Colegio de San Juan de Letran

College of Business Administration and Accountancy

NAME:_____________________________________________ SECTION______________

FINAL EXAMINATION

1. According to PSA 400, which of the following is correct regarding internal control system?
a. Internal control system refers to all the policies and procedures adopted by the auditor to
assist in achieving management’s objective.
b. A strong environment, by itself, ensures the effectiveness of the internal control system.
c. In the audit of financial statements, the auditor is only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the
financial statements.
d. The internal control system is confined to those matters which relate directly to the functions
of the accounting system.

2. The auditor is examining copies of sales invoices only for the initials of the person responsible
for checking the extensions. This is an example of a
a. Test of controls
b. Substantive test
c. Dual purpose test
d. Test of balances

3. Which of the following constitutes audit sampling?

a. Selecting and examining specific items to determine whether or not a particular procedure is
being performed.
b. Examining items to obtain information about matters such as the client’s business, the
nature of transactions, accounting and internal control systems.
c. Examining items whose values exceed a certain amount so as to verify a large proportion
of the total amount of an account balance or class of transactions.
d. Applying audit procedures to less than 100% of items within an account balance or class of
transactions such that all sampling units have a chance of selection.

4. The following situations will likely lead the auditor to use 100% testing, except
a. When the population constitutes a small number of large value items.
b. When both inherent and control risks are high and other means do not provide sufficient
appropriate audit evidence.
c. When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.
d. When testing controls that leave audit trail..

5. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population is called
a. Sampling error.
b. Non-sampling error.
c. Anomalous error.
d. Projected error.

6. Which statement is incorrect about sampling risk?

a. Sampling risk arises from the possibility that the auditor’s conclusion, based on a sample
may be different from the conclusion reached if the entire population were subjected to the
same audit procedure.
b. Risk of assessing control risk too low and risk of incorrect acceptance affects audit
effectiveness as it would usually lead to additional work to establish that initial conclusions
were incorrect.
c. The mathematical complements of sampling risks are termed confidence levels.
d. Risk of assessing control risk too high is the risk that the auditor will conclude, in the case of
a test of control, that control risk is higher than it actually is.
7. Which of the following statements is correct?
a. The expected population deviation rate has little or no effect on sample size.
b. As the population size doubles, the sample size also should double.
c. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases.
d. The population size has little or no effect on sample size except for very small populations.

8. Which of the following best illustrates the concept of sampling risk?

a. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
b. An auditor may select audit procedures that are not appropriate to achieve the specific
objective.
c. An auditor may fail to recognize errors in the documents examined for the chosen sample.
d. The documents related to the chosen sample may not be available for inspection

9. Statistical sampling may be applied to test controls when a client’s control procedures
a. Depend primarily on segregation of duties.
b. Are carefully reduced to writing and are included in client accounting manuals.
c. Leave an audit trail as evidence of compliance
d. Enable the detection of fraud.

10. The deviation rate the auditor will permit in the population and still be willing to reduce the
assessed level of control risk is called the
a. Tolerable deviation rate
b. Estimated population deviation rate
c. Acceptable risk of over-reliance
d. Sample deviation rate

11. An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the
client’s control procedures. One of the checks in the chosen sample of 20 cannot be found The
auditor should consider the reasons for this limitation and
a. Evaluate the results as if the sample size had been 19.
b. Treat the missing check as a deviation for the purpose of evaluating the sample.
c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e.
countersigned or not.
d. Choose another check to replace the missing check in the sample.

12. Assuming the tolerable deviation rate is 5 percent, the expected population rate is 3 percent,
and the allowance for sampling risk is 2 percent, what should an auditor conclude if test of 100
randomly selected documents reveals 4 deviations?
a. Accept the sample results as support for assessing control risk below the maximum because
the tolerable rate less the allowance for sampling risk equals the expected population
deviation rate.
b. Assess control risk at the maximum because the sample deviation rate plus the allowance
for sampling risk exceeds the tolerable rate.
c. Assess control risk at the maximum because the tolerable rate plus the allowance for
sampling risk exceeds the expected population deviation rate.
d. Accept the sample results as support for assessing control risk below the maximum because
the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

13. The likelihood of assessing control risk too high is the risk that the sample selected to test
controls
a. Does not support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control justifies such an assessment.
b. Contains misstatements that could be material to the financial statements when aggregated
with misstatements in other account balances or transaction classes.
c. Contains proportionately fewer monetary errors or deviations from prescribed internal
control policies or procedures than exist in the balance or class as a whole .
d. Does not support the tolerable misstatement for some or all of management’s assertions.

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14. As lower acceptable levels of both audit risk and materiality are established, the auditor should
plan more work on individual accounts to
a. Find smaller misstatements.
b. Find larger misstatements.
c. Increase the tolerable misstatement in the accounts.
d. Decrease the risk of assessing control risk too low.

15. Conducting a substantive test of an account balance, an auditor hypothesis that no material
misstatement exists. The risk that sample results will support the hypothesis when a material
misstatement actually does exist is the risk of
a. Incorrect rejection.
b. Alpha error.
c. Efficiency of the audit
d. Effectiveness of the audit

16. Which of the following courses of action would an auditor most likely follow in planning a sample
of cash disbursements if the auditor is aware of several unusually large cash disbursements?
a. Set the tolerable rate deviation at a lower level than originally planned.
b. Stratify the cash disbursements population so that the unusually large disbursements are
selected.
c. Increase the sample size to reduce the effect of the unusually large disbursements.
d. Continue to draw new samples until all the unusually large disbursements appear in the
sample.

17. How would increases in tolerable misstatement and assessed level of control risk affect the
sample size in a substantive test of details?

Increased in Tolerable Increased in assessed level of

Misstatement Control Risk
a. Increase sample size Increase sample size
b. Increase sample size Decrease sample size
c. Decrease sample size Increase sample size
d. Decrease sample size Decrease sample size

18. When using classical variables sampling for estimation, an auditor normally evaluates the
sampling results by calculating the possible error in either direction. This statistical concept is
known as?
a. Precision.
b. Reliability.
c. Projected error.
d. Standard deviation.

19. When sampling for attributes, which of the following would decrease sample size?

Risk of assessing Tolerable rate of Expected population

Control risk too low deviation deviation rate
a. Increase Decrease Increase
b. Decrease Increase Decrease
c. Increase Increase Decrease
d. Increase Increase Increase

20. At times a sample may indicate that the auditor’s assessed level of control risk for a given
control is reasonable when, in fact, the true compliance rate does not justify the assessed level.
This situation illustrates the risk of
a. Assessing control risk too low.
b. Assessing control risk too high.
c. Incorrect precision.
d. Incorrect rejection.

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21. After the auditor has prepared a flowchart of internal control for sales, and cash receipts
transactions and evaluated the design of the system, the auditor would perform tests of controls
on all control procedures
a. Documented in the flowchart.
b. Considered to be deficiencies that might allow errors to enter the accounting system.
c. Considered to be strengths that the auditor plans to rely on in assessing control risk.
d. That would aid in preventing irregularities.

22. Which of the following is an effective internal control over accounts receivable?
a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be
assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general
ledger control account once a year, preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary records.

23. Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to
promote, an assurance client’s position or opinion to the point that objectivity may, or may be
perceived to be, compromised. Such may be the case if a firm or a member of the assurance
team were to subordinate their judgment to that of the client.
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat

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

25. Which of the following control procedures could prevent or detect payment of goods not
received?
a. Counting goods when received.
b. Matching the purchase order, receiving report, and vendor’s invoice.
c. Comparing goods received with goods requisitioned.
d. Verifying vouchers for accuracy and approval.

26. Assume an auditor’s interim consideration of internal control in the expenditure/disbursement

cycle reveals that control risk can be assessed below the maximum and detection risk above the
minimum for some assertions. Which of the following is true about substantive tests applied to
accounts payable?
a. The auditor is more apt to confirm payable balances.
b. The auditor is less apt to perform substantive tests at the balance sheet date.
c. The auditor is more apt to increase the extent of substantive tests.
d. The auditor is more apt to ignore the risk of incorrect acceptance when sampling accounts
payable.

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

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28. A common audit procedures in the audit of payroll transactions involves tracing selected items
from the payroll journal to employee time cards that have been approved by supervisory
personnel. This procedure is designed to provide evidence in support of the audit proposition
that
a. Only bona fide employees worked, and their pay was properly computed.
b. Jobs on which employees worked were charged with the appropriate labor cost.
c. Internal controls relating to payroll disbursements are operating effectively.
d. All employees worked the number of hours for which their pay was computed.

29. The partner may continue to serve as the lead engagement partner before rotating off the
engagement for how many years after audit client becomes a listed entity?
a. One year
b. Two years
c. Three years
d. Four years

30. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should be
segregated.
d. The payment of cash to employees should be replaced with payment by checks.

31. Which of the following policies is an internal control weakness related to the acquisition of
factory equipment?
a. Advance executive approvals are required for equipment acquisitions.
b. Variances between authorized equipment expenditures and actual costs are to be
immediately reported to management.
c. Depreciation policies are reviewed only once a year.
d. Acquisitions are to be made through and approved by the department in need of the
equipment.

32. To strengthen control procedures over the custody of heavy mobile equipment, the client would
most likely institute a policy requiring a periodic
a. Increase in insurance coverage.
b. Accounting for work orders.
c. Solicitation, but not advertising, by individual professional accountants in public practice is
permitted in the Philippines.
d. Inspection of equipment and reconciliation with accounting records.

33. An effective internal control procedures covering fixed asset additions should require:
a. Classification as investments of those fixed asset additions that are not used in the business.
b. Capitalization of the cost of fixed asset addition in excess of a specific peso amount..
c. Performance of recurring fixed asset maintenance work solely by company maintenance
staff.
d. Authorization and approval of major fixed asset additions.

34. Which of the following questions would an auditor most likely include on an internal control
questionnaire for notes payable?
a. Are assets that collateralize note payable critically needed for the entity’s continued
existence?.
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used for the purchase of noncurrent assets?.
d. Are direct borrowings on notes payable authorized by the board of directors?

35. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. Not be defaced but segregated from other stock certificates and retained in a canceled
certificates file.
b. Be destroyed to prevent fraudulent reissuance.
c. Be defaced and sent to the secretary of state.
d. Be defaced to prevent reissuance and attached to their corresponding stubs.

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36. Which of the following is an effective internal control over accounts receivable?
a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be
assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general
ledger control account once a year, preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary records.

37. After the auditor has prepared a flowchart of internal control for sales, and cash receipts
transactions and evaluated the design of the system, the auditor would perform tests of controls
on all control procedures
a. Documented in the flowchart.
b. Considered to be deficiencies that might allow errors to enter the accounting system.
c. Considered to be strengths that the auditor plans to rely on in assessing control risk.
d. That would aid in preventing irregularities.

38. In considering internal control within the revenue/receipt cycle, what is the purpose of a
transaction walk through?
a. To assure that employees are performing assigned functions accurately
b. To confirm the auditor’s understanding of the internal control structure
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan

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

40. A common audit procedure in the audit of payroll transactions involves tracing selected items
from the payroll journal to employee time cards that have been approved by supervisory
personnel. This procedure is designed to provide evidence in support of the audit proposition
that
a. Only bona fide employees worked, and their pay was properly computed
b. Jobs on which employees worked were charged with the appropriate labor cost
c. Internal controls relating to payroll disbursements are operating effectively
d. All employees worked the number of hours for which their pay was computed

41. An auditor's tests of a client's cost accounting system are designed primarily to determine that
a. Quantities on hand have been computed based on acceptable methods that reasonably
approximate actual quantities on hand
b. Physical inventories substantially agree with book inventories.
c. The system complies with generally accepted accounting principles and functions as
planned.
d. Costs have been assigned properly to finished goods, work in process, and cost of goods
sold

42. A surprise payroll payoff in which employees must pick-up and sign for their pay check is one
means of:
a. identifying employees who do not have proper work credentials
b. establishing a tightly controlled, fraud-free work environment
c. testing for nonexistent employees
d. identifying employees who have not submitted proper W-2 forms

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43. An auditor learns that collections of accounts receivable during the first ten days of January
were debited to cash and credited to accounts receivable as of December 31. The effect
generally will be to:
a. overstate the current ratio with no effect on working capital at December 31.
b. overstate both working capital and the current ratio at December 31.
c. overstate working capital with no effect on the current ratio at December 31.
d. leave both working capital and the current ratio unchanged at December 31.

44. Negative confirmations of receivables are less effective than positive confirmations of
receivables because:
a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that require extensive follow-up.
d. a majority of recipients usually lack the willingness to respond objectively.

45. When performing tests of controls and tests of transactions for sales, the auditor generally
defines the population as:
a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.

46. In the audit of the transactions and amounts in the capital acquisitions and repayments cycle,
the auditor must take great care in making sure that the significant legal requirements affecting
the financial statements have been properly fulfilled and:
a. any violations are reported to the SEC.
b. are adequately disclosed in the financial statements
c. must issue a disclaimer if they haven’t been fulfilled.
d. any departures from the agreements are made with management’s knowledge and consent.

47. The audit objective that requires that existing notes payable are included in the notes payable
schedule is satisfied by performing which of the following audit procedures?
a. confirm notes payable.
b. trace the total of the notes payable schedule to the general ledger.
c. review the notes payable schedule to determine whether any are related parties
d. obtain confirmations from creditors who have held notes from the client in the past and are
not currently included in the notes payable schedule.

48. When a company maintains its own records of stock transactions and outstanding stock, internal
controls must be adequate to ensure that:
a. actual owners are recorded in the bylaws
b. the correct amount of dividends is paid to stockholders owning the stock on the dividend
record date.
c. the correct amount of dividends is paid to stockholders owning the stock on the declaration
date.
d. actual owners are recorded in the minutes.

49. The amount of time spent verifying owners’ equity is frequently minimal for closely held
corporations because
a. these companies are so small that it is not necessary to audit the capital section
b. the few owners all have access to the books so the auditor spends more time on accounts
like liabilities, which affect outsiders
c. there are few if any transactions during the year for the capital stock accounts, except for
earnings and dividends
d. there is no public interest in these companies

50. Which of the following is the best audit procedure for the discovery of damaged merchandise in
a client’s ending inventory?
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 a. Compare the physical quantities of slow-moving items with corresponding quantities of the
prior year
b. Observe merchandise and raw materials during the client's physical inventory count.
c. Review the management’s inventory representation letter for accuracy
d. Test overall fairness of inventory values by comparing the company’s turnover ratio with the
industry average

51. A common inventory observation procedure is to select a random sample of tag numbers and
identify the tag with that number attached to the actual inventory item. The audit objective being
achieved by this procedure is:
a. inventory as recorded on tags actually exists (existence).
b. existing inventory is counted and tagged (completeness).
c. inventory is counted accurately (accuracy).
d. inventory is classified correctly (classification).

52. When an auditor observes that personnel who are responsible for physically counting inventory
are not following the inventory instructions, the auditor should:
a. contact a client’s supervisor in an attempt to correct the problem.
b. modify the client’s physical inventory instructions.
c. not discuss the problem with client’s supervisor in order to maintain independence.
d. assign audit staff to the inventory count.

53. According to PSA 210, which of the following statements is correct?

a. The auditor and the client need not agree on the terms of the engagement..
b. Where the terms of the engagement are changed, the auditor and the client need not agree
on the new terms if they already agreed on the old terms.
c. The engagement letter assists in the supervision and review of the audit work.
d. The auditor may agree to a change of engagement where there is reasonable justification for
doing so.

54. If permission from client to discuss its affairs with the proposed auditor is denied by the client,
the predecessor auditor should:
a. Keep silent of the denial.
b. Disclose the fact that the permission to disclose is denied by the client.
c. Disclose adequately to proposed auditor all noncompliance made by the client.
d. Seek legal advice before responding to the proposed auditor.

55. To obtain an understanding of a continuing client’s business in planning an audit, an auditor

most likely would
a. Perform tests of details of transactions and balances.
b. Review prior-year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate client’s internal control environment.

56. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level
of misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception ofthev
needs of a reasonable person who will rely on the financial statements..

57. Which of the following is correct statement?

a. The auditor should use professional judgment to assess audit risk and to design audit
procedures to ensure it is eliminated.
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 b. The auditor is an insurer, and his or her report constitutes a guarantee.
c. The subsequent discovery that a material misstatement exists in the financial statements is
evidence of inadequate planning, performance, or judgment on the part of the auditor.
d. The auditor should obtain an understanding of the accounting and internal control systems
sufficient to plan the audit and develop an effective audit approach.

58. An auditor decides to increase the assessed level of control risk from that originally planned on
the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Increase materiality levels.
c. Increase inherent risk.
d. Decrease detection risk.

59. Which statement is incorrect regarding obtaining an understanding of the entity and its
environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of
performing an audit in accordance with PSAs.
b. That understanding establishes a frame of reference within which the auditor plans the audit
and exercises professional judgment about assessing risks of material misstatement of the
financial statements and responding to those risks throughout the audit.
c. The auditor’s primary consideration is whether the understanding that has been obtained is
sufficient to assess the risks of material misstatement of the financial statements and to
design and perform further audit procedures.
d. The depth of the overall understanding that is required by the auditor in performing the audit
is equal to that possessed by management in managing the entity.

60. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If
the controls leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
a. Confirmation and observation
b. Observation and inquiry
c. Analytical procedures and confirmation
d. Inquiry and analytical procedures

61. An auditor may not express a qualified opinion when

a. A scope limitation prevents the auditor from completing an important audit procedure.
b. The auditor’s report refers to the work of a specialist.
c. An accounting principles at variance with generally accepted accounting principles is used.
d. The auditor lacks independence with respect to the audited entity.

62. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year had
ended. The timing of Pamela’s appointment as auditor and the start of field work made
confirmation of accounts receivable by direct communication with the debtors ineffective.
However, Pamela applied other procedures and was satisfied as to the reasonableness of the
account balances. Pamela’s auditor’s report most likely contained a(n)?
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from PSA.

63. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always
result when management
a. Engages the auditor after the year-end physical inventory count is completed.
b. Fails to correct a material internal control weakness that had been identified during the prior
year’s audit.
c. Refuses to furnish a management representation letter to the auditor.
d. Prevents the auditor from reviewing the working papers of the predecessor auditor.

64. Analytical procedures used in the overall review stage of the audit generally include
a. Retesting controls that appeared to be ineffective during the assessment of control risk.
b. Considering unusual or unexpected account balances that were not previously identified.

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 c. Gathering evidence concerning account balances that have not changed from the prior
year.
d. Performing tests of transactions to corroborate management’s financial statement
assertions.

65. The responsibility for the identification and disclosure of related parties and transactions with
such parties rests with the
a. Auditor
b. Entity’s management
c. Financial Reporting Standards Council (FRSC)
d. Securities and Exchange Commission (SEC)

66. Which of the following events most likely indicates the existence of related parties?
a. Making a loan without scheduled terms for repayment of the funds.
b. Discussing merger terms with a company that is a major competitor.
c. Selling real estate at a price that differs significantly from its book value.
d. Borrowing a large sum of money at a variable rate of interest.

67. After determining that a related party transaction has, in fact, occurred, an auditor should
a. Obtain an understanding of the business purpose of the transaction.
b. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length
transaction.
c. Add a separate paragraph to the auditor’s report to explain the transaction.
d. Perform analytical procedures to verify whether similar transactions occurred, but were not
recorded.

68. Which of the following statements best describes the “date of the financial statements”?
a. The date on which those with the recognized authority assert that they have prepared the
entity’s complete set of financial statements, including the related notes, and that they have
taken responsibility for them.
b. The date that the auditor’s report and audited financial statements are made available to
third parties.
c. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject to
audit.
d. The date on which the auditor has obtained sufficient appropriate audit evidence on which to
base the opinion on the financial statements.

69. Which of the following statements best expresses the auditor’s responsibility with respect to
facts discovered after the date of the auditor’s report but before the date the financial statements
are issued?
a. The auditor should amend the financial statements.
b. If the facts discovered will materially affect the financial statements, the auditor should issue
a new report which contains either a qualified opinion or an adverse opinion.
c. The auditor should consider whether the financial statements need amendment, discuss
the matter with management, and consider taking actions appropriate in the circumstances.
d. The auditor should withdraw from the management.

70. PSA 570 (Going Concern) states that a fundamental principle in the preparation of financial
statements is the going concern assumption. Under this assumption, an entity is ordinarily
viewed as continuing in business for the foreseeable future with neither the intention nor the
necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws
and regulations. The responsibility to make an assessment of an entity’s ability to continue as a
going concern rests with the
a. Auditor
b. Entity’s management
c. SEC
d. Entity’s creditors

71. Which of the following statements best describes the auditor’s responsibility concerning the
appropriateness of the going concern assumption in the preparation of the financial statements?

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 a. The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue
as a going concern.
b. The auditor’s responsibility is to predict future events or conditions that may cause the entity
to cease to continue as a going concern.
c. The auditor’s responsibility is to consider the appropriateness of management’s use of the
going concern assumption and consider whether these are material uncertainties about the
entity’s ability to continue as a going concern that need to be disclosed in the financial
statements.
d. The auditor’s responsibility is to give a guarantee in the audit report that the entity has the
ability to continue as a going concern.

72. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability
to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
a. Consider the adequacy of disclosure about the client’s possible inability to continue as a
going concern.
b. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects
on the financial statements.
c. Report to the client’s audit committee that management’s accounting estimates may need
to be adjusted.
d. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that
specifically refers to “substantial doubt” and “going concern”.

73. 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 assertion.
d. Complement, but do not replace, substantive tests designed to support the assertion.

74. Which of the following statements concerning management representations is incorrect?

a. Representations by management can be a substitute for other audit evidence that the
auditor could reasonably expect to be available.
b. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter,
which has, or may have, a material effect on the financial statements and such audit
evidence is expected to be available, this will constitute a limitation in the scope of the audit,
even if a representation from management has been received on the matter.
c. If a representation by management is contradicted by other evidence, the auditor should
investigate the circumstances and, when necessary, reconsider the reliability of other
representations by management.
d. The auditor’s working papers would ordinarily include a summary of oral discussions with
management or written representations from management.

75. What type of opinion should be expressed if the client’s management refuses to provide a
representation that the auditor considers necessary?
a. Qualified opinion or a disclaimer or opinion.
b. Qualified opinion or an adverse opinion.
c. Adverse opinion or a disclaimer of opinion.
d. Unqualified opinion.

76. The primary source of information to be reported about litigation, claims, and assessments is the
a. Independent auditor
b. Client’s management
c. Court records
d. Client’s lawyer

77. Management’s refusal to give the auditor permission to communicate with the entity’s legal
counsel is most likely to lead to
a. An adverse opinion.

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 b. A qualified opinion or an adverse opinion.
c. An unmodified opinion.
d. A qualified opinion or a disclaimer of opinion.

78. The auditor should consider the status of legal matters up to the
a. Balance sheet date.
b. Date of the auditor’s report.
c. Date of approval of the financial statements.
d. Date of issuance of the financial statements.

79. The auditor’s report should be addressed

a. Only to the shareholders of the entity whose financial statements are being audited.
b. Only to the board of directors of the entity whose financial statements are being audited.
c. Only to the president of the entity whose financial statements are being audited.
d. Either to the shareholders or the board of directors, or both, of the entity whose financial
statements are being audited.

80. Which of the following is included in the introductory or opening paragraph of the auditor’s
report?
a. Identification of the financial statements audited, including the date of and period covered by
the financial statements.
b. A statement that the financial statements are the responsibility of the entity’s management.
c. A statement that the audit was conducted in accordance with the Philippine Standards on
Auditing.
d. A statement that the responsibility of the auditor is to express an opinion on the financial
statements based on the audit.

81. The following statements 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 only 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 (i.e., the balance sheet date).

82. In which of the following circumstances would an auditor most likely add an emphasis of matter
paragraph to the auditor’s report while expressing an unqualified opinion?
a. There is a substantial doubt about the entity’s ability to continue as a going concern.
b. Management’s estimates of the effects of future events are unreasonable.
c. No depreciation has been provided in the financial statements.
d. Certain transactions cannot be tested because of management’s records retention policy.

83. An auditor’s responsibility to express an opinion on the financial statements is

a. Implicitly represented in the auditor’s report.
b. Explicitly represented in the “Auditor’s Responsibility” paragraph of the auditor’s report.
c. Explicitly represented in the “Management’s Responsibility” paragraph of the auditor’s report.
d. Explicitly represented in the opinion paragraph of the auditor’s report.

84. Which paragraphs of an auditor’s report on financial statements should refer to Philippine
Financial Reporting Standards?
a. Introductory and Opinion
b. Auditor’s Responsibility and Management’s Responsibility
c. Introductory and Auditor’s Responsibility
d. Management’s Responsibility and Opinion

85. 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

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 a. Unmodified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Scope qualification

86. 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 bank 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

87. An auditor who uses the work of an expert may refer to the expert in the auditor’s report if the
a. Expert is employed by the entity.
b. Expert’s work provides the auditor greater assurance of reliability.
c. Auditor expresses a qualified opinion or an adverse opinion related to the work of the expert.
d. Auditor indicates a division of responsibility related to the work of the expert.

88. When would the auditor refer to the work of an appraiser in the auditor’s report?
a. An adverse opinion is expressed based on a difference of opinion between the client and the
outside appraiser as to the value of certain assets.
b. A disclaimer of opinion is expressed because of scope limitation imposed on the auditor by
the appraiser.
c. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
d. An unqualified opinion is expressed and an emphasis of matter paragraph is added to
disclose the use of the appraiser’s work.

89. Which of the following statements 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

90. When audited financial statements are presented in a document (e.g., annual report) containing
other information, the auditor
a. Should read the other information to consider whether it is inconsistent with the audited
financial statements.
b. Has no responsibility for the other information because it is not part of the basic financial
statements.
c. Is required to express a qualified opinion if the other information has a material misstatement
of fact.

91. An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the
financial statements do not require revision, but the client refuses to revise or eliminate the
material inconsistency, the auditor may
a. Disclaim an opinion on the financial statements after explaining the material inconsistency in
an emphasis of matter paragraph.
b. Revise the auditor’s report to include an other matter paragraph describing the material
inconsistency.
c. Express a qualified opinion after discussing the matter with the client’s directors.
d. Consider the matter closed because the other information is not in the audited statements.

92. If, on reading the other information, the auditor identifies a material inconsistency, the auditor
shall determine whether the audited financial statements or other information needs to be
amended. What type of opinion should be expressed if the client refuses to make the necessary
amendment in the financial statements?
a. Disclaimer of opinion
b. Qualified opinion or disclaimer of opinion
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 c. Unmodified opinion with an emphasis of matter paragraph describing the material
inconsistency
d. Qualified or adverse opinion

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

Lack of sufficient Restriction on the Scope

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

94. Which of the following should be included in the opinion paragraph when an auditor expresses a
qualified opinion?

When Read in With the Foregoing

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

95. 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.

96. 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.

97. An auditor’s report includes the following statement: “In our opinion, because of the effects of the
matters discussed in the Basis for Adverse Opinion paragraph, the financial statements do not
present fairly, in all material respects, the financial position of ABC Company as of December
31, 20X1, and of its financial performance and its cash flows for the year then ended in
accordance with Philippine Financial Reporting Standards.” This auditor’s report contains a/an
a. Qualified opinion
b. Unmodified opinion
c. Disclaimer of opinion
d. Adverse opinion

98. An auditor should disclose the substantive reasons for expressing an adverse opinion in the
Basis for Adverse Opinion paragraph
a. Following the opinion paragraph
b. Preceding the opinion paragraph
c. Following the introductory paragraph
d. Within the notes to the financial statements

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

100. In which of the following circumstances would an auditor’s report least likely include specific
reference to the corresponding figures?
a. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is resolved and properly dealt with
in the financial statements.
b. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, and results in a
modification of the auditor’s report regarding the current period figures.
c. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, but does not result
in a modification of the auditor’s report regarding the current period figures.
d. When the auditor’s report on the prior period financial statements containing a material
misstatement included an unmodified opinion and the prior period financial statements have
not been revised and reissued, and the corresponding figures have not been properly
restated and/or appropriate disclosures have not been made.

101. J, CPA, audited JST Company’s prior-year financial statements. These statements are
presented with those of the current year for comparative purposes without J’s auditor’s report,
which expressed 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 auditor
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’s report.

a. I, II, and IV only

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

102. When comparative financial statements are presented, the auditor’s opinion on the financial
statements “taken as a whole” should be considered to apply to the financial statements of the
a. Current period only.
b. Current period and those of the other periods presented.
c. Current and immediately preceding period only.
d. Periods presented plus one preceding period.

103. Comparative financial statements include the financial statements of the prior year that were
audited by a predecessor auditor whose report is not presented. If the predecessor’s report was
qualified, the incoming auditor should
a. Express an opinion only on the current year’s statements and make no reference to the prior
year’s statements.
b. Issue an updated comparative audit report indicating the division of responsibility.
c. Request the client to reissue the predecessor’s report on the prior year’s statements.
d. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.

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104. The predecessor auditor, who is satisfied after properly communicating with the incoming
auditor, has reissued his/her auditor’s report on prior year financial statements. The predecessor
auditor’s report should
a. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
b. Refer to the report of the incoming auditor only in the scope paragraph.
c. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
d. Not refer to the report or the work of the incoming auditor.

105. The following statements relate to unaudited prior year financial statements that are presented in
comparative form with audited current year financial statements. Which is incorrect?
a. The incoming auditor should state in the auditor’s report that the comparative financial
statements are unaudited.
b. The incoming auditor need not perform audit procedures regarding opening balances of the
current period.
c. Clear disclosure in the financial statements that the comparative financial statements are
unaudited is encouraged.
d. In situations where the incoming auditor identifies that the prior year unaudited figures are
materially misstated, the auditor should request management to revise the prior year’s
figures or if management refuses to do so, appropriately modify the report.

-END OF EXAMINATION-

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