
c. Internal control over billing and shipping is thought to be strong and the auditor considers
additional testing of selected controls will result in a major reduction in substantive testing.
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided
among a large number of customers.
263. An auditor is required to obtain a basic understanding of the client’s internal control to plan the
audit. The auditor may then decide to perform tests of controls on all internal control procedures:
a. that would aid in preventing fraud.
b. documented in the flowchart.
c. considered to be weaknesses that might allow errors to enter the accounting system.
d. considered to be strengths for which the auditor desires further reduction in the assessed level
of control risk.
264. Which of the following is the best way to compensate for the lack of adequate segregation of duties
in a small organization?
a. Disclosing lack of segregation of duties to the external auditors during the annual review
b. Replacing personnel every three or four years
c. Requiring accountants to pass a yearly background check
d. Allowing for greater management involvement and oversight of incompatible activities
265. Which of the following is usually considered a monitoring activity?

a. segregating duties of employees
b. processing entity transactions
c. analyzing new information systems
d. using information from customer complaints
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266. Which of the following least likely identifies an inherent limitation to internal control?
a. breakdowns in internal control because of employee mistakes
b. collusion involving two or more employees
c. faulty decision making by employees
d. an override of internal controls by a low-level employee
267. Which of the following factors would an auditor most likely consider in evaluating the control
environment for an audit client?
a. Monthly bank reconciliations with supervisor sign-offs.
b. The number of employees in each department.
c. The ethical values demonstrated by management.
d. Organizational structure used for tax purposes.
268. Of the following statements about internal controls, which one is least likely to be correct?
a. Transactions must be properly authorized before such transactions are processed.
b. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
c. Control procedures reasonably ensure that collusion among employees cannot occur.
d. Because of the cost-benefit relationship, a client may apply controls on a test basis.
269. The assessment of control risk must be made in terms of

a. Specific control procedure.
b. Types of potential irregularities.
c. Financial statement assertions.
d. Control environment factors.
270. Which of the following questions would be inappropriate for an auditor to ask a client when
exhibiting an appropriate level of professional skepticism while completing an audit procedure
related to the internal control system?
a. What can go wrong in this process?
b. Which of your employees is a fraudster?
c. What else is important to know about this process?
d. What happens when a key employees goes on vacation?
271. Which statement is correct concerning the relevance of various types of controls to a financial
statement audit?
a. An auditor may ordinarily ignore the consideration of controls when using a substantive audit
approach.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an
audit, but other controls may also be relevant.
c. Controls over safeguarding assets and liabilities are of primary importance, while controls over
the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.
272. In communicating internal control deficiencies to management and/or those charged with
governance, which of the following should be included in the written communication made by the
auditor?
a. A description of the deficiencies and an explanation of their potential effects.
b. Explanation that the purpose of the audit was for the auditor to express an opinion on the
c. Explanation that the audit included consideration of internal control relevant to the preparation
of the financial statements to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal
control.
d. All of the above.
273. For effective internal control, which functions should not be assigned to the company's accounting
department?
a. Reconciling accounting records with existing assets
b. Recording financial transactions
c. Signing payroll checks
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d. Preparing financial reports
274. An internal control questionnaire indicates that an approved receiving report is required to
accompany every check request for payment of merchandise. Which of the following procedures
provides the best evidence of operating effectiveness?
a. Select and examine receiving reports and test whether the related canceled checks are dated
no earlier than the receiving reports.
b. Select and examine receiving reports and test whether the related canceled checks are dated
no later than the receiving reports.
c. Select and examine canceled checks and test whether the related receiving reports are dated
no earlier than the checks.
d. Select and examine canceled checks and test whether the related receiving reports are dated
no later than the checks.
275. 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.
276. When discussing control risk (CR) and the audit risk model, which of the following is false?
a. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be
prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or detect
errors, he/she would assign a low value to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support account balances is
direct.
277. A consideration of internal control made during an audit is usually not sufficient to express an
opinion on an entity's controls because
a. Weaknesses in the system may go unnoticed during the audit engagement.
b. A consideration of internal control is not necessarily made during an audit engagement.
c. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated.
d. Controls can change each year.
278. After testing a client's internal control activities, an auditor discovers a number of significant
deficiencies in the operation of a client's internal controls. Under these circumstances the auditor
most likely would
a. Issue a disclaimer of opinion about the internal controls as part of the auditor's report.
b. Increase the assessment of control risk and increase the extent of substantive tests.
c. Issue a qualified opinion of this finding as part of the auditor's report.
d. Withdraw from the audit because the internal controls are ineffective.
279. During an audit of an entity’s financial statements, an auditor should perform tests of controls to
obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if
a. the auditor does not presume that client management has committed fraud.
b. more financial documentation is available through tests of controls.
c. substantive procedures alone cannot provide sufficient appropriate audit evidence.
d. the auditor does not intend to rely on the operating effectiveness of controls.
280. Internal auditors review the adequacy of the company's internal control system primarily to
a. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives.
b. Determine whether the internal control system provides reasonable assurance that the
company's objectives and goals are met efficiently and economically.
c. Ensure that material weaknesses in the system of internal control are corrected.
d. Determine whether the internal control system ensures that financial statements are fairly
presented.
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281. Before reducing assessed control risk, the auditor obtains reasonable assurance that the internal
control procedures are in use and operating as planned. The auditor obtains this assurance by
performing
a. tests of details of balances.
b. substantive tests of transaction.
c. tests of controls.
d. tests of trends and ratios.
282. 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.
283. Which officer has the responsibility for the signature plate for checks?
a. President
b. Secretary
c. Treasurer
d. Vice President for Finance
284. Which is considered a specific type of transaction authorization?

a. Establishment of requirements to be met in determining a customer's credit limits.
b. Setting of automatic reorder points for material or merchandise.
c. Approval of a detailed construction budget for a warehouse.
d. Establishment of sales prices for products to be sold to any customer.
Audit Evidence and Substantive Testing

285. All the information used by the auditor in arriving at the conclusions on which the audit
opinion is based is called
a. Audit information
b. Audit evidence
c. Accounting records
d. Corroborating information
286. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Potentially unrecorded items to the financial statements.
b. Financial statements to the potentially unrecorded items.
c. Supporting evidence to the accounting records.
d. Accounting records to the supporting evidence.
287. 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.
288. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditor most likely would compare the
a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.
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289. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls
over the invoicing function allow goods to be shipped that are not invoiced. The inadequate
controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.
290. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high, an auditor would probably
a. Insist that the client perform physical counts of inventory items several times during the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls of the inventory cycle.
d. Request the client to schedule the physical inventory count at the end of the year.
291. Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor
b. Correspondence between auditor and vendors
c. Copies of sales invoices inspected by the auditor
d. Computations made by the auditor
292. An auditor selected items for test counts while observing a client’s physical inventory. The
auditor then traced the test counts to the client’s inventory listing. This procedure most
likely obtained evidence concerning management’s assertion of
a. Existence
b. Rights and obligations
c. Completeness
d. Valuation and allocation
293. Which of the following is the best example of a substantive procedure?

a. Examining a sample of cash disbursements to test whether expenses have been properly
approved.
b. Confirmation of balances of accounts receivable.
c. Comparison of signatures on checks to a list of authorized signers.
d. Flowcharting of the client's cash receipts system.
294. Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor
b. Correspondence between auditor and vendors
c. Copies of sales invoices inspected by the auditor
d. Computations made by the auditor
295. Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level
of control risk from that originally planned. To achieve an overall audit risk level that is substantially
the same as the planned audit risk level, the auditor would.
a. Increase materiality levels.
b. Decrease detection risk.
d. Increase inherent risk.
296. An audit supervisor reviewed the work performed by the staff to determine if the audit was
adequately performed. The supervisor accomplished this by primarily reviewing which of the
following?
a. Checklists. c. Analytical procedures.
b. Working papers. d. Financial statements.
297. Holding other planning considerations equal, a decrease in the amount of misstatement in a class
of transactions that an auditor could tolerate most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
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d. Decrease the extent of auditing procedures to be applied to the class of transactions.
298. To determine whether internal control effectively minimized errors of failure to bill a customer for a
shipment, the auditor would select a sample of transactions from the population represented by the
a. Customer order file
b. Shipping records file
c. Subsidiary customer accounts ledger
d. Sales invoice
299. After assessing control risk, an auditor desires to seek a further reduction in the assessed level of
control risk. At this time, the auditor would consider whether
a. It would be efficient to obtain an understanding of the entity’s information system.
b. The entity’s controls have been implemented.
c. The entity’s controls pertain to any financial statement assertions.
d. Additional audit evidence sufficient to support a further reduction is likely to be available.
300. Assessing control risk at a low level most likely would involve
a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances.
c. Changing the timing of substantive tests by omitting interim-date testing and performing the
tests at year-end.
d. Identifying specific controls relevant to specific assertions.
301. During an audit engagement, data are compiled and included in the audit working papers. The
working papers are:
a. a client-owned record of conclusions reached by the auditors who performed the engagement.
b. evidence supporting financial statements.
c. support for the auditor’s compliance with generally accepted auditing standards.
d. a record to be used as a basis for the following year’s engagement.
302. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an
interim date rather than as of the statement of financial position (SFP) date. The auditor should be
aware that this practice:
a. Eliminates the use of certain statistical sampling methods that would otherwise be available.
b. Presumes that the auditor will reperform the tests as of the SFP date.
c. Should be especially considered when there are rapidly changing economic conditions.
d. Potentially increases the risk that errors that exist at the SFP date will not be detected.
303. Tests for unrecorded assets typically involve tracing from:

a. Source documents to recorded journal entries.
b. Source documents to observations.
c. Recorded journal entries to documents.
d. Recorded journal entries to observations.
304. An entity’s accounting records generally include the records of initial entries and supporting records
including
a. Confirmations from third parties.
b. Information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection.
c. Worksheets and spreadsheets supporting cost allocations.
d. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.
305. If a management's expert’s work is used to prepare the information to be used as audit evidence,
the auditor shall
I. Evaluate the competence, capabilities and objectivity of the management's expert.
II. Obtain an understanding of the work of the management’s expert.
III. Evaluate the appropriateness of the management's expert’s work as audit evidence for the
relevant assertion.
a. I and II only c. II and III only
b. I and III only d. I, II and III
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306. Which of the following generalizations does not relate to the reliability of audit evidence?
a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference.
c. Audit evidence that is generated internally is more reliable when the related controls imposed
by the entity are effective.
d. An auditor's opinion, to be economically useful, is formed within a reasonable time and based
on audit evidence obtained at a reasonable cost.
307. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditor most likely would compare the
a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.
308. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high, an auditor would probably
a. Insist that the client perform physical counts of inventory items several times during the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls of the inventory cycle.
d. Request the client to schedule the physical inventory count at the end of the year.
309. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls
over the invoicing function allow goods to be shipped that are not invoiced. The inadequate
controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.
310. Under which circumstance is it likely that the extent of substantive procedures will be expanded
beyond that anticipated in the audit plan?
a. The auditors have determined that controls have been implemented (placed in operation) but, in
accordance with the audit plan, have performed no tests of controls.
b. Certain controls do not leave a trail of documentary evidence.
c. Deviation rates were greater than zero and approached anticipated levels.
d. The operating effectiveness of certain controls was found to be less than expected, although no
material misstatements were identified.
311. Which of the following would be least likely to diminish the validity of evidence obtained through
the confirmation of accounts receivable?
a. The confirmations are sent on the client's letterhead.
b. The confirmations are mailed to customers by the internal auditors.
c. The client's mailroom personnel closely monitor and inspect confirmations during mailing.
d. The return address on the envelope used to send the confirmation request is that of the client.
312. The understanding obtained by the auditor regarding internal control and the final assessed level of
control risk is used primarily to determine the nature, timing, and extent of
a. Sampling procedures
b. Test of controls
c. Substantive procedures
d. Further audit procedures
313. While testing a sample of an audit client's bank reconciliations during the year under audit, an
auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner.
The auditor suspects there may be fraud. Which of the following audit responses is most
appropriate in this situation?
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a. Because the findings are not material, the auditor should project the errors to the population
and consider the materiality of the projected misstatement in the auditor's concluding
procedures.
b. The auditor should consider the implications for the integrity of management or employees and
the possible effect on other aspects of the audit.
c. The auditor should focus on material misstatements and not consider these immaterial findings
or potential errors further.
d. The auditor should report the finding to the appropriate level of management immediately.
314. When an auditor discovered that certain control activities were ineffective, the auditor
a. Level of detection risk.
b. Extent of tests of details.
c. Level of inherent risk.
d. Extent of tests of controls.
315. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by
a. Confirmation with individual holders of retired bonds.
b. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
c. Examination and count of the bonds retired during the year.
d. Confirmation with the bond trustee.
316. A receiving department compares inventory items received with copies of purchase orders. The
purchase orders list the vendor’s name and do not list the quantities of the material ordered. Using
the purchase orders, the receiving department is most likely to detect:
a. Deliveries for which no purchase order was issued.
b. Unapproved sales orders.
c. Partial deliveries.
d. Deliveries of inferior quality than what was expected.
317. Which of the following controls would most likely detect equipment acquisitions that are
misclassified as maintenance expense?
a. Investigation of variances within a formal budgeting system.
b. Authorization by the board of directors of significant equipment acquisitions.
c. Independent verification of invoices for disbursements recorded as equipment acquisitions.
d. Segregation of duties of employees in the accounts payable department.
318. An entity has leased an asset and appropriately recorded a finance lease because of the existence
of a bargain purchase option. The auditor should determine
a. Whether the interest rate used in computing the present value of the minimum lease payments
is the interest rate implicit in the lease.
b. That the cost recorded by the entity is the cost of the property to the lessor.
c. That the leased property is being depreciated over the lease term.
d. Whether the sum of the minimum lease payments, equals the fair value of the property.
319. Assets may suffer to impairment in value for a variety of reasons, but not likely as a result of:
a. A corporate restructuring.
b. Significant increase in market value.
c. Slumping demand for uncompetitive products.
d. Obsolescence
320. An auditor is verifying a company’s ownership of equipment. What is the best evidence of
ownership?
a. An interview with the equipment custodian verifying company ownership.
b. The presence of the equipment on the company’s statement of financial position.
c. The current year’s depreciation expense journal entry.
d. A canceled check written to acquire the equipment.
321. Why is PPE typically considered to be one of the accounts least susceptible to fraud?
a. Internal control on this account is inherently effective.
b. The depreciated values are always smaller than cost.
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c. For most companies, the recorded amounts of PPE are immaterial.
d. The inherent risk of PPE is usually low.
322. A "bill and hold" scheme is most likely to include:

a. Shipment of items to a customer beyond what the customer has ordered.
b. Recording as sales items that the company retains as of year-end.
c. Billing of items that customers hold for future revenue production purposes.
d. Selling items at substantial discounts near year-end.
323. Which of the following shall be included in the firm’s response to circumstances indicating an
engagement team omitted a required audit procedure or the report may be inappropriate?
I. Respond appropriately to relevant professional standards and applicable legal and
regulatory requirements.
II. When the report is considered inappropriate, consider the implications and take appropriate
action, but avoid obtaining legal advice.
a. I only c. Both I and II
b. II only d. Neither I nor II
324. An auditor determines that the management integrity is high, the risk of account misstatements is
low, and the client’s information system is reliable. Which of the following conclusions can be
reached regarding the need to perform direct tests of account balances?
a. Direct tests should be limited to material account balances, and the extent of testing should be
sufficient to corroborate the auditor’s assessment of low risk.
b. Direct tests of account balances are not needed.
c. Direct tests of account balances are necessary if audit risk was set at a low level but are not
necessary if audit risk was set at a high level.
d. Direct tests should be performed on all account balances to independently verify the
correctness of the financial statements.
325. Which of the following types of documentary evidence should the auditor consider to be
the most reliable?
a. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
b. A check, issued by the company and bearing the payee’s endorsement, that is included with the
bank statements mailed directly to the auditor.
c. A working paper prepared by the client’s controller and reviewed by the client’s treasurer.
d. Confirmation of an account payable balance mailed by and returned directly to the auditor.
326. Which of the following procedures would be appropriate to test the existence assertion during an
audit of accounts receivable?
a. Trace transactions from the subsidiary ledger to the general ledger.
b. Send confirmations to customers.
c. Trace a sample of invoices to recording in the general ledger.
d. Determine that all shipments before year end are recorded as sales.
327. Which of the following errors is most likely to be detected by examining unrecorded expenditure
invoices on randomly selected dates during the month after fiscal yearend?
a. Sales are overstated for the current month.
b. Expenses are overstated for the fiscal year just ended.
c. Accounts payable are understated at fiscal year end.
d. Inventory are overstated at fiscal year end.
328. The negative form of accounts receivable confirmation request is useful except when
a. internal control surrounding accounts receivable is considered to be effective.
b. a large number of small balances are involved.
c. the auditor has reason to believe the persons receiving the requests are likely to give them
consideration.
d. individual account balances are relatively large.
329. Audit working papers should not

a. Include any client-prepared papers or documents other than those prepared by the CPA or his
assistant.
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b. Be kept by the CPA after review and completion of the audit except for items required for the
income tax return or the permanent file.
c. Be submitted to the client to support the financial statements and to provide evidence of the
audit work performed.
d. By themselves be expected to provide sufficient support for the auditor’s opinion.
330. An auditor traces the serial numbers on equipment to an entity’s sub-ledger. Which of the following
management assertions is supported by this test?
a. Accuracy, valuation and allocation.
b. Completeness.
c. Rights and obligations.
d. Presentation.
331. The following statements relate to audit working papers. Which statement is incorrect?
a. The term “documentation” in PSA 230 means the material (working papers) prepared by and
for, or obtained and retained by the auditor in connection with the performance of the audit.
b. The nature and complexity of the business of the audit client may affect the form and content
of working papers.
c. The auditor is prohibited from utilizing schedules, analyses and other documentation prepared
by the entity.
d. The extent of working papers is a matter of professional judgment since it is neither necessary
nor practical to document every matter the auditor considers.
332. Tracing from receiving reports and vendors’ invoices to the perpetual records are procedures used
to verify________________.
a. completeness of the perpetual records
b. existence of the inventory
c. both completeness of the perpetual records and existence of the inventory
d. statement presentation and classification of inventory
333. Sending confirmation letters to customers for their outstanding balances provide primary evidence
on
a. Completeness and valuation.
b. Valuation and rights and obligations.
c. Rights and obligations and existence.
d. Existence and completeness.
334. 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.
335. Audit working papers are indexed by means of reference numbers. The primary purpose of
indexing is to
a. Support the audit report.
b. Eliminate the need for follow-up reviews.
c. Determine that working papers adequately support findings, conclusions, and reports.
d. Permit cross-referencing and simplify supervisory review.
336. The most reliable type of audit evidence that an auditor can obtain is
a. physical examination by the auditor.
b. calculations by the auditor from company records.
c. confirmations received directly from third parties.
d. external documents.
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337. The auditor looks for an indication on duplicate sales invoices to see if the invoices have been
verified. This is an example of
a. a test of details of balances.
b. a test of control.
c. a substantive test of transactions.
d. both a test of control and a substantive test of transactions.
338. Which of the following control activities is most likely to prevent the improper disposition of
equipment?
a. A periodic analysis of the scrap sales and the repairs and maintenance accounts.
b. Periodic comparison of removal work orders with authorizing documentation.
c. The use of serial numbers to identify equipment that could be sold.
d. A separation of duties between those authorized to dispose of equipment and those authorized
to approve removal work orders.
339. 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.
340. Which of the following controls would most likely detect equipment acquisitions that are
misclassified as maintenance expense?
a. Segregation of duties of employees in the accounts payable department.
b. Authorization by the board of directors of significant equipment acquisitions.
c. Independent verification of invoices for disbursements recorded as equipment acquisitions.
d. Investigation of variances within a formal budgeting system.
341. 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.
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.
342. 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.
343. Renato, CPA is auditing the sales transactions of Shoe Dog Corp for the period ended December 31,
2022. One of the procedures in the audit program includes the tracing of selected debit entries in
the accounts receivable subsidiary ledger back to customer invoices. What objective does Renato,
CPA intend to establish with this procedure?
a. All sales have been recorded.
b. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales
invoices.
c. All sales invoices have been properly posted to customer accounts.
d. Sales invoices represent bona fide sales.
P a g e | 44
344. Which of the following is the most likely reason why auditors often set control risk at a high level
for bonds?
a. Small number of transactions per year.
b. Use of bond certificate book.
c. Outside investors monitor payments.
d. All transactions are approved by the board of directors.
345. 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.
Auditing Transaction Cycles

346. If accounts receivable turned over 7.1 times in 2021, as compared to only 5.6 times in 2020, it is
possible that there were:
a. unrecorded credit sales in 2021.
b. unrecorded cash receipts in 2021.
c. more thorough credit investigations made by the company in late 2021.
d. fictitious sales in 2021.
347. You are auditing the financial statements of a small rural municipality. The receivable balances
represent residents’ delinquent real estate taxes. Control risk is at the maximum. To determine the
existence of the accounts receivable balances at the balance sheet date, you would most likely:
a. send positive confirmation requests.
b. send negative confirmation requests.
c. examine evidence of subsequent cash receipts.
d. inspect internal records such as copies of tax invoices that had been mailed to the residents.
Audit Sampling
348. In examining cash disbursements, an auditor plans to choose a sample using systematic selection
with a random start. The primary advantage of such a systematic selection is that population items:
a. that include irregularities will not be overlooked when the auditor exercises compatible
reciprocal options.
b. may occur in a systematic pattern, thus making the sample more representative.
c. may occur more than once in a sample.
d. do not have to be prenumbered in order for the auditor to use the technique.
349. Which of the following factors will result in a decrease in the sample size?
a. An increase in the extent to which the auditor’s risk assessment takes into account relevant
controls
b. An increase in the expected rate of deviation of the population to be tested
c. An increase in the number of sampling units in the population
d. An increase in the tolerable rate of deviation
350. Which of the following applications of sampling to test controls is most appropriate?
a. Testing a sample of customer orders for evidence of credit approval.
b. Testing a sample of controls to determine segregation of duties between inventory control and
sales processing duties.
c. Testing a sample of accounts receivable confirmations.
d. Testing a sample of the budget center directors' allocation of annual budget to sales units.
351. The major working paper for stockholder’s equity is the

a. Schedule of all activity for each equity account for the year.
b. Confirmation of shares outstanding with stockholders.
c. Carry-forward schedule of all transactions since the initial audit.
d. Subsidiary schedule of stock issued to general ledger control.
P a g e | 45
352. Which of the following actions should the auditor take in response to discovering a deviation from
the prescribed control procedure?
a. Make inquiries to understand the potential consequence of the deviation.
b. Assume that the deviation is an isolated occurrence without audit significance.
c. Report the matter to the next higher level of authority within the entity.
d. Increase sample size of tests of controls.
353. Which of the following misstatements or questionable practices may be uncovered if an auditor
tours an entity’s production facility?
a. Insurance coverage on the facility has lapsed.
b. Overhead has been overapplied.
c. Depreciation expense on fully depreciated machinery has been recognized.
d. Necessary facility maintenance has not been performed.
354. Auditors who prefer statistical sampling to non-statistical sampling may do so because statistical
sampling helps the auditor
a. Measure the sufficiency of the evidential matter obtained
b. Minimize the failure to detect errors and irregularities.
c. Eliminate subjectivity in the evaluation of sampling results
d. Reduce the level of tolerable error to a relatively low amount.
355. Alpha risk in statistical sampling is

a. Related to nonsampling risk.
b. The risk that a material misstatement will occur in a financial statement assertion and the audit
will not detect it.
c. The risk of deciding a book balance is materially misstated when it is fairly stated.
d. The risk of selecting a sample that is too small.
Completing the Audit

356. Auditors often request that the audit client send a letter of inquiry to those attorneys who have
been consulted with respect to litigation, claims, or assessments. The primary reason for this
request is to provide the auditor with:
a. an estimate of the amount of the probable loss.
b. an opinion about whether the loss is possible, probable, or remote.
c. information concerning the progress of cases to date.
d. corroborative evidential matter.
357. Which of the following is not a subsequent events procedure?

a. Review available interim financial information.
b. Read available minutes of meetings of stockholders and directors.
c. Make inquiries with respect to the financial statements covered by the auditor’s previously
issued report if new information has become available during the current examination that
might affect that report.
d. Discuss with officers the current status of items in the financial statements that were accounted
for on the basis of tentative, preliminary, or inconclusive data.
358. Which of the following is least appropriately considered a condition or event that indicates that
there could be substantial doubt about an entity's ability to continue as a going concern?
a. Issuance of bonds at the prevailing interest rate.
b. Uneconomic long-term commitments.
c. Arrearages in dividends.
d. An uninsured or underinsured catastrophe.
359. If a subsequent event occurs after the report date but prior to the release date of an audit report,
resulting in management's revision of the financial statements, then the auditor may do any of the
following, except:
a. Maintain the original date of the report and state that the opinion is limited to the financial
statements as they existed prior to the subsequent event.
b. Perform audit procedures necessary to obtain assurance about the revised financial statements.
P a g e | 46
c. Include an additional date in the audit report that is limited to the revision to the financial
statements.
d. Revise the date of the audit report to reflect the necessity of additional audit procedures.
360. On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial
statements for the year ended January 31. On March 2, the CPA learned that on February 11, the
entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating
financial condition of the entity’s principal customer that led to the customer's bankruptcy.
Management then refused to adjust the financial statements for this subsequent event. The CPA
determined that the information is reliable and that there are creditors currently relying on the
financial statements. The CPA’s next course of action most likely would be to
a. Notify the entity’s creditors that the financial statements and the related auditor’s report should
no longer be relied on.
b. Notify each member of the entity’s board of directors about management’s refusal to adjust the
c. Issue revised financial statements and distribute them to each creditor known to be relying on
d. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the
361. 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.
362. Analytical procedures used in the overall review stage of an audit generally include
a. Gathering evidence concerning account balances that have not changed from the prior year.
b. Retesting control procedures that appeared to be ineffective during the assessment of control
risk.
c. Considering unusual or unexpected account balances that were not previously identified.
d. Performing tests of transactions to corroborate management's financial statement assertions.
363. This refers to the susceptibility of an accounting estimate and related disclosures to an inherent
lack of precision in its measurement.
a. Estimation uncertainty
b. Management bias
c. Inherent risk
d. Allowance for measurement errors
364. Analytical procedures used in the overall review stage of an audit generally include
a. Gathering evidence concerning account balances that have not changed from the prior year.
b. Retesting control procedures that appeared to be ineffective during the assessment of control
risk.
c. Considering unusual or unexpected account balances that were not previously identified.
d. Performing tests of transactions to corroborate management's financial statement assertions.
365. Which of the following procedures would an auditor most likely perform while evaluating audit
findings at the conclusion of an audit?
a. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the
b. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
c. Determine whether reportable conditions have been corrected.
d. Develop an estimate of the total likely misstatement.
366. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Confirmation of accounts payable.
P a g e | 47
d. Reading and minutes of meetings of the board of directors.
367. Which of the following material events occurring subsequent to the December 31, 2019, reporting
date would not ordinarily result in an adjustment to the financial statements before they are issued
on March 2, 2020?
a. Write-off of a receivable from a debtor who had suffered from deteriorating financial condition
for the past 6 years. The debtor filed for bankruptcy on January 23, 2020.
b. Acquisition of a subsidiary on January 23, 2020. Negotiations had begun in December 2019.
c. A 3 for 5 reverse stock split consummated on January 23, 2020.
d. Settlement of extended ligation of January 23, 2020 in excess of the recorded year-end liability.
368. When obtaining evidence regarding litigation against a client, the CPA will be least interested in
determining?
a. The period in which the underlying cause of the litigation occurred
b. The probability of an unfavorable outcome
c. An estimate of when the matter will be resolved
d. An estimate of the potential loss
369. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. Constitute sufficient appropriate audit evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk
b. Are not part of the audit evidence considered to support the assertion
c. Replace a low assessed level of control risk as audit evidence to support the assertion
d. Complement, but not replace, substantive tests designed to support the assertion
370. The primary reason an auditor requests letter of inquiry 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 attorney’s 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.
371. In evaluating the reasonableness of an accounting estimate, an auditor most likely would
concentrate on key factors and assumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective and not susceptible to bias.
d. Deviations from historical patterns.
Audit Report
372. Which of the following ultimately determines the specific audit procedures necessary to provide an
independent auditor with a reasonable basis for the expression of an opinion?
a. the audit program.
b. the auditor’s judgment.
c. Philippine Standards on Auditing.
d. the auditor’s working papers.
373. An auditor accepted an engagement to audit the 2021 financial statements of EFG Corporation and
began the fieldwork on September 30. EFG gave the auditor the 2021 financial statements on
January 17, 2022. The auditor completed the fieldwork on February 10, 2022, and delivered the
report on February 16, 2022. The client’s representation letter normally would be dated:
a. December 31, 2021. c. February 10, 2022.
b. January 17, 2022. d. February 16, 2022.
374. Which of the following best describes the auditor’s responsibility for “other information” included in
the annual report to stockholders, which contains financial statements and the auditor’s report?
a. The auditor has no obligation to read the “other information.”
P a g e | 48
b. The auditor has no obligation to corroborate the “other information” but should read the “other
information” to determine whether it is materially inconsistent with the financial statements.
c. The auditor should extend the examination to the extent necessary to verify the “other
information.”
d. The auditor must modify the auditor’s report to state that the “other information is unaudited”
or “not covered by the auditor’s report.”
375. Statement I: When the financial statements are prepared in accordance with a compliance
framework, the auditor is not required to evaluate whether the financial statements achieve fair
presentation.
Statement II: Since auditor’s report shall always be in writing, the use of an electronic medium for
such purpose is not acceptable.
376. Pervasive effects on the financial statements are those that, in the auditor’s judgment (choose the
exception).
a. Are not confined to specific elements, accounts, or items of the financial statements.
b. If so confined, represent or could represent a substantial proportion of the financial statements.
c. In relation to disclosures, are fundamental to users’ understanding of the financial statements.
d. None of the above.
377. In the auditing profession, there is a need for uniformity in reporting in order to
I. Avoid confusion
II. Promote credibility in the global marketplace
a. I only
b. II only
c. Both I and II
d. Neither I nor II
378. On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial
statements for the year ended January 31. On March 2, the CPA learned that on February 11, the
entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating
financial condition of the entity’s principal customer that led to the customer's bankruptcy.
Management then refused to adjust the financial statements for this subsequent event. The CPA
determined that the information is reliable and that there are creditors currently relying on the
financial statements. The CPA’s next course of action most likely would be to
a. Notify the entity’s creditors that the financial statements and the related auditor’s report should
no longer be relied on.
b. Notify each member of the entity’s board of directors about management’s refusal to adjust the
c. Issue revised financial statements and distribute them to each creditor known to be relying on
d. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the
379. An auditor’s report on financial statements prepared in accordance with another comprehensive
basis of accounting should include all of the following except
a. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
b. An opinion as to whether the financial statements are presented fairly in conformity with the
comprehensive basis of accounting.
c. Reference to the note to the financial statements that describes the basis of presentation.
d. A statement that the basis of presentation is a comprehensive basis of accounting other than
generally accepted accounting principles.
380. Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on the
statements of income, retained earnings, or cash flows. Harris will have access to all information
underlying the basic financial statements. Under these circumstances, Harris may
a. Not accept the engagement because it would constitute a violation of the profession’s ethical
standards.
b. Not accept the engagement because it would be tantamount to rendering a piecemeal opinion.
P a g e | 49
c. Accept the engagement because such engagements merely involve limited reporting objectives.
d. Accept the engagement but should disclaim an opinion because of an inability to apply the
procedures considered necessary.
381. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
a. Financial projection
b. Partial presentation
c. Pro forma financial statement
d. Financial forecast
382. Tatsuki is the external auditor for Heavenly Host Enterprises. The company provided him with the
statement of cash flows, statement of financial position and statement of comprehensive income.
The company did not provide him the statement of retained earnings and statement of changes in
equity. If the omission proves to be somewhat close to the level of materiality, what should be
Tatsuki's opinion?
a. Qualified
b. Unqualified
c. Adverse
d. Disclaimer of Opinion
383. An audit report contains the following paragraph: “Since the company did not take physical
inventories and we were not able to apply auditing procedures to satisfy ourselves as to inventory
quantities and the cost of property and equipment, the scope of our work was not sufficient to
enable us to express, and we do not express, an opinion on these financial statements.” This
paragraph illustrates a (an)
a. Disclaimer of opinion due to uncertainty
b. Disclaimer of opinion due to scope restrictions
c. Adverse audit opinion
d. Audit opinion qualified for material scope restrictions.
384. An entity ordinarily issues on an annual basis a document which includes its financial statements
together with the audit report thereon. This document is frequently referred to as the
a. Annual financial statement
b. Annual report
c. Annual document
d. Audit report
385. An auditor’s report on financial statements prepared in accordance with another comprehensive
basis of accounting should include all of the following except
a. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
b. An opinion as to whether the financial statements are presented fairly in conformity with the
comprehensive basis of accounting.
c. Reference to the note to the financial statements that describes the basis of presentation.
d. A statement that the basis of presentation is a comprehensive basis of accounting other than
generally accepted accounting principles.
386. Statement I: The date of the auditor’s report informs the user of the auditor’s report that the
auditor has considered the effect of events and transactions of which the auditor became aware
and that occurred up to that date.
Statement II: Since the auditor’s opinion is provided on the financial statements and the financial
statements are the responsibility of management, the auditor is not in a position to conclude that
sufficient appropriate audit evidence has been obtained until evidence is obtained that all the
statements that comprise the financial statements, including the related notes, have been prepared
and management has accepted responsibility for them.
387. Which of the following statements indicates a qualified opinion?

a. The financial statements do not present fairly in all material respects the financial position,
results of operations, and cash flows in conformity with PFRS.
P a g e | 50
b. The auditor does not express an opinion on the financial statements.
c. The financial statements present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with PFRS.
d. Except for the effects of a matter, the financial statements present fairly in all material respects
the financial position, results of operations, and cash flows in conformity with PFRS.
388. All of the following would require an emphasis of matter paragraph except for:
a. the existence of material related party transactions.
b. the lack of auditor independence.
c. important events occurring subsequent to the statement of financial position date.
d. material uncertainties disclosed in the footnotes.
389. Statement I: When the auditor expresses a qualified or adverse opinion, communicating other key
audit matters is not anymore relevant to enhancing intended users’ understanding of the audit, and
therefore the requirements to determine key audit matters do not apply.
Statement II: A matter giving rise to a modified opinion in accordance with PSA 705 (Revised), or a
material uncertainty related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with PSA 570 (Revised), are by their nature
key audit matters.
390. In determining the type of opinion to express, an auditor assesses the nature of the report
qualifications and the materiality of their effects. Materiality will be the primary factor considered in
the choice between
a. An "except for" opinion and an adverse opinion.
b. An "except for" opinion and a qualified opinion.
c. An adverse opinion and a disclaimer of opinion.
d. A qualified opinion and a piecemeal opinion.
391. When issuing 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. amount of known misstatement is acknowledged and recorded by the client.
c. estimate of the total likely misstatement includes the adjusting entries already recorded by the
client.
d. estimate of the total likely misstatement is less than a material amount.
Other Reporting Responsibilities

392. When a practitioner examines projected financial statements, the practitioner's report should
include a separate paragraph that:
a. Describes the limitations on the usefulness of the presentation.
b. Provides an explanation of the differences between an examination and a review.
c. States that the accountant is responsible for events and circumstances for a period not
exceeding one year after the report's date.
d. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.
393. CPA Firm A has performed most of the audit of Consolidated Company’s financial statements and
qualities as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to
assume full responsibility for Firm B’s work. Which of the following statements is CORRECT?
a. In such circumstances, when appropriate requirements have been met, Firm A should issue a
unqualified opinion on the financial statements.
b. In such circumstances, when appropriate requirements have been met, Firm A should issue an
unqualified opinion on the financial statements but should make appropriate reference to the
Firm B in the audit report.
c. Such assumption of responsibility violates the profession’s standards
d. CPA Firm A should normally qualify its audit report on the basis of the scope limitation involved
when another CPA firm in involved.
P a g e | 51
Auditing in IT Environment
394. Ecclesta Corporation has numerous customers. A customer file is kept on disk. Each customer file
contains the name, address, credit limit, and account balance. The auditor wishes to test this file to
determine whether credit limits are being exceeded. The best procedure for the auditor to follow
would be to:
a. develop test data that would cause some account balances to exceed the credit limit and
determine if the system properly detects such situations.
b. request a printout of a sample of account balances so they can be individually checked against
the credit limits.
c. request a printout of all account balances so they can be manually checked against the credit
limits.
d. develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.
395. Which of the following is true of generalized audit software?

a. They can be used only in auditing on-line computer systems.
b. They can be used on any computer without modification.
c. They each have their own characteristics, which the auditor must carefully consider before
using in a given audit situation.
d. They enable the auditor to perform all manual compliance test procedures less expensively.
396. Assume that an auditor estimated that 10,000 checks were issued during the accounting period. If
an application control that performs a limit check for each check request is to be subjected to the
auditor’s test–data approach, the sample should include:
a. approximately 1,000 test items.
b. a number of test items determined by the auditor to be sufficient under the circumstances.
c. a number of test items determined by the auditor’s reference to the appropriate sampling
tables.
d. one transaction.
397. Manual controls would most likely be more suitable than automated controls for which of the
following?
a. Large, unusual, or nonrecurring transactions.
b. High-volume transactions that require additional calculations.
c. Situations with routine errors that can be predicted and corrected.
d. Circumstances that require a high degree of accuracy.
398. Which of the following would the auditors consider a weakness in an IT system?
a. Operators have access to terminals.
b. Programmers are allowed access to the file library.
c. A data control group handles reprocessing of exceptions detected by the computer.
d. More than one employee is present when the computer facility is in use.
399. When designing the physical layout of a data processing center, which of the following would be
least likely to be a necessary control that is considered?
a. Design of controls to restrict access
b. Adequate physical layout space for the operating system
c. Inclusions of an adequate power supply system with surge protection
d. Consideration of risks related to other uses of electricity in the area
400. The test data approach in auditing in a computerized accounting system

a. Must consist of all possible valid and invalid conditions.
b. Involves processing test data in the client's computer programs under the auditor's control.
c. Uses a program other than the program used throughout the year by the client.
d. Requires that several transactions of each type must be tested.
401. Auditing by testing the input and output of a computer system instead of the computer program
itself will
a. Not detect program errors which do not show up in the output sampled.
b. Detect all program errors, regardless of the nature of the output.
P a g e | 52
c. Provide the auditor with the same type of evidence as tests of application controls.
d. Not provide the auditor with confidence in the results of the auditing procedures.
402. When an auditor tests a computerized accounting system, which of the following is true of the test
data approach?
a. Several transactions of each type must be tested.
b. Test data are processed by the client’s computer programs under the auditor’s control.
c. Test data must consist of all possible valid and invalid conditions.
d. The program tested is different from the program used throughout the year by the client.
403. A primary advantage of using generalized audit software packages to audit the financial statements
of a client that uses a computer system is that the auditor may
a. Access information stored on computer files while having a limited understanding of the client’s
hardware and software features.
b. Consider increasing the use of substantive tests of transactions in place of analytical
procedures.
c. Substantiate the accuracy of data through self-checking digits and hash totals.
d. Reduce the level of required tests of controls to a relatively small amount.
404. Auditing by testing the input and output of a computer system instead of the computer program
itself will
a. Not detect program errors which do not show up in the output sampled.
b. Detect all program errors, regardless of the nature of the output.
c. Provide the auditor with the same type of evidence as tests of application controls.
d. Not provide the auditor with confidence in the results of the auditing procedures.
405. When an auditor tests a computerized accounting system, which of the following is true of the test
data approach?
a. Several transactions of each type must be tested.
b. Test data are processed by the client’s computer programs under the auditor’s control.
c. Test data must consist of all possible valid and invalid conditions.
d. The program tested is different from the program used throughout the year by the client.
406. A primary advantage of using generalized audit software packages to audit the financial statements
of a client that uses a computer system is that the auditor may
a. Access information stored on computer files while having a limited understanding of the client’s
hardware and software features.
b. Consider increasing the use of substantive tests of transactions in place of analytical
procedures.
c. Substantiate the accuracy of data through self-checking digits and hash totals.
d. Reduce the level of required tests of controls to a relatively small amount.
407. The use of a computer changes the processing, storage, and communication of financial
information. A CIS environment may affect the following, except
a. The accounting and internal control systems of the entity.
b. The overall objective and scope of an audit.
c. The auditor’s design and performance of tests of control and substantive procedures to satisfy
the audit objectives.
d. The specific procedures to obtain knowledge of the entity’s accounting and internal control
systems.
408. Which of the following is not a hardware element in an IT environment?

a. Scanners c. Utility application
b. Solid-state drive d. Modems
*End of Quizzer*
P a g e | 53
P a g e | 54

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Compiled Reviewer in Auditing Theory

2. In an assurance engagement, the person or persons, either as individuals or representatives of an

3. Which of the following best describes the objective of an assurance engagement?

6. A practitioner's report on agreed-upon procedures should contain which of the following

12. In performing an attestation engagement, a CPA typically:

14. Which is not true of the intended user?

16. Non-assurance engagements include all of the following, except

20. The objective of assurance services is to

22. In an assurance engagement, the outcome of the evaluation or measurement of a subject

25. Which of the following is not an assurance service?

26. Non-assurance engagements include all of the following, except

38. An auditor may achieve audit objectives related to particular assertions by

39. Place these phases of an audit in chronological order:

46. Which of the following procedures is not included in a review engagement?

52. Which of the following procedures is not included in a review engagement?

Systems of Quality Management

63. Evaluate the following statements:

The Philippine Accountancy Act of 2004 and Other Laws

80. Evaluate the following statements:

81. Evaluate the following statements:

82. Evaluate the following statements:

83. Which of the following statements is correct?

84. The following first-time candidates had these CPALE ratings:

Of the following statements, how many is/are correct?

Management Services 75%

The Code of Ethics for Professional Accountants

96. Independence is linked to the principles of

100. Independence is required for which of the following types of services?

127. When a company has changed auditors:

134. Professional skepticism requires that an auditor assume that management is

141. Which of the following is correct concerning performance materiality on an audit?

148. The risk of material misstatement refers to

155. . __________ is an individual or organization possessing expertise in a field other than

179. When is the use of analytical procedures required in an audit?

187. Which of the following is an example of the concept of inherent risk?

195. Which of the following statements is not true?

Fraud, Error and Non-compliance

199. Evaluate the following statements:

203. An auditor may achieve audit objectives related to particular assertions by

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

215. A primary objective of procedures performed to obtain an understanding of internal control is to

221. The objective of tests of details of transactions performed as tests of controls is to

223. Which of the following statements concerning internal control is incorrect?

228. Which is correct?

236. The following are components of internal control, except

237. An auditor’s flowchart of an entity’s information system is a diagrammatic representation that

244. The objective of tests of details of transactions performed as tests of controls is to

255. If an auditor is obtaining an understanding of an entity’s information and communication

265. Which of the following is usually considered a monitoring activity?

269. The assessment of control risk must be made in terms of

284. Which is considered a specific type of transaction authorization?

Audit Evidence and Substantive Testing

293. Which of the following is the best example of a substantive procedure?

303. Tests for unrecorded assets typically involve tracing from:

322. A "bill and hold" scheme is most likely to include:

329. Audit working papers should not

Auditing Transaction Cycles

351. The major working paper for stockholder’s equity is the

355. Alpha risk in statistical sampling is

Completing the Audit