Logo Here Auditing Theory Introduction To Assurance and Non-Assurance Engagements

Auditing Theory: Review of Audit Process
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Introduction to Assurance and Non-assurance Engagements

1. Which of the following Philippine Standards are to be applied to compilation
engagements, agreed-upon procedures and other related standards as specified by the
AASC?
a. PSAs b. PSREs c. PSAEs d. PSRSs
2. These are issued to provide interpretative guidance and practical assistance to

professional accountants in implementing PSAs and to promote good practice.
a. Practice statements b. PREPSs, and PRSPSs c. PAPSs and PREPSs d.
PAPSs
3. Assurance engagement
a. Is an engagement in which a practitioner is engaged to issue, or does issue, a
written communication that expresses a conclusion about the reliability of a written
assertion that is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the results to interested users.
c. Is an engagement in which the auditor provides a moderate level of assurance that
the information subject to the engagement is free of material misstatement.
d. Is an engagement 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, thereby improving the likelihood
that the information will meet the needs of an intended user.
4. The single feature that most clearly distinguishes auditing, attestation, and assurance
is
a. Type of service. c. Training required to perform the service
b. Scope of services. d. CPA's approach to the service
5. It refers to the auditor's satisfaction as to the reliability of an assertion being made by

one party for use by another party.
a. Confidence b. Reasonableness c. Assurance d. Tolerable
6. The three types of attestation services are:

a. Audits, review, and compilations
b. Audits, compilations, and other attestation services
c. Reviews, compilations, and other attestation services
d. Audits, reviews, and other attestation services
7. Assurance engagement include the following, except

a. An engagement conducted to provide a high level of assurance that the subject
matter conforms in all material respects with identified suitable criteria.
b. An engagement conducted to provide a moderate level of assurance that the
subject matter is plausible in the circumstances.
c. An engagement in accordance with the Philippine Standard on Assurance
Engagement(s) issued by the Auditing and Assurance Standard Council as approved
by the Board of Accountancy/Professional Regulation Commission.
d. An engagement to perform agreed-upon procedures.
8. Which of the following is an objective of a review engagement?

a. Expressing a positive opinion that the financial information is presented in
conformity with generally accepted accounting principles.
b. Expressing a limited assurance to users who have agreed as to procedures that will
be performed by the CPA.
c. Reporting whether material modifications should be made to such
financial statements to make them conform with generally accepted
accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the
financial position and operating results of the client.
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AT by Raymund Francis A. Escala, CPA, MBA AT – 11th Batch – HQ02
9. Not all engagements performed by professional accountants are assurance
engagements. Other engagements frequently performed by professional accountants
that are not assurance engagements include the following, except
a. Agreed-upon procedures c. Management consulting
b. Compilation of financial or other information d. Examination of prospective
financial information
10.Unlike consulting services, assurance services:

a. Make recommendations to management c. Report on quality information
b. Report on how to use information d. Are two-party contracts
11.The primary goal of the CPA in performing the attest function is to

a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures
12.Which of the following criteria is unique to the independent practitioner's attest

function?
a. General competence c. Independence
b. Due professional care d. Familiarity with the particular
industry of each client
13.Ultimately, the decision about whether or not an practitioner is independent must be

made by
a. Practitioner b. Public c. Client d. Reguators
14.With regard to independence, which of the following statements is correct?

a. In case of audits of financial statements, the Code of Ethics requires member of the
assurance team, the firm but not network firms to be independent of the client.
b. Only the engagement partner is required by the Code of Ethics to be independent
from their assurance clients.
c. Audit engagements provide assurance to a wide range of potential users;
consequently, both independence in mind and independence in
appearance are of particular importance.
d. In case of audits of financial statements, the Code of Ethics requires the auditor to
be independent from their assurance team from the start of performing procedures
required by the engagement up to the issuance of the report.
15.Which of the following statements least likely a characteristic to be possessed by

responsible party?
a. may or may not be the only intended user
b. may nor may not be the engaging party to the practitioner
c. may or may not be from the same organization with the intended users
d. may be responsible to both or either the subject matter or the subject matter
information
16.According to Preface on Assurance Engagements, these are the standards or

benchmarks used to evaluate or measure the subject matter of an assurance
engagement:
a. Criteria c. Assertions
b. Engagement process d. Generally accepted auditing
standards
17.The criteria for evaluating quantitative information vary. For example, in the audit of
historical financial statements by CPA firms, the criteria are usually
a. International accounting standards c. Regulations of the BIR
b. Generally accepted accounting principles d. Regulations of the SEC
18.The decision of whether the criteria are suitable involves considering whether the
subject matter of the assurance engagement is capable of reasonably consistent
evaluation or measurement using such criteria. Which of the following characteristics
is not considered necessary in determining whether the criteria are suitable?
a. Relevance b. Sufficiency c. Neutrality d. Reliability
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19.Which of the following statements is/are correct?
Statement 1: The practitioner considers the relationship between the cost of obtaining
evidence and the usefulness of the information obtained.
Statement 2: The difficulty and the expense involved are valid basis for omitting an
procedure for which there is no alternative.
Statement 3: The practitioner relies on evidence that is persuasive rather than

conclusive.
Statement 4: The practitioner uses professional judgment and exercise professional

skepticism to determine the sufficiency and appropriateness of evidence.
a. Only one statement is correct c. Only three statements are
correct
b. Only two statements are correct d. All statements are correct
20.The following statements are correct, except:

a. The greater the risk of misstatement, the more evidence is likely to be required.
b. The higher the quality of evidence, the less may be required.
c. Obtaining more evidence will compensate for its poor quality.
d. The sufficiency and appropriateness of evidence are interrelated.
21.The Philippine Framework for Assurance Engagements identifies two types of assurance
engagement a practitioner is permitted to perform: a reasonable assurance
engagement and a limited assurance engagement. Which of the following is the
objective of a reasonable assurance engagement?
a. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a negative form of expression of
the practitioner’s conclusion.
b. A reduction in assurance engagement risk to a very low level in the circumstances
of the engagement as a basis for a disclaimer of the practitioner’s conclusion.
c. A reduction in assurance engagement risk to an acceptably low level that
is acceptable in the circumstances of the engagement as a basis for a
positive form of expression of the practitioner’s conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement as a basis for a qualified form of the
practitioner’s conclusion.
22.In an engagement to perform agreed –upon procedures, an auditor is engaged to

a. Use accounting expertise as opposed to auditing expertise to collect, classify, and
summarize financial information.
b. Carry out those procedures of an audit to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual
findings.
c. Provide a moderate level of assurance that the information is free of material
misstatement.
d. Provide a high, but not absolute level of assurance that the information is free of
material misstatement.
23.Which of the following is true of the report based on agreed-upon-procedures?

a. The CPA provides the recipients of the report limited assurance as to
reasonableness of the assertion(s) presented in the financial information.
b. The report states that the auditor has not recognized any basis that requires
revision of financial statements.
c. The report is restricted to those parties who have agreed to the
procedures to be performed.
d. The report should state that the procedures performed are limited to analytical
procedures and inquiry.
24.According to Philippine Standard on Auditing, the procedures employed in doing

compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
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d. Less extensive than review procedures but more extensive than agreed-upon
procedures.
25.Indicate the level of assurance provided by audit and related services.

A B C D
Audit High High Negative Absolute
Review Moderate None Moderate High
Agreed-upon procedures None None None Limited
Compilation None None None None
Introduction to Auditing
1. The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor's degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret FRSC Statements.
2. Identify the following as financial audit (FA), compliance audit (CA), and operational
audit (OA).
1) A supervisor is not carrying out his assigned responsibilities.
2) A company's tax return does not conform to income tax laws and regulations.
3) A municipality's financial statements correctly show actual cash receipts and
disbursements.
4) A company's receiving department is inefficient.
a. CA, CA, FA, OA c. OA, CA, FA, OA

b. OA, CA, CA, OA d. CA, CA, FA, CA
3. Independent auditing can best be described as a

a. Branch of accounting
b. Discipline that attests to the results of accounting and other operations
and data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information
4. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit b. Compliance audit c. FS audit d. Internal
audit
5. An operational audit is designed to

a. Assess the efficiency and effectiveness of management's operating
procedures
b. Assess the presentation of management's financial statements in accordance with
generally accepted accounting principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively
discharging its responsibility to oversee management's operations
6. A review of any part of an organization's procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a (n)
a. FS Audit b. Operational audit c. Compliance audit d.
Production audit
7. Which one of the following is more difficult to evaluate objectively?

a. Efficiency and effectiveness of operations.
b. Compliance with government regulations.
c. Presentation of financial statements in accordance with generally accepted
accounting principles.
d. All three of the above are equally difficult.
8. A governmental audit may extend beyond an examination leading to the expression of

an opinion on the fairness of financial presentation to include
Program results Compliance Economy and
efficiency
a. Yes Yes No
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b. Yes Yes Yes
c. No Yes Yes
d. No No Yes
9. An audit designed to determine the extent to which the desired results of an activity
established by the legislative or other authorizing body are being achieved is a (an)
a. Economy audit b. Efficiency audit c. Program audit d.
Financial related audit
10.Which of the following best describes what is meant by the term PSA?
a. Rules acknowledged by the accounting profession because of their universal
application.
b. Pronouncements issued by the Auditing Standards Board.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support financial statements.
11.A financial statement audit:

a. Confirms that FS assertions are accurate. c. Assures that fraud had been
detected.
b. Guarantees that FS are presented fairly. d. Lends credibility to the FS.
12.Which of the following best describes the objective of an audit of financial statements?
a. To express an opinion whether the financial statements are prepared in accordance
with prescribed criteria.
b. To express an assurance as to the future viability of the entity whose financial
statements are being audited.
c. To express an assurance about the management's efficiency or effectiveness in
conducting the operations of entity.
d. To express an opinion whether the financial statements are prepared, in all material
respect, in accordance with an identified financial reporting framework.
13.Which of the following accurately depicts the auditor's responsibility with respect to
Philippine Standards on Auditing?
a. The auditor is required to follow the guidance provided by the Standards, without
exception.
b. The auditor is generally required to follow the guidance provided by Standards with
which he or she is familiar, but will not be held responsible for departing from
provisions of which he or she was unaware.
c. The auditor is generally required to follow the guidance provided by the Standards,
unless following such guidance would result in an audit that is not cost-effective.
d. The auditor is generally required to follow the guidance provided by the Standards,
and should be able to justify any departures.
14.Which of the following is responsible for an entity's financial statements?

a. The entity's management c. The entity's audit committee
b. The entity's internal auditors d. The entity's board of directors
15.The best statement of the responsibility of the auditor with respect to audited financial
statement is:
a. The audit of the financial statements relieves management of its
responsibilities
b. The auditor's responsibility is confined to his expression of opinion about the
audited financial statements.
c. The responsibility over the financial statements rests with the management
and the auditor assumes responsibility with respect to the notes of financial
statements.
d. The auditor is responsible only to his unqualified opinion but not for any other
type of opinion.
16.For an entity's financial statements to be presented fairly in conformity with PFRS, the
principles selected should:
a. Be applied on a basis consistent with those followed in the prior year.
b. Be approved by the Auditing Standards Board or the appropriate industry
subcommittee.
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c. Reflect transactions in a manner that presents the financial statements within a
range of acceptable limits.
d. Match the principles used by most other entities within the entity's particular
industry.
17.As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the
information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.
d. Assertions are found only in the footnotes to the financial statements.
18.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.
19.Which of the following least likely limits the auditors ability to detect material
misstatement?
a. Most audit evidences are conclusive rather than being persuasive.
b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are
ineffective in detecting intentional misstatements.
20.Which of the following statements does not describe a condition that creates a demand
for auditing?
a. Conflict between an information preparer and a user can result in biased
information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
21.Because an examination in accordance with generally accepted auditing standards is

influenced by the possibility of material errors, the auditor should conduct the
examination with an attitude of
a. Professional responsiveness c. Objective judgment
b. Conservative advocacy d. Professional skepticism
22.Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the
following is not a postulate of auditing?
a. No long-term conflict exists between the auditor and the management of the
enterprise under audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.
23.An audit can have a significant effect on

a. Information Risk c. Business Risk
b. The risk-free interest rate d. All of these
24.The main way(s) to reduce information risk include the following, except
a. To have the user verify the information
b. To have the financial statements audited
c. To have the management prepare the financial statements
d. To have the user share the information risk with management
25.Which of the following is an appraisal activity established within an entity as a service

to the entity?
a. External auditing b. Internal auditing c. Financial auditing d.
Compliance auditing
26.The scope and objectives of internal auditing vary widely and depend on the size and
structure of the entity and the requirements of its management. Ordinarily, internal
auditing activities include one or more of the following:
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A. B. C. D.
Establishment and review of the Yes Yes No No
accounting and internal control
systems
Examination of financial and operating Yes Yes No Yes
information
Review of the economy, efficiency and Yes Yes Yes Yes
effectiveness of operations
Review of compliance with laws, Yes No Yes Yes
regulations and other external
requirements
27.To operate effectively, an internal auditor must be independent of

a. The entity
b. The line functions of the organizations
c. The employer-employee relationship which exists for other employees in the
organization
d. Internal auditor does not need to be independent of the entity and any
member of the organization
28.To provide for the greatest degree of independence in performing internal auditing
functions, an internal auditor most likely should report to
a. Board of Directors b. VP for Finance c. Controller d. Audit Committee
29.Which statement is correct regarding the relationship between internal auditing and the
external auditor?
a. Some judgments relating to the audit of the financial statements are those of
the internal auditor.
b. The external audit function's objectives vary according to management's
requirements.
c. Certain aspects of internal auditing may be useful in determining the nature,
timing and extent of external audit procedures.
d. The external auditor is responsible for the audit opinion expressed, however
that responsibility may be reduced by any use made of internal auditing.
30.Which of the following statements is not a distinction between independent auditing

and internal auditing?
a. Independent auditors represent third party users external to the auditee
entity, whereas internal auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of
evidence, internal auditors are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors
are independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to
encompass operational and performance auditing.
Audit Process and Evidence-Gathering Procedures

1. Set the following phases in proper order:
i. Pre-Engagement iii. Evidence-Gathering v. Post-Audit
Responsibilities
ii. Internal Controls iv. Planning vi. Reporting
a. i, ii, iii, iv, v, vi b. i, iv, ii, iii, vi, v c. i, iv, iii, ii, v, vi d. i,
iv, ii, iii, v, vi
2. Acts to be performed in order to obtain audit evidence.

a. Audit standards b. Audit proceduresc. Audit program d. Audit strategy
3. Audit procedures performed to obtain an understanding of the entity and its

environment, including its internal control, and to assess the risks of material
misstatements at the financial statement and assertion levels.
a. Risk assessment procedures c. Tests of control
b. Substantive procedures d. Analytical procedures
4. Audit procedures to test the operating effectiveness of controls in preventing or

detecting and correcting material misstatements at the assertion level.
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5. Audit procedures to detect material misstatements at the assertion level.

6. An auditor may achieve audit objectives related to particular assertions by:

a. Performing analytical procedures. c. Preparing audit documentation.
b. Adhering to a system of quality control. d. Increasing the level of
detection risk.
7. Examining records or documents, whether internal or external, in paper form,

electronic form, or other media.
a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry
8. Physical examination of the assets.

9. Consists of looking at a process or procedures being performed by others.

10.Consists of seeking information from knowledgeable persons, both financial and

nonfinancial, within the entity or outside the entity.
11.The process of obtaining a representation of information or of an existing condition

directly from third party. It is a specific type of inquiry.
a. Reperformance b. Confirmation c. Reconciliation d.
Recomputation
12.Consists of checking the mathematical accuracy of documents or records.

a. Reperformance b. Recalculation c. Reconciliation d.
Recomputation
13.Auditor’s independent execution of procedures or controls that were originally

performed as part of the entity’s internal control.
a. Reperformance b. Confirmation c. Reconciliation d.
Recomputation
14.Evaluation of financial information made by study of plausible relationships among both

financial and non-financial data.
a. Reperformance b. Confirmation c. Reconciliation d. Analytical
procedures
15.Which of the following is the best explanation of the difference, if any, between
audit objectives and audit procedures?
a. Audit procedures and audit objectives are essentially the same.
b. Audit objectives are tailor-made for each assignment, audit procedures are
generic in application.
c. Audit procedures establish broad general goals, audit objectives specify the
detailed work to be performed.
d. Audit objectives define specific desired accomplishments; audit procedures
provide the means of achieving audit objectives.
16. Which of the following is a false statement about audit objectives?

a. Audit objectives should be developed in light of management assertions about
the financial statement components.
b. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.
c. The auditor should resolve any substantial doubt about any of management's
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material financial statement assertions
d. There should be a one-to-one relationship between audit objectives and
procedures.
17.Management assertions are:

a. Stated in the footnotes to the financial statements
b. Explicitly expressed representations about the financial statements
c. Implied or express representations about the accounts in the financial statements
d. Provided to the auditor in the assertions letter, but are not disclosed in the financial
statements of the entity.
18.Management assertions are:

a. Directly related to PSAs c. Directly related to GAAP
b. Indirectly related to PSAs d. Indirectly related to GAAP
19.Assertions used by the auditor fall into the following categories, except:
a. Assertions about the faithful representations
b. Assertions about presentation and disclosure
c. Assertions about account balances at period end
d. Assertions about classes of transactions and events
20.Assertions about account balances at the period-end include valuation and allocation,
which means that
a. Assets, liabilities and equity interest exist.
b. All assets, liabilities and equity interests that should have been recorded have been
recorded.
c. Assets, liabilities and equity interests are included in the financial statements at
appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.
d. The entity holds or controls the rights to assets, and liabilities are the obligations of
the entity.
21.The assertion of cut-off means that:

a. Transactions and events have been recorded in the proper accounts
b. All transactions and events that should have been recorded are recorded
c. Transactions and events have been recorded in the correct accounting period
d. Amounts and other data relating to recorded transactions and events have been
recorded appropriately
22.The assertions of occurrence means that:

a. All transactions and events that should have been recorded are recorded
b. Amounts and other data relating to recorded transactions and events have been
recorded appropriately
c. Transactions and events that have been recorded have occurred, and pertain to the
entity
d. Transactions and events have been recorded in the proper accounts
23.Which description refers to the completeness assertion?

a. All disclosures that should have been included in the financial statements have
been included.
b. Disclosed events, transactions and other matters have occurred and pertain to the
entity.
c. Financial information is appropriately presented and described, and disclosures are
clearly expressed.
d. Financial and other information are disclosure fairly and at appropriate amounts.
24.Confirming proper title to equipment supports which of the following assertions?

a. Existence or occurrence c. Presentation and disclosure
b. Insurance coverage d. Rights and obligations
25.The auditor notices that a client’s cash-basis financial statements are prepared with
accrual basis financial titles. This situation bears on which financial statement
assertion?
a. Valuation or allocation c. Rights and obligations
b. Presentation and disclosure d. Completeness
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26.The process of vouching helps establish that all recorded transactions are
a. Recorded b. Complete c. Valid d. Presented
properly
27.Physical examination of tangible assets is not a sufficient form of evidence when the
auditor wants to determine the:
a. Existence of the asset c. Condition or quality of the asset
b. Quantity and description of the asset d. Ownership of the asset
28.Which of the following audit procedures is used extensively throughout the audit but
does not, by itself, provide sufficient appropriate evidence?
a. Inspection of records or documents c. Inquiry
b. Observation d. Inspection of tangible assets
29.Evidence obtained directly by the auditor is more reliable than information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?
a. Inspection b. Observation c. Computation d. Inquiry
30.In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to
support which of the following assertions?
a. Pricing b. Accuracy c. Valuation d. Rights and
obligations
Preliminary Engagement Activities

1. Which of the following would not be a consideration of a CPA firm in deciding whether
to accept a new client?
a. The client’s financial ability.
b. The client’s standing in the business community.
c. The client’s relations with its previous CPA firm.
d. The client’s probability of achieving an unqualified opinion.
2. Auditors must not only decide whether to accept new clients; they also should
periodically review their list of current clients and remove those clients the firm no
longer wants to be associated with. Reasons for discontinuing clients might include the
following, except:
a. Difficulty in working with client personnel.
b. Inability to negotiate an acceptable increase in the audit fee.
c. Evidence indicating a client’s management has integrity.
d. Client need for specialized services the current firm is unable or unwilling to
provide.
3. Management’s integrity affects all of the following risks except:

a. Business risk c. Audit risk
b. Financial Reporting risk d. All of these risks are affected
4. Which of the following factors most likely would influence an auditor’s determination of
the auditability of an entity’s financial statements?
a. The complexity of the accounting system c. The adequacy of the accounting
records
b. The existence of related-party transactions d. The operating effectiveness of
control procedures
5. Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be performed?
a. Management fails to modify prescribed internal controls for changes in information
technology.
b. Internal control activities requiring segregation of duties are rarely monitored by
management.
c. Management is dominated by one person who is also the majority stockholder.
d. There is a substantial risk of intentional misapplication of accounting principles.
6. Prior to the acceptance of an audit engagement with a client who has terminated the
services of the predecessor auditor, the CPA should
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a. Contact the predecessor auditor without advising the prospective client and request
a complete report of the circumstances leading to the termination of the
engagement with an understanding that all information disclosed will be kept
confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA
can include audit procedures to verify the reason given by the client for the
termination.
c. Not communicate with the predecessor auditor because this would in effect be
asking the auditor to violate the confidential relationship between an auditor and
the client.
d. Advise the client of the intention to contact the predecessor auditor and request a
permission for the contact.
7. Which of the following factors most likely would cause a CPA to not accept a new audit
engagement?
a. The prospective client has already completed its physical inventory count.
b. The CPA lacks an understanding of the prospective client's operations and industry.
c. The CPA is unable to review the predecessor auditor's audit documentation.
d. The prospective client is unwilling to make all financial records available to the CPA.
8. Which of the following factors most likely would lead a CPA to conclude that a potential
audit engagement should be rejected?
a. The details of most recorded transactions are not available after a specified period
of time.
b. Internal control activities requiring the segregation of duties are subject to
management override.
c. It is unlikely that sufficient appropriate evidence is available to support an opinion
on the financial statements.
d. Management has a reputation for consulting with several accounting firms about
significant accounting issues.
9. If the prospective client refuses to permit the predecessor to respond or limits the
predecessor’s response, the successor should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the
integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Inquire as to the reasons and consider the implications in deciding whether to
accept the engagement
d. Issue a disclaimer of opinion because the limited response of the predecessor
auditor constitutes a significant scope limitation
10.A firm has obtained information that would have caused it to decline an engagement
had the information been available earlier. Actions available to the auditor would
include the following, except:
a. Reporting the information and its implications to the person/s who appointed the
CPA
b. Withdraw from the engagement
c. Withdraw from the client relationship
d. Issue a disclaimer of opinion
11.According to PSA 210, the auditor and the client should agree on the terms of
engagement. The agreed terms would need to be recorded in a(n)
a. Client representation letter c. Engagement letter
b. Memo placed in the working papers d. Comfort letter
12.An engagement letter is best described as

a. A letter from the company to the auditors specifying management’s expectations
for completion of the audit on a timely basis and the fees.
b. A letter from the auditors to company management specifying that management is
responsible for the financial statements, and the auditors will issue an opinion on
the financial statements.
c. A letter from the auditors to company management that specifies the
responsibilities of both the company and the auditors in completing the audit and
the timing for its completion.
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d. A letter from the Board of Directors’ audit committee to the auditor that indicates
the auditor has been engaged to perform the audit and the fees to be paid.
13.An engagement letter is prepared with the interest(s) of __________.

a. The auditor only c. The public
b. The client only d. Both the client and the auditor
14.Engagement letters are widely used in practice for:

a. Audits only c. Assurance engagements only
b. Professional engagements of all types d. Related services only
15.The primary purpose of the engagement letter is to:

a. Satisfy the requirements of the CPA’s liability insurance policy
b. Remind management that the primary responsibility for the financial statements
rests with management
c. Provide a written record of the agreement with the client as to the services to be
provided
d. Provide a starting point for the auditor’s preparation of the preliminary audit
program
16.Engagement letter that documents and confirms the auditor’s acceptance of the
engagement would normally be sent to the client.
a. Before the auditor report is issued c. At the end of the fieldwork
b. After the audit report is issued d. Before the commencement of the
engagement
17.An auditor's engagement letter most likely would include a statement regarding:
a. Management's responsibility to provide certain written representations to the
auditor.
b. Conditions under which the auditor may modify the preliminary judgment about
materiality.
c. Internal control activities that would reduce the auditor's assessment of risk.
d. Materiality matters that could modify the auditor's preliminary assessment of fraud
risk.
18.An audit engagement letter least likely include:

a. A reference to the inherent limitations of an audit that there is an unavoidable risk
that some material misstatements may remain undiscovered
b. Description of any letters or reports that the auditor expects to submit to the client
c. Identification of specific audit procedures that the auditor needs to undertake
d. Basis on which fees are computed and any billing arrangements
19.An engagement letter should ordinarily include information on the objectives of the
engagement and
A B C D
 CPA’s responsibilities Yes Yes Yes No
 Client’s responsibilities Yes No No No
 Limitations of engagement Yes Yes No No
20.Which of the following is (are) valid reasons why an auditor sends to his client an
engagement letter?
A B C D
 To avoid misunderstanding with respect to management Yes Yes No No
 To confirm the auditor’s acceptance of the appointment Yes Yes Yes
No
 To document the objective and scope of the audit Yes Yes Yes Yes
 To ensure CPA’s compliance to PSA Yes No No Yes
21.The form and content of the audit engagement letters may vary for each client, but
they would generally include reference to except:
a. Management’s responsibility for all the financial statements.
b. The scope of the audit, excluding reference to applicable legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.
c. The form of any reports or any communication of results of engagement.
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d. Unrestricted access to whatever records, documentation and other information
requested in connection with the audit.
22.In making arrangements for an audit, there should be a clear understanding between
the auditor and the client as to the following except:
a. Assurance of auditor’s independence c. Terms of settlement for audit
services
b. The type of audit to be performed d. Official to whom audit report shall
be addressed
23.An auditor's engagement letter most likely would include a statement that:
a. Lists potential significant deficiencies discovered during the prior year's audit.
b. Explains the analytical procedures that the auditor expects to apply.
c. Describes the auditor's responsibility to evaluate going concern issues.
d. Limits the auditor's responsibility to detect errors and fraud.
24.Which of the following statements is/are correct?

Statement 1: On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is a need to
remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an
established client.
a. Only statement 1 is correct c. Both statements are correct
b. Only statement 2 is correct d. Both statements are incorrect
25.On recurring audit engagements, the auditor may decide not to send a new
engagement letter each period. In which of the following situations will there be no
need to send a new letter?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of the client’s business
c. Indications of misunderstanding of the objective and scope of the audit
d. Recent change of middle management and rank and file organizational structure
26.A client’s insistence that the audited results are reported quickly after the fiscal year
end is of concern to auditors because:
a. Many uncertainties inherent in the financial statements cannot be resolved until
several months after the year-end closing of the books.
b. The financial statements are less reliable because the period covered by the review
for subsequent events is shortened
c. Many clients have December 31 year ends and it is difficult to complete the audit
when many of the client’s personnel are on holidays.
d. Time pressure created by unrealistic deadlines increases the risk of errors in
judgment and in the performance of audit procedures.
27.If the auditor concludes that there is reasonable justification for the change in
engagement, the report to be issued would
a. Be that appropriate for the revised terms of the engagement
b. Include reference to the original engagement
c. Include reference to any procedures that may have been performed in the original
engagement
d. Not include reference to any procedures that may have been performed, particularly
when the new engagement is to undertake agreed-upon procedures
28.If a change in the type of engagement from higher to lower of assurance is not
justified, the auditor should:
a. Qualify the report on the original engagement.
b. Continue with the revised engagement, but make explicit reference about the
original engagement.
c. Refuse to agree to management’s request on the change of engagement and
continue with the original engagement.
d. Withdraw from the engagement.
29.Which of the following helps prevent misunderstandings during audit planning?

a. Auditor involvement in the preparation of the client’s financial records.
b. Client involvement in determining specific audit planning issues.
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c. A preliminary meeting conference with the client to discuss fees, timing, client
assistance and related issues.
d. Involvement of the client’s internal auditors in setting materiality levels and
determining the scope of audit tests.
30.One of the first things that the auditor will do after accepting a new client is:
a. Communicate with the predecessor auditor.
b. Contact the client’s attorney to discover legal obligations.
c. Study the client’s internal control structure.
d. Tour the client’s facilities.
Audit Planning and Risk Assessment Procedures

1. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed
in an effective manner.
Statement 2: The auditor should conduct the audit with an attitude of professional
skepticism.
Statement 2: The auditor should develop and document an overall audit plan
describing the scope and conduct of the audit.
a. Only one statement is correct c. All statements are correct
b. Only two statements are correct d. All statements are incorrect
2. It involves establishing the overall audit strategy for the engagement and developing
an audit plan in order to reduce audit risk to an acceptably low level.
a. Reporting b. Planning c. Field work d. Organizing
3. Adequate planning of the audit work helps the auditor of accomplishing the following
objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.
4. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an
effective manner.
b. Planning an audit involves establishing the overall audit strategy for the
engagement and developing the audit plan, in order to reduce audit risk to an
acceptably low level.
c. Planning involves the engagement partner and other key members of the
engagement team to benefit from their experience and insight and to enhance the
effectiveness and efficiency of the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of the
previous audit and continues until the finalization of the audit program.
5. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor's experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
6. Which of the following activities shall not be included in preplanning an audit?

a. Understanding the client’s reason for obtaining an audit
b. Investigating the client’s background
c. Determining the likelihood of issuing an unqualified audit opinion on the client’s
financial statements
d. Communicating with the prospective client’s prior auditor to inquire about any
disagreements with the client
7. The auditors plan should

A B C D
 Precede action Yes No Yes No
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 Be flexible Yes No No Yes
 Be cost-beneficial Yes Yes Yes Yes

Statement 1: The overall audit plan and the audit program should not be revised during
the course of the audit.
Statement 2: The auditor should develop and document an audit program setting out
the nature, timing and extent of planned audit procedures required to implement the
overall audit plan.
a. Only statement 1 is correct c. Both statements are correct
b. Only statement 2 is correct d. Both statements are incorrect

Statement 1: According to PSA 300, the auditor may discuss elements of planning with
those charged with governance and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides
the development of the more detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and
includes the nature, timing and extent of audit procedures to be performed
engagement team members to obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
a. Only 1 statement is correct c. All statements are correct
b. Only 2 statements are correct d. All statements are incorrect
10.Which of the following matters should be considered by the auditor in developing the
overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its
reporting requirements including changes since the date of the prior audit
b. Conditions requiring special attention, such as the existence of the related parties
c. The setting of materiality level for audit purposes
d. All of the above
11.The timing of the audit and nature of communications required include the following,
except:
a. The organization of meetings with management, and those charged with
governance, to discuss the nature, extent and timing of the audit work.
b. The discussion with management and those charged with governance regarding the
expected type and timing of reports to be issued and other communications.
c. Audit areas where there is a higher risk of material misstatement.
d. The entity’s timetable for reporting, such as interim and final stages.
12.In developing the overall audit strategy, the focus of the engagement team’s efforts is
considered. Which of the following is not appropriately classified as a factor affecting
the focus of the team’s efforts?
a. The financial reporting framework on which the financial information to be audited
has been prepared, including any need for reconciliation to another reporting
framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the
auditor to rely on internal control.
13.In developing an overall audit strategy, an auditor should consider:

a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
b. Findings from substantive tests performed at interim dates.
c. Whether the inquiry of the client's attorney identifies any litigation, claims, or
assessments not disclosed in the financial statements.
d. Preliminary evaluations of materiality, audit risk, and internal control.
14.This serves as the set of instructions to assistants involved in the audit and as a means
to control and record the proper execution of the work of the personnel involved in the
service.
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a. Audit procedures b. Audit plan c. Audit program d. Audit risk model
15.The 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.
16.One of the primary uses of an audit program is to

a. Provide for a standardized approach to the audit engagement
b. Serve as a tool for planning, directing and controlling the audit work
c. Document an auditor’s understanding of the internal control
d. Delineate the audit risk accepted by the auditor
17.The auditor should document the overall audit strategy and the audit plan, including
significant changes made during the audit engagement. Which of the following
statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a
memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but
such programs and checklists need to be tailored to the particular client.
c. The auditor’s documentation of any significant changes to the originally planned
overall audit strategy and to the detailed audit plan need not include the reasons
for the significant changes.
d. The form and extent of documentation depend on such matters as the size and
complexity of the entity, materiality, the extent of other documentation, and the
circumstances of the specific engagement.
18.An audit program is ordinarily prepared for an audit engagement because:

a. It documents the auditor’s understanding of the client’s internal control.
b. It aids in instructing assistants in the work to be done.
c. It is required by generally accepted auditing standards.
d. It explains any weaknesses noted in the evaluation of the client’s existing internal
control.
19.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 communicated to the audit committee.
c. Reportable conditions have been communicated to the audit committee.
d. Search for unrecorded liabilities has been performed and documented.
20.The audit program should contain the following, except:

a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk
21.Audit procedures may be classified as risk assessment procedures and further audit
procedures. Which of the following best describes risk assessment procedures?
a. These procedures test the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion level.
b. These procedures are used detect material misstatements at the assertion level.
c. These are procedures for obtaining an understanding of the entity and its
environment, including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
d. These procedures include tests of details of classes of transactions, account
balances, and disclosures and analytical procedures.
22.In performing an audit of financial statements, the auditor should obtain a sufficient
knowledge of a client’s business and industry to
a. Develop an attitude of professional skepticism concerning management’s financial
statements assertions.
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b. Make constructive suggestion concerning improvements causes the financial
statements taken as a whole to be materially misstated.
c. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect on the client’s
financial statements.
23.Which of the following procedures is not performed as a part of planning an audit

engagement?
a. Reviewing working papers of the prior year c. Designing an audit program
b. Performing analytical procedures d. Test of controls
24.Which of the following procedures not normally performed as part of obtaining an

understanding of the client’s environment?
a. Reading trade publications to gain a better understanding of the client’s industry
b. Studying the internal controls over cash receipts and disbursements
c. Confirming customer accounts receivable for existence and valuation
d. Touring the client’s facilities
25.Which of the following procedures would an auditor least likely perform in planning a
financial statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for
non-audit services to the entity.
c. Selecting a sample of vendor’s invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.
26.Audit risk has three components: inherent risk, control risk and detection risk. Which of
the following statements is correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater
inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis
by internal control can be reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at
the discretion of the auditor.
27.Which of the following audit risk components maybe assessed in quantitative terms?
Inherent Risk Control Risk Detection Risk
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes
28.Some accounts balances, such as those for retirement benefits and finance lease, are
the results of complex calculations. The susceptibility to material misstatements in
these types of accounts is referred to as
a. Audit risk b. Detection risk c. Control risk d. Inherent risk
29.Inherent risk and control risk differ from detection risk in that inherent risk and control
risk are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor’s discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not.
d. Considered at the individual account balance level while detection risk is not.
30.There is an inverse relationship that exist between the acceptable level of detection
risk and the
a. Risk of misapplying audit process c. Risk of falling to discover material
misstatement
b. Assurance provided by substantive tests d. Preliminary judgments about
materiality levels
31.On the basis of audit evidence gathered and evaluated, an auditor decides to increase
the assessed level of control risk, and therefore the risk of material misstatement, from
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that originally planned. To achieve an overall audit risk level that is substantially the
same as the planned audit risk level, the auditor would:
a. Increase inherent risk c. Decrease substantive testing
b. Increase materiality levels d. Decrease detection risk
32.Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
33.Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with GAAP, while other matters
are not important.
b. An auditor considers materiality for planning purposes in terms of the largest
aggregate level of misstatements that could be material to any one of the financial
statements.
c. Materiality judgments are made in light of surrounding circumstanced 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.
34.In considering materiality for planning purposes, Munda, auditor believes that
misstatements aggregating P60,000 would have material effect on an entity’s income
statement, but that misstatements would have to aggregate P40,000 to materially
affect the balance sheet. Ordinarily, it would be appropriate to design auditing
procedures that would be expected to detect misstatements that aggregate:
a. P40,000 b. P50,000 c. P60,000 d. P100,000
35.Which of the following statements concerning materiality thresholds in incorrect?

a. Materiality thresholds may change between the planning and review stages of the
audit. These changes may be due to quantitative and/or qualitative factors.
b. The smallest aggregate level of errors or fraud that could be considered material to
any of the financial statements is referred to as a materiality threshold.
c. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
d. Aggregate materiality thresholds are a function of the auditor’s preliminary
judgment concerning audit risk.
36.The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review their work. Which of the following statements
is incorrect regarding direction, supervision and review?
a. The auditor plans the nature, timing, and extent of direction and supervision of
engagement team members based on the assessed risk of material misstatement.
b. As the assessed risk of material misstatement increases, for the area of audit risk,
the auditor ordinarily increases the extent and timeliness of direction and
supervision of engagement team members.
c. As the assessed risk of material misstatement decreases, for the area of audit risk,
the auditor performs a more detailed review of their work.
d. The auditor plans the nature, timing and extent of the review of the team’s work
based on the capabilities and competence of the individual team members
performing the audit work.
37.Which of the following matters would an auditor most likely consider when establishing
the scope of the audit?
a. The expected audit coverage, including the number and locations of the entity’s
components to be included.
b. The entity’s timetable for reporting, such as at interim and final stages.
c. The discussion with the entity’s management concerning the expected
communications on the status of audit work throughout the engagement and the
expected deliverables resulting from the audit procedures.
d. Audit areas where there is a higher risk of material misstatement.
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38.In connection with the planning phase of an audit engagement, which of the following
statements is always correct?
a. Observation of inventory count should be performed at year-end.
b. An engagement should not be accepted after the client’s financial year-end
c. Final staffing decisions must be made prior to completion of the planning stage.
d. A portion of the audit of a continuing audit client can be performed at interim dates.
39.A retailing entity uses the Internet to execute and record its purchase transactions. The
entity's auditor recognizes that the documentation of details of transactions will be
retained for only a short period of time. To compensate for this limitation, the auditor
most likely would:
a. Compare a sample of paid vendors' invoices to the receiving records at year-end.
b. Perform tests several times during the year, rather than only at year-end.
c. Plan for a large measure of tolerable misstatement in substantive tests.
d. Increase the sample of transactions to be selected for cutoff tests.
40.Which of the following matters would an auditor least likely to consider when setting
the direction of the audit?
a. The availability of client personnel and data.
b. The selection of the engagement team and the assignment of audit work to the
team members.
c. The engagement budget which includes consideration of the appropriate amount of
time to allot for areas where there may be higher risks of material misstatement.
d. The manner in which the auditor emphasizes to engagement team members the
need to maintain a questioning mind and to exercise professional skepticism in the
gathering and evaluation of audit evidence.
Internal Control Consideration

1. It is a process, effected by those charged with governance, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories:
 Effectiveness and efficiency of operations
 Reliability of financial reporting
 Compliance with applicable laws and regulations
a. Internal auditing b. Internal control c. Business strategy
d. Accounting process
2. Which of the following best describes an internal control system?

a. All the policies and procedures adopted by the management of an entity to assist in
achieving management's objective of ensuring, as far as practicable, orderly and
efficient conduct of its business, including adherence to management policies;
safeguarding of assets; prevention and detection of fraud and error; accuracy and
completeness of the accounting records; and timely preparation of reliable financial
information.
b. The series of tasks and records of an entity by which transactions are processed
as a means of maintaining financial records. Such systems identify, assemble,
analyze, calculate, classify, record, summarize and report transactions and
other events.
c. This includes, but is not limited to, plan of organization and the procedures and
records that are concerned with the decision processes leading to management’s
authorization of transactions. It promotes operational efficiency and adherence to
managerial policies.
d. This comprises the plan of organization and the procedures and records that are
concerned with the safeguarding of assets and the reliability of financial records. It
involves systems of authorization and approval controls over assets, internal audit
and all other financial matters.
3. Which of the following is not one of the essential concepts of internal controls?
a. It is a process
b. It is effected by those charged with governance, management, and other personnel
in an entity
c. It is a means or tool used by management to achieve the entity’s objectives
d. It can be expected to absolute assurance regarding that the achievement of the
entity’s objectives
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4. A reason to establish internal control is to:
a. Have a basis for planning the audit
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organizational objectives
d. Ensure the accuracy, reliability and timeliness of information
5. Internal controls are not designed to provide reasonable assurance that

a. Transactions are executed in accordance with management’s authorization
b. Irregularities will be eliminated
c. Access to assets is permitted only in accordance with management’s authorization
d. The recorded accountability for assets is compared with the existing assets at
reasonable intervals
6. Internal control can only provide reasonable, not absolute, assurance of achieving
entity control objectives. One of the factors limiting the likelihood of achieving those
objectives is that:
a. The auditor’s primary responsibility is the detection of fraud.
b. The board of directors is active and independent.
c. The cost of internal control should not exceed its benefits.
d. Management monitors internal control.
7. Which of the following is an example of an inherent limitation in a client’s internal

control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in
accordance with management’s authorization.
c. In the performance of most control procedures, there are possibilities of errors
arising from mistakes in judgment.
d. Procedures for handling large numbers of transactions are processed by information
technology (IT) equipment.
8. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity
b. Cannot be circumvented by management
c. Is unaffected by changing circumstances and conditions encountered by the entity
d. Reduces the need for management the review exception reports on a day-to-day
basis
9. This internal component is the foundation for all other components. It set the tone of
the organization, provides discipline and structure, and influences the control
consciousness of employees.
a. Control activities c. Control environment
b. Monitoring of control d. Entity's risk assessment process
10.Which of the following statements best describes “control environment”?

a. The entity’s process for identifying business risks relevant to financial reporting
objectives and deciding about actions to address those risks, and the results
thereof.
b. The system for transferring information from transaction processing systems to the
general ledger or the financial reporting system.
c. Policies and procedures that help ensure that management directives are carried
out.
d. This includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management
concerning the entity’s internal control and its importance to the entity.
11.Which of the following considered control environment elements?

Commitment Detection Organizational
To competence Risk Structure
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes
12.The information system consists of the following:
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A B C D
 Infrastructure (physical and hardware components) Yes Yes No Yes
 Software Yes Yes Yes Yes
 People No Yes No No
 Procedures and inputs No Yes Yes No
13.An entity’s risk assessment process includes how management:

A B C D
 Identifies risk Yes Yes No Yes
 Assesses significance and likelihood of occurrence
of these identified risks Yes Yes Yes No
 Decides upon actions to manage these risks Yes No Yes No
14.Risks can arise or change due to circumstances such as the following, except:
a. There is a change in the regulatory or operating environment (i.e. a new law has
been passed which prohibits the use of a chemical which is a main ingredient of the
company’s major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past
five years, and no new pronouncements have been made.
15.Under PSA 315, monitoring of controls is an internal control component that involves a
process of assessing the quality of internal control performance over time. It involves
assessing the design and operation of controls on a timely basis and taking necessary
corrective actions. Monitoring of controls is accomplished through ongoing monitoring
activities, separate evaluations, or a combination of the two. An entity's ongoing
monitoring activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal
control
b. Reviewing the purchasing account
c. Periodic audits by the audit committee
d. The audit of the annual financial statements
16.Control activities constitute one of the five components of internal control. Which of
the following is not included in this internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization
17.Which of the following is a management control method that most likely could improve
management's ability to supervise company activities effectively?
a. Monitoring compliance with internal control requirements imposed by regulatory
bodies.
b. Limiting direct access to assets by physical segregation and protective devices.
c. Establishing budgets and forecasts to identify variances from expectations.
d. Supporting employees with the resources necessary to discharge their
responsibilities.
18.PSA 315 requires the auditor to obtain an understanding of the client’s internal controls
a. For every audit c. For first-time audits
b. Sufficient to find any frauds which may exist d. Whenever it would be appropriate
19.In planning the audit, the auditor obtains a sufficient understanding of the existing
internal control. Which one of the following is not among the auditor's primary
objectives for obtaining such knowledge?
a. Identify types of material misstatements.
b. Consider the factors that affect the risk of material misstatement.
c. Make constructive suggestions to the client for improvement.
d. Design effective substantive tests.
20.The primary purpose of the auditor’s consideration of internal control is to provide a

basis for
a. Determining whether procedures and records that are concerned with the
safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
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c. Determining the nature, timing and extent of audit tests to be applied.
d. The expression of an opinion.
21.When obtaining knowledge about an entity's internal control, it is important for the
auditor to consider the competence of its employees, because their competence bears
directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed
22.Obtaining an understanding of internal control involves:

A B C D
 Evaluating the design of a control Yes Yes Yes No
 Determining whether the control has been implemented Yes Yes No Yes
 Testing the effectiveness of a control No Yes Yes Yes
23.Which of the following statements best describes the phrase, “evaluating the design of
a control”?
a. Considering whether the control, individually or in combination with other controls,
is capable of effectively preventing, or detecting and correcting, material
misstatements.
b. Determining whether the control exists and that the entity is using it.
c. Expressing an opinion as to the effectiveness of a control.
d. Observing the application of specific controls.
24.When obtaining an understanding of the accounting and internal control system the
auditor may trace a few transactions through the accounting system. This technique
is:
a. Reperformance b. Walk-through c. Control test d. Validity
Test
25.When obtaining an understanding of an entity’s internal control, an auditor should

concentrate on the substance of controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the
auditor.
d. Management may implement controls with costs in excess of benefits.
26.After obtaining an understanding of an entity’s internal control structure and assessing

control risk, an auditor may next:
a. Perform tests of control to verify management’s assertions that are embodied in the
b. Apply analytical procedures as substantive tests to validate the assessed level of
control risk.
c. Consider whether evidential matter is available to support a further reduction in the
assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures detected
material misstatements in the financial statements.
27.After obtaining an understanding of internal control and assessing control risk, an

auditor decided to perform tests of controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in
planned substantive tests.
c. An increase in the assessed level of control risk is justified for certain financial
statement assertions.
d. There were many internal control weaknesses that could allow errors to enter the
accounting system.
28.Tests of controls are used to test whether controls are:

a. Operating effectively c. Properly incorporated in the
b. Placed in operation or implemented d. Properly documented by the client
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29.Which of the following is the auditor’s purpose of further testing internal control
procedures?
a. Provide a basis for reducing the assessed level of control risk below that which
resulted from the auditor’s initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal
control are not detected by the independent audit.
c. Provide assurance that transactions are executed in accordance with management’s
authorization and access to assets is limited by a proper segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the
preparation of the financial statements in accordance with PFRS.
30.Which of the following procedures most likely would provide an auditor with evidence
about whether an entity's internal control activities are suitably designed to prevent or
detect material misstatements?
a. Reperforming the activities for a sample of transactions.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Observing the entity's personnel applying the activities.
31.In conducting an audit in accordance with PSAs, the auditor is required to identify and
assess the risks of material misstatement at the financial statements level, and at the
assertion level for classes of transactions, account balances, and disclosure. Some of
these risks, in the auditor's judgment, require special audit consideration, such as
those that involve fraud or complex transactions. Such risks are called
a. Business risks b. Audit risks c. Significant risks d. Material
risks
32.Which of the following statements concerning audit risk and its components is
incorrect?
a. Regardless of the assessed levels of inherent and control risks, the auditor should
always perform some substantive procedures for material account balances and
classes of transactions
b. The higher the assessment of inherent and control risks, the more evidence the
auditor obtain from the performance of substantive procedures
c. The assessed level of inherent risk need not be considered in determining the
nature, timing and extent of substantive procedures required to reduce audit risk to
an acceptably low level
d. After obtaining an understanding of the accounting and internal control systems,
the auditor should make a preliminary assessment of control risk, at the assertion
level, for each material account balance or class of transactions
33.Which of the following statements is correct?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive
approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk
at a HIGH (maximum) level.
c. The auditor can simultaneously obtain an understanding of internal control and
perform tests of controls.
d. After performing tests of controls, the auditor will always assess control risk at a
HIGH level.
34.Tests of controls may include the following, except:

a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Analytical procedures involving comparison of operating expenses with budget
amount
d. Inspection of documentary support to transactions evidencing authorization
35.Evidence of the performance of control risk assessment procedures includes all of the
following except
a. Flowcharts b. Questionnaires c. Lead schedule d.
Memoranda
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36.Which of the following statements regarding auditor documentation of the client’s
internal control structure is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of
documentation may vary.
37.When control risk is assessed at HIGH for all financial statements assertions, an auditor
should document the auditor’s
A B C D
 Understanding of the entity’s internal control structure Yes Yes No
Yes
 Conclusion that control risk is HIGH No Yes Yes Yes
 Basis for concluding that control risk is HIGH No No Yes Yes
38.A control that reduces the risk that an existing or potential control weakness will result
in a failure to meet a control objective is referred to as:
a. Compensating control b. Non-routine control c. Conditional control
d. Offset control
39.When a compensating control exists, a weakness in the system:

a. Is no longer a concern because the potential for misstatement has been sufficiently
reduced.
b. Is reduced but it is not removed; therefore, it is still of concern to the auditor.
c. Could cause a material loss, so it must be tested using substantive procedures.
d. Is magnified and must be removed from the sampling process and examined in its
entity.
40.If no changes have occurred since the controls were last tested, a CPA should
a. Rely on the prior year audit’s assessment of internal controls and use this
assessment in the current year.
b. Test the operating effectiveness of such controls at least once in every fourth audit.
c. Rely entirely on the performance of substantive audit procedures.
d. Test the operating effectiveness of such controls at least once in every third audit
Other Matters Related to Internal Controls

1. This refers to person(s) or organization(s) (e.g., a corporate trustee) with responsibility
for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process.
a. Top level management c. Those charged with governance
b. Management d. Audit Committee
2. Matters to be communicated to those charged with governance may include the

following, except
a. The auditor’s responsibilities in relation to the financial statement audit
b. Significant findings from the audit
c. Auditors independence
d. Planned audit opinion
3. Which of the following statements is correct concerning an auditor’s required

communication with those charged with governance of an audit client?
a. This communication is required to occur before the auditor’s report on the financial
statements is issued.
b. This communication should include discussion of any significant disagreements with
management concerning the financial statements.
c. Any significant matter communicated to the audit committee also should be
communicated to management.
d. Significant audit adjustments proposed by the auditor and recorded by
management need not be communicated to those charged with governance.
4. Which of the following statements is correct about an auditor’s required communication

with those charged with governance of an audit client?
a. Any matters communicated to the entity’s audit committee also are required to be
communicated to the entity’s management.
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b. The auditor is required to inform those charged with governance about significant
misstatements discovered by the auditor and subsequently corrected by
management.
c. Disagreements with management about the application of accounting principles are
required to be communicated in writing to those charged with governance.
d. Weaknesses in internal control previously reported to those charged with
governance need not be recommunicated.
5. Which of the following best describes reportable conditions?

a. A significant deficiency (or combination of significant deficiencies) that results in a
reasonable possibility of a material misstatement which will not be prevented or
detected.
b. A situation in which the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to
prevent or detect material misstatements on a timely basis.
c. A control deficiency that is less severe than a material weakness, but important
enough to merit attention by those responsible for oversight of the company's
financial reporting.
d. It refers to significant deficiencies in the design or operation of the internal control
structure that could adversely affect the organization’s ability to record, process,
summarize, and report financial data consistent with the assertions of management
in the financial statements.
6. Reportable conditions are matters that come to an auditor's attention and that should
be communicated to an entity's audit committee because they represent
a. Material irregularities or illegal acts perpetrated by management.
b. Significant deficiencies in the design or operation of internal control.
c. Flagrant violations of the entity's documented conflict of interest policies.
d. Intentional attempts by client personnel to limit the scope of the auditor's work.
7. In general, a material weakness in internal control may be defined as a condition in

which material errors or irregularities may occur and not be detected within a timely
period by
a. An independent auditor during tests of controls.
b. Employees in the normal course of performing their assigned functions.
c. Management when reviewing interim financial statements and reconciling account
balances.
d. Outside consultants who issue a special-purpose report on internal control structure.
8. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee?
a. Management's failure to renegotiate unfavorable long-term purchase commitments.
b. Recurring operating losses that may indicate going concern problems.
c. Evidence of a lack of objectivity by those responsible for accounting decisions.
d. Management's current plans to reduce its ownership equity in the entity.
9. Which of the following statements concerning material weaknesses and significant

deficiencies is correct?
a. An auditor should not identify and communicate material weaknesses separately
from significant deficiencies.
b. Compensating controls may limit the severity of a material weakness or significant
deficiency.
c. Upon discovery an auditor should immediately report all material weaknesses and
significant deficiencies identified during an audit.
d. All significant deficiencies are material weaknesses.
10.The development of constructive suggestions to clients for improvements in internal

control is
a. A requirement of the auditor’s consideration of internal control.
b. A desirable by-product of an audit engagement.
c. Addressed by the auditor only during a special engagement.
d. As important as establishing a basis for reliance upon the internal control structure.
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11.A third-party organization (or segment of a third-party organization) that provides
services to user entities that are part of those entities’ information systems relevant to
financial reporting.
a. Service organization c. Service organization’s system
b. Subservice organization d. Third-party organization
12.This refers to controls that the service organization which assumes, in the design of its
service, will be implemented by user entities, and, if necessary to achieve control
objectives, are identified in the description of its system.
a. Complementary user entity controls c. Primary user entity controls
b. Complementary service entity controls d. Primary service entity controls
13.When obtaining an understanding of the user entity in accordance with PSA 315
(Redrafted), the user auditor shall obtain an understanding of how a user entity uses
the services of a service organization in the user entity’s operations, including:
a. b. c. d.
 The nature of the services provided by the service
organization and the significance of those services to
Yes Yes Yes Yes
the user entity, including the effect thereof on the user
entity’s internal control
 The nature and materiality of the transactions
processed or accounts or financial reporting processes Yes Yes Yes Yes
affected by the service organization
 The degree of interaction between the activities of the
Yes No No Yes
service organization and those of the user entity
 The nature of the relationship between the user entity
and the service organization, including the relevant
No No Yes Yes
contractual terms for the activities undertaken by the
service organization.
14.Type 1 report on service organization includes a report on

Description of Design of controls Operating
controls effectiveness of
controls
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. Yes Yes No
15.If the user auditor is unable to obtain a sufficient understanding from the user entity,
the user auditor shall obtain understanding from any other procedures. Which of the
following is least likely procedure that will be used by the auditor?
a. Obtaining a type 1 or type 2 report, if available
b. Contacting the service organization, through the user entity, to obtain specific
information
c. Visiting the service organization and performing procedures that will provide the
necessary information about the relevant controls at the service organization
d. Contacting law enforcement agencies to force the user entity to provide the
necessary information relevant to understanding by the user auditor.
16.Which of the following is the least concern of the client auditor in reviewing the report
of service organization auditor on suitability of internal control design of the service
organization?
a. The accuracy of description of the service organization's accounting and internal
control systems, ordinarily prepared by the management of the service
organization.
b. The systems' controls have been placed in operation.
c. The accounting and internal control systems are suitably designed to achieve their
stated objectives.
d. The type of documentation of the understanding of the service organization's
control system.
17. AAA Company processes payroll transactions for schools. Raymund, CPA, is engaged to
report on AAA’s policies and procedures implemented as of a specific date. These
policies and procedures are relevant to the schools’ internal control, so Raymund’s
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report will be useful in providing the schools’ independent auditors with information
necessary to plan their audits. Raymund’s report expressing an opinion on AAA’s
policies and procedures implemented as of a specific date should contain a(n)
a. Description of the scope and nature of Raymund’s procedures.
b. Statement that AAA’s management has disclosed to Raymund all design
deficiencies of which it is aware.
c. Opinion on the operating effectiveness of AAA’s policies and procedures.
d. Paragraph indicating the basis for Raymund’s assessment of control risk.
18.Which of the following is correct on reporting by the user auditor?

a. The user auditor should never refer to the work of a service auditor.
b. The user auditor can only refer to the work of the service auditor if it will issue
modified opinion.
c. When reference to the service auditor work is required by law or regulation, the user
auditor’s report shall indicate that the reference does not diminish the user
auditor’s responsibility for the audit opinion.
d. The user auditor should not issue unmodified opinion when using the work of a
service auditor.
19. AAA Company processes payroll transactions for a retailer. Francis, CPA, is engaged to
express an opinion on a description of AAA’s internal controls implemented as of a
specific date. These controls are relevant to the retailer’s internal control, so Francis’s
report may be useful in providing the retailer’s independent auditor with information
necessary to plan a financial statement audit. Francis’s report should
a. Contain a disclaimer of opinion on the operating effectiveness of AAA’s controls.
b. State whether AAA’s controls were suitably designed to achieve the retailer’s
objectives.
c. Identify AAA’s controls relevant to specific financial statement assertions.
d. Disclose Francis’s assessed level of control risk for AAA.
20.Which of the following is correct on reporting by the user auditor?

a. The user auditor should never refer to the work of a service auditor.
b. The user auditor can only refer to the work of the service auditor if it will issue
modified opinion.
c. When reference to the service auditor work is required by law or regulation, the user
auditor’s report shall indicate that the reference does not diminish the user
auditor’s responsibility for the audit opinion.
d. The user auditor should not issue unmodified opinion when using the work of a
service auditor.
21.In comparison to the external auditor, an internal auditor is more likely to be concerned
with
a. Internal control. c. Cost accounting procedures.
b. Operational auditing. d. Reviewing interim financial
statements.
22.The objectives of internal audit functions vary widely and depend on the size and
structure of the entity and the requirements of management and, where applicable,
those charged with governance. The activities of the internal audit function may
include one or more of the following, except
a. Monitoring of internal control.
b. Examination of financial and operating information.
c. Review of compliance with laws and regulations.
d. Issuing opinion as to whether internal controls are effective.
23.The independent auditor should acquire an understanding of the internal audit function
as it relates to the independent auditor’s consideration of internal control because
a. The audit programs, working papers, and reports of internal auditors can often be
used as a substitute for the work of the independent auditor’s staff.
b. The procedures performed by the internal audit staff may eliminate the independent
auditor’s need for an extensive consideration of internal control.
c. The work performed by internal auditors may be a factor in determining the nature,
timing and extent of the independent auditor’s procedures.
d. The understanding of the internal audit function is an important substantive test by
the independent auditor.
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24.If the independent auditors decide that the work performed by the internal auditor may
have a bearing on their own procedures, they should consider the internal auditor’s
a. Competence and objectivity. c. Efficiency and experience.
b. Independence and review skills. d. Training and supervisory skills.
25.If the independent auditor decides that the work performed by internal auditors may
have a bearing on the independent auditor’s own procedures, the independent auditor
should consider the objectivity of the internal auditors. One method of judging
objectivity is to
a. Review the recommendation made in the reports of internal auditors.
b. Examine, on a test basis, documentary evidence of the work performed by internal
auditors.
c. Inquire of management about the qualification of the internal audit staff.
d. Consider the client’s practices for hiring, training, and supervising the internal audit
staff.
26. Ash Retailing, Inc. maintains a staff of three full-time internal auditors who report
directly to the controller. In planning to use the internal auditors to provide assistance
in performing the audit, the independent auditor most likely will
a. Place limited reliance on the work performed by the internal auditors.
b. Decrease the extent of the tests of controls needed to support the assessed level of
detection risk.
c. Increase the extent of the procedures needed to reduce control risk to an
acceptable level.
d. Avoid using the work performed by the internal controls.
27.Which of the following is not a responsibility that should be assigned to a company's

internal audit department?
a. Evaluating internal control c. Reporting on effectiveness of
operating segments
b. Approving disbursements d. Investigating potential merger candidates
28.For which of the following judgments may an independent auditor share responsibility
with an entity’s internal auditor who is assessed to be both competent and objective?
Assessment of Assessment of
inherent risk control risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
29.During an audit, an internal auditor may provide direct assistance to an independent

CPA in
Obtaining Performing tests Performing
understanding of of controls substantive tests
internal control
a. No No No
b. Yes No No
c. Yes Yes No
d. Yes Yes Yes
30.In connection with the examination of financial statements by an independent auditor,

the client suggests that members of the internal audit staff be utilized to minimize
audit costs. Which of the following tasks could most appropriately be delegated to the
internal audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal’s
judgment as to how many accounts and which accounts will provide sufficient
coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control for accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.
Audit Evidence
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1. All the information used by the auditor in arriving at the conclusion on which the audit
opinion is based. It includes the information contained in the accounting records
underlying the financial statements (underlying accounting data) and other information
(corroborating information).
a. Audit Evidence b. Audit risk c. Audit opinion d. Audit
program
2. Which of the following best describes the primary purpose of audit procedures?
a. To detect fraud
b. To verify the accuracy of account balances
c. To comply with generally accepted accounting principles
d. To gather corroborative evidence to support the audit opinion

Statement 1: Audit evidence comprises source documents and accounting records,
underlying the financial statements and corroborating information from other sources.
Statement 2: Audit evidence is obtained to form an appropriate mix of tests of control

and substantive procedures.
Statement 3: The auditor should obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the audit opinion.
a. Statements 1 and 2 only c. Statements 2 and 3 only
b. Statements 1 and 3 only d. All statements are correct
4. All of the following are underlying accounting data, except:

a. Minutes of meetings c. Records of initial entries and
supporting documents
b. General and subsidiary ledgers d. Worksheets and spreadsheets for
cost allocations
5. Accounting records least likely include

a. General and subsidiary ledgers c. Work sheets and supporting cost
allocations
b. Comparable data about competitors d. Records of initial entries and
supporting records
6. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of meetings.
b. Confirmations from third parties.
c. Adjustments to the financial statements that are not reflected in formal journal
entries.
d. Information obtained by the auditor from such audit procedures as inquiry,
observation, and inspection.
7. An evidence to be considered appropriate must be:

a. Relevant b. Reliable c. Relevant and reliable d. Relevant
or reliable
8. The most reliable form of documentary evidence are those documents that are:
a. Internally generated c. Authorized by a responsible official
b. Pre-numbered d. Easily duplicated
9. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s internal audit staff held in private
b. Inspection of prenumbered client purchase orders filed in the vouchers payable
department
c. Analytical procedures performed by the auditor on the entity’s trial balance
d. Inspection of bank statements obtained directly from the client’s financial institution
10.Which of the following statements relating to the competence of evidential matter is

always true?
a. Evidence gathered by auditors must be both valid and relevant to be considered
competent.
b. Properly designed analytical procedures will detect material misstatements.
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c. Evidential matter gathered by an auditor from outside a client is reliable.
d. Oral representations made by management are not valid.
11.Which of the following statements regarding reliability of evidence is incorrect?

a. Audit evidence is more reliable when it is obtained from independent sources
outside the entity.
b. The condition of internal controls of the entity does not contribute to the reliability
of audit evidence.
c. Audit evidence that is generated internally is more reliable when the related
controls are effective.
d. Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly.
12.Which statement is incorrect regarding the nature of further audit procedures?

a. The nature of further audit procedures refers to their purpose and type.
b. Certain audit procedures may be more appropriate for some assertions than others.
c. The auditor is required to obtain audit evidence about the accuracy and
completeness of information produced by the entity’s information system when that
information is used in performing audit procedures.
d. The higher the auditor’s assessment of inherent and control risks, the less reliable
and relevant is the audit evidence sought by the auditor from substantive
procedures.
13.As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at
year-end
b. Nature of substantive tests from a less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one
time
d. Assessed level of inherent risk to a higher amount
14.Which of the following methods is considered the best combination in obtaining audit
evidence assuming documentary evidence is available to the auditor?
a. Inspection and re-performance. c. Inquiry and inspection
b. Observation and inquiry. d. Inquiry and analytical procedures.
15. “Physical examination” is the inspection or count by the auditor of assets such as:
a. Cash or inventory only
b. Cash, inventory, cancelled checks, and sales documents
c. Cash, inventory, securities, notes receivable, and tangible assets
d. Cash, inventory, cancelled checks, and tangible fixed assets
Confirmation and Analytical Procedures

1. Confirmation is most likely to be the relevant form of evidence with regard to
assertions about accounts receivable when the auditor has concerns about the
receivables’
a. Valuation b. Classification c. Existence d. Completeness
2. Confirmation is the process of obtaining a representation of information or of an

existing condition directly from a third party. Traditionally, confirmation is used to
verify:
a. Fixed asset additions.
b. Bank balances and accounts receivables.
c. Individual transactions between organizations, such as sales transactions.
d. All three of the above.
3. Who signs the confirmation requests:

a. The appropriate level of management c. The audit partner
b. The CEO/CFO of the client d. Both management and the auditor
4. When the recipient has accomplished the confirmation request, replies should be:
a. Sent directly to the auditor
b. Sent directly to the client, after which the client gives the replies to the auditor
c. Sent directly to the auditor, with another copy of the reply going to the client
d. Not sent back since a confirmation request does not necessitate replies
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5. Positive confirmation requests is not used when:

a. A large number of small balances is involved.
b. The entity’s information systems and internal controls are unreliable or ineffective
c. The information available to corroborate management’s assertion(s) is only
available outside the entity
d. Specific fraud risk factors, such as risk of management override of internal controls,
prevent the auditor from relying on evidence from the entity.
6. Negative confirmation requests may be used when:

a. A substantial number of errors is expected
b. A large number of large balances is involved
c. The assessed levels of inherent and control risks are high
d. The auditor has no reason to believe that respondents will disregard these
requests
7. Where no response is received to a positive confirmation request, the auditor should

a. Contact the recipient/respondent in order to force a response from such recipient
b. Issue a qualified opinion or a disclaimer of opinion on grounds of a scope limitation
c. Issue a qualified opinion or an adverse opinion, depending on the materiality
involved
d. Contact the recipient to elicit a response and perform alternative procedures as
necessary
8. If management refuses to allow the auditor to send confirmation request, the auditor
ordinarily performs the following audit procedure, except:
a. Report the management to the House of Representatives and to the Senate, as
necessary.
b. Where possible, perform alternative procedures designed to obtain relevant and
reliable audit evidence.
c. Evaluate the possible effect on the auditor’s opinion when the auditor concludes
that the management’s refusal is unreasonable and no alternative procedures can
be performed.
d. Evaluate the reasonableness of management’s refusal on the assessment of the
relevant risks of material misstatements, including risk of fraud, and on the nature,
timing and extent of other audit procedures.
9. Analytical procedures are required:

A B C D
 As a risk assessment procedure performed Yes Yes Yes Yes
during planning
 As a substantive test procedure during evidence Yes Yes No No
gathering
 As an overall review at audit completion No Yes No Yes
10.Analytical procedures used in planning an audit should focus on identifying:

a. Material weaknesses in the internal control system
b. The predictability of financial data from individual transactions
c. The various assertions that are embodied in the financial statements
d. Areas that may represent specific risks relevant to the audit
11.The objective of performing analytical procedures in planning an audit

engagement is to identify the existence of:
a. Unusual transactions and events
b. Illegal acts that went undetected because of internal control weaknesses
c. Related party transactions
d. Recorded transactions that were not properly authorized
12.Which of the following procedures would an auditor most likely perform in planning
an audit of financial statements?
a. Inquiring of the client’s legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of
internal controls.
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d. Searching for unauthorized transactions that may aid in detecting unrecorded
liabilities.
13.Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assuming the adequacy of the available evidential matter.
14.In performing analytical procedures, set the following procedures in proper order.
iii. Calculate predictions and compare them to recorded amount
iv. Develop an expectation
v. Define a significant difference
vi. Investigate significant difference
a. i, ii, iii, iv b. ii, i, iii, iv c. i, ii, iv, iii d. ii, i, iv, iii
15.An auditor compares expenses as a percent of sales to expectations. This is an

example of
a. Ratio analysis b. Crease analysis c. Trend analysis d. Vertical analysis
16.Which of the following results from analytical procedures might indicate inventory
obsolescence?
a. A decline in inventory turnover c. A decline in the gross margin ratio
b. A decline in days’ sales in inventory d. An increase in operating margin
17.Analytical procedures are

a. Substantive tests designed to evaluate a system of internal control.
b. Tests of controls designed to evaluate the validity of management's representation
letter.
c. Substantive tests designed to evaluate the reasonableness of financial
information.
d. Tests of controls designed to evaluate the reasonableness of financial information.
18.A basic premise underlying the application of analytical procedures is that

a. The study of financial ratios is an acceptable alternative to the investigation of
unusual fluctuations
b. Statistical tests of financial information may lead to the discovery of material errors
in the financial statements
c. Plausible relationships among data may reasonably be expected to exist and
continue in the absence of known conditions to the contrary
d. These procedures cannot replace tests of balances and transactions
19.The following are purposes of analytical procedures, except:

a. Assist the auditor in planning the nature, timing and extent of other audit
procedures
b. As a test to obtain audit evidence about the suitability of design and effective
operation of internal controls.
c. As a substantive procedure when their use can be more effective or efficient that
tests of details in reducing detection risk for specific financial statement assertions
d. As an overall review of the financial statements in the final review stage of the
audit.
20.Where there are unusual fluctuations and relationships ordinarily begins with
inquiries of management, followed by
A B C D
 Corroboration of management’s responses Yes No Yes No
 Consideration of the need to apply other audit Yes Yes No No
procedures based on the results of management
inquiries
Audit Sampling
1. The application of audit procedures to less than 100% of items within a class of
transactions on account balances such that all sampling units have a chance of
selection.
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a. Audit sampling c. 100% examination
b. Specific items testing d. Statistical sampling
2. Any approach to sampling that uses probability theory to evaluate sample results,
including measurement of sampling risk, and randomly selects samples is:
a. Statistical Sampling b. Attribute sampling c. Non-statistical sampling
d. Variable sampling
3. The risk that the auditor’s conclusion based on a sample may be different from the
conclusions reached if the entire population were subjected to the same audit
procedure.
a. Audit risk b. Control risk c. Sampling risk d. Information risk
4. Non sampling risk arises from the following, except:

a. reliance on persuasive rather than conclusive audit evidence
b. use of inappropriate audit procedures
c. misinterpretation of audit evidence
d. failure to recognize an error
5. Which of the following explanations best describes the distinguishing feature of

statistical sampling?
a. It allows the auditor to have the same degree of confidence as with judgment
sampling but with substantially less work.
b. It allows the auditor to substitute sampling techniques for audit judgment
c. It provides for measuring mathematically the degree of uncertainty that results from
examining only a part of the data.
d. It provides for measuring the actual misstatements in financial statements in terms
of reliability and precision.
6. The maximum error in a population that the auditor is willing to accept.

a. Tolerable Error b. Sample error c. Anomalous Error d. Expected
Population Error
7. An error that arises from an isolated event that has not recurred other than on
specifically identifiable occasions and is therefore not representative of
errors in the population.
a. Tolerable Error b. Sample error c. Anomalous Error d. Expected
Population Error
8. This is the process of dividing a population into subpopulations, each of which is

a group of sampling units which have similar characteristics.
a. Subdivision b. Statistical c. Stratification d. Non-statistical
sampling
9. The objective of stratification is:

a. To reduce the variability of items within each stratum and therefore allow sample
size to be reduced without a proportional increase in sampling risk.
b. To mathematically quantify sampling risk.
c. To reduce sampling risk.
d. To select samples that are more representative of the population.
10.The number of sampling units in the population is divided by the sample size to give a
sampling interval. When using this sample selection method, the auditor would need
to determine that sampling units within the population are not structured in such a way
that the sampling interval corresponds with a particular pattern in the population.
a. Systematic selection b. Haphazard selection c. Block selection d. Variable
sampling
11.The auditor selects the sample without following a structured technique. It is not
appropriate when using statistical sampling.
sampling
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12.Selecting a block(s) of contiguous items from within the population. it would rarely
be an appropriate sample selection technique when the auditor intends to
draw valid inferences about the entire population based on the sample.
sampling
13.The consequence of assessing control risk too high relates to the

a. Efficiency of the audit c. Preliminary estimates of materiality
levels
b. Effectiveness of the audit d. Allowable risk of tolerable error.
14.Which of the following best describes what the auditor means by the rate of
occurrence in the attribute sampling plan?
a. The number of errors that can be reasonably expected to be found in a population.
b. The frequency with which a certain characteristic occurs within a population.
c. The acceptable risk that the sample is not representative of the population.
d. The peso range within which the true population totals can be expected to fail.
15.The tolerable rate of deviations for a compliance test is generally

a. Lower than the expected rate of errors in the related accounting records.
b. Higher than the expected rate of errors in the related accounting records.
c. Identical to the expected rate of errors in the related accounting records.
d. Unrelated to the expected rate of errors in the related accounting records.
16.In planning a statistical sample for a test of controls, an auditor increased the expected
population deviation rate from the prior year’s rate because of the results of the prior
year’s tests of controls and the overall control environment. The auditor most likely
would then increase the planned:
a. Tolerable rate c. Risk of assessing control risk too low
b. Allowance for sampling risk d. Sample size
17.Which of the following statements is correct concerning statistical sampling in tests of

controls?
a. The expected population deviation rate has little or no effect on determining sample
size except for very small populations.
b. As the population size doubles, the sample size also should double.
c. For a given tolerance rate, a larger sample size should be selected as the expected
population deviation rate decreases.
d. The population size has little or no effect on determining sample size except for a
very small population.
18.An auditor is testing internal control procedures that are evidenced on an entity’s
voucher by matching random numbers with voucher numbers. If a random number
matches the number of a voided voucher, the voucher should ordinarily be replaced by
another voucher in the random sample if the voucher
a. Constitutes deviation c. Cannot be located
b. Has been properly voided d. Represents an immaterial peso amount
19.An auditor plans to examine a sample of 20 purchase orders for proper approvals as
prescribed by the client’s internal control procedures. One of the purchase orders in
the chosen sample of 20 cannot be found, and the auditor is unable to use alternative
procedures to test whether that purchase order was properly approved. The auditor
should
a. Choose another purchase order to replace the missing purchase order in the
sample.
b. Consider this test of control invalid and proceed with substantive tests since internal
control cannot be relied upon.
c. Treat the missing purchase order as a deviation for the sample.
d. Select a completely new set of 20 purchase orders.
20.The final step in the evaluation of the audit results in tests of controls is the decision to:
a. Determine the error in each sample.
b. Conclude whether the control tested is effective or is not effective.
c. Determine sampling error and calculate the estimated total population error.
d. Project the point estimate.
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21.Sampling technique used by auditors in detecting fraud or locating a particular

event.
a. Statistical Sampling b. Variable sampling c. Discovery Sampling d.
Attribute Sampling
22.Which of the following sampling plans would be designed to estimate a numerical

measurement of a population such as peso value?
a. Numerical sampling c. Discovery sampling
b. Sampling for attributes d. Sampling for variables
23.In applying variables sampling, an auditor attempts to:

a. Estimate a qualitative characteristic of interest
b. Determine various rates of occurrence for specified attributes
c. Discover at least one instance of a critical deviation
d. Predict a monetary population value within a range of precision
24.Tolerable error is a measure of the maximum monetary error that may exist in an
account balance without causing the financial statements to be materially misstated,
and is directly related to:
a. Reliability of evidence b. Audit risk c. Materiality d. Cost-benefit
analysis.
25.Which of the following is true about alpha and beta errors?

a. The alpha error is of greater concern to the auditor than the beta error.
b. The beta error is greater concern to the auditor than the alpha error.
c. The beta error and the alpha error are of equal importance to the auditor.
d. Neither the alpha error nor the beta error need be considered by the auditor.
26.The risk which the auditor is willing to take of acceptance a balance as correct when
the true error in the balance is equal to or greater than the tolerable misstatement is
a. The upper bound c. The tolerable risk
b. The acceptable risk of incorrect acceptance d. The lower bound
27.A number of factors influence the sample size for a substantive test of details of
an account balance. All other factors being equal, which of the following would lead
to a larger sample size?
a. Greater reliance on internal controls c. Smaller expected frequency of
errors
b. Greater reliance on analytical procedures d. Smaller measure of tolerable
misstatement
28.The final step in the evaluation of the audit results in substantive tests is the
decision to:
a. Determine sampling error and calculate the estimated total population error
b. Accept the population as fairly stated or to require further action
c. Determine the error in each sample
d. Project the point estimate
29.Use of the ratio estimation sampling technique to estimated peso amounts is

inappropriate when
a. The total book value is known and corresponds to the sum of all the individual book
values.
b. A book value for each sample item is unknown.
c. There are some observed differences between audited values and book values.
d. The audited values are nearly proportional to the book values
30.When using classical variables sampling for estimation, an auditor normally evaluates
the sampling results by calculating the possible misstatement in either direction. This
statistical concept is known as
a. Precision c. Projected misstatement
b. Reliability d. Standard deviation
Audit of Accounting Estimates, Including Fair Value

1. Which of the following statements is incorrect about accounting estimates?
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a. Management is responsible for making accounting estimates included in the
b. When evaluating accounting estimates, the auditor should pay particular attention
to assumptions that are objective and are consistent with industry patterns.
c. The risk of material misstatement is greater when accounting estimates are
involved.
d. The evidence available to support an accounting estimate will often be more
difficult to obtain and less conclusive than evidence available to support other items
in the financial statements.
2. In evaluating the reasonableness of an entity’s accounting estimates, an auditor

normally would be concerned about assumptions that are
a. Susceptible to bias c. Insensitive to variations
b. Consistent with prior periods d. Similar to industry guidelines
3. Which of the following would an auditor ordinarily perform first in evaluating

management’s accounting estimates for reasonableness?
a. Develop independent expectations of management’s estimates.
b. Consider the appropriateness of the key factors or assumptions used in preparing
the estimates.
c. Test the calculations used by management in developing the estimates.
d. Obtain an understanding of how management developed its estimates.
4. Which of the following would an auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
a. Inquiry of management
b. Make an independent estimate for comparison with client’s estimate
c. Review subsequent events
d. Obtain knowledge about the applicable financial reporting standards related
to the accounting estimate
5. Which of the following procedures would an auditor least likely perform when
evaluating the reasonableness of management’s estimates?
a. Make an independent estimates for comparison with management estimates
b. Read minutes of board of directors’ meeting
c. Review and test the process used by management
d. Review subsequent events and confirm the estimate made
6. 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 c. Based on objective assumptions
b. Consistent with industry guidelines d. Reasonable in the circumstances
7. In evaluating the reasonableness of an accounting estimate, an auditor most likely

would concentrate on key factors and assumption that are
a. Consistent with prior periods c. Objective and not susceptible to
bias
b. Similar to industry guidelines d. Deviations from historical
patterns
8. When auditing the fair value of an asset or liability, valuation issues ordinarily arise
at the point of
Initial recording Subsequent to initial recording
a. Yes Yes
b. Yes No
c. No Yes
d. No No
9. Which of the following is least likely to be an approach followed when auditing the
fair values of assets and liabilities?
a. Review and test management’s process of valuation.
b. Confirm valuation with audit committee members.
c. Independently develop an estimate of the value of the account.
d. Review subsequent events relating to the account.
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10.Which of the following is not a specialist upon whose an auditor may rely?
a. Actuary b. Internal auditor c. Appraiser d. Engineer
Audit Documentation
1. According to PSA 230 “Documentation”, working papers do not
a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support an
auditor’s opinion.
d. Prove the independence of the auditor.
2. Statement 1: Working papers are the property of the auditor.
Statement 2: Although portions of or extracts from the working papers maybe made
available to the entity at the discretion of the auditor, they may be substitute for the
entity’s accounting records.
a. Only statement one is correct c. Both statements are correct
b. Only statement two is correct d. Both statements are incorrect
3. Statement 1: The auditor should prepare working papers which are sufficiently
complete and detailed to provide an overall understanding of the audit.
Statement 2: 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 drawn from the audit evidence obtained.
a. Only statement one is correct c. Both statements are correct
b. Only statement two is correct d. Both statements are incorrect
4. Audit working papers are used to record the results of the auditor’s evidence gathering
work. When preparing working papers, the auditor should remember that
a. Working papers should be designed to meet the circumstances and the
auditor’s need for each engagement.
b. Working papers should be kept on the client’s premises so as to provide ready
access to them by the client.
c. Working papers should be at the primary support for the financial statements being
examined.
d. Working papers should be considered as a substitute for the client’s accounting
records.
5. The primary purpose of audit working papers is to

a. Provide evidence of compliance with auditing standards.
b. Provide management with an independent copy of financial records.
c. Provide protection against litigation.
d. Document deficiencies in client policies and procedures.

a. Documentation prepared at the time the work is performed is likely to be more
accurate than documentation prepared subsequently.
b. The auditor ordinarily includes from audit documentation superseded drafts of
working papers and financial statements, notes that reflect incomplete or
preliminary thinking, previous copies of documents corrected for typographical or
other errors, and duplicates of documents.
c. It is neither necessary nor practicable to document every matter the auditor
considers during the audit.
d. Oral explanations by the auditor, on their own, do not represent adequate support
for the work the auditor performed or conclusions the auditor reached, but may be
used to explain or clarify information contained in the audit documentation.
7. Audit working papers should not

a. Include any client-prepared papers or documents other than those prepared by the
CPA or his assistant.
b. Be kept by the CPA after review and completion of the audit except for items
required for the income tax return or the permanent file.
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c. Be submitted to the client to support the financial statements and to provide
evidence of the audit work performed.
d. Be themselves be expected to provide sufficient support for the auditor’s opinion.
8. Which of the following is not a factor affecting the independent auditor’s judgment
about the quantity, type and content of audit working papers?
a. The needs for supervision and review of the work performed by assistants.
b. The nature and condition of the client’s records and internal control.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of financial statements, schedules, or other information on which the
auditor is reporting.
9. Although the quantity, type and content of working paper will vary with the
circumstances, the working papers generally include the
a. Copies of those client records examined by the auditor during the course of the
engagement.
b. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit.
c. Auditor’s comments concerning the efficiency and competence of client
management personnel.
d. Auditing procedures followed, and the testing performed in obtaining
evidential matter.
10.Which of the following is generally included or shown in the auditor’s working

papers?
a. The procedures used by the auditor to verify the personal financial status of
members of the client’s management’s team.
b. Analysis that are designed to be a part of, or a substitute for, the client’s accounting
records.
c. Excerpts from authoritative pronouncements that supports the underlying generally
accepted accounting principles used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.
11.An auditor’s working papers should

a. Not be permitted to serve as a reference source for the client.
b. Not contain comments critical of management.
c. Show that the accounting records agree or reconcile with the financial
statements.
d. Be considered the primary support for the financial statements being audited.
12.Using laptop computers in auditing may affect the methods used to review the work of
staff assistants because
a. Supervisory personnel may not have an understanding of the capabilities and
limitations of computers.
b. Working paper documentation may not contain readily observable details of
calculations.
c. The audit fieldwork standards for supervision may differ.
d. Documenting the supervisory review may require assistance of management
services personnel.
13.Documentation is a form of evidence

a. Used in every financial statement audit
b. Used in most financial statement audit
c. Used on the rare occasions when it is both readily available and less costly than
other procedures
d. Used when nothing is available that is more competent
14.An audit working paper that shows the detailed evidence and procedures regarding the
balance in the accumulated depreciation account in the year under audit will be found
in the
a. Current file of working papers c. Other information working papers in
the current file
b. Permanent file of working papers d. Planning memorandum in the
current file
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15.In the case of recurring audits, some working papers files may be classified as audit
files which are updated with new information of continuing importance. This type of
audit file is known as:
a. Current audit file c. Electronic audit file
b. Permanent audit file d. Planning memorandum file
16.The audit working paper that reflects the major components of an amount
reported in the FS is the
a. Inter-bank transfer schedule c. Supporting schedule
b. Carry-forward schedule d. Lead schedule
17.A schedule listing account balances for the current and previous years, and columns for
adjusting and reclassifying entries proposed by the auditors to arrive at the final
amount that will appear in the financial statements, is referred to as a
a. Working trial balance c. Summarizing schedule
b. Lead schedule d. Supporting schedule
18.What do you call the type of working paper where matters of importance are noted
down for further verification?
a. Summary sheet b. Audit program c. Agenda sheet d. Supporting
schedules
19.The current file of the auditor’s working papers generally should include
a. A flowchart of the internal controls c. A copy of the financial
statements
b. Organization charts d. Copies of bond and note indentures
20.The permanent file portion of the auditor’s working papers generally should
include
a. A copy of the engagement letter.
b. A copy of key customer confirmation.
c. Names and addresses of audit staff personnel on the engagements.
d. Time and expense reports.
21.The permanent (continuing) file of an auditor’s working paper most likely would include
copies of the
a. Lead schedules b. Attorney’s letter c. Bank statements d. Debt
agreements
22.The current file of an auditor’s working paper most likely would include copy of the
a. Bank reconciliation c. Articles of incorporation
b. Pension plan contract d. Flowchart of the internal control
activities
23.The permanent file section of the working papers that is kept for each audit client
most likely contains
a. Review notes pertaining to questions and comments regarding the audit work
performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client’s legal counsel concerning pending litigation.
d. Narrative descriptions of the client’s accounting procedures and internal
controls.
24.In general, which of the following statements is correct with respect to ownership,
possession, or access to working papers prepared by a CPA firm in connection with an
audit?
a. The working papers may be obtained by third parties where they appear to be
relevant to issues raised in litigation.
b. The working papers are subject to the privileged communication rule which, in
a majority of jurisdictions, prevents third-party access to the working papers.
c. The working papers are the property of the client after the client pays the fees.
d. The working papers must be retained by the CPA firm for a period of ten years.
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25.For what minimum period should audit working papers be retained by the
independent CPA?
a. For the period during which the entity remains a client of the independent CPA.
b. For the period during which an auditor-client relationship exists but not more than
six (6) years.
c. For the statutory period within which legal action may be brought against
the independent CPA.
d. For as long as the CPA is in public practice.
26.Which of the following documentation is required for an audit in accordance

with PSA?
a. An internal control questionnaire c. A planning memorandum or
checklist
b. A client engagement letter d. A client representation letter
27.The auditor should complete the assembly of the financial audit file on a timely
basis after the date of the auditor’s report. As PSQC 1 indicates, days after the
date of the auditor’s report is ordinarily an appropriate time limit within which to
complete the assembly of the financial audit file.
a. 30 b. 60 c. 90 d. 120
28.After the assembly of the final audit file has been completed, the auditor not delete or
discard audit documentation before the end of its retention period. As PSQC 1
indicates, the retention period for audit engagement ordinarily is no shorter than
years from the date of the auditor’s report
a. 5 b. 3 c. 7 d. 10
29.The main advantage of properly indexed working papers is to

a. Reduce the size of the file c. Better organize the working papers
b. Allow division of labor within the audit team d. Facilitate the efficient use of audit
staff
30.During the working paper review, an audit supervisor finds that the auditor’s reported
findings are not adequately cross-referenced to supporting documentation. The
supervisor will most likely instruct the auditor to
a. Prepare working paper to indicate that the full scope of the audit was carried out.
b. Familiarize him/herself with the sequence of working papers so that he/she will be
able to answer questions about the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is unclear.
d. Provide a working paper indexing system that shows the relationship between
findings, conclusions, and the related facts.
Completing the Audit

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 reporting date
d. They are usually performed by audit managers or other senior members of the audit
team who have extensive audit experience
2. 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
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3. 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. The communication with the audit committee should be revised
b. Irregularities exist among the relevant account balance
c. Additional substantive tests of details are required
d. Internal control activities are not operating effectively
4. 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
5. The responsibility for the identification and disclosure of related parties and
transactions with such parties rests with the
a. Auditor b. Management c. FRSC d. SEC
6. The auditor should review information provided by those charged with governance and
management identifying
I. The names of all known related parties
II. Related party transactions
a. I only b. II only c. Both I and II d. Neither I nor II
7. Which of the following events most likely indicates the existence of related
parties?
a. Making a loan without scheduled terms for payment of the funds
b. Discussing merger terms with a company that is a major competitor
c. Selling a real estate at a price that differs significantly from its book value
d. Borrowing a large sum of money at a variable rate of interest
8. An auditor searching for related party transactions should obtain an understanding of

each subsidiary’s relationship to the total entity because
a. This may permit the audit of intercompany account balances to be performed as of
concurrent dates
b. This may reveal whether particular transactions would have taken place if the
parties had not been related
c. The business structure may be deliberately designed to obscure related
party transactions
d. Intercompany transactions may have been consummated on terms equivalent to
arm’s-length transactions
9. After determining that a related party transactions has, in fact, occurred, an

auditor should
a. Obtain an understanding of the business purpose of the transaction
b. Substantiate that the transaction was consummated on terms equivalent to an
arm’s-length transaction
c. Add a separate paragraph to the auditor’s report to explain the transactions
d. Perform analytical procedures to verify whether similar transactions occurred, but
were not recorded
10. “Subsequent events” are defined as events which occur subsequent to the
a. Reporting date
b. Date of the auditor’s report
c. Reporting 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
11. When completing the audit, the auditor performs procedures designed to identify
subsequent events may require adjustment of, or disclosure in the financial
statements. Accordingly
Those that provide evidence Those that are indicative of
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about conditions that exist at conditions that arose
period end subsequent to period end
a. Will require adjustment Will require adjustment
b. Will require adjustment Will require disclosure
c. Will require disclosure Will require disclosure
d. Will require disclosure Will require adjustment
12. Which of the following statements best describes the “date of the financial
statements?”
a. The date on which those with the recognized authority assert that they have
prepared the entity’s complete set of financial statements, including the related
notes, and that they have taken responsibility for them
b. The date that the auditor’s report and audited financial statements are made
available to third parties
c. The date of the end of the latest period covered by the financial statements, which
is normally the date of the most recent balance sheet in the financial
statements subject to audit
d. The date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the opinion on the financial statements
13. Which of the following procedures would an auditor most likely perform to
obtain evidence about the occurrence of subsequent events?
a. Inquiring as to whether any unusual adjustment were made after the date of
b. Confirming a sample of material accounts receivable established after the date of
c. Comparing the financial statement being reported on with those of the prior period
d. Investigating personnel changes in the accounting department occurring after the
date of the financial statements
14. Which of the following statements best expresses the auditor’s responsibility
with respect to facts discovered after the date of the auditor’s report but
before the date the financial statements are issued?
a. The auditor should amend the financial statements
b. If the facts discovered will materially affect the financial statements, the auditor
should issue a new report which contains either a qualified opinion or an adverse
opinion
c. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in
the circumstances
d. The auditor should withdraw from the engagement
15. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statement, unless
a. Final determinations or resolutions are made of contingencies that had been
disclosed in the financial statements
b. Information about an event that occurred after the date of the auditor’s report
comes to the auditor’s attention
c. The control environment changes after issuance of the report
d. Information, which existed at the report date and may affect the report, comes to
the auditor’s attention
16. Which of the following events occurring after the issuance of an auditor’s report
most likely would cause the auditor to make further inquiries about the previously
issued financial statements?
a. A technological development that could affect the entity’s future ability to continue
as a going concern
b. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated
sales
c. The discovery of information regarding a contingency that existed before the
financial statement were issued
d. The final resolution of a lawsuit disclosed in the notes to the financial statements
17. Which of the following procedures should an auditor generally perform

regarding subsequent events?
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a. Compare the latest available interim financial statements with the financial
statements being audited
b. Send second requests to the clients customers who failed to respond to initial
accounts receivable confirmation requests
c. Communicate material weaknesses in the internal control structure to the client’s
audit committee
d. Review the cut-off bank statements for several months after the year-end
18. The procedures to identify events that may require adjustment of, or
disclosure in, the financial statements would be performed as near as
practicable to the date of the auditor’s report. These procedures would ordinarily
include the following except
a. Reviewing procedures management has established to ensure that subsequent
events are identified
b. Reading minutes of the meetings of shareholders, the board of directors and audit
and executive committee held after period end and inquiring about matters
discussed at meetings for which minutes are not yet available
c. Testing the effectiveness of those internal control policies and procedures that may
have significantly changed in the subsequent period
d. Inquiring or extending previous oral or written inquiries, of the entity’s lawyers
concerning litigation and claims
19. Which of the following material event occurring subsequent to the reporting date
would require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, in excess of the recorded liability
20. Which of the following events in the subsequent period will require disclosure in
the notes to financial statements?
a. Realization of recorded year-end receivables at a different amount than recorded
b. Settlement of recorded year-end estimated product warranty liabilities at a different
amount than recorded
c. Purchase of a machine
d. Purchase of a business
21. A major customer of an audit client suffers a fire just prior to completion of year-end
field work. The audit client believes that this event could have a significant direct
effect on the financial statements. The auditor should
a. Advise management to disclose the event in notes to the financial statement
b. Disclosure the event in the auditor’s report
c. Withhold submission of the auditor’s report until the extent of the direct effect on
the financial statements is known
d. Advise management to adjust the financial statements
22. Which of the following subsequent events will be least likely to result in an
adjustment to the financial statements?
a. Culmination of events affecting the realization of accounts receivable owned as of
the reporting date
b. Culmination of events affecting the realization of inventories owned as of the
reporting date
c. Material changes in the settlement of liabilities which were estimated as of the
reporting date
d. Material changes in the quoted market prices of listed investment securities since
the reporting date
23. If a lawyer refuses to furnish corroborating information regarding litigation, claims,

and assessment, 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 statement
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24. When a CPA has concluded that action should be taken to prevent future reliance on
his report he should
a. Advise his client to make appropriate disclosure of the newly discovered facts and
their impact on the financial statement to persons who are currently relying or who
are likely rely on the financial statements and the related auditor’s report
b. Recall the financial statement and issue revised statements and include an
appropriate opinion
c. Advise the client and others not to rely on the financial statements and make
appropriate disclosures of the corrections in the statements of a subsequent opinion
d. Recall the financial statement and issue a disclaimer of opinion which should
generally be followed by revised statements and a qualified opinion
25. After an audit report containing an unqualified opinion on a non-public client’s

financial statements was issued, the client decided to sell the shares of a subsidiary
that accounts for 30% of its revenue and 25% of its net income. The auditor should
a. Determine whether the information is reliable and if determined to be reliable,
request that revised financial statement be issued
b. Notify the entity that the auditor’s report may no longer be associated with the
c. Describe the effect of this subsequently discovered information in a communication
with persons known to be relying on the financial statements
d. Take no action because the auditor has no obligation to make any further inquiries
26. PSA 570 (Going Concern) states that a fundamental principle in the preparation of
financial statements is the going concern assumption. Under this assumption, an
entity is ordinarily viewed as continuing in business for the foreseeable future with
neither the intention nor the necessity of liquidation, ceasing trading or seeking
protection from creditors pursuant to laws and regulations. The responsibility to make
an assessment of an entity’s ability to continue as a going concern rests with the
a. Auditor b. Management c. Creditors d. SEC
27. Which of the following statements best describes the auditor’s responsibility
concerning the appropriateness of the going concern assumption in the
preparation of the financial statements?
a. The auditor’s responsibility is to make a specific assessment of the entity’s ability to
continue as a going concern
b. The auditor’s responsibility is to predict future events or conditions that may cause
the entity to cease to continue as a going concern
c. The auditor’s responsibility is to consider the appropriateness of
management’s use of the going concern assumption and consider whether
there are material uncertainties about the entity’s ability to continue as a going
concern that need to be disclosed in the financial statements
d. The auditor’s responsibility is to give a guarantee in the audit report that the entity
has the ability to continue as a going concern
28. Which of the following conditions or events most likely would cause an auditor to
have substantial doubt on an entity’s ability to continue as a going concern?
a. Restrictions on disposal of principal assets are present
b. Significant related party transactions are pervasive
c. Usual trade credit from suppliers is DENIED
d. Arrearages in principal stock dividends are paid
29. Which of the following audit procedure would most likely assist an auditor in
identifying conditions and events that may indicate there could be substantial doubt
on an entity’s ability to continue as a going concern?
a. Confirmation of bank balances
b. Reconciliation of interest expense with debt outstanding
c. Confirmation of accounts receivable from customers
d. Review of compliance with terms of debt agreement
30. Juan, CPA, believes there is substantial doubt about the ability of Peter Co. to
continue as a going concern for a reasonable period of time. In evaluating Peter’s
plans for dealing with the adverse effects of future conditions and events, Juan most
likely would consider, as a mitigating factor, Peter’s plan to
a. Postpone expenditures for research and development projects
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b. Purchase production facilities currently being leased from a related party
c. Strengthen internal controls over cash disbursement
d. Discuss with lenders the terms and loan agreements
31. When an auditor concludes that there is substantial doubt about a continuing
audit client’s ability to continue as a going concern for a reasonable period of time, the
auditor’s responsibility is to
a. Consider the adequacy of disclosure about the client’s possible inability to
b. Issue a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements
c. Report to the client’s audit committee that management’s accounting estimates
may need to be adjusted
d. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph
that specifically refers to “substantial doubt” and “going concern”
32. 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
statement should be prepared using an appropriate basis; otherwise the auditor will
issue a(an)
a. An adverse opinion c. Either qualified or adverse opinion
b. A disclaimer of opinion d. An unqualified opinion with
explanatory paragraph
33. Which of the following may not cast significant doubt about the going concern
assumption of an entity?
a. The entity heavily used long-term capital in financing its investment in permanent
assets
b. Non-compliance with capital or other statutory requirements
c. Pending legal or regulatory proceeding against the entity may, if successful, result
in claims that are unlikely to be satisfied
d. Changes in legislation or government policy expected to adversely affect the entity
34. Which of the following statement is not correct about the auditor’s
responsibility about management’s use of the going concern assumptions?
a. The auditor should evaluate management’s assessment of the entity’s ability to
b. The auditor should inquire of management as to its knowledge of events or
conditions beyond the period of assessment used by management that cast
significant doubts on the entity’s ability to continue as a going concern
c. The auditor does not have a responsibility to design procedures other than inquiry
of management to tests for inclination of events or conditions which cast significant
doubt on the entity’s ability to continue as a going concern beyond the period
assessed by management
d. The absence of any reference to going uncertainty in the auditor’s report can be
reviewed as a guarantee as to the entity’s ability to continue as a going concern
35. The auditor is required to obtain audit evidence that management

I. Acknowledges its responsibility for the fair presentation of the financial
statements in accordance with applicable financial reporting framework
II. Has approved the financial statements
36. The date of the management representation letter should coincide with the date of
the
a. Financial statements c. Auditor’s report
b. Latest related party transaction d. Latest interim financial information
37. An auditor generally obtains from a client a formal written statement concerning the
accuracy of the inventory. The particular letter of representation is used by the auditor
to
a. Reduce the scope of the auditor’s physical inventory work but not the other
inventory audit work that is normally performed
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b. Confirm in writing the evaluation basis used by the client to value the inventory at
the lower of cost or net realizable value
c. Lessen the auditor’s responsibility for the fair presentation of balance sheet
inventories
d. Remind management that the primary responsibility for the overall fairness of the
financial statements rests with management and not with the auditor
38. A purpose of a management representation letter is to REDUCE

a. Audit risk to an aggregate level of misstatement that could be considered material
b. An auditor’s responsibility to detect material misstatement only to the extent that
the letter is relied on
c. The possibility of misunderstanding concerning management’s responsibility for
d. The scope of an auditor’s procedures concerning related party transactions and
subsequent events
39. A written representation from a client’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
a. Chief financial officer and the chair of the board of directors
b. Chief executive officer and the chief of financial officer
c. Chief executive officer, the chair of the board and the client’s lawyer
d. Chair of the audit committee of the board of directors
40. Management’s refusal to furnish a written representation letter on a matter which

the auditor considers essential constitutes
a. Prima facie evidence that the financial statement are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unqualified opinion
d. A scope limitation sufficient to preclude an unqualified opinion
Audit Reporting on General-Purpose Statements

1. The expression “financial statements, taken as a whole “ applies:
a. Equally to a complete set of financial statements and to an individual financial
statement.
b. Only to a complete set of financial statements.
c. Equally to each item in each financial statement.
d. Equally to each material item in each financial statement.
2. To distinguish it from report that might be issued by others, such as by officers of the
entity, the board of directors, or from the reports of other auditors who may not have to
abide by the same ethical requirements as the independent auditor, the auditor’s
report should have an appropriate
a. Addresses B. TITLE c. Signature d. Opinion
3. The auditor’s report should be addressed

a. Only to the shareholders of the entity whose financial statements are being audited
b. Only to the board of directors of the entity whose financial statements are being
audited
c. Either to the shareholders or the board of directors of the entity whose financial
statement are being audited
d. Either to the shareholders or the board of directors, or both, of the entity
whose statements are being audited
4. Which of the following is included in the introductory or opening paragraph of

the auditor’s report?
a. Identification of the financial statements audited, including the date of and period
covered by the financial statements
b. A statement that the financial statements are the responsibility of the entity’s
management
c. A statement that the audit was conducted in accordance with Philippine Standard
on Auditing
d. A statement that the responsibility of the auditor is to express an opinion on the
financial statements based on the audit
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5. The following statements relate to the date of the auditor’s report. Which is false?
a. The auditor should date the report as of the completion date of the audit
b. The date of the auditor’s report should not be earlier than the date on which
the financial statements are signed or approved by management
c. The date of the auditor’s report should not be later than the date on which financial
statements are signed or approved by management
d. The date of the auditor’s report always be later than the date of the financial
statement (i.e., the statement of financial position)
6. In which of the following circumstances would an auditor most likely add an emphasis
of matter paragraph to the auditor’s report while expressing an unqualified opinion?
a. There is a substantial doubt about the entity’s ability to continue as a going concern
b. Management’s estimates of the effects of future events are unreasonable
c. No depreciation has been provided in the financial statements
d. Certain transactions cannot be tested because of management’s records retention
policy
7. An explanatory paragraph following an opinion paragraph describes an uncertainty as

follows:
“As discussed in Note X to the financial statements, the company is a defendant in a
lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determines. Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying financial statements.”
What type of opinion should the auditor express in these circumstances?

a. Unqualified b. Qualified c. Disclaimer d. Adverse
8. The independent auditor refers to both PFRS and PSA when writing the standard audit
report. These terms are mentioned in which paragraph?
Auditor’s Management’s
responsibility responsibility Opinion
a. PFRS PFRS PSA
b. PSA PSA PFRS
c. PFRS PFRS PFRS
d. PSA PFRS PFRS
9. An independent auditor discovers that a payroll supervisor of the company being

audited has misappropriated P50,000. The company’s total assets and income before
tax are P70 million and P15 million, respectively. Assuming no other issues affect the
report, the auditor’s report will most likely contain a/an
a. Unqualified b. Disclaimer c. Adverse d. Scope
qualification
10.A note to the financial statements of the Prudent Bank indicates that all of the records
relating to the bank’s business operations are stored on magnetic disks, and that no
emergency backup systems or duplicate disks are stored because the bank and its
auditors consider the occurrence of a catastrophe of be remote. Based upon this note,
the auditor’s should express
a. A qualified opinion c. An adverse opinion
b. An unqualified opinion d. Scope qualification
11.Which of the following statements indicates a disclaimer of opinion?

a. The financial statements do not present fairly in all material respects the financial
position, results of operations, and cash flows in conformity with PFRS.
b. The auditor does not express an opinion on the financial statements.
c. The financial statements present fairly in all material respects the financial position,
results of operations, and cash flows in conformity with PFRS.
d. Except for the effects of a matter, the financial statements present fairly in all
material respects the financial position, results of operations, and cash flows in
conformity with PFRS.
12.A modified opinion on the financial statements is necessary when

I. The auditors concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement
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II. The auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement
a. I only b. II only c. Either I or II d. Neither I nor II
13.Which of the following terms is used in the standard to describe the effects on
the financial statements of misstatements or the possible effects on the
financial statements, if any, that are undetected due to an inability to obtain
sufficient appropriate audit evidence?
a. Persuasive b. Material c. Pervasive d. Extensive
14.A limitation on the scope of the audit may arise from

I. Circumstances beyond the control of the entity
II. Circumstances relating to the nature and timing of the auditor’s work
III. Limitations imposed by management
a. I and II only b. II and III only c. I and III only d. I, II and III
15.In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
a. The auditor wishes to emphasize an unusually important subsequent event
b. The financial statements fail to disclose information that is required by
Philippine Financial Reporting Standards
c. Events disclosed in the financial statements cause the auditor to have substantial
doubt about the entity’s ability to continue as a going concern
d. The auditor did not observe the entity’s physical inventory and is unable to become
satisfied as to its balance by other auditing procedures
16.Which of the following phrases would an auditor most likely include in the auditor’s
report when expressing a qualified opinion because of inadequate disclosure?
a. Do not present fairly in all material respects
b. Except for the omission of the information included in the preceding paragraph
c. With the foregoing explanation of these omitted procedures
d. Subject to the departure from generally accepted accounting principles, as
described above
17.An auditor’s report includes the following statement: “In our opinion, because of the
effects of the matters discussed in the preceding paragraph, the financial statements
do not present fairly, in all material respects, the financial position of ABC Company
as of December 31, 20X1, and of its financial performance and its cash flows for the
year then ended in accordance with Philippine Financial Reporting Standards.” This
auditor’s report contains a/an
a. Qualified b. Unqualified c. Adverse d. Disclaimer
18.An auditor should disclose the substantive reasons for expressing an adverse opinion in
an emphasis of matter paragraph
a. Following the opinion paragraph c. Following the introductory paragraph
b. Preceding the opinion paragraph d. Within the notes to the financial
statements
19.There are two broad financial reporting frameworks for comparatives: the
corresponding figures and the comparative financial statements. Which of the
following statements is correct concerning these reporting frameworks?
a. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are considered separate financial statements
b. Under the comparative financial statements framework, the comparative financial
statement for the prior period(s) are intended to be read in conjunction with the
amounts and other disclosures relating to the current period.
c. Under the comparative financial statements framework, the amounts and other
disclosures for the prior period(s) form part of the current period financial
statements
d. Under the corresponding figures framework, the corresponding figures for the
prior period(s) are integral part of the current period financial statements
20.Which statement is incorrect regarding PSA 710, Comparatives?
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a. The auditor is required to determine whether the comparatives comply in all
material respects with GAAP relevant to the financial statements being audited.
b. There are two broad financial reporting frameworks for comparatives; the
corresponding figures and the comparative financial statements.
c. Under the comparative financial statements framework, the comparatives financial
statements for the prior period(s) are considered separate financial statements.
d. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are not an integral part of the current period financial statements and
may be read without reference to amounts and other disclosures relating to the
current period.
21.When the prior period financial statement are not audited, the incoming auditor should
state in the auditor’s report that
I. The corresponding figures are unaudited
II. The incoming auditor is not required to perform procedures regarding opening
balances of the current period
22.When comparative financial statements are presented, the auditor’s opinion on the
financial statements “taken as a whole” should be considered to apply to the financial
statements of the
a. Current period only
b. Periods presented plus one preceding period
c. Current and immediately preceding period only
d. Current period and those of the other periods presented
23.In which of the following circumstances would an auditor’s report least likely include
specific reference to the corresponding figures?
a. When the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modification is resolved and
properly dealt with in the financial statements
b. When the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modification is unresolved,
and results in a modification of the auditor’s report regarding the current period
figures
c. When the auditor’s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modification is unresolved,
but does not result in a modification of the auditor’s report regarding the current
period figures
d. When the auditor’s report on the prior period financial statement containing a
material misstatement included an unmodified opinion and the prior period financial
statements have not been revised and reissued, and the corresponding figures have
not been properly restated and/or appropriate disclosures have not been made
24.Comparative financial statements include the financial statements of the prior year
that were audited by a predecessor auditor whose report is not presented. If the
predecessor’s report was qualified, the incoming auditor should
a. Express an opinion only on the current’s year statements and make no reference to
the prior year’s statements
b. Issue an updated comparative audit report indicating the division of responsibility
c. Request the client to reissue the predecessor’s report on the prior year’s statement
d. Indicate the substantive reasons for the qualification in the predecessor auditor’s
opinion
25.The predecessor auditor, who is satisfied after properly communicating with the
incoming auditor, has reissued his/her auditor’s report on prior year financial
statements. The predecessor auditor’s report should
a. Refer to the work of the incoming auditor in the scope and opinion paragraphs
b. Refers to the report of the incoming auditor only in the scope paragraphs
c. Refer to both the work and the report of the incoming auditor only in the opinion
paragraph
d. Not refer to the report or the work of the incoming auditor
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26.The following statements relate to unaudited prior year financial statements that
are presented in comparative form with audited current year financial statements.
Which is incorrect?
a. The incoming auditor should state in the auditor’s report that the comparative
financial statements are unaudited
b. The incoming auditor need not perform audit procedures regarding opening
balances of the current period
c. Clear disclosure in the financial statements that the comparative financial
statements are unaudited is encouraged
d. In situations where the incoming auditor identifies that the prior year unaudited
figures are materially misstated, the auditor should request management to revise
the prior year’s figures or if management refuses to do so, appropriately modify the
report.
27.When audited financial statements are presented in a document (e.g., annual report)
containing other information, the auditor
a. Has no responsibility for the other information because it is not part of the basic
b. Should read the other information to consider whether it is inconsistent with the
audited financial statements
c. Has an obligation to perform auditing procedures to corroborate the other
information
d. Is required to express a qualified opinion if the other information has a material
misstatement of fact
28.An auditor concludes that there is a material inconsistency in the other information in
an annual report to shareholders containing audited financial statements. If the auditor
concludes that the financial statement do not require revision, but the client refuses to
revise or eliminate the material inconsistency, the auditor may
a. Disclaim an opinion on the financial statements after explaining the material
inconsistency in an emphasis of matter paragraph
b. Revise the auditor’s report to include an emphasis of matter paragraph describing
the material inconsistency
c. Express a qualified opinion after discussing the matter with the client’s directors
d. Consider the matter closed because the other information is not in the audited
statements
29.PSA 720 states, “If, on reading the other information, the auditor identifies a material
inconsistency, the auditor should determine whether the audited financial statement or
the other information needs to be amended”. What type of opinion should be
expressed if the client refuses to make the necessary amendment in the financial
statements?
a. Disclaimer of opinion
b. Qualified opinion or disclaimer of opinion
c. Unqualified opinion with an emphasis of matter paragraph describing the material
inconsistency
d. Qualified or adverse opinion
30.If an amendment to other information in a document containing audited financial

statements is necessary and the entity refuses to make the amendment, the auditor
would consider issuing:
a. Qualified or disclaimer of opinion c. Unqualified opinion with
explanatory paragraph
b. Adverse or disclaimer of opinion d. Qualified or adverse opinion
31.If an accounting change has no material effect on the financial statements in the
current year but the change is reasonably certain to have a material effect in later
years, the change should be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statement of the current year.
c. Disclosed in the notes to financial statements and referred to in the audit report for
the current year.
d. Treated as a subsequent event.
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32.An auditor completed field work on March 31, 2013 for a December 31, 2012 year-end
client. A significant subsequent event occurred on April 14, 2013. In this case, which
of the following report dates would not be appropriate?
a. March 31, 2013 c. April 14, 2013
b. March 31, except Note 1, April 14, 2013 d. December 31, 2012
33.Rexy, CPA, dated her audit report (on a client’s 2012 financial statements) as of
February 14, 2013, except for Note X, as to which the date is March 15, 2013. In this
case, Rexy is taking responsibility for:
a. All subsequent events occurring through March 15, 2013.
b. All subsequent events occurring through February 14, 2013 only.
c. All subsequent events occurring through February 14, 2013, and the specific
subsequent event referred to in Note X through March 15, 2013.
d. Only the specific subsequent event referred to Note X through March 3, 2013.
34.A person or firm possessing special skill, knowledge and experience in a particular
field other than accounting and auditing is called a/an
b. Professional b. Expert c. Consultant d. Assistant
35.During an audit, the auditor may need 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
36.Each of the following procedures requires the assistance of an expert except

a. Determining the physical condition or quantity of underground
b. Determining the value of works of art
c. Interpreting major contracts
d. Determining the adequacy of disclosure in the notes to the financial statements
37.When would the auditor refer to the work of an appraiser in the auditor’s report?
a. An adverse opinion is expressed based on a difference of opinion between the client
and the outside appraiser as to the value of certain assets
b. A disclaimer of opinion is expressed because of a scope limitation imposed on the
auditor by the appraiser
c. A qualified opinion is expressed because of a matter unrelated to the work of the
appraiser
d. An unqualified opinion is expressed and an emphasis of matter paragraph is added
to disclose the use of the appraiser’s work
38.When determining the need to use the work of an expert, the auditor would consider
the following except
a. The materiality of the financial statement item being considered
b. The risk of misstatement based on the nature and complexity of the matter being
considered
c. The quantity and quality of other audit evidence available
d. The professional certification or licensing by, or membership in, an appropriate
professional body
39.The auditor is most likely to place little reliance on the work of an expert who:
a. Does not have the highest level of certification for their profession
b. Received his formal training at a nonaccredited institution
c. Is an attorney who barely passed the bar examination
d. Is employed by the entity
40.An auditor used the services of an expert during the audit of a client’s financial
statements. When issuing an unmodified auditor’s report, the auditor should:
a. Mention the expert and justify the use of the expert’s services.
b. Not mention the expert in the opinion and instead disclose the expert in the notes.
c. Not mention the expert as this might mislead financial statements users
d. Mention the expert in both the audit report and the notes to the financial
statements.
Page 51 of 55
Audit Reporting on Special Reports
1. The following are special purpose audit engagements, except:
a. Compilation of financial statements.
b. Audits involving statements prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles in the Philippines.
c. Audits of specified accounts, elements of accounts, or items in a financial
statement.
d. Audits of compliance with contractual agreements.

a. Before undertaking a special purpose audit engagement, the auditor should ensure
there is agreement with the client as to the exact nature of the
engagement and the form and content of the report to be issued.
b. When requested to report in a prescribed format, the prescribed format always
prevails over the format presented in PSA 800.
c. The auditor needs to consider whether any significant interpretations of an
agreement on which the financial information is based are clearly disclosed in the
financial information.
d. In certain circumstances, the auditor may wish to indicate in the report the purpose
for which the report is prepared and any restrictions on its distribution and use.
3. A comprehensive basis of accounting comprises a set of criteria used in preparing

financial statements which applies to all material items and which has substantial
support. Other comprehensive financial reporting frameworks may include the
following, except
a. A conglomeration of accounting conventions devised to suit individual preference.
b. That used by an entity to prepare its income tax return.
c. The cash receipts and disbursements basis of accounting.
d. The financial reporting provisions of a government regulatory agency.

Statement 1: A comprehensive basis of accounting comprises a set of criteria used in
preparing financial statements which applies to all material items and which has
substantial support.
Statement 2: A conglomeration of accounting conventions devised to suit individual
preference is considered as another comprehensive basis of accounting.
a. Only the first statement is correct c. Both statements are correct
b. Only the second statement is correct d. Both statements are incorrect
5. Other comprehensive financial reporting frameworks may include the following,

except:
a. The Philippine Financial Reporting Framework
b. That used by an entity to prepare its income tax return
c. The cash receipts and disbursements basis of accounting
d. The financial reporting provisions of a government regulatory agency
6. Auditors may issue a special report for all of the following except for audit of financial
presentations
a. That are prepared on a cash basis of accounting that the entity uses to file its tax
return
b. Of specified elements or accounts
c. Of an organization that has limited the scope of the audit
d. To comply with contractual agreements
7. The fact that the financial statements are prepared under the modified cash basis
should be disclosed in
a. The financial statements
b. The management letter given to the client.
c. The auditor’s special report on the financial statements
d. Both the financial statements and the auditor’s special report therein
8. If the financial statements prepared on special reporting frameworks are not suitably
titled or the basis of accounting is not adequately disclosed, the auditor should:
a. Withdraw from the engagement
b. Issue an appropriately modified report
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c. Reword the title of the financial statements
d. Request for an additional representation in the management representation letter
9. An accountant is requested to express an opinion on a particular balance sheet

account, but not on other accounts. This is
a. An invalid audit engagement, since the scope is significantly limited.
b. Acceptable provided the auditor provides moderate assurance only.
c. Known as reporting on components of financial statements.
d. Unacceptable accounting practice, since it is obviously restricted to prevent the
discovery of irregularities perpetrated by client management.
10.Audits of components of financial statements:

a. Must be undertaken as a separate, stand-alone engagement.
b. Must be performed in conjunction with an audit of the entity’s financial statements.
c. May be undertaken as a separate engagement or in conjunction with an audit of the
entity’s financial statements.
d. Are not allowed since it is tantamount to expressing a piecemeal opinion on the
accounts subjected to the audit.
11.The following statements relates to audit of specific components of financial

statements. Which is incorrect?
a. This type of engagement may be undertaken as a separate engagement or in
conjunction with an audit of the entity’s financial statements.
b. The auditor needs to consider financial statement items that are interrelated and
which could materially affect the information on which the audit opinion is to be
expressed.
c. The auditor’s examination will ordinarily be less extensive than if the same
component were to be audited in connection with a report on the entire financial
statements.
d. When an adverse opinion or disclaimer of opinion on the entire financial statements
has been expressed, the auditor may report on components of the financial
statements only if those components are not so extensive as to constitute a major
portion of the financial statements.
12.Which statement is correct regarding report on a component of financial statements?

a. This type of engagement may be undertaken as a separate engagement or in
conjunction with an audit of the entity's financial statements.
b. In determining the scope of the engagement, the auditor need not consider those
financial statement items that are interrelated and which could materially affect the
information on which the audit opinion is to be expressed.
c. The auditor's examination will ordinarily be less extensive than if the same
component were to be audited in connection with a report on the entire financial
statements.
d. When an adverse opinion or disclaimer of opinion on the entire financial statements
has been expressed, the auditor may report on components of the financial
statements even if those components are so extensive as to constitute a major
portion of the financial statements.
13.When an auditor is requested to express an opinion on the rental and royalty income of
an entity, the auditor may
a. Accept the engagement provided the auditor’s opinion is expressed in a special
purpose engagement report.
b. Accept the engagement provided distribution of the auditor’s report is limited to the
entity’s management.
c. Not accept the engagement unless also engaged to audit the full financial
statement of the entity.
d. Not accept the engagement because to do so would be tantamount to agreeing to
express a piecemeal opinion.
14.Which of the following statement is correct with respect to an auditor’s report

expressing an opinion on a specific element on a financial statement?
a. The auditor who has expressed an adverse opinion on the financial statements as a
whole can never express an unmodified opinion on a specific element in these
Page 53 of 55
b. Such a report can only be issued if the auditor is also engaged to audit the entire
set of financial statements.
c. The attention is devoted to the specific element is usually less than it would be if
the financial statements as a whole were audited.
d. The materiality determined for a specific element of a financial statement may be
lower than the materiality determined for the entity’s complete set of financial
statements.
15.Which statement is incorrect regarding report on compliance with contractual

agreements?
a. The auditor cannot be requested to report on an entity's compliance with
certain aspects of contractual agreements, such as bond indentures or loan
agreements.
b. Engagements to express an opinion as to an entity's compliance with
contractual agreements should be undertaken only when the overall aspects of
compliance relate to accounting and financial matters within the scope of the
auditor's professional competence.
c. When there are particular matters forming part of the engagement that are
outside the auditor's expertise, the auditor would consider using the work of an
expert.
d. The report should state whether, in the auditor's opinion, the entity has
complied with the particular provisions of the agreement.
16.An accountant who is not independent of the client is precluded from issuing
a. Report on factual findings of procedures.
b. Compilation report on historical financial statements.
c. Compilation reports on prospective financial statements.
d. Special reports on compliance with contractual agreements.
17.Summarized financial statements are presented:

a. In considerably less detail than annual audited financial statements
b. In considerably more detail than annual audited financial statements
c. In equal detail with annual audited financial statements
d. In equal detail with the interim financial statements
18. Which statement is incorrect regarding report on summarized financial

statements?
a. Unless the auditor has expressed an audit opinion on the financial statements
from which the summarized financial statements were derived, the auditor
should not report on summarized financial statements.
b. Summarized financial statements are presented in considerably less detail than
annual audited financial statements.
c. Summarized financial statements need to be appropriately titled to identify the
audited financial statements from which they have been derived.
d. Summarized financial statements contain all the information required by the
financial reporting framework used for the annual audited financial statements.
19.Bal, CPA, is requested to report on summarized financial statements of Ting Books, Inc.
Bal has not expressed an audit opinion on the financial statements from which the
summarized financial statements were derived. Based solely on this information,
should Bal accept the engagement?
a. Yes, because a report on summarized financial statements is a separate
engagement.
b. No, because PSA 810 mandates that the auditor should not report on summarized
financial statements unless the auditor has expressed an audit opinion on the
financial statements from which the summarized financial statements were derived.
c. Yes, because an audit of summarized financial statements is comparable to the
audit of financial statements from which such summarized statements were
derived.
d. None of the above choices can be selected because of lack of information.
20.Engagements to express an opinion on the entity’s compliance with contractual

agreements should be undertaken only when
a. The contract specifically requires the auditor to express an opinion as to entity’s
compliance.
Page 54 of 55
b. The CPA’s report will be in the form of negative assurance.
c. The overall aspects of compliance relate to accounting and financial matters.
d. The financial statements are prepared in conformity with other comprehensive basis
of accounting.
“You cannot change the past, but you can learn from it. When the same
situation arises, you can do things differently and enjoy a more successful
present.”
“You’re a winner when you decide to be.

No other person must give you permission to be successful. There’s no one else
to blame when you’re not. Your life is exactly what you determine to make of
it.”
“Flaming enthusiasm, backed up by horse sense and persistence, is the quality

that most often makes for success.” – Dale Carnegie
“The path to success is in front of you, and you are free to travel that path one
step at a time. Each step is within your reach. It’s up to you to take every one of
them.”
“Small, simple acts can reliably lead to big, magnificent achievements. It’s just
a matter of putting enough of those small, simple actions together in the same
direction.”
“Our greatest glory is not in never falling, but in rising up every time we fall.” –
Ralph Waldo Emerson
END OF HANDOUTS
Page 55 of 55

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Auditing Theory: Review of Audit Process

Introduction to Assurance and Non-assurance Engagements

2. These are issued to provide interpretative guidance and practical assistance to

5. It refers to the auditor's satisfaction as to the reliability of an assertion being made by

6. The three types of attestation services are:

7. Assurance engagement include the following, except

8. Which of the following is an objective of a review engagement?

10.Unlike consulting services, assurance services:

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

12.Which of the following criteria is unique to the independent practitioner's attest

13.Ultimately, the decision about whether or not an practitioner is independent must be

14.With regard to independence, which of the following statements is correct?

15.Which of the following statements least likely a characteristic to be possessed by

16.According to Preface on Assurance Engagements, these are the standards or

Statement 3: The practitioner relies on evidence that is persuasive rather than

Statement 4: The practitioner uses professional judgment and exercise professional

20.The following statements are correct, except:

22.In an engagement to perform agreed –upon procedures, an auditor is engaged to

23.Which of the following is true of the report based on agreed-upon-procedures?

24.According to Philippine Standard on Auditing, the procedures employed in doing

25.Indicate the level of assurance provided by audit and related services.

a. CA, CA, FA, OA c. OA, CA, FA, OA

3. Independent auditing can best be described as a

5. An operational audit is designed to

7. Which one of the following is more difficult to evaluate objectively?

8. A governmental audit may extend beyond an examination leading to the expression of

11.A financial statement audit:

14.Which of the following is responsible for an entity's financial statements?

21.Because an examination in accordance with generally accepted auditing standards is

23.An audit can have a significant effect on

25.Which of the following is an appraisal activity established within an entity as a service

27.To operate effectively, an internal auditor must be independent of

30.Which of the following statements is not a distinction between independent auditing

Audit Process and Evidence-Gathering Procedures

2. Acts to be performed in order to obtain audit evidence.

3. Audit procedures performed to obtain an understanding of the entity and its

4. Audit procedures to test the operating effectiveness of controls in preventing or

5. Audit procedures to detect material misstatements at the assertion level.

6. An auditor may achieve audit objectives related to particular assertions by:

7. Examining records or documents, whether internal or external, in paper form,

8. Physical examination of the assets.

9. Consists of looking at a process or procedures being performed by others.

10.Consists of seeking information from knowledgeable persons, both financial and

11.The process of obtaining a representation of information or of an existing condition

12.Consists of checking the mathematical accuracy of documents or records.

13.Auditor’s independent execution of procedures or controls that were originally

14.Evaluation of financial information made by study of plausible relationships among both

16. Which of the following is a false statement about audit objectives?

17.Management assertions are:

18.Management assertions are:

21.The assertion of cut-off means that:

22.The assertions of occurrence means that:

23.Which description refers to the completeness assertion?

24.Confirming proper title to equipment supports which of the following assertions?

Preliminary Engagement Activities

3. Management’s integrity affects all of the following risks except:

12.An engagement letter is best described as

13.An engagement letter is prepared with the interest(s) of __________.

14.Engagement letters are widely used in practice for:

15.The primary purpose of the engagement letter is to:

18.An audit engagement letter least likely include:

24.Which of the following statements is/are correct?