College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

THE ASSET PROGRAM – GENERAL REVIEW

AUDITING THEORY

1. Assurance services are best described as

a. Services designed for the improvement of operations, resulting in better outcomes.
b. Independent professional services that improve the quality of information, or its context, for decision
makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on the results of an audit.

2. Assurance services least likely involve

a. Improving the quality of information for decision purposes.
b. Improving the quality of the decision model used.
c. Improving the relevance of information.
d. Implementing a system that improves the processing of information.

3. The quality of performance of an auditor is measured by the statements emanating from the
a. Accounting Standards Council
b. Quality Control Standards
c. Auditing and Assurance Standards Council
d. Interpretations of Accountants in Practice

4. Statement 1: Under assertion-based engagement, it is the practitioner who performs the evaluation/
measurement of the subject matter.
Statement 2: In a direct reporting engagement, the subject matter information subject matter information
contained in a report to intended users.
a. True, true
b. False, false
c. True, false
d. False, true

5. Statement 1: For a criteria to be relevant, it must allow reasonably consistent evaluation or measurement of the
subject matter.
Statement 2: PSA can be considered a criteria in auditing financial statements in some exceptional cases.
a. True, true
b. False, false
c. True, false
d. False, true

6. Statement 1: Issuance of final Philippine Standard and Practice Statement requires approval of at least 10
members of the council.
Statement 2: The mission of the IAASB is the worldwide development and enhancement of an accountancy
profession with harmonized standards, able to provide services of consistently high quality in the public interest.
a. True, true
b. False, false
c. True, false
d. False, true

7. Statement 1: As per PSA 120, related services include review, compilation, and agreed-upon procedures.
Statement 2: Economy audit is an audit that aims to determine whether certain activity met the cost related to
the task.
a. True, true
b. False, false
c. True, false
d. False, true

8. Which of the following is considered least likely an objective of Philippine Framework for Assurance Engagement?
a. The standard serves as a framework for the development by the AASC of specific standards for particular type
of assurance engagement.
b. To define specific rules on issuing report that contains either a high or moderate level of assurance.

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

c. To establish standards for and provide guidance to professional accountants in public practice for the
performance of engagement intended to provide a high level of assurance.
d. To describe the objectives and elements of assurance engagements intended to provide either a high or
moderate levels of assurance.

9. Which of the following is least likely an objective of an assurance engagement?

a. The engagement is intended to prevent the issuance of materially misleading information.
b. The engagement is intended to enhance the credibility of information about a subject matter.
c. An assurance engagement is intended for a professional accountant to express a conclusion that provides the
intended users with a level of assurance about the subject matter.
d. The engagement is intended to provide a level of assurance to be issued by a professional accountant about
the information of being in conformity, in all material respects, with suitable criteria.

10. Statement 1: Preconditions of an audit includes the determination of applicable financial reporting framework,
and obtaining acknowledgement from management regarding its responsibilities.
Statement 2: Even if there are no revision on the terms of an engagement, the auditor may still send an
engagement letter to the client.
a. True, true
b. False, false
c. True, false
d. False, true

11. The objective and scope of the audit and the extend of the auditor’s responsibilities to the client are best
documented in
a. Independent auditor’s report.
b. Audit engagement letter.
c. Client’s representation letter
d. Audit program.

12. Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the results of the engagement.
d. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.

13. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

14. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry.
b. The competency of the client’s internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.

15. Which of the following would not be a method used to conduct tests of controls?
a. Inquiry
b. Inspection
c. Confirmation
d. Observation

16. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the
extensions. This is an example of a
a. Test of controls
b. Substantive test
c. Dual purpose test
d. Test of balances

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

17. When considering internal control, the auditor’s primary concern is to determine
a. The reliability of the accounting information system.
b. The possibility of fraud occurring.
c. Compliance with policies, plans, and procedures.
d. The type of an opinion he will issue.

18. After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the controls. Which
of the following in not appropriate reason to omit tests of controls?
a. The controls duplicate other controls.
b. The controls appear adequate.
c. Reportable conditions preclude assessing control risk below the maximum.
d. The effort to test controls exceeds the effort saved by not performing substantive tests.

19. 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 material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.

20. 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 circumstances and necessarily involve both
quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the financial statements.

21. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a variety of
techniques, including
a. Reperformance and observation.
b. Inquiry and analytical procedures.
c. Comparison and confirmation.
d. Inspection and verification.

22. If the results of the auditor’s expert’s work do not provide sufficient appropriate audit evidence or are not
consistent with other audit evidence, the auditor should
a. Report the matter to the appropriate regulatory agency of the government.
b. Resolve the matter.
c. Withdraw from the engagement.
d. Express an unqualified opinion with reference to the work of the expert.

23. Statement 1: When obtaining an understanding of controls that are relevant to the audit, the auditor shall
evaluate the design and implementation of controls.
Statement 2: Risk assessment process, as part of client’s internal control, includes the conduct of analytical
procedures on client’s financial statement.
a. True, true
b. False, false
c. True, false
d. False, true

24. Statement 1: Three commonly used methods of documenting the understanding of internal control are
narratives, flowchart, and internal control questionnaire.
Statement 2: Risk of fraud is an example of significant risk.
a. True, true
b. False, false
c. True, false
d. False, true

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

25. 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.

26. Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between auditor and vendors.
c. Copies of sales invoices inspected by the auditor.
d. Computations made by the auditor.

27. Underlying accounting records most likely include

a. Minutes of meetings.
b. Comparable data about competitors (benchmarking) and industry analyses.
c. Inventory count observation memorandum.
d. The general and subsidiary ledgers.

28. 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.

29. Two assertions for which confirmation of accounts receivable balances provides primary evidence are
a. Completeness and valuation.
b. Valuation and rights and obligations.
c. Rights and obligations and existence.
d. Existence and completeness.

30. Which of the following statements concerning the auditor's attendance at the physical inventory count is
incorrect?
a. A financial statement audit should always include attendance at the physical inventory count.
b. If the auditor is unable to attend the physical inventory count on the date planned due to unforeseen
circumstances, he/she should take or observe some physical counts on an alternative date and, when
necessary, perform audit procedures on intervening transactions.
c. Where attendance is impracticable, due to factors such as the nature and location of the inventory, the
auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that reference to a scope limitation need not be made.
d. Inventories that are under the custody and control of third parties (for example, inventories located in public
warehouses) may be verified by obtaining direct confirmation from the custodians, provided that, depending
on the materiality of the amount involved, additional procedures should be applied as deemed necessary.

31. If the current period's accounting policies have not been consistently applied in relation to opening balances and
if the change has not been properly accounted for or disclosed, the auditor should issue either a(n)
a. Qualified or disclaimer of opinion.
b. Qualified or adverse opinion.
c. Adverse or disclaimer of opinion.
d. Standard unqualified opinion or unqualified opinion with explanatory paragraph.

32. While performing a substantive test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not
materially misstated. This situation illustrates the risk of
a. Alpha risk c. Assessing control risk too low.
b. Beta risk d. Assessing control risk too high

33. Statement 1: Audit plan precedes audit strategy.

Statement 2: The purpose and objective of the audit varies depending on whether the audit is initial or recurring.
a. True, true

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

b. False, false
c. True, false
d. False, true

34. Statement 1: Cancelled check is an example of internal evidence.

Statement 2: Worksheets and cost schedule is an example of corroborating evidence.
a. True, true
b. False, false
c. True, false
d. False, true

35. For which of the following matters should an auditor obtain written management representations?
a. Management’s cost-benefit justifications for not correcting internal control weaknesses
b. Management’s knowledge of the future plans that may affect the price of the entity’s stock
c. Management’s compliance with contractual agreements that may affect the financial statements
d. Management’s acknowledgement of its responsibility for employees’ violation of laws

36. The date of the management representation letter should coincide with the date of the
a. Balance sheet
b. Latest interim financial information
c. Auditor’s report
d. Latest related-party transaction

37. A written representation from a client’s management which, among other matters, acknowledges responsibility
for the fair presentation of financial statements, should normally be signed by the
a. CEO and the chief financial officer (CFO)
b. CFO and the chairman of the board
c. Chairman of the audit committee and of the BOD
d. CEO, BOD chairman, and the client’s lawyer

38. The existence of a related party transaction may be indicated when another entity
a. Sells real estate to the corporation at a price that is comparable to its appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals the current market rate.
d. Lends to the corporation at a rate of interest, which equals the current marker rate.

39. 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.

40. After determining that a related party transaction has, in fact, occurred, an auditor should
a. Add a separate paragraph to the auditor’s standard report to explain the transaction.
b. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.
c. Obtain an understanding of the business purpose of the transaction.
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction.

41. S1: The primary source of evidence concerning contingencies is the client’s management.
S2: Indicators of possible management bias do not themselves constitute misstatements.
a. True, true
b. False, false
c. True, false
d. False, true

42. S1: The identity of the related party should be disclosed in the financial statements.
S2: In the absence of the contrary, related party transactions are conducted in the normal course of business
a. True, true
b. False, false
c. True, false

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 244-3400 loc. 137

d. False, true

43. The date of the auditor’s report (choose the exception)

a. Indicates that the auditor has performed procedures for subsequent events that would materially affect the
financial statements through the date of the report
b. Should not be earlier that the date management approves the financial statements and furnishes a written
representation
c. Should be later than the date of the statement of financial position
d. Must not coincide with the date of the Management Representation Letter

44. An auditor completed fieldwork on February 10, 2023 for a December 31, 2022 year-end client. A significant
subsequent event occurred on February 22, 2023. In this case, which of the following report dates would not be
appropriate?
a. February 10, 2023
b. February 10, except for Note 1, February 22, 2023
c. February 22, 2023
d. December 31, 2022

45. An auditor expresses an unmodified opinion, it means that

a. No material error or fraud was found
b. The company is financially sound and the financial statements are accurate
c. The auditor is responsible for the fairness of the financial statements
d. Material disagreements were resolved to the auditor’s satisfaction

46. An discovered a P50,000 misappropriation by the payroll supervisor. The company’s total assets and pre-tax
income are P 70 million and P 15 million, respectively. Considering materiality, the most likely opinion would be
a. Unmodified
b. Qualified
c. Adverse
d. Disclaimer

47. It is appropriate to issue an adverse opinion when the auditor

a. Was not able to gather sufficient appropriate evidence regarding the fairness of the financial statements
b. Management refuses to furnish written representations
c. Has knowledge that the Philippine Standards on Auditing were not followed
d. Has gathered sufficient appropriate evidence that the financial statements are not fairly stated

48. Unresolved disagreement with management normally leads to what type of opinion
a. Qualified or adverse
b. Qualified or disclaimer
c. Adverse or disclaimer
d. Unmodified with emphasis of matter paragraph

49. Choose the incorrect statement. The other matter paragraph

a. Does not affect the auditor’s opinion
b. Follows the Emphasis of Matter paragraph, if any
c. Is included to alert readers on the framework used when reporting on financial statement prepared in
accordance with a special purpose framework
d. Highlights an item which is not otherwise disclosed in the financial statements

50. S1: Auditor’s responsibilities section is amended when the auditor issues disclaimer of opinion.
S2: Departure from GAAP results to either qualified or disclaimer of opinion.
a. True, true
b. False, false
c. True, false
d. False, true

END OF EXAMINATION