PSA 200

1. The criteria for evaluating quantitative information vary. For example, in the audit of historical
financial statements by CPA firms, the criteria are usually
a. Generally accepted auditing standards.
b. Generally accepted accounting principles.
c. Regulations of the Internal Revenue Service.
d. Regulations of the Securities and Exchange Commission.

2. A financial statement audit:

a. Confirms that financial statement assertion are accurate.
b. Lends credibility to the financial statements.
c. Guarantees that financial statements are presented fairly.
d. Assures that fraud had been detected.

3. Because an external auditor is paid a fee by a client company, he or she

a. Is absolutely independent and may conduct an audit
b. May be sufficiently independent to conduct an audit
c. Is never considered to be independent
d. Must receive approval of the Securities and Exchange Commission before conducting an audit

4. Which of the following is responsible for an entity’s financial statements?

a. The entity’s management c. The entity’s audit committee
b. The entity’s internal auditors d. The entity’s board of directors

5. The best statement of the responsibility of the auditor with respect to audited financial statement
is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited financial
statements.
c. The responsibility over the financial statements rests with the management and the auditor
assumes responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

6. Which of the following least likely limits the auditors ability to detect material misstatement?
a. Most audit evidences are conclusive rather than being persuasive.
b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in
detecting intentional misstatements.

7. Because an examination in accordance with generally accepted auditing standards is influenced by

the possibility of material errors, the auditor should conduct the examination with an attitude of
a. Professional responsiveness c. Objective judgment
b. Conservative advocacy d. Professional skepticism

8. Which of the following best describes why an independent auditor reports on financial statements?
a. Independent auditors are likely to detect fraud
b. Competing interests may exist between management and the users of the statements
c. Misstated account balances are generally corrected by an independent audit.
d. Ineffective internal controls may exist.

9. An audit can have a significant effect on

a. Information Risk c. Business Risk
b. The risk-free interest rate d. All of these

10. The main way(s) to reduce information risk is to have

a. The user verify the information
b. The user share the information risk with management
c. Audited financial statements provided
d. All of the above

11. Which of the following is an appraisal activity established within an entity as a service to the entity?
a. External auditing c. Financial auditing
 b. Internal auditing d. Compliance auditing

12. Which of the following factors most likely would influence an auditor’s determination of the
audibility of the entity’s financial statements?
a. The complexity of the accounting system
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures

13. Which of the following types of audits would be intended to cover environmental matters that may
impact on the financial statements?
a. A financial statement audit c. A program audit
b. An operational audit d. An environmental audit

14. S1: Audit risk is the risk that the auditor gives unqualified audit opinion when the financial
statement are materially misstated.
S2: The independent auditor lends credibility to the financial statements by maintaining a clear-cut
distinction between management’s representations and the auditor’s representation.
a. False, true c. True, true
b. True, false d. False, false

15. One of the following is not a cause of information risk:

a. Voluminous data
b. Biases and motives of the provider of information
c. Remoteness of the information
d. Simplicity of exchange transactions

16. In “auditing” accounting data, the concern is with:

a. Determining whether recorded information properly reflects the economic events that occurred
during the accounting period
b. Determining is fraud has occurred
c. Determining if taxable income has been calculated correctly
d. Analyzing the financial information to be sure that it complies with government requirements

17. The “hallmark” of auditing is

a. Available audit technology c. Materiality and audit risk
b. Generally accepted auditing standards d. Professional judgment

18. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the following is
not a postulate of auditing?
a. No long-term conflict exists between the auditor and the management of the enterprise under
audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.

19. In all cases, audit reports must

a. Be signed by the individual who performed the audit procedures.
b. Certify the accuracy of the quantitative information which was audited.
c. Communicate the auditor’s finding to the general public.
d. Inform readers of the degree of correspondence between the quantifiable information and the
established criteria.

20. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter c. Management letter.
b. Audit report d. Financial statements.

PSA 210

1. An auditor who, before the completion of the engagement, is requested to change the engagement
to one which provides a lower level of assurance, should
 a. Withdrawal and consider whether there is any obligation to report to other parties the
circumstances necessitating the withdrawal.
b. Issue a report that includes references to the original engagement and any procedures that may
have been performed in the original engagement.
c. Not agree to a change of engagement where there is no reasonable justification doing so.
d. Consider the change reasonable if it relates to information that is correct, or otherwise
unsatisfactory.

2. Which of the following factors most likely would influence an auditor’s determination of the
auditability of an entity’s financial statements?
a. The complexity of accounting system
b. The existence of related-party transactions.
c. The adequacy of accounting records.
d. The operating effectiveness of control procedures.

3. In making a decision to accept or continue with a client the auditor should consider:
A B C D
Its own independence yes no yes no
Its ability to service a client properly yes yes yes no
The integrity of the client’s management yes yes no yes

4. Which of the following is least likely a source of information about potential new audit client?
a. The predecessor auditor
b. Management
c. Industry journal
d. The new auditor’s permanent file.

5. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by
the auditor. The best place to set forth these arrangements is in
a. A memorandum to be placed in the permanent section of the auditing working papers
b. An engagement letter.
c. A client representation letter
d. A conformation letter attached to the constructive services letter.

6. When an auditor believes that an understanding with the client has not been established he or she
should ordinarily
a. Perform the audit with increased professional skepticism.
b. Decline to accept or perform the audit.
c. Assess control risk at the maximum level and perform a preliminary substantive audit.
d. Modify the scope of the audit to reflect an increased risk of material misstatements due to
fraud.

7. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete
report of the circumstance leading to the termination with the understanding that all
information disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the
auditor to violate the confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for
the contact.

8. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

9. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry.
b. The competency of the client’s internal audit staff.
 c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.

10. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an
audit engagement?
a. Analysis of balance sheet accounts
b. Analysis of income statement accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management

11. When an independent auditor is approached to perform an audit for the first time, he or she should
make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be
able to provide the successor with information that will assist the successor in determining whether
a. The predecessor’s work should be used.
b. The company rotates auditors.
c. In the predecessor’s opinion, control risk is low.
d. The engagement should be accepted.

12. 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

13. The following are valid reasons why an auditor sends to his client an engagement letter:
A B C D
Avoid misunderstanding with respect to
engagement Yes Yes No Yes
Confirms the auditor’s acceptance of the
appointment Yes Yes Yes No
Objective and scope of the audit Yes Yes Yes Yes
Assures CPA’s compliance to GAAS Yes No No Yes

14. Which of the following is appropriately included in an audit engagement letter?

I. Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.
II. The audit will be made with the objective of expressing an opinion on the financial statements.
III. An audit also includes assessing the accounting procedures used and significant estimates made
by management.

a. I and II c. II and III

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

15. An audit engagement letter least likely includes

a. A reference to the inherent limitation of an audit that some material misstatements may remain
undiscovered.
b. Identification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client.
d. Arrangements concerning the involvement of internal auditors and other client’s staff.

16. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firm’s management.
d. Legal requirements and other government agencies’ pronouncements.

17. 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.

18. Which of the following is a NOT valid reason for a change of the engagement to a lower “level of
assurance”?
a. Change in circumstances affecting the need for the service.
b. Restriction on the scope of the engagement.
c. Misunderstanding as to the nature of the engagement originally requested.
d. The client’s need is satisfied by an engagement that provides lower level of assurance.

19. Which of the following actions may be appropriate if the auditor is unable to agree to a change of
the engagement and is not permitted to continue the original engagement
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders the
circumstances necessitating withdrawal
a. I only c. II and III
b. I and II d. I, II and III

20. When a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement (choose the incorrect one).
a. Should not contain a separate paragraph that refers to the original engagement.
b. Should not refer to any procedures that may have been performed in the original engagement.
c. Should qualify the opinion due to scope limitation.
d. Omits reference to the original engagement.

PSA 220

1. Quality control policies and procedures should provide the firm with reasonable assurance that
the policies and procedures relating to other elements of quality control are being effectively
applied. This statement defines the quality control element of
A. Acceptance and continuance of client relationships and specific Engagements.
B. Ethical requirements.
C. Monitoring
D. Leadership responsibility for quality within the firm.

2. A CPA firm should establish procedures for conducting and supervising work at all organizational
kevels to provide reasonable assurance that the work performed meets the firm’s standards of
quality. To achieve this goal, the firm most likely would establish procedures for
A. Evaluating prospective and continuing client relationships.
B. Reviewing engagements working papers and reports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of
personnel.

3. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
A. Enable the CPA firm o attest to the reliability of the client.
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lack
integrity.
D. Anticipate before performing any field work whether an unqualified opinion can be
expressed.

4. According to PSQC 1, a firm should establish policies and procedures to provide it with
reasonable assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice. Such policies and
procedures should include an ongoing consideration and evaluation of the firm’s system of quality
control, including a periodic inspection of a selection of completed engagements. The inspection of
a selection of completed engagements is ordinarily performed on a cyclical basis. Engagements
selected for inspection include.
A. At least one engagement for each engagement partner over an inspection cycle,
which ordinarily spans no more than 2 years.
 B. At least one engagement for each engagement partner over an inspection cycle,
which ordinarily spans no more than 1 year.
C. At least 3 engagements for each engagement partner over an inspection cycle,
which ordinarily spans no more than 5 years.
D. At least one engagement for each engagement partner over an inspection cycle,
which ordinarily spans no more than 3 years

5. Under PSQC 1, the firm should communicate the results of the monitoring of its quality control
system to engagement partners and other appropriate individuals within the firm at least
A. Monthly B. Quarterly C. weekly C. Annually

6. As defined in PSQC 1, it is a process designed to provide an objective evaluation, before the

report is issued, of the significant judgments the engagement team made and the conclusions they
reached in formulating the report.
A. Engagements quality control review
B. Engagement performance.
C. Monitoring
D. Continuing professional education.

7. PSA 220 (Revised) requires the engagement partner to consider whether members of the
engagement team have complied with the ethical requirements relating to audit engagements of
the Philippine Code. The Philippine Code establishes the fundamental principles of professional
ethics, which include
I. Integrity
II. Objectivity
III. Professional competence and due care
IV. Confidentiality
V. Professional behavior
A. I, II, IV, and V only. C. I, III, IV, and V only.
B. II, III, IV, and V only. D. I, II, III, IV, and V.

8. For audits of financial statements of listed entities, the engagement partner should
A. Determine that an engagement quality control reviewer has been appointed.
B. Discuss significant matters arising quality control reviewer, with the engagement
quality control reviewer.
C. Not issue the auditor’s report until the completion of the engagement quality
control review.
D. All of the above.

9. An engagement quality control reviewer should include an objective evaluation of

I. The significant judgments made by the engagement team.
II. The conclusion reached in formulating the auditor’s report
A. I only. C. both I and II.
B. II only. D. Neither I nor II.

10. A firm’s system of quality control should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personal files.
C. Documentation to provide evidence of the operation of each element of its system of quality
control.
D. Documentation to demonstrate compliance with regulatory requirements.

11. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
A. Auditor’s system of quality control has been maintained at a high level
B. Results are consistent with the conclusions to be presented in the auditor’s report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by person’s having adequate technical training and proficiency as
auditors.

12. The nature and extent of a CPE firm’s quality control policies and procedures depend on
The CPA The Nature of the Cost-Benefit
Firm’s Size CPA Firm’s Practice Consideration
 A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes

13. Which of the following is the best criterion in evaluating a staff auditor’s work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients
c. Working papers appearance.
d. Fulfillment of requirements set forth in the audit programs.

14. The auditors with final responsibility for an engagement and one of the assistants have a
difference of opinion about the results of an auditing procedure. If the assistant believes it is
necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable
the assistant to
a. Refer the disagreement to the PICPA’s Quality Review Committee.
b. Document the details of the disagreement with the conclusion reached.
c. Discuss the disagreement with the entity’s management or its audit committee.
d. Report on the disagreement to an impartial peer monitoring team.

15. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit
client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily
b. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management
c. Consideration of whether sufficient competent evidential matter may be obtained to afford a
reasonable basis for an opinion
d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the extent of required substantive tests

PSA 240

1. The auditor is most likely to presume that a high risk of a defalcation exists if
a. The client is a multinational company that does business in numerous foreign countries
b. The client does business with several related parties
c. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts
d. Inadequate employee training results in lengthy EDP exception reports each month

2. Which of the following characteristics most likely would heighten an auditor’s about the risk of
intentional manipulation of financial statements
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of the entity’s stock
c. Management places substantial emphasis on meeting earnings projection
d. The rate of change in the entity’s industry is slow

3. Which of the following circumstances most likely would cause and auditor to consider whether
material misstatements exist in an entity’s financial statements?
a. Management places little emphasis on meeting earnings projection
b. The board of directors makes all major financing decisions
c. Reportable conditions previously communicated to management are not corrected
d. Transactions selected for testing are not supported by proper documentation

4. Which of the following circumstances most likely would cause an auditor to believe that material
misstatements may exist in an entity’s financial statements?
a. Accounts receivable confirmation requests yield significantly fewer responses than expected
b. Audit trails of computer-generated transactions exist only for a short-time
c. The chief financial officer does not sign the management representation letter until the last
day of the auditor’s fieldwork
d. Management consults with other accountants about significant accounting matters

5. Which of the following inquiries are auditors required to make on management regarding fraud?
a. Whether management has ever intentionally violated the securities law
 b. Whether management has any knowledge of fraud that has been perpetrated on or within
the entity
c. Management’s attitudes toward its employees
d. Auditors are not required to make inquiries of management relating to fraud

6. When fraud has been identified, CPA responsibility consists of

a. Report the matter to the police c. he should have prevented it
b. He is not at all responsible d. Determination of its extent

7. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an
understanding of the nature of the act to
a. Evaluate the effect on the financial statements
b. Determine the reliability of management’s representation
c. Consider whether other similar acts may have occurred
d. Recommend remedial actions to the audit committee

8. The regular examination of financial statements is not primarily designed to disclose fraud and other
irregularities although their discovery may result. Normal audit procedures are more likely to detect
a fraud arising from
a. Forgeries on company checks
b. Failure to record cash receipts for services rendered
c. Theft of inventories
d. Collusion on the part of several employees

9. An entity’s financial statements were misstated over a period of years due to large amounts of
revenue being recorded in journal entries that involved and credits to an illogical combination of
accounts. The auditor could most likely have been alerted to this irregularity by
a. Scanning the general journal for unusual entries
b. Performing a revenue cut-off test at year-end
c. Tracing a sample of journal entries to the general ledger
d. Examining documentary evidence of sales returns and allowances recorded after year-end

10. When engaged to prepare unaudited financial statements, the CPA is engaged to detect fraud
a. Is limited to informing the client of matters that come to the auditor’s attention which cause the
auditor to believe that an irregularity exists
b. Is the same as the responsibility that exists when the CPA is engaged to perform an audit of
financial statements in accordance with generally accepted auditing standards
c. Arises out of the CPA’s obligation to apply procedures which are designed to bring out that
defalcation may have occurred
d. Does not exist unless an engagement letter is prepared

11. The ordinary examination of financial statements is not primarily designed to disclose defalcations
and other irregularities although their discovery may result. Normal audit procedures are more likely
to detect a fraud arising from
a. Collusion on the part of several employees
b. Failure to record cash receipts for services rendered
c. Forgeries on the company checks
d. Theft of inventories

12. When is the auditor responsible for detecting fraud?

a. When the fraud did not result from collusion
b. When third parties are likely to rely on the client’s financial statements
c. When the client’s system of internal control is judged by the auditor to be adequate
d. When the application of generally accepted auditing standards would have uncovered the
fraud

13. An independent auditor has the responsibility to plan the audit examination to search for errors and
irregularities that might have material effect on the financial statements. Which of the following, if
material, would be an irregularity as defined in the AICPA Statements on Auditing Standards?
a. Misappropriation of an assets or groups of assets
b. Clerical mistake in the accounting data underlying the financial statements
c. Mistake in the application of accounting principles
d. Misinterpretation of facts that existed when the financial statements were prepared
14. Which of the following statement is best describes the auditor’s responsibility regarding the
detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from nonperformance of audit procedures specifically described in the engagement
letter
b. The auditor must extend auditing procedures to actively search for evidence of fraud in all
situations
c. The auditor must extend auditing procedures to actively search for evidence of fraud where
the examination indicates that fraud may exist
d. The auditor is responsible for the failure detect fraud only when an unqualified opinion is
issued

15. Generally, the decision to notify parties outside the client’s organization of an illegal act is the
responsibility of the
a. Independent auditor c. Outside legal counsel
b. Management d. Internal auditors

16. An audit should be designed to achieve reasonable assurance of detecting material

a. Errors
b. Errors and irregularities with a direct effect on financial statement amounts
c. Errors, irregularities and those illegal acts with a direct effect on financial statement
amounts and presentation
d. Errors, irregularities and illegal acts

17. Which of the following statements reflects an auditor’s responsibility for detection fraud and error?
a. An auditor is responsible for detecting employee errors and simple fraud, but not for
discovering fraud involving employee collusion or management override
b. An auditor should plan the audit to detect errors and fraud that are caused by departures
from GAAP
c. An auditor is not responsible for detecting errors and fraud unless the application of GAAS
would result in such detection
d. An auditor should design the audit to provide reasonable assurance of detecting errors and
fraud that are material to the financial statements

18. Which of the following is not an example of an error?

a. Client personnel make mistakes in gathering or processing accounting data from which
financial statements are prepared
b. Client personnel after accounting records from which financial statements are prepared
c. Client personnel overlook or misinterpret facts, causing accounting estimates to be incorrect
d. Client personnel make mistakes in the application of accounting principles

PSA 300

1. Controls activities are the policies and procedures that help ensure that management
directives are carried out. These include activities relating to authorization, performance reviews,
information processing, physical controls, and segregation of duties. There is proper segregation of
duties when an individual who
a. A record to transaction does not compare the accounting record of the
assets with the asset itself.
b. Authorizes a transaction record it.
c. Authorization a transaction maintains custody of the asset that resulted
from the transaction.
d. Maintains custody of an asset has access to the accounting records for
the asset.

2. An auditor should obtain sufficient knowledge of an entity’s information system,

including the related business processes relevant to financial reporting, to understand the
a. Policies used to detect the concealment of fraud.
b. Process used to prepare significant accounting estimates.
c. Safeguards used to limit access to computer facilities.
d. Procedures used to assure proper authorization of transaction.

3. The primary objectives of procedures performed to obtain an understanding of internal

control is to provide an audit with
 a. Knowledge necessary to plan the audit.
b. A basis for modifying tests of controls.
c. Information necessary to prepare flowcharts.
d. Evidence to use in reducing detection risk.

4. In obtaining an understanding of internal control relevant to the audit, an auditor is

required to obtain knowledge about the
a. Effectiveness of controls that have been implemented.
b. Consistency with which controls are currently being applied.
c. Designed of the controls pertaining to internal control components.
d. Controls related to each class of transactions and account balance.

5. The auditor uses the understanding of internal control to

I. Identify types of potential misstatements.
II. Consider factors that affect the risks of material misstatement.
III. Designed the nature, timing, and extent of further audit procedures.
a. I and II only c. II and III only
b. I and III only d. I, II, and III

6. Information about segregation of duties ordinarily is best obtained by

a. Performing tests of transactions that corroborate management’s
financial statement assertions.
b. Developing audit objectives that reduce control risk.
c. Observing employees as they apply specific controls.
d. Obtaining a flowchart of activities performed by entity personnel.

7. In conducting an audit in accordance with PSAs, the auditor is required to identify and
assess the risk of material misstatement at the financial statement level, and at the assertion level
for classes of transactions, account balances, and disclosures. Some of these risks, in the auditor’s
judgment, require special audit consideration, such as those that involve fraud or complex
transactions. Such risk are called
a. Business risk c. Significant risk
b. Audit risk d. Material risk

8. As a result of obtaining an understanding of an entity’s internal control system, the

auditor may become aware of material weakness in the design or implementation of internal
control. The auditor is required to communicate this matter to
a. Those charged with governance or management
b. Chief executive officer
c. Securities and Exchange Commission
d. Board of Accountancy

9. Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded?
a. The accounting department supervisor controls the mailing of monthly
statements to customer and investigates any differences reported by the customers.
b. The accounting department supervisor independently reconciles, on a
monthly basis, the accounts receivable subsidiary ledger to the accounts receivable controls
account.
c. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
d. The billing department supervisor sends copies of approved sales order
to the credit department for comparison to authorized credit limits and current customer
account balances.

10. A sound internal Control procedures should require that defective merchandise
returned by customers be presented initially to the
a. Receiving c. Billing clerk
b. Accounts receivable supervisor d. Shipping department supervisor

11. Dancer Company uses its sales invoices for posting perpetual inventory records.
Inadequate internal control over the invoicing function allows goods to be shipped but not invoiced.
The adequate controls could cause what type of misstatement in each of the following accounts?
Revenues Receivables Inventories
 a. Understatement Understatement Understatement
b. Overstatement Overstatement Understatement
c. Understatement Understatement Overstatement
d. Overstatement Overstatement Overstatement

12. Which of the following control activities in an entity’s revenue/receipt cycle would
provide reasonable assurance that all billed sales are correctly posted to the accounts receivable
ledger?
a. Each shipment of goods on credit is supported by a prenumbered sales
invoice.
b. The accounts receivable subsidiary ledger is reconciled daily to the
accounts receivable control account in the general ledger.
c. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
d. Each sales invoice is supported by a prenumbered shipping document.

13. The auditor’s primary objective in obtaining an understanding of the client’s controls
over the purchasing function is to
a. Investigate the recording of unusual transactions regarding raw
materials.
b. Determine the reliability of financial reporting by the purchasing
function.
c. Observe the annual physical count.
d. Ascertain that raw material paid for are on hand.

14. Effective controls relevant to purchasing of raw materials should usually include all of
the following, except
a. Determining the needs for the raw materials prior to preparing the
purchase order.
b. Systematic reporting of product changes that will affect raw materials.
c. Obtaining financial approval prior to making a commitment.
d. Obtaining third-party written quality and quantity reports prior to
payment for the raw materials.

15. Which of the following controls is not usually performed in the accounts payable
department?
a. Indicating on the voucher the affected asset and expense accounts to be
debited.
b. Approving vouchers for payment by having an authorized employees
sign the vouchers.
c. Accounting for unused prenumbered purchase orders and receiving
reports.
d. Matching the vendor’s invoice with the related purchase requisition,
purchase order, and receiving report.

16. The following are appropriate questions on an internal control questionnaire concerning
purchase transactions, except
a. Are all goods received in a centralized receiving department and
counted, inspected, and compared with purchase order on receipt?
b. Are intact cash receipts deposited daily in the bank?
c. Are prenumbered purchase orders and receiving reports used and
accounted for?
d. Are an approved purchase requisition and a designed purchase order
required for each purchase?

17. Which of the following is of least concern to an auditor in assessing the risks of materials
misstatement?
a. Signed checks are distributed by the controller to approved payees.
b. Checks are signed by one person.
c. Cash receipts are not deposited intact daily.
d. Treasurer does not verify the names and addresses of check payees.

18. Which of the following is an essential control procedure to ensure the accuracy of the
recorded inventory quantities?
 a. Calculating unit costs and valuing obsolete or damaged inventory items
in accordance with inventory policy.
b. Testing inventory extensions.
c. Performing a gross profit test.
d. Establishing a cutoff for goods received and shipped.

19. Effective internal controls over inventories are designed and implemented for the
following reasons, except
a. Inventories typically represent a large component of an entity’s current
assets.
b. Inventories are the most liquid asset.
c. Inventories directly affect the financial performance of an entity.
d. Inventories typically represent a large portion of an entity’s total assets.

20. Your client, a merchandising concern, has annual sales of P30,000,000 and 40% gross
profit rate. Tests reveal that 2% of the peso amount of purchases do not get into inventory because
of breakage and inventory pilferage by employees. The company estimates that these losses could
be reduced to 0.5% of purchases by designing and implementing certain controls costing
approximately P350,000. Should the controls be designed and implemented?
a. Yes, regardless of cost-benefit considerations, because the situation
involves employees theft.
b. Yes, because the ideal system of internal control is the most extensive
one.
c. No, because the cost of designing and implementing the added controls
exceeds the projected savings.
d. Yes, because expected benefit to be derived exceed the cost of the
added controls.