PREWEEK LECTURE

AUDITING THEORY
OCTOBER 2021

OVERVIEW OF AUDIT AND ENGAGEMENT STANDARDS

1. 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

2. 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 expre
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

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

4. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial representations
b. Lends credibility to the financial statements
c. Guarantees that financial data are fairly presented
d. Assures the readers of financial statements that any fraudulent activity has been
corrected

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

6. Which of the following best describes what is meant by generally accepted auditing
standards?
a. Acts to be performed by the auditor
b. Measures of the quality of an auditor's performance
c. Procedures used to gather evidence to support financial statements
d. Audit objectives generally determined on audit engagements
7. 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.
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. d. The auditor is responsible only to his unqualified opinion but not for any other type
of opinion

8. The following are assurance engagements, except

a. Financial statements audit
b. Review of financial statements
c. Other assurance engagements
d. Tax consulting

9. Engagements frequently performed by professional accountants that are not assurance

engagements include the following, except
a. Agreed-upon procedures
b. Compilation
c. Financial statement audit
d. Management consulting

10. Which of the following criteria is unique to independent auditors offering assurance services?
a. General competence
b. Familiarity with the particular industry of each client
c. Due professional care
d. Independence

11. Indicate the level of assurance provided by audit and related services
a b c d
Audit High High Negative Absolute
Moderate None Moderate High
-upon procedures None None None Limited
None None None None

12. The four major steps in conducting an audit are

i. Testing internal controls
ii. Audit report
iii. Planning
iv. Testing transactions and balances

The proper sequence in applying the above steps is

a. iii, i, iv, ii
b. iii, iv, i, ii
c. ii, iii, iv, i
d. i, iv, iii, ii
PRELIMINARY ENGAGEMENT ACTIVITIES

13. A basic objective of a CPA firm is to provide professional services to conform to professional
standards. Reasonable assurance of achieving this basic objective is provided through
a. Continuing professional education
b. Compliance with generally accepted reporting standards
c. System of quality control
d. A system of peer review

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

15. A CPA establishes quality control policies and procedures for deciding whether to accept a
new client or continue to perform services for a current client. The primary purpose for
establishing such policies and procedures is
a. To enable the auditor to attest to the integrity or reliability of a client
b. To comply with the quality control standards established by regulatory bodies
c. To lessen the exposure to litigation resulting from failure to detect irregularities in
client financial statements
d. To minimize the likelihood of association with clients whose management lacks
integrity

16. Accounting firms should establish quality control procedures for professional development
in order to provide reasonable assurance that
a. Persons promoted possess the appropriate characteristics to perform competently
b. Personnel will have the knowledge required to fulfill responsibilities assigned
c. The extent of supervision and review in a given instance will be appropriate
d. Association with a client whose management lacks integrity will be minimized

17. The understanding between the client and the auditor as to the degree of responsibilities to
be assumed by each are normally set forth in a(an)
a. Representation letter
b. Engagement letter
c. Management letter
d. Comfort letter

18. The purpose of an engagement letter is to

a.
statements
b. Document the terms of the engagement in writing to minimize misunderstandings
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can
be facilitated
d.

19. Which of the following topics is not normally included in an engagement letter?
a. The auditors' preliminary assessment of internal control
b. The auditors' estimate of the fee for the engagement
c. Limitations on the scope of the engagement
d. A description of responsibility for the detection of fraud

20. The purpose of the requirement of having communication between the predecessor and
successor auditor is to
a. Allow the predecessor to disclose information which would otherwise be confidential
b. Help the successor auditor to evaluate whether to accept the engagement
 c. Help the client by facilitating the change of auditors
d. Ensure the predecessor collects all unpaid fees prior to a change in auditor
21. Which of the following is not correct regarding the communications between successor and
predecessor auditors?
a. The burden of initiating the communication rests with the predecessor auditor
b. The burden of initiating the communication rests with the successor auditor
c. The
divulging information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a successor
auditor

22. The primary responsibility for the prevention and detection of fraud and error rests with
a. The auditor
b. The management of an entity
c. Those charged with governance
d. Both b and c

23.
fraud include
I. Misstatements resulting from fraudulent financial reporting
II. Misstatements resulting from misappropriation of assets
a. I and II
b. I only
c. II only
d. Neither I nor II

24.
a. Factors whose presence indicates that the risk of fraud is high
b. Factors whose presence often has been observed in circumstances where frauds have
occurred
c. Factors whose presence requires modifications of planned audit procedures
d. Reportable conditions identified during an audit

25. The following are examples of error, except

a. A mistake in gathering or processing data from which financial statements are
prepared
b. An incorrect accounting estimate arising from oversight or misinterpretation of facts
c. A mistake in the application of accounting principles relating to measurement,
recognition, classification, presentation, or disclosure
d. Misrepresentation in the financial statements of events, transactions or other
significant information

26. The risk of not detecting a material misstatement resulting from fraud is higher than the risk
of not detecting a material misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence
c. Fraud is always a result of connivance between or among employees
d. The auditor is responsible to detect errors but not fraud

27. 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
b. Objective judgment
c. Conservative advocacy
d. Professional skepticism
28. Reasonable assurance means
a. Gathering of all available corroborating evidence for the auditor to conclude that
there are no material misstatements in the financial statements, taken as a whole
b. Gathering of the audit evidence necessary for the auditor to conclude that there are
no material misstatements in the financial statements, taken as a whole
c. Gathering of the audit evidence necessary for the auditor to conclude that the
financial statements, taken as a whole, are free from any misstatements
d. Gathering of the audit evidence necessary for the auditor to conclude that the
financial statements are free of material unintentional misstatements

AUDIT PLANNING

29. The development of a general strategy and a detailed approach for the expected nature,
timing, and extent of audit refers to
a. Supervision
b. Audit procedures
c. Directing
d. Planning

30. The extent of planning will vary according to any of the following, except
a. Size of the audit client
b. 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

31. The au
a. Evaluate whether the financial statements are materially misstated
b. Document material weaknesses in accounting and internal control systems
c. Identify and understand events, transactions and practices that may have effect on
financial statements
d. Have an overall evaluation of whether financial assertions are fairly presented in the
financial statements

32. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting
estimates
b. The information technology used by the client
c. The content of management representation letter
d. The nature and timing of reports or other communication with the entity that are
expected under the engagement

33. Initial audit planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
c. Schedule engagement staff and audit specialists
d.

34. 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
35. Which of the following is correct with respect to the use of analytical procedures?
a. Analytical procedures may be used in evaluating balances in the testing phase as long
as the auditor also uses them in assessing the going concern assumption
b. Analytical procedures must be used throughout the audit
c. Analytical procedures used in the testing phase of the audit are primarily used to
direct an
improved
d. Analytical procedures are performed by studying plausible relationships between
financial and nonfinancial data

36. Which of the following statements is not correct with respect to analytical procedures?
a. Auditing standards emphasize the need for auditors to develop and use expectations
b. Analytical procedures must be performed throughout the audit → not required

c. Analytical procedures may be performed at any time during the audit

d. Analytical procedures use comparisons and relationships to assess whether account
balances appear reasonable

37. Which of the following procedures is not performed as a part of planning an audit
engagement?
a. Reviewing the working papers of the prior year
b. Performing analytical procedures
substantive Testing
c. Confirmation of all major accounts →

d. Designing an audit program

38. When planning an audit, an auditor should

a. Consider whether the extent of substantive procedures may be reduced based on the
results of the internal control questionnaire
b. Make preliminary judgments about materiality levels for audit purposes
c. Conclude whether changes in compliance with prescribed control procedures justifies
reliance on them
d. Prepare a preliminary draft of the management representation letter

39. The auditors must consider materiality in planning an audit engagement. Materiality for
planning purposes is
a. The auditors' preliminary estimate of the largest amount of misstatement that would
be material to any one of the client's financial statements
b. The auditors' preliminary estimate of the smallest amount of misstatement that
would be material to any one of the client's financial statements
c. The auditors' preliminary estimate of the amount of misstatement that would be
material to the client's balance sheet
d. An amount that cannot be quantitatively stated since it depends on the nature of the
item

40. Which of the following statements concerning materiality thresholds is incorrect?

a. Aggregate materiality thresholds are a function of the auditor's preliminary
judgments concerning audit risk
b. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold
c. The smallest aggregate level of errors or fraud that could be considered material to
any one of the financial statements is referred to as a "materiality threshold"
d. Materiality thresholds may change between the planning and review stages of the
audit. These changes may be due to quantitative and/or qualitative factors
AUDIT RISK

41. Audit risk means

a. The susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated with misstatements in other
balances or classes, assuming that there were no related internal controls
b. The risk that a misstatement, that could occur in an account balance or class of
transactions and that could be material, individually or when aggregated with
misstatements in other balances or classes, will not be prevented or detected and
corrected on a timely basis by the accounting and internal control systems
c.
exists in an account balance or class of transactions that could be material, individually
or when aggregated with misstatements in other balances or classes
d. The risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated

42. What is the primary means of dealing with risk in planning decisions related to audit
evidence?
a. Selection of more effective tests of details of balances
b. Application of the audit risk model
c. Establishing a lower preliminary judgment about materiality
d. Allocating materiality judgment to segments

43. These are the procedures performed by an auditor to obtain an understanding of the entity

material misstatement.
a. Risk assessment procedures
b. Further audit procedures
c. Substantive test
d. Test of Controls

44. The risk of material misstatement is a function of

a. Inherent and control risk
b. Inherent and detection risk
c. Control and detection risk
d. Inherent, control and detection risk

45. 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.
c. Considered at the individual account-balance level while detection risk is not
d. Functions of the client and its environment while detection risk is not

46. Which of the following is an incorrect statement?

a.
b. If individual audit risk remains the same, detection risk bears an inverse relationship
to inherent and control risks
c. The greater the inherent and control risks the auditor believes exists, the less
detection risk that can be accepted
d. The auditor might make separate or combined assessments of inherent risk and
control risk

47. The relationship between acceptable level of detection risk and the combined level of
inherent and control risk is
 a. Direct
b. Inverse
c. Parallel
d. Independent

48. An auditor decides to increase the assessed level of control risk from that originally planned
on the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing
b. Increase inherent risk
c. Increase materiality levels
d. Decrease detection risk

49. Which of the following statements is true?

a. If control risk is assessed at maximum, the nature of related substantive tests should
be changed from more to less effective
b. If control risk is assessed at maximum, the nature of related substantive tests should
be changed from less to more effective
c. If control risk is assessed at maximum, the timing of related substantive tests should
be changed from year-end to an interim date
d. If control risk is assessed at maximum, the extent of related substantive tests should
be changed from a larger to a smaller sample

50. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase
b. Substantive tests should decrease
c. Tests of controls should increase
d. Tests of controls should decrease

INTERNAL CONTROLS

51. Which of the following best describe the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning
b. Control environment, risk assessment, information and communication systems,
control activities and monitoring
c. Risk assessment, backup facilities, responsibility accounting and natural laws
d. Legal environment of the firm, management philosophy, and organizational structure

52. Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk

53. ol?
a. Management
b. Auditors
c. Management and auditors
d. Committee of Sponsoring Organizations

54. Which of the following comes closest to outlining the auditors' responsibility for considering
internal control in all financial statement audits?
a. An understanding of the control environment, information and communication, risk
assessment and monitoring is necessary; an understanding of control activities is only
necessary for areas in which the auditor is performing tests of controls
b. The auditor must obtain an understanding of each of the five internal control
components sufficient to assess the risks of material misstatement for the audit
c. When tests of controls have been performed, control risk must be assessed at a level
less than the maximum
 d. An understanding of the control environment is necessary, but no understanding of
the other components is necessary unless control risk is to be assessed at a level less
than the maximum

55. On financial statement audits, it is required that the auditors obtain an understanding of
internal control, including
a. Its operating effectiveness
b. Its design and whether it has been implemented (placed in operation)
c. Performing tests of controls for all material controls
d. Its ability to provide reasonable assurance

56. Proper segregation of functional responsibilities calls for the separation of the
a. Authorization, recording, and custodial functions
b. Authorization, execution, and payment functions
c. Receiving, shipping, and custodial functions
d. Authorization, approval, and execution functions

57. Audit evidence concerning segregation of duties ordinarily is best obtained by

a. statement
assertions
b. Observing the employees as they apply specific controls
c. Obtaining a flowchart of activities performed by available personnel
d. Developing audit objectives that reduce control risk

58. Which of the following statements about preliminary assessment of control risks is correct?
a. After obtaining an understanding of the accounting and internal control systems, the
auditor should make a preliminary assessment of control risks, at the assertion level,
for all accounts or transaction classes
b. The preliminary assessment of control risk can be done only after completing tests of
controls
c. The preliminary assessment of control risk for a financial assertion is normally low,
unless the auditor is able to identify weaknesses that may indicate ineffectiveness of
accounting and internal control system
d. The auditor ordinarily assesses control risk at high level for some or all assertions
when it is not cost efficient to do tests of controls

59. Controls that enhance the reliability of the financial statements may be classified as
prevention controls and detection controls. Which of the following is primarily a detection
control?
a. Separation of duties between recording cash receipts and depositing cash
b. Bank accounts are reconciled monthly by persons independent of cash recording and
cash custody
c. The human resources department authorizes the hiring of only those persons for
accounting positions that meet the written job requirements specified by the
corporate controller
d. An accounting manual, accompanied by a detailed chart of accounts, carefully and
clearly describes each type of transaction affecting the entity

60. Which of the following statements about internal control is correct?

a. Properly maintained internal controls reasonably assure that collusion among
employees cannot occur
b.
c. Exceptionally strong control allows the auditor to eliminate substantive tests
d. The cost-benefit relationship should be considered in designing internal control

61. Of the following statements about internal control, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset
b. Transactions must be properly authorized before such transactions are processed
 c. Because of the cost/benefit relationship, a client may apply control procedures on a
test basis
d. Control activities reasonably insure that collusion among employees cannot occur

62. Which of the following factors would most likely be considered an inherent limitation to an
entity's internal control?
a. The complexity of the information processing system
b. Human judgment in the decision making process
c. The ineffectiveness of the board of directors
d. The lack of management incentives to improve the control environment

TESTING OF CONTROLS (TOC)

63. After obtaining an understanding of internal control and arriving at a preliminary assessed
level of control risk, an auditor decided to perform tests of controls. The auditor most likely
decided that
a. Additional evidence to support a reduction in the assessed level of control risk is not
available.
b. An increase in the assessed level of control risk is justified for certain financial
statement assertions
c. It would be efficient to perform tests of controls that would result in a reduction in
planned substantive procedures
d. There were many internal control deficiencies that would allow misstatements to
enter the accounting system

64. An auditor's purpose for performing tests of controls is to provide reasonable assurance that
a. Controls are operating effectively
b. The risk that the auditor may unknowingly fail to modify the opinion on the financial
statements is minimized
c. Transactions are executed in accordance with management's authorization and
access to assets is limited by a segregation of functions
d. Transactions are recorded as necessary to permit the preparation of the financial
statements in conformity with generally accepted accounting principles

65. If the auditors do not perform tests of controls for certain assertions
a. They have performed a substandard audit
b. They are not required to communicate significant deficiencies relating to those
accounts to management and the board of directors
c. They must issue a qualified opinion
d. They must assess control risk at the maximum level for those assertions

66. Tests of controls are most likely to be performed when

a. Controls seem weak and must be properly documented
b. Inadequate substantive procedures exist to restrict audit risk to an acceptable level
c. The auditor wishes to assess control risk at the maximum
d. The client's control environment appears weak

67. The effectiveness of controls is not generally tested by

a. Inspection of documents and reports
b. Performance of analytical procedures
c. Observation of the application of accounting policies and procedures
d. Inquiries of appropriate client personnel

68. Which of the following is the most effective control procedure to detect vouchers that were
prepared for the payment of goods that were not received?
a. Count goods upon receipt in storeroom
b. Match purchase order, receiving report, and vendor's invoice for each voucher in
accounts payable department
 c. Compare goods received with goods requisitioned in receiving department
d. Verify vouchers for accuracy and approval in internal audit department

69. Internal control procedures are strengthened when the quantity of merchandise ordered is
omitted from the copy of the purchase order sent to the
a. Department that initiated the requisition
b. Receiving department
c. Purchasing agent
d. Accounts payable department

AUDIT EVIDENCE (SUBSTANTIVE TESTING)

70. 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 opinion
c. Audit risk
d. Audit program

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

a. Risk assessment procedures
b. Substantive procedures
c. Tests of control
d. Analytical procedures

72. Which of the following best describes the primary purpose of audit procedures?
a. To detect fraud
b. To comply with generally accepted accounting principles
c. To gather corroborative evidence to support the audit opinion
d. To verify the accuracy of account balances

73. The scope of substantive procedures as compared to the scope of tests of controls generally
vary
a. In a parallel manner
b. Inversely
c. Directly
d. Equally

74. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
a. The audit program
b. The auditor's judgment
c. Generally accepted auditing standards
d. The auditor's working papers

75. Which of the following statements is (are) correct?

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
 b. Statement 2 and 3 only
c. Statements 1 and 3 only
d. All statements are correct

76. An evidence to be considered appropriate must be

a. Relevant
b. Reliable
c. Relevant and reliable
d. Relevant or reliable

77. All of the following are underlying accounting records, except

a. Records of initial entries and supporting documents
b. General and subsidiary ledgers
c. Worksheets and spreadsheets for cost allocations
d. Minutes of meetings

78. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of meetings
b. Confirmations from third parties
c. Information obtained by the auditor from such audit procedures as inquiry,
observation, and inspection
d. General and subsidiary ledgers

79. Consists of seeking information from knowledgeable persons, both financial and nonfinancial,
within the entity or outside the entity.
a. Inspection of records or documents
b. Observation
c. Inspection of tangible assets
d. Inquiry

80. 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. Reconciliation
c. Confirmation
d. Recomputation

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

a. Reperformance
b. Reconciliation
c. Recalculation
d. Recomputation

82. independent execution of procedures or controls that were originally performed as

a. Reperformance
b. Reconciliation
c. Confirmation
d. Recomputation

83. Evaluation of financial information made by study of plausible relationships among both
financial and non-financial data.
a. Reperformance
b. Reconciliation
c. Confirmation
d. Analytical procedures

84. Observation
 a. Consists of looking at a process or procedure being performed by others
b. Consists of seeking information of knowledgeable persons, both financial and non-
financial, throughout the entity or outside the entity
c. Is the process of obtaining a representation of information or of an existing condition
directly from a third party
d. Is the

85. These are representations by management, explicit or otherwise, that are embodied in the
financial statements
a. Assumptions
b. Assertions
c. Statements
d. Assurances

86. Confirmation is most likely to be the relevant form of evidence with regard to assertions

a. Valuation
b. Existence
c. Classification
d. Completeness

87. The completeness assertion addresses whether

a. All of the assets on the balance sheet exist
b. All recorded transactions occurred
c. The entity has property rights to all assets on the balance sheet
d. All of the transactions, which occurred during the period, were recorded

88. Confirming proper title to equipment supports which of the following assertions?
a. Existence or occurrence
b. Presentation and disclosure
c. Insurance or coverage
d. Rights and obligations

89. 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. Valuation
c. Accuracy
d. Rights and obligations

90. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to the potentially unrecorded items
b. Potentially unrecorded items to the financial statements
c. Accounting records to the supporting evidence
d. Supporting evidence to the accounting records

91. In determining whether transactions have been recorded, the direction of the audit testing
should be from the
a. General ledger balance
b. Original source documents
c. Adjusted trial balance
d. General journal entries

92. Why does an auditor document audit evidence?

a. To comply with the requirements of gathering all available evidence
b. To provide client reference for all account balances and correcting entries
c. To support audit opinion and to provide evidence that the audit was carried out in
accordance with PSA
d. To document all records of misstatements noted in the financial statements
93. When reviewing audit working papers, the primary responsibility of an audit supervisor is to
determine that
a. Each worksheet is properly identified with a descriptive heading
b. Working papers are properly referenced and kept in logical groupings
c. Standard departmental procedures are adhered to with regard to work paper
preparation and technique
d. Working papers adequately support the audit findings, conclusions, and report

AUDIT SAMPLING

94. Which of the following constitutes audit sampling?

a. Selecting and examining specific items to determine whether or not a particular
procedure is being performed
b.
the nature of transactions, accounting and internal control systems
c. Examining items whose values exceed a certain amount so as to verify a large
proportion of the total amount of an account balance or class of transactions
d. Applying audit procedures to less than 100% of items within an account balance or
class of transactions such that all sampling units have a chance of selection

95.
if the entire population were subjected to the same audit procedure is
a. Sampling risk
b. Non-sampling risk
c. Risk of incorrect rejection
d. Risk of incorrect acceptance

96. The risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk is
a. Sampling risk
b. Non-sampling risk
c. Audit risk
d. Detection risk

97. Sampling risk that leads the auditor to conclude that controls are more effective than they
actually are is
a. Risk of assessing control risk too low
b. Risk of assessing control risk too high
c. Risk of incorrect rejection
d. Risk of incorrect acceptance

98. Sampling risk that leads the auditor to conclude that a material misstatement exists when in
fact it does not is
a. Risk of assessing control risk too low
b. Risk of assessing control risk too high
c. Risk of incorrect rejection
d. Risk of incorrect acceptance

99. The risk of incorrect acceptance and the risk of assessing control risk too low relate to the
a. Preliminary estimates of materiality levels
b. Efficiency of the audit
c. Allowable risk of tolerable error
d. Effectiveness of the audit

100. The decision whether to use statistical or nonstatistical sampling depends upon the
a. Philippine Standards on Auditing
b.
c. Size of the population
d. Generally Accepted Auditing Standards
101. Which of the following sampling methods would be used to estimate a numerical
measurement of a population, such as a peso value?
a. Attribute sampling
b. Stop-or-go sampling
c. Variables sampling
d. Random-number sampling

102. The expected population deviation rate of client billing errors is 3%. The auditor has
established a tolerable rate of 5%. In the review of client invoices the auditor should use
a. Stratified sampling
b. Variable sampling
c. Discovery sampling
d. Attribute sampling

103. For which of the following audit tests would an auditor most likely use attribute sampling?
a. Making an independent estimate of the amount of a FIFO inventory
b. Examining invoices in support of the valuation of fixed asset additions
c. Selecting accounts receivable for confirmation of account balances
d. Inspecting employee time cards for proper approval by supervisors

104. A sample in which every possible combination of items in the population has an equal
chance of constituting the sample is a
a. Representative sample
b. Random sample
c. Statistical sample
d. Judgment sample

105. Which of the following contains incorrect description of methods of sample selection
described?
a. Random selection is applied through random number generators, for example,
random number tables
b. Monetary unit sampling is a type of value-weighted selection in which sample size,
selection and evaluation results in a conclusion in monetary amounts
c. Systematic selection is a statistical sampling technique in which the auditor selects
the sample without following a structured technique
d. Block selection involved selection of a block(s) of contiguous items from within the
population

106. The process which requires the calculation of an interval and then selects the items based
on the size of the interval is
a. Statistical sampling
b. Systematic selection
c. Random selection
d. Computerized selection

107. The relationship between the sampling risk that the auditor is willing to accept and the
sample size is selected is
a. Inverse
b. Direct
c. Parallel
d. Indeterminate

108. A rate of deviation from prescribed internal control procedures set by the auditor in
respect of which the auditor seeks to obtain an appropriate level of assurance that the rate
of deviation set by the auditor is not exceeded by the actual rate of deviation in the
population is
a. Tolerable misstatement
b. Tolerable rate of deviation
 c. Anomaly
d. Expected misstatement

109. A monetary amount set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the monetary amount set by the auditor is not exceeded
by the actual misstatement in the population is
a. Tolerable misstatement
b. Tolerable rate of deviation
c. Anomaly
d. Expected misstatement
110. Which of the following combinations results in a decrease in sample size in a sample for
attributes?
Risk of assessing Tolerable rate Expected population
control risk too low deviation rate

a. Increase Decrease Increase

b. Decrease Increase Decrease
c. Increase Increase Decrease
d. Increase Increase Increase

COMPLETING THE AUDIT

111. Which statement is incorrect regarding the auditor's responsibilities and audit procedures
regarding related parties and transactions with such parties?
a. The auditor should perform audit procedures designed to obtain sufficient
appropriate audit evidence regarding the identification and disclosure by
management of related parties and the effect of related party transactions that are
material to the financial statements.
b. An audit cannot be expected to detect all related party transactions
c. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties
d. The auditor needs to have a level of knowledge of the entity's business and industry
that will enable identification of the events, transactions and practices that may have
a material effect on the financial statements

112. When auditing related-party transactions, an auditor places primary emphasis on

a. Confirming the existence of the related parties
b. Verifying the valuation of the related-party transactions
c. Evaluating the disclosure of the related-party transactions
d. Ascertaining the rights and obligations of the related parties

113. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate that there could be substantial doubt about an
inue as a going concern?
a. Review compliance with the terms of debt agreements
b. Confirm accounts receivable from principal customers
c. Reconcile interest expense with debt outstanding
d. Confirm bank balances

114. The auditor has a responsibility to review transactions and activities occurring after the
year-end to determine whether anything occurred that might affect the statements being
audited. The procedures required to verify these transactions are commonly referred to as
the review for
a. Contingent liabilities
b. Subsequent
c. Late unusual occurrences
d. Subsequent events

115. Which of the following is not correct concerning a type I and a type II subsequent events?
I t
adjusting disclosures
 a. A type I may require adjustment to financial statements while a type II would not
b. Both a type I and a type II subsequent event may require note disclosure
c. A type I is an event that occurred prior to year end, but was discovered after, while a
type II is one that arises subsequent to year-end
d. A type II event may require adjustment to the financial statements and a type I may
require note disclosure

116. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
a. Confirming a sample of material accounts receivable established after year-end
b. Comparing the financial statements being reported on with those of the prior period
c. Investigating personnel changes in the accounting department occurring after year-
end
d. Inquiring as to whether any unusual adjustments were made after year-end

117.
the date of the
a.
b. Next formal written financial statements
c. Delivery of the audit report to the client
d. Mailing of the financial statements to the stockholders

118. Which of the following auditing procedures is ordinarily performed last?

a.
b. Confirming accounts payable
c. Obtaining a management representation letter
d. Testing of the purchasing function

119. 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.
the letter is relied on
c.
financial statements
d.
subsequent events

120. Which one of the following would the auditor consider to be an indication of a potential
going-concern problem?
a. Loss of the controller to a competitor
b. Improper reporting of internal controls by management
c. Adverse key financial ratios
d. Large increase to sales in the month previous to yea-end

121. The primary source of information to be reported about litigation, claims, and
assessments is the
a. lawyer
b.
c. Court records
d. Independent auditor

122. When litigation or claims have been identified or when the auditor believes they may
exist, the auditor should
a.
b. Disclose
c. Issue unqualified opinion with explanatory paragraph
d. Issue qualified or adverse opinion
123. Which of the following statements is not correct?
a. Analytical procedures used in the planning phase of the audit are primarily directed

that may contain possible misstatements

b. Analytical procedures used in the completion phase are primarily aimed at assessing

may contain possible misstatements

c. Analytical procedures must be used in the planning and completion phases of the
audit, and are optional in the testing phase
d. Analytical procedures used in the completion phase are primarily aimed at directing

secondarily aimed at assessing going concern

124. 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. Irregularities exist among the relevant account balances
b. Internal control activities are not operating effectively
c. Additional tests of details are required
d. The communication with the audit committee should be revised

FORMING AN OPINION AND AUDITOR'S REPORT

125. T 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. To the CEO or the CFO of the entity whose financial statements are being audited
d. Either to the shareholders or the board of directors of the entity whose financial
statements are being audited

126. An unqualified opinion expressed on an audit means that

a. The financial statements, including the notes, are accurate
b. The entity is not incurring losses and is an attractive entity for investment purposes
c. The auditor guarantees that the entity is clear of error and fraud
d. In all material respects, the financial statements are fairly presented

127. If the auditor concludes that the fraud or error has a material effect on the financial
statements and has not been properly corrected in the financial statements, the auditor
should issue a
a. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
c. Qualified or adverse opinion
d. Adverse or disclaimer of opinion

128. An auditor may not express a qualified opinion when

a. A scope limitation prevents the auditor from completing an important audit
procedure
b.
c. An accounting principles at variance with generally accepted accounting principles is
used
d. The auditor lacks independence with respect to the audited entity

129. If the auditor is precluded (scope limitation) by the entity from obtaining evidence to
evaluate whether fraud or error that may be material to the financial statements has, or is
likely to have, occurred, the auditor should issue a (n)
a. Unqualified opinion with explanatory paragraph
b. Qualified or adverse opinion
 c. Qualified or disclaimer of opinion
d. Adverse or disclaimer of opinion

130. When there is an assessed substantial doubt about the ability of the entity to continue as
a going concern and such information is adequately disclosed in the notes to financial
statements, the auditor should express a(n)
a. Standard unqualified opinion
b. Qualified opinion
c. Unqualified opinion with explanatory paragraph
d. Adverse opinion

131. If adequate disclosure is not made by the entity regarding substantial doubt about its
ability to continue as a going concern, the auditor should include in his report specific
reference to the substantial doubt as to ability of the company to continue as a going concern
and should express
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion
c.
d. A disclaimer of opinion

132. Which
a. Opinion paragraph
b. Basis for Opinion paragraph
c. Key Audit Matters
d. Introductory paragraph

133. When an auditor expresses an opinion, a clear description of all substantive reasons for
the modification of the opinion should be included in the report. This explanation should be
presented
a. As a separate paragraph that precedes the opinion paragraph of the audit report
b. As a separate paragraph after the opinion paragraph of the audit report
c. In the opinion paragraph
d. As a separate paragraph in the notes to financial statements

134. Which of the following is (are) included in the Management Responsibility section of the

a. Management and, where appropriate, those charged with governance accept

responsibility for the preparation of the financial statements in accordance with the
applicable financial reporting framework, including, where relevant, their fair
presentation
b. Management also accepts responsibility for such internal control as it determines is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error
c. The
reference to both responsibilities as it helps to explain to users the premise on which
an audit is conducted
d. All of the above

135. These are matters that, in the auditor's professional judgment, were of most significance
in the audit of the financial statements of the current period. Key audit matters are selected
from matters communicated with those charged with governance.
a. Other matters
b. Key audit matters
c. Emphasis of matter
d. None of the above
IT AUDIT

136. Which statement is incorrect when auditing in a CIS environment?

a. A CIS environment exists when a computer of any type or size is involved in the
processing by the entity of financial information of significance to the audit, whether
that computer is operated by the entity or by a third party
b. The auditor should consider how a CIS environment affects the audit
c. The use of a computer changes the processing, storage and communication of
financial information and may affect the accounting and internal control systems
employed by the entity
d. A CIS environment changes the overall objective and scope of an audit

137. Certain general CIS controls that are particularly important to online processing least
likely include
a. Access controls
b. System development and maintenance controls
c. Edit, reasonableness and other validation tests
d. Use of anti-virus software program

138. CIS application controls include, except

a. Controls over input
b. Controls over processing and computer data files
c. Controls over output
d. Monitoring controls

139. Which of the following is a computer test made to ascertain whether a given characteristic
belongs to the group?
a. Parity check
b. Echo check
c. Validity check
d. Limit check

140. The applications of auditing procedures using the computer as an audit tool refer to
a. Integrated test facility
b. Auditing through the computer
c. Data-based management system
d. Computer assisted audit techniques

141. Which of the following statements is not true to the test data approach when testing a
computerized accounting system?
a. The test need consist of only those valid and invalid conditions which interest the
auditor
b. Only one transaction of each type need be tested
c. The test data must consist of all possible valid and invalid conditions
d.
142. Which of the following computer-assisted auditing techniques allows fictitious and real
transactions to be processed together without client operating personnel being aware of the
testing process?
a. Integrated test facility
b. Parallel simulation
c. Input controls matrix
d. Data entry monitor

143. Which of the following methods of testing application controls utilizes a generalized audit
software package prepared by the auditors?
a. Parallel simulation
b. Test data approach
c. Integrated testing facility approach
d. Exception report tests

CODE OF ETHICS

144. Which of the following is incorrect regarding integrity and objectivity?

a. Integrity implies not merely honesty but fair dealing and truthfulness
b. The principle of objectivity imposes the obligation on all professional accountants to
be fair, intellectually honest and free of conflicts of interest
c. Professional accountants serve in many different capacities and should demonstrate
their objectivity in varying circumstances
d. Professional accountants should neither accept nor offer any gifts or entertainment

145. Which of the following is incorrect regarding independence?

a. Independence consists of independence of mind and independence in appearance
b. Independence of mind is the state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism
c. Independence in appearance is the avoidance of facts and circumstances that are so
significant a reasonable and informed third party, having knowledge of all relevant
information, including any safeguards applied, would reasonably conclude a firm's or
a member of th
been compromised
d. Independence is a combination of impartiality, intellectual honesty and a freedom
from conflicts of interest →
objectivity

146. A CPA, while performing an audit, strives to achieve independence in appearance in order
to
a. Reduce risk and liability
b. Comply with the generally accepted standards of field work
c. Become independent in fact
d. Maintain public confidence in the profession

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

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

148. A professional accountant has a professional duty or right to disclose confidential

information in each of the following, except
a. To comply with technical standards and ethics requirements
b. To disclose to BIR fraudulent scheme committed by the client on payment of income
tax
c. To comply with the quality review of a member body or professional body
 d. To respond to an inquiry or investigation by a member body or regulatory body

149. Occurs when a firm or a member of the assurance team could benefit from a financial
interest in, or other self-interest conflict with, an assurance client
a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat

150. Occurs when any product or judgment of a previous assurance engagement or non-
assurance engagement needs to be re-evaluated in reaching conclusions on the assurance
engagement or when a member of the assurance team was previously a director or officer of
the assurance client or was an employee in a position to exert direct and significant influence
over the subject matter of the assurance engagement.
a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat

151. A CPA-lawyer, acting as a legal counsel to one of his audit client, is an example of
a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat

152. Intimidation threat

a. Is not a threat to independence
b. Occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threats, actual or perceived,
from the directors, officers or employees of an assurance client
c. Occurs when, by virtue of a close relationship with an assurance client, its directors,
officers or employees, a firm or a member of the assurance team becomes too

d. Occurs when a firm, or a member of the assurance team, promotes, or may be

perceived to pr
objectivity may, or may be perceived to be, compromised

153. Occurs when, by virtue of a close relationship with an assurance client, its directors,
officers or employees, a firm or a member of the assurance team becomes too sympathetic

a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat

RA 9298

154. Which of the following is not one of the specified objectives of the Accountancy Act of
2004?
a. Examination for registration of CPAs
b. Supervision, control, and regulation of accounting practice
c. Standardization and regulation of accounting education
d. Promulgation of accounting and auditing standards
155. The members of the Professional Regulatory Board of Accountancy shall be appointed by
the
a. Philippine Institute of CPAs (PICPA)
b. Professional Regulation Commission (PRC)
c. President of the Philippines
d. Association of CPAs in Public Practice (ACPAPP)

156. The integrated national professional organization of Certified Public Accountants

accredited by the BOA and the PRC per PRC accreditation No. 15 dated October 2, 1975.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)

157. Which statement is incorrect regarding the term of office of the chairman and the
members of the Board of Accountancy (BOA)?
a. The Chairman and members of the Board shall hold office for a term of three years
b. No person who has served two (2) successive complete terms shall be eligible for
reappointment until the lapse of one (1) year
c. A person may serve the BOA for not more than twelve years
d. A member of the BOA may continuously serve office for more than nine years

158. The creation of FRSC and AASC is intended to assist the BOA in carrying out its function to
a. To monitor the conditions affecting the practice of accountancy and adopt such
measures, rules and regulations and best practices as may be deemed proper for the
enhancement and maintenance of high professional, ethical, accounting and auditing
standards
b. To supervise the registration, licensure and practice of accountancy in the Philippines
c. To prescribe and adopt the rules and regulations necessary for carrying out the
provisions of RA 9298
d. To prepare, adopt, issue or amend the syllabi of the subjects for examinations

159. The following statements relate to CPA examination ratings. Which of the following is
incorrect?
a. To pass the examination, candidates should obtain a general weighted average of 75%
and above, with no rating in any subject less than 65%
b. Candidates who obtain a rating of 75% and above in at least four subjects shall receive
a conditional credit for the subjects passed
c. Candidates who failed in four complete examinations shall no longer be allowed to
take the examinations the fifth time
d. Conditioned candidates shall take an examination in the remaining subjects within
two years from the preceding examination

160. The Board, subject to the approval of the Commission, may revise or exclude any of the
subjects and their syllabi, and add new ones as the need arises. Provided that the change
shall not be more often than every
a. 2 years
b. 3 years
c. 4 years
d. 5 years

161. A Professional Identification Card bearing the registration number, date of issuance,
expiry date, duly signed by the chairperson of the Commission, shall be issued to every
registrant renewable every
a. Two years
b. Three years
c. Four years
d. Five years
162. A certificate of accreditation shall be issued to certified public accountants in public
practice only upon showing, in accordance with rules and regulations promulgated by the
Board and approved by the Commission, that such registrant has acquired how many years
of meaningful experience in any of the areas of public practice?
a. One
b. Two
c. Three
d. Four

163. A person whose CPA certificate has been revoked

a. Can no longer be reinstated as a CPA
b. Is automatically reinstated as a CPA after two years if the has acted in an exemplary
manner
c. May be reinstated as a CPA by the Board of Accountancy after two years if he has
acted in an exemplary manner
d. May be reinstated by the PRC after two years if he has acted in an exemplary manner