MM&C CO. CPD TRAINING CENTER, INC.

RANDY S. PADERES MMC AT 1PB

FIRST PREBOARD EXAMS
AUDITING THEORY

BATCH 02

DIRECTION: Shade the letter of the most appropriate answer.

1. 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 the laws and regulations.
b. Using statistical sampling techniques.
c. Assigning personnel to engagements.
d. Considering audit risk and materiality.

2. Which of the following fare considered control environment factors?

Human resources
Detection Policies and
Risk practices

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

3. Which of the following best describes why an independent auditor is asked to express an opinion on the fair
presentation of financial statements?
a. It is difficult to prepare financial statements that fairly represent a company’s financial position, cash flow,
and operations without the expertise of an independent auditor.
b. It is management’s responsibility to seek available independent aid in the appraisal of the financial
information shown in its financial statements.
c. The opinion of an independent party is needed because a company may not be objective with respect to
its own financial statements.
d. It is a customary courtesy that all stockholders of a company receive an independent report on
management’s stewardship in managing the affairs of the business.

4. Yayamaning Co. engages the services of Mr. Ka Hirapan, CPA to make a project study on the expanded food
vending operations of the Corporation with the corresponding staffing and compensation package for its executive
staff. Mr. Ka Hirapan, however, has primarily auditing expertise and only in general merchandising operations.
Mr. Ka Hirapan may properly
a. Accept the engagement and carry it out consistent with the standards on auditing.
b. Accept the engagement but exercise more due professional care.
c. Accept the engagement and acquire the necessary competence or consult with established authorities.
d. Decline the engagement for lack of experience or competence in an entirely new line of specialization.

5. Because of the risk of material misstatement, an audit of financial statements in accordance with generally
accepted auditing standards should be planned and performed with an attitude of
a. Objective judgment. c. Independent integrity.
b. Professional skepticism. d. Impartial conservatism.

6. The level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Absolute assurance. c. Negative assurance
b. High assurance d. Reasonable assurance

7. Management philosophy and operating style most likely would have a significant influence on an entity’s control
environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process.

8. Which statement is correct concerning the relevance of various types of controls to a financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other
controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability
of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.

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 9. Before accepting an engagement with a new client, the CPA firm shall assess the following except
a. If the auditor is competent to perform the engagement, has the capabilities including time and resources
to do so.
b. The auditor can comply with the relevant ethical requirement.
c. If the client has integrity.
d. If the client has the financial capacity to pay the estimated audit fee.

10. If information is for management’s use only, which of the following forms of CPA association with financial
information is most likely to result in no report being issued?
a. An agreed-upon procedures engagement.
b. An audit.
c. A compilation.
d. A review.

11. A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor
with
a. Knowledge necessary to assess the risks of material misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. d. An evaluation of the consistency of application of management’s policies.

12. During the audit of the 2017 financial statements of Goldirock’s Corp, an entity which supplies hardware materials
to construction companies, Mr. Henry Chips received several types of documentary evidences. Which of the
following is considered as the most reliable?
a. Working papers prepared by the Chief Accountant and reviewed personally by the VP-Finance.
b. A check issued by the Treasurer, with the payee’s endorsement, included in the statement mailed by the
bank directly to the auditor.
c. A delivery receipt issued by the shipping department, signed by the customer, with an accompanying copy
of the sales invoice.
d. Vendor’s Confirmation of the balance of an accounts payable mailed by and returned directly to the
auditor.

13. Wald, CPA, is preparing unaudited financial statements for Zaikin Company. During the engagement, Wald
becomes aware that the statements are misleading. Wald should
a. Disclaim an opinion.
b. Insist that the statements be corrected.
c. Issue an adverse opinion.
d. Insist that the statements be audited.

14. In accordance with the provisions of Republic Act No. 9298, the following are the available penalties against
violating CPAs
I. Revocation of CPA license.
II. Suspension of the CPA license
III. Imprisonment and/or fines
a. I and II c. II and III
b. I and III d. I, II and III

15. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied
by Modern company regarding Modern’s written assertions about its compliance with contractual requirements to
pay royalties. Mill’s report on these agreed-upon procedures should contain a (an)
a. Disclaimer of opinion about the fair presentation of Modern’s financial statements.
b. List of the procedures performed (or reference thereto) and Mill’s findings.
c. Opinion about the effectiveness of Modern’s internal control activities concerning royalty payments.
d. Acknowledgement that the sufficiency of the procedures is solely Mill’s responsibility.

16. A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated
criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the
following prescribed standards:
a. Professional ethics.
b. Supervision and review.
c. Accounting and review services.
d. Quality control.

17. When a practitioner knows that a subject of an assurance engagement may be misleading because they were not
prepared in conformity with its criteria, he or she must issue
a. a qualified opinion
b. an adverse opinion
c. a disclaimer of opinion
d. a qualified or an adverse opinion depending on the materiality of the item in question.

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 18. For an entity's financial statements to be presented fairly in conformity with generally accepted accounting
principles, the principles selected should:
a. Be applied on a basis consistent with those followed in the prior year.
b. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
c. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
d. Match the principles used by most other entities within the entity's particular industry.

19. 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.

20. Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements?
a. An auditor may not draft an entity's financial statements based on information from management's
accounting system.
b. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.
c. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's
opinion.
d. d. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's
independence.

21. Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. An understanding of the prospective client's industry and business.
b. The prospective client's signature to the representation letter.
c. A preliminary understanding of the prospective client's control environment.
d. The prospective client's consent to make inquiries of the predecessor auditor, if any.

22. Which of the following provides the most authoritative guidance for an auditor?
a. A PICPA audit and accounting guide that provides specific guidance with respect to the accounting
practices in the client's industry.
b. A Journal of Accountancy article discussing implementation of a new standard.
c. General guidance provided by a Statement on Auditing Standards.
d. Specific guidance provided by an interpretation of a Statement on Auditing Standards.

23. After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a non-
assurance engagement or from a reasonable assurance engagement to a limited assurance engagement, except
when there is reasonable justification for the change. Which of the following ordinarily will justify a request for a
change in the engagement?
IV. A change in circumstances that affects the intended user’s requirements.
V. A misunderstanding concerning the nature of the engagement.
a. I only c. II only
b. Both I and II d. Neither I or II

24. In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application
of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the
beginning of the current year. This was due to the client's record retention policies. If the amounts in question
could materially affect current operating results, the auditor would:
a. Be unable to express an opinion on the current year's results of operations and cash flows.
b. Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
c. Withdraw from the engagement and refuse to be associated with the financial statements.
d. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

25. Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?

Opportunities for Continuity and periodic

On-the-job training Rotation of personnel
a. Yes Yes
b. Yes No
c. No Yes
d. No No

26. An accountant providing a compilation service must

a. Be independent of the client.

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 b. Assure that the work is performed by a person with adequate training and with the professional care.
c. Carefully review the information provided by the client.
d. Provide limited assurance that the information follows the acceptable financial reporting standards in the
Philippines.

27. A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:
Contingencies Internal Control
a. Yes Yes
b. Yes No
c. No Yes
d. No No

28. An auditor's engagement letter most likely would include:

a. Management's acknowledgment of its responsibility for maintaining effective internal control.
b. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent
financial reporting.
c. A reminder that management is responsible for illegal acts committed by employees.
d. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and
assessments.

29. Internal accounting control comprises the plan of organization and the procedures and records that are concerned
with the safeguarding of assets and the
a. Decision process of management.
b. Reliability of financial records.
c. Authorization of transactions.
d. Achievement of administrative objectives.

30. Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s
permanent files most likely include
a. Schedules that support the current year’s adjusting entries.
b. Prior years’ accounts receivable confirmation that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and supervised.
d. Analyses of capital stock and other owners’ equity accounts.

31. Early appointment of the auditor enables preliminary work to be performed by the auditor, which benefits the
client in that it permits the examination to be performed in
a. A more efficient manner.
b. A more thorough manner.
c. Accordance with quality control standards.
d. Accordance with generally accepted auditing standards.

32. With respect to the auditor's planning of a year-end examination, which of the following statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures that will be performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

33. In planning an audit engagement, which of the following affects the independent auditor's judgment as to the
quantity, type, and content of working papers?
a. The estimated occurrence rate of attributes.
b. The preliminary evaluations based on substantive testing.
c. The content of the client's representation letter.
d. The anticipated nature of the auditor's report.

34. Which of the following criteria is unique to the independent auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence.

35. The market for auditing services is driven by

a. The regulatory authority of the Securities and Exchange Commission.
b. A demand by external users of financial statements.
c. Pronouncements issued by the Auditing Standards Board.
d. Congress at the federal level and elected legislative bodies at the state level.

END OF MMC AT-1PB

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