POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE

Sta. Mesa, M a n i l a

P R A C T I C E E X A M I N A T I O N
A U D I T I N G T H E O R Y

Framework of Assurance Engagement

1. What is an assurance engagement?

a. Assurance engagement enables the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with an identified financial
reporting framework.
b. Assurance engagement enables an auditor to state whether, on the basis of procedures which do
not provide all the evidence that would be required in an audit, anything has come to the auditor's
attention that causes the auditor to believe that the financial statements are not prepared, in all
material respects, in accordance with an identified financial reporting framework.
c. Assurance engagement carries out those procedures of an audit nature to which the auditor and
the entity and any appropriate third parties have agreed and to report on factual findings.
d. Assurance engagement means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible
party about the outcome of the evaluation or measurement of a subject matter against criteria.

2. Which of the following is not element of assurance engagement?

a. A third-party relationship involving a practitioner, a responsible party, and intended users;

b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. A written assurance report in the form appropriate to a reasonable assurance engagement or a
limited assurance engagement.

3. In an assurance engagement, the responsible party and the intended users

a. Are from different entities c. May be (a) or (b)

b. Are from the same entities d. Neither (a) or (b)

4. In an assurance engagement, the person or class of persons for whom the professional accountant
prepares the report for a specific use of purpose is the

a. Intended user c. Management

b. Responsible party d. Client

5. An assurance engagement should have which of the following elements?

Subject Matter Criteria

a. Yes No
b. No Yes
c. Yes Yes
d. No No
6. The subject matter of an assurance engagement may include

Financial Internal Compliance

Information Controls with Regulation
a. Yes Yes Yes
b. No No No
c. Yes No Yes
d. No Yes No

7. When performing an assurance service, professional accountants use standards or benchmarks to

evaluate or measure the subject matter of an assurance engagement. These are referred to in the
framework as

a. Criteria c. Conditions
b. Norms d. Gauges

8. The following are characteristics of suitable criteria, except:

a. Relevance c. Neutrality
b. Reliability d. Understanding

9. An assurance engagement should have the following elements?

Sufficient Appropriate Assurance Report,

Evidence which can be oral
a. Yes No
b. No Yes
c. Yes Yes
d. No No

10. The auditor’s report should be titled, and the title should include the word

a. Standard c. Audit
b. Opinion d. Independent

Conduct of an Audit of Financial Statement in Accordance with PSA

11. The main purpose of implementing quality control policies and procedures is

a. To comply with regulatory agency

b. To provide reasonable assurance that audit will be conducted in accordance with PSA
c. To have a favorable peer review
d. To standardize the policies and procedures of the audit firm

12. The objectives of the quality control policies to be adopted by the audit firm will ordinarily incorporate

Skills and Professional

Monitoring
competence Requirements
a. Yes Yes Yes
b. No No No
c. Yes No Yes
d. No Yes No

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13. Which of the following is an element of a CPA firm’s quality control system that should be considered
in establishing its quality control policies and procedures?

a. Complying with laws and regulations c. Human resources

b. Using statistical sampling d. Considering audit risk and materiality

14. Which of the following is one of the elements of a CPA firm’s quality control system?

a. Complying with laws and regulations c. Delegation

b. Using statistical sampling techniques d. Considering audit risk and materiality

15. Ethical principles governing audit of financial statements do not include

a. Independence c. Technical standards

b. Competence and due care d. Professional responsiveness

16. In planning an audit, the auditor should consider the presence of fraud risk factors relating to
misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. In
which of the following situations would the auditor most likely presume that a high risk of defalcation
exists?

a. ABC Company is a multinational company that does business in various countries in the Asia-
Pacific rim.
b. DEF Company does business with related parties.
c. GHI Company has a cashier who also handles accounting and authorization functions.
d. MNO Company is in an industry where the rate of change is very slow.

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

a. Errors in the application of the accounting principles

b. Clerical error in accounting data underlying the financial statements
c. Misinterpretation of facts that existed when financial statements were prepared
d. Misappropriation of assets or group of assets

18. The major reason an independent auditor gather evidence is to

a. Detect fraud
b. Form an opinion on the financial statements
c. Evaluate management
d. Evaluate internal controls

19. In working with the bank reconciliation and the bank cutoff statement, the auditor finds that a prior
check was not on the reconciliation as an outstanding check. This may be an indication of

a. Window dressing c. Kiting

b. Lapping d. An attempt to conceal a cash shortage

20. Which is the appropriate timing of substantive test if the risk of material misstatement is low for an
assertion?

a. All testing must be done for yearend balances

b. Interim testing and yearend update
c. No testing must be done
d. Either a, b, or c

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Planning an Audit of Financial Statements

21. Planning an audit involves

a. Establishing the overall audit strategy for the engagement

b. Developing an audit plan
c. Both A and B
d. Neither A and B

22. The auditor should perform the following risk assessment procedures to obtain an understating of the
entity and its environment, including its internal control

I. Inquiries of management and others within the entity

II. Confirmation
III. Reperformance
IV. Analytical procedures
V. Observation
VI. inspection

a. I, II, III, IV only c. I, IV, V and VI only

b. I, II, IV, V, and VI only d. I, II, III, IV, V and VI

23. The auditor should obtain sufficient understanding of the entity and its environment, including its
internal control in order to

Identify and assess the

Design appropriate audit
risk of material
procedures
misstatement
a Yes Yes
b Yes Yes
c Yes No
d No No

24. When obtaining understanding of the entity’s control, the auditor should obtain knowledge about the
internal control’s

Design Implementation Maintenance

a Yes Yes Yes
b Yes Yes No
c Yes No No
d No No Yes

25. It sets the tone of the organization, provides discipline and structure, and influences the control
consciousness of employees

a. Control Activities c. Control Environment

b. Monitoring of controls d. Entity's risk assessment process

26. In evaluating the design of the entity’s internal control environment, the auditor considers the
following elements and how they incorporated into the entity’s processes. Such elements would
include all of the following except.

a. Integrity and ethical values

b. Commitment to competence
c. Organizational structure
d. Information and communication system

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27. After obtaining a sufficient understanding of the client’s internal control, the auditor

a. Assesses the need to apply PSAs

b. Determines the preliminary assessment of control risk
c. Assesses detection risk to determine the acceptable level of inherent risk
d. Determines the acceptable level of detection risk and inherent risk

28. The auditor is not always required to perform

a. Risk assessment procedures

b. Test of controls
c. Substantive procedures
d. Both a and c

29. As the acceptable level of detection risk decreases, an auditor may change the

a. Timing of substantive tests; perform them at an interim date rather than at year-end
b. Nature of substantive tests; select from less effective to a more effective procedure
c. Timing of tests of controls; perform them at several dates rather than at one time
d. Assessment of inherent risk; assume a higher level

30. Which of the following is not considered a substantive test?

a. Analytical procedures
b. Test of details of transactions
c. Test of controls
d. Test of details of balances

Gathering Sufficient Appropriate Audit Evidence

Audit of cash

31. The best evidence regarding year-end bank balances is documented in the

a. Cutoff bank statement

b. Bank reconciliations
c. Interbank transfer schedule
d. Bank deposit lead schedule

32. A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?

a. Simultaneous confirmation
b. Simultaneous bank reconciliation
c. Simultaneous verification
d. Simultaneous surprise cash count

33. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After
the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the
major flaw in this audit procedure?

a. The confirmation request was signed by the treasurer

b. Sending request was meaningless because the account was closed before year-end
c. The request was mailed by the assistant treasurer
d. The CPA did not sign the confirmation request before it was mailed
34. On receiving the bank cut off statement, the auditor trace

a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal
b. Checks dated prior to year-end to the outstanding checks listed on the year end bank
reconciliation
c. Deposits listed on the cut off bank statement to deposits in the cash receipts journal
d. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank
reconciliation

35. An unrecorded check issued during the last week of the year would most likely be discovered by the
auditor when

a. Check register for the last month is reviewed

b. Cutoff bank statement is reconciled
c. Bank confirmation is reviewed
d. Search for unrecorded liabilities is performed

36. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine
all of the following except

a. Cutoff bank statement

b. Year-end bank statement
c. Bank reconciliation
d. General ledger

37. And auditor compares information on cancelled checks with information contained in the cash
disbursements journal. The objective of this test is to determine that

a. Recorded cash disbursement transactions are properly authorized

b. Proper cash purchase discounts have been recorded
c. Cash disbursements are for goods and services actually rendered
d. No discrepancies exists between data on the checks and the data in the journal

38. When counting cash on hand, the auditor must exercise control over all cash and other negotiable
assets to prevent

a. Theft
b. Irregular endorsement
c. Substitution
d. Deposit in transit

39. An independent auditor asked a client’s internal auditor to assist in preparing a standard bank
confirmation request for payroll account that had been closed during the year under audit. After the
internal auditor prepared the form, the controller signed it and mailed it to the bank. What is the
major flaw in this procedure?

a. The internal auditor did not sign the form

b. The form was mailed by the controller
c. The form was prepared by the internal auditor
d. The account was closed, so the balance was zero

40. The usefulness of the standard bank confirmation requests may be limited because the bank
employee who completes the form may

a. Not believe that the bank is obligated to verify confidential information to a third party
b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation
c. Not have access to the client’s cut off bank statement
d. Be unaware of all the financial relationship that the bank has with the client

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Audit of receivables

41. Which of the following statements would an auditor most likely add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipients?

a. This is not a request for payment; remittances should not be sent to our auditors in the enclosed
envelope
b. Report any differences on the enclosed statement directly to our auditors; no reply is necessary
if this amount agrees with your records
c. If you do not report any differences within fifteen days, it will be assumed that this statement is
correct
d. The following invoices have been selected for confirmation and represent amounts that are
overdue

42. Who should receive the confirmation replies?

a. The audit client

b. The auditor
c. The regulators
d. Either a or b

43. All of the following are examples of substantive tests to verify the valuation of net accounts receivable
except the

a. Recomputation of the allowance for bad debts

b. Inspection of accounts for current versus non-current status in the statement of financial
position
c. Inspection of the aging schedule and credit records of past due accounts
d. Comparison of the allowance for bad debts with pas records

44. The auditor finds a situation in which one person has the ability to collect receivables, make deposits,
issue credit memos, and record receipt of payments. The auditor suspects the individual may be
stealing from cash receipts. Which of the following audit procedures would be most effective in
discovering fraud in this scenario?

a. Send positive confirmations to a random selection of customers

b. Send negative confirmations to all outstanding accounts receivable customers
c. Perform a detailed review of debits to customer accounts, sales return, or other debit accounts,
excluding cash posted to the cash receipts journal
d. Take a sample of bank deposits and trace the detail in each bank deposit to the entry in the cash
receipts journal

45. In confirming accounts receivable, and auditor decided to confirm customer’s account balances rather
than individual invoices. Which of the following most likely would be included with the client’s
confirmation letter?

a. An auditor-prepared letter explaining that a non-response may cause inference that the account
balance is correct.
b. A client-prepared letter reminding the customer that a non-response will cause a second request
to be sent
c. An auditor-prepared letter requesting the customer to supply missing an incorrect information
directly to the auditor
d. A client prepared statement of account showing the details of the customer’s account balance

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46. Auditors may use positive or negative forms of confirmation requests for accounts receivable. And
auditor most likely will use

a. The positive form to confirm all balances regardless of size

b. A combination of the two forms with the positive form used for large balances and the negative
form for the small balances
c. A combination of the two forms, with the positive form used for trade receivables and the
negative form for other receivables
d. The positive form when the combined assessed level of inherent and control risk for assertions
related to receivables is acceptably low, and the negative form when it is unacceptably high.

47. The negative request form of accounts receivable confirmation may be used when the

Combined Number of small Consideration by

assessed level of balances is the recipient is
inherent and
control risk is
A Low Many Likely
B Low Few Unlikely
C High Few Likely
D High Many Likely

48. In the confirmation of accounts receivable, the auditor would most likely

a. Request confirmation of a sample of the inactive accounts

b. Seek to obtain positive confirmation for at least 50% of the total peso amount of the receivables
c. Require confirmation of all receivables from agencies of the government
d. Require that confirmation requests be sent within 1 month of the fiscal year end

49. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because

a. A majority of recipients usually lack the willingness to respond objectively

b. Some recipients may report incorrect balances that require extensive follow-up
c. The auditor cannot infer that all nonrespondents have verified their account information
d. Negative confirmation do not procedure evidence that is statistically quantifiable

50. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts
receivable, an auditor most likely would

a. Examine the shipping documents that provide evidence for the existence assertion
b. Verify the sources and contents of the faxes in telephone calls to the senders
c. Consider the faxes to be nonresponses and evaluate them as unadjusted differences
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted

51. An auditor who has confirmed accounts receivable may discover that the sales journal was held open
past year-end if

a. Positive confirmation sent to debtors are not returned

b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that
the amount being confirmed
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than
the amount being confirmed

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Audit of inventories

52. 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

a. Existence
b. Completeness
c. Rights and obligations
d. Valuation and allocation

53. Purchase cut-off procedures should be designed to test whether all inventory

a. Purchased and received before year-end was paid for

b. Ordered before year-end was received
c. Purchased and received before year-end was recorded
d. Owned by the company is in the possession of the company at year–end

54. Which of the following is not one of the independent auditor’s objectives regarding the audit of
inventories?

a. Verifying that inventory counted is owned by the client

b. Verifying that the client has used proper inventory pricing
c. Ascertaining the physical quantities of inventory on hand
d. Verifying that all inventory owned by the client is on hand at the time of the count

55. Which of the following audit procedures probably provides the most reliable evidence concerning the
entity’s assertion of rights and obligations related to inventories?

a. Trace test counts noted during the entity’s physical count to the entity’s summarization of
quantities
b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any
liens
c. Select the last few shipping advices used before the physical count and determine whether
shipments were recorded as sales
d. Inspect the open purchase order file for significant commitments that should be considered for
disclosures

56. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged
to support management’s financial statement assertion of

a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation

57. Periodic cycle counts of selected inventory items are made at various times during the year rather
than a single inventory count at year end. Which of the following is necessary if the auditor plans to
observe inventories at interim dates?

a. Complete recounts by independent teams are performed

b. Perpetual inventory records are maintained
c. Unit cost records are integrated with production accounting records
d. Inventory balances are rarely at low levels

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58. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high, and auditor will probably

a. Apply gross profit tests to ascertain the reasonableness of the physical counts
b. Increase the extent of test of control relevant to the inventory cycle
c. Requests the client to schedule the physical inventory count at the end of the year
d. Insist that the client perform physical counts of inventory items several times during the year

59. After accounting for a sequence of inventory tags, and auditor traces a sample of tags to the physical
inventory listing to obtain evidence that all items

a. Included in the listing have been counted

b. Represented by inventory tags are included in the listing
c. Included in the listings are represented by inventory tags
d. Represented by inventory tags are bona fide

60. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which
of the following could explain the difference?

a. Inventory items has been counted but the tags placed on the items had not been taken off the
items and added to the accumulation sheets
b. Credit memos for several items returned by customers had not been recorded
c. No journal entry had been made on the retailer’s books for several items returned to its suppliers
d. An item purchases FOB shipping point had not arrived at the date of the inventory count and had
not been reflected in the perpetual records

61. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry is sales personnel

b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual records

62. The audit of year-end inventories should include steps to verify that the client purchases and sales
cutoff were adequate. This audit step should be designed to detect whether merchandise included in
the physical count at year-end was not recorded as a

a. Sale in the subsequent period

b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period

63. An auditor’s observation of physical inventories at the main plant at year end provides direct evidence
to support which of the following objectives

a. Accuracy of the priced-out inventory

b. Evaluation of the lower of cost or market tests
c. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence
d. Determination of goods on consignment at another location

64. What form of analytical review might uncover the existence of obsolete merchandise

a. Inventory turnover rates

b. Decrease in the ratio of gross profit to sales
c. Ratio of inventory to accounts payable
d. Comparison of inventory values to purchase invoices

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65. Which of the following is the best audit test to evaluate the accuracy of the inventory records for
materials inventory in production operation?

a. Trace selected inventory receipts to perpetual inventory records

b. Vouch selected postings in the perpetual inventory records to source documents
c. Perform turnover tests for materials inventory
d. Reconcile quantities on hand per physical counts of selected items with perpetual inventory
records and verify pricing

Audit of investments

66. Which statement is correct regarding audit of investment securities?

a. An auditor’s objective is to determine whether the securities are authentic

b. Examination of paid checks issued in payments of securities purchased is the most effective
procedure to verify existence
c. In performing tests of the carrying amount of investment in equity securities, the auditor would
usually refer to the quoted market prices of the securities
If a client has a large and active investment portfolio that is kept in a bank safe-deposit box and
the auditor is unable to count the securities at the end of the reporting period, the auditor most
likely will

67. Which of the following is not one of the auditor’s primary objectives in an audit of trading securities?

a. To determine whether securities are authentic

b. To determine whether securities are the property of the client
c. To determine whether securities actually exist
d. To determine whether securities are properly classified on the balance sheet date

68. An auditor is most likely to verify the interest earned on bond investment by

a. Verifying the receipt and deposit of interest checks

b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on basis of face amount, interest rate, and period held
d. Testing controls relevant to cash receipts

69. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the
auditor is unable to count the securities at the balance sheet date, the auditor most likely will

a. Request the bank to confirm to the auditor the contents of the safe-deposit box at the balance
sheet date
b. Examine supporting evidence for transactions occurring during the year
c. Count the securities at a subsequent date and confirm with bank whether securities were added
or revamped since the balance date
d. Requests the client to have the bank seal the safe deposit-box until the auditor can count the
securities at a subsequent date.

70. When an auditor is unable to inspect and count a client’s investment securities until after the balance
sheet date, the bank where the securities are held in a safe-deposit box should be asked to

a. Verify any difference between the contents of the box and the balance in the client’s subsidiary
ledger
b. Provide a list of securities added and removed from the box between the balance sheet date and
the security count date
c. Count the securities in the box so that the auditor will have an independent direct verification
d. Confirm that there has been no access to the box between the balance sheet date and the security
count date

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71. Which of the following is the least effective audit procedure regarding the existence assertion for the
securities held by the auditee?

a. Examination of paid checks issued in payment of securities purchased

b. Voicing all changes during the year to supporting documents
c. Simultaneous count of liquid assets
d. Confirmation from the custodian

72. An auditee is holding equity securities as collateral for a debt. The auditor should

a. Determine from data published in the financial press that the auditee has recorded dividend
income from the collateral
b. Ascertain the value of the securities
c. Ascertain that the amount recorded for the collateral in the investment account is equal to its fair
value at the balance sheet date
d. Verify that the client has taken title to the securities

73. Which of the following is the most effective procedure for verification of dividends earned on
investment in equity securities?

a. Tracing deposited dividend checks to the cash receipts book

b. Reconciling the amounts received with published dividend records
c. Comparing the amounts received with preceding year dividends received
d. Recomputing selected extensions and footings of dividends schedules and comparing totals to the
general ledger

74. Which of the following provides the best form of evidence pirating to the annual valuation of an
investment in which the independent auditor’s client owns a 30% voting interest?

a. Market quotations of the investee company’s stock

b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statement of the investee company

75. 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. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium
d. Examination and count of the bonds retired during the year

76. An auditor who physically examines securities should insist that a client representative be present in
order to

a. Detect fraudulent activities

b. Lend authority to the auditor’s directives
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned

77. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain
the reasonable of the

a. Classification between current and non-current portfolios

b. Valuation of marketable equity securities
c. Existence of unrealized gains or losses in the portfolio
d. Completeness of recorded investment income

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Audit of property, plant, and equipment

78. Property, plant, and equipment is typically judged to be one of the accounts least susceptible to fraud
because

a. The amounts recorded on the balance sheet for most companies are immaterial
b. The inherent risk is usually low
c. The depreciated values are always smaller than cost
d. Internal cost is inherently effective regarding this account

79. Which of the following combinations of procedures is an auditor most likely to perform to obtain
evidence about fixed asset additions?

a. Inspecting documents and physically examining assets

b. Recomputing calculations and obtaining written management representations
c. Observing operating activities and comparing balances to prior period balances
d. Confirming ownership and corroborating transactions through inquiries of client

80. Which of the best audit procedure to obtain evidence to support the legal ownership of real property

a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property
b. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property
d. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property

81. When few property and equipment transactions occur during the year, the continuing auditor usually
obtains an understanding of internal control and performs

a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year
d. Extensive tests of current year property and equipment transactions

82. If an auditor tours a production facility, which of the misstatements or questionable practices is most
likely to be detected by the audit procedure specified?

a. Depreciation expense on fully depreciated machinery has been recognized

b. Overhead has been over-applied
c. Necessary facility maintenance has not been performed
d. Insurance coverage on the facility has lapsed

83. In testing for unrecorded retirements of equipment, an auditor most likely to

a. Select items of equipment from the accounting records and then locate them during the plant
tour
b. Compare depreciation journal entries with similar prior-year entries in search of July depreciated
equipment
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense

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84. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertion of valuation and allocation and

a. Presentation and disclosure

b. Completeness
c. Rights and obligations
d. Existence

85. The auditor may conclude that depreciation charges are insufficient by noting

a. Insured values greatly in excess of book values

b. Large number of fully depreciated assets
c. Continuous trade-in of relatively new assets
d. Excessive recurring losses on assets retires

86. Which of the following questions would an auditor least likely include on an internal control
questionnaire concerning the initiation and execution of equipment transaction?

a. Are requests for major repairs approved at a higher level than the department initiating the
request
b. Are prerenumbered purchases orders used for equipment and periodically accounted for
c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids
d. Are procedures in place to monitor and properly restrict access to equipment

87. In violation of company policy, Campus Company erroneously capitalized the cost of painting its
warehouse. An auditor most likely detect this when

a. Discussing capitalization policies with the client

b. Examining maintenance expense accounts
c. Observing that the warehouse had been repainted
d. Examining construction work orders that support items capitalized during the year

Audit of Intangibles

88. In auditing intangible assets, an auditor most likely would review or recomputed amortization and
determine whether the amortization period is reasonable in support of management’s financial
statement assertion to

a. Valuation
b. Existence
c. Completeness
d. Rights and obligations

89. A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most
likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a
written representation from

a. A patent attorney
b. The SEC
c. The patent inventor
d. The patent owner

90. The most effective means for the auditor to determine whether a recorded intangible asset possesses
the characteristics of an asset is

a. Vouched the purchase by reference to underlying documentation

b. Inquire as to the status of patent application
c. Evaluate the future revenue-producing capacity of the intangible asset

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 d. Analyze the research and development expenditures to determine that only those expenditures
possessing future economic benefit have been capitalized

91. Assuming LT has capitalized all research and development costs associated with patent. NewYou, CPA,
who is examining this account will probably

a. Confer management regarding transfer of the amount from the balance sheet to the income
statement
b. Confirm that the patent is registered an on file with the intellectual property office
c. Confer with management regarding a change in the title of the account to goodwill
d. Confer with management regarding ownership of the patent

92. Which of the following comparison would be the most appropriate audit test for the amount of
recorded goodwill?

a. The purchase price and the book value of net tangible and identifiable assets purchased
b. The purchase price and the fair value of net tangible and identifiable assets purchased
c. The figure for goodwill specified in the contract of purchase
d. Earnings in excess of 5% of net assets for the past five years

Audit of liabilities

93. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period
b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports
c. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments
d. Reconciling vendor’s statement to the file of receiving reports to identify items received just
prior to the balance sheet date

94. Which of the following is a substantive test that an auditor is most likely to perform to verify the
existence and valuation of recorded accounts payable?

a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are
used and accounted for
b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search
for unrecorded vendor’s invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports
d. Confirming accounts payable balances with known suppliers who have zero balances

95. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertions of

a. Existence
b. Presentation and disclosure
c. Completeness
d. Valuation and allocation

96. The primary audit test to determine if accounts payable are valued properly is

a. Confirmation of accounts payable

b. Vouching accounts payable to supporting documents
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet

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 97. Which of the following procedure is least likely to be performed before the balance sheet date

a. Observation of inventory count

b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables

98. An audit assistance found a purchase order for a regular supplier in the amount of P5,500. The
purchase order was dated after receipt of goods. The purchasing agent had forgotten to issue the
purchase order. Also, a disbursement of P450 for materials did not have a receiving report. The
assistant wanted to select additional purchase orders for investigation but was unconcerned about
lack of receiving report. The auditor director should

a. Agree with the assistance because the amount of the purchase order exception was considerably
larger that the receiving report exception
b. Agree with the assistance because the cash disbursement had been assured by the receiving clerk
that the failure to fill out a report didn’t happen very often
c. Disagree with the assistance because two problems have an equal risk of loss associated with
them
d. Disagree with the assistance because the lack of a receiving report has a greater risk of loss
associated with it

99. Which of the following procedure relating to the examination of accounts payable could the auditor
delegates entirely to the client’s employees?

a. Test footings in the accounts payable ledger

b. Reconcile unpaid invoices to vendor’s statements
c. Prepare a schedule of accounts payable
d. Mail confirmation for selected account balances

Audit of shareholder’s equity

100. In an examination of shareholders’ equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized

b. Stock splits are capitalized at par or stated value on the dividend declaration date
c. Dividends during the year under audit were approved by the shareholders
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent

101. The auditor does not expect the client to debit retained earnings for which of the following
transactions?

a. A 10% stock dividend

b. An appropriation of retained earnings for treasury shares
c. A large stock dividend
d. A four for one stock split

102. In an audit of a medium-sized manufacturing concern, which one of the following areas can be
expected to require the least amount of time?

a. Owner’s equity
b. Assets
c. Revenue
d. Liabilities

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103. When a corporate client maintains its own stock records, the auditor primarily will rely upon

a. Confirmation with the company secretary of shares outstanding

b. Review of the corporate minutes for data as to shares outstanding
c. Confirmation of the number of shares outstanding at year-end with the appropriate state official
d. Inspection of the stock b0ok at year-end and accounting for all certificate numbers

104. When a client company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar convening

a. Restriction on the payment of dividends

b. The number of shares issued and outstanding
c. Guarantees of preferred stock liquidation value
d. The number of shares subject to agreement to repurchase

105. Where no independent stock transfer agents are employed and the corporation issues its own stocks
and maintains stock records, cancelled stock certificates should

a. Not be defaced, but segregated from other stock certificates and retained in a cancelled
certificate file
b. Be destroyed to prevent fraudulent reissuance
c. Be defaced and sent to the Secretary of the Department of Finance
d. Be defaced to prevent reissuance and attached to their corresponding stubs

106. With respect to treasury shares, the auditor should not object to which of the following?

a. Restrictions on retained earnings have not been met

b. Dividends have been paid on treasury shares
c. The treasury share certificate have been destroyed
d. Treasury shares are recovered at cost rather than par value

Completing the Audit

107. The auditor has a responsibility to review transactions and activities occurring after the year-end to
determine whether anything occurred that might affect the valuation or disclosure of the statements
being audited. The auditing procedures required to verify these transactions are commonly referred
to as the review for
a. contingent liabilities.
b. subsequent year’s transactions.
c. late unusual occurrences.
d. subsequent events.

108. Which type of subsequent event requires consideration by management and evaluation by the
auditor?
a. Subsequent events that have a direct effect on the financial statements and require adjustment.
b. Subsequent events that have no direct effect on the financial statements but for which disclosure
is advisable.
c. Both a and b.
d. Neither a nor b.

109. The concept of “dual dating” on the auditor’s report refers to

a. the client’s date on the statements (12/31/18) and the auditor’s date on the report (3/30/19).
b. the auditor’s date on the report (3/30/19) and the review required when the client files a
registration statement with the SEC (5/30/19).
c. the auditor’s date on the report representing the end of the fieldwork (3/30/19) and the review
of an important event that occurred after the completion of fieldwork (4/5/19) but before the
auditor’s report was issued.

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 d. the wording problem created because some of client’s statements are for a period of time (for
year ended 12/31/18) and others are for one specific date (12/31/18).

110. Which of the following subsequent events is most likely to result in an adjustment to a company’s
financial statements?
a. Merger or acquisition activities.
b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts
receivable balance.
c. Issuance of common stock.
d. An uninsured loss of inventories due to a fire.

111. At what stages of the audit must analytical procedures be used?

a. Planning and testing.
b. Testing and completion.
c. Planning and completion.
d. Planning, testing, and completion.

112. Which of the following procedures might be useful in discovering a contingent liability for a lawsuit
that management is intentionally neglecting to disclose?
a. Inquiries (orally and in writing) of management.
b. Analyzing legal expense and review invoices and statements from outside legal counsel.
c. Reviewing current and previous years’ internal revenue agent reports.
d. Obtaining a letter of representation from management that it is aware of no undisclosed
contingent liabilities.

113. The standard letter of inquiry from the client’s legal counsel should be prepared on
a. plain paper (no letterhead) and be unsigned.
b. lawyer’s stationery and signed by the lawyer.
c. auditor’s stationery and signed by an audit partner.
d. client’s stationery and signed by a company official.

114. The letter of representation obtained from an audit client should

a. be dated as of the end of the period under audit.
b. be dated as of the audit report date.
c. be dated as of any date decided upon by the client and auditor.
d. be left undated.

115. The following events all occurred after the balance sheet date (12/31/18) but prior to the auditor’s
report (3/15/19). Which one would not require an adjustment of the account balances as of
12/31/18?
a. A customer declared bankruptcy on 1/31/19.
b. Investments on the books at a cost of P100,000 were sold on 2/l/19 for P60,000.
c. Uninsured inventory valued at P100,000 on 12/31/18 was destroyed in a fire on 2/l/19.
d. A contingent liability recorded on the books as of 12/31/18 for P100,000 was settled out of court
on 2/15/19 for P125,000.

116. When should auditors generally assess a client’s ability to continue as a going concern?
a. Upon completion of the audit.
b. During the planning stages of the audit.
c. Throughout the entire audit process.
d. During testing and completion phases of the audit.

117. A client representation letter is a written statement from a non-independent source and, therefore,
a. cannot be regarded as reliable evidence.
b. can be regarded as reliable evidence only if the auditor finds a strong internal control system.
c. can be regarded as reliable evidence if the high-level corporate officials who sign it are
trustworthy.

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 d. needs to be confirmed by an outside, independent source such as a financial institution, or law
firm.

118. If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes
that sufficient evidence has not been obtained to draw a conclusion about fairness of the client’s
representations, there are two choices:
a. (1) issue a qualified opinion, or (2) issue a disclaimer.
b. (1) issue a disclaimer, or (2) withdraw from the engagement.
c. (1) obtain additional information, or (2) issue an adverse opinion.
d. (1) obtain additional evidence, or (2) issue a qualified report or a disclaimer.

119. If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes
that there is sufficient evidence but it does not warrant a conclusion of fairly presented financial
statements, the auditor has two choices:
a. (1) the statements must be revised to the auditor’s satisfaction, or (2) either a qualified or an
adverse opinion must be issued.
b. (1) either a qualified opinion must be issued, or (2) an adverse opinion must be issued.
c. (1) either a disclaimer must be issued, or (2) an adverse opinion must be issued.
d. (1) the statements must be revised to the auditor’s satisfaction, or (2) a disclaimer must be issued.

120. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain
a(an)
a. disclaimer of opinion.
b. qualified opinion.
c. standard unqualified opinion.
d. unqualified opinion with a separate explanatory paragraph.

121. Which of the following auditing procedures is ordinarily performed last?

a. Reading of the minutes of the directors’ meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing of the purchasing function.

122. In connection with the annual audit, which of the following is not a “subsequent events” procedure?
a. Review available interim financial statements.
b. Read available minutes of meetings of stockholders, directors, and committees and, as to
meetings for which minutes are not available, inquire about matters dealt with at such meetings.
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.

123. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the
auditor’s report would not require disclosure in the financial statements?
a. Sale of a bond or capital stock issue.
b. Loss of plant or inventories as a result of fire or flood.
c. A major drop in the quoted market price of the stock of the corporation.
d. Settlement of litigation when the event giving rise to the claim took place after the balance sheet
date.

Forming an Opinion and Reporting on Financial Statements

124. A major purpose of the auditor’s report on financial statement is to

a. Assure investors of the complete accuracy of the financial statements

b. Enhance the degree of confidence of intended users in the financial statements
c. Deter creditors from extending loans in high-risk situations

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 d. Describe the specific auditing procedures undertaken to gather evidence for the opinion

125. What is the appropriate opinion to express when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting
framework?

a. Unmodified
b. Qualified
c. Adverse
d. Disclaimer

126. The first section of the auditor’s report shall have the heading

a. Responsibilities for the financial statements

b. Opinion
c. Auditor’s responsibilities for the audit of the financial statements
d. Basis for opinion

127. Which of the following sections in the auditor’s report shall be placed immediately after the Opinion
section?

a. Management’s responsibilities for the financial statements

b. Auditors responsibilities for the audit of the financial statements
c. Basis for opinion
d. Other reporting responsibilities

128. The basis for Opinion section of the auditor’s report shall

a. State that the financial statements have been audited

b. State that the objective of the auditor is to issue an auditor’s report that include the auditor’s
opinion
c. Describe management responsibility for preparing the financial statements in accordance with
the applicable financial reporting framework
d. State that the audit was conducted in accordance with PSA

129. Which of the following management’s responsibilities shall be described in the responsibilities for the
financial statements section of the auditor’s report?

a. Responsibility for preparing the financial statements in accordance with the applicable financial
reporting framework
b. Responsibility for obtaining reasonable assurance about whether the financial statements as a
whole are free from material misstatement
c. Responsibility to exercise professional judgment and maintain professional skepticism throughout
the audit
d. Responsibility to identify and assess the risks of material misstatement of the financial statements

130. The description of the auditor’s responsibilities for the audit of the financial statement shall be
included

I. Within the body of the auditor’s report

II. Within an appendix to the auditor’s report
III. By a specific reference with the auditor’s report to the location of such a description on a
website of an appropriate authority

a. I only
b. II only
c. I or II only
d. I, II, or III

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131. Which of the following statements concerning communication of key audit matters in the auditor’s
report is incorrect?

a. Communicating key audit matters in the auditor’s report enhances the communicative value of
the auditor’s report by providing greater transparency about the audit that was performed
b. Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements of the
current and prior periods.
c. Communicating key audit matters may assist intended users in understanding the entity and areas
of significant management judge men in the audited financial statements.
d. The auditor’s determination of key audit matters is limited to those matters of most significance
in the audit of the financial statements of the current period, even when comparative financial
statements are presented.

132. Communicating key audit matters in the auditor’s report is

A B C D
A substitute for disclosures in the financial statements Yes Yes No No
A substitute for the auditor’s expression of a modified
Yes No No No
opinion
A substitute for reporting in accordance with PSA 570
when material uncertainty exists relating to the No Yes Yes No
entity’s ability to continue as going concern
A separate opinion on individual matters Yes Yes No No

133. PSA 705 prohibits the auditor from communicating key audit matters when the auditor expresses

a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

134. The following statement relate to the date of the auditor’s report. Which is false?

a. The auditor should date the report as of the completion date of the audit
b. The date of the auditor’s report should not be earlier than the date on which the financial
statements are signed or approved by management
c. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management
d. The date of the auditor’s report should always be later than the date of the financial statements

135. An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15
million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely
contain a/an

a. Unmodified opinion
b. Disclaimer of opinion
c. Adverse Opinion
d. Scope of Qualification

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136. A note to the financial statements of the Prudent Bank indicates that all of the records relating to the
bank’s business operations are stored on magnetic disks, and that no emergency backup systems or
duplicate disks are stored because the and its auditors consider the occurrence of a catastrophe to be
remote. Based upon this note, the auditor’s report should express

a. A qualified opinion
b. An unmodified opinion
c. An adverse opinion
d. A subject to opinion

137. Which of the following terms is used in the standard to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements, if any, that are
undetected due to an inability to obtain sufficient appropriate audit evidence?

a. Persuasive
b. Pervasive
c. Material
d. Extensive

138. A limitation on the scope of the audit may arise from

I. Circumstances beyond the control of the entity

II. Circumstances relating to the nature and timing of the auditor’s work
III. Limitations imposed by management

a. I and II
b. II and III
c. I and III
d. I, II, and III

139. When an audited financial statements are presented in a document containing other information, the
auditor

a. Should read the other information to consider whether it is consistent with the audited financial
statements
b. Has no responsibility for the other information because it is not part of the basic financial
statements
c. Has an obligation to perform auditing procedures to corroborate the other information
d. Is required to express a qualified opinion if the other information has a material misstatement of
fact

140. An auditor may express a qualified opinion under which of the following circumstances?

Lack of Sufficient Restriction on the

Appropriate Scope of the Audit
Evidence
a No No
b No Yes
c Yes No
d Yes Yes

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141. Which of the following should be included in the Qualified Opinion section when an auditor expresses
a qualified opinion?

When Read in With the Foregoing

Conjunction with Explanation
Note X
a Yes No
b No Yes
c No No
d Yes yes

142. In which of the following situations would an auditor ordinarily choose between expressing a qualified
opinion or an adverse opinion?

a. The auditor wishes to emphasize an unusually important subsequent event

b. The financial statements fail to disclose information that is required by Philippine Financial
Reporting Standards
c. Events disclosed in the financial statements cause the auditor to have substantial doubt about the
entity’s ability to continue as a going concern
d. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as
to its balance by other auditing procedures

143. Which of the following phrases would an auditor most likely include in the auditor’s report when
expressing a qualified opinion because of inadequate disclosure?

a. Do not present fairly in all material respects

b. Except for the omission of the information included in the Basis for Qualified Opinion paragraph
c. With the foregoing explanation of these omitted procedures
d. Subject to the departure from generally accepted accounting principles, as described above

144. An auditor should disclose the substantive reasons for expressing an adverse opinion in the Basis for
Adverse Opinion section

a. Following the opinion section

b. Preceding the opinion section
c. Following the Auditor’s Responsibility section
d. Within the notes to the financial statements

145. There are two broad financial reporting frameworks for comparatives: the corresponding figures and
the comparative financial statements. Which of the following statements is correct concerning these
reporting frameworks?

a. Under the corresponding figures framework, the corresponding figures for the prior periods are
integral part of the current period financial statements.
b. Under the corresponding figures framework, the corresponding figures for the prior period are
considered separate financial statements
c. Under the comparative financial statements framework, the comparative financial statements for
the prior period are intended to be read in conjunction with the amounts and other disclosure
relating to the current period.
d. Under this comparative financial statements framework, the amounts and other disclosures for
the prior period form part of the current period financial statements.

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146. The following statements relate to the auditor’s reporting responsibilities regarding comparatives.
Which is incorrect?

I. For corresponding figures, the auditor’s report only refers to the financial statements of the
current period.

II. For comparative financial statements, the auditor’s report refers to each period that financial
statements are presented.

a. I only
b. II only
c. Both I and II
d. Neither I and II

147. According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the
corresponding figures in the incoming auditor’s report for the current period. The incoming auditor’s
report should indicate

I. That the financial statements of the prior period were audited by the another auditor
II. The type of report issued by the predecessor auditor
III.The date of the predecessor auditor’s report

a. I and II
b. II and III
c. I and III
d. I, II, and III

148. J, CPA, audited JST Company’s prior-year financial statement. These statements are presented with
those of the current for comparative purposes without J;s auditor’s report, which expresses a qualified
opinion. In drafting the current year’s auditor’s report, S, CPA, the incoming auditor, should

I. Not name J as the predecessor

II. Indicate the type of report issued by J
III. Indicate the substantive reasons for J’s qualification
IV. Indicate the date of J’s auditor report

a. I, II, and IV
b. II, III, and IV
c. I, II, and III
d. I, II, III, and IV

149. Financial statements prepared in accordance with a financial reporting framework designed to meet
the financial information needs of specific users are referred to as

a. Special purpose financial statements

b. Special purpose framework
c. General purpose financial statements
d. Specific purpose financial statements

150. An auditor’s report on financial statements prepared in accordance with the financial reporting
provisions of a contract to comply with the provision of that contract should include all of the
following, except

a. An opinion as to whether the financial statements are presented fairly, in all material respects, in
accordance with the financial reporting provisions of the contract
b. A statement that indicates that basis of accounting used
c. An opinion as to whether the basis of accounting used is appropriate under the circumstances

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 d. Reference to the note to the financial statements that describes the basis of presentation.

151. A CPA is permitted to accept a separate engagement to audit an entity’s

Schedule of Accounts Schedule of Profit

Receivable Participation
a Yes No
b No Yes
c Yes Yes
d No No

152. An auditor may express an opinion on an entity’s account receivable balance even if the auditor has
disclaimed an opinion on the financial statements taken as a whole provided the

a. Report on the accounts receivable is presented separately from the disclaimer opinion on the
financial statements
b. Auditor also reports on the current asset portion of the entity’s statement of financial position
c. Use of the report on the account receivable is restricted
d. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the
financial statements

153. In the auditor’s report on summary financial statement that are derived from an entity’s audited
financial statements, a CPA should indicate that the

a. CPA has audited and expressed an opinion on the complete statements

b. CPA expresses limited assurance that the financial statements are presented in accordance with
PFRS
c. Summary financial statements are not fairly presented in all material respects
d. Summary financial statements are prepared in accordance with special purpose financial
reporting framework

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