SUMMARY

OF
REVIEW MULTIPLE QUESTIONS
WITH KEY ANSWERS
FOR
AUDITING THEORY

Submitted by: Ma. Tiffany G. Roble

Submitted to: Ms. Christine May J. Roncales, CPA
 Table of Contents
Page

The Code Of Professional Ethics 1

Philippine Accountancy Act Of 2004 (Ra 9298) 7

Audit-An Overview 13

The Professional Standards 18

Auditor’S Responsibility 24

The Audit Process- Accepting An Engagement 30

Audit Planning 36

Performing Substantive Tests 41

Audit Sampling 46

Completing The Audit And Post Audit Responsibilities 51

The Auditor’S Report On Financial Statements 56

Assurance Engagements And Related Services 62

THE CODE OF PROFESSIONAL ETHICS
1. In order to achieve the objectives of the accountant profession, professional
accountants have to observe a number of prerequisites or fundamental principles. The
fundamental principles include the following, except
a. Objectivity
b. Professional Competence and due Care
c. Technical Standards
d. Confidence

2. The principle of professional competence and due care imposes certain obligations
on professional accountants. Which following is not one of those obligations required by
this the principle?
a. To act diligently in accordance with applicable technical and professional
standards.
b. To be fair, intellectually honest and free of conflict of interest.
c. To become aware and understand relevant technical professional and business
developments
d. To obtain professional knowledge and experience to enable them to fulfill their
responsibilities.

3. Competence as a certified public accountant includes all of the following except

a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information needed.

4. The underlying reason for a code of professional conduct for any profession is
a. The need for public confidence in the quality of service of the profession
b. That it provides a safeguard to keep unscrupulous people out.
c. That it is required by federal legislation
d. That it allows licensing agencies to have a yardstick to measure deficient
performance.

5. Which of the following statements is true when the CPA has been engaged to
perform an audit of financial statements?
a. The CPA firm is engaged and paid by the client; therefore, the firm has primary
responsibility to be an advocate for the client.
b.The CPA firm is engaged and paid by the client, but the primary beneficiaries of
the audit are those who rely on the financial statements.
c. Should a situation arise where there is no convincing authoritative standard
available, and there is a choice of actions which could impact a client's financial
statements, the CPA is free to endorse the choice which is in the investors'
interests
d.The CPA firm's paramount concern should be the interest of the client.

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6. Which of the following is not one of the characteristics of a profession?
a. Mastery of a particular intellectual skill acquired by training and education
b. Adherence by its members to a common code of conduct
c. Acceptance of a duty to society as a whole.
d. A responsibility to protect exclusively the interest of a client or employer.

7. Society has attached a special meaning to the term "professional." A professional is

a. Someone who has passed a qualifying exam to enter the job market.
b. A person who is expected to conduct himself or herself at a higher level than the
requirements of society's laws or regulations
c. Any person who receives pay for the services performed.
d. Someone who has both an education in the trade and on the-job experience
received under an experienced supervisor.

8. The code of professional ethics for CPAs promulgated by the Board of Accountancy
applies to
a. All CPAs in public practice.
b. All CPAs in government.
c. All CPAs in public practice and employed in private business.
d. All CPAs in public practice, employed in private business and industry, in the
government, and in education.

9. Which of the following statements best describes why the profession of certified
public accountants has deemed it essential to promulgate a code of ethics and to
establish a mechanism for enforcing observance of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the
public.
b. A prerequisite to success is the establishment of an ethical code that stresses
primarily the professionals responsibility to clients and colleagues.
c. A requirement of most laws calls for the profession to establish a code of ethics
d. An essential means of self-protection for the profession is the establishment of
flexible ethical standards by the profession.

10. An auditor who accepts an audit engagement and does not possess the industry
expertise of the business entity should
a. Engage financial experts familiar with nature of the business entity
b. Obtain knowledge of matters that relate to the nature of the entity's business
c. Refer a substantial portion of the audit to another CPA who will act as the
principal auditor
d. First inform management that an unmodified opinion cannot be issued

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11. Professional competence should include
Attainment of professional Maintenance of professional
Competence Competence
a. YES YES
b. NO YES
c. NO NO
d. YES NO

12. The phase of professional competence that requires a professional accountant to

adopt a program designed to ensure quality control in the performance of professional
services consistent with technical and professional standards is
a. attainment of professional competence
b. maintenance of professional competence
c. application of professional competence
d. review of professional competence

13. Which of the following is the least required in attaining professional competence?
a. High standard of general education.
b. Specific education, training and examination in professionally relevant subjects.
c. Period of meaningful work experience.
d. Continuing awareness of development in the accountancy profession.

14. Which of the following is considered a violation of rules on confidentiality?

a. The CPA discloses information to protect his own interest in the course of legal
proceedings.
b. The CPA discloses information to a successor auditor after obtaining the client's
permission.
c. The CPA discloses information to another CPA in compliance with a quality
control review conducted the Board of Accountancy.
d. The CPA divulges information disclosed to him prospective client.

15. When a professional accountant learns of a material error or omission in a tax

return of a prior year, or of the failure to file a required tax return, the professional
accountant has responsibility to do the following, except
a. Promptly advise the client or employer of the error or omission and recommend
that disclosure be made to the revenue authorities.
b. Immediately inform the revenue authorities.
c. Take reasonable steps to ensure that the error is not repeated in subsequent tax
returns if the professional accountant concludes that a professional relationship
with the client or employer can be continued.
d. Inform the client or the employer that it is not possible to act for them in
connection with that return or other related information submitted to the
authorities if the client or the employer does not correct the error.

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16. In which of the following circumstances would a CPA be bound by ethics to refrain
from disclosing any confidential information obtained during the course of a
professional engagement?
a. The CPA is issued a summon enforceable by a court order which orders the CPA
to present confidential information.
b. A major stockholder of a client company seeks accounting information from the
CPA after the management declined to disclose the requested information.
c. Confidential client information is made available with the client's permission
d. An inquiry by the Professional Regulation Commission and the CPA needs the
disclosure to defend himself

17. The essence of the due care principle is that the auditor should not be guilty of
a. bias.
b. errors in judgement
c. Fraud
d. Negligence

18. The principle of confidentiality applies to:

a. Professional accountants in public practice
b. Professional accountants in commerce and industry
c. Professional accountants in government
d. All professional accountants

19. The principle of confidentiality imposes an obligation on professional accountants

to refrain from:
a. disclosing confidential information to another party even if the client authorizes
the disclosure.
b. using confidential information acquired as a result of professional and business
relationships to their personal advantage or the advantage of third parties.
c. disclosing information to defend themselves in case of litigation
d. responding to an inquiry or investigation conducted by the Professional
Regulatory Board of Accountancy.

20. A CPA shall not disclose confidential information obtained during an audit
engagement in which one of the following situations?
a. When the security of the state requires.
b. With the consent of the client.
c. In defense of himself when sued by his client.
d. To a successor auditor without the client's permission.

21. Which of the following is incorrect regarding confidentiality?

a. Professional accountants have an obligation to respect the confidentiality of
information about a client's or employer's affairs acquired in the course of
professional services.

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 b. The duty of confidentiality ceases after the end of the relationship between the
professional accountant and the client or employer.
c. Confidentiality should always be observed by a professional accountant unless
specific authority has been given to disclose information or there is a legal or
professional duty to disclose.
d. Confidentiality requires that a professional accountant acquiring information in
the course of performing professional services neither uses nor appear to use
that information for personal advantage or for the advantage of a third party.

22. The principle of professional behavior requires a professional accountant to

a. Be straightforward and honest in performing professional services
b. Be fair and should not allow prejudice or bias, conflict of interest or influence of
others to override objectivity
c. Perform professional services with due care, competence and diligence
d. Act in a manner consistent with the good reputation of the profession and
refrain from any conduct which might bring discredit to the profession.

23. Identify the incorrect statement. "A professional accountant rendering tax service is
entitled to put forward the best position in favor of a client or an employer, provided.…”
a. it does not impair the accountant's integrity and objectivity
b. it is rendered with professional competence
c. it is consistent with the law.
d. the professional accountant assumes responsibility for the content of the tax
return.

24. The confidential relationship will be violated if, without client's permission, the CPA
provides working papers about client to
a. A court of law which subpoenas them
b. Another CPA as part of PICPA's quality assurance review program
c. Another CPA firm which has just purchased the CPA's entire practice
d. An investigative or disciplinary body of the Board of Accountancy which is
conducting a review of the CPA's practice

25. Which one of the following statements is false?

a. Confidentiality is broken when an auditor is presented with a subpoena
concerning an audit client
b. Information that a CPA obtains from a client is generally not privileged.
c. When the Board of Accountancy conducts a review of the quality controls of
another CPA firm, permission of the client is not needed to examine audit
documentation.
d. A CPA firm which observes substandard audit documentation of another firm
during a quality control review should immediately inform the firm being
reviewed in order to rectify the deficiency.

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Key Answer

1. D
2. B
3. C
4. A
5. B
6. D
7. B
8. D
9. A
10. B
11. A
12. B
13. D
14. D
15. B
16. B
17. D
18. D
19. B
20. D
21. B
22. D
23. D
24. C
25. A

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PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA 9298)
1. Which of the following functions to promulgate auditions
standards?
a. National Accredited Professional Organization
b. Financial Reporting Standards Council
c. ACPAPP
d. Auditing and Assurance Standards Council

2. Rio, CPA is applying for renewal of his professional license. She is exempted from the
CPE requirements
a. If she is at least 65 years old
b. If she is working abroad and he has been out of the country for at least two
years immediately prior to the date of renewal.
c. Either A or B
d. Under no circumstances

3. A registered CPA who is working or practicing his/her profession or furthering abroad

shall be temporarily exempted from compliance with CPE requirements during the
period of his/her stay abroad, provided that prior to the date of renewal he/she has
been out of the country for at least
a. Four years
b. two years
c. Three years
d. one year

4. Unless otherwise exempted, registered CPAs in the practice of accountancy who have
not completed the CPE requirements shall
a. Be dropped from the roster of CPAs.
b. Not be allowed to renew their professional licenses
c. Present evidence to the satisfaction of the Board that they have the necessary
knowledge, skills and experience to discharge their professional responsibility.
d. Submit a letter addressed to the Board indicating the reasons for not complying
with the CPE requirements.

5. Affixing the CPA's seal and signature on the auditor's report is an indication of
a. CPA's acceptance of responsibility for the financial statements audited.
b. Compliance by the CPA of the requisite accounting and auditing standards and
rules.
c. CPA's accreditation to practice public accountancy.
d. Fair presentation of financial statements audited.

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6. Which of the following statements about working paper is correct?
a. Working papers prepared by a CPA including those prepared and submitted by
the client are the personal property of the auditor and the client has no
right to these working papers.
b. Working papers may substitute the client's accounting records
c. Working papers are subject to confidentiality rules and they cannot be shown
to third parties in any circumstances.
d. Working papers should not serve as a reference source for the clients
accounting records.

7. The objective of the Philippine Accountancy Act of 2004 includes:

a. The standardization and regulation of accounting education
b. Governing the examination for registration of certified public accountants
c. The supervision, control, and regulation of the practice of accountancy in the
Philippines
d. All of the above

8. Which of the following does not constitute a practice of accountancy?

a. A person holding out himself as one skilled in the knowledge, science and
practice of accounting and as a qualified person to render professional
services as a CPA to more than one client.
b. A person representing his/her employer before government agencies on tax
and other accounting related matters.
c. A person in educational institution teaching accounting, auditing, business law,
taxation or other technically related subjects.
d. A person is appointed as a marketing director of a government owned and
controlled corporation.

9. The following statements relate to the Board of Accountancy, Which statement is

correct?
a. The Board consists of a Chairman and six members.
b. The chairman and members are appointed by the President of the Philippines
upon recommendation of PICPA.
c. The Professional Regulation Commission may remove from the Board any
member whose certificate to practice has been removed or suspended.
d. Majority of the board members shall as much as possible be in public practice.

10. Which of the following statements about the composition of the Board of
Accountancy is incorrect?
a. The Board shall be composed of a chairman and six members.
b. The members of the Board shall be appointed by the President of the
Philippines from a list of three recommended for each position and ranked by
the Commission, from a list of five nominees for each position submitted by
Accredited Professional Organization or PICPA.

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 c. The Board shall elect a chairman from among its members to serve for a term of
one year.
d. If the APO fails to submit its nominees within 60 days prior to the expiry of the
term of an incumbent chairman remember, the Commission in consultation
with the Board shall submit to the president a list of three nominees for each
vacant position.

11. The president of the Philippines, upon the recommendation of the Commission, may
suspend or remove any member of the Board of Accountancy. Which of the following is
not a valid ground for suspension or removal of members of the Board of Accountancy?
a. Neglect of duty or incompetence
b. A member of the Board manipulated the CPA licensure examination results.
c. A member of the Board has violated RA9298
d. A member of the Board has been sued of crimes involving moral turpitude.

12. Which of the following is not a function of the Board of Accountancy?

a. To supervise the registration, licensure and practice of accountancy in the
Philippines
b. To issue, suspend, revoke, or reinstate the certificate of registration for the
practice of the accountancy profession
c. To prescribe and/or adopt a code of ethics for the practice of accountancy
d. To adopt an official seal of the Commission.

13. Which is the least function of the Board of Accountancy?

a. To prepare, adopt, issue or amend syllabi at the subjects for examinations in
consultation with the academe.
b. To prepare questions for the CPA licensure examination which shall strictly
within the scope of the syllabi of the subjects for examination.
c. To investigate violations of the RA 9298
d. To supervise PICPA

14. Which of the following is not one of the qualifications of the members of the Board
of Accountancy?
a. He/She must be a natural-born citizen and a resident of the Philippines
b. He/She must be a duly Certified Public Accountant with the Philippines at least
ten years of experience in practice of public accountancy
c. He/She must not have any direct or indirect pecuniary interest in any school,
college, university, or institution offering a BS Accountancy course or institution
conducting review classes in preparation for the licensure examination at the
time of his appointment to the Board.
d. He/She must not be a director or officer of PICPA at the time of his appointment

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15. Which of the following is not one of the qualifications of the members of the Board
of accountancy?
a. Must be a natural-born CPA and a resident of the Philippines.
b. Must be a duly Certified Public Accountant with at least ten years of experience
in practice of accountancy.
c. Must be of good moral character.
d. Must not have been convicted of crimes involving moral turpitude.

16. Which statement is correct regarding the term of office of the chairman and the
members of the Board of Accountancy
(BOA)?
a. No person who has served three (3) successive complete terms shall be eligible
for reappointment until the lapse of one (1) year
b. Appointment to fill up an unexpired term is to be considered a complete term
c. A person may serve in the Board of Accountancy for eight consecutive years.
d. No person shall serve in the Board for more than 10 years.

17. The auditing standard setting body created by the Board of Accountancy is known
a. Financial Reporting Standards Council (FRSC)
b. Auditing Standards and Practices Council (ASPC)
c. Accounting Standards Council (ASC)
d. Auditing and Assurance Standards Council (AASC)

18. Which of the following statements is correct about AASC?

a. The AASC shall be composed of a chairman and six members.
b. The chairman and members of the AASC shall be appointed by the President of
the Philippines from a list of three recommendees ranked by the Commission
from the list of 5 nominees for each position submitted by APO.
c. The chairman and members of the AASC shall have a term of three years
renewable for another term.
d. The AASC shall elect a Vice- Chairman from among its members for a term of
one year.

19. The sector that is most represented in the AASC is the

a. Commerce and Industry
b. Academe
c. Government
d. Public Practice

20. Which of the following government regulatory represented in the AASC?

a. Securities and Exchange Commission
b. Bureau of Internal Revenue
c. Banko Sentral ng Pilipinas
d. Board of Accountancy

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21. Educational Technical Council (ETC) differs from accounting and auditing standard
setting councils in that
a. ETC is composed of 15 members with a chairman.
b. The chairman and members of ETC are appointed by the Commission
c. The chairman and members of ETC have a three year term renewable for
another term.
d. The chairman of ETC must have been or presently a senior accounting
practitioner in Academe/Education.

22. The following statements relate to the RA9298. Which statement is true? (134)
a. The Professional Regulation Commission has the authority to remove any
member of the Board of Accountancy for negligence, incompetence, or any
other just cause.
b. Insanity is not a ground for proceeding against a CPA.
c. No person shall be appointed as a member of the Board of Accountancy unless
he has been in the practice of accountancy for at least 10 years, among others.
d. After three years, subject to certain conditions, the Board of Accountancy may
order the reinstatement of a CPA whose certificate of registration has been
revoked.

23. The following are qualifications of applicants for CPA licensure examination, except
a. He/She is a Filipino Citizen
b. He/She is of good moral character
c. He/She is a holder of the degree of Bachelor of Science in Accountancy
d. He/She is at least 21 years of age

24. To be qualified as having passed the CPA licensure examination

a. The candidate must have a general weighted average of at least 75%.
b. The candidate must not have a grade lower than 65% in any given subject.
c. Both A and B
d. Neither A no B

25. Which of the following shall be issued to examinees the CPA licensure examination?
a. Certificate of accreditation
b. Personal identification card
c. Certificate of registration and professional identification card
d. Certificate of full compliance and PRC ID.

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Key Answers
1. D
2. C
3. C
4. B
5. B
6. A
7. D
8. D
9. A
10. C
11. D
12. D
13. D
14. B
15. A
16. C
17. C
18. C
19. D
20. B
21. D
22. C
23. D
24. C
25. C

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AUDIT-AN OVERVIEW
1. Recording, classifying, and summarizing economic events in a logical manner for the
purpose of providing financial information for decision making is commonly called:
a. finance
b. auditing
c. accounting
d. economics

2. An audit involves ascertaining the degree of correspondence between assertions and

established criteria. In the case of financial statement audit, which of the following is
not a valid criterion?
a. Philippine Standards on Auditing
b. International Accounting Standards
c. Authoritative financial reporting framework
d. Accounting standards generally accepted in the Philippines

3. The subject matter of the financial audit is the

a. Financial statements
b. Economic data
c. Assertions
d. Operating data

4. Whenever a CPA professional is engaged to perform an audit of financial statements

according to Philippine Standard on Auditing, he is required to comply with those
standards in order to
a. Eliminate audit risk
b. Meet the minimum requirement when providing audit services
c. To reduce the auditor's responsibility
d. Eliminate the professional judgment in resolving audit issues

5. The criteria for evaluating quantitative information vary. For example, in the case of
an independent audit of financial statements by CPA firms, the criteria are usually the
a. Philippine Standards on Auditing
b. Philippine Financial Reporting Standards
c. National Internal Revenue Code
d. Regulations of the Securities and Exchange Commission

6. In "auditing" financial accounting data, the primary concern is with:

a. determining whether recorded information properly reflects the economic
events that occurred during the accounting period.
b. determining if 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.

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7. An audit of financial statements is conducted to determine if the
a. Organization is operating efficiently and effectively
b. Auditee is following specific procedures or rules set down by some higher
authority
c. Overall financial statements are stated in accordance with the applicable
financial reporting framework.
d. Client's internal control is functioning as intended.

8. In determining the primary responsibility of the external auditor for an audit of a

company's financial statements, the auditor owes primary allegiance to:
a. Stockholders, creditors and the investing public.
b. The management of the audit client because the auditor is hired and paid by
management.
c. The Auditing and Assurance Standards Council, because it determines auditing
standards and auditor's responsibility.
d. The audit committee of the audit client because that committee is responsible
for coordinating and reviewing all audit activities within the company.

9. An audit involves ascertaining the degree of correspondence between assertions and

established criteria. In the case of an audit of financial statements, which of the
following would be a valid criterion?
a International Standards on Auditing.
b. Philippine Standards on Auditing,
c. Generally accepted accounting principles
d. Quality Control Standards

10. Most of the independent auditor's work in formulating an opinion on financial

statements consists of
a. Obtaining and examining evidence
b. Examining cash transactions
c. Comparing recorded accountability with assets
d. Studying and evaluating internal control

11. One objective of an operational audit is to

a. determine whether the financial statements fairly present the entity's
operations
b. evaluate the feasibility of attaining the entity's operational objectives
c. make recommendations for improving performance
d. report on the entity's relative success in attaining profit maximization

12. An audit designed to provide reasonable assurance of detecting violations of a

specific provisions of contracts or grant agreements would be called a(e):
a. performance audit
b. management audit

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 c. operational audit
d. compliance audit

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

14. When performing an operational audit, the internal audit team must first determine
that
a. financial audit has been performed by an independent auditor.
b. a financial audit has been performed by an internal auditor.
c. a review was performed by either an independent or an internal auditor.
d. specific criteria are developed to define effectiveness.

15. Which of the following types of auditing is performed commonly by CPA's on a

contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing

16. By providing high level of assurance on audit reports on financial statements, the
auditor
a. Guarantees the fair presentation of the financial statements
b. Confirms the accuracy of the financial statements.
c. Enhances the credibility of the financial statements.
d. Assures the readers that fraudulent activities of employees have been detected

17. The reason an independent auditor gathers evidence is to

a. form an opinion on the financial statements.
b. detect fraud.
c. evaluate management's performance
d. evaluate the entity's internal control.

18. The trait that distinguishes auditors from accountants is the:

a. auditor's ability to interpret accounting standards.
b. auditor's education beyond the Bachelor's degree.
c. auditor's ability to interpret PFRS.
d. auditor's accumulation and interpretation of evidence related to the company's
financial statements

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19. The level of assurance provided by an auditor on an report is:
a. low
b. high
c. moderate
d. none

20. Theoretically, it is possible to provide an infinite range of assurance from a very low
level of assurance to an absolute level of assurance. In practice, the professional
accountants cannot provide absolute assurance because of the following except,
a. The internal control has its inherent limitations
b. The professional accountants employ testing process
c. The lack of expertise of the professional accountants in doing a systematic
engagement process.
d. The use of judgment in gathering evidence and drawing conclusions based on
that evidence.

21. Which of the following statements about independent financial statement audit is
incorrect?
a. Scope of the audit refers to audit procedures deemed necessary in the
circumstances to achieve the objective of the audit
b. The auditor's opinion enhances the credibility of the financial statements.
c. The phrase used to express the auditor's opinion is "present fairly, in all material
respects".
d. The risk that the auditor will fail to uncover material misstatement is eliminated
when the auditor conducts the audit in accordance with PSAs.

22. Which of the following statements does not properly describe a limitation of an
audit?
a. Many audit conclusions are made on the basis of examining a sample of
evidence.
b. The work undertaken by the auditor is permeated by judgment
c. The auditor might misinterpret the evidence obtained
d. Most of the items in the financial statements do not have supporting evidence

23. Which of the following is one of the limitations of an audit?

a. Nature of evidence obtained
b. Inadequacy of the accounting records
c. Confidentiality of information
d. Scope limitations imposed by the entity

24. The assumption underlying an audit of financial statements is that they will be used
by
a. Different groups for different purposes
b. The general public in making investment decisions.

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 c. The board of directors as basis of declaring cash dividends.
d. The regulatory agencies to verify information that is relevant to their
supervisory functions

25. The objective of the ordinary examination by the independent auditor is the
expression of an opinion on
a. The fairness of the financial statements
b. The accuracy of the financial statements
c. The accuracy of the annual report
d. The balance sheet and income statement

Key Answers
1. C
2. A
3. A
4. B
5. B
6. A
7. C
8. A
9. C
10. A
11. C
12. D
13. B
14. D
15. D
16. C
17. A
18. D
19. B
20. C
21. D
22. D
23. A
24. A
25. A

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THE PROFESSIONAL STANDARDS
1. According to Philippine Standards on Auditing, because there are inherent limitations
in an audit that affect the auditor's ability to detect material misstatements, the auditor
is:
a. A guarantor but not an insurer of the statements.
b. An insurer but not a guarantor of the statements.
c. Neither a guarantor nor an insurer of financial statements.
d. Both a guarantor and an insurer of the financial statements

2. An auditor need not abide with a specific requirement of PSA if the auditor believes
that:
a. The amount is insignificant.
b. The requirement of the PSA is impractical to perform.
c. The requirement of the PSA is impossible to perform.
d. Any of the given three choices is correct.

3. The Philippine Standards on Auditing can be described as

a. Providing very specific guidance about the specific activities an auditor must
perform on each engagement.
b. Similar to Philippine Financial Reporting Standards (PFRS).
c. Defining the minimum standards of performance for an auditor
d. Providing assurance that an auditor will not issue an inappropriate audit opinion

4. Which of the following best describes the function of Auditing and Assurance
Standards Council (AASC)?
a. To establish and promulgate generally accepted accounting principles in the
Philippines.
b. To investigate violations of Accountancy Law.
c. To promulgate auditing standards, practices and procedures that shall be
generally accepted by the accounting profession in the Philippines.
d. To determine the minimum requirements for admission in the accounting
profession.

5. Which of the following is correct about Philippine Auditing Practices Statements

(PAPS)?
a. These are issued to resolve issues relating to PSAs.
b. These statements are intended to have the authority of PSAS.
c. These statements are issued to provide practical assistance to auditors in
implementing PSAs or to promote good practice.
d. These statements are forms of interpretations issued AASC

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6. Which of the following pronouncements issued by AASC designed to resolve issues
relating to PSAS?
a. Philippine Auditing Practice Statements
b. Interpretations
c. Statements of Auditing Standards in the Philippines
d. Generally Accepted Auditing Standards

7. A firm of independent auditors must establish and follow quality control policies and
procedures because these standards
a. Are necessary to meet increasing requirements of auditors' liability as insurers.
b. Are required by the SEC for auditors of all firms.
c. Include formal filing of records of such policies and procedures to a regulatory
agency.
d. Give reasonable assurance that the firm as a whole will comply with
professional standards.

8. Which of the following is not an essential component of quality control?

a. Policies and procedures to ensure that firm personnel are actively engaged in
marketing strategies.
b. Policies and procedures to ensure that the work performed by firm personnel
meet applicable professional standards.
C. Policies to ensure that personnel maintain their independence in fact and in
appearance.
d. Policies that ensure that monitoring activities are effectively applied.

9. The objective of the quality control policies to be adopted by an audit firm will
ordinarily incorporate all of the following except:
a. Risk assessment
b. Leadership responsibilities
c. Engagement performance
d. Human resources

10. The person responsible for the audit engagement and its performance, and for the
auditor's report that is issued in behalf of the firm is the
a. quality control reviewer
b. engagement partner
c. client's management
d. audit manager

11. Which of the following is an element of a CPA firm's quality control system that
should be considered in establishing its quality control policies and procedures?
a. Complying with laws and regulations
b. Using statistical sampling techniques
c. Independence

19
 d. Consideration of audit risk and materiality

12. In connection with the element of engagement performance, CPA fem's system of
quality control should ordinarily provide that all personnel
a. Have the knowledge required to enable them to fulfill responsibilities assigned
b. Review and test compliance with the firm's quality control policies and
procedures
c. Seek assistance from persons having appropriate levels of knowledge, judgment
and authority
d. Appropriately maintain independence when providing assurance services

13. Maintaining or providing access to adequate reference libraries and other

authoritative sources is a procedure that is most likely performed to comply with the
policy of
a. monitoring
b. skills and competence
c. consultation
d. assignment

14. Which of the following quality control procedures engagement performance?

a. Hiring
b. Direction
c. Professional development
d. Advancement

15. Within the context of quality control, the primary purpose of continuing professional
education and training activities is to enable a CPA firm to provide its personnel with:
a. technical training that assutes proficiency as a valuation expert.
b. professional education that is required in order to perform with due
professional care.
c. knowledge required to fulfil assigned responsibilities
d. knowledge required to perform a peer review.

16. In the auditing environment, failure to meet auditing standards is often

a. an accepted practice
b. a suggestion of negligence
c. conclusive evidence of negligence
d. tantamount to criminal behavior

17. Audit standard requires an auditor to:

a. Perform procedures that are designed to detect all instances of fraud
b. Provide reasonable assurance that the financial statements not materially
misstated.

20
 c. Issue an unmodified opinion only when the auditor is satisfied that no instances
of fraud have occurred
d. Design the audit program to meet financial statement users' expectations
concerning fraud.

18. Which of the following underlies the application of generally accepted auditing
standards, particularly the standards of field work and reporting?
a. Element of internal control
b. Elements of materiality and risk.
c. Element of reasonable assurance
d. Element of corroborating evidence.

19.Which of the following best describes what is meant by generally accepted auditing
standards?
a. Audit objectives generally determined on audit engagements
b. Acts to be performed by the auditor.
c. Measures of the quality of the auditor's performance
d. Procedures to be used to gather evidence to support financial statements

20. Requirements for training, independence and due professional care are included in
which group of the generally accepted auditing standards?
a. Fieldwork
b. General
c. Reporting
d. Quality control

21. The general standards of the generally accepted auditing standards include a
requirement that
a. The fieldwork to be adequately planned.
b. The auditor's report to state whether the financial statements are presented in
conformity with PFRS.
c. Due professional care be exercised by the auditor.
d. The auditor to obtain sufficient, competent evidential matter.

22. Under GAAS, which of the following reflects a concept from the general group?
a. The confirmation of accounts receivable.
b. Completing an internal control questionnaire.
c. The initial planning of the audit with the audit partner, manager, senior, staff
and client personnel.
d. The assignment of audit personnel to an engagement where they have no
financial interest.

21
23. What is the general character of the three generally accepted auditing standards
classified as general standards?
a. Criteria for competence, independence, and professional care of individuals
performing the audit.
b. Criteria of evidence gathering.
c. Criteria for the content of the auditor's' report on financial statements and
related footnote disclosures
d. The requirements for the planning of the audit and supervision of assistants, if
any.

24. Which of the following does not pertain to the standards of fieldwork?
a. Adequate planning and supervision.
b. Obtaining sufficient competent evidential matter.
c. Proper study and evaluation of internal control as for reliance thereon.
d. Technical training and proficiency.

25. While performing audit services for their clients, professional accountants have a
duty to provide a level care which is
a. Reasonable
b. Greater than average
c. Superior
d. Guaranteed to be free from error.

Key Answers
1. C
2. D
3. C
4. C
5. C
6. B
7. D
8. A
9. A
10. B
11. C
12. C
13. C
14. B
15. C
16. C
17. B
18. B
19. C
20. B

22
21. C
22. D
23. A
24. D
25. A

23
AUDITOR’S RESPONSIBILITY
1. These are acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws and regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation

2. Generally the decision to notify parties outside the client's organization regarding
noncompliance with laws and regulations is the responsibility of the
a. independent auditor
b. client's legal counsel
c. management
d. internal auditors

3. Which of the following circumstances is not an indication of possible noncompliance?

a. Payment of fines or penalties
b. Payment for unspecified services to consultants, related parties, or government
employees
c. Purchasing at prices significantly above or below market price
d. Payment for goods or services to the country from which the goods or services
originated.

4. Which of the following conditions would least likely indicate the occurrence of
noncompliance?
a. Investigation by government agencies
b. Payments without proper documentation
c. Purchasing a real property for a price that is significantly higher than the seller's
book value
d. Existence of an accounting system which fails to provide an adequate audit trail
or sufficient evidence

5. Which of the following conditions would most likely indicatea possible

noncompliance with laws and regulations?
a. Media comment
b. Purchasing land for a price significantly different the seller's recorded amount
c. Payment of commission to sales agent
d. Payment for specified services to consultant

6. Which of the following does not properly describe a procedure that the auditor
normally performs in connection with noncompliance?
a. The auditor should obtain a general understanding of legal and regulatory
framework applicable to the entity

24
 b. The auditor should perform procedures to identify instances of noncompliance
with laws and regulations
c. The auditor should obtain oral representation that management has disclosed
to the auditor all known actual or possible noncompliance with laws and
regulations
d. The auditor should obtain sufficient appropriate evidence about compliance
with laws and regulations

7. Which of the following procedures would an auditor be unlikely to perform when

obtaining a general understanding about the laws and regulations affecting the client's
business?
a. Inquire of management concerning the entity's policies and procedures
regarding compliance with laws and regulations
b. Inquire of management as to the laws or regulations that may be expected to
have a fundamental effect on the operations of the entity
c. Discuss with management the policies or procedures adopted for identifying,
evaluating and accounting for litigation claims and assessments
d. Obtain a representation letter from the client's legal counsel

8. After obtaining sufficient level of understanding about the client's legal and
regulatory framework, the auditor should
a. develop a code of conduct and ensure that these employees comply with such
code.
b. perform procedures to help identify instances of noncompliance with laws and
regulations
c. monitor entity's legal requirements and ensure that operating procedures are
designed to meet these requirements
d. inquire of management as to the laws or regulations that may be expected to
have a fundamental effect on the operations of the entity

9. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud.
b. Misappropriation of asset and defalcation
c . Management fraud and employee fraud
d. Fraudulent financial reporting and management fraud

10. Fraudulent financial reporting is often called

a. management fraud
b. Defalcation
c. misappropriation of assets
d. employee fraud

11. Fraudulent financial reporting is most likely to be committed by whom?

a. Line employees of the company

25
 b. Outside members of the company's board of directors
c. Company's management
d. The company's auditors

12. The auditor has considerable responsibility for notifying users as to whether or not
the statements are properly stated. This imposes upon the auditor a duty to
a. Provide reasonable assurance that material misstatements will be detected
b. Be a guarantor of the fairness in the statements
c. Be equally responsible with management for the preparation of the financial
statements
d. Be an insurer of the fairness in the statements

13. Which of the following statements is true?

a. It is usually easier for the author to uncover fraud that errors
b. It is usually easier for the auditor to uncover errors than fraud
c. It is usually equally difficult for the auditor to uncover errors or fraud
d. Usually, none of the above statements is true

14. The auditor's best defense when material misstatements in the financial statements
are not uncovered in the audit is that
a. the audit was conducted in accordance with generally accepted accounting
principles
b. client is guilty of contributory negligence
c. the audit was conducted in accordance with PSA
d. the financial statements are client's responsibility

15. The following statements relate to the auditor's responsibility for the detection of
errors and fraud. Identify the correct statements
I. Due to the inherent limitations of the audit, there a possibility that material
misstatements in the financial statements may not be detected
II. The subsequent discovery of material misstatement of the financial information
resulting from fraud or error does not, in itself, indicate that the auditor failed to
follow the basic principles and essential procedures of an audit.

a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect

16. The auditor's responsibility for failure to detect fraud arises

a. When the failure clearly results from non-compliance to PSA
b. Whenever the amounts involved are material
c. Only when the examination was specifically designed to detect fraud.

26
 d. Only when such failure clearly results from negligence so gross as to sustain an
inference of fraud on the part of the auditor.

17. The level of assurance provided by an audit of detecting a material misstatement is

referred to as
a. Reasonable assurance
b. Moderate assurance
c. Absolute assurance
d. Negative assurance.

18. The responsibility for the detection and prevention of errors fraud and
noncompliance with laws and regulations rests with
a. Auditor
b. client's legal counsel
c. client management
d. internal auditor

19. The responsibility for adopting sound accounting policies, maintaining adequate
internal control, and making fair representation in the financial statement rests
a. With the management
b. With the independent auditor
c. Equally with management and the auditor.
d. With the internal audit department.

20. The management responsibility to detect and prevent fraud and error is
accomplished by
a. Implementing adequate quality control system.
b. Having an annual audit of financial statements.
c. Implementing adequate accounting and internal control system
d. Issuing a representation letter to the auditor.

21. Material misstatements may emanate from all of the following except
a. fraud
b. error
c. non compliance with laws and regulations
d. inadequacy of accounting records.

22. Which of the following factors is most important concerning an auditor's

responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations,
alterations, and the misapplication of accounting principles
b. The probability that unreasonable accounting estimates result from
unintentional bias or intentional attempts to misstate the financial statements

27
 c. The possibility that management fraud, defalcations, and the misappropriation
of assets may indicate the existence of illegal acts
d. The risk that mistakes, falsifications, and omissions may cause the financial
statements to contain material misstatements.

23. The auditor gives an audit opinion on the fair presentation of the financial
statements and associates his or her name with it when, on the basis of adequate
evidence, the auditor concludes that the financial statements are unlikely to mislead
a. Investors
b. Management
c. A prudent user
d. The reader

24. Which of the following terms relates to the embezzling of receipts?

a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication

25. Noncompliance means act of omission by the entity, ___________ which are
contrary to the prevailing laws and regulations.
a. Either Intentional or Unintentonal
b. Unintentional
c. And non-complying the laws
d. Intentional

Key Answers
1. B
2. C
3. D
4. C
5. A
6. C
7. D
8. B
9. C
10. A
11. C
12. A
13. B
14. C
15. C
16. A
17. A

28
18. C
19. A
20. C
21. D
22. D
23. C
24. C
25. A

29
THE AUDIT PROCESS- ACCEPTING AN ENGAGEMENT
1. In performing an audit, which one of the following procedures would be considered
an analytical procedure?
a. Reviewing procedures followed in receiving, depositing, and disbursing cash.
b. Comparing signatures on checks with the signatures of authorized check signers.
c. Reviewing initials on received documents.
d. Comparing last year's interest expense with this year's interest expense.

2. Failure to record the acquisition of goods is a violation of which audit objective?

a. Accuracy
b. Completeness
c. Occurrence
d. Authorization

3. In assessing whether to accept a client for an audit engagement, an auditor should

consider the
I. Client's business risk
II. Auditors business risk
a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. Which of the following factors most likely would cause an auditor to define a new
audit engagement?
a. Concluding that the entity's management probably lacks integrity.
b. An inability to perform preliminary analytical procedures before assessing
control risk.
c. An inadequate understanding of the entity's internal control.
d. The close proximity to the end of the entity's reporting period.

5. Which of the following conditions most likely would pose the greatest risk in
accepting a new audit engagement?
a. There will be a client-imposed scope limitation.
b. The client's financial reporting system has been in place for 10 years.
c. The firm will have to hire an expert in one audit area.
d. Staff will need to be rescheduled to cover this new client.

6. In an audit based on Philippine Standards on Auditing (PSAs), a successor auditor

would normally become satisfied with opening balances by
a. Performing analytic review procedures.
b. Reviewing the predecessor's working papers.
c. Auditing the previous year's working papers.
d. Interviewing client personnel.

30
7. A predecessor withdrew from the engagement after discov ering that a client's
financial statements are materially misstated that it would not revise. If asked by the
successor auditor about the termination of the engagement, the predecessor should
a. Suggest that the successor auditor should obtain the client's consent to discuss
the reasons.
b. Indicate that there was a misunderstanding.
c. State that the audit revealed material misstatement that the client would not
revise.
d. Suggest that the successor auditor ask the client.

8. The following matters are generally included in an auditors engagement letter,

except
a. The factors to be considered in determining the overall materiality.
b. The fact that because of the test nature and other inher ent limitations of an
audit, together with the inherent limitations of internal control, there is an
unavoidable risk that even some material misstatements may remain
undiscovered.
c. The scope of the audit.
d. Management's responsibility for the financial statements.

9. The following are usually included in an auditor's engage ment letter, except
a. List of audit procedures to be used in inventory observation.
b. The financial statements are the responsibility of the company's management,
c. A reference to PFRS.
d. A reference to PSAS.

10. Which of the following statements would least likely appear in an auditor's
engagement letter?
a. Our audit will be made with the objective of our express ing an opinion on the
financial statements.
b. We remind you that the responsibility for the preparation of financial
statements including adequate disclosure is that of the management of the
entity.
c. After performing our preliminary analytical procedures, we will discuss with you
the other procedures we consider er necessary to complete the engagement.
d. Our fees, which will be billed as work progresses, are based on the time
required by the individuals assigned to the engagement plus out-of-pocket
expenses.
e.
11. Planning an audit involves
I. Establishing the overall audit strategy for the engagement.
II. Developing an audit plan.
a. I only
b. II only

31
 c. Both I and II
d. Neither I nor II

12. Which of the following activities should be performed by the auditor at the
beginning of the current audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the
specific audit engagement.
II. Evaluate compliance with relevant ethical requirements,including independence.
III. Establish an understanding of the terms of the engagement.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

13. Initial audit planning involves the following matters, except

a. Identify the client's reason for the engagement.
b. Schedule engagement staff and auditor's experts.
c. Develop an overall audit strategy.
d. Request that bank balances be confirmed.

14. In the planning stage of an audit engagement, the auditor is required to perform
audit procedures to obtain an under standing of the entity and its environment,
including its in internal control. These procedures are called
a. Risk assessment procedures
b. Substantive tests
c. Tests of controls
d. Dual-purpose tests

15. Audit programs are modified to suit the circumstances of particular engagements. A
complete audit program usually should be developed
a. When the engagement letter is prepared.
b. After obtaining an understanding of the control environment and control
activities component of the entity's in internal control.
c. After the auditor has obtained an understanding of the entity and its
environment, including its internal control and assessed the risks of material
misstatement.
d. Prior to beginning the actual audit work.

16. In designing written audit programs, an auditor should establish specific audit
objectives that relate primarily to the
a. Selected audit techniques.
b. Cost-benefit of gathering audit evidence.
c. Timing of audit procedures.
d. Financial statement assertions.

32
17. What materiality level would be considered by the auditor to determine whether
the proposed adjustments are significant or not?
a. Overall materiality
b. Scoping materiality
c. Specific materiality
d. Performance materiality

18. What materiality level is used by the auditor in determining which line items in the
financial statements are to be tested?
a. Overall materiality
b. Performance materiality
c. Specific materiality
d. Individual materiality

19. __________is an individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the auditor to assist the audit
in obtaining sufficient appropriate audit evidence.
a. Auditor's expert
b. Management's expert
c. Expert
d. Specialist

20. is an individual or organization possessing er pertise in a field other than accounting

or auditing, whose work in that field is used by the entity to assist the entity in preparing
the financial statements.
a. Auditor's expert
b. Management's expert
c. Expert
d. Specialist

21. When planning to use the work of an expert, the auditor should evaluate the
expert's
I. Professional competence
II. Objectivity
a. I only
b. II only
c. Both I and II
d. Neither I nor II

22. The objective of the ordinary audit of financial statements is the expression of an
opinion on:
a. the fairness of the financial statements in all material respects
b. the accuracy of the financial statements.
c. the accuracy of the annual report.

33
 d. the accuracy of the balance sheet and income statement.

23. The responsibility for the preparation of the financial statements and the
accompanying footnotes belongs to:
a. the auditor.
b. management
c. both management and the auditor equally.
d. management for the statements and the auditor for the notes

24. Auditors accumulate evidence to:

a. defend themselves in the event of a lawsuit.
b. justify the conclusions they have otherwise reached.
C. satisfy the requirements of the Securities and Exchange Commission.
d. enable them to reach conclusions about the fairness the financial statements

25. Management assertions are:

a. directly related to the financial reporting framework used by the company
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the company's financial condition
d. provided to the auditor in the assertions letter, but are not disclosed on the
financial statements

Key Answers
1. D
2. B
3. C
4. A
5. A
6. B
7. A
8. A
9. A
10. C
11. C
12. D
13. D
14. A
15. C
16. D
17. A
18. B
19. A
20. B
21. C

34
22. A
23. B
24. D
25. A

35
AUDIT PLANNING
1. Which of the following is not normally performed in the planning stage of the audit?
a. Develop an overall audit strategy.
b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client's reason for the audit.

2. Which of the following procedures would a CPA ordinarily perform during audit
planning?
a. Obtain understanding of the client's business and industry
b. Review the client's bank reconciliation
c. Obtain client's representation letter
d. Review and evaluate client's internal control

3. Early appointment of the independent auditor will enable:

a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

4. In developing the overall audit plan for a new client, factor not to be considered is
a. Materiality levels.
b. The client's business, including the structure of the organization and accounting
system used
c. The amount of estimated audit fee
d. The audit risks an procedures to be performed to achieve audit objectives

5. In planning the audit engagement, the auditor should consider each of the following
except
a. matters relating to the entity's business and the industries in which it operates
b. the entity's accounting policies and procedures
c. anticipated levels of control risk and materiality
d. the kind of opinion that is likely to be expressed

6. Which of the following is the most likely first step an auditor would perform at the
beginning of an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor's report
b. Study and evaluate the system of internal administrative control
c. Tour the client's facilities and review the general records
d. Consult with and review the work of the predecessor auditor prior to discussing
the engagement with the client management

36
7. A tour of the client's facilities is helpful in obtaining an understanding of the client's
operations because
a. The auditor will be able to assess the physical safeguards over assets
b. The auditor may be better able to assess certain inherent risks
c. The auditor obtains a broader perspective about the company as a whole
d. All of the above

8. Prior to beginning the field work on a new audit engagement in which a CPA does not
possess expertise in the industry in which the client operates, the CPA should
a. Reduce audit risk by lowering the preliminary levels of materiality
b. Design special substantive tests to compensate for the lack of industry expertise
c. Engage financial experts familiar with the nature of the industry
d. Obtain a knowledge of matters that relate to the nature of the entity's business

9. An extensive understanding of the client's business and industry and knowledge

about the company's operations are essential for doing an adequate audit. For a new
client, most of this information is obtained.
a. From the precedessor auditor
b. From the Securities and Exchange Commission
c. From the permanent file
d. At the client's premises

10. If an auditor establishes a relatively high level for materiality, then the auditor will:
a. accumulate more evidence than if a lower level had been set.
b. accumulate less evidence than if a lower level had been set.
c. accumulate approximately the same evidence as would be the case were
materiality lower.
d. accumulate an undetermined amount of evidence.

11. 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 the applicable financial
reporting framework, 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 of the needs of a reasonable person who will rely on the financial
statements.

12. In developing the preliminary level of materiality in an audit, the auditor will
a. Look to audit standards for specific materiality guidelines

37
 b. Increase the level of materiality if fraud is suspected
c. Rely primarily on professional judgment to determine the materiality level
d. Use the same materiality level as that used for different clients in the same
industry

13. In making a preliminary judgment about materiality, the auditor initially determines
the aggregate (overall) level of materiality for each statement. For planning purposes,
the auditor should use the
a. levels separately.
b. largest aggregate level.
c. average of these levels.
d. smallest aggregate level.

14. The probability that an auditor's procedure leading to the conclusion that a material
error does not exist in an account balance when, in fact, such error does exist is referred
to as
a. Prevention risk
b. Inherent risk.
c. Control risk.
d. Detection risk

15. The risk that the auditor may express an incorrect opinion on the financial
statements is called
a. inherent risk
b. detection risk
c. control risk
d. audit risk

16. The risk that financial statements are likely to materially without regard to the
effectiveness is the
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk

17. A measure of the auditor's assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the client's internal
control is called:
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

38
18. These consist of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationship that are inconsistent with other relevant
information or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis

19. Evaluations of financial information made by a study of plausible relationships

among financial and nonfinancial data involving comparisons of recorded amounts to
expectations developed by the auditor is a definition of
a. Analytical procedures
b. Tests of balances
c. Tests of transactions
d. Auditing

20. The purpose of analytical procedures during the audit planning stage is to
a. Aid in planning the observation of physical inventory.
b. Identify unusual circumstances that the auditor may need to investigate further
c. Flag individual transactions for further review.
d. Determine whether sales transactions are approved.

21. Unusual fluctuations occur when

a. Significant differences are not expected but do exist
b. Significant differences are expected but do not exist
c. Significant differences are expected and do exist
d. Either A or B is true

22. The audit program usually cannot be finalized until the

a. Consideration of the entity's internal control has been completed
b. Engagement letter has been signed by the auditor and the client
c. Significant deficiency has been communicated to the audit committee of the
board of directors
d. Search for unrecorded liabilities has been performed and documented

23. Audit programs should be designed so that

a. Most of the required procedures can be performed as interim work
b. Inherent risk is assessed at a sufficiently low level
c. The auditor can make constructive suggestions to management
d. The audit evidence gathered supports the auditor's conclusions

24. In designing written audit programs, an auditor should establish audit objectives
that relate primarily to the
a. Timing of audit procedures

39
 b. Cost-benefit of gathering evidence
c. Selected audit techniques
d. Financial statement assertions

25. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of
transactions.

Key Answers
1. B
2. A
3. D
4. C
5. D
6. C
7. D
8. D
9. D
10. B
11. B
12. C
13. D
14. D
15. D
16. A
17. D
18. C
19. A
20. B
21. D
22. A
23. D
24. D
25. C

40
PERFORMING SUBSTANTIVE TESTS
1. Which of the following statements is most correct regarding the primary purpose of
audit procedures?
a. to detect all errors or fraudulent activities as well as illegal activities
b. to comply with the SEC
c. to gather corroborative audit evidence about management's assertions
regarding the client's financial statements
d. to determine the amount of errors in the balance sheet accounts in order to
adjust the accounts to actual

2. In the context of an audit of financial statements, substantive tests are audit

procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct tests of financial balances, or
analytical procedures
d. Will increase proportionately with the auditor's reliance on internal control

3. The primary emphasis in most tests of details of balances is on the

a. Balance sheet accounts
b. Income statement accounts
c. Cash flow statement account
d. All of the above

4. A procedure designed to test for monetary misstatements directly affecting the

validity of the financial statement balances is a:
a. test of controls
b. substantive test
c. test of attributes
d. monetary-unit sampling test

5. More types of evidence are obtained by using what type of test than any other?
a. Substantive tests of transactions
b. Tests of controls
c. Analytical procedures
d. Tests of details of balances

6. The information obtained by the auditor in arriving at the conclusions on which the
audit opinion is based is called:
a. audit working papers
b. audit assertions
c. audit evidence
d. audit standards

41
7. The major reason an independent auditor gathers evidence is to
a. Form an opinion on the financial statements
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal control

8. Which of the following is the best example of a corroborating evidence?

a. general journal
b. worksheet cost allocations
c. vendor's invoice
d. cash receipts journal

9. Which of the following statements relating to the competence of evidential matter is

always true?
a. Evidence from outside an enterprise is always reliable.
b. Accounting data developed under satisfactory conditions of internal control are
more relevant than data developed under unsatisfactory internal control
conditions.
c. Oral representations made by management are not reliable evidence.
d. Evidence must be both reliable and relevant to be considered appropriate.

10. It refers to the material (working papers) prepared by and for or obtained and
retained by the auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence

11. Which of the following best describes one of the primary objectives of audit
documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income tax return.
c. Provide documentation that the audit was conducted in accordance with
auditing standards
d. Provide additional support of recorded amounts to the client.

12. Which one of the following is not one of the primary purposes of audit
documentation prepared by the audit team?
a. A basis for planning the audit
b. A record of the evidence accumulated and the results of the tests
c. A basis for review by supervisors and partners
d. A basis for determining work deficiencies by peer review teams.

42
13. Which of the following statements is incorrect about the working papers prepared
by the auditor?
a. The auditor should record in the working papers information on planning the
audit work, the nature, timing and extent of the audit procedures performed,
the results thereof, and the conclusions reached from the audit evidence
obtained.
b. The extent of working paper documentation is a matter of professional
judgment.
c. Working papers should be in the form of data stored on paper.
d. Working papers should be designed and organized to meet the circumstances
and the auditor's need for each individual audit.

14. It is an approximation of the amount of an item in the absence of a precise means

of measurement
a. Accounting estimate
b. Audit sampling
c. Materiality
d. Audit risk

15. In evaluating the reasonableness of an accounting an auditor most likely would

concentrate on key factors and estimate, assumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective and not susceptible to bias.
d. Deviations from historical patterns.

16. In evaluating an entity's accounting estimates, one of an auditor's objectives is to

determine whether the estimates are
a. Not subject to bias.
b. Consistent with industry guidelines.
c. Based on objective assumptions.
d. Reasonable in the circumstances

17. The auditor should adopt one or a combination of the following approaches in the
audit of an accounting estimate:
I. Review and test the process used by management.
II. Use an independent estimate for comparison with that prepared by management.
III. Review subsequent events which confirm the estimate made.
a. Any of the above
b. None of the above
c. Either I or II
d. I only

43
18. The primary concern of the auditor regarding related party transactions is that
a. They are reported to proper regulatory authorities because they are illegal
b. Their form be emphasized rather than their economic substance
c. Their existence and significance be adequately disclosed.
d. Their effects are eliminated from the financial statements.

19. The auditor determines that Jin Company occupies the 3rd floor of an office tower
for which it pays no rent. The most likely explanation is:
a. they got lucky the landlord hasn't noticed the lack of payments.
b. landlord has weak internal controls over billings
c. related party transaction in which a major shareholder owns the office tower
d. Jin Company is engaging in fraudulent activities.

20. Most auditors assess inherent risk as high for related parties and related-party
transactions because:
a. of the unique classification of related-party transactions required on the
balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income
statement
d. it is required by PFRS.

21. Which of the would not necessarily be a related-party transaction?

a. Sale to another corporation with a similar name
b. Purchases from another corporation that is controlled by the corporation's chief
stockholder
c. Loan from the corporation to a major stockholder
d. Sale of land to the corporation by the spouse of a director

22. A person or firm possessing special skill, knowledge and experience in a particular
field other than accounting and auditing is called a/an
a. Professional
b. Consultant
c. Expert
d. Assistant

23. Which of the following is not an expert upon auditor may rely?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer

44
24. During an audit, the auditor may need an the assistance of an expert in obtaining
sufficient appropriate evidence. A common example is
a. Evaluating the potential financial statement effect of an employee fraud
b. Determination of the amounts using actuarial computations
c. Evaluating the integrity of management.
d. Determining the sufficiency and appropriateness of evidential matter obtained.

25. An expert whose expertise is used by the firm in obtaining sufficient appropriate
evidence is called a(n):
a. Financial expert
b. Management expert
c. Auditor's expert
d. Specialist

Key Answers
1. C
2. C
3. A
4. B
5. D
6. C
7. A
8. C
9. D
10. A
11. C
12. D
13. C
14. A
15. D
16. D
17. A
18. C
19. C
20. B
21. A
22. C
23. B
24. B
25. B

45
AUDIT SAMPLING
1. 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 characteristics of interest
b. An auditor may select audit procedure that are not appropriate to achieve the
specific objective
c. An auditor may fail to recognize errors in the documents examined for chosen
sample
d. The documents related to the chosen sample may not be available for
inspection

2. One of the ways to reduce sampling risk is to

a. Increase the sample size.
b. Carefully design the audit procedures to be used.
c. Provide proper supervision and instruction of the audit team
d. Use variables sampling rather than attribute sampling

3. Non-sampling errors occur when audit tests do not uncover existing exceptions in the
a. Population
b. Planning stage
c. Sample
d. Financial statement

4. One of the causes of non-sampling error is

a. failure to draw a random sample
b. failure to draw a representative sample
c. the use of inappropriate or ineffective audit procedures
d. the use of attributes sampling instead of variables sampling

5. One of the ways to control non-sampling risk is through

a. Proper supervision and instruction of the client's employees.
b. Proper supervision and instruction of the audit team.
c. The use of attributes sampling rather than variables sampling
d. Control which ensure that the sample drawn is random and representative

6. Which of the following is not true for nonstatistical sampling?

a. applies mathematical rules that allows auditors to quantify sampling risk
b. may use statistical selection techniques.
c. reaches conclusion about the population on a judgmental sample
d. does not allow measurement of sample reliability

7. An advantage of using statistical sampling is that such techniques

a. mathematically measure risk
b. eliminate the need for judgmental decision

46
 c. define the value of reliability necessary to provide audit assurance
d. have been established in the courts to be superior to nonstatistical sampling

8. Which of the following statements is most correct about the quantification of

sampling risk?
a. Sampling risk cannot be quantified.
b. Sampling risk can be quantified only when non-statistical selection techniques
are used to select the sample.
c. Sampling risk can be quantified only when statistical selection techniques are
used to select the sample.
d. None of the above

9. Statistical samples do not allow

a. More efficient samples
b. Measurement of sample reliability
c. Replacement of the auditor's professional judgment
d. Measurement of sample risk

10. Statistical sampling cannot

a. Determine reliability of samples
b. Select a sample to draw inference about a population
c. Assure a sample will be representative of a population
d. Measure the risk that a sample is not representative of population

11. A principal advantage of statistical methods of attribute sampling over nonstatistical

methods is that they provide, scientific basis for establishing the:
a. risk of assessing control risk too low.
b. tolerable exception rate.
c. expected population exception rate.
d. sample size

12. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population such at peso value?
a. Numerical sampling
b. Sampling for attributes
c. Discovery sampling
d. Sampling for variables

13. Which of the following sampling methods would be most appropriate in performing
tests of controls over authorization of cash disbursements
a. Attributes
b. Variables
c. Ratio
d. Stratified

47
14. There are many kinds of statistical estimates that an auditor may find useful, but
basically every accounting estimate is either of a quantity or of an error rate. The
statistical terms that roughly correspond to "quantities" and "error rate," respectively,
are:
a. attributes and variables.
b. variables and attributes.
c. constants and attributes
d. constants and variables.

15. Attributes sampling would be an appropriate method to use on which one of the
following procedures in an audit program?
a. Review sales transactions for large and unreasonable amounts
b. Observe whether the duties of the accounts receivable clerk are separate from
handling cash.
c. Examine a sample of duplicate sales invoices for credit approval by the credit
manager.
d. Review the aged schedule of accounts receivable determine if receivables from
officers are included.

16. Which of the following must be set prior to testing a sample?

a. Sample deviation rate.
b. Achieved upper precision limit.
c. Computed deviation rate.
d. Tolerable deviation rate

17. The tolerable rate of deviations for tests of controls is generally:

a. lower than the expected rate of deviation
b. higher than the expected rate of deviation
c. identical to the expected rate of deviation
d. unrelated to the expected rate of deviation.

18. Which of the following factors is generally not considered in

determining sample size for a test of controls?
a. Population size
b. Tolerable rate
c. Risk of assessing control risk too low
d. Expected population deviation rate

19. The relationship between sample size and the allowable sampling risk is
a. Direct
b. Inverse
c. Variable
d. Indeterminate

48
20. If an auditor desires a greater level of assurance in auditing a balance, the
acceptable risk of incorrect acceptance:
a. is reduced.
b. is increased
c. is not changed
d. may be reduced or increased depending upon other circumstances.

21. The tolerable rate of deviation for tests of controls necessary to justify a control risk
assessment depends primarily on which of the following?
a. the cause of errors
b. the extent of reliance to be placed on the procedures
c. the amount of any substantive errors
d. the limit used in audits of similar clients

22. The appropriate assumption to make regarding the overall percent of error in those
population items containing an error is:
a. determined using random number tables
b. set after a quantitative analysis of client's internal control system
c. based on the auditor's personal judgment in the circumstances
d. based on statistical analysis using confidence limits

23. A sample in which the characteristics of the sample are the same as those of the
population is a(n)
a. Variables sample
b. Representative sample
c. Attributes sample
d. Random sample

24. When the auditor decides to select less than 100 percent of the population for
testing, the auditor is said to be using
a. Audit sampling
b. Representative sampling
c. Poor judgment
d. None of the above

25. One of the ways to eliminate nonsampling risk is through

a. Proper supervision and instruction of the client's employees
b. Proper supervision and instruction of the audit team
c. The use of attributes sampling rather than variables sampling
d. Controls which ensure that the sample drawn and representative

49
Key Answers
1. A
2. A
3. C
4. C
5. B
6. A
7. A
8. C
9. C
10. C
11. D
12. D
13. A
14. B
15. C
16. D
17. B
18. A
19. B
20. A
21. B
22. C
23. B
24. A
25. B

50
COMPLETING THE AUDIT AND POST AUDIT RESPONSIBILITIES
1. Which of the following is not among the characteristics of the procedures performed
in completing the audit?
a. They are optional since they have only an indirect impact on the opinion to be
expressed.
b. They involve many subjective judgments by the auditor.
c. They are performed after the balance sheet date.
d. They are usually performed by audit managers or other senior members of the
audit team who have extensive audit experience with the client.

2. An auditor has the responsibility to actively search for subsequent events that occur
subsequent to the:
a. balance sheet date.
b. date of the auditor's report.
c. balance sheet date, but prior to the audit report.
d. date of the management representation letter.

3. "Subsequent events" for reporting purposes are events occur which subsequent to
the
a. Financial statement date.
b. Date of the auditor's report.
с. Financial statement date but prior to the date of the auditor's report.
d. Date of the auditor's report and concern contingencies which are not reflected
in the financial statements.

4. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
a. Recomputing a sample of large-peso transactions occurring after year-end for
arithmetic accuracy.
b. Investigating changes in stockholders' equity occurring after year-end.
c. Inquiring of the entity's legal counsel concerning litigation, claims, and
assessments arising after year-end.
d. Confirming bank accounts established after year-end.

5. An auditor should obtain evidential matter relevant to all the following factors
concerning third-party litigation against a
client except the
a. Period in which the underlying cause for legal action occurred
b. Probability of an unfavorable outcome
c. Jurisdiction in which the matter will be resolved
d. Existence of a situation indicating an uncertainty as to the possible loss

51
6. If a potential loss on a contingent liability is remote, the liability usually is:
a. disclosed in the notes, but not accrued.
b. neither accrued nor disclosed in notes
c. accrued and indicated in the body of the financial statements.
d. disclosed in the auditor's report but not disclosed on the financial statements.

7. An auditor will ordinarily examine invoices from lawyers primarily in order to

a. Substantiate accruals
b. Assess the legal ramifications of litigation in progress
c. Estimate the peso amount of contingent liabilities
d. Identify possible unasserted litigation, claims, and assessments

8. If a lawyer refuses to furnish corroborating information regarding litigation, claims,

and assessments, the auditor should
a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements

9. The date of the management representation letter should coincide with the date of
the
a. Balance sheet
b. Latest interim financial statements
c. Auditor's report
d. Latest related party transaction.

10. A client representation letter is:

a. Prepared on the CPA's letterhead.
b. Addressed to the client.
c. Signed by high-level officials (eg, the president and chief financial officer).
d. Dated as of the client's year-end

11. Which of the following would the auditor find most useful in relation to its previous
audit procedures from the client representation letter?
a. to impress upon the audit firm its responsibility for the audit
b. to impress upon management its responsibility for the financial statement
assertions
c. to remind management of potential misstatements or omissions in the financial
statements
d. to document the responses from management to inquiries about various
aspects of the audit

52
12. Manageinent's refusal to furnish a written representation letter on a matter which
the auditor considers essential constitutes
a. Prima facie evidence that the financial statements are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unmodified opinion
d. A scope limitation sufficient to preclude an unmodified opinion

13. PSA 570 requires the auditor to evaluate whether there is a substantial doubt about
a client's ability to continue as a going concern for at least:
a. one quarter beyond the balance sheet date.
b. one quarter beyond the date of the auditor's report.
c. one year beyond the balance sheet date
d. one year beyond the date of the auditor's report

14. Which of the following audit procedures would most likely assist an auditor in
identifying conditions and events that may indicate there could be substantial doubt
about an entity's ability to continue as a going concern?
a. review compliance with the terms of debt agreements
b. confirmation of accounts receivable from principal customers
c. reconciliation of interest expense with debt outstanding
d. confirmation of bank balances

15. Which of the following conditions or events most likely would cause an auditor to
have significant doubt about an entity's ability to continue as a going concer?
a. Cash flow from operating activities are negative
b. Research and development projects are postponed
c. Significant related party transactions are pervasive
d. Stock dividends replace annual cash dividends

16. If, on the basis of the additional procedures carried out and the information
obtained, including the effect of mitigating
circumstances, the auditor's judgment is that the entity will not be able to continue as a
going concern, the financial statements should be prepared using an appropriate basis;
otherwise the auditor will issue a(n)
a. disclaimer of opinion
b. qualified opinion
c. adverse opinion
d. unmodified opinion with emphasis of matter paragraph

17. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely indicate that
a. Internal control activities are not operating effectively
b. Additional tests of details are required

53
 c. Irregularities exist among the relevant account balances
d. Communication with the audit committee should be revised

18. Where an unusual fluctuation is indicated by analytical procedures and management

is unable to provide a satisfactory explanation, the auditor must assume that there is a
high probability that an error or irregularity exists. In this case, the auditor must
a. issue either a qualified or an adverse opinion.
b. issue a disclaimer
c. issue either a qualified opinion or a disclaimer
d. design other appropriate audit procedures to determine if such errors do exists.

19. Analytical procedures used in the overall review stage of an audit generally include
a. Considering unusual or unexpected account balances that were not previously
identified.
b. Performing test of transactions to corroborate management's financial
statement assertions.
c. Gathering evidence concerning account balances that have not changed from
the prior year
d. Re-testing control procedures that appeared to be ineffective during the
assessment of control risk.

20. If a lawyer refuses to furnish corroborating information regarding litigation, claims,

and assessments, the auditor should
a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be tantamount to a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements

21. The least effective method of identifying related parties would be

a. An inquiry of management
b. A review of SEC filings
c. A review of the purchases and sales journals for the period under audit
d. An examination of stockholders' listings to identify principal stockholders.

22. The official record of the meetings of the board of directors and stockholders is
contained in the corporate
a. Bylaws
b. Minutes
c. charter
d. license

23. Which of the following is not considered a related party?

a. Affiliated companies
b. Principal owners of the company

54
 c. Line employees of the company
d. Members of company management

24. Related parties are commonly identified following ways?

a. Review of SEC filings
b. Examination of stockholder listings
c. Inquiry of management
d. All of the above

25. An auditor should examine minutes of the board of directors meetings

a. Through the date of the financial statements
b. Through the date of the audit report
C. Only at the beginning of the audit
d. On a test (sample) basis

Key Answers
1. A
2. C
3. C
4. C
5. C
6. B
7. D
8. B
9. C
10. C
11. B
12. D
13. C
14. A
15. A
16. C
17. B
18. D
19. A
20. B
21. C
22. B
23. C
24. D
25. B

55
THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
1. A major purpose of the auditor's report on financial statements is to
a. Assure investors of the complete accuracy of the financial statements
b. Enhance the degree of confidence of intended users in the financial statements
c. Deter creditors from extending loans in high-risk situations
d. Describe the specific auditing procedures undertaken to gather evidence of the
opinion

2. Which of the following parties is responsible for the fairness of the representations
made in financial statements?
a. Client's management
b. Independent auditor
c. Audit committee
d. PICPA

3. PSA 700 provides guidance on the:

a. Audit report that includes a modified opinion.
b. Audit report that includes an unmodified opinion.
C. Audit report that includes an unmodified opinion, though the auditor's report is
modified due to an emphasis of matter.
d. Audit report, irrespective of the type of opinion issued by the auditor

4. When the client's financial statements are misstated by a material and pervasive
amount, the auditor should issue a report that contains
a. An adverse opinion
b. A disclaimer of opinion
c. Either a qualified opinion or an adverse opinion, depending on which conditions
exist.
d. Either a qualified opinion or an unmodified opinion with modified wording,
depending on which conditions exist.

5. Whenever there is a scope limitation, the appropriate response is to issue

a. A disclaimer of opinion
b. An adverse opinion
c. A qualified opinion
d. An unmodified report, a qualification of scope and opinion, or a disclaimer,
depending on materiality and pervasiveness of effect

6. Conditions requiring departure from an unmodified audit report include all, but which
of the following?
a. Management refused to allow the auditor to confirm significant accounts
receivable for which there were no alternative procedures performed.

56
 b. Management has determined that inventories should be reported in the
statement of financial position at their fair values rather than lower of costs or
net realizable value.
c. The audit partner's dependent child received a gift of 10 shares of a client's
stock for her birthday from a grandparent
d. Management has decided to not allow the auditor to confirm significant
accounts receivable, but the auditor examined subsequent cash receipts related
to the accounts in question.

7. Which of the following is not to be construed as a modification of opinion?

a. Qualified opinion
b. Adverse opinion
c. Disclaimer of opinion
d. Audit report with emphasis of matter paragraph

8. The use of an "Emphasis of Matter” paragraph shall be limited only to those matters
a. Disclosed in the financial statements
b. Affecting the auditor's opinion
c. Not presented in the financial statements
d. Involving an uncertainty

9. The "Other Matter" paragraph is used by the auditor

a. To draw the readers' attention to a matter that is presented in the financial
statements
b. To draw the readers' attention to a matter that is disclosed in the notes to the
financial statements
c. To draw the readers' attention to a matter that is not presented or disclosed in
the financial statements.
d. To draw the readers' attention to a matter that caused the auditor to modify his
opinion.

10. When management prepares financial statements on the basis of a going concern
but the auditor believes the use of the going concern assumption is not appropriate, the
auditor would most likely issue an auditor's report that contains
a. A qualified opinion.
b. An unmodified opinion with respect to the income statement and an adverse
opinion with respect to the statement of financial position.
c. A disclaimer of opinion.
d. An adverse opinion.

11. The independent auditor has concluded that the use of going concern assumption is
appropriate and that no going concern uncertainties exist. In this case, the auditor
would probably issue a report that contains
a. Unmodified opinion with a separate going concern

57
 b. Qualified opinion
c. Disclaimer of opinion
d. Unmodified report

12. When the auditor concludes that there is substantial doubt about the entity's ability
to continue as a going concern, which was not adequately disclosed in the notes to
financial statements, the appropriate audit report would include
a. An qualified opinion or adverse opinion
b. A unmodified opinion with emphasis of matter paragraph
c. A qualified or disclaimer of opinion
d. An unmodified opinion with going concern section

13. This exists, when other information, not related to matters appearing in the financial
statements, is incorrectly stated or
presented.
a. Material inconsistency
b. Material misstatement
c. Material misstatement of fact
d. Material error affecting the other information

14. If an amendment is necessary in the other information and the entity refuses to
make an amendment, the auditor, depending
on particular circumstance, may do any of the following, except:
a. Describe the material inconsistency in other matter paragraph.
b. Not issue an audit report.
c. Withdraw from the engagement.
d. Express either qualified or adverse opinion.

15. Which of the following best describes the auditor's responsibility for "other
information" included in the annual report to the stockholders that contains financial
statements and the auditor's report?
a. The auditor has no obligation to read the other information
b. The auditor has no obligation to corroborate the other information but should
read it to determine whether it is materially inconsistent with the financial
statements and the auditor's knowledge of the entity.
c. The auditor should extend the examination to the extent necessary to verify the
other information
d. The auditor must modify the auditor's report to state that the other information
is unaudited or not covered by the auditor's report

16. Those matters that, in the auditor's professional judgment, were of most
significance in the audit of financial statements of the current period are called:
a. Key audit matters
b. Reportable conditions

58
 c. Matters of continuing significance
d. Most relevant matters

17. Communication of key audit matters in the auditor's report is required whenever the
auditor
a. Issues a disclaimer of opinion
b. Expresses a modified report
c. Audits financial statements of publicly accountable entities
d. Audits financial statements of listed entities

18. In determining key audit matters, the auditor shall take into account those matters
that are
a. Relevant to current and prior periods
b. Relevant to current period only
c. Relevant to current and prior periods if comparative financial statements are
presented.
d. Relevant to current period only unless the auditor is a continuing auditor.

19. When the audited financial statements of the prior year are presented together with
those of the current year, the continuing auditor's report should cover
a. Both years
b. Only the current year
c. Only the current year, but the prior year's report should be presented
d. Only the current year, but the prior year's report should be referred to

20. An auditor expressed a qualified opinion on the prior year's financial statements
because of a lack of adequate disclosure. These financial statements are properly
testated in the current year and presented in comparative form with the current year's
financial statements. The auditor's updated report on the prior year's financial
statements should
a. Be accompanied by the auditor's original report on the prior year's financial
statements
b. Continue to express a qualified opinion expressed on the prior year's financial
statements
c. Make no reference to the type of opinion expressed on the prior year's financial
statements
d. Disclose the substantive reasons for the different opinion.

21. When reporting on comparative financial statements where the financial statements
of the prior period have been examined by a predecessor auditor whose report is not
presented, the successor auditor's report should indicate
a. The reasons why the predecessor auditor's report is not presented.
b. The identity of the predecessor auditor who examined the financial statements
of the prior year.

59
 c. Whether the predecessor auditor's review of the current year's financial
statements revealed any matters that might have a material effect on the
successor auditor's opinion.
d. The type of opinion expressed by the predecessor auditor.

22. Which of the following will not result in a modification of the auditor's report?
a. Restrictions imposed by the client
b. Inability to obtain sufficient appropriate evidence
c. Reliance placed on the report of component auditor
d. Inadequacy in the accounting records

23. If the group auditor decides to refer in the report to the audit made by component
auditor
a. The group auditor assumes responsibility for the report on the other auditor
b. The component auditor is relieved of responsibility for his report but not his
work
c. The group auditor has violated the professional standards
d. The component auditor is relieved of responsibility for his work but not his
report

24. Financial statements prepared in accordance with a special purpose framework are
referred to in PSA 800 as
a. Special Reports
b. Special Purpose Financial Statements
c. Special Considerations
d. Specific Financial Statements

25. PSA 800 "Audit of financial statements prepared in accordance with special
frameworks” does not apply to
a. Audit of financial statements prepared in accordance with PFRS .
b. Audit of financial statements prepared in accordance with the cash receipts and cash
disbursement basis of accounting
c. Audit of financial statements prepared using modified cash basis.
d. Audit of financial presentation that complies with contractual agreement.

Key Answers
1. B
2. A
3. B
4. A
5. D
6. D
7. D
8. A

60
9. C
10. D
11. A
12. A
13. C
14. D
15. B
16. A
17. D
18. B
19. A
20. C
21. D
22. C
23. C
24. B
25. A

61
ASSURANCE ENGAGEMENTS AND RELATED SERVICES
1. Pronouncements of Auditing and Assurance Standards Council (AASC) do not cover
a Review engagement
b. Compilation engagement
c. Consultancy
d. Agreed-upon procedures engagement

2. Which of the following best describes "related services"?

a. Audit and Review of financial statements
b. Assurance and audit engagements
c. Compilation and agreed upon procedures engagements
d. Review, compilation and agreed-upon procedures engagements.

3. The auditor's satisfaction as to the reliability of an assertion being made by one party
is called:
a. Assurance
b. Audit risk
C. Precision
d. Materiality

4. The concept of limited assurance is provided for in which of the following

engagements?
a. audit
b. review
c. compilation
d. agreed-upon procedures

5. A CPA firm can issue a review report:

a. Only if the partners are independent.
b. Only if all the partners and the staff in the office performing engagement are
independent.
c. Of the partners have no material or direct immaterial interest in client.
d. Even if the CPA firm is not independent.

6. Which of the following statements best describes a review service?

a. A review engagement focuses on providing advice in a three party contract.
b. A review engagement focuses on providing assurance on the internal controls of
a public company.
c. A review engagement focuses on providing limited assurance on financial
statements of a private company.
d. A review engagement focuses on providing reasonable assurance on the
assertions contained in the financial statements of a public company.

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7. The objective of a review of financial statements is to
a. Express an opinion on the overall financial statements
b. Carry out audit procedures agreed on with the client and other users of report.
c. Assist the client in the preparation of the financial statements
d. State whether anything has come to the auditor's attention that indicates that
the financial statements are not presented fairly.

8. A report on factual findings is the end product of the auditor when performing
a. Examination
b. Audit
c. Review
d. Agreed-upon procedures

9. Which of the following ethical principles does not apply to an agreed-upon procedure
engagement?
a. Independence
b. Confidentiality
c. Professional behavior.
d. Professional competence and due care.

10. Which of the following is true of the report based on agreed upon-procedures?
a. The report is restricted to those parties who have agreed to the procedures to
be performed
b. The CPA provides the recipients of the report limited assurance as to
reasonableness of the assertion(s) presented in the financial information
c. The report states that the auditor has not recognized any basis that requires
revision of financial statements
d. The report should state that the procedures performed are limited to analytical
procedures and inquiry

11. A summary of findings rather than assurance is most likely to be issued on which
engagement?
a. Review
b. Compilation
c. Examination
d. Agreed-upon procedures

12. A CPA is not required to comply with the "Code of Professional Ethics for Certified
Public Accountants" promulgated by the Board of Accountancy when performing
a. Review
b. Agreed-upon procedures.
c. Compilation
d. None of the above.

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13. What level of assurance does an accountant give on compilation report?
a. None
b. Moderate
c. Low
d. High

14. The term "accountant" has been used by AASC to refer to a CPA in public practice
who is engaged to
a. Audit financial statements
b. Review financial statements
c. Apply agreed-upon procedures
d. Compile financial statements

15. Which of the following procedures would an accountant most likely perform in a
compilation engagement?
a. collect, classify and summarize financial information.
b. apply analytical procedures
c. assess risk components
d. test the accounting records

16. Which of the following statements about assurance engagements is not correct?
a. Assurance engagements are intended to enhance the credibility of information
about a subject matter by evaluating whether the subject matter conforms in all
material respects with suitable criteria.
b. The subject matter of an assurance engagement may take many forms such as
data, systems and processes or behavior.
c. Not all engagements performed by professional accountants are assurance
engagements.
d. The Philippine Standards on Assurance Engagements issued by AASC describe
the objectives and elements of assurance engagements to provide high,
moderate or low level of assurance.

17. Which of the following is an example of an assurance engagement?

a. management advisory services
b. reporting on financial statements prepared using other comprehensive basis of
accounting
c. compilation of financial information
d. preparation of tax returns

18. Which of the following services provides a moderate level of assurance about the
client's financial statements?
a. Forecasts and projections
b. Compliance with contractual agreement
c. Review

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 d. Compilation

19. Which of the following is not one of the elements of an assurance engagement?
a. Sufficient appropriate evidence
b. A subject matter
c. Suitable criteria
d. An opinion about whether the subject matter conform, in all material respects,
with identified criteria.

20. An examination of financial forecast is a professional service that involves

a. assembling financial forecast that is based on management assumptions
b. limiting the distribution of the accountants report to management and board of
directors
c. assuming responsibility on the financial forecast
d. evaluating the preparation of the financial forecast and the support underlying
management assumptions

21. When an accountant examines financial forecast that fails to disclose several
significant assumptions used to prepare the forecast, the accountant should describe
the assumption in the accountant's report and issue a report that contains a(an):
a. qualifiedfied opinion
b. unmodified opinion with emphasis of matter paragraph
c. adverse opinion
d. disclaimer of opinion

22. Accepting an engagement to examine financial projection most likely would be

appropriate if the projection will be distributed to
a. all employees who work for the entity
b. investing public
c. a bank with which the entity is negotiating for a loan
d. all stockholders of record as of the report date

23. Which of the following is correct concerning prospective, financial statements?

a. Only financial forecast would normally be appropriate for limited use.
b. Only financial projection would normally be appropriate for limited use.
c. Any type of prospective financial statements would normally be appropriate for
limited use.
d. Any type of prospective financial statements would normally be appropriate for
general use.

24. When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should
a. Express a qualified opinion on the prospective financial information.
b. Express an adverse opinion on the prospective financial information.

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 c. Disclaim an opinion on the prospective financial information.
d. Either a or b.

25. The party responsible for assumptions identified in the preparation of prospective
financial statements is usually
a. A third-party lending institution
b. The client's management
c. The reporting accountant
d. The independent auditor

Key Answers
1. C
2. C
3. A
4. B
5. B
6. C
7. D
8. D
9. A
10. A
11. D
12. D
13. A
14. D
15. A
16. A
17. B
18. C
19. D
20. D
21. C
22. C
23. C
24. D
25. B

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