1.

Which of the following elements is most likely to be a component of direct reporting

assurance engagement?
 Auditor independence
2. Which of the following internal control is most likely relevant to an audit of financial
statements?
 A bank's loan approval process
3. Which of the following is not a distinguishing feature of risk-based auditing?
 Collecting and evaluating evidence
4. When obtaining an understanding of an entity's internal controls, an auditor should
concentrate on their substance rather than their form because
 Management may establish appropriate controls but not enforce compliance with
them
5. The following are considered by a CPA firm in deciding whether to accept a new client,
except:
 The prospective client's probability of an unqualified opinion
6. Evaluation of financial information made by a study of plausible relationships among
both financial and non-financial data, It also encompasses t investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or that
differ from expected values by a significant amount
 Analytical procedures
7. Which of the following is incorrect regarding the three-party relationship element of
assurance engagement?
 intended user is generally the addressee of professional accountant's report
8. Assertions are representations by management, explicit or otherwise, that are embodied
in the financial statements. Management's assertions in the financial statements are of
relevance to audit process because:
 they are utilized by auditors in developing proper tests and procedures.
9.
10. Which of the following is not an assurance to be provided by an effective internal control
system?
 access to assets is limited to members of management
11. Which of the following types of auditing is performed most commonly by CPAs on a
contractual basis?
 external auditing
12. In general, material irregularities perpetrated by which of the following are most difficult
to detect?
 Controller
13. The risk that an auditor gives an inappropriate audit opinion when the financial statements
are materially misstated
=Audit Risk

14. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
=Concluding that the entity's management probably lacks integrity

15. Which of the following is incorrect regarding the control environment component of internal
control?
= The absence of programs and controls addressing the fraud risk of cotrol environment may
not represent a material weakness.

16. In performing a financial statement audit, which of the following would an auditor least likely
consider?
= Quality of management's business decisions

17. These refer to the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where
appropriate those charged with governance to premise on which an audit is conducted.
= PRECONDITIONS FOR THE AUDIT

18. Who is the most knowledgeable about entity's operations and financial reporting?
= The management and those charged with governance.

19. 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?
= Philippine Standards on Auditing

20. The assessment of the risks of material misstatement at the financial statement level is
affected by the auditor’s understanding of the control environment. Weaknesses in the control
environment ordinarily will lead the auditor to
= Modify the nature of audit procedures to obtain more persuasive audit evidence.

21. Which one of the following is not considered a valid source of information about the client’s
processes?
= Confirmation from third-parties

22. Which of the following is not a limitation of assurance services provided by professional
accountants?
= The practitioner uses judgement in evaluating the subject matter.

23. Control risk is a measure of the auditor’s expectation that the internal control structure
= will neither prevent material misstatements nor detect and correct them

24. Which of the following statements is false with regard to the auditor’s consideration of an
entity’s internal control?
= Controls over operations and compliance objectives are totally not relevant to audit of
financial statements.

25. Assurance services may include which of the following, except?

 Tax preparation services

26. As part of audit planning, CPAs should design audit programs for each individual audit and
should include audit steps and procedures to
 Provide assurance that the objectives of the audit are met.

27. Even with the most effectively designed internal control structure, the auditor must obtain
audit evidence, beyond testing the controls, for every
 Material financial statement account

28. Which of the following statements is(are) true regarding the provision of assurance services
I. The third party who receives the assurance generally pays for the assurance received
II. Assurance services always involve a report by one person to a third party on which an
independent organization provides assurance.
III. Assurance services can be provided either on information or process.
 III only

29. Which of the following is not a medium that can normally be used by an auditor to record
information concerning a client’s internal control policies and procedures?
 Procedures Manual

30. The primary purpose of an independent audit of financial statements is to

 Provide users with an unbiased opinion about the fairness of information reported in the
financial statements

31. Which of the following concepts about materiality is incorrect?

ANSWER: Materiality does not apply if internal control is highly effective

32. For an internal auditor to render impartial and unbiased judgements, he or she must be
independent of the entity's
ANSWER: Personnel and operating activities

33. The auditor's responsibility for identifying "direct effect" noncompliance to laws and
regulations differs from their responsibility for detecting
ANSWER: fraud

34. The auditor's understanding of the accounting and internal control systems significant to the
audit is ordinarily obtained through previous experience with the entity. In addition, the auditor
may perform the following procedures, except
ANSWER: Reperformance of internal control procedures.

35. The difference between what the public expects to get from the audited financial statements
and what the public is actually getting is known as:
ANSWER: Expectation gap

36. Accuracy and valuation assertions about presentation and disclosures means
ANSWER: Financial and other information are disclosed fairly and at appropriate amounts.

37. Which of the following types of audit uses laws and regulations as its criteria?
c. Compliance audit

38. Which of the following statements concerning compilation engagement is incorrect?

The procedures employed in compilation engagement enable the accountant to express
a low level of assurance on the compiled financial information

39. Which of the following matters is generally included in auditor’s engagement letter?
The auditor’s responsibility to search for significant internal control deficiencies

40. Whom should the auditors contact when they suspect a fraud?
Either the senior management or the audit committee

41. Client strategy templates provide a means for an auditor to

c. C o m p i l e t h e s t r a t e g i e s a n d c h a r a c t e r i s t i c s o f a n entity.

42. An entity’s ongoing monitoring activities, which are built into normal recurring actions, often
include
Control risk assessment in conjunction with quarterly reviews

43. When is the case that obtaining an understanding of internal control is sufficient to test the
operating effectiveness of control?
● Controls are periodically evaluated by internal auditors.

44. Engagement letters are required for?

● All engagements

45. Which of the following is at least concern to an auditor regarding a client’s internal controls?
● Efficiency and effectiveness of operations

46. External factors can either strengthen or weaken an entity’s internal control. Which of the
following conditions supports strong internal control?
● Strict monitoring by the Bureau of Internal Revenue.

47. The auditor’s judgment concerning the overall fairness of the presentation of financial
position, results of operations, and changes in financial position is applied within the framework
of
● Generally accepted accounting principles.

48. An audit plan is

● Detailed plan of analytical procedures and all substantive tests to be performed in the
course of the audit.

49. When a compensating control exists, the absence of a key control:

● Is no longer a concern because there is no longer a significant deficiency or material
weakness.
50. Which of the following procedures is not performed as part of planning in an audit
engagement
● Confirmation of all major accounts

51. Which of the following best describes the operational audit?

● It concentrates on seeking out aspects of operations in which waste would be reduced
by the introduction of controls.

52. In general, a material internal control weakness may be defined as a condition in which
material errors or fraud would ordinarily not be detected within a timely period.
● Employees in the normal course of performing their assigned functions.

53.

54. The primary purpose of the engagement letter is to

● Remind management that the primary responsibility for the FSs rests with management
● Provide a written record of the agreement with the client as to the services to be
provided

55. Which of the following statements is correct with respect to the auditor’s use of analytical
procedures?
● Analytical procedures are required to be used during the planning and completion
phases of the audit.

56. Internal auditing relates to an

● Audit which serves the needs of management.

57. It is considered as the hallmark of auditing that enables a professional accountant to apply
his or her relevant training, knowledge, and experience to properly interpret relevant ethical
requirements and PSAs and make informed decisions.
● Professional judgment

58. For good internal control, which of the following functions should not be the responsibility of
the treasurer’s department?
● Data processing

59. The procedures to test effectiveness of control policies and procedures in support of a
reduced assessed control risk are called
● Tests of controls

60. Analytical procedures enable the auditor to predict the balance or quantity of an item under
audit. Information to develop this estimate can be obtained from all of the following, except
● Tracing transactions through the system to determine whether procedures are being
applied as prescribed.

61.

62. If a change in the type of engagement from higher to lower level of assurance is not justified,
the auditor should
 ● Refuse to agree to management’s request on the change of engagement and continue
with the original engagement.
63.
64.
65.

66. In which of the following order would the auditors perform the following steps?
● Determine audit risk; set materiality; assess control risk; determine detection risk.

67. If the auditor sets the preliminary judgment about materiality level at a relatively low peso
amount

● More evidence will be required than for a high level

68. Which of the following is least likely to be appropriate as the basis for determining the
preliminary judgment about materiality in the audit of financial statements?
● Inventory

69. An auditor evaluates the existing internal control in order to

● Determine the extent of substantive tests which must be performed

70. The auditor communicates the results of his or her work through medium of the

● Audit report

71. Which of the following is most likely to be a characteristic of an owner-managed small

business?

● Management tend to override internal control

72. Materiality and audit risk are inversely related. Why should the auditor plan more work on
individual accounts as lower acceptable levels of both audit risk and materiality are established?

● To find smaller errors.

73. Which of the following best describes the assurance process?

● Proving the accuracy of the books and records

74. In audit smaller entities, an auditor usually finds it more efficient to apply

● Combination of a and b.

75. Controls that enhance the reliability of the financial statements may be classified as
prevention controls and detection controls. Which of the following is primarily a detection
control?

● Bank accounts are reconciled monthly by persons who are independent of cash
recording anc cash custody.
76. The risk of fraudulent financial reporting increases in the presence of

● Incentive systems based on operating income.

77. When considering internal control, an auditor must be aware of the concept of reasonable
assurance, which recognizes that

● Cost of internal control procedures should not exceed the benefits expected to be
derived from the control.

78. The auditor uses analytical procedures during the course of an audit. The most important
phase of performing these procedures is the:

● Investigation of significant and unusual relationships.

79 
The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
o Timing of inventory observation procedures

80
When auditors allocate the preliminary judgment about materiality to account balances, the
materiality allocated to any given account is referred to as:

o Tolerable misstatement

81
Which one of the following is not a provider of assurance services?

o PICPA

82

The primary goal of the CPA in performing the attest function is to

o Determine whether the client's assertions are fairly stated.

83

It is important for the auditor to consider the competence of the audit client's employees
because their competence bears directly and importantly upon the

o Achievement of the objectives of internal control

84
Which of the following tasks should he be performed prior to the final audit?

o Understanding internal control.

85
While assessing the risk of material misstatement, the auditors identity risks, relate risk to what
could go wrong, consider the magnitude of risks and:

o Consider the likelihood that the risks could result in material misstatements.

86
Which of the following statements is false?

o The objective of an audit cannot be fulfilled unless the auditor achieves the overall
objective of the auditor. In all cases when the overall objective of the auditor cannot be
achieved, the PSAs require that the auditor modifies the auditor's opinion accordingly or
withdraws from the engagement tama na to tehh

87
Engagement letters are widely used in practice for professional engagements for all types.
Which of the following best describes the purpose of the engagement letter?

o By clearly defining the nature of the engagement, the engagement letter helps to avoid
and resolve misunderstandings between CPA and client regarding the precise nature of
the work to be performed and the type of report to be issued.

88
When an organization has strong internal control, management can expect various benefits.
The benefit least likely to occur is

o an elimination of employee fraud.

89
Which of the following is not considered an assertion as formulated by the Auditing Standards
Board?

o Mathematical accuracy

90
Which of the following factors do not influence the decision of the auditor to send a separate
engagement letter to the parent entity and its component (subsidiary, branch or division)
assuming the same auditor handles both entities?

o ethical requirements

91

An initial audit requires more audit time to complete than a recurring audit. One of the reasons
for this is that
 o the client's business, industry, and internal control are unfamiliar to the auditor and he
needs to carefully study them.
92

Which statement is correct regarding business risks?

o A business risk may have an immediate consequence for the risk of misstatement for
classes of transactions, account balances, and disclosures at the assertion level or the
financial statements as a whole.

93

Obtaining knowledge about whether the control is implemented can best be obtained by

o Tracing transactions through the information system relevant to financial reporting.

94

Which of the following statements is correct with respect to separation of duties?

o Employees who authorize transactions should not have custody of related assets
95

The following matters relate to the requirements of PSA 315 regarding the discussion among
the engagement team as part of understanding the entity and assessing risks of material
misstatement. Which is incorrect?

o The discussion shall in all cases, include all of the members of the engagement team to
attend and be informed of all of the decisions reached.

96

The single feature that most clearly distinguishes auditing, attestation, and assurance is

o Scope of services.

97

The objective of assurance services is to

o Enhance decision making.

98

The overall objectives of the auditor in conducting an audit of financial statements are

I. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatements, whether caused by fraud or error

II. To report on the financial statements

 III. To obtain conclusive rather than persuasive evidence

IV. To detect all misstatements, whether due to fraud or error

o I and II only

99

Which of the following will an auditor least likely discuss with the former auditors of a potential
client prior to acceptance of an audit engagement?

o Fees charged for the services